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TKEOEY AND PRACTICE 
 
 OP 
 
 BANKIN& 
 
Testimony is like the sliot of a long bow, -wrliich 
 owes its efficacy to the force of the shooter; argument 
 is like the shot of the cross how, equally forcible 
 whether discharged by a giant or a dwarf. — BOYLE 
 
THE 
 
 THEOEY km PRACTICE 
 
 OP 
 
 BANKING 
 
 BY 
 
 HENEY DUNNINO MACLEOD, MA. 
 
 OF TKINITY GOLLEQE, CAMBKIDGE, AHD THE INNEE TEMPLE, BAEKISTER-AT-LAW ; 
 
 SELECTED BT THE EOYAL COMMISSIONEES FOE THE DIGEST OF THE LAW TO PREPAEK 
 THE DIGEST OP THE LAW OE BILtS OP EXCHANGE, BANK NOTES, ETC. 
 
 HONOEABY MEMBER OP THE JURIDICAL SOCIETY OP PALEEMO 
 
 LECTURER ON POLITICAL ECONOMY IN THE UNIVERSITY OP OAMBEIDGE 
 
 FOURTH EDITION 
 VOLUME I 
 
 LONDON 
 LONGMANS, GEBEN, EEADEE AND DYER 
 
 1883 . 
 
 THE AUTHOK RESERVES THE EIGHT OP TEANSLATION 
 
lUNlVERSiTY 
 ^^LiBRARV/ 
 
 LONDON: 
 
 Pkinteb by a. p. Bldndell & Co., 
 
 26, Gablick Hill, Cannon Street, E.G. 
 
 VVJ ;■}{•] VI HI) 
 
To THE Right Honotjeablb 
 SIR CHARLES BOWEN, D.C.L., 
 
 One of the Lords Justices of the Court of Appeal 
 IN THE Supreme Court of Judicature 
 
 Dear Lord Justice Bowbn, 
 
 It is with the greatest pleasure that I inscribe 
 this Work with your Name, in acknowledgement of the 
 many kindnesses I have received from you 
 
 Most earnestly hoping that you may have a long career 
 on the Bench which you so adorn. 
 
 Believe me to be, 
 Yours most faithfully and truly, 
 
 H. D. MACLEOD 
 
Viii PREFACE 
 
 Scotland requested me to draw up a Report of it to be laid before 
 Parliament, with the view of making it better known throughout 
 the country. My paper was included in their Seventh Annual 
 Eeport to Parliament, in 1852; and it had great effect in 
 encouraging the rest of the country to adopt the same system : 
 and at this time it has been universally followed. At this time I 
 had not read a line of any work on Political Economy ; but the 
 circumstances I have mentioned enabled me to acquire a store of 
 facts from original knowledge and observation, which were of 
 the greatest use to me when I was obliged to take up the 
 subject 
 
 In 1853 I was invited to join ihe Direction of a Bank which 
 had been formed under Sir Robert Peel's Joint Stock Banking 
 Act of 1845. The Board of Trade had made certain proniises to 
 the Bank, which were essential to its existence, and whi^h ha,d been 
 embodied in the Charter of the Bank with the express Consent 
 of the Board of Trade, and of their legal adviser,, Mr. 
 Bellender Ker 
 
 When the proper time came when the Bank, in terms of their 
 Charter, applied to the Board of Trade to carry out these engage- 
 ments, to the surprise of the Directors thp Bpard of Trade refused 
 to fulfil them, on the alleged ground that they were illegal. 
 When I joined the Direction, I found that the Directors had been 
 endeavouring for three years to induce the Board of Trade to 
 fulfil their engagements ; but the Board had steadfastly refused to 
 do so, as Mr. Ker held them to be illegal 
 
 The case being submitted to me, I gave it as my opinion that 
 the Board of Trade were entirely wrong in their contention ; that 
 the clauses were perfectly legal ; and that I could draw such a 
 case as would satisfy the Board on the point. The Board 
 directed the case to be drawn and laid before the Law Officers of 
 the Crown, then Sir A. Cockburn and Sir R. Bethel, whose 
 decision was to be final. Upon reading the case I had prepared, 
 the Attorney and Solicitor-General decided, without the slightest 
 hesitation, that my contention was right ; and Mr. Ker also 
 joined in the decision 
 
PREFACE IX 
 
 In the preparation of this case I was led to examine 
 thoroughly the works of Adam Smith and John Stuart Mill, and 
 I soon perceived that whatever merits in other respects they may 
 possess, they were extremely defective in all matters relating to 
 Credit, Banking, and the Foreign Exchanges 
 
 The Bullion Committee of 1810, which was appointed in 
 consequence of the serious depreciation of the Paper Currency 
 caused by the extravagant issues of Bank Notes by the Bank of 
 England, in its Keport, one of the most celebrated ever made to 
 Parliament, and which is one of the great landmarks in Political 
 Economy, laid down the principles that the Bank must regulate 
 the issues of its Notes by the quantity of Bullion it held, and by 
 the state of the Foreign Exchanges ; but unfortunately it entirely 
 omitted to state the practical measures by which its principles 
 should be carried into effect 
 
 This Eeport was summarily rejected by Parliament in 1811 : 
 but it gradually won the assent of all competent men, and in 1819 
 the Committees of both Houses of Parliament adopted its 
 doctrines. The Bank of England alone issued a protest against 
 ihem ; but the Bank itself was converted in 1827, and made 
 some attempts to adopt these principles, but they all failed 
 
 The last attempt was that of the Bank Charter Act of 1844. 
 This Act is expressly founded on the dogma that Bank Notes 
 payable to bearer on demand are alone Currency, to the exclusion 
 of all other forms of Credit : and it is intended to carry out a 
 particular Theory of Currency : and the method it adopted was 
 that of imposing a strict numerical limit on the Notes issued by 
 the Bank 
 
 Every mercantile lawyer would at once say that the definition 
 of Currency adopted by the framers of the Act is entirely 
 erroneous ; that the Act entirely fails to carry out the Theory of 
 Currency it professes to do : that if that Theory was enforced the 
 Bank could make no profits : and that no Bank constructed on 
 that principle ever did, or could by any possibiUty, make any 
 profits. Furthermore all the great authorities of former times, 
 
 b 
 
X PREFACE 
 
 including the EuUion Keporfc, and Peel himself on several 
 occasions, solemnly protested against imposing a strict numerical 
 limit on the Notes of the Bank. Mr. Thornton, the eminent 
 banker, who was one of the authors of the Bullion Eeport, said, 
 in 1804, that if this rule was strictly carried out in a period of 
 commercial panic it would lead to universal failure 
 
 This opinion was fully verified in the monetary crisis of 1847 : 
 the only one which took place after the passing of the Act and 
 before the publication of this work : and also in the subsequent 
 crises of 1857 and 1866 : when, if the Act had not been 
 suspended, not only the Bank of England itself, but every Bank 
 in England would have stopped payment, and all commerce been 
 thrown into the most terrible convulsions 
 
 In the autumn of 1855 a very sudden and severe monetary 
 drain took place. During this drain some very startling and 
 extraordinary circumstances took place, which I have never seen 
 mentioned in any book. Eeflecting on these, I came to the 
 conclusion that the only true method of controlling Credit and 
 the Paper Currency is by sedulously adjusting the Rate of 
 Discount by the Bullion in the Bank and by 
 the state of the Foreign Exchanges. And I 
 explained the reasoning on which this principle is founded, in 
 the first edition of this work 
 
 This doctrine, but very imperfectly understood and extremely 
 unpopular at the time it was first published in 1856, is now 
 universally acknowledged to be the true one, and is adopted by 
 all the Banks in the world. It was acknowledged to be perfectly 
 efllcient by Mr. Norman, before the Committee of the House of 
 Commons, on the crisis of 1857 ; it is the principle upon which 
 the Bank of England is now managed ; the Usury Laws in 
 France were modified for the express purpose of enabling the 
 Bank of France to adopt it : and through understanding and 
 adopting this principle, the Notes of the Bank of France, which 
 was obHged to suspend payments in cash during the misfortunes 
 Of the country, were enabled to circulate at par. In fact, this 
 principle is now as well established among all competent persons 
 as the Newtonian Law of Gravity 
 
PREFACE XI 
 
 In that edition also I investigated the Theory of Accom- 
 modation Paper, which has produced so many calamities, 
 but which has been so much misunderstood. I explained 
 wherein the true danger of Accommodation Paper consists. In 
 1861 the failure of Lawrence, Mortimer, and, Schrader, popularly 
 known as the great leather fraud case, took place. In his very 
 long and elaborate judgment in the 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 
 
 After the publication of the first edition of this Work, I was 
 led to examine the works of the First School of Economists, the 
 Physiocrates of France, and I found that they originated the 
 expression, " Production, Distribution, and Consumption " of 
 Wealth ; that they especially restricted the word Wealth to the 
 material products of the earth, which are brought into Commerce 
 and Exchanged ; and that they expressly excluded Labour and 
 Eights from the term Wealth ; and that the expressions 
 " Production, Distribution, and Consumption " of Wealth and 
 Commerce or Exchanges were used by them as equivalent and 
 identical : but restricted to the material products of the earth, to 
 the exclusion of Labour and Eights 
 
 In the first chapter of this Work I have shown that the 
 ancients unanimously held that Exchangeability, or the 
 capability of being bought and sold, is the sole essence and 
 principle of Wealth ; and that everything is technically. Wealth 
 which can be bought and sold, whatever its form may be.. The 
 ancients showed that there are three distinct orders, or kinds of 
 Qaantities which can be bought and sold, namely : 1, Material 
 Things ; 2, Labour, or Personal Qualities ; 3, Abstract Eights 
 
 Smith begins his work by speaking of real Wealth as being 
 the produce of " Land and Labour," but fiirther on he expressly 
 classes Personal Quahties under the title of Fixed Capital ; and 
 Bank Notes, Bills of Exchange, &c., which are mere Eights, or 
 Credit, under Circulating Capital. Thus he distinctly recognises 
 the three orders of Exchangeable Quantities as Wealth. More- 
 
 h 2 
 
xii PREFACE 
 
 over, he was well aware of the true and original meaning of the 
 expression, " Production and Distribution," because he expressly 
 says that the purport of his first two books is to investigate the 
 Theory of Prices, and they are nothing but an investigation of 
 the Theory of Value, more or less imperfect. McCulloch, in a 
 note to his edition of the work, says that Political Economy might 
 be defined as the Science of Values. Condillac published his 
 work, le Commerce et le Gouveriiement in. 1776, the same year as 
 Smith published his. He expressly defines Economics as the 
 Science of Commerce, and the first book of his work, like that of 
 Smith, is a Treatise on Commerce. But, unfortunately, he never 
 got beyond the Commerce of Material Products . 
 
 Thus it will be seen that, as devised by its originators, the 
 expression " Production, Distribution, and Consumption "' is one, 
 entire, and indivisible : and it must not be separated into its 
 oomponent terms 
 
 J. B. Say, who first defined Political Economy to be the 
 Science of the Production, Distribution, and Consumption of 
 Wealth, unfortunately totally overlooked this fact, and has divided 
 his work into separate parts relating to these terms. He has been 
 followed in this by his disciple, John Stuart Mill, who, however, 
 varies from his master in adopting the term Production, Dis- 
 tribution, and Exchange of Wealth 
 
 Each of these works contains many excellent parts and a 
 considerable amount of truth ; but, unfortunately, they have been 
 utterly destructive of the scientific character of the subject. 
 Each of these writers, like Smith, recognises Personal Qualities 
 and Rights as Wealth. And how can we speak of the " Produc- 
 tion, Distribution and Consumption " of Labour and Rights ? 
 But it is quite usual to speak of the Supply and the Demand for 
 Labour and Bills, which are mere Eights 
 
 So long as the term Wealth was restricted to the material 
 products of the earth only, the two expressions, " Production, 
 Distribution, and Consumption," and Commerce or Exchanges 
 were equally good and applicable, and it was perfectly indifferent 
 
PBEFACE XlU 
 
 which was used ; but the second school of Ecouomists, as those 
 who adopt the first expression or some variation of it are now 
 usually termed, while fully recognising Labour and Eights as 
 Wealth, have continued to use that expression as the description 
 of the Science, when it was expressly designed by its originators 
 to exclude Labour and Eights from the term Wealth 
 
 Seeing, then, that Labour and Eights are now recognised as 
 Wealth by aU Economists, the most advanced Economists in 
 Europe and America have now seen that it is absolutely 
 indispensable to resort to and adopt the term Commerce or 
 Exchanges, as the only true conception by which the subject 
 can be made a regular Science. Whately was the first person in 
 this country who clearly explained this, when Professor at 
 Oxford ; and Bagehot has repeatedly said that Political Economy 
 is the Theory of Business. Such was the conception I adopted 
 on my first acquaintance with the subject 
 
 In 1858 I published the Elements of Political Economy, in 
 which, for the first time, it was treated as the Science of 
 Exchanges, or of Commerce, in accordance with the conception of 
 its founders, and of Whately. Upon sending this work to M. 
 Michel Chevalier, who was at that time the most distinguished 
 Professor of Political Economy in Europe, he at once declared his 
 entire approval of it ; and ever after he continued my most 
 steadfast adherent, and used all his influence to popularise my 
 doctrines in France 
 
 In 1862 he presented an elaborate Eeport on my then 
 •published works to the Academy of the Moral and Political 
 Sciences of the Institute of France, in which he declared his 
 unreserved adhesion to their principles 
 
 In 1874 he proposed me to fill a vacancy among the 
 Foreign Correspondents of the Academy _ of Moral and Political 
 Sciences 
 
 In 1875, when I had-"pubKshed a much enlarged and 
 improved edition of the Elements under the title of the 
 Principles of Economical Philosophy, he wrote to me—" It is 
 
XIV PREFACE 
 
 your book which serves me as the guide for all the Philosophy of 
 my teaching at the College d,e France " 
 
 Being of course acquainted with the Juridical Principles of 
 Credit, I acquired a knowledge of their appHcation in Commerce 
 and Banking ; from my own observation I then saw how 
 utterly vague, contradictory, and inadequate the notions on the 
 subject were in the works of literary Economists. Not an 
 Economist that I have seen had the slightest idea of the 
 fundamental distinction between a Bill of Exchange and a Bill 
 of Lading, or of the distinction between the nature of the Funds 
 and a Mortgage Deed, to which Mill and many others compare 
 them. Moreover, Algebraists have for the last 150 years 
 frequently given Debts as an example of Negative Quantities : 
 but either they have given no explanation of the meaning of the 
 term Negative as applied to Debts : or the few that have done so 
 have given one which every jurist or man of business would tell 
 them is quite erroneous 
 
 In the article Credit in my Dictionary of Political Economy, 
 I explained the Juridical Theory of Credit, and showed the real 
 meaning of the term Negative as applied to Belts : and showed 
 the application of the principles of Law and Algebra to the great 
 system of Credit and Banking ; and also showed the strange 
 self-contradictions of S^ and Mill on the subject of Credit 
 
 In 1863, M. Rouher, who was then Minister of Commerce and 
 Agriculture, who was one of the most distinguished Economists in 
 France, and also a distinguished Advocate, and therefore fully 
 capable of appreciating the truth of my doctrines, instructed M. 
 Henri Eichelot, one of the heads of Departments in his Ministry, 
 to draw up an account of my system of Political Economy, which 
 he ordered to be distributed to all the Chambers of Commerce in 
 the Empire 
 
 In 1867 the Government of the day appointed a Commission 
 to take measures to prepare a Digest of the Law for the 
 guidance of the Courts of Law in the contemplated fusion of Law 
 and Equity 
 
PREFACE XV 
 
 The Commissiouers begau by proposing to prepare Digests of 
 three branches of the Law, as Specimens of the Digest of the 
 whole Law. They invited Members of the Bar to oifer their 
 services to prepare these Digests, and to send in specimens of 
 the manner in which they proposed to frame them. One of the' 
 branches selected was the Law of Bills of Exchange, Bank 
 Notes, &c. 
 
 In preparing my Paper for this competition, it struck me that 
 the doctrines then current in the profession as to the Transfer of 
 Choses-in-aciion were contradictory ; and as the Digest was to be 
 an authoritative declaration of the Law, it became necessary to 
 trace these doctrines to their earliest sources 
 
 At that time it was carefully inculcated on all aspirants to the 
 bar that Ghoses-in-action are absolutely incapable of being assigned 
 at Law : that Bills of Exchange are the sole exception to this 
 rule, being transferable by the custom of merchants : that Pro- 
 missory Notes are not legal at Law : and that they were fiist 
 legalised by the Act of 1705 : that Instruments under seal are 
 not Negotiable at Law. In a very well known case in the House 
 of Lords, Lord Cranworth, then Chancellor, laid down the doctrine 
 that it was not tolerated by the Law, either of Scotland or Eng- 
 land, that any one should issue floating Rights of action against 
 himself. This doctrine, of course, declares that the whole business 
 of Banking, which consists exclusively in issuing floating Rights 
 of action, is illegal 
 
 Such were the doctrines which, trusting to the uniform dogmas 
 of the Judges and text writers, I stated in the first two 
 editions of this work. But, to my surprise, I found a series of 
 decisions of the Courts of Common Law, extending through 550 
 years, in which it had been uniformly held that all Obligations 
 made transferable and assignable by the Obligor himself, were 
 assignable, and that the Transferee, or Assignee might sue the 
 Obligor in his own name : and that all these Obligations were 
 Deeds or Instruments under seal. I further found that up to the 
 end of the sixteenth century, all Bills of Exchange were sealed as 
 Deeds : and that it was during the seventeenth century that the 
 practice of signing Bills of Exchange gradually superseded that of 
 sealing them : but there is a case of a sealed Bill of Exchange 
 
Xvi PREFACE 
 
 SO late as 1680, and the Court perfectly allowed it to be a legal 
 instrument 
 
 Moreover, I found that so far from Promissory Notes being a 
 new instrument, only introduced by the bankers at the end of the 
 seventeenth century, sealed Notes payable to assigns or to 
 bearer were in common use in the City of London in the fifteenth 
 century 
 
 The doctrine that Ghoses-in-action are not transferable at ' 
 Common Law had at various times been urged at the Bar ; but 
 it was invariably over-ruled by the Court. As a matter of fact, 
 this doctrine had been finally set at rest in 1628, and it was never 
 heard of again, till it was revived by Lord Kenyon in Master v. 
 Miller in 1791, when it was expressly denied by Buller, J. 
 This was the first time in legal history in which it was emitted 
 from the Bench. But Buller died, and henceforth Lord Kenyon 
 ruled supreme. The first time in which the whole Court held this 
 doctrine was in the case of Johnson v. Gollings in 1800, and it 
 is from this date only that it became a firmly accredited dogma, 
 in the profession 
 
 Furthermore, during the preparation of this Paper, my 
 attention having been directed to the Pandects of Justinian, of 
 which at that time, as Lord Campbell says, an ordinary lawyer 
 knew as much as of Cherokee, I was surprised to find that the 
 complete Juridical Theory of Credit had been developed by the 
 Roman Lawyers, and was contained in the Pandects ; absolutely 
 identical with the Theory of Credit in my Dictionary of Political 
 Economy, simply from my own knowledge of Mercantile Law, 
 and my observation of the actual mechanism of the system of 
 Credit and Banking. There is not a single principle in my 
 article which is not in the Pandects : and there is not a single 
 principle in the Pandects which is not in my article ; and the 
 simple reason is this, that the Eoman Lawyers and myself had 
 exactly the same state of facts before us 
 
 The Royal Commissioners, who included the most eminent 
 Lawyers of the day, Lord Cranworth, Lord We&tbury, Lord 
 
PREFACE XVll 
 
 Cairns, Lord Hatherley, Lord Selbome, Lord Penzance — to 
 mention only those of judicial rank — upon an examination of my 
 Paper, unanimously selected me to prepare the Digest .of the Law 
 of Instruments of Credit 
 
 Being therefore invested by the Commissioners with the 
 duty — not of making a mere Digest of Cases and Statutes — but 
 of making an authoritative declaration of " the Law," I 
 formally excluded from the Digest the whole series of cases upon 
 which the modern opinion of the Judges had been founded, as 
 not being Law ; I stated that, in fact, the Act of 1705 was 
 entirely unnecessary to legalise Promissory Notes, as they were 
 legal at Common Law 
 
 After some time the Commissioners discontinued the work on 
 the Digest, and recommended that it should be commenced in 
 another form : which, however, has never, been done, and conse- 
 quently my Digest was never published. But on a subsequent 
 occasion Mr. Archibald, then Junior Counsel for the Crown, 
 afterwards Mr. Justice Archibald, when he was acting for the 
 Crown, acknowledged that my Digest was executed with " the 
 highest legal skill the country could produce " 
 
 My selection by the Commissioners to prepare the Digest was, 
 from their rank and authority, a practical reversal of the doctrines 
 then held by the Judges regarding the Transfer of Ghoses-in- 
 action. It was, in fact, equivalent to a judgment of the House 
 of Lords in my favour ; because, if the Law Lords approved of 
 ■my written arguments in their capacity of Commissioners, they 
 must have done the same if I had had the opportunity of 
 arguing the question Before them in their capacity as Law 
 Lords 
 
 Fortified, therefore, by the private approbation of the 
 Commissioners, I introduced the apparently new, but in reality 
 the old and true, doctrines relating to Credit into my Principles 
 of Economical Philosophy, published in 1872 
 
 In 1878 these very doctrines came before the Court of Queen's 
 
XVIU PREFACE 
 
 Bench in. the case of Grouch v. the Credit Fonpier of Englaiid. 
 In the absence of the Lord Chief Justice, Mr. Justice (now Lord) 
 Blackburn, delivered the judgment of the Court, re-stating in the 
 strongest and most decided terms, that Choses-in-acUon are not 
 transferable at Common Law, and that Instruments under seal 
 cannot be made Negotiable. Thus, as the selected exponent of 
 the Law, I was in direct conflict with the judgment of the 
 Queen's Bench 
 
 In 1875, however, the very same question came before all the 
 Judges in the great case of Goodivin v. Rolarts. In this case 
 the question was whether Scrip, which was a mere promise to 
 deliver Bonds, possessed the attribute of Negotiability, or Cur- 
 rency, like Bank Notes, Bills of Exchange, and other Securities 
 for Money. The Court of Exchequer held that it did. The case 
 was then taken by appeal to the Court of Exchequer Chamber. 
 In the course of the argument before the Court, the Lord Chief 
 Justice expressed the strongest condemnation of Lord Holt's cases, 
 and said that they were a blot on our judicial history. In deliver- 
 ing the unanimous judgment of the Court he set them entii-ely 
 aside, and held that the Act of 1705, which had always been 
 supposed in the profession to have legalised them for the first 
 time, was in reality only declaratory of the Common Law. The 
 judgment also reversed the doctrines of the Queen's Bench in 
 Grouch V. The GredU Fonpier of England, and aiSrmed the doc- 
 trines I had laid down in my Digest on these points, as'the true 
 statement of the Law 
 
 In delivering the judgment, the Lord Chief Justice did me 
 the very high honour of referring to my Competition Paper, and' 
 said — 
 
 " We find it stated, in a Law tract by Mr. Macleod, entitled 
 ' Specimen of a Digest of the Law of Bills of Exchange,' prepared, 
 we believe, as a Eeport to the Government, but which from its 
 research and ability, deserves to be produced in a form calculated 
 to ensure a wider circulation," &c. 
 
 Thus I had already anticipated, in 1872, the suggestion of the 
 Lord Chief Justice in 1875 ; and in this work I have embodied 
 lurther portions of my Digest 
 
 The case of aoodwin v. Robarts is, beyond aU comparison, the 
 
PREFACE XIX 
 
 most imporfcaat mercantile case ia modern times. It has com- 
 pletely swept away the unfortunate dogma that Ghoses-in-adion 
 are not assignable at Law : and it has established the whole 
 business of Bills of Exchange and Banking on a strictly legal 
 basis : it has now finally settled that the right of private persons 
 to issue Notes is not a privilege which can only be granted by Act 
 of Parliament, but that it is a Common Law right which can 
 only be taken away by Act of Parliament 
 
 Moreover, by the Supreme Court of Judicature Act, which 
 came into operation on the 1st November, 1875, it is enacted 
 that wherever the rules of Equity and Law conflict, those of 
 Equity shall prevail. Consequently, the juridical principles of 
 Credit developed by the Eoman Lawyers, which are fnlly set forth 
 in this Work, and which have always been adopted in Equity, 
 -have now become Law 
 
 I have, then, shown the exemplification of the Juridical Theory 
 of Credit in the great business of Banking : and explained the 
 mechanism of Mercantile and Agricultural Banks : and that of 
 the Scotch Banks, which combine the two. Readers who reflect 
 on the prodigious development of the Agriculture and Public 
 Works in Scotland, will then understand the tenacity with which 
 the people of Scotland cling to their issues of £1 Notes, which 
 has been the subject of so much ridicule and misunderstanding 
 
 It is somewhat remarkable that the method of Discount 
 invariably used in Banking, the most colossal branch of modern 
 commerce, which differs considerably from that given in the 
 ordinary books on Algebra, and used by Insurance and some other 
 Companies, has been entirely overlooked by Algebraists. I have 
 given the complete Theory of Banking Discount 
 
 As the action of the Bank of England is now governed by the 
 Foreign Exchanges, it was necessary to give an exposition of their 
 mechanism as an essential branch of Banking. The exposition 
 given here is, I believe, fuller than that given in any other Work 
 
 It is seen that the Ancients possessed the true scientific 
 instinct. They fixed upon a Single General Idea, or Quality, as 
 
XX PREFACE 
 
 the sole essence and principle of "Wealth— namely, Exchange- 
 ability — or the capability of being bought and sold. They 
 then searched for and discovered all the different orders of Quan- 
 tities which can be bought and sold, or exchanged ; or whose value 
 can be measured in Money : and they expressly classed them under 
 the terms Wealth, Merchandise, and Goods and Chattels. All 
 modern Economists since Smith recognise these three orders of 
 Exchangeable Quantities. Mill begins his work by saying that 
 Everything is "Wealth which has a Power of Purchasing : which 
 exactly agrees with Aristotle's definition. And reflection will 
 show that there is nothing which can be bought and sold which is 
 not of one of these three forms. And all Commerce, in its widest 
 extent, and in all its forms and varieties, consists in the exchanges 
 of these three orders of Quantities. And as the Science of Wealth 
 is the Science of the facts or phenomena relating to that Quality 
 of things which constitutes them Wealth : and as it is agreed that 
 Exchangeability is the sole Quality which constitutes things 
 Wealth : it necessarily follows that the Science of Wealth can be 
 nothing else than the Science of Exchanges, or of Commerce : or 
 the Science which treats of the Laws which govern the varying 
 relations of these diverse Quantities. And this is the conclusion 
 to which the most advanced Economists throughout the world 
 have now arrived : and it is the only conception of Economics 
 which enables it to be erected into a definite Science 
 
 The Science is now what is technically termed complete : that 
 is, we know, as a positive fact, that we have discovered all the 
 different kinds of Quantities it deals with. We know, as a posi- 
 tive fact, that there are no other orders of Exchangeable Quantities 
 besides those already mentioned 
 
 And there being Three orders of Exchangeable Quantities they 
 can be exchanged in Six different ways — 
 
 1. A Material thing can be exchanged for a Material thing 
 
 2. A Material thing can be exchanged for Labour 
 
 3. A Material thing can be exchanged for a Eight 
 
 4. One kind of Labour can be exchanged for another kind of 
 Labour 
 
 5. Labour can be exchanged for a Eight 
 
 . &. One Eight can be exchanged for another Eight 
 
PREFACE XXI 
 
 These six species of Exchanges constitute -Commerce in its 
 widest extent, and in all its forms and varieties : and are the 
 subject matter of the Science of Economics 
 
 And of the General Science of Economics, or Commerce, com- 
 prising six distinct species of Exchanges, the business of Banking 
 consists of those numbered (3) and (6) : for Banking consists 
 exclusively of the Exchanges of Money for Credit, and of Credit 
 for Credit 
 
 Any person whatever, possessed of the slightest feeling for 
 Mathematical and Physical Science, can at once perceive that we 
 have here a gieat Mathematical and Physical Science : because 
 we have seen that a Physical Science is a body of facts or 
 phenomena all based upon a single central Idea or Quality ; and 
 the object of the Science is to determine the Laws which govern 
 the Numerical Relations of the Quantities it deals with 
 
 Now here we have a distinct body of phenomena or facts, all 
 based upon a single central Idea or Quality — Exchange- 
 ability ; and, therefore, it is iitted to form a great 
 Demonstrative Science of the same rank as Mechanics or 
 Optics, or any other Physical Science. Another great body of 
 particular facts is won from the vague floating mass of human 
 knowledge — won from the void and formless infinite — and 
 circumscribed by a definition, and formed into a great Inductive 
 Science, whose investigations must be governed by the same 
 general principles of Inductive Logic as all other sciences are : 
 and yet it will be found to contribute its own quota to Inductive 
 Logic — bearing a general similarity to its sister sciences, and yet 
 with peculiarities of its own. 
 
 We have seen that there are three distinct orders of 
 Exchangeable Quantities, and, therefore, there are six distinct 
 kinds of Exchanges : and the ojjject of the Science is to discover 
 the Laws of the phenomena of these Exchanges, that is, the 
 changes in the numerical relations of these Exchangeable 
 Quantities. We have thus a new order of Variable Quantities : 
 and by the general principles of Natural Philosophy, the laws 
 which govern the Variable Relations of Economic Quantities 
 must be strictly iu conformity with the laws which govern the 
 
xxii PREFACE 
 
 relation of Variable Quantities in general. The same general 
 principles of reasoning which govern the varying relations of the 
 stars in their courses must govern the varying relations of 
 Economic Quantities. Hence we have a body of phenomena 
 susceptible of the strictest mathematical treatment, which 
 I shall designate as the great Science of Analytical 
 Economics 
 
 No one is more sensible than I am of the immortal services 
 rendered by the two preceding schools of Economists — that of 
 Turgot, Quesnay, and their followers— and that of Smith and his 
 followers— and I should never wish, in the slightest degree, to 
 extenuate or diminish the glorious triumphs achieved by them. 
 But in all sciences there is progress : and it is the constant fortune 
 of scientific systems to be succeeded and superseded by those of a 
 superior order. Every science is greater than any of its culti- 
 vators. Astronomy is greater than Hipparchus, than Ptolemy, 
 than Copernicus, than Kepler, — greater even than Newton 
 himself. So Economics is greater than Turgot, than Quesnay, 
 than Smith, than Mill. To every one who has done good service 
 let us pay rational respect, but not abject idolatry. No one, how- 
 ever eminent, is now permitted to be a despot in science, and 
 chain up the human mind, and arrest the progress of thought. As 
 Ptolemy said — " He who studies Philosophy must be a freeman in 
 mind," and, making the most ample acknowledgments for the 
 services rendered by the preceding schools of Economists, scientific 
 truth compels me to say that their systems are now exhausted, and 
 are inapplicable to great Economic problems of the present day, 
 namely Credit, Banking, and the Foreign Exchanges. 
 To understand these subjects properly, we must adopt a far 
 wider and more comprehensive system of Economics than has 
 hitherto prevailed : one, which I am happy to say, is now gaining 
 the ascendency throughout the world. As a matter of fact, the 
 most eminent and advanced Economists in Europe and America 
 have declared their adhesion to this enlarged and expanded 
 system of Economics, which I have been advocating for twenty- 
 five years; which. has given the solution of those questions of 
 Credit and Banking, which entirely baffied the preceding schools 
 of Economists : and by the acknowledgment of all practical men 
 
PREFACK XXin 
 
 of business, has finally set at rest that terrible Currency Question 
 which has agitated and convulsed this country for three quarters 
 of a century 
 
 Economic Science is the profoundest and most complicated 
 branch of human knowledge, and requires a greater variety of 
 knowledge than any other 
 
 1. It deals with Property of every description and in all 
 its forms : consequently a profound knowledge of the Law of 
 Property, and especially of Mercantile Law, is absolutely 
 indispensable to enable a person to perceive and recognise the 
 existence of the various Quantities with which the Science deals 
 
 2. It deals with all the Exchanges of Property, and 
 consequently a thorough and profound knowledge of Commerce 
 in its widest extent, and in all its forms and varieties, is 
 necessary to enable us to understand the great Mechanism of 
 Exchanges 
 
 3. A knowledge of Mathematics and of Physical Science, 
 and of the methods and principles by which the various Physical 
 Sciences have been constructed, is necessary to enable a person 
 to express th& Laws which govern the varying relations^ of 
 Economic Quantities in strict harmony and analogy with the Laws 
 of the other Physical Sciences 
 
 At the present stage of Economics it is not possible to turn 
 a sentence in it without a knowledge of the profoundest and 
 subtlest principles of Mercantile Law, of the- mechanism of 
 Commerce, and of the Laws of Mathematics and Natural 
 Philosophy. Among other things, it may be said that the 
 perplexities and subtleties of the Theory of Credit can only be 
 unraveled by principles of Algebra which have only been clearly 
 understood by Mathematicians themselves within the last fifty 
 years. In fact. Economics could not have been erected into a 
 great Inductive Science until Mathematicians had perfected 
 the General Theory of Variable Quantities, and the Theory of 
 Algebraical Signs 
 
 Economics is the noblest and grandest creation of the human 
 intellect. It is the crown and glory of the Baconian Philosophy. 
 No one can thoroughly realise the awful sublimity of the genius 
 of Bacon until he studies Economics ; because it is the literal 
 
Xxiv PREFACE 
 
 realisation of his matchless discovery that the same principles of 
 Mathematical and Physical Science which govern- the phenomena 
 of nature equally govern the 'practical business of life 
 
 " Time's noblest offspring is its last " 
 
 Economics is now clearly seen to be a Physical Science : but 
 it is also a Moral Science : because it is based upon the mores, the 
 wants, desires, and demands of men. We find that the same 
 general Laws of Exchange hold good among all nations, among 
 the rudest and the most civilised in all ages and countries. The 
 principles of Commerce are absolutely uniform throughout the 
 world. The same causes are invariably followed hy the same 
 effects : and that is the reason why Economics may be raised to 
 the rank of an exact science : a permanent and universal science 
 of the same nature as the Physical ones : because it is based upon 
 principles of human nature which aire as permanent and universal 
 as those of physical substances upon which the Physical Sciences 
 are based. And therefore it is a Physical Moral Science, and the 
 only Moral Science which is capable of being raised to the rank 
 of an exact science 
 
 Gentle reader, if you wish to know what Economics is — 
 
 " Vien dietro a me, e lascia dir le genti ; 
 Sta come torre fenno, che non croUa 
 Giammai la cima per soffiar de' venti " 
 
 " Follow thou me, heed not what others say. 
 Be like a tower which never stoops its head 
 Bellow the tempests fiercely as they may " 
 
CONTENTS 
 
 THE FIRST VOLUME 
 
 CHAPTER I 
 DEFINITION OF TEEMS 
 
 PAGE 
 
 § 1. Bankings a department of Economics or the Science of 
 
 Exchanges 1 
 
 2. Definition of Wealth or of an Economic Quantity . 2 
 
 Aristotle's Definition of Wealth 2 
 
 Wealth is Everything which is Exchangeahle . . 2 
 
 3. Wealth or Economic Quantities of Three Species — 
 
 Material Wealth . .^ 3 
 
 4. Ancient Dialogue to show that Personal Qualities are 
 
 Wealth 3 
 
 5. Smith classes Personal Qualities as Wealth ... 5 
 J. B. Say classes Personal Qualities as Wealth ... 6 
 Senior classes Personal Qualities as Wealth ... 6 
 Mill classes Personal Qualities as Wealth .... 7 
 
 6. Bights are Saleable Commodities .... 9 
 
 7. General Eule of Eoman Law that Rights are Wealth . 12 
 
 8. General Eule of Greek Law that Eights are Wealth . 13 
 
 9. Eule of English Law that Eights are Goods and 
 
 Chattels 14 
 
 10. Smith classes Eights as Wealth 16 
 
 J. B. Say classes Eights as Wealth 16 
 
 MiU classes Eights as Wealth 17 
 
 11. There is no such Thing as Absolute Wealth . . .18 
 
 12. Commerce or Economics consists of Six distinct kinds 
 
 of Exchange 18 
 
 Banking consists of the Exchange of Money for 
 Credit, and of Credit for Credit . .19 
 
 13. Meaning of the word Property 20 
 
 14. Property is a Eight and not a Thing . . .20 
 
 A 
 
xxvi CONTENTS 
 
 PAGE 
 
 § 15. Property in English is a Bight and not a Thing . .21 
 
 16. On Kight of Property and Biglit of Possession . 22 
 
 17. Meaning of Persona in Eoman Law 28 
 
 18. Meaning of Bes in Eoman Law 24 
 
 19. Commerce or Economies is the Science which treats of 
 
 the Exchanges of Rigbts 26 
 
 Wealth, in Economics means an Exchangeable 
 Eight 25 
 
 20. On the Application of the Positive and Negative Signs 
 
 to Property 26 
 
 21. On the Classification of Property 27 
 
 Property in Land ......... 28 
 
 Personal Credit t;, ... 29 
 
 22. Every Sum of Money is equivalent to the Sum- of the Present 
 
 Values of an Infinite Series of Future Payments . . 30 
 
 23. On the Distinction between Rights to Things^ or Jura in 
 
 Re : and Rights against Persons, or Jura in Personam 30 
 
 24. Definition of Value ... ^ .... 32 
 
 25. On Money and Credit 33 
 
 On Barter 83 
 
 26. On the Want which gave rise to the use of Money . .34 
 
 27. Nature of Money 36 
 
 Money is a Right a Title to demand something from 
 
 some one else ......... 36 
 
 Money is G-eneral Credit 36 
 
 28. Aristotle, Bishop Berkeley, the Physioerates, Smith, Thornton, 
 
 MiU, and Jurists have seen the true Nature of Money . 36 
 Grold and Silver Money are Metallic Credit . . 40 
 
 29. Diifereut Substances used as Money 40 
 
 30. On Credit 41 
 
 Money and Credit are Rights to demand something to 
 
 be paid or done by some person 43 
 
 31. Eeason why Paper can supersede Metalhc Money . . .44 
 
 82. The Distinction between Money and Credit . . .45 
 
 83. On Barter, Sale or Circulation and Exchange . . 46 
 
 34. On the Meaning of Circulating Medium . . . .48 
 
 35. On the Meaning of Currency 49 
 
 86. The Different Forms of Currency 51 
 
 37. On the Channel of Circulation 62 
 
 38. The Fundamental Concept of Monetary Science . . .64 
 
 39. On Securities for Money and. Convertihle Securities 55 
 
 40. On Price . . 57 
 
 The Term Value of Money has Two Distinct Meanings . 57 
 
 41. On Interest and Discount 58 
 
 42. On Production 59 
 
 43: Three Different Classes of Producers 60 
 
CONTENTS XXVU 
 
 PAQE 
 
 44. On Consmnption 62 
 
 45. Meaning of " Production and Consumption " . . .64 
 
 46. On Supply and Demand 65 
 
 47. On Cost of Production 67 
 
 48. On Productive Labour 67 
 
 49. On Profit and Rate of Profit 67 
 
 50. On Payment, Discharge and Satisfaction . . .68 
 
 51. On Capital 70 
 
 Definition of Capital 71 
 
 Personal Qualities as Capital 72 
 
 Personal Qualities as Labour 72 
 
 Personal Qualities as Credit 73 
 
 Eights as Capital 73 
 
 52. There is no such thing as Absolute Capital . . . .74 
 
 53. Capital may increase in Two distinct ways . . . .74 
 
 54. On Fixed and Circulating Capital . . . .77 
 
 On Fixed Capital 77 
 
 On Floating Capital 78 
 
 55. On the Conversion of Floating into Fixed Capital . . .80 
 
 56. On the Three Amhiguities in the Theory of Credit 81 
 First Ambiguity — A Debt is not Money owed by 
 
 the Debtor, but the Personal Duty to pay Money 81 
 
 57. Second Ambiguity — The word Debt means the 
 
 Creditor's Bight of Action as well as the Debtor's 
 Duty to pay 83 
 
 58. Debt in English Law means a Right of Action . . 84 
 
 59. Third Ambiguity — On the double meaning of the words 
 
 "Lend," "Loan," "BorroTW," or the Distinction 
 between Mutuum and Commodatum 
 
 60. Meaning of Commodatum .... 
 
 61. Meaning oj Mutuum 
 
 62. Theophilus on the Mutuum and Commodatum 
 
 63. Distinction between a Debt and a Bailment 
 
 64. Summary of Definitions .... 
 
 90 
 91 
 93 
 95 
 98 
 
 CHAPTEB II 
 
 THE THEORY OF VALUE 
 
 Pbelimikaby Eemakks 102 
 
 Section I 
 Definition of Value 
 
 1. The Definition of Value 103 
 
 2. Heciprocal Demand is the Origin of Value . . 104 
 The Value of any Economic Quantity is any other 
 
 Economic Quantity for which it can be exchanged . 104 
 
 A 2 
 
XXVm CONTENTS 
 
 PAGE 
 
 § 2. Value is a Batio or an Equation . . • • 105 
 A Single Object cannot have Value 105 
 
 3. Any Economic Quantity can, have Value in terms of any 
 
 other 106 
 
 The Value of an Incorporeal Right is the Tiling 
 
 Promised which may be Demanded . . 106 
 
 Money is a Bight or Title to demand any Product or 
 
 Service . . 107 
 
 4. The Value of any Economic Quantity increases or decreases 
 
 according to the Cluantity of other things it wiU 
 
 purchase . . ...... 107 
 
 5. There may be a General Else of Prices hut not of Values . 108 
 
 6. Error of the Expression Intrinsic Value . . . 109 
 Barbon points out the error of Intrinsic Value . . . 109 
 Origin of the confusion on Value ..... 110 
 
 7. Distinction between Diminution in Value and Depre- 
 
 ciation 112 
 
 8. A Standard of Value is impossible : but there may be 
 
 H, Measure of Value 114 
 
 Section II 
 
 On the Origin, Cause, or Form of Value 
 
 9. Fundamental conditions of the Inquiry . '. . . 118 
 
 10. Example of Baconian Induction ...... 119 
 
 11. Demand is the Sole Cause of Value .... 120 
 Ancient writers unanimously held that Demand is the Cause 
 
 of Value 120 
 
 All Foreign Economists hold that Demand is the Cause of 
 
 Value 121 
 
 12. Error of the doctrine that Labour is the Cause of Value 123 
 Locke the originator of the doctrine that all Value is due to 
 
 Labour 123 
 
 Examples of the fallacy that Labour is the Cause of Value 126 
 IB. Even where Labour has been bestowed on anything which 
 
 has Value, it is not Ijabour which is the Cause of its 
 
 Value: but the Demand for it .... 128 
 
 Self-contradiction of Smith, Eioardo, and MoOuUoch on the 
 
 Cause of Value 128 
 
 14. Demand is the Sole Origin, Cause, or Form of 
 
 Value \ . .131 
 
 It is not Labour which is the Cause of Value : but 
 
 Value which is the Cause of, or Inducement to, 
 
 Labour 131 
 
 It is not the Labour of the Producer which constitutes a 
 
 thing Wealth, but the Demand of the Consumer 132 
 
CONTENTS XXIX 
 
 PAGE 
 
 15. Demand confers Value on Things on which no Labour 
 
 was ever bestowed ........ 132 
 
 16. Credits or Debts have "Value because they will be paid 
 
 in Money . 133 
 
 Section III * 
 
 On the General Law of Value : or the General Equation of Economics 
 
 17. General Principles of the Inquiry 135 
 
 There can be only One General Law of Value . . 136 
 
 18. Application of the principles of the Continuity of Science 
 
 to determine the General Equation of Economics . 136 
 
 19. Meaning of saying that Economics is a Physical Science . 137 
 
 20. Lord Lauderdale's Law of Value 138 
 
 The General Equation of Economics .... 138 
 
 Economics is an Exact but not a Precise Science . 140 
 Economics is a Positive Inductive Physico-Moral 
 
 Science .... .... Ill 
 
 CHAPTER ni 
 THE THEOEY OF THE COINAGE 
 
 1. Values are estimated in Honey and Credit . 142 
 
 2. Meaning of Bullion 142 
 
 3. Standard of Gold and Silver Bullion 143 
 
 4. Meaning of Coin 143 
 
 5. Relation of Coin to Bullion 143 
 
 6. Invention of Coining 145 
 
 7. Meaning of the Mint Price of Gold and Silver . 146 
 
 8. It is not an Economic error to Fix the Mint Price of 
 
 BuUion .... . ... 147 
 
 9. Meaning of the Market Price of Gold and Silver . . 148 
 
 10. If a change takes place in the Relative Value of the Gold 
 
 and Silver Coins, to determine whether it is due to an 
 Alteration in the Value of Gold and Silver, or to 
 a Depreciation of the Coinage . 
 
 11. On Gresham's La'w of the Coinage . 
 
 12. What is a Pound? 
 
 13. Introduction of a Gold Coinage in England . 
 How Gold became the Standard Coinage of England 
 
 14. The Silver Coinage . . . . 
 
 150 
 151 
 153 
 155 
 155 
 156 
 
 CHAPTER IV 
 
 THE THEORY OF CREDIT 
 
 Pbeliminaky Remarks ... ... 157 
 
 The trade in Debts the most colossal branch of modern 
 
 Commerce . . , . . .' . . " . . 157 
 
XXX CONTENTS 
 
 FAQE 
 
 § The System of Credit, Banking, and BiUs of Exchange was 
 
 originated by the Bomana 159 
 
 The Theory of Credit brought to perfection by the Eoman 
 
 Lawyers ■^'"' 
 
 Mathematicians err in their application of the term 
 
 "Negative" to Debts 160 
 
 Section I 
 
 On the Origin of the System of Credit, Banking, and Bills of Exchange 
 in Europe 
 
 161 
 161 
 163 
 164 
 166 
 166 
 167 
 168 
 168 
 169 
 171 
 
 1. Methodical business habits of the Bomans . 
 
 2. Banking invented by the Bomans .... 
 
 3. On the Family Ledgers of Eoman citizens . 
 
 4. On the Method of contractiug a Loan among the Bomans 
 
 5. On the Stipulatio, or Verbal Contract .... 
 
 6. On Arcana Nomina ....... 
 
 7. On the Obliyatio Litteris, or Written Contract . 
 
 8. On the Obligatio Consensu, or Consensual Contract 
 
 9. The Boman Bankers invented Bills of Exchange . 
 
 10. On Transferable Documents of Debt .... 
 
 11. On the Greek Trapezitse 
 
 Section II 
 On the Nature of Credit 
 
 12. Personal Q,ualities are Wealth. 173 
 
 13. On the Creation of Obligations 176 
 
 14. Division of Opinion among Jurists as to the Case of the 
 
 Debtor in the Obligation 177 
 
 15. Advantage of adopting the Conception of Economics as the 
 
 Science of Exchanges, or of Commerce .... 179 
 
 16. On an Erroneous Idea as to the Nature of Credit . . 180 
 
 17. On the Error made by some Mathematicians in terming 
 
 Debts Negative Quantities 182 
 
 18. Error of Peacock 185 
 
 19. On the Application of the Theory of Algebraical Signs 
 
 to Xlconomics 186 
 
 20. AU Sciences deal with Quantities and Operations . 188 
 
 21. Examples of the Algebraical Signs applied to Quantities . 190 
 
 22. Examples of the Algebraical Signs applied to Operations . 192 
 
 23. The Terms Positive and Negative are also used by Jurists 
 
 to denote Opposition 193 
 
 24. Example of the Application of the Positive and Negative 
 
 Signs to Time 194 
 
 25. The Theory of the Value- of Land 195 
 
CONTKNTS XXXI 
 
 FAas 
 
 26. A Person exercising any Profitable Business is an Economic 
 
 Quantity analagous to Land 196 
 
 27. If Money is termed Positive Capital Credit may be 
 
 termed Negative Capital 197 
 
 28. On Debts as Negative Quantities . . . .198 
 
 Section III 
 On the Transfer of Credits, or Debts 
 
 29. Debts are Saleable Commodities . . ... 200 
 
 30. On Property held in Contract, or on Jura in Personam . 201 
 
 31. Unilateral and Bilateral Contracts 202 
 
 32. On the Sale or Transfer of Debts in Roman Law . . 204 
 
 33. The Prsstorian Jurisdiction 205 
 
 34. The Sale of Debts made free 208 
 
 35. Quotation from Azo 209 
 
 36. Bills of Exchange negotiable by the Mercantile Law of 
 
 Europe 209 
 
 37. On the Principles of English Law and Equity relating to the 
 
 Sale or Transfer of Debts 
 
 38. Lord Coke's reason erroneous 212 
 
 39. Property under the Feudal System 212 
 
 40. Nature of Feudal Society 213 
 
 41. Appointment of a Eoyal Commission to prepare a Digest of 
 
 the Law 214 
 
 42. Contract between Lord and Vassal 216 
 
 43. On the Rules of the Common Law of England relating to 
 
 the Transfer of Ghoses-in-action , 218 
 
 44. Feuds and Charters made Assignable 219 
 
 45. Case in which the Debtor had not assented to the Transfer 
 
 of the Debt 221 
 
 46. General Results of the preceding Cases .... 222 
 
 47. The King's Bench holds that Promissory Notes could not be 
 
 sued upon at Common Law 223 
 
 48. Similar Decisions of the Court of Session .... 225 
 
 49. Grounds of Lord Holt's Decisions 225 
 
 50. In Grant v. Vaughan the King's Bench holds these Cases 
 
 erroneous 226 
 
 51. Lord Holt's Cases in modern times supposed to be correct . 227 
 
 52. Respondentia Bonds held assignable 228 
 
 53. The Opinion of some Judges on the Transfer of Ghoses-in- 
 
 action 228 
 
 54. On the Property of the Transferee in Instruments Lost or 
 
 Stolen 231 
 
 55. On the Origin of the Dogma that Ghoses-in-action are not 
 
 Assignable at Common Law 234 
 
XXXll CONTENTS 
 
 PAGE 
 
 § 66. Obligations under the Feudal System 235 
 
 57. For 550 years the Courts of Common Law held Ghoses-in- 
 
 action Assignable 236 
 
 58. Bills and Notes were Deeds, or Specialties in English Law 236 
 
 59. Signature substituted for Seals 237 
 
 60. Modern doctrine due to Lord Kenyou 238 
 
 61. Case of Johnson v. Callings, in 1800 239 
 
 62. Propositions contained in the general Dogma . . . 239 
 
 63. Lord Mansfield founder of Mercantile Jarisprudence . . 240 
 
 64. The Case of Bovill v. Dixon 244 
 
 65. The Author selected by the Law Digest Commissioners to 
 
 prepare the Digest of the Law of Bills of Exchange . 248 
 
 66. The Case of Crouch v. The Credit Fongier of England . . 252 
 
 67. Points of Conflict between the principles held in this case 
 
 and those in the Author's Digest 256 
 
 68. The Case of Goodwin v. Mobarts 259 
 
 69. Choses-in-action made Transferable by Statute . . . 263 
 
 Section IV 
 Upon Instriiments of Credit 
 
 70. Meaning of Instrument of Credit . . , . . . 265 
 
 71. Origin of BiUs of Exchange 266 
 
 72. Eevival of Banking in Europe 267 
 
 73. The Statute of Merchants 269 
 
 74. Promissory Notes payable to bearer in common use in the 
 
 time of Edward IV 269 
 
 75. The word BiU included Deeds 272 
 
 76. Bank Post Bills 274 
 
 77. On Bills of Exchange, Drafts, and Promissory Notes . . 275 
 
 78. Definition of a Draft 277 
 
 79. Definition of a Promissory Note 278 
 
 80. Upon Indorsement 279 
 
 81. On Banking Instruments of Credit 281 
 
 82. Bankers' Notes and Cheques 283 
 
 Section V 
 On the Extinction of Obligations 
 
 83. On the Limits of Credit 285 
 
 84. On the Extinction of Obligations 287 
 
 85. On Belease, or Acceptilatio 288 
 
 86. AppHoation of Algebra and Eoman Law to Comimerce . . 288 
 
 87. The Belease of a Debt in all cases Equivalent to a Donation 
 
 or Payment in Money . 289 
 
CONTENTS XXXUl 
 
 PAGE 
 
 i 88. The same oontiuued 290 
 
 89. On Gonfusio, iu Eoman Law 291 
 
 90. The Belease of a Debt may Extinguish an Obligation in Two 
 
 ways 292 
 
 91. When + £100 cancels — £100, and when it does not . 292 
 
 92. On Payment in Money 293 
 
 93. On Benewal, or Transfer : or Novatio 294 
 
 94. On Delegatio 295 
 
 95. A Set Off : or Compensation 296 
 
 96. Compensation allowed as a Eight 296 
 
 97. Set Ofe allowed as a Eight 297 
 
 98. Examples of Set OH, or Compensation .... 297 
 
 99. On the Quantity of Credit compared to the Quantity of 
 
 Money 299 
 
 100. Two Branches of the System of Credit . . . .300 
 
 CHAPTEE V 
 ON COMMEECIAL CEEDIT 
 
 1. AppUoation of Credit iu Commerce 302 
 
 2. On the System of Credit based upon simultaneous Transfers 
 
 of Commodities 302 
 
 3. Debts made transferable 304 
 
 4. Credit used by Foreign Merchants 305 
 
 6. Exaggerated Ideas of the Security of Eeal Bills . . . 306 
 
 6. On Accommodation Bills 307 
 
 7. Distinction between Bills of Exchange and Bills of Lading . 309 
 
 8. On Credit created for the purpose of being applied to the 
 
 Formation of New Products 311 
 
 CHAPTEE VI 
 
 THE THEOET OP BANKING 
 
 1. Application of the Juridical Theory of Credit to the business 
 
 of Banking 313 
 
 2. On the Meaning of the word Bank 314 
 
 3. Meaning of Bank in English 316 
 
 4. Meaning of the word Banker 318 
 
 5. On the Currency Principle 321 
 
 6. On the Mechanism of Banking 324 
 
 7. On the Common Error respecting Deposits .... 327 
 
 8. In Banking Language a Deposit and an Issue are the 
 
 same . , 330 
 
 9. On the method of Utilising Banking Credits . . . 331 
 10. Operations by means of Cheques 382 
 
XXXIV CONTENTS 
 
 PAGE 
 
 11. On the Legal Eelation between Banker and Customer . . 333 
 
 12. On the Legal Contract between Banker and Customer . . 334 
 
 13. Error of the Common Description of Banking . . ■ 336 
 
 14. On the Clearing House 337 
 
 15. On the Caution necessary in applying Mathematics to Eco- 
 
 nomics . ....... 339 
 
 16. On the Scotch System of Banking . . . . , 341 
 
 17. On Cash Credits 344 
 
 18. Fundamental Concept 344 
 
 19. Cash Credits granted in aid of Persons .... 345 
 
 20. On Cash Credits granted to promote Agriculture and other 
 
 Public Works 347 
 
 21. Public Works created by means of Cash Credits . . . 348 
 
 22. Credit may purchase Labour as well as Commodities . . 349 
 
 23. On Banks of Credit Fongier : or Land Banks . . . 351 
 
 24. On the Economical Effects of Banking .... 354 
 
 25. Contrast between the Common Notions about Banking and 
 
 the Reality 357 
 
 26. How Credit is Capital to a Banker 358 
 
 27. On Accommodation Bills 359 
 
 28. Explanation of the Eeal Danger of Accommodation Bills . 361 
 
 29. On the Danger of Accommodation Paper to a Bank . . 363 
 
 30. She Case of Laurence, Mortimer & Go. .... 364 
 
 31. On the Transformation of Temporary Credit into Permanent 
 
 Capital 369 
 
 CHAPTER VII 
 THE THEORY OP BANKING DISCOUNT 
 
 1. Meaning of Discount 372 
 
 2. On Banking Discount 373 
 
 3. Table of Profits 374 
 
 4. To find in what Time a Sum of Money wiU -double itself at 
 
 Simple Banking Discount ...... 375- 
 
 5. Figures exhibiting differences of Discount and Interest . 375 
 
 6. To find the Amount of a given Sum in any Time at Com- 
 
 pound Banking Discount . - 377 
 
 7. To find in what Time a Sum of Money wiU double itself at 
 
 Compound Banking Discount 378 
 
 8. Formulffi for the Amount of a Sum at Interest and Discount, 
 
 Simple and Compound 379 
 
 9. To find the difference in Profit between Discounting Long 
 
 and Short BiUs 379 
 
 10. To find the Profit on Discounting at more frequent intervals 
 
 than a year . . . . ., . . . . , . 380 
 
CONTENTS XXXV 
 
 CHAPTER Vm 
 ON THE FOREIGN EXCHANGES 
 
 FASG 
 
 1. Definition of an Exchange 381 
 
 2. On the Nominal Exchange 382 
 
 3. Effect of a Depreciated Coinage .... . . 882 
 
 4. No Par of Exchange between countries which use difierent 
 
 Metals as a Legal Standard 384 
 
 5. If the Coinage is in a Depreciated State, to determine whether ^ 
 
 the Exchange is Favourable, at Par, or Adverse . . 384 
 
 6. On Inconvertible Paper Money 386 
 
 7. Lord King's Law of Paper Money . . . . . 387 
 
 8. On the Real, or Commercial Exchange . . . 389 
 
 9. On Exchange with Four Parties 390 
 
 10. The Time Par of Exchange 391 
 
 11. On Foreign Exchange 392 
 
 12. Effects of the Exchanges being Favourable or Adverse to 
 
 London .393 
 
 13. Exchange between London and Places from which it Receives 
 
 the Variable Price 393 
 
 14. Exchange between London and Places to which it Gives the 
 
 Variable Price 394 
 
 15. On the Limits of the Variations of the Exchanges . . 395 
 
 16. Effects of the Restoration of the Coinage on the Exchanges. 396 
 
 17. On Exchange Operations 397 
 
 18. On the Real or Commercial Exchange 401 
 
 19. The Mercantile System 403 
 
 20. The " Balance of Trade " 404 
 
 21. Examples of Foreign Trade 405 
 
 22. Further Example 408 
 
 23. Foreign Market 409 
 
 24. Example from New York 410 
 
 25. BuUion the least profitable article of Import . . . 410 
 
 26. Cause of Export of BulKon 411 
 
 27. Causes of drain of Bullion 412 
 
 28. Russian and Irish Exchanges 413 
 
 29. Further Example of Foreign Trade 413 
 
 30. Foreign Trade may not require Export of BuUion . . 414 
 
 31. Error of " Balance of Trade " 415 
 
 32. On the Bate of Discount as influencing the Exchanges . 417 
 
 33. On Foreign Loans, Securities, and Remittances, as affecting 
 
 the Exchanges 418 
 
 34. Payment of the French Indemnity 421 
 
 35. The India Council Bills 427 
 
 36. On Monetary and Political Conwilsions as affecting the 
 
 Exchanges 430 
 
XXXVl CONTENTS 
 
 PAGE 
 
 § 37. On the Means ol Correcting an Adverse Exchange . . 430 
 
 CHAPTBB IX 
 
 ON THE HISTOEY OE BANKING IN ENGLAND UNTIL THE 
 EENBWAL OE THE BANK CHAETEE IN 1800 
 
 1. Ba,nking did not exist in England before 1640 . . . 433 
 
 2. Circumstances from whicli it sprung — Difficulties of King 
 
 Charles 1 434 
 
 3. Dissolution of Parliament in 1640 434 
 
 4. Charles I. seizes the merchants' money in the Tower . . 435 
 
 5. The merchants obliged to keep their money at home . . 435 
 
 6. Afterwards they entrust it to the Goldsmiths . . . 436 
 
 . 437 
 
 . 437 
 
 . 437 
 
 . 437 
 
 . 438 
 
 . 438 
 
 . 439 
 
 . 439 
 
 . 440 
 
 These Goldsmiths were then caUed Bankees 
 
 7. The Bankers lend money to Cromwell . 
 
 8. They lend money to Charles II. . 
 
 9. Their method of doing business with the Crown 
 
 10. Much esteemed by the Government 
 
 11. The Dutch destroy Sheerness and Chatham . 
 
 12. Which causes a run upon the Bankers 
 
 13. TheTreaty of Dover, 1660 .... 
 
 14. Charles 11. obtains £800,000 from Parliament 
 
 15. He quarrels with the Dutch — pecuniary difficulties . . 440 
 
 16. He shuts up the Exchequer, 2nd Jan., 1672, and seizes the 
 
 Bankers' money in it . . . . . ■ . 441 
 
 17. Great distress of the Bankers, Merchants, and others . . 441 
 
 18. Case of the Bankers in the Court of Exchequer, and the Ex- 
 
 chequer Chamber — Judgment of Lord Somers . . 442 
 
 19. Eeversed by the House of Lords in 1700 .... 443 
 
 20. Many projects for Banks about this time, 1679 . . . 444 
 
 21. Great falling off in the Bevenue, after the Eevolution . . 444 
 
 22. Plans for raising money to carry on the War with France . 445 
 28. Which do not succeed 446 
 
 24. Paterson's three plans for raising money to carry on the 
 
 War 446 
 
 25. The third attempt succeeds, and an Act passed for the estab- 
 
 lishment of the Bank of England 448 
 
 26. None but Commercial States had hitherto been able to raise 
 
 money by way of Perpetual Annuities .... 448 
 
 27. Chief provisions in the Act relating to the Bank of England 448 
 
 28. Great hostility to its establishment 450 
 
 29. Mr. Michael Godfrey's pamphlet about the Bank . . .451 
 
 30. First outbreak of a speculative mania in 1694 . . . 452 
 
 31. Great derangement of the Coinage in 1695 .... 452 
 
 32. Parliamentary proceedings to remedy the disorder . . 454 
 
CONTENTS XXXVU 
 
 PAGE 
 
 33. Guineas rise to 30s. — great fall in the Exchange . . . 457 
 
 34. Lord Somers proposes to make the Coin current by weight, 
 
 instead of by tale 458 
 
 35. Eeport of Mr. Lowndes on the State of the Coin . . . 459 
 He proposes to alter the current rate of the Coin . . . 460 
 
 36. Beply of Locke 462 
 
 Locke demonstrates the futility of Lowndes's plan . . 464 
 
 37. Confusion caused by the bad state of the Coinage . . 470 
 
 38. Committee appointed by the House of Commons to consider 
 
 the price of guineas — numerous petitions . . . 471 
 
 39. Eesolutiona of Parliament on the price of guineas . . 472 
 
 40. Partial suspension of payments at the Bank . . . 473 
 
 41. Extracts from Evelyn's Diary about the Coinage . . . 473 
 
 42. The Reformation in the Coinage restores the Exchanges to 
 
 par 474 
 
 43. Projected Land Bank — Bank Notes at 20 per cent, discount . 475 
 
 44. Parliament undertakes to restore the public credit, 1696 . 476 
 
 45. An Act for increasing the Capital of the Bank first creates a 
 
 monopoly on its behalf 476 
 
 46. First Issue of Exchequer Bills 478 
 
 47. Licrease of Capital by the Bank, and Bank Notes rise to par 478 
 
 48. Unfortunate effects of the monopoly granted to the Bank of 
 
 England 478 
 
 49. Extract from the Bullion Eeport 479 
 
 60. Certain allegations in this extract 482 
 
 51. Which are shown to be erroneous 482 
 
 52 . This monetary crisis important in the Theory of the Currency 484 
 
 53. Large amount of the Bank Notes probably contributed to in- 
 
 crease the discount it fell to 484 
 
 54. Error in allowing the old and new Coin to circulate together 484 
 
 55. Writers of this period always said that Notes were at a dis- 
 
 count, and not that Gold had risen .... 485 
 
 56. Conduct of the Directors impugned by some of their Pro- 
 
 prietors .......... 485 
 
 57. The Bank in difficulties in 1704 and 1709 . . . .486 
 
 58. Act of 1709, enlarging the Capital of the Bank . . .486 
 69. Prohibition of Banking partnerships of more than six persons 487 
 
 60. This clause effectual at that time 488 
 
 61. Extension of the Bank Charter in 1713 to 1742 . . .488 
 
 62. Bank of England exempted from Usury Laws in 1716 . . 488 
 
 63. Disorder of the Coinage in 1708 489 
 
 Eeport of Newton on the Coinage 489 
 
 Guineas finally fixed at 21s. ; and the Mint Price of Gold at 
 
 £3 17s. lOp 494 
 
 64. South Sea Company's proposals regarding the Public Debt . 495 
 
 65 . Bank of England's prjsposala 496 
 
XXXVlll CONTENTS 
 
 FAas 
 § 66. Great contest between the Bank and the South Sea Company 
 
 in 1720 496 
 
 67. Proposals of the Bank, and amended proposals of both . 497 
 
 68. Victory of the South Sea Company 497 
 
 69. Bursting of the bubble mania 498 
 
 70. Bank purchases a portion of the South Sea Annuities, and 
 
 run upon the Bank 498 
 
 71. Formation of the Eeserve Fund, or Best .... 499 
 
 72. Eenewal of the Charter in 1742, and extension of the 
 
 Monopoly 500 
 
 73. Eebellion in Scotland in 1745, and run upon the Bank . 501 
 
 74. Increase of Capital in 1746 502 
 
 75. Bank issues £10 and £15 Notes in 1759 . . . .502 
 
 76. Great failures on the Continent in 1763 .... 502 
 
 77. Benewal of the Charter in 1764 504 
 
 78. Great failures in England in 1772 504 
 
 79. Else in the market price of Gold, from the deterioration of 
 
 the Coinage 504 
 
 80. Eenewal of the Charter in 1781 ...... 505 
 
 81. Great development of mechanical genius in England, and in- 
 
 crease of country Bankers during the American War . 505 
 
 82. Which gives rise to a great multipUcation of country Bank 
 
 Notes 606 
 
 83. Derangement of the Foreign Exchanges .... 507 
 
 84. Crisis in 1783 507 
 
 85. Doctrine of Mr. Bosauquet 608 
 
 86. Apparent prosperity after American War .... 508 
 
 87. Declaration of War in 1793, and commercial panic . . 609 
 
 88. Pressure on the London Bankers 610 
 
 89. Sir Francis Baring blames the conduct of the Bank in 1793 610 
 
 90. Three different causes for a demand for guineas . . . 611 
 
 91. Great commercial crisis in England and Scotland . . 511 
 
 92. Appointment and Eeport of the Committee of the House of 
 
 Commons 512 
 
 93. Committee recommend an issue of Exchequer Bills . . 512 
 
 94. Sums sent down to Manchester and Glasgow allay the panic 513 
 
 95. Great success of this measure . . . . . . 513 
 
 513 
 514 
 514 
 514 
 
 96. Opinions of contemporary writers 
 
 97. Approved by the Bullion Eeport . 
 
 98. Difference of opinion respecting it 
 
 99. Eeply to such objection 
 
 100. London Bankers discontinue the issue of Notes . . . 615 
 
 101. Commencement of embarrassments in 1795, which led to the 
 
 suspension of cash payments in 1797 .... 516 
 
 102. Cause of part of the embarrassment, according to Sir Francis 
 
 Baring 516 
 
CONTENTS XXXIX 
 
 PAQK 
 
 103. Advances by the Bank to Government contrary to its Charter 516 
 
 104. Act obtained by Mr. Pitt, and pressure exerted by him on 
 
 the Bank 518 
 
 105. Mr. Pitt pays no attention to the remonstrances of the Di- 
 
 rectors 518 
 
 106. Pall of the Foreign Exchanges, and extension of the issues 
 
 by the Bank 619 
 
 107. Commencement of a drain of Gold in 1795 . . . .519 
 
 108. Meeting of Parhament — great failure of the harvest . . 520 
 
 109. Proposal of further loans ; remonstrance of the Bank . . 521 
 
 110. Eule for the restriction of discounts, 31st December, 1795 . 521 
 
 111. Directors inform Mr. Pitt that a further loan would be fatal 
 
 to the Bank 521 
 
 112. Unscrupulous conduct of Mr. Pitt 522 
 
 113. Great fall in the Exchange with Hamburg .... 522 
 
 114. Complaint of the merchants of a want of circulating medium 522 
 
 115. Mr. Pitt solicits further loans from the Bank . . . 523 
 
 116. Mr. Pitt again demands further loans from the Bank . . 524 
 
 117. Exchanges become favourable, but the Bank continues its 
 
 restrictive pohcy ........ 524 
 
 118. Gloomy condition of the political situation of the country 
 
 in 1796 525 
 
 119. Demand of guineas for Ireland in January, 1797 . . . 526 
 
 120. " Mr. Pitt demands £1,500,000 in gold for Ireland, on 1st Feb., 
 
 1797 526 
 
 121. Great run upon the Newcastle Banks, which stop payment . 526 
 
 122. Great drain of Bullion from the Bank of England ; proposal 
 
 of a suspension of cash payments 527 
 
 123. Great contraction of the Bank's issues in February, 1797 . 628 
 
 124. Meeting of the Cabinet, on Sunday, 26th February, 1797 ; and 
 
 order in Council directing a suspension of cash payments 528 
 
 125. The King sends a Message to Parliament .... 528 
 
 126. State of the cash in the Bank when it stopped payment . 629 
 
 127. Eehef produced by the stoppage of cash payments ; and ex- 
 
 tension of the Bank's issues 529 
 
 128. Eeports of the Committees of both Houses of the flourishing 
 
 state of the Bank 529 
 
 129. Provisions of the Bank Bestriction Act .... 629 
 
 130. Country Banks allowed to issue Notes under £5. . . 530 
 
 131. Scotch Banks allowed to issue Notes under 20s. . . . 530 
 
 132. Definition of the " Circulating Medium," by Mr. Pitt, agrees 
 
 with the principles of this work 530 
 
 133. Conflicting opinions' respecting the stoppage of payment . 531 
 
 134. Point to be determined 531 
 
 135. Opinion of Mr. Henry Thornton 531 
 
 136. Opinion of Mr. Walter Boyd 532 
 
xl CONTENTS 
 
 ^^ PAGE 
 
 § 137. Opinion of Mr. George Ellison ■ ^^2 
 
 138. The Bullion Committee condemns the policy of the Bank in 
 
 1793 and 1797 532 
 
 139. Erroneous policy of the Directors in 1795 .... 532 
 
 140. This crisis in a great measure owing to the monopoly of the 
 
 Bank ........... 533 
 
 141. Suspension of cash payments must probably have taken 
 
 place at some period of the War 534 
 
 142. The Bank authorised to issue £1 and £2 Notes . . . 535 
 
 143. The Exchanges favourable when the stoppage took place . 536 
 
 144. Eestriction prolonged to the end of the War . . . . 536 
 
 145. Sir William Pulteney's motion to establish a new Bank .. 537 
 
 146. Great influx of gold in 1798 537 
 
 147. Great scarcity in 1800 538 
 
 148. Eise in the market price of gold in 1800 .... 588 
 
 149. Eenewal of the Bank Charter in 1800 688 
 
 150. Eesults of the two theories ; and Stoppage of the Bank of 
 
 England - .... 539 
 
THE 
 
 THEOEY AND PEACTICE 
 
 OF 
 
 BANKING 
 
 CHAPTER I 
 
 DBPINITION OF TERMS 
 
 1. Banking is a department of the great Science of 
 Economics: or the Science of Exchanges; or of Com- 
 merce in its widest extent and in all its forms and varieties 
 
 The term Economics is compounded of the Greek words 
 oT/cos and vo^os 
 
 Ot/cos in Greek means Property of every sort and descrip- 
 tion : it is the technical term in Attic Law for a person's whole 
 substance and estate in whatever form : it includes not only such 
 Material Property as lands, houses, money, jewelry, corn, cattle, 
 timber, &c., but also all such Property as Hights of action, 
 Bank Notes, Bills of Exchange, the Funds, Shares in Commer- 
 cial Companies, the Goodwill of a business, Copyrights, Patents, 
 Policies of Insurance, and all Property which consists in mere 
 abstract Eights, which in Law are termed Incorporeal Property 
 
 No'/ios in Greek means a Law 
 
 Hence Economics is the Science which treats of the Ex- 
 changes of aU the different species of Property: it is the 
 Science which treats of the Laws which govern the Relations of 
 
 B 
 
2 THEOEY AND PRACTICE OF BANKING 
 
 Exchangealle Quantities: or the Priaciples and Mechanism of 
 Commerce in all its forms : it is sometimes called the Theory 
 of Value : or the Science of Wealth 
 
 Banking, as will be explained more fully hereafter, is that 
 department of the General Science of Economics, or Commerce, 
 which treats of the Exchanges of Money for Credit, and 
 of Credit for Credit. 
 
 Definition of Wealth or of an Economic Quantity 
 
 2. As Economics treats exclusively about things so far as 
 
 they are Wealth, it is necessary to define clearly what is the 
 
 technical meaning of the terna Wealth 
 
 Ancient writers unanimously held that Exchangeability, 
 
 or the capability of being bought and sold, is the sole essence and 
 
 principle of Wealth : and that everything whatever which can 
 
 be bought and sold, or exchanged, is Wealth, whatever its 
 
 nature may be 
 
 Thus Aristotle says — 
 
 "XpijfjiaTa Se A.^-yo/iev Travra ocriav ?J d^ia vofj-icr/j-aTi fierpiiTai 
 
 "And we call Wealth all things whose Value -can be 
 
 measured in Money" 
 
 So the eminent Roman Jurist, Ulpian, says — 
 
 "Ea enim Res est quae emi et venire potest" 
 
 "For that is Wealth which can be bought and sold" 
 
 The most recent Economists agree in this definition. Thus 
 
 Mill says — 
 
 "Everything therefore forms a part of Wealth which 
 
 has a Power of Purchasing" 
 
 This is the Definition of Wealth which we adopt as the basis 
 
 of the Science of Economics 
 
 A Quantity means anything which can be measured: 
 hence an Economic Quantity means anything whose 
 Value can be measured in money 
 
 The sole criterion, then, of anything being Wealth is — Can it 
 be bought and sold ? Can it be exchanged separately and inde- 
 pendently of anything else ? Can its Value be measured in 
 Money ? 
 
PERSONAL QUALITIES ARE WEALTH 3 
 
 This criterion may seem very simple : but in fact to apply it 
 properly : to discern what is and what is not separate and inde- 
 pendent Exchangeable Property: requires a thorough knowledge 
 of some of the most abstruse branches of Law and Commerce 
 
 On the Three Species of Wealth or of Economic 
 Quantities 
 
 3. Having then adopted Exchangeability, or the capability 
 of being bought and sold, as the sole essence and principle of 
 "Wealth, we have next to discover how many distinct orders, or 
 species of Quantities there are which satisfy this definition 
 
 Now, first, there are Material Things of all sorts, such 
 as land, houses, cattle, corn, money, jewelry, &c., which can be 
 bought and sold. Everybody now admits these things to be 
 Wealth : therefore we need say nothing more about them here 
 
 There are, however, other things or orders of Quantities 
 which can be bought and sold : and in modern times there has 
 been a vast aimount of controversy as to whether they should 
 be admitted to be Wealth or not : and it is these species of 
 Quantities which we have now to consider 
 
 Ancient Dialogue to shew that Personal Qualities are 
 
 Wealth 
 
 4. There is a very remarkable work of antiquity extant, 
 which is the earliest regular 'treatise that we are aware of, on an 
 Economical question. It is a dialogue called the " Eryxias," or 
 " On Wealth," and is frequently bound up with the dialogues of 
 Plato, and is attributed to Jilschines Socraticus, one of the most 
 distinguished disciples of Socrates. Critics, however, unanimously 
 pronounce it to be spurious, without being able to attribute it to 
 any definite author. High authorities consider that it was 
 probably written about the early Peripatetic Period 
 
 This dialogue is to the following effect : — The Syraousans had 
 sent an embassy to Athens : and the Athenians had sent a return 
 embassy to Syracuse. As the ambassadors were entering the city 
 on their return from Syracuse, they met Socrates and a party of 
 his friends, with whom they entered into conversation. Eryxias 
 
 B 2 
 
4 THEORY AND PRACTICE OF BANKING 
 
 one of the envoys, said that he had seen the richest man ih all 
 Sicily. Socrates immediately started a discussion on the nature 
 of Wealth. Eryxias said that he thought upon the subject as 
 every one else did : and that to be Wealthy meant to have much 
 Money. Socrates asked him what kind of Money he meant : and 
 he described the Moneys of various countries : at Carthage they 
 used as Money leather discs in which something was sewn up, hut 
 no one knew what it was : and he who possessed the greatest 
 quantity of this money at Carthage was the richest man there : 
 but at Athens he would be no richer than if he had so many 
 pebbles from the hill. At Lacedsemon they used iron as money, 
 and that useless iron : he who possessed a great quantity of this 
 at Sparta would be wealthy, but anywhere else it would be worth 
 nothing. In Ethiopia again, they used carved pebbles, which 
 were of no use anywhere else. Among the nomade Scythians- a 
 house was not wealth, because no one wanted a house, but greatly 
 preferred a good sheepskin cloak. He shewed that if anyone 
 could live without meat and drink they would not be wealth to 
 him, because he did not want them. Socrates then asked why 
 some things were Wealth and other things not Wealth ? Why 
 were some things Wealth in' some places and not in others ? He 
 shewed that whether a thing is Wealth, or not depends entirely 
 upon Human Wants and Desires: that everything is 
 Wealth where it is Wanted and Demanded : and that it is 
 not Wealth where it is not Wanted and Demanded. That things 
 are x/"?V<''^"j or Wealth, only when and where they are x/^'yo't/^a, 
 that is, where they are' Wanted and Demanded 
 
 Thus we see that though some persons might be puzzled at the 
 meaning of the word Wealth, there is no possibility of mistake 
 when we refer to the Greek : because xp-^fjiara, which is the 
 usual word for Wealth, comes from xp<^ofiai,, to Want or Demand: 
 consequently the word xPW°-'^'^> or Wealth, means simply any- 
 thing whatever which is Wanted and Demanded : no matter what 
 its nature may be 
 
 It is, then, Human Wants and Desires which alone 
 constitute anything Wealth : anything whatever which people 
 want, demand, and are willing to pay for, is Wealth, whatever its 
 nature may be : and anything which no one wants and demands 
 js not Wealth 
 
PERSONAL QUALITIES ARE WEALTH 5 
 
 Socrates shewed that gold aad silver are only Wealth ia so far 
 as they enable us to obtain what we want and demand : and that 
 if we can use anything else to obtain what we want and demand 
 in the same way as gold and silver do, such things are "Wealth/ 
 just for the same reason that gold and silver are 
 
 Socrates then instanced professors and persons who gained 
 their living by giving instruction in the various sciences. He 
 said that persons got what they wanted in exchange for this 
 instruction, just as they did for gold and silver : and consequently 
 that the Sciences are Wealth — aC eTrto-TT/jnai )(pr]fj.aTa ovaai : and 
 that those who are masters of such sciences are so much the richer 
 
 — TrXovatoiTepoL eicrt 
 
 Now in instancing the Sciences as Wealth, that of course is a 
 general term for Labour: because Labour in Economics is 
 any exertion of Human Ability or Thought which is 
 wanted, demanded, and paid for. Thus the author of this 
 dialogue expressly classes Labour under the term Wealth 
 
 Socrates in this dialogue shews that the Mind has wants and 
 demands as well as the body : and that the things which are 
 wanted and demanded for the Mind, and are paid for, are equally 
 Wealth as those things which satisfy the wants and demands of 
 the body, and are paid for 
 
 And this exactly agrees with Aristotle's definition that 
 everything is Wealth whose Value can he measured in 
 money: because if one person wants another to do any Labour 
 or Service for him, and pays him for such Labour or Service, its 
 Value is measured in money, as exactly as if it were a material 
 chattel. Suppose that a person gives fifty guineas for a horse, 
 and also fifty guineas for the opinion of an eminent counsel, the 
 Value of the opinion is measured in money as exactly as the Value 
 of the horse : and therefore they are both equally Wealth : and in 
 fact all modern Economists treat Labour as a Commodity, which 
 can be bought and sold, and is subject to exactly the same Laws 
 of Value as any material chattel 
 
 Modern Economists include Personal Qualities under the 
 term Wealth 
 
 5. And in accordance with the -author of the Eryxias all 
 
6 THEORY AND PEACTICE OF BANKING 
 
 Economists of note since Smith include Personal Qualities, 
 Skill and Energy under the term Wealth 
 
 Thus under the term Fixed Capital Smith enumerates 
 " the acquired and useful Abilities of all the inhabitants, or 
 members of the society. The acquisition of such Talents, by 
 the maintenance of the acquirer during his education, study, or 
 apprenticeship always costs a real expense, which is a Capital fixed 
 and reahsed as it were in his person. These Talents as they 
 make part of his Fortune, so do they likewise that of the 
 society to which he belongs " 
 
 So J. B. Say says—" He who has acquired a Talent at the 
 price of an annual sacrifice, enjoys an accumulated Capital, and 
 this Wealth, though immaterial, is nevertheless so little 
 fictitious, that he daily exchanges the exercise of his art for gold 
 and silver " 
 
 "Since it has been proved that Immaterial Property 
 such as Talents and acquired Personal Abilities foi-m 
 an integral part of Social Wealth " 
 
 " You see that Utility, under whatever form it presents itself, 
 is the source of the Value of things : and what may surprise you 
 Is that this Utility can be created, can have Value, and become 
 the subject of an Exchange, without being incorporated in any 
 material object. A manufacturer of glass places value in sand : a 
 manufacturer of cloth places it in wool : but a physician sells us a 
 Utility without being incorporated in any matter. This Utihty 
 is truly the fruit of his studies, his Labour and his Capital. We 
 buy it in buying his opinion. It is a real product, but im- 
 material " 
 
 Say calls all species of Labour and Services Immaterial 
 Wealth, because they are vendible products or commodities, but 
 not embodied in any matter. We may also call them Personal 
 Wealth, because they are always the products of some Person 
 
 Senior says—" If the question whether Personal Quali- 
 ties are articles of Wealth had been proposed in classical 
 times, it would have appeared too clear for discussion. [We have 
 already seen that the question was discussed in classical times.] 
 The only differences in this respect between a freeman and a slave 
 
PERSONAL QUALITIES ARE WEALTH 7 
 
 are, first, that the freeman sells himself, and only for a period, 
 and to a certain extent: the slave may be sold by others, and 
 absolutely : and secondly, that the Personal Qualities of the slave 
 are a portion of the Wealth of his master : those of the freeman, 
 so far as they can be made the subject of Exchange, are part of 
 his own Wealth. They perish indeed by his death, and may be 
 impaired or destroyed by disease, or rendered valueless by any 
 change in the custom of the country, which shall destroy the 
 Demand for his services : but, subject to these contingencies, they 
 are Wealth, and Wealth of the most valuable kind. The 
 amount of revenue derived from their exercise in England far 
 exceeds the rental of all the lands in Great Britain " 
 
 So also — " Even in our present state of civilisation, which 
 high as it appears by comparison, is far short of what may be 
 easily conceived, or even of what may be confidently expected, the 
 Intellectual and Moral Capital of Great Britain far ex- 
 ceeds all the Material Capital, not only in importance, but 
 in productiveness. The families that receive mere wages probably 
 do not form a fourth of the community : and the comparatively 
 larger amount of the wages even of these is principally owing to 
 the Capital and Skill with which their efforts are assisted and 
 directed by the more educated members of the society. Those 
 who receive mere rent, even using that word in its largest sense, 
 are still fewer : and the amount of rent, like that of wages, prin- 
 cipally depends on the knowledge by which the gifts of nature are 
 directed and employed. The bulk of the national revenue is 
 profit : and of that profit the portion which is merely interest on 
 Material Capital probably does not amount to one-third. The 
 rest is the result of Personal Capital, or, in other words, of 
 Education 
 
 " It is not in the accidents of the soil, in the climate, in the 
 existing accumulation of the material instruments of production, 
 but LQ the quantity and diffusion of this Immaterial Capital 
 that the Wealth of a country depends. The climate, the soil, 
 and the situation of Ireland have been described as superior, and 
 certainly not much inferior to our own. Her poverty has been 
 attributed to the want of Material Capital : but were Ireland now 
 to exchange her native population for seven millions of our 
 English North countrymen, they would quickly create the Capital 
 
8 THEORY AND PRACTICE OF BANKING 
 
 that is wanted. And were England North of the Trent to be 
 peopled exclusively by a million of families from the west of Ire- 
 land, Lancashire and Yorkshire would still more rapidly resemble 
 Connaught.. Ireland is physically poor, because she is morally 
 and intellectually poor. And while she continues uneducated, 
 while the ignorance and violence of her population render persons 
 and property, insecure, and prevent the accumulation, and prohibit 
 the introduction of Capital, legislative measures, intended solely 
 and directly to relieve her poverty may not indeed be ineffectual, 
 for they may aggravate the disease, the symptoms of which they 
 are meant to palliate, but undoubtedly will be productive of no 
 permanent benefit. Knowledge has been called Power — it is 
 far more certainly Wealth. Asia Minor, Syria, Egypt, 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 " 
 
 So Mill says—" The Skill and the Energy and the Per- 
 severance of the artizans of a country are reckoned part of 
 its Wealth., no less than its tools and machinery." And why 
 not the Skill and Energy and Perseverance of other classes as well 
 as artizans ? He also says — " Acquired capacities, which exist 
 only as means, and have been called into existence by Labour, 
 fall exactly, as it seems to me, within that designation " 
 
 So Madam Campan inscribed over the Hall of Study in her 
 establishment at St. Germain — 
 
 " Talents are the ornament of the rich, and the Wealth 
 of the poor " 
 
 We have thus already found two distinct Idnds of things 
 which can be bought and sold, or whose Value can be measured in 
 Money .- (1) Material Things which can be seen and handled, 
 such as money, cattle, corn, &c. : and (2) Things which can 
 neither be seen nor handled, but which can be bought and sold ;, 
 and though these two kinds of things have nothing in common 
 except the capability of being bought and sold, they are each for 
 that reason comprehended under the term Wealth 
 
RIGHTS ARE WEALTH 9 
 
 General Rule of Roman Law that Eights are Wealth. 
 
 6. But there is yet another order of Quantities, quite distinct 
 from the two preceding ones, which can be bought and sold, or 
 exchanged, and whose Value, therefore, can he measured in Money: 
 and it is to this class of Quantities that the student must direct 
 his most earnest attention ; because it is the one which modern 
 Economists have the greatest difficulty in apprehending : and it 
 is the one with which we are chiefly concerned in this work 
 
 Suppose that a customer pays in a sum of money to his 
 account at his banker's — What becomes of that Money ? It 
 becomes the absolute property of the banker to deal with in any 
 way he pleases. The customer transfers the absolute property in 
 the money to the banker : but he does not make him a present of 
 it. He gets something in exchange for it. And what is that 
 something ? In exchange for the Money the banker gives his 
 customer a Credit in his books : which is a Right of action 
 to demand back an equivalent sum of money at any time he 
 pleases. Furthermore, the banker agrees that his customer may 
 transfer this Eight of action, in the form of a Cheque or Bank 
 Note, to any one else he pleases. So this Right of action may 
 pass through any number of hands, and effect any number of 
 exchanges, exactly like the same sum of money, until the holder 
 of it demands payment of it and it is extinguished 
 
 This Eight of action is termed a Credit : because any 
 one who chooses to take it in exchange for goods or services 
 knows well enough that it is not the Eight or Title to any specific 
 sura of money : but it is only an abstract Eight against the 
 lanker to demand a sum of money from him : and it is only taken 
 because the receiver has the belief or confidence that he can get 
 money for it when he requires it 
 
 It will be convenient to. state here that this Eight of 
 action is also in Law and common usage termed a Debt : and 
 that the words Credit and Debt are used perfectly indis- 
 criminately to mean -a Creditor's Eight of action against 
 his Debtor. The reason of this will be explained in a subsequent 
 section. And this Eight of action or Credit, or Debt, is the 
 Price which the banker pays for the money 
 
10 THEORY AND PRACTICE OF BANKING 
 
 Similarly, when a merchant sells goods " On Credit," as it is 
 termed, to a trader, he cedes the Property in the goods to the 
 trader, exactly as if he had sold them for Money. And in ex- 
 change for the goods the trader gives the merchant a Promise to 
 fay, or a Eight of action to demand the money some time 
 —three months, perhaps— after date. This Eight of action 
 is also termed a Credit or a Debt : and it is the Price the 
 trader pays for the goods. And if it be recorded on Paper in the 
 form of a Bill of Exchange, it may be exchanged against other 
 goods, and circulated in commerce, exactly like an equal sum of 
 money, until it is paid off and extinguished 
 
 Again, suppose that the Government has need of a sum of 
 money for some public purpose. It " borrows " Money, as it is 
 termed, from private persons. That Money becomes the actual 
 property of the Government to exchange as it pleases : and in 
 Exchange for the Money, it gives to the " lenders " of it the 
 Eight to demand a series of payments either for ever, or for a 
 limited term of years. These Eights are the Price the Govern- 
 ment pays for the Money. In popular language they are termed 
 the Funds. And the owners of these Eights may sell them to 
 any one else they please. They are Saleable Commodities 
 
 Suppose, again, that a person subscribes to the Capital of a 
 Commercial Company. He pays the Money to the Company : the 
 Money becomes the property of the Company as a whole, and not 
 of any individual member of it. In exchange for the Money the 
 subscriber receives the Eight to share in the profits to be made 
 by the Company in the proportion in which he subscribed to the 
 Capital. These Rights are termed Shares : and they are 
 also Saleable Commodities : which may be bought and sold like 
 any material chattels 
 
 So, when a trader has established a successful business, he has 
 the Eight to receive the future Profits to be made by the business. 
 This Eight to receive the future profits is a Property quite 
 separate and distinct from and additional -to the house or shop, 
 and the actual goods in them. It is the product of labour, 
 thought, and care as much as any material chattel, and is part of 
 the trader's assets. It is termed the Goodwill of the business 
 
KIGHTS ARE WEALTH 11 
 
 An interesting example of this is given by Boswell. Thrale, 
 the great brewer, appointed Johnson one of his executors. In 
 that capacity it became his duty to sell the business. When the 
 sale was going on, Johnson appeared bustling about with an ink- 
 horn in his button-hole, like an exciseman, and on being asked 
 ■what he considered the Value of the property to be disposed of, he 
 answered, " We are not here to sell a parcel of Yats and boilers, 
 but the Potentiality of growing rich beyond the dreams of 
 ayarice." The sum realised was, we are told, £130,000, and the 
 latter phrase was merely Johnsonese for the Goodwill of the 
 business 
 
 When the great banking house of Jones Lloyd & Co. sold 
 their business to the London and Westminster Bank, it was said 
 in the papers that the sum paid was £500,000. And in a similar 
 way every place of business in the country has a Goodwill of 
 greater or less amount, which is a Valuable Commodity, and an 
 asset of the trader's, just as much as the house or shop, and the 
 material goods in it 
 
 So when an author has published a successful work, the Right 
 to multiply and sell copies of it is a Valuable Right, quite separate 
 and distinct from the printed copies of the work : and this Right 
 is termed Copyright : and it may be bought and sold like 
 any material chattel 
 
 It was said in the papers that the Copyright of the popular 
 song, " Slap bang ! here we are again," sold for £2,000 
 
 So there is a vast variety of Rights of a similar nature : such 
 as Patents, Trade Secrets, a Professional Practice, Policies of 
 Assurance, and many others which we need not enumerate here, 
 as we only wish to describe a distinct class or Order of Exchange- 
 able Quantities ; and not to discuss all the different varieties 
 of it 
 
 Now all these Abstract Rights of various sorts can be bought 
 and sold or exchanged : they can neither be seen nor handled in 
 that form : but their Value can be measured in Money ; and they 
 can be transferred from one person to another as easily as any 
 material chattels. They satisfy Aristotle's definition of Wealth. 
 
12 THEORY AND PKACTICB OF BANKING 
 
 They possess that Quality which Economists are now agreed is 
 the sole essence and principle of Wealth: and therefore by the 
 fundamental Laws of Natural Philosophy they are Wealth 
 
 7. Now in the Pandects of Justinian, which are the great 
 Code or Digest of Eoman Law, which is the basis of most of the 
 existing Law of the Continent and of Scotland, and whose 
 doctrines on Credit have always been adopted in Equity, and have 
 recently been enacted by Statute as the Law of England, it is laid 
 down as a fundamental General Rule — 
 
 " Pecuniae nomine non solvun numerata Pecunia, sed 
 omnes Res, tam soli quam mobiles, et tarn Corpora quam 
 Jura continentur" 
 
 " Under the term "Wealth, not only ready Money, lut all 
 Things, loth immovable and movable, both Corporeal and Eights 
 are included" 
 
 So Ulpian, one of the most eminent Roman Jurists, says — 
 
 " ICoiniiia eorum qui sub conditione vel in diem debent, et 
 emere et vendere solemus. Ea enim Res est, qu.se emi et 
 venire potest" 
 
 " We are accustomed to buy and sell Debts payable at a 
 certain event and on a certain day. For that is "Wealth which 
 can be bought and sold" 
 
 So also — " MquQ Bonis adnumerabitur etiam si quid est in 
 Actionibus " 
 
 " Rights of action are properly included under the term 
 Goods" 
 
 Also — "Rei appellatione et Causse et Jura continentur" 
 " Under the term Property both Rights of action and 
 Rights are included " 
 
 It is so important to understand clearly that a mere Abstract 
 Right, wholly severed from any specific money, is itself a Vendible 
 Commodity, that we may give one more extract 
 
 Sir Patrick Colquhoun in his Summary of Roman Law says — 
 " The first requisite of the consensual contract of emptio et 
 ' is a Merx, or object to be transferred from the buyer to 
 
EIGHTS ARE WEALTH 13 
 
 the seller : and the first great requirement is that it should be in 
 commercio : that is, capable of being freely bought and sold. 
 Supposing such to be the case it matters not whether it is an 
 immovable or a movable : corporeal or incorporeal : existent or 
 non-existent : certain or uncertain : the property of the vendor or 
 another : thus a horse, or a Eight of action, servitude, or 
 thing to be acquired, or the acquisition where it depends on 
 chance 
 
 " A purchaser may buy of a farmer the future crop of a certain 
 field. Wine which may grow the next year on a certain vineyard 
 may be bought at so much a pipe : or a certain price may be paid 
 irrespective of quantity or quality ; and the price would be due 
 though nothing grew, or for whatever did grow. In the second 
 case the bargain is termed emptio spei : and in the first and last 
 emplio rei speratm : which all such bargains are presumed to be in 
 cases of doubt 
 
 " The cession of a Sight of action being legal in the 
 Roman Law, the Eight of A to receive a Debt due by B may be 
 sold to " 
 
 Thus it is clearly seen that Abstract Eights of various sorts, 
 including Rights of action, which in Law, Commerce and 
 Economics are termed Credits or Debts, are expressly in- 
 cluded in the terms Pecunia (Wealth): Res (Proper t/j) : 
 Bona (Goods) : and Merx (Merchandise) in Eoman Law 
 
 General Rule of Greek Law that Rights a/re Wealth 
 
 8. For nearly 500 years after Constantine removed the seat 
 of Government to Constantinople, the language of the Court was 
 Latin, but the people were Greek. Consequently, though the 
 ofiicial language was Latin, it was unintelligible to the mass of 
 the people. The great Code of Eoman Law, termed the Pandects, 
 was published in 530 a.d., but all the pleadings in the Courts 
 were carried on in Greek. The Latin Pandects soon fell into 
 desuetude : they were superseded by Greek treatises, translations, 
 and compilations. The Latin Institutes of Justinian did not hold 
 their ground in the curriculum of legal education for more than 
 ten years. They were superseded by the paraphrase of Theophilus, 
 
14 THEORY AND PRACTICE OF BANKING 
 
 one of the Professors of Law who were charged with the com- 
 pilation of the Institutes : and this paraphrase became the legal 
 text-book throughout the Eastern Empire 
 
 At last, in the ninth and tenth centuries, under the Basilian 
 dynasty, all the Pandects, Institutes, and Legislation of Justinian 
 were set aside as obsolete. A new Digest or Code was published 
 in Greek, called the Basilica, which thenceforth became the 
 Law of the Eastern Empire : and has remained to the present 
 time as the Common Law of all the Greek population in the 
 East : and is the Common Law of the modern kingdom of 
 Greece 
 
 And in the Basilica the Koman definition of Wealth is 
 repeated — 
 
 "t(3 ovojxaTL T(Sv ■xp-qjj.a.TW ov fwvov to. )(py]fji.aTa, dWd Trdvra. 
 Ta KivrjTa Kol dKLvrjTa, koI rd AiKaia SrjXoVTai" 
 
 Under the term xp'?>ci-ra, or Wealth, Rights are included 
 
 And also — rfj tov UpdyfjiaTOS Trpotrvfyopta kcu Mtlm koX 
 AtKata Trepii^ETaL 
 
 Under the term Jlpdyfuara, Chattels, both Eights of 
 action and Rights are included 
 
 In Greek Law these Eights are also included under the terms 
 'Ayaed (Goods): Ilepwva-ia (Estate): and 'Ai^op/^T; (Capital) 
 
 Thus, by express enactment in Greek Law, the words xp^iTa 
 and irpdyixara include Rights of all descriptions : and these words 
 include all the Three orders of Exchangeable or Economic 
 Quantities 
 
 In English Law Property or Rights are included under 
 the terms Goods and Chattels 
 
 9. We have thus seen that all ancient jurists include abstract 
 Eights of all sorts, and among them Rights of action 
 under the terms Wealth, Goods, Chattels, Property^ 
 and Merchandise. _But the subject is of such great import- 
 ance, and is so little understood by lay writers, that it will be of 
 use to say something more about it 
 
 It is exactly the same in every system of Jurisprudence. In 
 English Law, a Right of action for a sum of money, termed 
 
RIGHTS ARE WEALTH 15 
 
 a Debt or Ghose-in- action, is included under the terms " Goods," 
 " Chattels," " Effects." It is an article of Merchandise or a 
 Saleable Commodity 
 
 Thus Sheppard says under " Chattels" — "All kinds of emble- 
 ments, sown and growing, grass cut : all money, plate, jewels, 
 utensils, household stuffs. Debts, wood cut, wares in a shop, 
 tools and instruments for work, wares, merchandises, carts, 
 ploughs, coaches, saddles, and the like : all kinds of cattle, as 
 horses, oxen, kine, bullocks, goats, sheep, pigs, and all tame fowl 
 and birds, as swans, turkeys, geese, capons, hens, ducks, poultry, 
 and the like are accounted Chattels 
 
 "All Obligations, Bills, Statutes, Recognizances, Judgments, 
 shall be as a Chattel in the executor " 
 
 "All Right of action to any personal action is a 
 Chattel " 
 
 So it was resolved by Popham, Chief Justice of England, and 
 other Justices that — " Personal actions are -as well included 
 within the word " Goods " in an Act of Parliament as Goods in 
 possession " 
 
 So in another case. Lord Chancellor Hardwicke said — " And 
 
 Debts come within the words and meaning of the Act, and 
 
 would pass in a will thereby" 
 
 Burnet, J., said — "A Bond Debt is certainly a Chattel" 
 Parker, L. C. B., said — "But Goods and Chattels 
 
 include Debts. . . . Things-in-action are considered 
 
 as Goods and Chattels" 
 
 So Blackstone says — " For it is to be understood that in our 
 law Chattels (or Goods and Chattels) is a term used to 
 express any property which, having regard either to subject matter 
 or quantity of interest therein, is not freehold 
 
 " Property or Chattels personal may be either in possession or 
 else in action. . . . Property in action is where a man has 
 not the enjoyment (either active or constructive) of the Thing in 
 question, but merely a Eight to receive it by a suit or action at 
 law" 
 
16 THEORY AND PRACTICE OF BANKING 
 
 Thus in English Law all such Property as Debts, Rights of 
 action, Bank Notes, Bills of Exchange, the Funds, Shares in 
 Commercial Companies, Copyrights, Patents, &o., are Goods and 
 Chattels as much as any material chattel 
 
 Modern Economists include Rights of action, i.e., Credit 
 or Debts under the term Circulating Capital 
 
 10. Modern Economists since Smith also include Bank Notes, 
 Bills of Exchange, &c., which are merely Eights of action, or 
 Credit, or Debts, under the term Circulating Capital 
 
 Thus Smith expressly includes Money under the term Circu- 
 lating Capital : and under the term Money he includes Paper, 
 such as Bank Notes and Bills of Exchange, which are simply 
 Eights of Action. Among several passages it will be sufficient to 
 quote one here — 
 
 " Suppose different banks and bankers issue Promissory Notes 
 payable to bearer on demand to the extent of one million, 
 reserving in their different coffers £200,000 for answering occa- 
 sional demands. There would remain, therefore, in circulation 
 £800,000 in gold and silver, and £1,000,000 in Bank Notes ; or 
 £1,800,000 of Paper and Money together." He also observes 
 that Credits in the Bank of Amsterdam are called Bank 
 Money. Thus we see that Smith in this and numerous passages 
 places Paper Credit exactly on the same footing as independent 
 property, and of the same value, as gold and silver 
 
 So J. B. Say says — " The exclusive possession which in the 
 midst of society clearly distinguishes the property of one person 
 from that of another in common usage is that to which the title 
 of Wealth is given. . . . Under this title are included not 
 only things which are directly capable of satisfying the wants of 
 man, either natural or social, but the things which can satisfy 
 them only indirectly, such as Money, Instruments of Cre- 
 dit (titres de creance), the public Funds, &c. 
 
 Thus Say expressly includes Instruments of Credit 
 and the Funds, which are mere Rights of action, under 
 the term Wealth: but he also includes Bills of Exchange, 
 Bank Notes, and Bank Credits under the term Capital 
 
RIGHTS ARE WEALTH 17 
 
 So Mill SEiys that " Wealth is every Iking which has purchasing 
 power : " and he says — 
 
 " Aa Order or Note of Hand, or Bill payable at sight for au 
 ounce of gold [which is Credit] while the Credit of thegiyer is 
 unimpaired, is worth neither mol-e nor less than the gold itself " 
 
 " We have now found that there are other things such as Bank 
 Notes, Bills of Exchange, and Cheques [which are Credit] which 
 circulate as Money and perform all the functions of it " 
 
 Mill also designates Bank Notes as Productive Capital 
 
 So Professor Hunter speaks of Debts as Marketable 
 Commodities 
 
 So also Debts are included under the term Movable Eights 
 in Scotch Law 
 
 We need not multiply quotations-: in fact, those we have 
 already given are chiefly for the benefit of lay readers ; because it 
 is one of the most elementary principles of Mercantile Law, 
 clearly explained and enforced by every Jurist in the world, that a 
 simple abstract Right of action, or Credit, or Debt is 
 included under the term Goods and Chattels, Merchandise, or a 
 Vendible Commodity : and that a Eight of action can be bought 
 and sold, or exchanged, exactly like any material chattel 
 
 And when this conception is firmly grasped the whole difficulty 
 and mystery which is sometimes supposed to envelope the subject 
 of Credit and Banking vanishes : because the whole system of 
 Credit and Banking consists in Creating, Buying and Selling, 
 or Transferring, and Extinguishing that species of Goods arid 
 Chattels, Merchandise, or Commodities termed Credits or 
 Debts 
 
 It is thus seen that the ancients possessed the true scientific 
 instinct. They fixed upon a Single General Quality as 
 the sole essence and principle of Wealth — namely Ex- 
 changeability, or the capability of being bought and sold. 
 They then searched for and discovered all the different orders of 
 Quantities which can be bought and sold, or exchanged : or whose 
 Value can be measured in Money: and expressly classed them under 
 
 
 
18 THEORY AND PRACTICE OF BANKING 
 
 the terms Wealth, Merchandise, and Goods and Chattels. They 
 found that there are Three, and only Three, distinct orders of 
 Quantities which can be bought and sold, namely, (1) Material 
 Things : (2) Labour or Services : and (3) Abstract Eights 
 
 And reflection will shew that there, is nothing which can be 
 bought and sold, which is not of one of these three forms. And 
 these Three forms of Exchangeable Quantities may be symbolised 
 by the words Money, Labour, and Credit— Money being 
 taken as the type of all Material Things : Labour as the type of 
 Services of all sorts : and Credit as the type of all the different 
 forms of Abstract Rights. And all Commerce, in its widest 
 extent and in all its forms and varieties, consists in the Exchanges 
 of these Three orders of Quantities 
 
 There is no such Thing as Absolute Wealth 
 
 11. And as we have seen that all ancient writers held that the 
 sole essence and principle of Wealth resides in Exchange^ 
 ability, it follows as a necessary consequence that there is no 
 such thing as Absolute Wealth — that is, there is nothing 
 which is in its own nature Wealth, in all places and at all 
 times. For anything to be Exchangeable it is necessary that 
 some one else should want and Demand it. Things are only 
 Wealth in those places and at those times when they are wanted 
 and demanded: and consequently they cease to be Wealth when 
 they cease to be wanted and demanded. Therefore the very same 
 thing may be Wealth in some places and not in others : and 
 among some people and not among others : and at some times , 
 and not at others 
 
 Commerce or Economics consists of Six 
 of Exchange 
 
 IS. There being, then. Three, and only Three, distinct orders 
 of Exchangeable Quantities, Commerce consists in their Ex- 
 changes. And as these Three orders of Quantities can be 
 combined two and two in Six different ways, it follows that 
 Commerce in its widest extent consists of Six distinct kinds of 
 Exchange. These different kinds of Exchange are— 
 
MEANING OF PROPERTY 19 
 
 1. A Material thing for a Material thing 
 
 As when gold money is exchanged for lands, houses, corn, 
 timber, cattle, &c. 
 
 2. A Material thing for Labour 
 
 As when gold money is given as wages, fees, or salary for 
 services done 
 
 3. A Material thing for a Bight 
 
 As when gold money is given to purchase a Bill of Exchange, 
 the fimds, copyrights, shares, &o. 
 
 4. Labour for Labour 
 
 As when persons agree to perform reciprocal services for each 
 other 
 
 5. Labour for a Right 
 
 As when wages, fees, or salaries are paid in bank notes, 
 cheques, &c. 
 
 6. A Eight for a Right 
 
 As when a banker buys one Eight of action, such as a Bill of 
 Exchange, and gives in exchange for it a Credit in his books, 
 which is another Eight of action 
 
 These Six species of Exchange comprehend all Commerce in 
 itfi widest extent, and in all its forms and varieties. They con- 
 stitute the great Science of Economics : orthe science which 
 treats of the Exchanges of Property 
 
 And of the general science of Economics the business of 
 Banking consists in the two species of Exchange marked (3) and 
 (6). It consists in the Exchange of 
 
 1. Money for Rights of action, or Credit, or 
 Debts 
 
 2. One Right of action for another Right of 
 action : or one kind of Credit or Debt for another kind 
 of Credit or Debt 
 
 And it is this department of the complete Science of Economics 
 which is the subject matter of this work 
 
 On the Meaning of the word Property 
 
 13. We have now seen that thpre are Three distinct classes 
 or orders of Economic or Exchangeable Quantities (1) Material 
 
 c2 
 
20 THEORY AND PEACTICB OF BANKING 
 
 Things : (2), Labour : (3) Abstract Eights : typified by the 
 terms Money, Labour, and Credit 
 
 The next thing to be done is to find a General Term which 
 will include all these orders of Quantities. And this general term 
 we shall find in the word Property. And when we understand 
 the true and original meaning of the word Property, it will 
 throw a blaze of light over the whole science of Economics : and 
 clear up all difiicnlties which the word Wealth has given rise to : 
 in fact, the meaning of the word Property is the key to all 
 Economics. 
 
 Most persons when they hear the word Property, think of, 
 some material things such as lands, houses, money, corn, cattle, 
 &c. But that is not the true and original meaning of the word 
 Property 
 
 Property in its true and original meaning is not any 
 material thing, but the absolute Right to something 
 
 In early Roman Jurisprudence a man's possessions were called: 
 Maneipium, because they were supposed to be acquired with 
 the strong hand in war : and if not retained with a very firm 
 grasp would probably be lost again. The word Maneipium was 
 applied not only to the things themselves but to the absolute' 
 ownership in them. Thus Lucretius says — 
 
 " Vitaque Mancipio nuUi datur, omnibus usn " 
 
 ^^ And Life is given in absolute Oivnership to none, lut only as 
 a Loan to all " 
 
 In process of time a new word came into use. All the pos- 
 sessions of the family (domus) belonged to the family as a whole : 
 but the head of the house, the Dominus, alone exercised all Eights 
 over them. He alone had the absolute ownership of hia familia, 
 and all its possessions. Hence this Eight was termed Dominium: 
 and Dominium was always used in Roman Law to denote absolute 
 Ownership 
 
 In the time of the early Emperors the extreme rigour of the 
 Patria Potestas was relaxed : and in some cases the individual 
 members of the family were allowed to have Eights to possessions 
 independently of the head of the house and its other members : 
 and this Right was termed Proprietas 
 
PRaPERTY IS A RIGHT 21 
 
 The strict rigour of the Patria Potestas began gradually to be 
 relaxed when the Dominus granted the exclusive Right to certain 
 things to his sons and slaves. This was termed PecuUum 
 
 The Emperors Augustus, Nero, and Trajan enacted that the 
 sons of a family might possess in their own Eight, and dispose of • 
 by will, as if they were Domini, what they acquired in war. This 
 was called Gastrense PecuUum. This Right of holding possessions 
 independently of other members of the family was considerably 
 extended by subsequent Emperors : and it was termed Pi'oprietas 
 
 Proprietas, therefore, in Roman Law meant the absolute and 
 exclusive Right which a person -had to anything independently 
 of any one else : and was synonymous with Dominium. Neratius, 
 a jurist of the time of Hadrian, says, " Proprietas id est Domi- 
 nium." " Property which means Ownership " 
 
 The word Proprietas in Roman Law was never applied to a 
 material thing, but meant the absolute Right to it : the thing 
 itself was called Materia 
 
 The word Property m English means a Eight and not 
 
 a Thing 
 
 14. So, also, originally in English the word Property always 
 meant a Eight and not a Thing 
 
 Thus grand old WycUffe says — "They will have Property of 
 ghostly goods where no Property may be : and leave Property in 
 worldly goods where Christian men may have Property " 
 
 So Bacon invariably uses the word Property to mean a Right, 
 and not a Thing. He says one of the uses of the law " is to 
 dispose of the Property of their goods and chattels." He 
 explains the various methods by which Property in goods and 
 chattels may be acquired. So he speaks of the " Property or 
 Interest of a timber tree : " and in many other cases 
 
 Property, then, in its true and original sense, means solely a 
 Right, Title, Interest, or Ownership : and consequently to call 
 material things like lands, houses, money, cattle, &c.. Property, 
 is as great an absurdity as to call them Right, Title, Interest, of 
 Ownership 
 
 Neither Bacon, nor as far as we are aware, does any writer of 
 his period, call material goods Property ; such a use of the word is 
 quite a modem corruption, and we cannot say when it began 
 
22 THEORY AND PRACTICE OF BANKING 
 
 Every Jurist knows that the true meaning of the word 
 Property is a Eight. Thus Erskine says—" The sovereign or real 
 Right is that of Property, which is the Eight of using and 
 disposing a subject as our own, except in so far as we are 
 restrained by law or paction " 
 
 And this meaning of the word Property has been recognised 
 by Economists as well as by Jurists. Thus Mercier de la Eiviere, 
 one of the most eminent of the early French Economists, says— 
 " Property is nothing but the Ilight to enjoy. . . . It is 
 seen that there is but one Right of Property ; that is a 
 Eight in a person : but which changes it name according to the 
 nature of the object to which it is applied" 
 
 Thus Landed Property means Eights to Land : Funded Pro- 
 perty means Eights to payments from the nation : Eeal Property 
 means Eights to Eealty : Personal Property means Eights to 
 Personality : Literary Property means Eights to the profits from 
 works of literature or art : Newspaper Property means the Eight 
 to publish certain Newspapers : and so pn 
 
 In the Law of Scotland what is called Eeal Property in 
 English Law is termed Heritable Eights, because the Eight to 
 them passes to the heir : and what is called Personal Property in 
 English Law, is termed Movable Eight in the Law of Scotland 
 
 So when the Socialists and Communists wish to destroy Pro- 
 perty, as being robbery, it is not the material things which they 
 wish to destroy, but the exclusive Eights which private persons 
 have in them 
 
 On Ilight of Property and Ilight of Possesion 
 
 15. But though all Property is a Eight, it must be carefully 
 observed that all Eights are not property 
 
 There is an essential distinction between the mere Right of 
 Possession and the Eight of Property 
 
 Thus, where one person lends his horse or a book or a picture 
 to another : or delivers goods to him as a common carrier to he 
 conveyed from one place to another: or deposits goods or valuables 
 with him as a warehouseman, for the mere purpose of being kept 
 safely : or by way of pledge, hypothec, or lien : or hires a horse, 
 or house,, or furniture : or finds valuable goods : in all these cases 
 
MEANING OF PERSONA 23 
 
 the person has the mere Right of Possesion of the goods : 
 and he can bring an action against any one who deprives him of 
 their possesion. But he has no right to use the goods in any way 
 except in the way and for the specific purpose for which they are 
 deHvered to him. He has therefore only a particular Eight to 
 them : but not the absolute Ownership in them to deal with them 
 in any way he pleases 
 
 The word Property means absolute, entire, and exclusive 
 0"wnership : it is the absolute Right to deal with the things in 
 any way he pleases : except in so far as he may be restrained by 
 Law 
 
 Property comprehends the Jus possidendi, or the Eight of 
 Possession ; the Jus utendi, or the Eight of using the thing in any 
 way he pleases ; the Jus fruendi, the Eight of appropriating any 
 fruit or profit from it : the Jus ahutendi, the Eight of alienating 
 or destroying it ; and the Jus vindicandi, or the Eight of reclaim- 
 ing it if found in the wrongful possession of any one else 
 
 The word Property or Dominion, then, does not mean a single 
 Eight : but an aggregate or bundle of Eights : it comprehends 
 the Totality of Eights which can be exercised over anything 
 
 "We shall find hereafter that some of the subtlest and most 
 profound branches of Mercantile Law and Commerce are entirely 
 based on the distinction between the Right of Property 
 and the Right of Possession 
 
 On the Meaning of Persona in Roman Law 
 
 16. It will be very useful to understand clearly the meaning 
 of Persona in Eoman Law 
 
 The word Persona means any single Person, or any society of 
 Persons, who can enjoy and exercise Eights. Thus in a Partner- 
 ship each individual member is a Persona : and also the part- 
 nership itself is a Persona quite separate and distinct from its 
 individual members. Hence each member of the partnership can 
 buy or sell with the partnership as a separate individual 
 
 So a Joint Stock Company is a Persona : and when the indi- 
 vidual members pay their money as Capital to the Company, the 
 Property in it is gone from them and vests in the Company : and 
 what they receive in exchange for their money is the Right to 
 
24 THEORY AND PRACTICE OF BANKING 
 
 share in the Profits made by the Company, in the proportion in 
 which they have contributed Capital. These Rights are termed 
 Shares. A shareholder in a Joint Stock Bank banks with the 
 Bank as a separate person 
 
 So the State is a Persona, separate and distinct from its 
 citizens : and private persons can lend money to the State, and 
 receive in exchange for it the Right to demand a series of annual 
 payments. These Rights in common language are termed the 
 
 Funds 
 
 So every Municipal or other Incorporated body is also a 
 Persona, and trades, or buys and sells, in that capacity, without 
 reference to its individual members 
 
 The Parson of a parish is the Persona who has the Eight to 
 certain dues for performing religious services : and this Eight is 
 termed a Benefice 
 
 Thus a Persona may be defined to be a centre of Eights. 
 Many individual persons may make up one Persona : and also a 
 single individual may be several Persona. Thus a man may be 
 executor of one person : trustee of another : guardian of another : 
 in each of these he is a separate Persona, or character, with a 
 distinct set of Rights and Duties : and he may trade, or buy and 
 sell, or exchange with himself in these separate Persona, or 
 characters. Hence all exchanges take place between separate 
 
 On the Meaning of Res in Roman Law 
 
 17. And as Persona means any body, single or corporate, 
 which can enjoy and exercise Rights, so Res in Roman Law 
 means anything whatever which can be the subject of a Eight. 
 Thus not only Material Things are Res, but also human actions 
 or Labour. If I hire a workman to do any sort of Labour for 
 me, I have the Eight to have that Labour performed : and 
 therefore that Labour or Service is a Res 
 
 So if I ha,ve the Eight to demand a sum of money from any 
 person at any given time that Eight is a Res '. so is the Eight to 
 share in the future profits of any enterprise 
 
 A Eight to some specific material substance which has already 
 come into possession is termed a Res Gorporalis in Roman Law, 
 
SCIENCE OF ECONOMICS 25 
 
 and Corporeal Property in English Law : a mere abstract Eight 
 to something which will only come into possession at some future 
 time is termed Res Incorporalis in Eoman Law, or Incorporeal 
 Property in English Law 
 
 In recent times these Incorporeal Eights have attained an 
 enormous magnitude, and increased at a much greater ratio than 
 Corporeal Property. But as each of these different kinds of 
 Eight can be bought and sold or exchanged : or their Value 
 can ie measured in Money: they are equally classed under the 
 terms Pecunia, Bona, Res, Merx, in Eoman Law: under the 
 
 terms oikos, ^rj/jLara, wpayfiara, TrXovroi, TrcpLovcria, dcjyopfi'^ in 
 
 Greek Law: under the terms "Goods," " Chattels," "Effects," 
 " Substance," " Estate," " vendible or marketable Commodities " 
 in EngUsh Law : and therefore under the term "Wealth in 
 Economics 
 
 Commerce or Scouomics is the Science which treats of 
 the Exchanges of Rights 
 
 18. Several eminent Jurists have observed that Juris- 
 prudence is the science of Eights. Ortolan observes that 
 Jurisprudence has nothing to do with the Things themselves, 
 but only with the Rights to them. So says Lord Mackenzie — 
 " Natural Philosophy considers things according to their physical 
 properties. Law regards them as the objects of Rights " 
 
 And as Jurisprudence is the Science which treats exclusively 
 about Eights, and not about Things : so Commerce or Economics 
 is the Science which treats exclusively about the Exchanges 
 of Rights, and not about the Exchanges of Things 
 
 And it is for this reason that mere abstract Eights, wholly 
 separated from any material things, are the objects not only of 
 Jurisprudence, but also of Commerce and Economics : because 
 these abstract Eights can not only be infringed upon and damaged, 
 but they can also be bought and sold, and are therefore articles of 
 commerce : and the business of Banking, which is the subject 
 matter of this work, consists ehiefly in the sale, or commerce, of 
 mere Eights of action 
 
 Hence we see that the true meaning of the word "Wealth is 
 
26 THEORY AND PRACTICE OE BANKING 
 
 an Exchangeable Riglit : and that these three orders of 
 Eights may be exchanged in Six difiPerent ways— 
 
 1. The Eight or Property in a Material Thing may be 
 exchanged against the Right or Property in another Material 
 Thing 
 
 2. The Eight or Property in a Material Thing may be ex- 
 changed against the Eight to demand so much Labour or Service 
 
 3. The Eight or Property in a Material Thing may be ex- 
 changed against the Right to have something paid or done at a 
 future time 
 
 4. The Right to demand one kind of service may be exchanged 
 against the Right to demand another kind of service 
 
 5. The Right to demand a certain amount of service may 
 be exchanged against the Right to demand money 
 
 6. The Right to demand money may be exchanged against 
 another Right to demand money 
 
 Thus it is, seen that all Exchanges are the Exchanges of Rights 
 against Rights : and these Six kinds of Exchanges of Rights 
 constitute the Science of Commerce, or of Pure Economics 
 
 And of this general science, the business of Banking consists 
 of the Exchanges numbered (3) and (6) : for it consists in the 
 Exchanges of the Right or Property in specific sums of money 
 against the Right to demand Money : and of one Right to demand 
 money against another Eight to demand money 
 
 And it is the Exchange of these kinds of Eights which is the 
 subject matter of this work 
 
 On the amplication of the Positive and Negative Signs to 
 Property 
 
 19. Economic Quantities, or Economic Rights, are then of 
 three distinct orders — 
 
 1. Rights or Property in some material substance 
 which has already been acquired 
 
 2. Rights or Property in Labour or Service 
 
 3. Rights or Property in something which is only to 
 le acquired at some future time 
 
 IS'ow we observe that the first and third of these species of 
 
CLASSIFICATION OF PROPERTY 27 
 
 Economic Eights are Inverse, or Opposite, to each other. 
 Property Hke Janus has two faces placed back to back. It regards 
 the Past and the Future. We may buy and sell a right to a 
 thing which has actually come into possession, as well as the Eight 
 to a Thing that wUl only come into possession at a future time : 
 Property therefore is of Opposite Qualities 
 
 Now in all mathematical and physical Sciences, it is invari- 
 ably the custom to denote similar Quantities but of Opposite 
 Qualities by Opposite Signs. Hence as a matter of simple 
 convenience, and following the invariable custom in physical 
 science, if we denote one of these kinds of Property as Positive, 
 we may as a distinguishing mark denote the other as Negative 
 
 The important consequences that flow from this notation wiU 
 be explained hereafter. We shall simply observe at present that 
 ^ we choose to denote Property in a thing which has been acquired 
 in time past as Positive, we may denote Property in a thing 
 which is to be acquired in time future as Negative 
 
 Now Property in a thing which has been acquired is Corporeal 
 Property : and Property in a thing which is to be acquired is 
 Incorporeal Property. Hence, if we denote Corporeal Property by 
 the Positive Sign, it is strictly in accordance with aU Physical 
 Philosophy to denote Incorporeal Property by the Negative Sign 
 
 And as in all Mathematical and Physical Sciences the whole 
 Science comprehends both Positive and Negative Quantities : so 
 that the whole Science of Economics comprehends both Positive 
 Economic Quantities and Negative - Economic Quantities : both 
 Corporeal and Incorporeal Property. By this means we double the 
 field of Economics as usually treated : and we do in Economics 
 what those did in Mathematics and Natural Philosophy who 
 introduced Negative Quantities. By these means we are enabled 
 to obtain the solution of problems which all preceding Economists 
 have given up in despair : and it is by this means only that the 
 Theory of Credit and Banking can be explained 
 
 On the Classification of Property 
 
 20. We shall now show the practical convenience which 
 arises from applying the Positive and Negative Signs to Property : 
 and denoting the Eight or Property in things which have already 
 
28 THEORY AND PRACTICE OF BANKING 
 
 come into existence as Positive, and the Right to things which are 
 only to come into existence at a future time as Negative. For 
 many species of Property are of a mixed nature : that is, the 
 entire Property in them consists partly of Corporeal Quantities 
 and partly of Incorporeal Quantities 
 
 Property in Land is the highest Property of all : and to 
 understand the nature of Property in. Land is the grammar of 
 Property in general 
 
 Suppose that we purchase an Estate in Land for the sum of 
 £100,000 : where is the Value for our Money ? Does it consist 
 in things which are already in existence ? The veriest tiro would 
 answer — Certainly not. "Where, then, is the equivalent for the 
 purchase-money ? 
 
 "When we purchase an Estate in Land, we purchase the Eight* 
 or Property, not only in the existing products of the land and 
 labour ; such as the houses, the timber, the crops on the ground, 
 but also the Eight to receive its annual products for ever : that is, 
 to a series of products which will only come into existence at 
 definite intervals of time for ever. Thus we purchase not only 
 the actually existing products of the land : but also its Capacity 
 to produce future products to the end of time — say £3,000 a year 
 for ever 
 
 Thus Property in Land may be conveniently denoted thus — 
 
 Existing products of Land (+) together with — £3,000, 
 — £3,000, — £3,000 .... for ever 
 
 "Where the Positive Sign denotes the products which have 
 already come into existence ; and the Negative Sign denotes the 
 products which will only come into existence year by year for 
 ever 
 
 But though the yearly products of the land will only come 
 into existence at future intervals of time, the Right or. Pro- 
 perty to them when they do come into existence, is Present, 
 and may be bought and sold like any material chattel, such as a 
 table, a chair, or so much corn. That is to say, each of these 
 annual products for ever has a Present Value: and the 
 purchase-money of the Land is simply the Sum of the Present 
 Value of this series of future products for ever 
 
 Again, although this series of future products is infinite, a 
 
PERSONAL CREDIT 29 
 
 simple algebraical formula shews that it has a finite limit : and 
 that finite limit depends chiefly on the current Eate of Interest. 
 When the usual Eate of Interest is three per cent., the total Value 
 of Land is about 33 times its annual value : consequently 32 
 parts out of 33 of the total Property in Land is Incorporeal : the 
 remaining one part only being Corporeal 
 
 Now, when a puirchaser has bought an Estate in Land, it may 
 be said without any yery great metaphor that it owes him a 
 series of annual payments for ever : as he bought it merely in the 
 belief or expectation that he would receive these products. Hence 
 we may call this Eight to receive the future products of the Land 
 the Credit of the Land. And by the notation we have adopted, 
 it is a Negative Economic Quantity 
 
 Many Banks in Central Europe have been founded for the 
 purpose of making advances to cultivate land, on the principle of 
 demanding an annual instalment of repayment out of the products 
 of the Land. These are called Banks of Credit Fongier, or Banks 
 of Liand. Credit 
 
 Personal Credit. — ^Now a man exercising any profitable 
 business, or profession, is an Economic Quantity analogous to 
 Land. He may have accumulated a quantity of money as the 
 fruits of his past industry : but over and above his accumulated 
 money, his possesses his Skill, his Abilities, his Character : in 
 short, his Capacity to earn profits in the future, as he has 
 already in the past: and of course he has the Property in the 
 expected future profits of his industry 
 
 And he may trade in two ways : he may trade with the Money 
 he has already acquired : or he may purchase goods by giving in 
 exchange for them the BigHt or Property to demand pay- 
 ment at a future time out of his profits which are to be earned in 
 future. Personal Character used in this way as a Purchasing 
 Power is termed Credit : and as we have seen that Anything 
 which has Purchasing Power is "Wealth : it necessarily 
 follows that Money and Credit are equally "Wealth 
 
 This must suffice here to indicate the origin and nature of 
 Credit, which will be more fully investigated in a future chapter 
 
 It is obvious that the other kinds of Incorporeal Property we 
 
30 THEORY AND PRACTICE OF BANKING 
 
 Have mentioned, the Funds, Shares in Commercial Companies, the 
 Goodwill of a business, Copyrights, Patents, &c., are all of the 
 same nature as Credit : they are all Eights to future Profits or 
 Payments 
 
 Every Sum of Money is Equivalent to the Sum of the 
 Present Values of an Infinite Series of Future 
 Payments 
 
 21. The explanation of the Theory of the Value of Land 
 demonstrates a proposition of great importance in Economics 
 
 It was seen that the £100,000 given to purchase the Estate in 
 Land expected to produce £3,000 a year for ever, was in reahty to; 
 the Sum of the Eights to the future products for ever. Each 
 annual Product has a Present Value ; and the Value of the- 
 Land is simply the sum of these Present Values 
 
 But the same is evidently true of every Sum of Money what- 
 ever. Hence any Sum of Money is not only equal in value to a 
 Quantity of Goods or Services, but also to a Perpetual 
 Annuity : or the Eight to receive an infinite series of futxire 
 profits 
 
 Hence an Annuity or the Eight to receive a series of future 
 payments is also an Economic Quantity : and may be bought and 
 sold like any other Economic Quantity. A sum of Money may he 
 paid to buy an Annuity : and equally, an Annuity may be paid to 
 buy a Sum of Money either paid down at once, or at some agreed 
 upon future time 
 
 On the Distinction between Higlits to Things, or Jura in 
 Ke or in E,em ; and Rights against Persons, 
 or Jura in Personam or ad B,em 
 
 22. We have now to notice a distinction between different 
 Kinds of Property, or Eights, of the greatest importance in 
 Commerce 
 
 Property or Eights are of two sorts — 
 
 1. The Property or Eight to a specific chattel termed in Law 
 a Jus in re, or in rem, without being related to any one 
 else : this Eight is also called in Eoman Law Dominium 
 
DISTINCTION or EIGHTS 31 
 
 When a person has such Property or suoh sole and exclusiTe 
 Right in any chattel, he may sell or transfer it to any one else he 
 pleases. Money, cattle, timher, and other goods are subject to 
 this kind of Property. And hence the Proprietor may freely 
 alienate or sell and transfer any of his own money, &c., to any 
 one he pleases 
 
 2. Property or Eights held in Contract or Obligation, called 
 in Roman Law a Jus in Personam, or ad rem (acquiren- 
 dam) : when a Person has a Right, not to any specific thing, but 
 only against a Person, to compel him to pay or do something 
 
 A simple example of this kind of Property, or Right, is the 
 Contract, or Obligation, of Debt : where one Person, the Creditor, 
 has only a Right to demand a sum of money from some other 
 Person, the Debtor. In such a case the Creditor has no Right to 
 any specific money in the Debtor's possession : but he has only 
 a Right of action to compel the Debtor to pay him a sum of Money, 
 or do something. And the Right of the Creditor exists against the 
 Debtor whether the Debtor has any Money or not 
 
 The former kind of Rights are called Real or Corporeal Rights 
 or Property, because they are always Rights to certain specific 
 things : the latter are called Personal Rights or Incor- 
 poreal Property, because they are merely abstract Rights 
 against a Person wholly severed from any specific chattel 
 
 But each of these classes of Rights may be bought and sold, or 
 exchanged : the Value of each class can be measured in Money : 
 and hence they are each equally Pecunia, Res, Bona, Merx, in 
 Roman Law : -^prmaTa, irpdyfiaTa, otKos, in Greek Law : G-oods 
 and Chattels, or Vendible Commodities in English Law : and 
 therefore Wealth, in Economics 
 
 It must be observed that in Corporeal Property, the Right 
 and the specific corpus cannot be separated : they cannot be bought 
 and sold separately and independently of each other : they must 
 always go together : and hence they form but one Property 
 
 But in Incorporeal Property, the mere Abstract Right is 
 absolutely separated from any specific corpus. This class of 
 Rights is bought and sold, or exchanged, separately : and there- 
 fore the whole mass of Incorporeal Property is itself independent 
 
32 THEORY AND PRACTICE OF BANKING 
 
 Exchangeable Property : pst like so much money, or coals, or 
 timber, or land, or houses, or jewelry, or cattle, or any other 
 material chattels : and in fact in this commercial country the mass 
 of Incorporeal Property of various kinds exceeds many times the 
 mass of Corporeal Property 
 
 Definition of Value 
 
 23. Economic Quantities are, as we have seen, of Three 
 distinct orders or species, any one of which may be exchanged 
 against any one of the others 
 
 Now if at any time any Economic Quantity A, can be 
 exchanged for any other Economic Quantity B, then each of thes^ 
 two Quantities is termed the Value of the other 
 
 Suppose that at any time one ounce of gold will exchange for 
 15 ounces of silver, then it is said that one ounce of gold is of the 
 Value of 15 ounces of silver which is simply this equation — 
 1 oz. Gold =15 ozs. Silver 
 
 Hence Value may be said to be the Sign of Equality between 
 any two Economic Quantities 
 
 We have, then, this definition — 
 
 Tlie Value of any Economic Quantity is any other 
 Economic Quantity for which it can be exchangeA 
 
 Hence any Economic Quantity has as many Values as other 
 Quantities it can be exchanged for : and, of course, if it can be 
 exchanged for nothing, it has no value 
 
 Value, therefore, by the definition, requires two objects : just 
 in the same way as Distance and Eatio require two objects. A 
 single object cannot have Value, any more than a single object can 
 be Distant or Equal. If we are told that any object is Distant or 
 Equal, we immediately ask Distant from what .? or Equal to what ? 
 So if it is said that a Quantity has Value, we must ask — Value in 
 what ? And it is clear that as it is absurd to speak of a single 
 object having Absolute or Intrinsic Distance or Equality, so it is 
 equally absurd to speak of a Quantity having Absolute, or Intrinsic, 
 Value 
 
 Hence, the student must observe that in Economics the word 
 Wealth is merely a technical term for any Quantity that can be 
 exchanged : and that the Theory of Value denotes the Laws of 
 the relations of Exchangeable Quantities 
 
ON MONEY AND CREDIT 33 
 
 This must suffice here for the Definition of Value : the Theory 
 of Value will form the subject of the next chapter 
 
 On Money and Credit 
 
 24. Money and Credit are the only Economic Quan- 
 tities with which Banking deals, and we must now explain their 
 nature clearly 
 
 We have abundant evidence that in the early ages of the world 
 there was no such thing as Money. When persons traded they 
 exchanged the products directly with each other. Thus we have 
 in Iliad, yii. 468 — 
 
 " From Lemnos' isle a numerous fleet had come 
 
 Freighted with wine 
 
 All the other Greets 
 
 Hastened to purchase, some with brass, and some 
 With gleaming iron ; 9ome with hides. 
 Cattle and slaves 
 
 This exchange of products against products is termed Barter : 
 and the inconveniences of this mode of trading are palpable. 
 What haggling and bargaining it would require to determine how 
 much leather should be given for how much wine ! how many 
 oxen or how many slaves ! Some ingenious person would then 
 discover that it would greatly facilitate traffic if the things to be 
 exchanged could be referred to some common Measure of Value. 
 There are several passages in 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 were 
 frequently estimated as being worth so many oxen. Thus, in 
 Iliad ii. 448, Pallas's shield, the iEgis, had one hundred tassels, 
 each of the value of one hundred oxen. In Iliad vi. 234, Homer 
 laughs at the folly of Glaucus, who exchanged his golden armour, 
 worth one hundred oxen, for the bronze armour of Diomede, worth 
 nine oxen. In Iliad xxiii. 703, Achilles offers as a prize in the 
 funeral games in honour of Patroclus, a large tripod, which the 
 Greeks valued among themselves at twelve oxen : and to the loser 
 a female slave, whom they valued at four oxen 
 
 But it must be observed that these oxen did not pass from 
 
 D 
 
34 THEORY AND PKACTICE OF BANKING 
 
 hand to hand like Money. The state of barter continued, as it is 
 quite common at the present day to exchange goods according tc 
 their value in money, without any actual money being used. Such 
 a state of things in no way implied the existence or use of money 
 
 25. The necessity for Money arises from a different cause. 
 So long as the things exchanged were equal in value there would 
 be no need for money. If it always happened that the exchanges 
 of products or services were Equal, there would be an end of 
 the transaction. But it would often happen that when one person, 
 required some product or service from some one else, that person 
 would not require an equivalent amount of product or service from 
 him, or, perhaps, even none at all. If, then, a transaction took 
 place with such an Unequal result, there would remain a cer- 
 tain amount of product or service due from the one to the other : 
 and this would constitute a I>ebt — that is to say, a Right, or 
 Property, would be created in the person of the one who had 
 received the less amount of service or product to demand the 
 balance due at some future time : and at the same time there 
 would be the corresponding Duty created in the person of the 
 other who had received the greater amount to render the balance 
 due when required 
 
 Now among all nations and persons who exchange, this result 
 must inevitably happen : persons want something from others 
 when those others want nothing, or not so much, from them. 
 And it is easy to imagine the inconveniences which would arise if 
 persons never could get anything they wanted, unless the persons 
 who could supply those things wanted something in return at the 
 same time 
 
 In process of time all nations hit upon this plan : they fixed 
 upon some material substance which they agreed to make always 
 exchangeable among themselves to represent the amount of 
 Debt 
 
 That is, if an Unequal exchange takes place among persons, 
 to leaving a balance due from one to another, the person who has 
 received the greater amount of product or service gives a quantity 
 of this Universally Exchangeable Merchandise to make up the 
 balance : so that the person to whom the balance of product is 
 due may get an equivalent from some one else 
 
NATURE OF MONEY 35 
 
 Suppose that a wine dealer wants bread from a baker : but the 
 baker wants no wine, or not so much wine from the wine dealer 
 
 The wine dealer takes the bread from the baker, and gives him 
 in exchange as much wine as he wants, and makes up the balance 
 by giving him the amount of this generally Exchangeable Mer- 
 chandise equivalent to the deficiency : or if the baker wants no 
 wine at all, the wine dealer gives him the full equivalent of the 
 bread in this Merchandise 
 
 The baker, perhaps, wants meat W shoes; but not wine. 
 Having received the universally Exchangeable Merchandise from 
 the wine dealer, he goes to the shoemaker, or butcher, and obtains 
 from them the equivalent of the bread he sold to the wine dealer. 
 Hence the satisfaction which was due to him from the wine dealer 
 is paid by the butcher or shoemaker 
 
 26. This universally Exchangealble Merchandise is called 
 Money : and these circumstances shew its fundamental nature. 
 Its function is to represent the Debts which arise from ITn- 
 equal exchanges among men : and to enable persons who have 
 rendered services to others, and have received no equivalent from 
 them, to obtain that equivalent or satisfaction from some one else 
 
 Many species of Merchandise have been used fot this purpose : 
 but however difiPerent in their formy this is the universal want 
 they supplied : and the true nature of Money is to be a Right 
 or Title to demand something to be paid or done by some one else 
 
 Now, when oiie person takes a piece of Money in exchange for 
 products or services,- he can neither eat it, nor drink it, nor can he 
 clothe hircLself With it • it is of no absolute direct use in itself : its' 
 sole use is to be a Eight or Title to demand something ffoih 
 some one else : and the person who receives it in exchange for 
 products or services, only agrees to do so because he Believes 
 that he can exchange it away again for something which he does 
 want whenever he pleases. It is, therefore, what is termed 
 Credit 
 
 Thus a iiondoh mercTiant, F. Cradockey in the time of the 
 Commonwealth, says — 
 
 " Having now pointed out the irie'ohvenience of these metals 
 (Gold and Silver) in which the medium of commerce or Uni- 
 versal Credit beeth formerly been plaiced 
 
 d2 
 
36 THEORY AND PRACTICE OF BANKING 
 
 " Now, that such Credit is as good as Money will appear, 
 if it be observed that Money itself is nothing else but a kind 
 of Security, which men receive upon parting with their com- 
 modities, as a ground of Hope or Assurance that they shall 
 be repaid in some other commodity : since no man would either 
 sell or part with any for the best Money, but in hopes thereby to 
 procure some other commodity or necessary " 
 
 So Edmund Burke speaks of Gold and Silver as — " The two 
 great recognised species that represent the lasting conventional 
 Credit of mankind." B,ence we see the Fundamental Nature 
 of Credit 
 
 Credit in anything which is of no direct use in itself: hut 
 which is taken in exchange for something else, solely in the Belief 
 or Confidence that we have the Right to exchange it away again 
 for something else we do require 
 
 Credit is, therefore, the Right or Property of de- 
 manding something to be paid or done by some person. It. 
 is the Kight to a future payment : and it must be carefully 
 observed that it is the. Name of a certain species of Right or 
 Property 
 
 Aristotle, Bishop Berkeley, the Physiocrates, Smith, 
 Thornton, Bastiat, Mill, and Jurists have seen 
 the true Nature of Money 
 
 27. The subject of Money and Credit is of such fundamental 
 importance, and so much misconception has prevailed regarding 
 it, that we must now show that a whole series of writers have 
 seen the identical nature of Money and Credit 
 
 Thus Aristotle says — 
 
 "virep Se Tr;s /AeXXoucrTjs dXka.yrj'; (et vvv /Jur/Sev SeiTai, on 
 eVrai edv SerjOy) to No;u.i.cr/x,a oi'^oi' 'EyyvjjTifs ccrrtv ■^/uv. Set yap 
 TOVTO <j>epovTi elvat XaySeiv" 
 
 " But with regard to a future exchange (if we want nothing at 
 present, that it may taTce place when we do want something) Money 
 is, as it were, our Security. For it is necessary that he tvho 
 Irings it should ie able to get what he wants " 
 
 So an old pamphleteer, in 1710, saw the same truth. He says, 
 
NATURE OF MONET 37 
 
 " Trade found itself unsufferaMy straightened and perplexed for 
 want of a general specie of a complete intrinsic worth as the 
 medium to supply the defect of exchanging, and to make good the 
 talance, where a nation or a market or a merchant demands of 
 another a greater quantity of goods than either the buyer hath 
 goods to answer, or the seller hath occasion to take back " 
 
 So the great metaphysician, Bishop Berkeley, says in his 
 
 21. Whether other things being given, as climate, soil, &c.j 
 the wealth be not proportioned to industry, and this to the Cir- 
 culation of Credit, be the Credit circulated by what Tokens 
 or Marks whatever ? 
 
 24. Whether the true idea of Money, as such, be not 
 altogether that of a Ticket or Counter ? 
 
 25. Whether the terms crown, livre, pound sterling, are not 
 to be considered as exponents or demonstrations : and whether 
 Gold, Silver, and Paper are not Tickets, or Counters, 
 for reckoning, recording, and transferring such denominations ? 
 
 35. Whether Po"Wer to command the Industry of others 
 be not real Wealth ? And whether Money be not in truth 
 Tickets, or Tokens, for recording and conveying such 
 Po"wer : and whether it be of consequence what material the 
 Tickets are made of ? 
 
 426. Whether all circulation be not alike a circulation of 
 Credit whatsoever medium — Metal or Paper — is employed : 
 and whether Gold be any more than Credit for so much 
 Power ? 
 
 So also Queries 441, 449, 450, 459, 475, and many others 
 
 It is one of the special merits of the Physi cerates that they 
 clearly saw the true nature of Money. Among many others, 
 Baudeau, one of the most eminent of them, says — 
 
 "This coined Money in circulation is no'^hing, as I have 
 said elsewhere, but effective Titles on the general mass of 
 useful and agreeable enjoyments, which cause the well-being and 
 propagation of the human race " 
 
 " It is a kind of Bill of Exchange, or Order, payable 
 at the will of the bearer " 
 
38 THEORY AND PKACTICB OF BANKING 
 
 " Instead of taking his share in kind of all matters of sub- 
 sistence, and all raw produce annually growing, the sovereign 
 demands it in Money, the effective Titles, the Order, the 
 pill of Exchange, &c." 
 
 So Smith says — '^ A Guinea may be > considered as a Bill 
 for 9, certain quantitjr of necessaries and conveniencesfupoE all 
 the tradesmen in the neighbourhood " 
 
 So Henry Thornton, the eminent banker, says — " Money of 
 every kind is an Order for goods. It is so considered by the 
 labourer when he receives it : and it is alniost instantly turned 
 into money's worth. It is merely the Instrument by which 
 the purchaseable stock of the country is distributed with eon- 
 Tenience and advantage among the several members of the 
 commimity '' 
 
 This great fundamental truth was also very clearly seen by 
 Bastiat — 
 
 " This is now the time to analyse the true functions of Money, 
 leaving out of consideration the miners and importation 
 
 "You have a Crown piece. What does it me^n in your 
 hands ? It is, as jt were, the witness, and the proof that you have 
 at some time done some work, which, instead of profiting by, you 
 have allowed society to enjoy in the person of your client, This 
 Crown piece witnesses that you have rendered a service to society, 
 and, moreover, it states the Value of it. It witnesses, besides, 
 that you have not received back from society a real equivalent 
 service as was your Right. To put it in your power to exercise 
 the Right when and how you please, society, by the hands of 
 your client, has given you an Acknowledgment" or Title, an 
 Order of the State, a Token, a Crown piece, in short, 
 lyhich does not differ from other Titles of Credit, except that 
 it carries its Value in itself (?), and if you read with the eye of 
 the mind the inscription it bears, you will distinctly see these 
 words : ' Bay to the bearer a service equivalent to that which 
 he has rendered to society. Value received, stated, proved, and 
 measured by that wliich is on me ' " 
 
 *' 4fter that you cede your Crown piece to me. Either it is a 
 
NATURE OIT MONEY 39 
 
 present, or it is in exchange for something else. If you give it 
 me as the price of a service, see what follows : your account as 
 regards the real satisfaction with society is satisfied, balanced, 
 closed. You rendered it a service in exchange for a Crown piece : 
 you now restore it, the Crown piece, in exchange for a service : so 
 far as regards you the account is settled. But I am now just in 
 the position you were before. It is I now who have done a service 
 to society in your person. It is I who have become its Creditor 
 for the value of the work which I have done for you, and which I 
 could devote to myself. It is into my hands, therefore, that this 
 Title of Credit should pass, the witness and the proof of this 
 social Debt. You cannot say that I am richer, because if I have 
 to receive something, it is because I have given something " 
 
 " It is enough for a man to have rendered services, and so to 
 have the Right to draw upon society, by the means of exchange, 
 for equivalent services. That which I call the means of exchange 
 is Money, Bills of Exchange, Bank Notes, and also 
 Bankers. Whoever has rendered a service, and has not received 
 an equal satisfaction, is the bearer of a "Warrant, either pos- 
 sessed of Value such as Money (?), or of Credit like Bank 
 Notes, which gives him the Hight to draw from society, when 
 he likes and where he likes, and under what form he will, an 
 equivalent service " 
 
 So Mill says — " The Pounds or Shillings which a person 
 receives weekly or yearly are not what constitutes his income : 
 they are a sort of Ticket or Order, which he can present for 
 payment at any shop he pleases, and which entitles him to receive 
 a certain value of any commodity that he makes choice of. The 
 farmer pays his labourers and his landlord in these Tickets, as 
 the most convenient plan for himself and them " 
 
 It is so clearly understood that Money is in reality nothing 
 more than the Right to demand something to be paid or done, 
 that many Jurists expressly class it under the Title of Incorporeal 
 Property 
 
 Thus Vulteius says — 
 
 " Nummus in quo non Materia ipsa, sed Valor attenditur " 
 
 " Money in which not the Material hut the Value is 
 regarded " 
 
40 THEORY AND PRACTICE OF BANKING 
 
 That is, we desire or demand other things for the direct satis- 
 faction they give us : but we only desire Money for the other 
 things it will purchase 
 
 Gold and Silver Money may, therefore, be justly temed 
 Metallic Credit 
 
 Though the fundamental nature of Money is that it is a mere 
 Right of demanding something, yet the Quantity of Matter, or 
 Stuff, which is required to represent any amount of Debt, or as 
 the equivalent of any commodity against which it is exchanged, 
 will entirely depend upon the general laws of Value 
 
 Different Substances used as Money 
 
 28. Thus it is seen that writers of all classes, Philosophers, 
 Economists, Merchants, Bankers, and Jurists are perfectly agreed 
 upon the fundamental Nature of Money. It represents In- 
 debtedness : or services due : it represents the Sights 
 which its holders have to demand some product or service in 
 recompense for some service they have done to some one else 
 
 A great many different substances have been used by different 
 nations to represent this universal want. The Hebrews, we know, 
 used Silver : although no money was in use in the times of the 
 Homeric poems, copper bars or skewers were sometime afterwards 
 used as Money in Greece. The Ethiopians used carved pebbles : 
 the Carthaginians used leather discs with some mysterious sub- 
 stance sewn up in them. Throughout the Hands of the Eastern 
 ocean, and many parts of Africa, shells are still used. In Thibet, 
 and some parts of China, little blocks of compressed tea are used 
 as money. In the last century dried cod was used in Newfound- 
 land ; sugar in the West Indies ; and tobacco in Virginia. Smith 
 says, that in his day nails were used as money in a village in 
 Scotland. In some of the American colonies powder and shot : 
 in Campeachy, logwood : and among the North American Indians 
 belts of wampum were used as money. We read of another people 
 who used cowries for small change, and the skuUs of their enemies 
 for large sums. It is said that, in 1867, the proprietors in Vir- 
 ginia were reduced to such straits as to use dried squirrel skins as 
 money : and, in other countries, many other things have been 
 used for the same purpose 
 
X)N CREDIT 41 
 
 But when we consider the purposes for which Money is 
 intended, it is easily seen that no substance possesses so many 
 advantages as Metal. The use of Money being to preserve the 
 record of services due to the owner of it for any future time, it is 
 clear that Money should not be liable to alter by time. A money 
 of dried cod would not be likely to keep very long, nor would it 
 be very easily divisible. Not many bankers would like to keep 
 their accounts in dried cod, or tobacco, or logwood, or sugar, or 
 powder and shot, or dead men's skulls. One of the very first 
 requisites of Money is that it should be easily divisible into very 
 small iragments ; so that its owner should be able to get any 
 amount of service he pleases at any time. Taking these requisites 
 into consideration, it is manifest that there is no substance which 
 combines these qualifications so weU as a Metal. It is uniform 
 in its texture r it can be divided into any number of fragments, 
 each of which shall be of equal value to another fragment of equal 
 weight : and, if required, these fragments can always be re-united, 
 and form a whole again of the aggregate Value of all its parts : 
 which can be said of no other substance. All civilised nations, 
 therefore, have agreed to adopt a Metal as Money ; and of 
 Metals, Gold, Silver, and Copper have been chiefly preferred 
 
 On Credit 
 
 29. So long as nations continue in a low state of civilisation 
 aU the Credit or Money is made of some material substance. But 
 when they advance in civilisation they use Credit of another form 
 
 To revert to the case from which we shewed that the necessity 
 of Money originated that of an Unequal exchange : suppose 
 that instead of the general merchandise called Money, the Debtor 
 gives the Creditor a simple Promise to render the balance of 
 service due when required. Then the Creditor has the Right 
 to demand an equivalent at a future time. But that Promise 
 is only a Right against & particular person. Suppose that a person 
 -holds a tea merchant's Promise to give five pounds of tea. If the 
 person wants tea, and the tea'merchant is able to give the tea, 
 such a promise is exactly equivalent to so much Money 
 
 Now that Promise is only the Right to demand a particular 
 thing from a particular person. And that person may die, or 
 
42 THEORY AND PRACTICE OF BANKING 
 
 become insolvent, and unable to fulfil his Promise. The tea is- 
 the Value of the Promise : and to any one who wants tea, the 
 Promise is of exactly the same Value as Money. So if any one 
 wants any particular thingr, an Order for that thing is of exactly 
 the same Value as Money with regard to that particular thing. 
 If a person wants a shilling's worth of bread, an Order for that 
 amount of bread is of exactly the same Value as a shilHng with 
 regard to bread ; if a person wants a shilling's worth of milk, an 
 Order for that amount of milk is of the same Value as a shil- 
 ling with regard to milk : and so on with regard to everything 
 else in succession. The only difference is that each of these 
 Orders entitles the owner to get only one particular thing : 
 whereas with a shilling he can buy a shilling's worth of bread : or 
 of milk : or of wine : or of tea : or of anything else he pleases. 
 Hence, each of these Orders has got only one Value ; whereas 
 Money has a multitude of Values. Again, if the person who has 
 made the Promise cannot fulfil it, the Promise has lost its Value. 
 Bat if a person has Money he can always find some person to give 
 him the equivalent he wants for it. Hence, such an Order has 
 only particular and precarious Value ; but Money has 
 general and permanent Value 
 
 This Order, or Promise, or Eight is what is usually 
 called Credit : and it is clearly seen that though it is of a lower 
 and inferior form, it is yet of the same general nature as Money. 
 And as, in Economics, we are in no way concerned with the 
 materials of things : and since these Eights or Orders may be 
 exchanged, or bought and sold, equally as well as any material 
 Chattels ; they are termed Pecunia, Res, Bona, Merx in Koman 
 
 Law : -)(prq)t.aTa, ayada, 7rpdy/j.a.Ta, irXovTOi, ovcrla, olkos in Greek 
 
 Law : goods and chattels and vendible commodities in English " 
 Law : and therefore Wealth, in Economics 
 
 Credit in this country is usually in the form of an Order or 
 Promise to pay Money, such a,s Bank Notes, Bills of Exchange, 
 Cheques, &c. : but we have shown that Credit in general is afi 
 Order to Pay or Do something : and a Promise or Order to Do 
 some service is equally Credit, as an Order or Promise to pay 
 Money 
 
 Thus a Postage Stamp is an Order or Promise to carry a letter, 
 and is a form of Credit 
 
NATURE OF CKEDIT 43 
 
 So, when we buy a Railway Ticket we buy a Eight to be 
 carried a certain distance by Eail : hence, a Eailway Ticket is 
 Credit 
 
 So Opera, Tickets, and all Tickets to see any dramatic or other 
 performances, are Orders or Promises to see these things, and are 
 all forms of Credit 
 
 In this country Mercantile Credit almost invariably consists in 
 Orders or Promises to pay money : but it is quite usual in the 
 south of Europe to negotiate Orders or Promises to pay in the 
 products of the earth. 
 
 From this it is seen that it is perfectly possible to carry on the 
 exchanges of society without material money. During the late 
 civil war in America, gold and silver money entirely disappeared 
 from circulation: and private Tickets of the nature described 
 above took its place. Instead of Metallic Money, people had 
 their pockets filled with bread tickets, milk tickets, railroad 
 tickets, and many others. If a man had his hair cut and 
 tendered a dollar in payment, he could not get change in money: 
 but he received so many Tickets promising to cut his hair so 
 many times. In one case we saw in an American paper, payment 
 was made in tickets promising to pay strawberries when the 
 season came on 
 
 The whole of the preceding considerations may be summed up 
 in a very simple form. When persons have sold products or done 
 services to other persons, they are entitled to receive either an 
 equivalent product or service at the same time, or the Hight to 
 demand an equivalent at some future time. Now this Right 
 may be in two forms : either that of Metallic Money, which 
 is a General Eight to demand any equivalent from the whole 
 mercantile community : or a Righ.t to demand an equivalent 
 from the particular person who has received the product or service. 
 This latter species of Right is what is usually termed a 
 Qredit. Hence, in either case, the Creditor is entitled to receive 
 a Right : the only difference is, that in one case the Eight is 
 general and permanent, and in the other it is particular and pre: 
 carious. But, for all that, they are clearly of the same nature. 
 It is, therefore, seeu th^t Mpaey and Credit are homogeneous 
 
44 Theory and practice of banking 
 
 quantities: and that Money is only the highest and most 
 general form of Credit 
 
 We now see the advantage of forming clear and distinct 
 fundamental concepts. We have seen that the only true technical 
 definition of Wealth in Economics is that it is an Exchange- 
 able Right. Now, as these Orders, or Credits, such 
 as Bank Notes, Bills of Exchange, are all Exchangeable 
 nights, it follows that they are Wealth by the very defini- 
 tion. They can neither be handled nor seen in the form of 
 Abstract Rights : but they can be bought and sold, or exchanged, 
 even in that form, with the most perfect facility : but they can be 
 recorded on Paper, and then they can be transferred by manual 
 delivery, just like any other material Chattels. The whole mass 
 of these Eights form a vast mass of Property : and are Wealth, 
 for exactly the same reason that Gold is : they affect Prices 
 exactly like an equal mass of Gold : and they are the subject of 
 the most colossal commerce of modern times 
 
 Reason why Paper can, supersede Metallic Money 
 
 30. The reason why Paper can supersede Metallic Money is 
 now clear. An Order to receive a coat could never serve as a 
 substitute for a coat, because it cannot serve the same purpose : 
 an Order to receive bread may be bought and sold, but it cannot 
 supersede bread, because it cannot serve as food : and so on in 
 other cases. An order for such things can never serve as a sub- 
 stitute for the things themselves, because they are heterogeneous 
 quantities. But an Order to pay Money can serve as a substitute 
 for Money, because they are homogeneous quantities. A piece of 
 Money is of no more direct use for eating, or drinking, or clothing 
 than a piece of Paper : consequently, the exchange of Paper for 
 Money is nothing more than the exchange of a Particular Right 
 for a General Right. As Daniel Webster, the eminent American 
 Jurist, said—" Credit is to Money what Money is to Goods " : 
 that is, Credit is an Order to pay Money, and Money is an Order 
 to pay Goods. To be useful, Money must be exchanged away just 
 as Paper is. Hence, if Paper can be exchanged for exactly the 
 same things that Gold can, Paper has t^ie same Value as Gold. 
 
DISTINCTION BETWEEN MONEY AND CREDIT 45 
 
 As the Italians say, che oro vale oro i : that which is of the Value 
 of Gold is Gold 
 
 On the Distinction between Money and Credit 
 
 31. Money and Credit, then, are both of the same nature : 
 they are each a Eight or Title to demand something to be paid or 
 done by some one else 
 
 Now, no one can compel another person to sell him anything 
 in exchange for Money or Credit : when, therefore, a person has 
 voluntarily exchanged anything for Money, it is in reality only 
 Credit ; because he only takes it because he thinks that he can 
 exchange it away again 
 
 But suppose that a Sale, or Exchange, has taken place, and that 
 a Debt has been incurred thereby, public policy requires that the 
 Debtor should be able to compel the Creditor to accept something 
 in discharge of his Debt. It would cause infinite misery if 
 Creditors might arbitrarily refuse the offer of payment of their 
 Debts. Hence, in all countries, the Law declares that if a Debt 
 has been incurred, the Debtor can compel the Creditor to receive 
 something in payment of it 
 
 Whatever that Something is which the Debtor can compel his 
 Creditor to receive in payment of a Debt is termed Money, or 
 Legal Tender 
 
 From this it follows that some things may be money in some 
 cases, and not in others 
 
 Gold Coin is Money, or Legal Tender, in all cases and to any 
 amount 
 
 Silver Coin is only Money to tlie amount of 40s. If a 
 Creditor chooses to receive it in payment of a Debt of a larger 
 amount than 40s., it is entirely of his own free will 
 
 In England, as between the public and the Bank of England, 
 Bank Notes are nothing but Credit. The Bank cannot compel 
 any one to receive its Notes : and any holder of its Notes can 
 compel it to cash them on demand. Between private persons, a 
 Bank Note for £5 is not Legal Tender, or money, for that exact 
 amount of Debt. But, for all Debts above £5, Bank Notes are 
 Money or Legal Tender. But even this is only so long as the 
 Bank pays its Notes in cash on demand. If it were to stop pay-; 
 ment, its Notes would cease to be Legal Tender in any case. 
 
46 THEORY AND PRACTICE OF BANKING 
 
 Also ia Scotland and Ireland Bank of England Notes are not 
 Legal Tender in any case 
 
 If two persons are mutually indebted in equal amounts, each 
 may compel the other to receive the Debt he owes, in payment of 
 the Debt which is due to him. Each Debt is, therefore, Money 
 or Legal Tender with respect to the other 
 
 On Barter^ Sale or Circulation, and Exchange 
 
 32. When material commodities are exchanged directly for 
 one another; the transaction is termed Barter 
 
 When Commodities are exchanged for Money or Credit, that 
 Money or Credit is only taken that it may be exchanged away 
 again. Hence, the early Economists called a transaction in which 
 Money, or Credit, is used, hmlf-an-exchange. It is also called a 
 Sale or Circulation. A Sale,- or Circulation, always denotes 
 a transaction in which one or both of the Quantities exchanged is 
 Money or Credit 
 
 The sum total of -these Sales is properly termed the Circu- 
 lation. Hence a single piece of Money may add considerably 
 to the Circulation : because every time it is transferred it is a 
 Sale : and therefore it augments the Circulation 
 
 The word Circulation is sometimes used in a very corrupt 
 sense, which must be carefully avoided ; namely, as the quantity 
 of Money and Bank Notes in circulation, especially the latter.. 
 Of all the terms in common use this is one of the most objection- 
 able. To call the Notes in Circulation the Circulation is as great 
 a confusion of ideas as to call a wheel which rotates, a Eotation. 
 We shall, accordingly, never use the word Circulation to mean 
 the amount of the Notes of a Bank : the correct expression 
 evidently is to say the NoUs in circulation 
 
 As the use of Money and Credit is to set industry in motion : 
 and inasmuch as they have no use unless they do that : their 
 beneficial effects are not to be measured by their actual amount, 
 but by the Quantity of industry which they generate. Money 
 lying up in a box, or Credit unused, only represents latent Power, 
 and not actual Power, They may be called Power or Wealth ia 
 
 i i 
 
AN EXCHANGU 47 
 
 the latent state : they resemble the Steam Engine of a mill which 
 is not going : and which is of no use unless it is set in motion. 
 And as the produce of the mill is measured by the Quantity 
 of Motion of the engine : so is the useful effect of Money and 
 Credit measured by their Quantity of Motion : which we have 
 called the Circulation. The Circulation which is the sole 
 test of their useful effect is, therefore, the product of their amount 
 multiplied into the velocity of their Circulation. Engineers 
 usually call the Quantity of Motion of the engine its Duty : so 
 we may call the Circulation the Duty of Money and Credit 
 
 It is so essential to have a clear conception of the useful effect 
 produced by any given amount of Money or Credit, that we may 
 add another illustration. The effect produced by any body in 
 motion is determined by the Weight or Mass multiplied by its 
 Velocity ; which is called the Momentum. If the mass be 
 diminished, yet by increasing the Velocity, the Effect or Mo- 
 mentum may still be the same. If a body weighing 100 lbs. 
 move with a velocity 1, its momentum will be 100 : but if we 
 diminish the weight to 50 lbs., and can double its Velocity, the 
 Effect or Momentum will still be the same. The effects of Money 
 and Credit are exactly analagous. Their useful effect is the result 
 of their combined amount and velocity of circulation : which we 
 have called the Circulation. If we can make £50 circulate 
 with twice the velocity that £100 does, the useful effect, or Cir- 
 culation, will be exactly the same. Hence we may say that the 
 Circulation is the Momentum of Money and Credit 
 
 An Exchange is always the interchange of thifigs of a like 
 nature : either commodities for commodities : or Moiiey or Credit 
 for Money or Credit 
 
 Thus^ we speak of the Foreign Exchanges, or the Value of the 
 Money of one country in terms of the Money of another. Or we 
 ask for the change {i.e., the 'change or the exchange) of S, £5 
 note or sovereign : so we speak of exchanging one book for 
 another ; or a picture for a statue 
 
 So, iu Lear, when Albany throws down his glove to the traitor 
 Edmund, the latter, throwing down his own, says, " There's my 
 exchange," meaning like for like. And a little further on in the 
 scene, Edgar says to Edmund, " Let's exchange charity" 
 
48 theor:^ ani> practice of banking 
 
 So, in Hamlet, Laertes says—" Exchange forgiveness with me, 
 noble Hamlet." 
 
 When the interchange is between commodities and Money or 
 Credit, the one who gives Money or Credit is said to Buy the 
 commodity : and the one who gives the commodity is. said to 
 Sell it 
 
 Thus we Buy a horse, or a house, or land, or cattle, or com 
 with Money. An officer formerly iought a commission in the 
 army : but he exchanged from one regiment into another 
 
 On the Meaning of Circulating Medium 
 
 33. The term Circulating Medium does not occur in 
 Smith. The first instance, that we are aware of, of its use is in a 
 speech of Fox's, in 1797, in which he complains that it was a novel 
 term, whose meaning was not very well settled 
 
 The verb Circulate, like several others in English, has both 
 an active and and a neuter sense- 
 
 1. It means that which Circulates commodities, i.e., which 
 causes commodities to circulate : where it is an active verb 
 
 2. That which Circulates itself : where Circulates is a neuter 
 verb 
 
 Smith uses the word Circulate in both senses in different places. 
 Thus he says — " Their (gold and silver) use consists in Circulating 
 commodities" 
 
 " The great wheel of Circulation is altogether different from 
 the goods circulated by means of it. The revenue of the society 
 consists altogether in these goods, and not in the wheel which 
 Circulates them " 
 
 A little farther on he speaks of the different sorts of paper 
 money, but he says that the Circulating Notes of banks and 
 bankers are the species best known — where Circulate is neuter 
 
 In the following sentence both senses occur : " Let us suppose 
 for example that the whole Circulating money of some particular 
 country amounted at a particular time to one million sterling, that 
 sum being then sufficient for Circulating the whole annual products 
 of their Land and Labour " 
 
 The ordinary meaning of words in scientific language leaves 
 no possible doubt as to which of the two senses of Circulate is the 
 
MEANING OF CURRENCY 49 
 
 true one in the expression " Circulating Medium." A Medium 
 in scientific language means some middle thing by which some- 
 thing else is done. The Circulating Medium is the Medium by 
 which Circulation is effected. We have already defined Circula- 
 tion to be the exchange of commodities for Money or Credit. 
 Consequently the Circulating Medium must include Money and 
 Credit in all its forms. Hence the total amount of the Circulating 
 Medium must be simply the total amount of Money and Credit in 
 all its forms 
 
 On the Meaning of Currency 
 
 34. All writers use the term Currency as absolutely 
 synonymous with Circulating Medium : if, therefore, we can 
 positively decide the meaning of one of these terms, that will 
 necessarily also determine the meaning of the other. It has been 
 seen that the meaning of the term Circulating Medium is perfectly 
 clear ; and this must also determine the meaning of Currency 
 
 But the scientific meaning of the word Currency itself is not so 
 evident, and it has given rise to protracted controversies in 
 modern times. We shall not discuss these controversies here ; we 
 shall simply explain the true meaning of the word : and reserve 
 all controversy for a future occasion. It is in fact a technical term 
 of Mercantile and Constitutional Law 
 
 The following is the true meaning of Current and 
 Currency in English Law 
 
 It is a general rule of Law that a person cannot transmit to 
 another any better Title to a thing than he has himself. It is also 
 a general rule of Law that if a person has accidentally lost a thing, 
 or has it stolen from him, he does not thereby lose his Property, or 
 Eight in it. Consequently he can not only recover it from the thief 
 or finder himself, but also from any one else to whom the thief or 
 finder may have sold it : even though the purchaser paid the full 
 price for it to the thief or finder, and bought it honestly and 
 without the knowledge that it was not the Property of the seller 
 
 By the Common Law of England, if the thief or finder 
 manages to sell the goods in market overt, the purchaser acquires 
 a valid title to them against the true owner. Thus in Every Man 
 in his Humour, when Down-right claims his cloak, Stephen 
 mendaciously says — 
 
 " Tour cloak, Sir ! I bought it even now in open market" 
 
 13 
 
60 THEORY AND PRACTICE OE BANKING 
 
 But to this rule of Law, Money was always an exception. If 
 the true owner of the Money finds it in the possesion of the thief 
 he can reclaim it, but if the thief or finder has purchased goods in 
 a shop with it, and the shopkeeper takes the money honestly in the 
 way of business, and without knowing that it has been stolen, he 
 may retain it against the true owner, from whom it has been 
 stolen, even if he can identify it. That is, the Property in Money 
 passes ly Delivery 
 
 It is this peculiarity in the law affecting the property in 
 Money which passes by Delivery, which is denoted by the words 
 Current and.Currency in English Law 
 
 And when the representatives and substitutes for Money, such 
 as Bank Notes, Bills of Exchange, Cheques, &c., came into use, 
 the Lex Mercatoria, or Custom of Merchants, applied the same 
 doctrine or principle of Currency to them. They were treated 
 like Money in so far as this, that the Property in them passes like 
 ,the Property in Money. Thus, if they are lost or stolen, the true 
 pwner may recover them so long as he finds them in the possession 
 of the thief or finder. But if the thief or finder passes them away 
 for value in the ordinary course of business to an innocent holder, 
 that innocent holder acquires the Property in them, and may 
 retain them against the true owner and enforce payment of them 
 from all the parties liable 
 
 It is thus seen that in strict Law this principle of Currency 
 can only be applied to those Eights which are recorded on some 
 material. An abstract Eight cannot be lost or stolen, mislaid, and 
 passed away in commerce. For a Eight to be Currency in strict 
 Law, it must be recorded on some material so as to be capable of 
 being carried in the hand : or in a man's pocket : or put away m 
 a drawer : or dropped in the street : or stolen from the drawer or 
 from a man's pocket, and carried off by the finder or thief, and 
 sold like a piece of goods 
 
 So far, then, as regards Law, there is no diflSculty. : the 
 meaning of the word is perfectly plain. But if the word Currency 
 is used to denote a certain class of Economic Quantities, synony- 
 mous with Circulating Medium, a diflBculty arises : because there 
 is an immense mass of Credit which has produced exchanges, and 
 has circulated commodities, and is therefore Circulating Mediiim, 
 
DIFFERENT FORMS OF CURRENCY 51 
 
 which is not recorded on any material at all, in such a way that 
 it can be lost, or stolen, and passed away by manual delivery 
 
 Thus the gigantic mass of Bank Credits and Book Debts of 
 traders have all effected a Sale, or Circulation : and therefore they 
 are all Circulating Medium : but they are not Currency in a legal 
 sense : because they cannot be mislaid or lost, or stolen, and 
 passed away by manual delivery. So, also, private Debts between 
 individuals termed Verbal Credits : they only arise out of the 
 Transfer of Money, or Commodities : and they exist equally 
 whether they are recorded on any material substance or not. 
 They are equally Circulating Medium. The private debts among 
 traders affect prices exactly like so much Money. Consequently, 
 though they are not Currency in strict Law, they must all be 
 included under that term when used in a scientific sense in 
 Economics, synonymous with Circulating Medium : because these 
 Rights of action are exactly the same in their nature and effects 
 whether they are recorded on paper or not 
 
 This truth was well expressed by the Marquis of Tichfield in 
 the House of Commons, in speaking of the various forms of Credit 
 used as substitutes for Money — " 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 was easy to see that the country had received a 
 great addition to its Currency. This addition to the Cur- 
 rency would have the same effect as if Gold had been increased 
 from the mines " 
 
 The different Forms of Currency 
 
 35. Adopting, then, this Definition of Currency, or Cir- 
 culating Medium, we may enumerate its different forms or species 
 as follows — 
 
 1. Coined Money : Gold, Silver, or Copper 
 
 2. The Paper Currency : Bank Notes, Bills of Ex- 
 change and Promissory Notes, in all their Varieties 
 
 3. Simple Debts of all sorts : not recorded on Circulating 
 Paper ; such as Credits in bankers' books termed Deposits : Book 
 Debts of Traders : and private Debts between individuals 
 
 It is obvious that there is no distinction in principle between 
 
 e2 
 
52 THEORT AND PBACTICE OF BANKING 
 
 these two latter species. They each denote that a transaction of 
 some sort has taken place, and are a Title to future payment. As 
 a matter of convenience some of them are recorded on paper : but 
 that does not alter their nature. It is certainly true that some of 
 these descriptions of Currency are more eligible and secure than 
 others : and perform their duties with different degrees of advan- 
 tage. The Metallic Currency rests upon the good faith of the 
 State that it is the proper weight and fineness, and the universal 
 readiness of the people to receive it in exchange for products and 
 services. Paper Currency, in this country at least, rests upon 
 private Credit : and is of all degrees of security from a Bank of 
 England Note down to a private I U. These different forms 
 of Currency, therefore, though they may possess different degrees 
 of Circulating Power, though they may be more or less eligible or 
 secure, represent but one Fundamental Idea — Debt. From 
 these considerations it follows that the amount of Currency or 
 Circulating Medium, in any country, is the svm total of all the 
 Belts due to every individual in it — that is, all the Money and 
 Credit in it 
 
 Postage Stamps must also be included under the term Cur- 
 rency. Though the point has not been decided in the Courts of 
 Law, there can be no doubt that Postage Stamps possess the 
 attribute of Currency. They are a most usual form of remittance : 
 they pass in small payments : and since the Law has ordered that 
 the Post OflBce should cash them, they are in reality One Penny 
 Notes. And if any one were to steal Postage Stamps, and pass 
 them away, and if they were taken honestly in payment, there 
 can be no doubt that the same principle of Currency would apply 
 to them as to Bant Notes, Bills, and Cheques : hence they are 
 strictly Currency 
 
 On the Channel of Circulation 
 
 36. When unequal exchanges take place of commodities or 
 services, it has been shewn that Money and Credit represent the 
 balances which arise from these unequal exchanges. The total of 
 these balances is the Circulation ; and in monetary discussions 
 the amount of these balances is sometimes called the Channel 
 of Circulation 
 
THE CHANNEL OF CIRCULATION 53, 
 
 This Channel of Circulation is filled with some material : and 
 Prices are estimated in pieces of this material 
 
 The Quantity of the material which represents any given 
 amount of Debt, and is equivalent to any amount of commodities 
 or services, is determined by the general Laws of Value, and need 
 not be adverted to here 
 
 Let us first suppose that Gold is used at any time to represent 
 Debt, and to fill the Channel of Circulation. This Cold metal is 
 divided into certain pieces of fixed quantity and weight, termed 
 Coins : and Prices are estimated in these Coins 
 
 But suppose that at any time Gold was suddenly discontinued 
 as the representative of Debt, and Silver substituted for it : and 
 suppose that pieces of Silver were coined of exactly the same 
 weight as the previous Gold pieces, and substituted for them as 
 the representative of Debt 
 
 Then, as Silver is about fifteen times less valuable than Gold, 
 it is clear that it would require fifteen times as many pieces in 
 Silver to represent any amount of Debt as it would Gold pieces : 
 and Prices would rise fifteen-fold : but other commodities would 
 stiU preserve the same relations among themselves. Hence, 
 though Prices would rise, yet the Values of commodities with 
 respect to each other would remain exactly the same 
 
 Again, suppose that Silver was taken away as the representative 
 of Debt, and Copper substituted : and Copper coins struck of the 
 same weight as the previous Gold and Silver ones, and called by 
 the same name. Then prices would be estimated in Copper : and 
 as Copper is about 900 times less valuable than Gold, Prices 
 estimated in Copper would rise to about 900 times the amount in 
 Gold ; the relative Values of all other commodities remaining the 
 same 
 
 Now, as the Value of Gold in representing Debt depends upon 
 the Quantity of the Gold which represents any amount of Debt, it 
 would manifestly follow that if the Quantity of Gold were suddenly 
 increased which represented any amount of Debt, the Value of 
 Gold would greatly diminish. And if Gold became as plentiful as 
 Silver, it would have no more Value than Silver : and consequently, 
 even while the weight of the coins and their quality remained the 
 same, Gold would fall to the fifteenth part of its former Value as 
 a Purchasing Power 
 
54 THEOEY AND PEACTICB OF BANKING 
 
 So, also, if Gold were to become as plentiful as Copper, while 
 it still represented, the same amount of Debt, it would be of no 
 more Value as Purchasing Power than Copper : that is, it would 
 fall to about the 900th part of its former Value 
 
 Thus, in a general way, if a certain Quantity of Stuff of any 
 sort is used to represent any Quantity of Debt at any time, and if 
 the Quantity of Stuff is greatly increased while the Quantity of 
 Debt remains the same, it necessarily produces a great diminution 
 in the Value of the Stuff : and a general rise of Prices 
 
 But the Quantity of Stuff which represents Debts, and fills the 
 Channel of Circulation, need not be all of the same material. It 
 may be partly Gold, partly Silver, and partly Copper : and Prices 
 will be estimated by the whole Quantity of Stuff which fills the 
 Channel of Circulation : and not by any particular portion of it 
 
 In modern times a new kind of Stuff has been employed to a 
 gigantic extent to fill the Channel of Circulation : and that is 
 Credit, or simple Rights of action in different forms 
 
 Thus the whole Quantity of Stuff which fills the Channel of 
 Circulation is composed of Gold, Silver, Copper, and Credit : 
 and the Prices of commodities are estimated according to the 
 aggregate of all these different kinds of Stuff : and not according 
 to any single one. Hence the creation and use of Credit in 
 modern times produces exactly the same effects, and acts upon 
 Prices exactly in the same way as an equal Quantity of Gold. 
 And this to an extent which is very imperfectly appreciated and 
 understood. It will be shewn hereafter that in this country the 
 Quantity of Credit which is used in commerce may be approxi- 
 mately estimated at about fifty times the quantity of metallic coin. 
 Hence the thorough comprehension of the principles and me- 
 chanism of the great System of Credit is the very foundation of all 
 modern Economics : and it is the excessive creation of Credit 
 which produces more changes in the Prices of commodities at the 
 present time than any other causes whatever 
 
 The Fundamental Concept of Monetary Science 
 
 37. The preceding considerations now enable us to perceive 
 the Fundamental Concept of Monetary Science 
 
SECUKITIES FOR MONEY 55 
 
 We have seen that writers of all classes are agreed as to the'^ 
 fundamental Nature of Money. It represents Debts which are 
 due to persons who have done services to others, and have received 
 no equivalent service in return. It is merely the Right to 
 demand these equivalent services when they please : and itS' 
 special function is to measure, record, and preserve for future use 
 these Eights 
 
 If all the services exchanged in society exactly balanced there 
 would be no need for Money 
 
 Supposing, then, that there was nothing but Metallic Money 
 in use, the following axiom is evident — 
 
 *' The Quantity of Money in any country represents the- 
 Quantity of Debt that there would ie, if there were no 
 Money " 
 
 But, as we have seen, that in modern civilised countries these 
 Debts or Rights are recorded in the simple abstract form of Rights 
 against particular persons, as well as in Metallic Coin, which are 
 Rights against the general community, the term Currency 
 includes these Debts or Rights in both forms 
 
 Hence it is clear that the Currency represents nothing but 
 Transferable Debt, and that whatever represents Trans- 
 ferable Debt is Currency, whatever its nature or form 
 may be 
 
 Consequently, the proposition necessarily follows — 
 
 " Where there is no Debt there can he no Currency " 
 
 We shall see hereafter that all erroneous Theories of Currency 
 have been founded on not perceiving the fundamental nature of 
 Currency : and the greatest monetary disasters the world has ever 
 seen have been produced by violating these fundamental axioms 
 
 On Securities for Money and Convertible 
 Securities 
 
 38. We must now explain the distinction between 
 Securities for Money and Convertible Securities 
 
 A Security for Money always means a Security, or 
 Obligation, for the Payment of a definite sum of Money by a 
 definite person at a definite time. There is, therefore, always 
 some Person who is bound to pay it. There are different forms 
 
56 THEORY AND PRACTICE OF BANKING 
 
 of such Securities, such as Bank Notes, Bills of Exchange, Navy 
 Bills, Exchequer Bills, and Debts of all sorts 
 
 Convertible Securites are Securities which no parr 
 ticular person is bound to pay : but tot which under usual 
 circumstances, a purchaser can readily be found in the open 
 market. A Convertible Security means any Property which can 
 readily be sold. This species of Property includes the Funds, 
 Shares in Commercial Companies, all Title Deeds to Goods of a 
 moveable description, such as Bills of Lading, Dock Warrants, &c. 
 As Convertible Securities means Property which can be readily 
 converted into Money, there are of course all degrees of con- 
 vertibility 
 
 There is no absolute distinction in principle between the 
 diiferent species of Property. But of all species of Property the 
 Funds are the most readily convertible : and the Land, or Eeal 
 Property, is the least readily convertible : mainly in consequence 
 of the diflBculty and expense of its transfer 
 
 Thus, Securities for Money are always Eights against a person, 
 or Jura in personam, and are never Eights to specific things or 
 Jura in re. Convertible Securities are nexer Eights against 
 persons : and certain kinds of them are always Titles to specific 
 goods 
 
 Sometimes a Security for money may be changed into a 
 Convertible Security. This is done in what is called Funding 
 the Unfunded DeU. The Government, like private individuals, 
 often raises Money on its Bills, and is, of course, bound to pay them 
 at maturity. These Exchequer Bills, as they are called, are like 
 any other Bills, Securities for Money. Sometimes when these 
 Bills, called Floating Debt, amount to a large sum, it is not 
 convenient for Government to pay them off: and it gets its 
 Creditors to agree not to demand repayment of the whole debt, 
 but only to receive interest on it in perpetuity. When this is 
 done the Creditor loses the Eight to demand the principal sum 
 from the Government : but he may sell the Annuity, or the Eight 
 to receive the future payment to anyone in the open market. It 
 then becomes a Convertible Security, and is called the Funds, or 
 Stock. This operation is termed Funding the Unfunded or 
 Floating Debt 
 
 In a similar way Eailways have been allowed to borrow Money 
 
ON PRICE 57 
 
 on their Bonds, termed Debentures. Finding it inconvenient 
 to repay these large sums, they have formed them into Debenture 
 Stock, upon which they are only bound to pay the Interest, hke 
 the Public Funds 
 
 On Price 
 
 39. When any Economic Quantity is exchanged for any 
 other Economic Quantity, each is termed the Value of the other. 
 But when one or both of the Quantities exchanged is Money or 
 Credit, they are termed the Price of the other. Price is therefore 
 always Value expressed in Money or Credit 
 
 Now the Value of Money is the Quantity of any Commodity 
 or Service which can be got in exchange for it : the greater the 
 Quantity so obtained the greater is the Value of Money : the less 
 the Quantity obtained the less is the Value of Money 
 
 Or if the commodity be taken as the fixed Quantity, the less 
 the Money given for it the greater is the Value of Money : and 
 the more Money given for it the less is the Value of Money 
 
 Hence it is seen that — The Value of Money varies 
 Inversely as Price 
 
 Debts or Credits, however, are Commodities which are bought 
 and sold like any material chattels : and for the convenience of 
 Sale, they must be divided into certain units. Coals are sold by 
 the ton : corn by the quarter : tea and sugar by the pound : and 
 other things by the ounce 
 
 The Unit of Debt is the Bight to demand £100 to le 
 paid one year hence 
 
 The sum of Money given to purchase this unit of Debt is its 
 Price : and of course, the less the Price given to buy the fixed 
 Unit of Debt, the greater is the Value of Money 
 
 But in the Commerce of Debts it is not usual to estimate the 
 Value of Money by the Price paid for the Debt. As Money 
 naturally produces a Profit, it is clear that the Price given for a 
 Debt payable one year hence must be less than the Debt. The 
 Difference between the Price and the Amount of the Debt is the 
 Profit made by buying it. This Difference or Profit is termed 
 Discount. And it is clear that as the Price of the Debt decreases 
 
58 THEORY AND PRACTICE OF BANKING 
 
 or increases, the Discount or Profit increases or decreases. In the 
 
 Commerce of Debts it is always usual to estimate the Value of 
 
 Money by the Discount, or Profit it yields 
 
 Hence, in the Commerce of Debts— The Value of Money 
 
 varies Directly «« Discount 
 
 This Eule embraces both branches of Commerce — 
 
 The Value of Money varies Inversely as Price, and 
 
 Directly as Discount 
 
 Hence it must be observed that the Term Value of Money has 
 two distinct meanings. There are two great branches of Com- 
 merce : the Commerce in Goods or Commodities : and the 
 Commerce in Debts. And the expression, Value of Money, has 
 two distinct meanings according as it is applied to these two 
 branches of Commerce. In the Commerce of Commodities the 
 Value of Money means the Quantity of the Commodity it can 
 buy : in the Commerce of Debts it means the Profit, or Discount 
 made by buying the Debt 
 
 On Interest and Discount 
 
 40. Profits made by trading in Money are made in two 
 ways^ 
 
 1. When the person advancing the Money agrees to defer 
 receiving Profit until the end of the time agreed upon. In this 
 case the Profit is termed Interest 
 
 If a man " lends " £100 for a year it is in reality a Sale, or 
 Exchange, in which he sells the Money, and in exchange for it he 
 receives the Eight to demand £105 at the end of the year ; and 
 the £5 is the Interest 
 
 2. Where the Profit is retained at the time of the advance, 
 and deducted from the amount " lent." In this case the Profit 
 is termed Discount 
 
 But Discount itself is of two kinds — 
 
 (a) In the ordinary books of Algebra it is said that Discount 
 is where the Profit is retained at the time of the advance : and 
 the sum advanced is such a sum as, improved at the given Rate 
 of Profit, would be equal to the full sum at the end of the period 
 of the advance. It is therefore the Present Value of the 
 
ON PRODUCTION 59 
 
 Sam at the agreed upon Eate of Profit. This may be called 
 Algebraical Discount. It is used by Insurance Companies 
 in determining the Present Value of future payments, and in some 
 other cases 
 
 (6) But this kind of Discount is never used by Bankers. In 
 banking it is invariably the custom to retain the full amount of 
 the Profit agreed upon at the time of the advance. Thus if a 
 Banker discounts a Bill of £100 for a year at £5 per cent., he 
 deducts and retains the full £5, and advances £95. That is, he 
 " lends " £95, and in exchange for it he acquires the Eight to 
 demand £100 at the end of the year. As this method is always 
 used in Banking, it may be termed Banking Discount 
 
 The Profits made by Interest and Algebraical Discount are 
 exactly equal : but Banking Discount is more profitable : because 
 in the former case a Profit of £5 is made on the actual advance 
 of £100 : in the latter case on that of £95 
 
 In either case the Money is the Price of the Debt, and the 
 Debt is the Price of the Money 
 
 The Rate of Interest or Discount is the Amount 
 
 of the Profit made in some given Time, as the year 
 
 On Production 
 
 41. The term Production comes from the Latin pro- 
 ducere, to lead or bring forth : it is the technical word in Latin 
 for to expose for sale 
 
 Thus, in the EunucTius of Terence, Thais says^- 
 " Pretium sperans iUico 
 Producit, vendit" 
 
 " Hoping for a good price, offers Mr therefor sale, sells her" 
 
 So, in the Heauton Timor oumenus, Menedemas says — 
 " ABoillas, servos 
 Omnes Prodiixi ac vendidi" 
 
 " All the slaves, male and female, I offered for sale, and sold" 
 The original sense of Produce in English is exaistly the 
 
60 THEORY AND PEACTICE OF BANKING 
 
 same : it is to draw forth, to cause to come near, to place in a given 
 spot 
 
 Thus it is said in Isaiah—" Produce your cause, saith the 
 Lord : bring forth your strong reasons, says the king of Jacoib : " 
 and the marginal note says—" Produce, cause to come near " 
 
 So, in Julius Gasar, Antony says — 
 
 " That's aU I seek, 
 And am moreover suitor, that I may 
 Produce his body in the market place" 
 
 So, in Lear, Albany says — 
 
 " Produce their todies, be they alive or dead " 
 
 So, when Mr. Montague Tigg gives a dinner to Mr. Jonas 
 Chuzzlewit and his friends, " It was as good a one as Money (or 
 Credit, no matter which,) could Produce " 
 
 So to Produce a thing is simply to bring it forward, and place 
 it where it is wanted. If a witness is told to Produce a deed 
 or other document in Court, it means that he is to bring it into 
 Court, and place it there. So a party to a cause Produces hiS 
 witnesses in Court. A gaoler is ordered to Produce the body 
 of his prisoner in Court, i.e., to place him there 
 
 In the universal language of commerce the Producer is 
 the person who brings any commodity into the market snA offers 
 it for sale 
 
 Hence the true and original meaning of Production in Econo- 
 mics is to place anything in the market where it is offered for 
 sale. And a Product is anything whatever which is offered 
 for sale 
 
 A great poet may Produce a great poem : a great sculptor may 
 Produce a great statue : a great artist may Produce a great pic- 
 ture : we may estimate their merits most highly : they may be 
 among the highest products of the human intellect : but Economics 
 has nothing to do with anything except their market Value. Now, 
 though the poem, the picture, the statue may be produced in 
 nature, or called into existence : they are hot Produced in 
 Economics until they are brought into the market and offered for 
 
 So, in French, the primary and original meaning of Produire 
 
THREE CLASSES OF PRODUCERS 61 
 
 is pousser mi avant : and of Production, it is action deproduire ,• de 
 mettre en avant ^ 
 
 Three different Classes of Producers 
 
 42. In Economics, then, the term Production means exclu- 
 sively the action of placing anything in the market where it is 
 offered for sale 
 
 Now there are in general Three distinct kinds of persons 
 who are required to place any commodity in the spot where it is 
 offered for sale to the final purchaser 
 
 1. Agricultural Producers. One class of persons 
 obtain the raw produce from the earth : such as agriculturists, 
 miners, liunters, fishermen, breeders of cattle and herds, &c., and 
 bring them into commerce : these are termed Agricultural 
 Producers 
 
 2. Manufacturing Producers. But as the raw 
 produce of the earth is seldom fitted for human use without 
 undergoing several processes of manufacturing and fashioning, 
 manufacturers of all sorts purchase this raw produce from its first 
 or Agricultural Producers, and fashion and transform it by an 
 infinity of processes, so as to render it fit for human use. These 
 are termed Manufacturing Producers 
 
 3. Commercial Producers. But after the raw pro- 
 duce of the earth has befin rendered fit for human use, it has to be 
 transported from one country to another : and from one place to 
 another to the shop or market where it is finally offered for sale 
 or use. Hence all modern Economists class Transport as one 
 species of Production. J. B. Say expressly enumerates 
 Transport under the term Production. So also does Michel 
 Chevalier. Mill, who gives the first book of his work to Pro- 
 duction, in the sense of obtaining things from the earth, in a 
 subsequent chapter says — " Improvements in Production, under- 
 standing the last expression in its widest sense to include the 
 process of procuring commodities from a distance, as well as of 
 producing them " 
 
 Hence, Merchants, or Foreign Importers, Wholesale and Eetail 
 dealers of all sorts, are Producers, because they place the 
 product in the spot where it is offered for sale. Hence it is most 
 
62 THEORY AND PRACTICE OP BANKING 
 
 important to observe that Commerce, or Circulation, is 
 
 one species of Production, All these classes are termed 
 Commercial Producers 
 
 Hence all Production is summed up in placing any article in 
 the place where it is offered for sale. So far as the Customer, or 
 Consumer, is concerned, the tradesman in whose shop he finds the 
 article is the Producer. It makes no difference to him whether 
 the tradesman keeps workmen in his own employ, and transports 
 the article from his workshop to his counter, or whether he pays 
 an independent manufacturer three hundred miles off to make it, 
 and then transports it to his shop 
 
 On Consumption 
 
 43. The word Consumption is the correlative of Pro- 
 duction : as Production means placing an article in the spot where 
 it is offered for sale, so Consumption means Purchasing the 
 article, and taking it out of Commerce for the purpose of use and 
 enjoyment. It requires some little explanation to shew how this 
 meaning is arrived at 
 
 The term in French for Consumption is Gonsommation, which 
 means OompUUon, and was used by the early French Economists 
 to mean simply Demand 
 
 Gonsommation is derived from Gonsommer, which comes from 
 the Latin consummare, to eompletn or accomplish 
 
 Thus La Fontaine says — " En peu de jours il consomma 
 I'affaire." " In a few days he completed the transaction " 
 
 So Pascal says — " On va chercher et consommer la demonstra- 
 tion." " We must now seek for and complete the proof " 
 
 So Dupuis says — " Durant lequelle se consomme le grand 
 ouvrage " " During which the great work is completed " 
 
 Another writer says — " Le sacrifice d'Isaac, qui ne fut point 
 consomme, fut I'image de celui qui fut consommi sur la croix." 
 " The sacrifice of Isaac, which was not completed, was the type of 
 the one which was completed on the Cross " 
 
 We need not multiply instances : as every French scholar knows 
 well enough that the genuine sense of Gonsomm,er is to Complete, 
 or Accomplish 
 
 And this was the meaning universally given to Consom- 
 mation by the early French Economists 
 
ON CONSUMPTION 63 
 
 Thus Le Trosne says — " II y a cette difference entre I'^change 
 et la Ysnte, que dans I'eohange tout est consomme' pour chacun 
 des parties : elles out le chose qu'elles voudraient se procurer, et 
 n'ont plus qu'^ jouir. Dans la rente, au contraire, et n'y a que 
 Tacheteur qui eut rempli son objet : parce qu'il n'y a que lui qui 
 soit a port6e de jouir. Mais tout n'est pas termini pour le 
 vendeur " 
 
 And again — " L'6change arrive directement au but, qui est la 
 Consommatiou, il n'a que deux termes, et se termine par un 
 seul contrat. Mais un contrat ou I'argent intervient n'est pas 
 Consomme' puisqu' U faut que le vendeur devienne acheteur, 
 ou par lui-m6me, ou par I'inteposition de celui auquel il tran- 
 portera son argent. II y a done pour aboutir k la Gonsonimation 
 qui est I'objet ulterieur au moins quatre terms et trois con- 
 tractants, dent I'un intervient deux fois " 
 
 So Blanqui says — " Toutes les transactions devaient se Con- 
 sommer par forme d'^change " 
 
 Oournot says — "Ou se Consomment les achats et les 
 vents " 
 
 Michelet says — " II ne consomme rien nefinit rien " 
 
 Gonsmnmation, or Consumption, then, in the language of the 
 early French Economists, simply meant the Completion of 
 an Exchange. Suppose, for example, that a painter and a sculptor 
 agree to exchange a picture and a statue. "When the painter has 
 received the statue, and the sculptor has received the picture, each 
 has Produced, i.e., offered, in exchange his own work, and 
 Consummated his desire by obtaining the thing he desired 
 to enjoy. And the Exchange is Consummated and Com- 
 pleted because each party has obtained a Satisfaction. 
 Hence was effected what the early Economists called a Com- 
 plete Exchange. But there was no idea of Destruction in this 
 reciprocal Consummation of desires 
 
 The Gonsommatem, or Consumer, then, was the person who 
 Consummated, Gompleted, or accomplished the desire of the Pro- 
 ducer. The Producer brings forward something and offers it for 
 sale : but it is the Purchaser who gives Value to it : it is he who 
 crowns the work, and consummates the desire of the Producer : 
 and completes the transaction by purchasing the product, and 
 
64 THEORY AND PRACTICE OF BANKING 
 
 thereby gives it Value. The Consumer, therefore, meant 
 nothing but the Purchaser or Customer 
 
 Thus Consammation was used by the early French Economists 
 simply to mean Demand 
 
 Thus Boisguillebert, the morning star of modern Economics, 
 says — " Gonsommation {Demand) is the principle of all Wealth" 
 
 " All the revenues, or rather all the riches in the world, both 
 of a prince and his subjects, only consist in Consommation 
 (Bemand) : all the most exquisite fruits of the earth, and the 
 most precious products would be nothing but rubbish if they were 
 not Consomme's {Demanded)" 
 
 So Smith used the word Consume to mean simply to Purchase: 
 " Though we frequently, therefore, express a person's revenue by 
 the metal pieces which are commonly paid to him, it is because 
 the amount of these pieces regulates the extent of his power of 
 Purchasing, or the value of the goods which he can annually 
 afford to Consume. We still consider his income as consisting 
 in this power of Purchasing or Consuming, and not in 
 the pieces which convey it " 
 
 It was J. B. Say who first used Gonsommation to mean 
 destruction. We have elsewhere pointed out the absurd con- 
 sequences to which this leads. But even Say himself says — " The 
 Consommateurs {Consumers) of things are the Buyers : " 
 and certainly persons do not purchase everything for the sake of 
 destroying it 
 
 We must, therefore, eliminate all idea of Destruction from the 
 term Consommation, or Consumption, in Economics : and 
 leave only Purchase as its true meaning. The Consumer is 
 simply the Purchaser or Customer 
 
 Meaning of the Expression "Production and 
 Consumption " 
 
 44. Hence the student must carefully observe that in the 
 language of Economics the expression « Production and 
 Consumption" is one and indivisible: and it must not be 
 separated into its component terms. Production and Con- 
 sumption together constitute Exchange : and each act of 
 exchange is a phenomenon of "V^alue, or of Clommerce 
 
ON SUPPLY AND DEMAND 65 
 
 So Burke says— "Market is the meeting and conference of 
 the Consumer and Producer" 
 
 So Bastiat says—" In genesal we devote ourselves to a trade^ 
 or profession, or career : and it is not from that that we expect 
 directly the object of our satisfaction. "We render and we receive 
 services : we offer and we demand values : we make purchases and 
 sales : we labour for others and others labour for us : in a word, 
 we are Producers and Consumers 
 
 On Supply and Demand 
 
 45. The terms Production and Consumption were used by 
 the early Economists to mean bringing a material product into 
 the market and offering it for sale, and purchasing it, and taking 
 it out of the market for the purpose of use and enjoyment. And 
 so long as the Science of Economics was limited to the Exchanges 
 of the material products of the earth, the expression " Pro- 
 duction and Consumption " was perfectly intelligible and unob- 
 jectionable as equivalent to Exchange. But when the term 
 Wealth and the Science of Economics were extended and enlarged 
 by modern Economists to include Labour and Rights as Wealth 
 and as objects of Exchange in conformity with the unanimous 
 doctrine of ancient writers, great awkwardness arises. For even 
 though it is carefully explained that Production means nothing 
 but offering for sale, and Consumption means nothing but Pur- 
 chasing, it is very awkward to speak of the Production and 
 Consumption of Labour 
 
 And it becomes still worse when Rights are brought into the 
 science as Exchangeable Quantities, or articles of commerce. For 
 who would understand such an expression as the Production and 
 Consumption of Debts, Shares, the Funds, Copyrights, &c. 
 
 Under such circumstances it is indispensable to resort to terms 
 of wider import, which include all the three orders of Economic 
 Quantities : and these we have in the terms Supply and 
 Demand 
 
 . Production is the Quantity of anything offered for sale : and 
 the Supply is also the Quantity of it offered for sale : and it is 
 quite usual to speak of the Supply of Labour, i.e., the persons 
 who are offering their Labour for sale : and it is also quite usual 
 
66 THEORY AND PRACTICE OF BANKING 
 
 to speak of the Supply of Bills, i.e., of Debts in the market. 
 Hence the word Supply is constantly used with respect to all 
 the three orders of Economic Quantities offered for sale ; and is, 
 therefore, the term we want 
 
 Somewhat more subtlety appertains to the word Demand 
 
 Demand, of com'se, is a desire of the mind to possess some- 
 thing : but unless persons possess something to give in exchange 
 for what they want, they can give no effect to their desire : and 
 such an impotent desire is not an Economical phenomenon 
 
 It is easy to see that Demand is not the same thing as Con- 
 sumption : because there may be exactly the same number of 
 things bought or consumed : and yet the Demand for them 
 may be very different 
 
 Suppose that a theatre holds a certain number of seats : in 
 ordinary times the house may be filled at certain prices. But an 
 artist of extraordinary merit, a Jenny Lind, comes, and the 
 Demand, or the desire to possess the seats, increases — prices 
 rise enormously. Now the number of the seats, or the Production, 
 remains exactly the same : the Supply is exactly the same ; the 
 number of seats offered for Sale, and the number bought, or the 
 Consumption, remain exactly the same : but the Demand has 
 varied greatly 
 
 Now, as Value is originally a desire of the mind : but as Value 
 is not manifested as an Economic phenomenon unless an Exchange 
 takes place : and what a person gives to obtain something else is 
 termed the Value of that commodity : so Mill has proposed 
 that the Quantity of Money, or anything else, a person gives to 
 obtain something in exchange for it should be called the De- 
 mand for it. This suggestion is excellent, and clears away 
 many difficulties which surrounded the term : and we shall adopt 
 it. Thus each Quantity offered for sale is the Supply of that 
 article : and the Quantity of the other article given for it is its 
 Value, or the Demand for it : thus each article exchanged 
 is the Value or the Demand for the other 
 
 Tims, while the terms Production and Consumption were 
 limited to the exchange of the single class of the Material pro- 
 ducts of the earth : the terms Supply and Demand embrace and 
 comprehend the exchanges of all the three classes of Economic 
 Quantities 
 
ON PROFIT 67 
 
 Thus, Production and Consumpfcion constitute Exchange : but 
 the relative Quantities in which the things will exchange, are 
 determined by the relation of Supply and Demand 
 
 On Cost of Production 
 
 46. Production in Economics means, as we have seen, placing 
 any Economic Quantity in the market, and offering it for sale 
 
 Consequently, the Cost of Production must mean the 
 sum actually expended on it, in all its various stages, to place it 
 in that market 
 
 On Productive Labour 
 
 47. The word Productive, like Production, comes from 
 p-oducere, to draw forth : it was always applied by the Physio- 
 crates to that which drew forth, or Produced a Profit : i.e., 
 produced a surplus after defraying its Cost. By Productive 
 Labour, the Physiocrates meant Labour which produced a 
 Profit after defraying the Cost of Production 
 
 So, Smith says, that a Capital may be employed in four 
 different ways, and that all persons who employ their Capital in 
 any of these four ways are Productive Labourers 
 
 And these passages agree exactly with common usage. Hence, 
 in accordance with them and with general usage, we shall always 
 use the term Productive Labour to mean Labour which produces 
 or earns a Profit 
 
 On Profit and Eate of Profit 
 
 48. The word Profit comes from the Latin Proficere, to 
 make progress 
 
 So in Marlowe's Faustus the Chorus says — 
 
 " So soon he Profits in Divinity." 
 i.e., makes progress 
 
 The sum actually expended in placing any commodity in the 
 market is its Cost of Production : the sum it actually sells for is 
 
 F 2 
 
68 THEOKT AND PRACTICK OF BANKING 
 
 its'Yarlue : arid the Difference between the Cost of Production 
 and the Value of any commodity is termed the Profit 
 
 The Value may exceed or may fall short of the Cost of Pro- 
 duction. When the Value exceeds -the Cost of Production, the 
 Difference, or Profit, is Positive, and is termed a Gain : when 
 the Value falls short of the Cost of Production, the Difference, or 
 Profit, is Negative, and is termed a Loss 
 
 The Rate of Profit is the Amount of Profit made 
 in some given Time, as a year 
 
 Hence the Rate of Profit varies directly as the 
 Amount of Profit, and Inversely as the Time in 
 which it is made 
 
 On Payment, Discharge, and Satisfaction 
 
 49. The words Payment, Discharge and Satisfac- 
 tion are often supposed to be identical in meaning, but they are 
 not so 
 
 The word Payment means Anything whatever which.is 
 voluntarily taken in exchange for anything else 
 
 It is originally from the Sanskrit Pag, which is the same word 
 
 as the Greek Trqym, Doric Trayu, ■n-ijyvvfji.i 
 
 In old Latin this was pago, or 2>aco, the same as paeiscor : 
 and also pango, pegi, or pepigi, or panxi, panctum, to covenant, 
 agree for, bargain for, stipulate, or come to terms with 
 
 Thus it is said in the Laws of the xii Tables — 
 
 " Eem ubi pagunt, orato " 
 
 "If they come to terms let it be settled as agreed upon" 
 
 "M pagunt in comitio aut in foro ante, meridiem causam 
 conjicito " 
 
 " If they do not come to terms Iring^ ths cause before the 
 meeting of the Court before noon 
 
 Kence pacare, to appease, or pacify: whence the Ita]ia.npagare: 
 and our Pay 
 
 When one person has delivered anything to another person or 
 done any service to him, he is entitled to receive some Equivalent 
 in return, unless it was meant as a donation. But at the same 
 time he has the right to consider Anything he pleases an 
 Equivalent 
 
ON PAYMENT 69 
 
 Thus where two persons agree to exchange any material products, 
 each is Payment for the other : because each satisfies and 
 appeases the claim that the other has for an equivalent for the 
 product he has given. "When goods are paid for in money it is 
 sometimes supposed that it is only the Money which is the 
 Payment. This however is an error. The Money is Payment 
 for the Goods : but the Goods are equally Payment for the Money : 
 because each side has got what he agreed to take in exchange for 
 his product 
 
 . So, when Money is paid as Wages for work done : the Money 
 is Payment for the "Work : but the "Work is equally payment for 
 the Money 
 
 So, where persons agree to exchange different kinds of 
 "Work, each is Payment for the other 
 
 So, where a merchant agrees to take a Trader's Bill at three 
 months in exchange for Goods, the Bill is Payment for the Goods. 
 It appeases the claim of the Merchant: because he has got what he 
 agreed to take in exchange for the Goods. "When the Bill becomes 
 due, the Trader has to Pay his Bill : that is, he has to appease the 
 claim which the owner of the Bill has for the Money 
 
 So if one person has a Debt, or Eight of Action against another 
 person, payable on demand, and if he agrees to take his Debtor's 
 Bill at three months : the Bill is Payment of the Debt : and as 
 before the Debtor has to Pay the Bill when it becomes due 
 
 Hence to Pay means simply to appease : when a man Pays a 
 Debt he appeases the Eight which the Creditor has to demand a 
 sum of money from him : when he Pays his Eent he appeases the 
 Eight which the owner of the House, Land, &c., has against him 
 for compensation for its use 
 
 But it does not follow that Payment is the final closing of the 
 transaction. The only legal word which denotes the final closing 
 of the transaction is Satisfaction. If a Bill is taken in 
 exchange for Goods : it is Payment : but it is not Satisfaction 
 (unless it is expressly received as such) until the Bill itself is Paid 
 
 If however the owner of the Bill neglects to follow up his 
 legal remedy, the Bill becomes not only Payment, but Satisfac- 
 tion : by doing so, the owner of it makes it Money 
 
 And Economists go further : they say that Money itself is 
 
70 THEORY AND FKACTICE OF BANKINa 
 
 only a higher order of Bill : and that though giving Money is 
 Payment, it is not Satisfaction until the Money is ex- 
 changed away for something which is desired 
 
 Thus though a shoemaker is paid when he has got Money for 
 his shoes ; yet he has not got a Satisfaction, until he has got 
 bread, or meat, or wine, or anything else he desires in exchange 
 for the Money 
 
 The early Economists pointed out that Money is itself only 
 an intermediary in exchange -. it is only a general Bill of Exchange 
 or Right, or Title to he paid in something else. They only 
 considered the Exchange as consomme or completed, when 
 products had been exchanged against products 
 
 It was formerly supposed that the word Discharge had the 
 same legal effect as Satisfaction and was the final closing of the 
 transaction. But it has now been decided that Discharge means 
 no more than Payment ; and, therefore, is not necessarily final 
 
 On Capital 
 
 50. "We have now come to the last Definition, or General 
 Concept, whose meaning it is absolutely necessary to determine — 
 namely Capital 
 
 The word Capital is derived from the Latin Caput, which 
 
 means the source of a spring, or the root of a plant, or the source 
 
 from which any increase flows 
 Thus Plautus says — 
 "0 scelerum Caput."— "0 source or fountain of crimes." 
 
 " Perjurii Caput."—" fountain of perjuries " 
 
 Stephens, in his Thesaurus, thus defines the word : 
 Ke<f>dXai.ov — Caput unde fructus et reditus manat : 
 Capital— </ie Source from which any Profit or Revenue 
 
 flows 
 
 So Senior says—" Economists are agreed that Whatever 
 gives a Profit is properly termed Capital " 
 
 And de Fontenay says—" Wherever there is a Revenue 
 you perceive Capital " 
 
 This is a good general Definition : and the whateVer gives 
 ^ Profit must be Interpreted in as wide and general a sense as the 
 
ON CAPITAL 71 
 
 Anything whose Valm can be measured in mm^y is in the 
 definition of Wealth 
 
 Now any Economic Quantity whatever may be used in two 
 different ways-^ 
 
 1. The Proprietor may use it himself for his own personal 
 enjoyment 
 
 2. He may trade with it : i.e., he may use it so as to produce 
 a Profit 
 
 When any Economic Quantity whatever is traded with and 
 used so as to produce a Profit it is termed Capital 
 
 -The definition of Capital, then, is this — Capital is any 
 Economic Quantity whatever used so as to produce a Profit 
 
 It has been seen that Economic Quantities are of Three 
 distinct orders : (1) Material Things : (2) Personal Qualities : 
 (3) Abstract Eights : and each of these Quantities may be used 
 in eitheii.iof the above ways 
 
 (1) iljffiaterial Things. — Suppose that a person has a sum 
 of money'. If he expends it on his own personal enjoyment and 
 gratification, or on his household expenses, such Money is not used 
 as Capital 
 
 But if he lends it out at Interest, then he uses it as Capital : 
 or if he buys into the Funds : or buys Shares in a Commercial 
 Company which bring him in a Eevenue : then he uses the Money 
 as Capital 
 
 Or if he buys goods with the intention of selling them again 
 with a profit, he uses the Money as Capital : and the goods are 
 also Capital, because they are intended to be sold again with a 
 Profit 
 
 So, if the owner of land Uves upon it himself, and uses it for 
 his own enjoyment, he does not use the land as Capital : but if he 
 lets it out to farmers, or to builders to build houses upon, and 
 receives a Rent for so doing : then he uses the land as Capital. 
 Some great noblemen possess large tracts of land upon which A 
 great part of London is built : that land yields them an enormous 
 Eevenue': and therefore it is Capital to them. And so any 
 material thing whatever may be used as Capital 
 
72 THiiOEY AND PRACTICE QS' BANKING 
 
 (2) Personal Qualities. — All modem Economists— 
 Smith, Say, Senior, Mill, and others, agree with the author of the 
 Eryxias, that Personal Qualities— Skill, Energy, Ability, 
 Knowledge, and Character are Wealth, and may be used as 
 Capital : because persons can make an Income, or earn a 
 Eevenue by their employment, as well as by any material chattel 
 
 But Personal Qualities may be used as Capital, or to earn 
 an Income by, in two distinct ways : if used in one way they are 
 Jjabour : if in the other way, Credit 
 
 (fl) Personal Qualities as Labour.— If a man digs 
 in his garden for his own amusement : or if he sings, acts, or 
 gives lectures for the private delectation of his friends, such 
 Labour is not used as Capital 
 
 But if he sells his Labour in any capacity for money : then 
 such Labour is used as Capital by him 
 
 Thus Huskisson said — "He had always maintained that 
 Xiabour is the poor man's Capital " 
 
 So Mr. Cardwell said to his constituents — " Labour is the 
 poor man's Capital " 
 
 So a writer in a daily paper said, speaking of the Irish 
 peasants — '■ The only Capital they possess is their Labour, 
 yhich-fchey must bring into the market to supply their daily 
 wants " 
 
 And, speaking of them, the Economist said — " They have no 
 Capital but their Labour" 
 
 De Quincey says of serving-men — " His Estate is his 
 capacity to serve " 
 
 So his Talents and Abilities are Capital to any one who earns 
 an income as an advocate, physician, surgeon, engineer, manager 
 of a' great oommercial company, or in any other profession. He 
 m£|kes an income which is measurable and taxable, just in the 
 same way as if be made an income by selling corn, or wine, or 
 cattle, or any other material chattels. All modern writers admit 
 that Labour is a Commodity, like a material chattel : and con- 
 sequently it can be sold for a Profit like any other Chattel ; and 
 therefore it may be used as Capital - 
 
ON CAPITAL 73 
 
 (i) Personal Qualities as Credit.— But a man may 
 use his Personal Skill, Abilities, Energy, and Character for the 
 purpose of Profit, and therefore as Capital, in another way 
 besides the direct exchange of them for Money 
 
 He may use them for the purpose of purchasing goods, or 
 materials, and employing labour, by giving in exchange for them 
 a Promise to pay at a future time, instead of actual Money. In 
 popular language this Purchasing Power of Character 
 is termed " Credit." A merchant or trader is said to be in 
 " good Credit " when persons are willing to sell to him goods, and 
 take in exchange for them a Promise to pay at a future time 
 instead of actual Money. And a trader makes a Profit by trading 
 with his Credit, precisely in the same way as if he traded with 
 Money 
 
 Mill expressly defines Wealth to be anything which 
 has Purchasing Power : and in a multitude of places he 
 says, that Credit is Purchasing Power : and therefore "Wealth, by 
 his own definition 
 
 But a merchant's Credit or Purchasing Power does not enter 
 into Economics until he actually does make some purchase with 
 it : and when he does exercise his Credit in this way, he gives his 
 Promise to pay in exchange for the goods instead of Money : and 
 it is this Promise to pay, or Right of action to demand 
 payment, which is the Economic Quantity termed a Credit : 
 and it may be bought and sold, and traded with, any number 
 of times hke any material chattel, before it is paid off and 
 extinguished 
 
 (3) Rights.^-When Personal Qualities are used as Credit, 
 a Eight of action, or an Economic Quantity of the third order, is 
 generated : and as we have seen, this Right of action is termed 
 Pecunia, Res, Bona, Merx, in Eoman Law : XWM") •"■pay/tta, &c., 
 in Greek Law : Goods and Chattels in English Law, because it 
 can be bought and sold, and used as Capital as well as any 
 material chattel. The Traffic in these Eights of action is the 
 most colossal branch of modern Commerce ; and is, as we shall 
 see, the express business of Banking 
 
 But any other Eight may also be used as Capital. If a man 
 buys into the Funds, they produce him a Profit : hence they are 
 
74 THEORY AND PRACTICE OF BANKING 
 
 Capital to Mm. So if he invests his Money in the Shares of a 
 Commercial Company, they are Capital to him. If an author 
 writes a successful work, the Copyright of it is Capital to him : 
 and if he sells it to a publisher, it is Capital to his publisher 
 
 There is a class of traders whose business it is to buy and sell 
 Eights, such as the Funds, Shares in Companies, and Securities of 
 this nature : and they keep a stock of this kind of Property on 
 hand, just as other traders keep a stock of material goods 
 
 There is no such thing as Absolute Capital 
 
 51. It has been shewn in a preceding section that there is 
 no such thing as Absolute Wealth — that is, there is nothing which 
 is by its own nature Wealth, and that whether anything is Wealth 
 or not depends entirely upon Human Wants and Demands 
 
 So, also, it must be carefully observed that there is nothing 
 which is in its own nature and always Capital. As Mill observes, 
 the distinction between Capital and non-Capital does not lie in 
 the kind of the Commodity, but in the Mind of the Capi- 
 talist : and in his Will to employ it in one way rather than in 
 another. That is, whether a thing is Capital or not does not in 
 any way depend on the nature of the thing itself, but solely and 
 exclusively on its method of use. It is sometimes said that Capital 
 is simply the accumulation of the products of past labour. But 
 this is a most vital error, and must be most carefully guarded 
 against. All the accumulation of the past is not used as Capital : 
 but only that portion of it which is traded with : or used for the 
 purpose of Profit. Moreover, material things may be used as 
 Capital which are in no way the accumulation of past labour, 
 such as the Land : and we shall see hereafter that we can trade 
 with, and make a Profit of, not only the Accumulated Profits of 
 the Past, but also the Expected Profits of the Future 
 
 Capital may Increase in Two distinct "Ways 
 
 52. Capital may increase in two fundamentally distinct 
 
 1. By an actual Increase of Quantity : thus, flocks 
 and herds, poultry, cattle, and all the fruits of the earth increase 
 by adding to their number or Quantities 
 
ON CAPITAL 75 
 
 2. By Commerce, or Exchange : that is, by ex- 
 changing away something which has a lower value in a place and 
 obtaining something which has a higher yalue in return for it 
 
 Money is used as Capital and produces a Profit by the second 
 of these methods. Money is used as Capital by exchanging it 
 away for goods which are sold for a higher price than they cost : 
 or by advancing a sum of Money and acquiring the Eight to be 
 repaid a larger sum at a future period: or by employing Labour 
 and selling its products for a higher sum than they cost. And it 
 is also clear that any Economic Quantity which is used as a sub- 
 stitute for Money, and produces exactly the same effects as Money, 
 may be used as Capital as well as Money : by the force of the 
 Definition which Senior says all Economists are agreed upon 
 
 Hence, if a trader or merchant can purchase goods or labour 
 for Credit — that is, by giving his Promise to pay at a future 
 time instead of actual Money, and can sell the goods at a higher 
 price than he paid for them : and so make a Profit after paying 
 ofE and discharging the Debt he has incurred — then it is clear 
 that his Credit is Capital to him, exactly in the same way and in 
 the same sense that Money is 
 
 Take a very simple example. Suppose that a trader buys 
 goods for £100, and sells them for £125 : he first replaces his 
 original Capital of £100, and then he has a Surplus or Profit of 
 £25. He is therefore better off by £25 at the end of the operation 
 than he was at the beginning : and he has used his Money as 
 Capital 
 
 On the other hand, suppose that a trader saw that he could 
 make a profit, if only he had the means to purchase the goods: 
 but suppose that he has no Money and no Credit : then he can 
 purchase no goods, and he can make no Profit 
 
 But suppose that he has Credit — that is, that the owner of the 
 goods has confidence in his Skill, Integrity and Cha- 
 racter — ^he may sell him the goods, and take in exchange for 
 them the trader's Promise to pay at a future time, instead of 
 actual Money 
 
 Now, as the payment is deferred, and there is always some 
 risk of failure of payment, the Price in Credit is always higher 
 than the Price in Money. Suppose that the Price in Credit is 
 £105 : then, as before, the trader sells the goods for £125. 
 
76 THEORY AND PRACTICE OF BANKING 
 
 At the agreed upon time he discharges his Debt of £105 : and he 
 has a Profit of £20 over. That is,, he is better off by £20 at the 
 end of the operation than he was at the beginning : and thus he 
 has used his Credit as Capital 
 
 Now by the Cash purchase he is £25 better off, and by the 
 Credit operation he is £20 better off than he was at the begin- 
 ning. It is true that he does not make so great a Profit by Credit 
 as by Cash : but yet he has made a Profit by his Credit, which 
 he could not have made without it. Hence, by the very definition 
 his Credit has been Capital to him : and it has produced 
 exactly the same circulation of commodities that Cash would have 
 done. Hence it is clear that Credit is Productive Capital, exactly 
 in the same way and in the same sense that Money is 
 
 Thus we see how a clear and distinct understanding of defini- 
 tions removes all diflBculties and doubts. Many persons have 
 found it very hard to understand how Credit is Capital. 
 But when we agree that Anything which has Purchasing 
 Power is Wealth, all difiiculty vanishes. Because Credit 
 is Purchasing Power. Money is Purchasing Power : and 
 a trader's Credit is his Purchasing Power of his Character over 
 and above his Money : and therefore, by the very definition, each 
 are equally Wealth. And as we have seen that the definition 
 of Capital is Anything which produces a Profit : and as we 
 have seen that a trader makes a Profit equally by his Money and 
 his Credit : it necessarily follows that he may use his Money and 
 his Credit equally as Capital 
 
 Thus the expression that Credit is Capital, which has called 
 forth so much dissent in recent times, simply means that Com- 
 merce is carried on, and Profits are made, by means of Credit or 
 Eights of action, as well as by Money 
 
 This meaning of Capital, as denoting anything by which a 
 profit can be made is constantly used in the common language of 
 Politics. Thus where one party in the State makes an error, the 
 other party is commonly said to make Capital of it ; i.e., turn itto 
 their own profit ; or when the Grovernment gains a great military 
 success it is said to make " Capital" of it ; i.e., turn it to their own 
 profit 
 
 So Cobden says in a letter—" They have traded for the last 
 
ON FIXED CAPITAL 77 
 
 fifteen years as a political party on the Irish Question ; but now 
 that Capital is exhausted " 
 
 On Fixed and Floating or Circulating Capital 
 
 53. We have seen that there is no such thing as Absolute 
 Capital : that any Economic Quantity whatever may be used as 
 Capital : and that it depends entirely upon the Mind of the user 
 and the Method of use whether any Economic Quantity is Capital 
 or not 
 
 But Capital itself may be used in two distinct ways — 
 
 1. The Capitalist may retain it in his own possession, and' 
 make a continuous series of profits by its use : and consequently 
 the Capital is only replaced with the profits in a series of instal- 
 ments : Capital used in this way is termed Fixed Capital 
 
 2. The Capitalist may part with it entirely : and replace the 
 entire Capital and Profits in one operation : hence it goes away 
 from him entirely : Capital used in this way is termed Floating 
 or Circulating Capital 
 
 It must' be clearly understood that it is according to the 
 intention of the person who uses it and the purpose and method 
 in which it is used that it receives either of these names. The 
 same article may be Floating Capital in the hands of one person, 
 and IMxed Capital in the hands of its next possessor, if the first 
 produces it for the purpose of selling it outright, and the second 
 purchases it for the purpose of making profit by its use 
 
 This distinction is often overlooked, and the term Fixed 
 Capital is often applied to articles of a particular nature : and 
 Floating or Circulating Capital to articles of another nature 
 
 Thus Smith enumerates four kinds of Fixed Capital — 
 
 1. The useful machines and instruments of trade, which 
 facilitate and abridge Labour 
 
 2. Buildings used for purposes of profit both by their pro- 
 prietor and by those who pay rent for them for trading purposes 
 
 3. Improvements in Land 
 
 4. The acquired and useful Abilities of all the 
 members of the society 
 
 This enumeration is very imperfect, because it omits all that 
 
78 THEORY AND PRACTICE OF BANKING 
 
 stupendous mass of Incorporeal Property which has increased so 
 immensely in recent times 
 
 Thus, if a man invests Money in the Funds : or in the Shares 
 of a Company : or in purchasing the Goodwill of a Business : or a 
 Practice : or a Copyright or a Patent : all these are Fixed Capital 
 to their purchasers 
 
 Smith also enumerates four kinds of Floating Capital — 
 
 1. The Money by means of which the other three are cir- 
 culated and distributed to their proper Consumers 
 
 Under the term Money, he includes Bank Notes, Bills of 
 Exchange, and other Securities for Money : but all these paper 
 documents are merely Rights of action or Credit : hence 
 Smith expressly includes Credit under the title Floating or 
 Circulating Capital 
 
 2. The stock of provisions in the hands of the farmers, 
 graziers, butchers, corn merchants, brewers, &c. 
 
 3. The materials in the hands of different workpeople to be 
 made up, clothes, furniture, &c. 
 
 4. The work which is made up and completed, but still 
 remains in the hands of the merchants and manufacturers, but not 
 yet disposed of, or distributed to the proper Consumers : such as 
 the finished work in the shops of the smith, cabinet maker, gold- 
 smith, jeweller, china merchant, &c. 
 
 It must be carefully observed that Smith's distinction of 
 certain articles as Fixed Capital, and of other things as Floating 
 Capital, is erroneous 
 
 Thus houses, lands, &c., are by no means invariably Fixed 
 Capital. It is quite common for speculators to buy up land and 
 build houses for the express purpose of selling them again. In 
 the hands of these speculators, houses and lands so traded with are 
 Floating Capital : because the entire property in them is 
 parted with in one operation. But if a person buys land for the 
 purpose of farming it himself for profit : or of letting it out to 
 farmers : or buys or builds the houses for the purpose of letting 
 them to tenants: then such houses and lands are Fixed 
 Capital. 
 
 Some manufacturers build engines which are sold to Eailway 
 Companies : or agricultural implements which are sold to farmers; 
 or machinery which is sold to manufacturers : in the hands of the 
 
ON FLOATING CAPITAL 79 
 
 makers these engines and machines are Floating Capital : 
 because they are made to be sold absolutely and so change masters: 
 and their whole price and profit is paid in one operation. "When 
 they come into the hands of the Railway company, the farmers, and 
 the manufacturers, they become Fixed Capital, because they 
 remain in the possesion of their owners, who only make a series of 
 profits by their use 
 
 So a shipbuilder builds ships and sells them to a Company : 
 in the hands of the builders the ships are Floating Capital : 
 in the hands of the Company they become Fixed Capital 
 
 Articles which are usually classed as Floating Capital may 
 become Fixed Capital. Furniture, and clothes, and plate are 
 usually Floating Capital, because they are usually made for the 
 purpose of being sold. But sometimes they are made for the 
 purpose of being let out for hire, and then they are Fixed 
 Capital 
 
 If a person buys into the Funds, or Shares, as an investment 
 to produce an income, they are Fixed Capital. But there is 
 a class of persons, called Stock Jobbers, who buy this kind of 
 property with the intention of selling it again with a profit : and 
 they keep a stock of it as traders do goods : in the hands of such 
 persons such property is Floating Capital 
 
 There is another class of traders, called Bankers, whose 
 especial business it is to buy Debts. The Bills in the portfolio 
 of a banker are exactly like the goods in the shop of a trader : the 
 banker buys them at a lower price from one person, and sells them 
 at a higher price to another : hence the bills are Floating 
 Capital to the banker 
 
 It is therefore incorrect to apply the terms Fixed and Floating 
 Capital to any object, whatever its nature may be, unless we know 
 the intention of its owner in using it. And unless an object is 
 incapable of being applied to more than one of these purposes, it 
 is not correct to call it by either name absolutely. There are 
 very few articles to which the name of Fixed Capital may be 
 invariably applied. The only one to which it seems necessarily 
 to be applied is the knowledge, skill, and capacity of a person : 
 because he cannot sell and devest himself of these qualities : 
 though he may sell the Eight to make use of them on a special 
 occasion 
 
80 THEORY AND PEACTICE OF BANKING 
 
 The only species of property whicli is necessarily Floating 
 Capital is Money. Money, to be used, must necessarily be paid 
 away and change naasters. Almost all other property is capable 
 of being used in either way at the will of the owner 
 
 On the Conversion 0/ Floating into Fixed Capital 
 
 54. It makes no difference to the Capitalist, who lives on 
 the profits of his Capital, whether he 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 workmen in his business — the difference in the 
 mode of employing Capital is of very great importance. Thus, if 
 the builder of the ship sells it immediately, and receives the whole 
 price of it at once, he can employ the full price in building another 
 ship, and the full price may be expended in the wages of ship- 
 wrights, and the producers of the materials for the new ship. In 
 this case the ship is Floating Capital 
 
 But if the builder of the ship only lets it out for hire, and 
 receives a periodical instalment for its use, he can only employ 
 that part of the instalment which represents the deterioration of 
 the ship in building a new one. Consequently, if he changes the 
 nature of his business very suddenly, that is, if he suddenly turns 
 his Floating into Fixed Capital, the fund applicable to the em- 
 ployment of Labour will be greatly diminished, and it must 
 infallibly cause much distress among the persons who were 
 dependent on him for their support. By seeking other employ- 
 ments they may perhaps be ultimately as well off as before.' But 
 it is clear that, if a large number of persons have been accustomed 
 to have a particular kind of labour found for them, any sudden 
 change by which the system is disorganised must produce at least 
 temporary distress. It may be said that the Capital of the pur- 
 chaser of the ships, instead of going to the builder of the shipi 
 and being spent among that class of workmen, might be employed 
 in encouraging other species of industry, so that the result to the 
 whole community would be the same. But the overthrow of any 
 system upon which a great number of people depend must be 
 followed by much suffering 
 
 It appears, then, that the conversion of Floating into Fixed 
 
AMBIGUITIES IN CREDIT 81 
 
 Capital requires to be done with much caution, and only in certain 
 quantities at a time, to prevent its being injurious to large classes 
 of persons. And if a large class of the public are seized with a 
 sudden mania to convert an unusual quantity of Floating into 
 Fixed Capital, it must be followed by at least temporary distress. 
 In 1847 the enormous quantity of Floating Capital which was 
 suddenly turned into Fixed Capital by the Railway mania in that 
 year was one of the causes of the great financial panic of that year 
 
 On the Three Ambiguities in the Theory of Credit 
 
 55. We must now notice Three Perplexities or Ambiguities 
 in the Theory of Credit, which have been the cause of much 
 error, and against which it is necessary to warn the student 
 
 Pirst Ambiguity — A Debt is not Money owed by 
 the Debtor, but the Personal Duty to Pay Money 
 
 When an Obligation has been created by the sale of the 
 Property in Goods or Money, the Credit is. the Personal 
 Eight of the Creditor to demand thejyioney, and the Debt 
 is the Personal Duty of the Debtor to pay the Money 
 
 It is very often supposed that a Debt is Money owed by the 
 Debtor, or Money in the Debtor's possession to which the Creditor 
 has a Eight 
 
 This, however, is a very great error, which has misled many 
 persons, as we shall see hereafter 
 
 This very common error is expressly provided against in the 
 Digest 
 
 " Obligationum substantia non in eo consistit ut aliquod 
 Corpus nostrum faciat ; sed ut Alium nobis adstringit ad dandum 
 aliquid, vel faciendum vel prmstandwm " 
 
 " The essence of an Obligation does not consist in this, that it 
 makes any Specific Goods our Property: but that it binds 
 some Person to give us something, or to do something, or to 
 supply something " 
 
 Every Jurist has carefully pointed out that a Credit is not the 
 Eight to any specific Thing, or a Jus in re .- but it is a mere 
 abstract Eight against the Person, or a Jus in Personam 
 
 G 
 
82 THEORY AND PRACTICE OF BANKING 
 
 This error is so widespread and so important that it is of the 
 utmost importance to eradicate it : we shall give some extracts 
 from Jurists to fix it more clearly in the student's mind 
 
 Pothier says— " The Eight which the Obligation gives the 
 Creditor of proceeding to obtain payment of the thing which the 
 Debtor is obliged to give him, is not a Right in the tiling 
 itself {Jus in re) : it is only a Eight against the Person of the 
 Debtor for the purpose of compelling him to give it (Jus ad rem). 
 The thing which the Debtor is obliged to give continues to belong 
 to him, aiid the Creditor cannot become proprietor of it except 
 by the delivery, real or fictitious, which is made to him by the 
 Debtor in the performance of the Obligation 
 
 " And till this delivery is made the Creditor has nothing more 
 than the Right of demanding the thing, and he has only that 
 Eight against the Person of the Debtor who has contracted 
 the Obligation 
 
 " Hence, it follows, that if my Debtor, after contracting an 
 Obligation to give a thing to me, transfers it upon a particular 
 title to a third person, whether by sale or donation, I cannot 
 demand it from the party who has so acquired it, but only from 
 iny Debtor. The reason is, as the Obligation does not, according 
 to our principle, give the Creditor any Eight in the thing which 
 is due to him, I have not any Eight in the thing which was due 
 to me that I can pursue against the person in whose hands it may 
 be found " 
 
 So Mr. Williams says — " Every person who borrows money 
 on mortgage or not incurs a Debt or Personal Obligation 
 to repay it out of whatever means he possesses " 
 
 So Gide well observes — " A Debt is not the Material Ob- ■ 
 ject, the Money, but the Juridical Object, the Duty to 
 pay" 
 
 The distinction is perfectly plain, and of the greatest im- 
 portance in Economics ; for if the Creditor had the Eight to auy 
 specific money in the Debtor's possession, that would be a dimi- 
 nution of the Debtor's Property : he would have no right to sell 
 or part with it : and there would, in fact, be only one Economic 
 Quantity in existence, i.e., the quantity of money. But as a 
 matter of fact, the whole of the money remains the Debtor's 
 
SECOND AMBIGUITY 83 
 
 Property : which he can sell or exchange as he pleases : and also 
 there is. the Property or Right in the person of the Creditor, 
 which he can also sell or exchange as he pleases : and which may 
 be sold or exchanged any number of times till it is paid off and 
 'extinguished. Hence, in this case, there are two Economic 
 Quantities in existence, which may each circulate in commerce at 
 the same time 
 
 If the Creditor's Right were the Right to a specific sum of 
 money in the Debtor's possession, it would follow that a person 
 could never be insolvent : because, if he had no money, his 
 Creditor could have no Right : but, unfortunately, this is very 
 far from being the case. In too many instances persons are in- 
 solvent ; i.e., they are under the Duty to pay money, and have no 
 money to pay it with : but the Creditor's Riyht to demand exists, 
 no matter whether the Debtor can pay it or not 
 
 If the Creditor's Right was the Right to a specific sum of 
 money, it would follow that the Quantity of Credit in circulation 
 could not exceed the Quantity of money : but this is contrary to 
 fact : because the Quantity of Credit in existence is not much 
 less than fifty-fold the Quantity of Money 
 
 Second Ambiguity — The word Debt means the Cre- 
 ditor's Eigbt of action as well as the Debtor's Duty to 
 pay 
 
 56. The second Ambiguity is this. The word Debt would 
 seem strictly to mean the Debtor's Duty to pay : but it has 
 long been used, both in Law and Common Usage, to mean the 
 Creditor's Right of action as well : it is thus used as 
 synonymous with Credit 
 
 We are not aware that the word Debitum was ever used in 
 classical Latin to mean the Creditor's Right of action : in juristic 
 Latin it is used as synonymous with Obligatio, and therefore 
 means a Contract : and therefore it includes both the Right 
 and the Duty 
 
 But in the twehfth century the word Debitum was commonly 
 used to mean a Right of action. In 1194, Richard I. issued 
 instructions for a judicial visitation on financial matters in which 
 it was ordered — 
 
 G 2 
 
84 THEORY AND PRACTICE OF BANKING 
 
 " Omnia Debita Judasorum inbre-vienfcur, terrse, domus, 
 reditus et possessiones " 
 
 " Let all the Debts (i.e., Rights of action) und pledges of 
 the Jews ie scheduled, their lands, houses, rents, and possessions" 
 
 "Item quilibet Judseus jurabit super rotulum suum quod 
 omnia Debita sua et yadia, et reditus, et omnes res, et pos- 
 sessiones suas inbreviari faciat " 
 
 " Also let every Jew swear thai he' will make a true return of 
 all Ms Debts (Rights of action), pledges, rents, and all Ms 
 property, and possessions " 
 
 In mediaeval charters the word Dehitale was used in the same 
 sense. Thus, in one of 1324, it says— ^ 
 
 " In omnibus et singulis bonis .... . domihiis, baroniis, 
 censibus, redditualibus, Debitalibus, servitutibus, homatgiis " 
 
 " In all and singular goods .... lordships, baronies, 
 revejiues, rents, Debts (Rights of action), servitudes, 
 homages" 
 
 In another, of 1874, it is said — 
 
 " Acquisiverunt redditus, census annuos, et Debitalia in 
 
 fcedis quorum redditorum, censuum, et Debi- 
 
 talium " 
 
 " They have acquired the rents, annual revenues, and Debts 
 (Rights of action) in fee .... of which rents, revenues, 
 and Debts ( Rights of action ) " 
 
 Thus the words' JDeUtum and Bebitale were already, at that 
 period, used to mean Rights of action in public instruments : 
 and if they were so used in public documents, it is clear that that 
 must have been their well understood meaning in common language 
 
 57. And the word Debt, has long been used to mean a 
 Right of action in English Law and common usage 
 .. Thus in the Statute of Acton Burnell, 11 Edward I., 1283 
 A.D., commonly called the Statute of Merchants, it is said — 
 
 " Pur ceo qe marchauntz qi avaunt ces houres unt preste lur 
 aver a diverse genz, sunt cheuz en poverte, pur ceo qe il ni aveit 
 pas si redde ley purvewe, par la quele il poeient lur Dettes 
 hastivement recoverir . . . . " 
 
 " Le Eei par luy par sun conseil ad ordine e establi, qe mar- 
 chaunt qi veut estre seur de sa Dette . . . . " 
 
SECOND AMBIGUITY 83 
 
 " E si le Meire ne troesse achatur face par renable pris liverer 
 les moebles al Oreauzur, desqe a la summe de la Dette en 
 allowance de sa Dette . . . . " 
 
 By which it appears that at that time the word Debt had 
 already acquired in English Law, the meaning of a Right of 
 action : a meaning which it has ever since retained both in Law 
 and common usage 
 
 So it is said, in " Les Ternles de la Ley," first published in 
 1567— 
 
 " Dett est un brief que gist lou ascun summe d'argent est 
 due a un per reason d'accompt, bargain, contract, obligation, ou 
 auter especialty a este pay a certain jour le quel n'est pay, 
 donques il averent cest brief" 
 
 " Debt is a Writ," &c. 
 
 So Ashe says — 
 
 " Quel Det, Duty, Chose-in-action ou Droit " 
 
 So, in the Act, 46 Geo. III. (1806), c. 125, s. 3, it is enacted 
 that — "one Debt or Demand may be set off against 
 another " 
 
 So Mr. "Williams says — 
 
 "Within the class of Ghoses-in-action yfSLB comprised a Right 
 of growing importance, namely, that of suing for money due ; 
 which Right is all that is called a Debt " 
 
 " "We have seen that a Debt was anciently considered as a 
 mere Right to bring an action against the Debtor " 
 
 ""WTien a Debt or Demand is equitable only " 
 . " Debts being formerly considered as mere Rights of 
 action " 
 
 So, as may be seen in any .daily paper, the executors of 
 deceased persons advertise for any persons who have " Debts, 
 Claims, or Demands " against the estate, to give in a 
 statement of them 
 
 Ortolan says—" Sous le premier point de vue le droit personnel 
 se nomme chez nous Cre'ance : chez les Eomains Nomen, 
 moins generalement Creditum " 
 
 Which Messrs Prichard and Kasmith translate thus — 
 
 " "Under the first point of view a Personal Eight is called by 
 us a " Debt : " among the EomanS Nomen, less usually, 
 Creditum " 
 
86 THEORY AND PRACTICE OF BANKING 
 
 In which they are right, because Cre'ance, in French, is 
 the Eight of action which a Creditor has against a Debtor : which 
 is, as we have seen, the meaning of Debt in English Law 
 
 Sometimes the word Debt is used in the same Act of Par- 
 liament in both senses of the Creditor's Eight of action and 
 the Debtor's Duty to pay 
 
 Thus, in the Supreme Court of Judicature Act, 36 and 37 
 Vict. (1873) c. 66, s. 28, § 6, it is said— 
 
 " Any absolute assignment by writing under the hand of the 
 assignor of any Debt, or other legal Chose-in-aclion .... 
 to receive or claim such Debt or Ohose-in-aciion " — where the 
 word Debt means the Creditor's Right of action 
 
 But in the same section, § 1, it is said — 
 
 " Whose estate may prove to be insufficient for the payment 
 in full of his Debts and Liabilities .... as to 
 Debts and Liabilities provable" where the word Debt 
 means the Debtor's Duty to pay 
 
 So, in Scotch Law, Debts are included under the title 
 Movable Rights : and in a Scotch marriage contract it is usual 
 for the bride to transfer to her intended husband " all goods, gear, 
 Debts, sums of money, and other movable estate " 
 
 An administrator is appointed by the Conrt of the " goods, 
 chattels, and Credits " of the deceased 
 
 Thus it is seen that the words Credit and Debt are used 
 synonymously in Law 
 
 It is exactly the same in common usage. A person makes his 
 will bequeathing his Debts, i.e., his Rights of action 
 
 Accordingly, in the Digest of the Law of Bills of Exchange, 
 &c., which we prepared for the Law Digest Commissioners, we 
 began with this fundamental definition — 
 
 " Credit or Debt in Legal and Commercial land Eco- 
 nomical^ language, means a Right of action against a 
 Person /or a sum of money" 
 
 We need not give any more examples. The student must 
 carefully observe that the word Debt is used both in English 
 Law and common usage, e[uite indiscriminately, to mean both the 
 Creditor's Right of action and the Debtor's Duty to 
 
SECOND AMBIGUITT 87 
 
 pay: and it requires constant vigilance to perceive in which 
 sense it is used 
 
 The word Duty also originally meant a Right : thus the 
 king's Daties meant the king's Right to levy customs. This 
 meaning appears in the extract from Ashe above cited : but it is 
 seldom used in this sense now 
 
 The word Right had also this double meaning in English. 
 Thus Lord Shelburne said in the House of Lords — " He would 
 think that America had as good a Right to pay taxes as 
 Britain," i.e., it was as much their Duty " 
 
 The word Right is not very commonly used in this sense in 
 England at the present day : but it is quite common in Scotland 
 to say, " I have no Right to do that," i.e., it is not my Duty 
 to do so 
 
 The word xpios in Greek has also this double meaning ; it 
 usually means the thing owed : or the Duty to pay it : but the 
 Greek jurists used xP^os to mean the Right of action 
 
 Thus Demosthenes says — 
 
 " Trjv ovcrtav aTracrai/ xpea KareXtTre 
 
 "ffe left all Ms Property in outstanding Debts, i.e., Rights 
 of action " 
 
 In the Basilica, XP^« is used as synonymous with nomen, 
 creance 
 
 So, in German, the word Schuld properly means a Debt or 
 Liability : accordingly, Schuldmr properly means a Debtor : but 
 Austin says that Schuld has also the double meaning : and that 
 in German Law Schuldner is often used to mean the Creditor 
 
 In French the words Droit and Dette are also used in 
 the double sense of the Right and the Duty : but in the 
 one case it is termed the Droit or Dette Active .- in the other the 
 Droit or Dette Passive 
 
 Thus Littre says — 
 
 " Dettes Actives : celles dont on a le droit d'exiger le 
 payement " 
 
1 < t t 
 88 THEORY A^D PKACTICE OF BANKING 
 
 " Dettes Passives : celles qu'on est oblige de payer" 
 " Cre'ance : droit d'exiger raccomplissement d'une obli- 
 ligation .... on oppose les droits de creauce au droits 
 r6els : " that is, Personal Rights, or Jura in personam, are dis- 
 tinguished from Real Rights, or Jura in re" 
 
 Thus the student must carefully observe that all these words 
 denoting a Contract or Obligation between two persons ; such as 
 xpeos; Debitum, Debitale, Duty, Debt, Right, Droit, Dette, 
 Schuld, are used quite indiscriminately with respect to both 
 parties ; and it requires constant vigilance to observe in which 
 sense they are used 
 
 The explanation of this seeming confusion is this : XP™' 
 comes from XP'7, it is fit or ordained : Debitum means that which 
 is due : Right, from rectum, means that which is ordered : and if 
 one person has the Right to demand a sum of money from 
 another : it is equally fit : ordained : due : and right that the 
 one party should receive as that the other should pay : hence they 
 are equally -xpia.. Debts, Duties, and Rights 
 
 On the Continent it is usual to term a person's Rights his 
 Actif : and his Liabilities his Passif : the words Droit or 
 Dette being understood 
 
 Third Ambiguity — On the Double Meaning of the 
 words " Lend," " Loan," and " Borrow ; " or the 
 distinction between Mutuum and Commodatum 
 
 58. There is still one more Ambiguity to clear away, which 
 has been the cause of most of the confusion in recent times on 
 the subject of Credit 
 
 All the older writers, who were chiefly men who had a practical 
 knowledge of business, seeing that the circulation of commodities 
 is affected, and that profits are made, equally by Money and by 
 Credit, said that Credit is Capital, without giving any very 
 nice definition either of Credit or of Capital 
 
 Smith, as we have seen, expressly classes Bank Notes, Bills of 
 Exchange, &c.— which are Credit— under the title of Cir- 
 culating Capital 
 
THIRD AMBIGUITY 89 
 
 Since the time, however, of the French Economist, J. B. Say, 
 this doctrine has been the subject of much ridicule. In one 
 passage Say says that those who say that Credit is Capital, main- 
 tain that the same thing can be in two places at once. Mill has 
 also, in one place, sneered at those who say that Credit is Capital 
 
 But the most remarkable thing is that both these writers have 
 said, over and 'over again, that Credit is Capital. The fact is, 
 that both these writers, though highly distinguished Mterary men, 
 were not mercantile lawyers, and were not able to form and retain 
 a clear and distinct grasp of Fundamental Concepts : and they 
 have contradicted themselves in the most extraordinary manner. 
 They have committed one of the most flagrant fallacies in Logic 
 — the Fallacy of Confusion — that is, of using the same word in 
 totally different senses in different passages 
 
 Although it would occupy far too much space to quote long 
 passages to prove this, we can shortly point out their fallacies and 
 self-contradictions 
 
 Say begins by expressly classing Instruments of Credit 
 {Titres de creance) and the Funds under the title of "Wealth : 
 and he understands that a Credit is a Right of action, or 
 the Eight to a future Payment : and then he repeatedly says that 
 Credit is Capital 
 
 But in another passage he considers Credit to be the Goods 
 lent : and then he asks how can the same Goods be in two places 
 at once, and serve two persons at the same time 
 
 So, also. Mill, in a multitude of places, says that Credit is 
 Wealth and Capital : in such places Mill means the Eight 
 of action recorded on paper in the form of Bank Notes, Bills of 
 . Exchange, &c. But in another passage he says that Credit is 
 only the Transfer of Capital : and then he sneers at those who 
 say that Credit is Capital 
 
 Careless and indolent readers, catching at a stinging epigram, 
 who have neither a sufficient knowledge of Mercantile Law to 
 perceive the fallacy, or to have clear ideas on the subject : and 
 who never take the least trouble to compare one part of the book 
 with the other : and who quite overlook the fact that both these 
 writers mean totally different things by the word Credit in 
 different passages of their works, chorus these silly sarcasms 
 But, as a matter of fact, the Credit is neither the " Goods " 
 
■90 THEOEY AND PRACTICE OF BANKING 
 
 lent : nor is it the " Transfer " of them : the Credit is 
 the Right of action to demand payment in Money at a 
 future time, which is given in exchange for the goods, and is their 
 Price. It is itself a Property, or an Exchangeable Right ; which 
 circulates in commerce and produces exactly the same effects as so 
 much money, until it is paid off and extinguished 
 
 All the confusion and misconception on the subject of Credit 
 has arisen from the want of knowledge of the most elementary 
 principles of Mercantile Law : and from not being aware that the 
 words " Loan," " Lend," and " Borrow " have two dis- 
 tinct meanings : and are applied to two transactions of a totally 
 distinct nature 
 
 When persons ridicule the idea of Credit being Capital, they 
 argue something in this way : suppose they say, I " lend " my 
 horse, or my book ; or my watch ; or my carriage to my friend : 
 that does not make two horses, or two books ; two watches ; or 
 two carriages : and then they jump at the conclusion that to gay 
 that Credit is Capital is to say that to lend a thing douWes it 
 
 59. We have already explained that there are two kinds of 
 Right — the Right of Possession only, and the Right of 
 Property 
 
 And there are two distinct kinds of " Loan : " the one in 
 which the Right of Possession only is given for a hmited 
 time : and at the end of the time the identical thing lent is 
 restored to the " lender : " the other in which the Absolute 
 Right of Property in the thing " lent" is transferred to 
 the " borrower : " and the " lender " only acquires the Right to 
 demand back an equivalent amount of the thing " lent" 
 both in quantity and quality : but not the identical thing 
 " lent " 
 
 1. The Commodatum. There are some things which 
 can be " lent," and the " borro"wer " can enjoy their use 
 without acquiring the Absolute Property in them : and after 
 having so enjoyed their use, he can restore the identical things 
 " lent " to their owner 
 
 Thus, if a person lends his horse ; or a book ; or his watch ; 
 or his carriage to a friend, his friend can ride the horse ; or read 
 
THIRD AMBIGUITY 91 
 
 the book ; or use the watch or the carriage, ■without acquiriDg the 
 Property in them : and after he has enjoyed their use he can 
 restore the identical things to their owner 
 
 In snch cases the " lender " does not cede the Property in the 
 thing " lent " to the " borrower : " but only the Eight of Posses- 
 sion of them for a limited time. The Property and the Possession 
 of such articles so lent remains in the lender ; and he can reclaim 
 them at any time he pleases, without any notice to the borrower. 
 In such cases there is no Exchange or Sale : and there is no new 
 creation of Property. And, of course, in such cases, both the 
 lender and the borrower cannot have the same article at the same 
 time. In such cases the relation of Creditor and Debtor is not 
 created between the parties : and there being no Sale or Exchange 
 there is no Economic phenomenon : and, consequently, such a 
 transaction does not «nter into the Science of Economics 
 
 In Eoman Law such a Loan is termed a Commodatum 
 
 2. The Mutuum. But there is another kind of "Loan" 
 in which the things " lent " cannot be used or enjoyed without 
 their Consumption, Destruction, or Alienation 
 
 Thus, if a person " borrows" bread, or wine, or oil, or 
 coals, or meat, or butter, or other things of a similar nature, he 
 cannot enjoy their use without destroying or consuming them : 
 and they are borrowed for the very purpose of being consumed 
 
 Hence, from the very necessity of the case, the Property in 
 snch things in such a Loan must be transferred to the borrower : 
 and what he undertakes to do is to return not the identical things 
 lent, but an equivalent amount of other things of the same nature, 
 and equal in quantity and quality to the things " lent " 
 
 So, also, when a person " borrows " Money he cannot have the 
 enjoyment of it unless he ■ exchanges it away for something else : 
 consequently, the person who " borrows " Money must necessarily 
 acquire the Property in it 
 
 So, if a person " borrows " a Postage Stamp, he can only use 
 it by affixing it to a letter ; by which it is destroyed : hence the 
 "borrower " must acquire the Property in it 
 
 In all cases, therefore, of the Loan of such things as wine, oil, 
 bread, meat, coals, &c., and also of Money or Postage Stamps, the 
 lender cedes the Property in the thing lent to the borrower : and 
 
92 THEORY AND PRACTICE OF BANKING 
 
 he acquires the Eight to demand back an equivalent amount of 
 the things lent : but not the identical things. In all such cases a 
 New Property is called into existence : and a Contract 
 or Obligation is created between the " lender " and the 
 " borrower " 
 
 In Roman Law a Loan of this nature is termed a Mutuum 
 The Roman Lawyers said that the word Mutuum was derived 
 from quod de meo tuum fit (because from ieing my Property it 
 tecomes yours). Modern scholars, however, repudiate this ety- 
 mology. The Romans, as is well known, knew very little of their 
 own language. Modern scholars say that Mutuum comes from 
 Mutare, to Exchange : as deciduus from decido, and dividuus from 
 
 But though the etymology may be fanciful, as are so many 
 others given by ancient writers, it exactly expresses the fact. In 
 the Lioan of the Mututini there is always an Exchange 
 of Properties. In all cases of the Mutuum the relation of 
 Creditor and Debtor is created between the lender and the bor- 
 rower : and the Right which the lender has to demand back 
 from the borrower an equivalent for the thing lent is the Credit : 
 or, as Ortolan calls it, the Price of the thing lent 
 
 Such transactions are always Sales or Exchanges : and are 
 Economic phenomena : and they all enter into the Science of 
 Economics 
 
 The student must therefore carefully observe that every Loan 
 of Money is a Mutuum : it is a Sale or an Exchange. 
 Suppose, as it is commonly said, one person lends to another £100 
 for one year, at 5 per cent, interest ; what is the real nature of 
 the transaction ? Every Jurist has pointed out that every Loan 
 of Money is in reality a Sale, in which the lender cedes the 
 Property in the Money to the borrower, and in exchange for it 
 acquires the Right or Property to demand £105 at the 
 end of the year : and this Right is termed a Credit, or a 
 Debt. And the Money is the Price of the Debt : and 
 the Debt is the Price of the Money 
 
 60. Hence those things only can be the subject of a 
 Mutuum which consist in ponder e, numero, et mensurd: or which 
 may be estimated generically in number, weight, and measure. 
 
MUTUUM AND COMMODATUM 93 
 
 Such, things, in Roman Law, are termed Quantitates : because an 
 equal Quantity of bi'ead, wine, oil, coals, &o., is as good as another 
 equal Quantity of the same things of the same Quality : or one 
 sum of one hundred soTereigns is equal to another sum of one 
 hundred sovereigns : or one Postage Stamp is always equal to 
 another of the same denomination 
 
 But also the Digest says that they mutuS, vice funguntur : one 
 quantity serves the same purpose as another quantity. From this 
 expression the mediseval jurists called them Res Fungibiles : and, 
 in modern English Law, they are termed Fungibles 
 
 In English Law the former kind of Loan or Gommodatwm is 
 said to be returnable in specie; because the identical thing is 
 restored : the latter kind of Loan, or the Mutuum, is said to be 
 returnable in genere ; because only similar things are restored 
 
 Sale of Goods. The same relation as is created by the 
 " Loan " of the Mutuum is created by the Sale of Goods " on 
 Credit." The seller of the goods cedes the Absolute Property in 
 them to the buyer, .exactly in the same manner as if he had sold 
 them for money : and in exchange for them He acquires the Right 
 to demand payment for them in money at a future time. This 
 Kight is a Property termed a Credit, or a Debt : and 
 it is the Price of the goods 
 
 Thus the Economic Quantity termed. Credit or Debt is 
 the Right which is created on a Loan of money, oil, corn, 
 bread, wine, coals, or other fungibles, to demand back an equivalent 
 Quantity of the things lent : or the Right which is created on 
 a Sale of goods " on Credit" to demand their Price in money 
 at a future time 
 
 TheqpMlus on the Mutuum and the Commodatum 
 
 61. This distinction is so important that we may cite a 
 passage from the paraphrase of the Institutes of Justinian, which 
 we prefer to quote because it is more full and distinct than the 
 corresponding passage in the Institutes : and it superseded them 
 as the authorised text-book of Law in the Law Schools of the 
 Empire 
 
 " A Real Obligation is contracted by an act, or by the manual 
 
94 THEORY AND PRACTICE OE BANKING 
 
 delivery of something counted out : and this includes the Mutuum. 
 A thing is a Mutuum where the Property in it passes to 
 the person who receives it : but he is bound to restore to us not 
 the identical thing delivered, but another of the same Quality and 
 Quantity. I said, so that the receiver becomes the proprietor of 
 it, that I might exclude the Commodatum and the Depo- 
 situm : for in these latter the receiver acquires no Property. 
 But he must be bound to us to exclude the Donation : for he who 
 receives one acquires the Property, but is not bound to us. I 
 said, he must restore not the identical things lent : but others of 
 similar Quality and Quantity, that I might not deprive him of the 
 use of the Mutuum. For a person takes a Mutuum that he may 
 use the things for his own purposes, and return others instead of 
 them. For if he were obliged to give back the same things, it 
 would be useless to borrow them 
 
 " But all things are not taken as Mutua, but only those which 
 consist in weight, number, and measure. In weight, as gold, 
 silver, lead, iron, wax, pitch, tin : in measure, such as oil, wine, 
 and corn : in number, such as Money. And, in short, whatever 
 we deliver with this intent, in number, measure, and weight, so as 
 to bind the receiver to return to us, not the same things, but others 
 of the same Nature and Quantity. Whence, . also, it is called 
 Mutuum : because it is transferred by me to you with the intent 
 that it should become your Property (quod de meo tuum Jit) 
 
 " But the Real Obligation includes Commodatum : as if 
 any one were to ask me to lend him a book, and I lent it. . . . 
 But the Comm.odatum. differs widely from the Mutuum. 
 For the Mutuum transfers the Property, but the Commodatum does 
 not transfer it : and therefore the borrower {Gommodatarius) ig 
 bound to restore the very thing lent " 
 
 So it it said in the Digest — " But it is called giving a Mutuum 
 because from being my Property it becomes yours {quod de mm 
 tuum fit) : and, therefore, if it does not become your Property, no 
 Obligation is created" 
 
 But, on the contrary, with respect to the Commodatum — " We 
 retain the Property and Possession of the thing lent (m com- 
 modatm) .... No one by lending {commodando) a thing 
 gives the Property in it to him who borrows it " 
 
 Thus the whole misconception has arisen from the English 
 
DEBT AND BAILMENT 95 
 
 words " Lend," " Loan," and " Borrow " being used to 
 denote two operations of essentially distinct natures. The French 
 language is equally faulty : the words emprunt and emprunter are 
 equally applied to both kinds of Loan. But the distinction is 
 clearly pointed out iu Roman Law : and the Latin language has 
 a distinct word for each operation 
 
 All commercial Loans are Mutua and not Oommodata .- every 
 Loan of Money is, in reality, a Sale or an Exchange in which a 
 New Property is created, which is called a Credit or 
 a Debt : and when the Loan is repaid, it is another Exchange, 
 by which the New Property is extinguished 
 
 No one who had the simplest knowledge of the elementary 
 principles of Eoman Law, or of Mercantile Law, would ever have 
 committed the mistake of confounding the distinction between 
 the Loan of an ordinary chattel, such as a horse, or a book, or a 
 watch, with a Loan of Money 
 
 On the Distinction between a Debt and a Bailment : or the 
 Distinction between a Mutuum and a Depositum 
 
 63. It has now been clearly shown that Credit is the Name 
 of a species of Incorporeal Property of colossal magnitude in this 
 country, which is bought and sold, like any other species of 
 Property : and chiefly by means of Paper Documents 
 
 We have still to point out one more common misconception to 
 complete the subject 
 
 There are two classes of Paper Documents which are in general 
 use in commerce, and which have some superficial resemblances — 
 that is, they both convey certain Eights, and are both transferable: 
 and are therefore considered by many persons to be of the same 
 nature. But yet they are fundamentally distinct in their nature : 
 and in this radical distinction is contained the basis of the Theory 
 of Credit. And it has been the confusion between these two 
 distinct classes of Paper Documents which has been at the root of 
 most of the false theories of Credit and Currency which have 
 produced such terrible catastrophes in the world 
 
 These two species of Paper Documents are : — 
 
 1. Bank Notes, Bills of Exchange, Cheques, and all other 
 Securities for money: all these are Instruments of Credit. 
 
96 THEORY AND PRACTICE OF BANKING 
 
 2. Bills of Lading, Dock ■Warrants, and all other Titles to 
 specific goods : which are termed in Law, Documents of 
 Title, to which class also belong Mortgage Deeds of Land 
 
 In order to understand clearly the fundamental distinctiou 
 between these classes of Paper Documents, we will explain how 
 each of them arises 
 
 When a man ships goods on board a vessel, he receives from 
 the captain a Paper Document acknowledging the receipt of the 
 goods, and promising to deliver them to whomsoever shall be the 
 owner of the Paper Document. This Document is called a Bill 
 of Lading 
 
 The shipper of the goods sends the Bill of Lading to the 
 consignee, who directly he receives it may sell and transfer it to any 
 one else : and so it may be sold and transferred any number of 
 times. And whoever buys the Bill of Lading may go to the 
 captain and demand the goods from him : and the captain is 
 bound to deliver the goods to whomsoever is the owner of the Bill 
 of Lading 
 
 Similarly when goods are deposited in a Dock Warehouse, the 
 dock master gives a Paper Document, or Receipt for them, of a 
 similar nature to the Bill of Lading : which Document is called a 
 Dock Warrant. This may be sold and transferred any 
 number of times like a Bill of Lading, and whoever buys the 
 Dock Warrant becomes the owner of the goods described in it, 
 and is entitled to demand and receive them from the dock master 
 
 And there are other Paper Documents of a similar nature 
 
 Now, it is to be particularly observed that, although the goods 
 are delivered into the temporary custody of the captain and the 
 dock master, they have no Property in them. They have a 
 mere Right of Possession of them. The Property in the goods 
 remains in the shipper, or the depositor, and is transferred by him 
 along with the Bill of Lading or the Dock Warrant 
 
 The goods are what is termed in Roman Law a Depositum, 
 and in English Law a Bailment : the captain or the dock 
 master is the mere Bailee or Trustee of the goods, and not 
 their 0"wner or Proprietor. He has no Right to convert 
 them to his own use : and if he did so it would be a robbery: and 
 he would be punished as a thief 
 
 Thus in these cases the goods are merely delivered into the 
 
BILLS OF EXCHANGE 97 
 
 temporary custody of the captain or dock master : and no new Pro- 
 perty is created. The Bill of Lading and the Dock "Warrant form 
 One Property with the goods, and cannot be separated from them. 
 The goods travel along with the Paper Document. Thus it may 
 be said in this case that the Paper Documents represent goods. 
 In every case where a Bill of Lading or Dock Warrant is offered 
 for sale or pledge, there must be some specific goods to which 
 it is the Title ; and if there were not, it would be an indict- 
 able offence. In fact, buying the Paper Document is only a 
 convenient method of buying the goods themselves 
 
 In this case there is no Exchange, and these documents have 
 no "Value : i.e., they cannot be bought and sold, or exchanged 
 separately and independently of the goods. They are not ex- 
 changeable for goods generally : but are Titles to certain specific 
 goods and to no others. No one ever spoke of the Value of a 
 Bill of Lading or Dock "Warrant. Such Documents are not 
 Credit : because the owner of them does not simply ielieve that 
 he can get goods for them : but he Mows that he has acquired 
 the Property in certain specific goods. These Paper Documents 
 are in themselves Notliing, and are no addition to the general 
 mass of Exchangeable Quantities 
 
 In a similar way, when a person borrows money by way of 
 mortgage on land, he actually sells the land to the lender of the 
 money ; and the Mortgage Deed is the Deed of Sale, and the 
 Title to that specific piece of land. A Mortgage Deed is a Deed 
 of the Sale of the land with a Eight of repurchase by the 
 mortgagor on repaying the money borrowed 
 
 Hence all these Documents, Bills of Lading, Dock "Warrants, 
 &c., and also Mortgage Deeds, belong to the class of Jurar in 
 re : they are Eeal Eights or Corporeal Property 
 
 63. But Bills of Exchange, Bank Notes, and all Securities 
 for Money, arise out of transactions of an essentially distinct 
 nature. They all arise out of the sale or exchange of the Mu- 
 tuum. Paper Credit always arises out of an Exchange, and 
 never out of a Bailment. It is the fundamental requisite of 
 all kinds of Paper Credit that they shall be absolutely severed 
 from any specific sum of money. They are even forbidden to be 
 made payable out of a particular fund. They must be nothing 
 
-98 THEORY AND PEACTICB OF BANKING 
 
 but abstract Eights against the Person : and that is the 
 very circumstance from which they derive their name : because 
 they must be received on the simple lelief that the person can pay 
 them. If any specific sum of money were set apart for their 
 payment, they would not be Credit. Bills of Lading and Dock 
 Warrants always go with the goods : Bank Notes and Bills of Ex- 
 change are always exchanged for Money, goods, &c. Bills of 
 Lading represent goods, but are not of the Value of goods, because 
 there is no exchange, and there can be no Value without an 
 exchange. Bank Kotes, Bills, &c., do not represent Money, but 
 they are of the Value of Money, because, in their case, there is 
 -always an exchange. And Credit in all its forms is a mass of 
 independent exchangeable Property : as is well known to every 
 -Lawyer, every Merchant, and every Economist 
 
 Summary of Definitions 
 
 64. The student will find it useful to have the results of the 
 preceding investigations condensed in a Summary 
 
 Banking; is a department of the Science of Economics 
 Economics is the Science of Commerce or Ex- 
 changes : it is also called the Science of Wealth : or the 
 Theory of Value 
 
 It may also be conveniently defined that Economics is tU 
 Science which treats of the Laws which govern the Relations of 
 Exchangeable Quantities 
 
 "Wealth is anything whatever whose Value can ie mmswed 
 in Money: or which can be bought and sold : or exchanged 
 
 Wealth, or Exchangeable Quantities, are of Three 
 different Forms — 
 
 1. Material Things 
 
 2. Personal Qualities : as Labour or Service : or Credit 
 
 3. Abstract Rights 
 
 These Three Orders of Quantities may be exchanged in Six 
 different ways 
 
 These Six distinct kinds of Exchange constitute Commerce 
 in its widest extent ; and in all its forms and varieties ; and are 
 the Science of Pure Economics 
 
SUMMARY or DEFINITIONS . .' 99 
 
 Banking consists of Two out of these Six kinds of Exchange 
 It consists in the Exchanges of Money for Credit ; 
 
 and of Credit for Credit 
 
 Property is not a Thing, but a Right : it includes all 
 
 kinds of Eights which can be exercised over anything : it means 
 
 Absolute Ownership 
 
 Hence Wealth, or Exchangeable or Economic 
 
 Quantities, consist exclusively of Exchangeable Eights 
 Jurisprudence is the Science of Rights 
 Economics is the Science of the Exchanges of Rights 
 Economic Quantities are of Three Species — 
 1. Rights to Material Things which have already come into 
 
 2. Eights to Personal Services 
 
 3. Eights to Things which will only come into possession at 
 a Future Time 
 
 Rights to Things which have already come into possession, 
 and Rights to Things which will only come into possession at 
 a Future time, are Inverse or Opposite to each other 
 
 Hence, if the former be termed Positive Economic 
 Quantities, the latter may be termed Negative Eco- 
 nomic Quantities 
 
 Every Sum of Money is Equivalent to the Sum of the Present 
 Values of an Infinite Series of Future Payments 
 
 Rights are divided into Rights to specific Things, termed 
 Jura in Re ; and Rights against Persons, termed Jura in 
 Personam 
 
 Value. The Value of any Economic Quantity is any 
 other Economic Quantity for which it can be exchanged 
 
 Money is anything whatever which a Debtor can compel a 
 Creditor to take in Payment of a Debt : it is also called Legal 
 Tender 
 
 Money is a Right or Title to demand some equivalent 
 for a product or service done 
 
 Credit is a Right of action against a Person to pay 
 or do something 
 
 Barter is an Exchange of Products 
 
 SalOj or Circulation, is an Exchange in which one 
 or both of the Quantities exchanged is Money or Credit 
 
 H 2 
 
100 THEORY AND PBACTICE OF BANKING 
 
 Exchange *ia where Quantities of a like nature are ex- 
 changed : such as Commodities for Commodities : or Money or 
 Credit for Money or Credit 
 
 The Circulating Medium is the Medium by which Circulation 
 is effected : it includes Money and Credit in all its forms 
 
 Currency, in Law, means anything in which the Property 
 passes hy delivery : it includes Money and all written documents of 
 Credit : as a scientiific term in Economics it includes Money and 
 Credit in all its forms : and is equivalent to Circulating 
 Medium 
 
 The Channel of Circulation means the Quantity of 
 Money and Credit existing at any time 
 
 Securities for Money are Rights against Persons 
 to pay Money 
 
 Convertible Securities are Eights to Things 
 which can be readily sold 
 
 Price is the Quantity of Money or Credit given in 
 Exchange for anything 
 
 Interest is the sum paid for the use of Money at the end 
 of the period agreed upon 
 
 Discount is where the sum paid for the use of Money is 
 retained at the time of the advance 
 
 Rate of Interest, or Discount, is the Amount of 
 Interest or Discount made in some given Time 
 
 Production means placing any product in the market and 
 offering it for sale 
 
 There are Three different Classes of Producers — 
 
 1. Agricultural Producers 
 
 2. Manufacturing Producers 
 
 3. Commercial Producers 
 
 Commerce, or Circulation, is one form of Production 
 Consumption is purchasing any product for use and 
 enjoyment, and finally taking it out of commerce 
 
 The expression " Production and Consumption " means Ex- 
 change 
 
 Supply and Demand also mean Exchange 
 Cost of Production means the sum actually expended in 
 placing any product in the market 
 
SUMMARY OJF DEFINITIONS 101 
 
 Profit is the difference between the Cost of Production of 
 ^any product and its Value : or the Quantity it exchanges for 
 
 Kate of Profit is the Amount of Profit made in some 
 given Time 
 
 Payment means anything whatever which is taken in 
 exchange for anything else 
 
 Discharge is equivalent to Payment 
 
 Satisfaction is anything which is received as the final 
 discharge and closing of any transaction 
 
 Capital is any Economic Quantity used so as to produce a 
 Profit 
 
 Any Economic Quantity may be used as Capital 
 
 There is no such thing as Absolute Capital 
 
 Capital may increase in Two distinct ways — 
 
 1. By actual Increase of Quantity 
 
 2. By Commerce or Exchange 
 
 Capital is said to be Fixed when it remains in the pos- 
 session of the Capitalist, and he derives a Eevenue from its use 
 
 Capital is said to be Floating when he parts with it 
 entirely in one operation, and it is restored to him in the Price of 
 the Product 
 
 There are Three Ambiguities in the Theory of 
 Credit 
 
 First Ambiguity. A Debt is not Money owed by 
 the Debtor, but the Personal Duty to pay Money 
 
 Second Ambiguity. The word Debt means the 
 Creditor's Right of action, as well as the Debtor's Duty 
 to pay 
 
 Third Ambiguity. The words " Loan," " Lend," 
 and " BorroTSf " have Two distinct meanings : and denote Two 
 distinct operations : which are distinguished in Latin as Mu- 
 tuum and Commodatum 
 
 Bank Notes and Bills of Exchange always represent Debts : 
 and arise out of an Exchange 
 
 Bills of Lading and Dock Warrants always are Rights or Titles 
 to goods : and arise out of a Bailment and not an Exchange 
 
102 THEORY AND PRACTICE OF BANKING 
 
 CHAPTER II 
 
 THE THEORY OF VALUE 
 
 Preliminary EemarJcs 
 
 li is now definitively settled that, used as a technical terin in 
 Economics, the word Wealth means anything whatever whose 
 Value can be measured in Money : or which can be bought and 
 Bold : or exchanged i and that there are Three distinct' kinds 
 of Things which can be bought and sold. (1) Material Things : 
 (2) Personal Qualities : (3) Abstract Eights 
 
 It is also seen that the Value of any Economic Quantity is any 
 other Economic Quantity for which it can be exchanged 
 
 The Theory of Value is the investigation of the Laws 
 which govern the numerical relations in which these Quantities 
 will exchange 
 
 The Complete Theory of Value comprehends — 
 
 1. The Definition of Value 
 
 2. The Origin, Cause, or Form of Value 
 3i The General Law of Value 
 
 It has been already shewn that the complete Science of Eco- 
 nomics comprehends Six distinct kinds of Exchanges -but as the 
 business of Banking includes only two of these six kinds of 
 "Exchange, we shall consider only such portions of the Theory of 
 Value as are necessary for our present subject : the complete 
 Theory of Value is developed in our Elements of Economics 
 
DEFINITION OE VALUE IQS 
 
 Section I 
 
 The Definition of Value 
 
 1, Value, in its true and original sense, is a Desire of 
 the Mind : it means Esteem, or Estimation : As Glo'ster says, 
 in Lear—" In the division of the kingdom it appears not which 
 of the Dukes he Values most " 
 
 So Troilus, in Troilus and Gressida — 
 
 " For what is aught but as 'tis Valued ? " 
 
 So Henry Esmond says — " There is some particular prize we 
 all of us Value : and that every man of spirit will venture his 
 life for" 
 ' So J. B. Say says — "Value is a Moral Quality" 
 
 2. But such Value is not an Economic phenomenon. To 
 bring Value into Economics it must be manifested in some tangible 
 form : a person must manifest his Desire, Demand, or 
 Value for something else, by giving something in Exchange 
 for it to acquire possession of it 
 
 But as one person cannot gain possession of what another 
 person possesses without giving him something in exchange for 
 it which he Desires, Deuti^'iids, and Values, it is evident 
 that for an Exchange to take place Requires the Concur^ 
 rence of two Minds. It is not.^^nfficient that the De- 
 mand or Value should exist on one side only. If one person 
 d.esires to obtain possession of what another possesses, it is not 
 BuflBcient to constitute a phenomenon of Value that he alonp 
 should desire it : he must offer in exchange for it something which 
 that other person Desires or Demands, If a person brought 
 a cargo of wine among a nation of teetotallers, no one would 
 Desire or Demand it ; no one would buy it : among such a 
 people wine would have no Value : so, among a nation of non^ 
 smokers, tobacco would have no Value : among a nation of 
 
104 THEORY AND PRACTICE OF BANKING 
 
 -vegetarians beef ancf mutton would have no Value. However 
 much a person should wish to sell his product, if no one will buy 
 it, it has no Value. For an Exchange, or a phenomenon of Value, 
 to take place, there must be the Reciprocal Desire, or 
 Bemaud of Two persons, each for the product of the other 
 
 When, however, two persons each Desire or Demand to 
 obtain the product of the other, and when they agree to exchange 
 their respective products, each Product .may be considered as the 
 Measure of the desire of its owner to obtain possession of the 
 product of the other. The two products, therefore, reciprocally 
 measure the Desire of their possessors to obtain the product of 
 the other : and when these persons have agreed upon the Quan- 
 tities of their products which are to be exchanged, the two pro- 
 ducts are said to be of equal Value. Each product is the 
 Value, or the Demand for the other : and this is the only 
 kind of Value with which Economics is concerned 
 
 Hence it is obvious that in every phenomenon of Value, or 
 Exchange, there must be two Demands and two Quan- 
 tities : and that the true Origin and Cause of Value is 
 Reciprocal Demand 
 
 Thus, let A and B be any two Economic Quantities which are 
 fixchanged at any instant : then we may say — 
 
 A valet B 
 
 oi', A is of the Value of B 
 or, A = B 
 
 Then B is the Value of A in terms of B : and A is the Value 
 of B in terms of A 
 Thus Aristotle says — 
 
 ■q o a^ia AcyeTai Trpos ra cktos ayaua 
 
 " Now the term Value is used in reference to External 
 
 things " 
 
 So it is said in Eoman Law — 
 
 Res tanti valet quanti vendi potest 
 
 The Value of a thing is what it can be Sold for 
 
 The Greek word for Value, d|ta, is derived from ayw, one of 
 
 whose meanings is to "Weigh, or, le of the weight of 
 
 So Demosthenes, speaking of some golden goblets, says-f 
 
DEFINITION OF VALUE 1,05 
 
 "dyovcra iKao-Trj fivSv'' — " each one Weighing a mina." And he 
 says of the sword of Mardonins — "os r/ye rpiaKoaiov^ SapetKous" 
 — "which weighed three hundred Darios." Hence a^ta always 
 meant equality, Weight for Weight : as when two Quantities are 
 put into a balance and are of equal weight 
 
 So Morocco says, in the Merchant of Venice — 
 
 " Pause, Morocco, 
 And Weigh, thy Value with an even hand" 
 
 So Le Trosne says, that Value is a new Quality which products 
 acquire when men live in society 
 
 " Products acquire, then, in the social state which arises from 
 the community of men among each other, a new Quality. This 
 Quality is Value, which makes products become Wealth 
 
 " Value consists in the Relation of Exchange which 
 takes place between such and such a product : between such a 
 Quantity of one product and such a Quantity of another 
 
 " Price is the expression of Value : it is not separate in Ex- 
 change : each thing is reciprocally the price of the merchandise : 
 in a Sale the Price is in Money " 
 
 Hence it is clear that Value is a Ratio, or an Equa- 
 tion : like Distance, or an Equation, it necessarily requires two 
 objects 
 
 The Value of a thing is always something External to 
 itself. It is absolutely impossible to predicate that any Quantity 
 has Value, without at the same time implying that it can be 
 exchanged for something else : and, of course, everything that 
 can be exchanged for it, is its Value in that commodity. Hence 
 any Economic Quantity has as many Values as Quantities it can 
 be exchanged for : and if it can be exchanged for nothing it has 
 no Value 
 
 Hence a single object cannot have Value. A single object 
 cannot be Distant : and cannot be Equal, If an object is 
 said to be Distant or Equal, we must ask— Distant from What ? 
 or— Equal to What ? So, if any Quantity is said to have Value, 
 we must ask — Value in What ? And, as it is absurd to speak of 
 Absolute or Intrinsic Distance ; or Absolute or Intrinsic EquaHty ; 
 so it is equally absurd to speak of Absolute or Intrinsic 
 Value 
 
106 THEORY AND PRACTICE OF BANKING 
 
 3. But auy Quantity may have Value in terms of any other 
 
 Suppose that B, as above, is 10 guineas : then A may be 
 either of the Three species of Economic Quantities. It may 
 be a Watch, or so much Corn, or Timber, or Clothes : or it may 
 be so much Labour, Instruction, or Amusement : or it may be a 
 Debt, or Eight of action, or the Funds, or a Copyright, or any 
 other Incorporeal Eight. Each of these species of Property is of 
 the Value of 10 guineas : and, therefore, it manifestly follows 
 that each of them is equal in Value to the others : because Things 
 which are equal to the same thing are equal to each other 
 
 The Value of the Money in the pockets of the public is the 
 various products and services it can command : the Value of the 
 goods in the warehouses of the merchants and traders is the 
 Money in the pockets of the public 
 
 The Value of a workman's Labour is the "Wages he can earn : 
 the Value of a Professor's Lectures is the Pees paid by his Students. 
 The Value of the Labour of the Advocate, the Physician, or the 
 Engineer, is the Income he earns 
 
 The Value of an Incorporeal Eight is the Thing Pro-, 
 mised which may be demanded 
 
 The Value of a £5 Note is five Sovereigns : the Value of a 
 Postage Stamp is the Carriage of a Letter : the Value of a Rail- 
 way Ticket is the Journey : the Value of the Promise or Pledge 
 to cut a man's hair is the cutting of the hair : the Value of an 
 Order to see the play is the Seeing of the play : the Value of an 
 Order for bread, milk, wine, &c., is the Bread, the Milk, the 
 Wine, &c. 
 
 Suppose that the Price of cutting one's hair is a shilling ; what 
 (iifference does it make to me whether I have a shilling or a 
 Promise of a hairdresser to cut my hair ? Is it' not clear that in 
 this case the Shilling and the Promise are of exactly the same 
 Value to me ? 
 
 If I want a loaf of bread which costs a Shilling, what differ- 
 ence does it make to me whether I have a Shilling or the Promise 
 of a baker to give me the bread ? In such a case the Shilling and 
 the Promise are exactly of the same Value to me 
 
 In shortj in the case of every product or service, the Money to 
 purchase it with, and a Promise to render the product or the' 
 service, are of exactly equal Value in each separate case 
 
DEFINITION OF VALUE 107 
 
 Each separate tradestnan, of course, only promises to render 
 some particular product or service : and as the Promise is not 
 demandable from any one else, each Promise has only Parti- 
 cular Value : and as that person may become bankrupt or die, 
 the Promise has only. Precarious Value 
 
 Now, what is Money by the unanimous consent of Economists ? 
 It is nothing but the generalised Right or Title to demand 
 any of these products or services we may require at any particular 
 time : and as there is always some person who is willing to render 
 these products or services if another cannot, Money has General 
 and Permanent Value : while each of these Promises has 
 only Particular and Precarious Value 
 
 Each of these separate Rights, then, is of exactly the same 
 Nature as Money ; but is of an inferior Degree. But they are 
 Economic Quantities, or Wealth, for the very same reason that 
 Money is. Is it not clear that, if a man had his pockets full of 
 Promises or Pledges by solvent persons to render him all the pro- 
 Tiucts and services he might want, he would be exactly as Wealthy 
 as if he had so much Money ? And he can always sell and ex- 
 change any of these orders, for orders for a different thing, just as 
 he can material chattels. Hence we see the perfect justice of the 
 doctrine of Roman Law — " Under the term "Wealth. .... 
 Rights are included " 
 
 These Eights are the most colossal species of Property in the 
 country : and they are the subject of the most gigantic commerce 
 of modern times, whose mechanism will be fully exhibited in a 
 future chapter 
 
 4. As Value is the Ratio in which any two Economic Quan- 
 tities will exchange, it is clear that the Value of A in terms of B 
 increases or decreases according to the greater or less Quantity of 
 B that A can purchase : and the Value of B in terms of A 
 increases or decreases according to the greater or less Quantity of 
 A that B can purchase. It is also clear, that if from any cause 
 whatever, the Value, or Ratio, between these Quantities has 
 changed, the Value of both has changed. It is manifestly as 
 absurd to say that the Value of one Quantity has remained the 
 same, while that of the other has changed, as it would be to say 
 that a Railway Station has remained at the same distance from a 
 train, whUe the train has increased its distance from the station 
 
108 THEORY AND PRACTICE OF BANKING 
 
 Moreover, it is as absurd to speak of a Quantity changing its 
 own Value, or keeping its own Value fixed, without stating the 
 -article with respect to which its Value has changed, or remained 
 fixed, as it would be to say that an object had changed or preserved 
 its own Distance, or Ratio, without saying Distance from what, 
 or Eatio to what 
 
 Hence it is clear that nothing can have Fixed or Invariable 
 Value unless everything else is Fixed and Invariable in Value as 
 well ; because, though a Quantity may retain its Value unchanged 
 with regard to a certain number of things, yet if its Value has 
 changed with respect to any other things whatever, the Value of 
 that Quantity has changed 
 
 And as the Value of anything is solely anything else for which 
 it can be exchanged, it is manifest that, if it can be exchanged for 
 nothing, it has no Value. No matter what Qualities it may pos- 
 sess, if no one else wants it, and will not give anything for it, it 
 has no more Value for its owner than if he were in the centre of 
 the Desert of Sahara. Many persons have almost a difiiculty in 
 believing that Money can have no Value : but Smith himself says 
 that, if a guinea could not be exchanged for anything, it would be 
 of no more Value than a bill upon a bankrupt. So Say says, that 
 - things can only be Valued by an Exchange 
 
 So a recent writer, describing the splendour of the houses in 
 some of the remote country districts of Spain, says, " Houses and 
 splendid furniture in such places are nearly Valueless : there is no 
 one to hire the former, nor to buy the latter " 
 
 There may be a General Rise of Prices, iut not of 
 Values 
 
 6. Having thus enforced the doctrine that the Value of any 
 Economic Quantity is any other Economic Quantity for which it 
 can be exchanged, there is only one other thing which need be 
 noticed here 
 
 Price is the Value of a Quantity in Money or Credit only. 
 Now, if Money and Credit be increased very greatly in Quantity, 
 the Prices of all things may rise : but they will still preserve their 
 relative Values among themselves. If a loaf of bread and a pound 
 of meat each cost a shilling, and if, in consequence of the ex- 
 
ERROR OF INTRINSIC VALUE 109 
 
 cessive abundance of Money and Credit, they each rise to two 
 shillings, the pound of meat is still of the Value of the loaf of 
 bread. Hence there may be a general rise, or a general fall, of 
 Prices 
 
 But there can be no such thing as a general rise, or a general 
 fall, of Values.. Everything can no more rise or fall with respect 
 to everything else, than, as MiU says, a dozen runners can each 
 outrun all the rest, or a hundred trees can all overtop one another. 
 To suppose that all things could rise relatively to each other, 
 would be to realise Pat's idea of society, where every man is as 
 good as his neighbour, and a great deal better too 
 
 On the Error of (he Expression Intrinsic Value 
 
 6. We must now say something about an expression which 
 has been the source of enormous confusion in Economics : which 
 has especially obscured the comprehension of the subject of 
 Credit : and no progress can be made in the science until it is 
 entirely exterminated 
 
 All ancient writers clearly understood that the Value of a thing 
 is something External to itself, and we have not found in them 
 any trace of such confusion of ideas as Intrinsic Value 
 
 It is not easy to determine when the unfortunate expression. 
 Intrinsic Value, came into use. But it arose in this way. 
 When people thought about Value, they looked to some Quality 
 of a thing as its Value. They therefore gradually began to speak 
 of Intrinsic Value. So long ago as 1696, an able writer, Barbon, 
 pointed out the confusion which had arisen from mistaking the 
 absolute Qualities of an object for the Quantity of things it would 
 exchange for — 
 
 "There is nothing which troubles this controversy more than 
 for want of distinguishing between Value and Virtue 
 
 " Value is only the Price of things : and that can never be 
 certain : because it must be there at all times and in all places 
 of the same Value : therefore, nothing can have Intrinsic 
 Value 
 
 "But things have an Intrinsic Value in themselves^ 
 which in aU things have the same Virtue : the loadstone to attract 
 
110 THEORY AND PRACTICE OF BANKING 
 
 iron; and the several Qualities that belong to herbs and drugs, 
 some purgative, some diuretical, &c. But these things, though' 
 they may have great Virtue, may be of small Value, or no 
 Price, according to the place where they are plenty or scarce ; as 
 the red nettle, though it be of excellent Virtue to stop bleeding, 
 yet here it is a weed of no Value from its plenty. And so are 
 spices 'and drugs in their own native soil of no Value but as 
 common shrubs and weeds, but with us of great Value, and yet 
 in both places of the same excellent Intrinsic Virtue . . . 
 
 " For these have no Value in themselves : it is opinion and 
 fashion brings them into use and gives them a Value " 
 
 Barbon thus puts his finger on the very phrase which is the 
 curse and the bane of Economics at the present day — the expres- 
 sion, Intrinsic Value— which is confounding an Intrinsic 
 Quality with an External Relation 
 
 The following passage from Senior shows how easily able men 
 are betrayed into ttiis error. He says, " We have already stated 
 that we use the word Value in its popular (?) acceptation, as 
 signifying that Quality is anything which Jits it to le given and, 
 received in exchange ; or, in other words, to be lent or sold, hired,' 
 or purchased 
 
 " So defined. Value denotes a Relation reciprocally existing 
 letween two objects " 
 
 Now, the Quality of a melon which fits it to be sold is its 
 agreeable flavour : its flavour, therefore, according to Senior, is 
 its Value : and, so defined, he says it means that it costs 5«. '! 
 That is, he defines the Quahty of a thing to be its Price ! 
 
 Smith, however, is the principal author of the confusion in 
 this subject in modern times. As we have pointed out ' in 
 another work, he begins by defining the Value of a thing to be 
 the- thing it will exchange for : he then suddenly changes his idea 
 of Value to the Quantity of Labour expended upon obtain- 
 ing the thing itself. Thus, the Quantity of Labour 
 necessary to produce it, came to be considered as the Value of a 
 thing, and then Value came to be called Intrinsic. This un? 
 happy phrase, Intrinsic Value, meets us at every turn in 
 Economics ; and yet the slightest reflection will show that to 
 define Value to be something External to a thing ; and then 
 to be constantly speaking. of Intrinsic Value, are self-cpntrar 
 
ERROR 01' INTRINSIC VALUE 111 
 
 dictory and inconsistent ideas. And it came to be held that 
 Labour is necessary to, and is the cause of, all Value 
 
 Thus, over and over again, it is repeated in Economical treatises 
 that Money has Intrinsic Value, but that a Bank Note or 
 Bill of Exchange is only the Representative of Value 
 
 Money, no doubt, is the produce of Labour : but Smith him- 
 self says that if Money would exchange for nothing it would have 
 no Value : so that, after all, he comes back to Exchangeability as 
 the real essence of Value. How, then, can the Value of Money 
 be Intrinsic ? How can anything have Intrinsic Value unless it 
 has the things it wUl exchange inside itself ? Money will ex- 
 change for anything — lands, corn, houses, carriages, books, &e., 
 and each of these is a Value of the Money : but which of these is 
 its Intrinsic Value ? 
 
 Money remains exactly the same in itself wherever it may be 
 placed : a hogshead full of sovereigns would have immense Value 
 in the middle of London ; but if a man had them in the midst of 
 the ocean, or on a desert iland, where would their Value be ? 
 
 All Economists admit that a Bank Note, payable on demand, 
 is of the Value of Money : and why is it so ? Simply because it 
 is exchangeable for Money. Hence it is clear that a Bank Note 
 has Value for exactly the same reason that Money has, and for no 
 other ; namely, that they are exchangeable for something else. 
 As Daniel Webster said truly, " Credit is to Money what Money 
 is to goods." Credit is the Right to demand Money, and Money 
 is the Right to demand goods. Wben Money can be exchanged 
 it has Value ; when it cannot be exchanged it has no Value : 
 when a Bank Note can be exchanged it has Value ; when it cannot 
 be exchanged it has no Value 
 
 Hence it is clear that the Value of Money and Credit of all 
 kinds is essentially of the same nature ; though there may be 
 different degrees of it. A piece of Credit, by the unanimous 
 doctrine of all Jurists, Economists, and Merchants, is an article of 
 merchandise, and an exchangeable commodity, just like Money, or 
 any other goods. 
 
 The expression Intrinsic Value is so common that persons are 
 apt to overlook its incongruity of ideas : it is, however, a plain 
 contradiction in 'terms : and if we use words of similar im- 
 port, whose meaning has not been so corrupted, its absurdity 
 
112 THEORY AND PRACTICE OF BANKING 
 
 will be apparent at once. Thus, whoever heard of Intrinsic 
 Distance ? or of an Intrinsic Ratio ? The absurdity of 
 these expressions is apparent at once : but they are in no way 
 more absurd than Intrinsic Value. If we speak of the 
 Intrinsic Value of Money, we may just as well speak of the 
 Intrinsic Distance of St. Paul's ; or the Intrinsic 
 Ratio of Five. To say that Money has Intrinsic Value because 
 it is material, and the produce of Labour, and that a Bank Note 
 or Bill of Exchange is only the Representative of Value, is just 
 as absurd as to say that a wooden yard measure is Intrinsic Disr 
 tance, and that the space between two points a yard apart is thfe 
 Representative of Distance 
 
 On the Distinction letween Diminution in Value and 
 Depreciation 
 
 7. We must now observe the difference between two ex- 
 pressions which, though often used indiscriminately, are essentially 
 distinct ; namely, Diminution in Value and Deprecia- 
 tion. An Alteration in Value of any commodity means 
 that the Quantity of it which was considered as the equivalent for 
 a certain amount of another commodity has undergone a change. 
 If corn is at one time worth 40s. a quarter, and at another time 
 worth 60s. a quarter, these two Quantities have undergone an 
 Alteration in Value. Depreciation means that it is 
 not really of the Quality it professes to be. Alteration in Value 
 always refers to some othsr commodity with which it is compared: 
 Depreciation is in reference to itself. Hence Alteration in Value 
 always refers to External Quantity : Depreciation to Internal 
 Quality — which, however, may affect its external Relations 
 
 If at any time an ounce of Gold will exchange for fifteen 
 ounces of Silver ; and if, owing to a sudden increase in the quan- 
 tity of Silver, an ounce of Gold becomes able to purchase twenty 
 ounces of Silver, Silver is said to hsive fallen in value with respect 
 to Gold : the quality of the Silver remaining exactly the same. 
 Or if, while the quantity of Silver remained the same. Gold 
 became extremely scarce, so that an ounce of Gold would similarly 
 buy twenty ounces of Silver, Gold would be said to have risen in 
 value with respect to Silver. In either case the result is the 
 
DEPRECIATION 113 
 
 same : there is an Alteration in Value, or a change m 
 the Exchangeable relation of the two metals : while each continues 
 exactly of the same Quality 
 
 But if a piece of money, as a Sovereign, which ought by law 
 to contain a certain amount of pure gold, does not contain the 
 amount it ought to, it is Depreciated ; or if a Bank Note 
 which professes to be of the Value of five Sovereigns will only 
 purchase four Sovereigns, it is Depreciated 
 
 These distinctions are of great importance, though they are 
 often overlooked : and they are especially necesssary to be observed 
 in all discussions regarding the value of coins which retain the 
 same name through a long series of ages. The pound of Money 
 in the days of William I. 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, such as Grold and 
 Credit, are used as money as well : which have greatly tended to 
 diminish the value of silver. It is said, though of course all such 
 statements are extremely diflfiicult to verify, that silver has fallen 
 to the twelfth part of its value in these times. But not only has 
 the value of silver greatly diminished, but also the coinage 
 has been greatly Depreciated. The shilling was originally 
 the 20th part of a pound weight of Silver Bullion : it is now 
 reduced to the 66th part. Hence, not only is silver greatly 
 diminished in value, but the coinage is also greatly depreciated : 
 and it is often said that, in consequence of these combined causes, 
 the modern shilling is only of the 36th part of the value it was in 
 the time of William I. 
 
 These causes affecting the value of coins which retain their 
 names through long periods, may act in the same or in opposite 
 directions. In the coinage of England, these two causes acted in 
 the same direction. But they may also act in opposite directions. 
 A coinage may be greatly depreciated, i.e., diminished in quantity, 
 but from the increased value of the material, it may be able to 
 purchase as much as it did in its original state. It is sometimes 
 alleged that this happened at Rome. The first coinage of Rome 
 was of copper, and the metal was found in great abundance for a 
 considerable time after the foundation of the city. The first 
 measure of value was the as, which was a pound weight of copper. 
 The as was subsequently, about the time of the second Pnnic 
 
 I 
 
114 THEORY AND PRACTICE OF BANKING 
 
 war, reduced to the twelfth part of its weight : and some writers 
 allege that, in consequence of- the great scarcity of the metal, it 
 had increased in value so much that the depreciated coinage 
 would purchase as much as the full pound of copper would origin- 
 ally. This may have been so or not : but it in no way affects the 
 argument ; it might very possibly have been so 
 
 The same principle applies in many other oases : in a besieged 
 town the vilest garbage has sometimes sold for enormous sums : 
 and damaged corn in one year may sell at a higher price than the 
 best corn in another year 
 
 These considerations greatly affect the public in matters of 
 pubhc debts. The State agrees at a particular time to pay a iixed 
 quantity of bullion for ever, or for a long period of time. Now, 
 even supposing that all other things remain the same, the Value 
 of the money may vary greatly during long periods, either from 
 the increased scarcity or the increased abundance of the metal : 
 and either the State or its Creditors may be grievously affected by 
 these changes 
 
 The Public Debt of England has not been suificiently long in 
 existence to be much affected by this last consideration : bat it 
 has been very sensibly felt in .perpetual leases granted by Cor- 
 porations several centuries ago to their tenants : in some cases 
 Eents were fixed in the Money of the period, and in consequence 
 of the great diminution in the Value of Money since that time, 
 the Eents have been little more than nominal at the present time : 
 in other cases the Eents were reserved payable in the value of 
 certain quantities of corn : and so have preserved their due value 
 with other commodities 
 
 A Standard of Value is Impossible; hut there may lea 
 Measure of Value 
 
 8. That unfortunate confusion of ideas between the Value of 
 a commodity being the Quantity of another commodity it will 
 purchase, and the Quantity of Labour embodied, as it were, in the 
 commodity itself, which is chiefly owing to Smith, and adopted by 
 Eicardo, has not only led to that mischievous expression. In- 
 trinsic Value, the source of endless confusion in Economics, 
 but also to the search for something which very shght reflection 
 
A STANDARD OF VALUE IS IMPOSSIBLE 115 
 
 would have shown to be impossible ; namely, an Invariable 
 Standard of Value 
 
 It is as well to explaia what those Economists mean who want 
 an Invariable Standard of Value 
 
 If we had a British yard and any foreign measures of length 
 before us, we could at once perceive the difference between them : 
 and if we were told the measurements of any foreign buildings, 
 however remote in age or country, we could by a very simple cal- 
 culation, reduce them to the standard of British measurement ; 
 and compare them with the size of our own buildings 
 
 Those Economists who want an Invariable Standard of Value, 
 want to fix upon some single commodity by which they can compare 
 the Value of all other things in other countries and ages 
 
 But the least reflection will show that such a standard is abso- 
 lutely impossible by the very nature of things. Money is, indeed, 
 termed the Measure of Value : and so it • is in exchanges which 
 are affected at the same time and place. If we are told that a 
 quarter of corn is worth 60s., and that a sheep is worth 60s. at a 
 certain time and place, we should say that they are then and 
 there equal in Value 
 
 But such matters are not the result of simple perception by 
 the senses. If a quantity of gold were placed beside a number of 
 other things, no human sense could discern what their Value 
 would be. And the most violent changes in their several Values 
 might take place in the market, without there being any visible 
 signs of such a thing. Value is a Mental affection : and 
 Values are not perceptible by ocular demonstration, but they must 
 be declared by the communication of Minds 
 
 Moreover, it is not possible to ascertain the different Values of 
 different quantities of gold obtained in different ages and coun- 
 tries. If a quantity of gold coins minted in the time of Ehzabeth : 
 an equal quantity minted in China : and an equal quantity minted 
 in the reign of Victoria were placed side by side, what human 
 sense could discern the difference in Value between them ? And 
 yet that is what those Economists require who want an Invari- 
 able Standard of Value. They want something by which 
 they can at once decide whether Gold is of more Value in a.d. 100; 
 in A,D. 1400 ; in a.d. 1880 : in England, or in China, without 
 reference to anything else 
 
 i2 
 
116 THEORY AND PRACTICE OF BANKING 
 
 But the only test of Value is an Exchange : and unless we 
 can effect an Exchange, there can be no Value. How can we 
 exchange an ounce of gold in the year 180 for one in the year 
 1580, or for one in the year 1880 ? Bailey well says — " Value is 
 a relation between contemporary commodities, because such only 
 admit of being exchanged with each other : and if we compare 
 the Value of a commodity at one time with its Value at another, it 
 is only a comparison of the relation in which it stood at these 
 different times to some other commodity. It is not a compaTison 
 of some intrinsic independent Quality at one period, with the same 
 Quality at another period, but a Comparison of Ratios, or 
 a comparison of the relative Quantities in which commodities 
 exchanged for each other at two different epochs. If a commodity 
 A, in the year 100 was worth 2 B, and in 1800 was worth 4 B, 
 we should say that A had doubled its value to B. But this, 
 which is the only kind of comparison we could institute, would 
 not give us any relation between A in 100 and A in 1800 : it 
 would be simply a comparison between A and B in each of 
 
 these years 
 
 " It is impossible for a direct Katio 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 period " 
 
 The fact is, that all this search after the impossible has arisen 
 from Smith's unfortunate idea that the Value of a thing is the 
 Quantity of Labour bestowed in obtaining it, which, as 
 we have seen in a former chapter, was adopted by Eicardo. From 
 this idea it followed that, if any Commodity could always be ob- 
 tained with an invariable quantity of Labour, it would be an 
 Invariable Standard of Value : Ricardo admitted that there was 
 no Commodity which is always obtained by an invariable quan- 
 tity of Labour ; and, therefore, for that reason alone, he admitted 
 that an Invariable Standard of Value was unattainable 
 
 An Invariable Standard of Value, however, is not only unat- 
 tainable for the reason given by Ricardo, but it is in itself 
 aibsolutely impossible by the very nature of things : because Value 
 is a Ratio : and a single Quantity cannot he the Measure of a 
 Ratio. A measure of length or capacity is an absolute single 
 Quantity : but Value is a Ratio. We may measure a tree with a 
 
A STANDARD OF VALUE IS IMPOSSIBLE 117 
 
 yard ; or a hogshead with a gallon measure ; because they are 
 each of them single Quantities : but Value is a Eatio : and it is 
 impossible to say that 
 
 It is manifestly absurd to say that 4 is to 5 as 8, without 
 saying 8 is to what : just as it is absurd to say that a horse 
 gallops at the rate of 20 miles, without saying in what time 
 
 Besides, as we have shown before that there can be no such 
 thing" as an Invariable Standard of Value by which to measure the 
 variations in Value of other things, because by the very nature of 
 things, the very condition of anything being invariable in Value 
 is that nothing else shall vary in Value : and, consequently, the 
 very condition of there being an Invariable Standard of Value is 
 that there shall be no variations to measure 
 
 But when we consider that Value is originally a Desire of 
 the Mind, there may be a Measure of Value : because any 
 commodity may be fixed upon to measure the intensity of the 
 Desire of persons to obtain something else : but even this is 
 only a measure for contemporary transactions : it cannot be a 
 permanent measure extending through all ages and countries 
 
118 THEORY AND PKACTICE OF BANKING 
 
 Section II 
 
 On the Origin, Source, or Cause of Value 
 
 '9. We now come to the second branch of our inquiry — 
 What is the Origin, Source, or Cause, or, in the language 
 of Bacon, the Form of Value, and whence does it originate ? 
 
 Now, when we are to search for the Cause or Source of Value, 
 it is necessary to understand what we are searching for. There 
 are three distinct orders of Quantities, each containing many 
 varieties which all have Value : we must, therefore, look mani- 
 festly for some Single Cause which is common to them all : and 
 ascertain what that Single Cause is by genuine Induction 
 
 Bacon says — " But the Induction which is to be available for 
 the discovery and demonstration of sciences and arts must analyse 
 nature by proper rejections and exclusions, and then' after a sufiBcient 
 number of Negatives, come to a conclusion on the Affirma- 
 tive instances." — "Now what the sciences stand in need of is a 
 form of Induction which shall analyse experience, and take it to 
 pieces, and by a due process of exclusion and rejection, lead to an 
 inevitable conclusion" 
 
 The iirst step in this process of Induction is to make a com- 
 plete collection of all the different kinds of Quantities, of whatever 
 nature they may be, which have Value. "For whoever is 
 acquainted with Forms {i.e., Causes] embraces the unity of nature 
 in substances the most unlike. From the discovery of Forms 
 [Causes] results Truth in Theory and Freedom in Practice " 
 
 Bacon earnestly inculcates as the foundation of all true 
 science a careful collection of all kinds of instances in which the 
 given Nature is found — "The investigation of Forms proceeds 
 thus : a Nature being given, we must first of all have a muster or 
 presentation before the understanding of all known instances 
 which agree in the same Nature, though in substances the most 
 unlike. And such collection must be made in the manner of 
 history, without premature speculation " 
 
THE CAUSE OF VALUE 119 
 
 Bacon theu exemplifies his method by an invesfcigatiou into 
 the Form of Heat : aud he gives tables of the divers instances 
 agreeing in the Nature of Heat : also where it appears in different 
 degrees— "The work and office of these tables I call the Presenta- 
 tion of Instances to the understanding, which presentation having 
 been made, Induction itself must be set to work : for the problem 
 is upon a review of the instances, all and each, to find such a 
 Nature as is always present or absent with the given Nature : and 
 always increases or decreases with it : and which is, as I have said, 
 a particular case of a more general Nature " 
 
 " We must therefore make a complete solution and separation 
 of Nature, not indeed by fire, but by the Mind, which is a kind 
 of divine fire. The first work, therefore, of trne Induction (as far 
 as regards the discovery of causes) is the rejection or exclusion of 
 the several Natures which are not found in some instances when 
 the given Nature is present? and are found in some instances 
 where the given Nature is absent : or are found to increase iu some 
 instances where the given Nature decreases : or to decrease when 
 the given Nature increases. Then indeed, after the rejection and 
 exclusion has been duly made, there will remain at the bottom, all 
 light opinions vanishing in smoke, a Cause affirmative, solid, and 
 true, and well defined" 
 
 An indispensable part of Induction is the rejection of erro- 
 neous causes — "I must now give an example of the Exclusion 
 and Eejection of Natures which by the table of presentations are 
 found not to belong to the Form (of Heat), observing in the 
 meantime not only each table suffices for the rejection of any 
 Nature : but even any one of the particular instances contained 
 in any of the tables. For it is manifest from what has been said 
 that any One contradictory instance overthrows a conjecture as 
 to the Cause " 
 
 10, Bacon has exemplified his process of Induction by 
 investigating the Cause of Heat: our present task is to investigate 
 the Cause of Value 
 
 Following the example of the mighty Master, we must begin 
 by making a complete collection of Instances of Value : 
 and we must now enumerate all the different kinds of Quantities 
 •which have Value. These are — 
 
120 THEORY AND PRACTICE OF BANKING 
 
 1. Corporeal or Material Property. Under this 
 species are comprised the following different varieties — 
 
 Lands : Trees : Cattle : Flocks and herds of all sorts : Corn 
 and other fruits of the earth : Houses : Furniture : Clothes : 
 Money : Fish : Minerals of all sorts : Precious Stones of all 
 sorts : Pearls : Manufactured Articles of all sorts 
 
 2. Immaterial Property. Under this species is com- 
 prised Labour of all sorts : Agricultural : Artisan : ProfessioEal; 
 Scientific : Literary 
 
 3. Incorporeal Property. Under this species are 
 comprised the following varieties : Eights of action, or Credits or 
 Debts of all sorts : the Funds: Copyrights: Shares in companies 
 the Goodwill of a business : the Practice of a profession : Tolls 
 Ferries : Annuities of all sorts : Advowsons : G-round Kents 
 Shootings : Fishings, &c. 
 
 We must now investigate the Cause of Value in all these 
 different Quantities : we must first of all, by a due and systematic 
 course of Eejections and Exclusions, eliminate all intrusive and 
 accidental Ideas which may sometimes accompany Value. And 
 after completing this process of exclusion, we must end by an 
 affirmative, and discover that Single General Cause which 
 is common to All these different Quantities : which being present 
 Value is present : which, when it increases. Value inci'eases : which, 
 when it decreases. Value decreases : and which, being absent, 
 Value is absent 
 
 Demand is the Sole Cause of Value 
 
 11. Aristotle, and all ancient writers, unanimously shoff 
 that Demand, is the Origin or Cause of Value: and, 
 considering that they held Exchangeability to be the sole 
 essence and principle of Wealth, it could not be otherwise. Be- 
 cause, if a thing is to be Exchangeable, there must be a Demand 
 for it. If I offer something for sale, what is necessary that it 
 should be sold ? Simply that some one else should Desire and 
 Demand it 
 
 The author of the Eryxias over and over again points out that 
 Demand is the sole cause which constitutes anything Wealth : 
 that anything, whatever its nature may be, is Wealth so long as 
 
DEMAND THE SOLE CAUSE OF VALUE 121 
 
 ifc is Demanded and paid for : and that a thing ceases to be 
 "Wealth when it ceases to be Demanded. He pointed out that 
 the local money of different places is only Wealth when and 
 where it has the Power of Purchasing : and is not Wealth when 
 and where it has no Power of Purchasing 
 
 It has been already shewn that the true meaning of the word 
 XpfjiuM, which is one of the most usual words in Greek for 
 Wealth, is simply " Anything tMt is "Wanted and De- 
 manded : " and that things are only xPVl^"-'^'^> where they 
 are ^PW'-H-'^i or Demanded : and that when they are not 
 xprjo-t/^a, Demanded, they are not ^pw"'^") "Wealth 
 
 The very same doctrine is laid down in Eoman Law. It is 
 said there that anything is Wealth which can be bought and sold : 
 or which is Exchangeable : and for that reason they class mere 
 Abstract Eights, not associated with any material substance, 
 under the terms Pecunia, Res, Bona, Merx, because they can be 
 bought and sold. And it is the same in every system of Juris- 
 prudence 
 
 Here it is quite clear that we have got the true Origin, 
 Source, Cause, or, in the language of Bacon, the Form of 
 Value : it is Demand. Value is not a Quality of an object, 
 but it is an Affection of the Mind. Value, in Latin, is 
 sestimatio. The sole Origin, Source, and Cause of Value is 
 Human Desire : when there is a Demand for things they 
 have Value : when the Demand increases (the Supply being sup- 
 posed the same) the Value increases : when the Demand decreases 
 the Value decreases : and when the Demand altogether ceases, the 
 Value is altogether gone 
 
 Boisguillebert, the morning star of Economic Science, saw 
 this most clearly. He says — '' Gonsommation {Consumption or 
 Demand) is the principle of aU Wealth." " All the revenues, or 
 rather, all the riches in the world, consists in Consumption (De- 
 mand): all the most exquisite fruits of the earth, and the most 
 precious products, would be nothing but rubbish if they were not 
 Consommes (Demanded) " 
 
 The Italian Economists are very clear and consistent in 
 shewing that Human Wants and Desires are the Cause of all 
 Value. G-enovesi clearly points out that the words prezzo, pregio, 
 
122 THBOBY AND PRACTICE OF BANKING 
 
 stimd, valuta, valore, are words of relation, and not absolute : and 
 that they are not applied to Intrinsic Qualities. That though 
 money is the apparent or proximate measure, the ultimate measure 
 to which not only things but their price is referred, is man him- 
 self. Nothing has Value where there are no men : and the very 
 things which have a low value where men are few, have a very 
 high value where there are many people : which is the reason why 
 things and services have a much higher Value in the Capital than 
 in distant provinces 
 
 " Men, however, do not give Value to things or services unlesB 
 they want them. Hence our wants are the first source of the 
 Value of all things : and Price is the power to satisfy our 
 wants." He says that nothing has Value except in relation to 
 these Wants or Demands. He shews how Prices are always 
 determined by Supply and Demand : and he says, " Value is 
 the child of Demand " 
 
 So Beccaria says — " Value is a substance which measures 
 the Estimation in which men hold things " 
 
 Verri shows that it is the Wants of men which give rise to 
 commerce : and as their ideas and wants increase, so does com- 
 merce increase. Nations which increase their wants increase 
 their power and their happiness. Desire or Demand incites man 
 to commerce. Commerce requires Demand and abundance : 
 Desire for the merchandise sought, and abundance to give in 
 ■exchange for it : and as a nation progresses from the few and 
 simple wants of the savage state to new wants and necessities, it 
 must proportionally increase its annual production, so that it may 
 have enough beyond its annual Consumption to purchase foreign 
 goods. They then require something to ascertain the equality 
 -between what they give and what they receive. Value is a word 
 which denotes, the Estimation which men make of a thing." 
 Verri also shews that all variations in price proceed from 
 variations in Supply and Demand 
 
 The Physiocrates, or the first school of Economists in modem 
 times, made all Value proceed from Demand : they showed that 
 things which remain without Demand (Consommation) are without 
 Value 
 
 Condillac is very clear and explicit on this subject. He begins 
 Jiis work by investigating the foundation of the Value of things, 
 
LABOtfli NOT THE CAUSE OF VALUE 123 
 
 and shows that it originates entirely from the Wants and 
 Desires of men. Those things which satisfy some want have 
 utihty, and this Want or Estimation is called Value 
 
 As people feel new wants they learn to make use of things 
 which they did not before. They give, therefore, Value at one 
 time to things to which, at another time, they do not 
 
 Fence all Value resides in the Mind, and he says—" This 
 Esteem is what is called Value." And he shows that all 
 variations in Value proceed from variations in Demand and 
 Supply 
 
 Error of the Doctrine that Labour is the Cause of Value 
 
 13. All this is so obvious that it might seem superfluous to 
 dwell upon it, But, unfortunately, English Economics has been 
 overrun and infested with another doctrine, namely that Labour 
 is the Cause of all Value : and nothing can be done in Eco- 
 nomics, and especially in the Theory of Credit and Banking, until 
 this fatal error is entirely exterminated 
 
 Locke, as far as we are aware, was the writer who originated 
 the notion that all Value is founded on Labour. As this 
 passage is but very little known, we must make room for it, 
 though it is rather long 
 
 After showing that the foundation of the right of appro- 
 priating portions of the earth, and its products, by private persons 
 originated in the Labour they bestowed on them, he says — 
 
 " Nor is it so strange as, perhaps, before consideration it might 
 appear, that the Property of Labour should be able to overbalance 
 the community of land : for it is Labour, indeed, that puts the 
 difference of Value upon everything : and let any one consider 
 what the difference is between an acre of land planted with 
 tobacco and sugar, sown with wheat or barley, and an acre of 
 the same land lying in common, without any husbandry upon it, 
 and he wiU find that the improvement of Labour makes the 
 far greater part of the Value. I think it will be but a very 
 modest computation to say, that of the products of the earth 
 iiseful to the life of man, nine-tenths are the effects of Labour : 
 nay, if we will rightly estimate things as they come to our use, 
 and cast up the several expenses about them, what in them is 
 
124: THEORY AND PRACTICE OF BANKING 
 
 purely owing to nature, and what to Labour, we shall find that in 
 most of them niaety-uine hundredths are wholly to be put on the 
 account of Labour 
 
 " There cannot be a clearer demonstration of anything, than 
 several nations of the Americans are aware of this, who are rich 
 in land and poor in all the comforts of life : whom nature having 
 furnished as liberally as any other people with the materials of 
 plenty, i.e., a fruitful soil, apt to produce in abundance what 
 might serve for food, raiment, and delight ; yet, for want of 
 improving it by labour, have not one-hundredth part of the con- 
 veniences we enjoy : and a king of a large and fruitful territory 
 there, feeds, lodges, and is clad worse than a day-labourer in 
 England 
 
 " To make this a little clearer, let us but trace some of the 
 ordinary provisions of life through their several progresses, before 
 they come to our use, and see how much of their value they receive 
 from human industry. Bread, wine, and cloth are things of daily 
 use, and great plenty : yet, notwithstanding, acorns, water, and 
 leaves, or clothing, or skins, must be our bread, drink, and 
 clothing, did not Labour furnish us with these more useful com- 
 modities : for whatever bread is more than acorns, wine than 
 water, and cloth or silk than leaves, skins, or moss, that is wholly 
 owing to Labour and Industry : the one of these being the food 
 and raiment which unassisted nature furnishes us with : the other, 
 provisions which our industry and pains prepares for us : which 
 how much they exceed the other in value, when any one hath 
 computed, he will then see how much Labour makes far the 
 greater part of the value of things we enjoy in this world : and 
 the ground which produces the materials is scarce to be reckoned 
 on, as any, or at most, but a very small part of it : so little, that 
 even among us, land that is left wholly to nature, that hath no 
 improvement of pasturage, tillage, or planting, is called, as indeed 
 it is, waste : and we shall find the benefit of it amount to little 
 more than nothing 
 
 " An acre of land that bears here twenty bushels of wheat, and 
 another in America which, with the same husbandry, would do 
 the like, are without doubt of the same natural intrinsic value : 
 but yet the benefit mankind receives from the one in a year is 
 worth £5, and from the other probably worth a penny, if all the 
 
LOCKE ON VALUE 125 
 
 profit an Indian received from it were to be valued and sold here : 
 at least I may truly say not one-thousandth. It is Labour, then, 
 which puts the greatest part of the value on land, without which 
 it would scarcely be worth anything : it is to that we owe the 
 greatest part of all its useful products : for all that the straw, 
 bran, bread of that acre of wheat is more worth than the product 
 of as good land which lies waste, is all the effect of Labour ; for 
 it is not barely the ploughman's pains, the reaper's and the 
 thresher's toils, and the baker's sweat, is to be counted in the 
 bread we eat : the Labour of those who broke the oxen, who 
 digged and wrought the iron and stones, who felled and framed 
 the timber employed about the plough, mill, oven, or any other 
 utensils, which are a vast number, requisite to this corn, from its 
 being seed to be sown to its being made bread, must all be charged 
 on the account of Labour, and received as an effect of that : 
 nature and the earth furnished only the almost worthless mate- 
 rials as in themselves. It would be a strange catalogue of things 
 that industry provided and made use of about every loaf of bread 
 before it came into our use, if we could trace them : iroUj wood, 
 leather, bark, timber, stone, brick, coals, lime, cloth, dyeing, drugs, 
 pitch, tar, masts, ropes, and all the materials made use of in the 
 ship that brought any of the commodities used by any of the 
 workmen to any part of the work : all which it would be 
 impossible, at least too long, to reckon up " 
 
 We have given this extract at length because it is probably 
 the most elaborate Economical analysis of Price of its time : and, 
 as far as we are aware, was the first assertion that Value is due to 
 human Labour. The doctrine that all Wealth is the produce of 
 Land and Labour became very common among the early thinkers 
 on Economics. Smith constantly repeats the phrase, though, as 
 we have shown elsewhere, he is quite contradictory to himself 
 
 Eicardo, perceiving the inconsistency of Smith's fundamental 
 doctrine of Value, finally rejected Exchangeability as the test of 
 Value, and adopted Labour as the Cause, or Form of Value — " In 
 speaking, however, of Labour as being the foundation of all 
 Value." He also maintains that if commodities were always pro- 
 duced by the same Quantity of Labour they would always be of 
 the same Value 
 
 McCulloch also maintained that Labour is the Cause of all 
 
126 THEORY AND PRACTICE OP BANKING 
 
 •Value — "Nature is not niggard nor parsimoniousr Her rude 
 products, powers, and capacities are all offered gratuitously to 
 man. She neither demands nor receives an equivalent for her 
 favours. An object which may be appropriated, or adapted, to 
 our use without any voluntary Labour on our part may be of the 
 highest utility, but as it is the free gift of nature, it is quite 
 impossible it can have the smallest Value" 
 
 Also — " In its natural state matter is very rarely possessed of 
 any immediate or direct utility, and is always destitute of Value. 
 It is only through tlie Labour expended on its appropriation, and 
 in fitting and preparing it for being used, that matter acquires 
 Exchangeable Value, and becomes Wealth " 
 
 So Carey, the American Economist, adopts to the fullest extent 
 the doctrine that Labour is the Cause of all Value 
 
 Now it is impossible to stir a step in this subject until this 
 contradiction is cleared up ; and we determine whether Labour, 
 or Exchangeability, i.e., Demand, is the Cause of 
 Value 
 
 Let us take a few examples. The Land upon which a great 
 city is built has enormous Value. Land, in the centre of London, 
 frequently sells at the rate of £1,000,000 an acre. Where is the 
 Labour there ? 
 
 As we recede from the centre the Value of Land diminishes :. 
 at Charing Cross it is much less than in the City : and at Ken- 
 sington much less than at Charing Cross 
 
 Moreover, Land in the same locality has very different Valne 
 according to its position. A frontage in a main thoroughfare like 
 Kegent Street, Fleet Street, Cheapside, or Cornhill, is of far more 
 value than an equal space of ground in a back street 
 
 How are these differences of Value due to differences of 
 Labour, when, as we have seen, there has been no Labour at all 
 bestowed upon the Land ? 
 
 As the tide of population, fashion, and wealth flows towards a 
 locality, the ground in it rises rapidly in Value : when the tide of 
 population, fashion, and wealth deserts a place, the ground , in it 
 falls rapidly in Value. How are these changes in the Value of 
 Land due to variations in Labour ? 
 
 The ground in the centre of London, Paris, Berlin, Vienna, 
 
LABOUR NOT THE CAUSE OF VALUE 127 
 
 and innumerable other cities, has enormous Value. There are 
 other places, now desolate and lonely, which were once the sites of 
 great cities. When the chariots and the horsemen were pouring 
 forth in multitudes from the hundred-gated Thebes, the land in it 
 had immense Value. So, with Memphis, Nineveh, Babylon, and 
 numberless other places. Where is their Value now ? Yet the 
 ground remains exactly the same as ever it was. If London, 
 Paris, Berlin, and Vienna should ever come to be as Babylon and 
 Nineveh are to-day, where would the Value of the Land be ? 
 When the future Belzoni or Layard comes from New Zealand to 
 sketch the ruins of St. Paul's from a broken arch of London 
 Bridge, will the ground near what was once the Eoyal Exchange 
 sell for £70 the square foot ? 
 
 When a fair is held in a country town persons pay a good sum 
 for leave to erect booths and tents upon the common. At other 
 times they would pay nothing. The Land has Value at one time 
 and not at another. How is its Value due to Labour ? 
 
 In the Midland counties of England a fine oak tree will sell 
 for £60 or £100 as it stands on the ground. How is its Value 
 due to Human Labour ? 
 
 It is said that, in 1810, an oak tree was cut down at Gelenas, 
 in Monmouthshire, whose bark sold for £240, and the wood for 
 £670. How was its Value due to Human Labour ? 
 
 Some time ago a whale was stranded on the shore of the Firth 
 of Forth : it was sold as it lay on the beach for £70. How was 
 its Value due to Human Labour ? 
 
 Some short time ago it was the fashion of European ladies to 
 pile huge masses of hair, termed Chignons, on their heads, in 
 imitation of their swarthy sisters of Central Africa : It was then 
 not unusual for a girl's fine head of hair to sell for £5, or even 
 much higher sums. Was the Value of the girl's hair due to 
 Human Labour ? 
 
 Now, by the fundamental Laws of Natural Philosophy, if it 
 could be shown that there was a single instance of Value not due 
 to Labour, that would be sufficient to overthrow the doctrine that 
 all Value is due to Labour : or that Labour is necessary to Value. 
 Bat, instead of a single instance, there are multitudes'. In fact, it 
 may be safely asserted that not twenty per cent, of valuable 
 things have any Labour associated with them at all 
 
128 THEORY AND PRACTICE OF BANKING 
 
 Even tvhere Labour has been bestowed on anything tvhich has 
 Value, it is not the Labour which is the Cause of its 
 Value ; but the Demand for it 
 
 13. It is perfectly easy to perceive the fallacy that peiTades 
 the eloquent and elaborate analysis of Locke, which has been 
 followed by so many writers. It is perfectly true that Labour 
 has been bestowed on the Land : and that the Land has great 
 Value : but it is quite easy to see that the Labour is not the 
 Cause of the Value of the Land : for, suppose that the 
 people of England were, like the Phocsans and Teians of old, to 
 emigrate in a body, where would the Value of the Land be ? 
 
 If there is a country in the world whose Value might be most 
 plausibly said to be due to Labour, that country is Holland. 
 "By nature a wide morass, in which oozy ilands and savage 
 forests were interspersed among lagoons and shallows : a district 
 lying partly below the level of the ocean at its higher tides, sub- 
 ject to constant overflow from the rivers, and to frequent and 
 terrible inundations by the sea" — there are probably not ten square 
 miles of its surface which do not owe their existence, as a habit- 
 able abode for men, to the incredible Labour of its hardy sons. 
 And it was one of the richest spots on the face of the globe. 
 Once, when it seemed that the last hour of the Republic had 
 come, surrounded and overwhelmed by the forces of Louis XIV., 
 it was seriously contemplated to emulate the example of the 
 ancient cities, and transport the whole people to their Eastern 
 possessions. If this desperate resolve had been carried into effect, 
 where would the Value of the Land have been ? 
 
 It is quite evident that the Land owes its Value, not to the 
 Labour bestowed upon it, but to the Demand for its pro- 
 ducts ; and persons bestow their Labour upon the Land because 
 its Products have Value. It is the Wants and Desires of men 
 for the products of the land which induce persons to bestow their 
 Labour upon the land. But if persons ceased to demand the^e 
 products, their value would instantly die off 
 
 And even the writers to whom the doctrine that Labour is the 
 Cause of all Value and all "Wealth is chiefly due, have contradicted 
 themselves. Thus Smith, who at the beginning of his work fills. 
 
THE CAUSE OF VALUE 129 
 
 the minds of his readers with the notion that all Value is due to 
 Labour, says that the vine " is more affected by the difference of 
 soils than any other fruit tree. From some it derives a flavour 
 which no culture or management can equal, it is supposed, on any 
 other. This flavour, real or imaginary, is sometimes peculiar to 
 the produce of a few vineyards : sometimes it extends through the 
 greater part of a large province. The whole quantity of such 
 wine that is brought to market falls short of the effectual demand, 
 or the demand of those who would be willing to pay the whole 
 rent, profit, and wages necessary for preparing and bringing them 
 thither, according to the ordinary rate at which they are paid on 
 common vineyards. The whole quantity, therefore, can be dis- 
 posed of to those who are willing to pay more, which necessarily 
 raises the price above that of common wine. The difference is 
 greater or less, according to the fashionableness or scarcity of the 
 wine render the competition of the buyers more or less eager. 
 Whatever it be the greater part of it goes to the rent of the land- 
 lord. For though such vineyards are in general more carefully 
 cultivated than most others, the high price of the wine seems 
 to be not so much the Effect, as the Cause of the careful 
 cultivation " 
 
 Now this last sentence is entirely antagonistic to the part of 
 the work in which it occurs. Here Smith sees and acknowledges 
 that it is Value which is the Inducement to Labour. He also 
 observes that if a guinea, which is certainly the produce of Land 
 and Labour, would exchange for nothing, it would have no Value. 
 Thus Smith, at last, comes to Exchangeability, i.e., De- 
 mand, as the real essence and principle of Value and Wealth 
 
 So, also, Eicardo, in combating Malthus' Theory of Eent, says 
 — " It is the rise in the Market Price of Corn which alone en- 
 courages production : for it may be laid down as a principle 
 uniformly true that the only great encouragement to the increased 
 production of a commodity is its Market Value exceeding its 
 Natural or Necessary Value " 
 
 So McCuUoch says — " Demand may therefore be considered 
 as the ultimate Source and Origin of both Exchange- 
 able and Heal Value : for the Desire of individuals to 
 possess themselves of articles, or rather the Demand for them 
 
 K 
 
130 THEORY AND PRACTICE OF BANKING 
 
 originating in that Desire, is the sole Cause of (heir being p 
 or appropriated" 
 
 Thus it is clearly seen that Smith, Eicardo, and McC 
 who are the chief writers in this country who, have mail 
 that Labour is the Cause of, and Necessary to all Val 
 Wealth, have most manifestly contradicted themselves ; 
 the last quoted passage have admitted that it is Value, or D^ 
 which is the Inducement to Labour 
 
 We now, then, see that the true doctrine in Economics 
 it is Value, or Demand, which is the Inducement to Labou 
 the tribunes of the Romans said, long ago — 
 
 " Eo impendi Laborem ac periculum . . . magna j 
 proponantur " 
 
 " Labour and danger are encountered . , . becatesi 
 rewards are offered " 
 
 So says Hume — " Our passions (i.e.. Desires or Demanc 
 the only causes of Labour " 
 
 Condillac says—" A thing has not Value because it hi 
 much, as people suppose ; but money is spent in produci 
 because it has Value " 
 
 So Whately says — " In this, as in so many other poi 
 Political Economy, men are prone to confound Cause and ] 
 It is not that pearls fetch a high price because men have 
 for them : but, on the contrary, men dive for them because 
 fetch a high price " 
 
 Labour itself has no Value unless there is a Demand f 
 and the products of Labour have no Value unless there 
 Demand for them. The Value of the Land arises solely fro 
 Demand of men for its products. And as this Demand, 1 
 very physical constitution of men is permanent, the land 
 source from which an annual revenue springs : and the Va] 
 an estate in land is found by finding the present Value of i 
 annual products for ever 
 
 This conception may be generalised, and we may afSrm 
 if men require any service continuously, and will pay to obt£ 
 the source which supplies this service, is a great Estate 1 
 produces a Revenue similar to land 
 
DEMAND THE SOLE QAUSE OE VALUE 131 
 
 Thus the Desire, oi' Demand of mea for Law, Medicine, 
 Surgery, Bagineering, Military and Naval Services, and also Art 
 and Literature ; for professions and trades of all Sorts constitutes, 
 each of them, a great Estate, all deriving their Value from one 
 ■ great common principle — the Wants of mankind, and their wil- 
 lingness to pay for then- products. And as it is this Desire, or 
 Demand, which calls them into existence, and confers Value on 
 them : so, a cessation of this desire, and the cessation of the 
 wilhngness to pay for their products, would immediately annihilate 
 their Value 
 
 14. Hence we see that Demand is .the sole Origin, 
 Source, or Cause of Value. It is Demand, or Con- 
 sumption, and not Labour, which gives Value to a, 
 Product. It is not the Labour which gives Value to the Pro- 
 duct : but the Demand for the Product which gives Value to the 
 Labour. Hence it is not Labour which is the Cause of 
 Value, but it is Value which is the Cause of, or Induce- 
 ment to Labour 
 
 All Production is founded on Speculation. Producers find out 
 or think of what other people want, and then they produce, or 
 offer for sale. A man may have things he wants to sell, but if no 
 One Will buy them they have no Value. He may wish to possess 
 things offered for sale by others, but if they do not want, and 
 will not take in exchange, what he offers, no exchange can take 
 place. In order to constitute an exchange two persons must each 
 produce something, and each must want what the other produces. 
 And it is the Reciprocal Desire of each for the product of 
 the other that gives rise to an exchange. Hence the Concur- 
 rence of two Minds is essential to produce an exchange, or 
 an Economic phenomenon 
 
 A constant supply of some things is wanted. Inventors hope 
 that they may excite or create a desire : but it is no reason that 
 people will buy because others produce : aad if none want, or will 
 buy, what is produced, such an article has no Value. k\\ pro- 
 duction, then, is founded on speculation, varying through all 
 degrees of prudence, certainty, and risk. All producers speculate 
 that there will not only be persons who want their products, but 
 will want them to such a degree of intensity as to be willing 
 
 K 2 
 
132 THEORT AND PRACTICE OF BANKING 
 
 to pay a sum sufficient to remunerate them for their time and 
 Labour 
 
 As Wbately said, pearls do not fetch a high price because 
 persons dive for them : but persons dive for -them because other 
 persons desire and demand them so much that they are wilUng to 
 pay a high price for them. Which entirely agrees with Oondillac's 
 observation that things are not dear because much cost of pro- 
 duction has been bestowed upon them; but much cost is bestowed 
 upon producing them because other people demand and want them 
 so much as. to be willing to pay a high price for them 
 
 Hence we have these fundamental truths that Speculation 
 is the Mother of Production : and also it is not the La- 
 bour of the Producer which constitutes a thing Wealth, 
 hut the Demand of the Consumer or Purchaser 
 
 Demand confers Value on Things upon which no Labour 
 was ever bestowed 
 
 15. And, as we have seen, that however much Labour may 
 be bestowed on a thing, it has no Value unless it is Wanted and 
 Demanded : so Demand confers Value on a thing, and constitutes 
 it Wealth, although no Labour was ever bestowed upon it 
 
 Thus it is the Demand for the ground upon which a city is 
 built that confers enormous Value on the ground, though no 
 Labour was ever bestowed upon it ; and it is the greater Demand 
 which gives very different Values to spaces of ground in the same 
 locality 
 
 It is Human Desire and Demand which alone constitutes the 
 fruits of the earth, as well as cattle, and herds, and flocks ; as 
 also the various kinds of timber trees, oaks, beeches, elms, teak, 
 mahogany, fir trees, and others : Wealth 
 
 It is Demand which discriminates between the diamond and 
 the rubbish it is found in, and between the pearl and its shell 
 
 So a recent lively writer, describing the splendour of the 
 houses in some of the remote country districts of Spain, says— 
 " Houses and splendid furniture in such places are nearly Value- 
 less, because there is no one to hire the former or to buy 
 the latter " 
 
 So, in the extract we have already given from Senior, speaking 
 
V^' 
 
 CEEDITS HAVE VALUE 133 
 
 of Personal Qualities as Wealth, he says — " They may be rendered 
 Valueless by any change in the custom of the country which 
 shall destroy the Demand for his seryices " 
 
 We have now said enough to overthrow the doctrine that 
 Labour is the Cause of, or even Necessary to Value : 
 and have shown that it proceeds entirely from Demand : or 
 that ExchangeabiUty is the sole real and true essence and principle 
 of Value and Wealth ; in strict accordance with the unanimous 
 doctrine of ancient writers and foreign Economists 
 
 This is all that is necessary for the purposes of our present 
 work. We must refer to what we have said elsewhere for the 
 complete Theory of Value 
 
 Credits or Debts have Value because they ivill be paid . q^ 
 
 in Money 
 
 16. The necessity for and the bearing of this investigation 
 on our present subject is obvious. For if it be laid down that 
 Labour is necessary to all Value, how could the Notes of the Bank 
 of England, or of any other Bank, have any Value ? How could 
 a Bill of Exchange on the most solvent merchant have Value ? 
 
 Kow every one knows that a Credit in Bank, or a Bank Note, 
 has Value, because the Bank will pay it in gold : a Bill of Ex- 
 change on a solvent merchant has Value because he will pay it in 
 gold at the proper time. And the gold the banker or the merchant 
 pays his Notes or Bills with is the Value of the Note or Bill 
 
 So Mill, who is a devotee of Ricardo, says—" An Order or 
 Note of hand, or Bill payable at sight, for an ounce of gold, while 
 the Credit of the giver is unimpaired, is worth neither more nor 
 less than the Gold itself " 
 
 So the whole of the second school of Economists, Smith, Say, 
 and Mil], class Bank Notes, &c., under the head of Circulating 
 Capital 
 
 Smith himself acknowledges that if Money were not Exchange- 
 able it would have no Value : as the author of the Eryxias showed 
 
 The fact is, that a Bank Note and a Bill of Exchange have 
 Value for precisely the same reason that Money itself has Value : 
 because they are Exchangeable. Bank Notes and Bills are ex- 
 
134 THEORY AND PRACTICE OF BANKING 
 
 changeable for Money, and Money is exchangeable for other 
 products or services 
 
 Thus we see that so long as ideas of Value are mixed up with 
 and founded on Labour, the subject is plunged into inextricable 
 difficulties and contradictions. But as soon as we clearly adopt 
 Exchangeability as the sole test of Value, and the sole essence and 
 principle of Wealth, all difiiculties and obscurities are cleared up 
 and dispersed like a fog before the morning sun 
 
THE GENERAL EQUATION OF ECONOMICS 135 
 
 Section III 
 
 On the General Law of Value : or the General 
 Equation of Economics 
 
 17. Having in the preceding section given the Definition of 
 Value : and found that its Origin, Form, or Cause, resides exclu- 
 sively in the Human Mind : the last branch of our inquiry 
 is to determine the General Law of Value : or the 
 General Equation of Economics : that is, to discover a 
 Single General Law which governs the changes in the Ex- 
 changeable Eelations of All Quantities, whatever their nature 
 may be, at all times and in all places 
 
 The acknowledged principles of Inductive Science show that 
 there can be but One General Law of Value. We have seen 
 that there are Three distinct species of Economic Quantities : 
 and we have generalised all the Fundamental Concepts of Eco- 
 nomics to grasp all these Quantities. These three orders of 
 Quantities can be exchanged in Six different ways. Our present 
 object is to investigate a General Equation which shall be appli- 
 cable to all the Six species of exchanges indifferently. Tlie 
 Law which governs the Exchangeable Relations of Material Pro- 
 ducts must equally govern the Exchangeable Relations of Debts 
 
 Suppose we make £ the general symbol of an Ecoiiuinic 
 Quantity, i.e., of anything whose Value can be measured in Money 
 — and representing these various species of Quantities under the 
 General Symbol £, we may say that there are in any country 
 Quantities of this sort — 
 
 £546,497,231 
 
 £347,879,261 
 
 £225,430,221 
 &c. &c. &c. 
 Now, we aifirm, by virtue of the principle of the Continuity of 
 Science, and of the great Algebraical doctrine of the Permanence 
 
136 THEORY AND PUACTICE OF BANKING 
 
 of Equivalent Forms, that whatever can be proved to be true 
 Econoraically of any one of this series of Quantities must be true 
 of them all. No one looking at the series of Quantities placed 
 above could tell of what species they were. Some may be land, 
 some corn, some minerals, some ships, some money, some Credit 
 or Debts, some labour, some shares, or copyrights, or patents, 
 and multitudes of other things. Now there can be but One 
 Cause of Value for them all : and we have shown that De- 
 mand is the Single General Cause of the Value of all Economic 
 Quantities 
 
 Having, then, obtained these independent Economic Quan- 
 tities, the whole purpose and object of the Science is to discover 
 the Single General Law which governs the variations of 
 their Exchangeable Relations. It is clear, by the principle of the 
 Gontinuity of Science, and the analogy of all other Physical 
 Sciences, that however varied and complicated the different Phe- 
 nomena of Value may be, there can, by no possibility, be more 
 than One General Law of Value, or a Single Ge- 
 neral Equation of Economics : whatever it may be 
 
 18. Now, let A and B be any two Quantities whatever, 
 supposed perfectly general : it is quite clear that their Exchange- 
 able Kelations are contained in the following Limits — 
 
 oo A = OB 
 
 &c. = &c. 
 
 2A = iB 
 A = B 
 
 iA = 2B 
 
 &c. = &c. 
 
 A = ooB 
 The meaning of which is simply this — Let the Exchangeable 
 Relation between A and B gradually and continuously change 
 from where the greatest possible Quantity of A will exchange for 
 the least possible Quantity of B, to where the least possible 
 Quantity of A will exchange for the greatest possible Quantity 
 of B 
 
 Now the Law of Continuity says that a Quantity cannot pass 
 from one amount to another by any change of conditions, without 
 
ECONOMICS AS A PHYSICAL SCIENCE 137 
 
 passing through all intermediate degrees of magnitude according 
 to the intermediate conditions 
 
 Hence we may affirm, by virtue of the Law of Continuity — 
 
 1. That if it can be indiibitahly proved that Any par- 
 ticular Law holds good at any one point in the range of Prices, 
 thai same Law must necessarily hold good at All points through- 
 out the whole range of prices 
 
 2. That as the Symbols A and B are perfectly general, if 
 any Law whatever can be proved to hold good in the Variation 
 of the Exchangeable Relation of Any Two Quantities whatever, 
 that Law must necessarily hold good in the Exchangeable Rela- 
 tions of all Quantities whatever 
 
 Thus, by the Law of Continuity, we are enabled to affirm 
 that — 
 
 If any Law whatever can be proved to be true at any one 
 point in the range of Prices, between any Two Quantities what- 
 ever, that same Law must be necessarily true at All points in 
 the range of Prices, and between All Quantities whatever 
 
 And, as a necessary coroUary from the preceding, we may 
 affirm that — 
 
 If any Law whatever can be proved Not to be true ivith 
 regard to the Relation of Any Ttvo quantities whatever, that 
 Law cannot be a General Law of Economics 
 
 Furthermore, as ifr is a universally acknowledged principle of 
 Natural Philosophy that that Law only is the true one which 
 explains all the phenomena, it may be laid down as an un- 
 questionable truth in Economics that — 
 
 If two or more Forms of Expression will explain or account 
 for any phenomena regarding Price, or the Change of Price, 
 that Form of Expression only is to be adopted as the true one 
 which explains all the phenomena in the science, and not that 
 individual case, or class of cases, only 
 
 19. We now see the meaning of saying that Economics is a 
 Physical Science. Because there being Three orders of Exchange- 
 able Quantities, and therefore Six species of Exchanges, the object 
 of the Science is to determine the Laws of th» Phenomena of these 
 Exchanges — that is, to determine the Laws which govern the 
 changes in their numerical Kelations of Exchange. Hence we 
 
138 THEORY AND PRACTICE OF BANKING 
 
 have a new order of Variable Quantities : and the Laws which 
 govern this new order of Variable Quantities must be in strict 
 harmony with the Laws which govern the Relations of Variable 
 Quantities in general. The same general principles of reasoning 
 which govern the varying relations of the stars in their courses, 
 must govern the varying relations of Economic Quantities 
 
 The fact is, that Astronomy is the Physical Science which is 
 the type of Economics. The fundamental problem of Economies 
 is identically the same as the fundamental problem of Astronmy, 
 The Astronomer sees a vast number of heavenly bodies moving in 
 all sorts of directions — sometimes advancing, sometimes appa- 
 rently stationary, sometimes retrograding^and his object is to 
 discover a single General Law which accounts for and governs all 
 these varying relations. So the Economist sees a multitude of 
 Quantities constantly changing their numerical relations to each 
 other, and his object is to discover a single General Law *hich 
 governs all these varying relations. Economics, like Astronomy, ^ 
 is a pure Science of Katios 
 
 Lord Lauderdale's Law of Value 
 
 20. The fundamental problem of Economics, then, is this-^ 
 Let any number of Economic Quantities of any form have a given 
 Eelatlon to each other at any given instant — to discover the Law 
 by which any change in their Exchangeable Relations will take 
 place 
 
 Lord Lauderdale in a work quoted by Ricardo, says 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 of Demand 
 
 It would Diminish in Value — 
 
 1. From an Increase of Quantity 
 
 2. From a Diminution of Demand 
 
 Now as the Variation of the other Quantity will be influenced 
 
THE GENERAL EQUATION OF ECONOMICS 139 
 
 by the same Four Causes : it is quite clear that the 
 Variation of both. Quantities will be influenced by Bight 
 Independent Causes : and if these be connected in the Form of an 
 Algebraical Equation, that will manifestly be the true General 
 La"w of Value : or the true General Equation of Eco- 
 nomics 
 
 This G-eneral Equation must manifestly comprehend the whole 
 Science of Pure, or Analytical Economics : and as it is in the 
 form of a fraction containing no less than Eight Independent 
 Variables, it at once shews the extremely complicated nature of 
 the science 
 
 All Economists admit that the Law of Supply and Demand, of 
 which the above extract from Lord Lauderdale is the full expression, 
 is true when the prices of things are very low : they also admit 
 that it is true when the prices of things are very high : it is there- 
 fore admited to be true at the Extremes of prices : and 
 therefore it is manifest by the Law of Gontinuity that it must 
 also be true at all intermediate points in the range of prices : that 
 is, it must be universally true in all cases 
 
 The General Equation of Economics is therefore a 
 Compound Katio of a very complicated nature : and to apply 
 it in particular cases requires a profound knowledge of the 
 ciroamstances : but yet it is demonstrably true : and the whole 
 science must be constructed taking that Equation as the basis 
 
 In obtaining this General Equation, we have followed the 
 method usual in aU Physical science. We have obtained the 
 Independent Variables, and they are connected by a General Law 
 or Formula. This insures Certainty to the Science : but it is in 
 the last point that the real difficulty arises, namely, in giving 
 Precision, or Numerical amounts, to the Co-efficients. It is difficult, 
 probably impossible, to say what numerial variations in Supply 
 and Demand produce definite variations in Value. This has been 
 attempted in some cases, as in that of corn, but it is manifestly 
 impossible to obtain exact numerical data : and, in fact, though 
 the same General Law is true, the same absolute variations in 
 Supply and Demand of various quantities will produce great 
 differences in the yariations of their numerical Values 
 
140 THEORY AND PRACTICE OF BANKING 
 
 It is this difficulty, or rather entire impossibiUfcy, of giving 
 exact numerical value to the co-efficients that maies many persons 
 suppose that it is impossible to make Economics an exact science. 
 It is sometimes supposed that for a science to be an "exact" one, 
 it is necessary that its lavrs should be capable of exact QuantUa- 
 tive statement. This, however, is an error which has been specially 
 noticed by Oomte, who well points out the difference between 
 Certainty and Precision in science. To constitute an exact science 
 it is not necessary that its laws can be ascertained with numerical 
 precision, but only that the Keasoniug be exact, or certain. 
 He says that a dangerous prejudice has sprung up : that because 
 the precision of different sciences is very unequal, that their 
 certainty is so too. This tends to discourage the study of the 
 most difficult : Precision and Certainty are perfectly distinct. 
 An absurd proposition may be very precise: as for instance that 
 \:hB angles of a triangle are equal to three right angles. On the 
 other hand, a certain proposition may not be precise, as that a 
 man will die. Hence, although the different sciences may vary in 
 precision, that does not affect their certainty. This observation 
 applies very forcibly to Economics. Some persons are apt to 
 despise it because it does not bring out its results with the same 
 numerical precision as those of Mathematics. This, however, is a 
 grievous mistake. In Economics the Causes of phenomena can be 
 ascertained with absolute certainty : and if we want to produce 
 any required effect, the method of producing it can be pointed out 
 with absolute certainty. This is all that is necessary to constitute 
 an exact science : because the method of producing the result 
 being pointed out with Certainty, we have only to put it in force 
 until the required result is produced 
 
 In considering the Greneral Equation of Economics, we see the 
 application of Bacon's aphorism, " that which in Theory is the 
 Cause in Practice is the Eule." No other Quantities but Demand 
 and Supply appear on the face of the Equation : we therefore 
 learn that no other Causes influence Value, or changes of Value, 
 except Intensity of Demand and Limitation of 
 Supply. We learn that neither Labour nor Cost of Production 
 can have any direct influence on Value : and that if they do so 
 indirectly, it can only be by and through the means of affecting 
 the Demand or the Supply : and that no change of Labour or Cost 
 
ECONOMICS IS A PHYSICO-MORAL SCIENCE 141 
 
 of Production can have any influence on Value unless they 
 produce a change in the relation of Supply and Demand 
 
 By this means we are enabled to create a rigorously exact 
 Theory of Economics : and by reverently following the precepts of 
 the mighty prophet of Inductive Philosophy, and the examples of 
 the immortal creators of the various Inductive Sciences, it is seen 
 that Economics as a Moral Science is fitted to take rank by the 
 side of Mechanics and Optics as a great Positive Inductive 
 Physico-Moral Science 
 
1^2 THEORY JCST> PRACTICE OF BANKING 
 
 CHAPTER III 
 
 THE THEORY OP THE COINAGE 
 
 1. Having in the preceding chapters investigated the fun- 
 damental Concepts of the Science of Economics, which are 
 necessary to understand the subject of Credit and Banking : 
 and ascertained the General Law which governs the varying 
 relations of Economic Quantities : our next step is to investigate 
 the Theory of the Coinage. Economics is the Theory of Value 
 in general ; but univer saL-CUstoau-has-icui rid thj ^ cnpyenipi^jj^i^nf 
 expr.eBsiJiS^3[aJ.iiaJjL-a ne medium ; viz., M.on§ y. jm j^redl t. 
 These are the sole Economic Quantities with which Banking 
 deals. We shall, therefore, in this chapter investigate the Theory 
 of the Coinage : and in the following one the Theory of 
 Credit 
 
 2. "We have in the first chapter explained the circumstanceB 
 out of which the necessity for Money arose, and shown that many 
 substances have been used by different nations for this purpose : 
 but that Metal has advantages superior to any other substance ; 
 and of Metals, Gold, Silver, and Copper have been chiefly pre- 
 ferred. Gold and Silver in a perfectly pure state, however, are 
 far too soft to be used for this purpose : and it is necessary to mix 
 some other metal with them to harden them, which is called Alloy. 
 By a chemical law, when two metals are mixed together, the 
 mixture is harder than either of the metals in a pure state 
 
 Gold and Silver in the mass are called Bullion ; but as the 
 laws of all countries which use Gold and Silver as Money define 
 the quantity of alloy which is to be used with the pure metal, we 
 shall henceforth use the word Bullion to mean gold or silver in 
 the mass mixed with such a proportion of alloy as is ordered by 
 law, so as to be fit to be made into Money 
 
MEANING OF COINS 143 
 
 3. The purity of Gold is measured by 24th parts, termed 
 Carats ; aad ever since the 6th Edward VI. (1553) the Bullion 
 used for the gold coinage has been 22 carats of pure gold and 2 
 carats of alloy. This is called Crown Gold. The standard 
 of Silver Bullion was fixed by William the Conqueror at 11 ozs. 
 2 dwts. fine : or 222 dwts. of pure silver, to 18 dwts. of alloy : and 
 except during a short period of confusion, from the 34th Henry 
 VIII. (1543) to Elizabeth, has never been departed from. It is 
 called the " Old right standard of England," or " Sterling ; " 
 and as the Sovereigns of England, though they reduced the weight 
 of the Coin, never, with the slight exception just mentioned, 
 tampered with the purity of the metal, Sterhng came to signify 
 honest and true, or to be depended upon 
 
 In France, and those countries which have adopted decimal 
 coinage, Bullion is made of 9 parts fine metal and 1 part alloy: 
 but it is found in practice that the English proportion gives 
 greater durability to the metal, and, therefore, is better for a 
 coinage 
 
 4. Some nations have used simple Bullion as money: but 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 was neces- 
 sary both to weigh and assay the Bullion at each operation, which 
 was, of course, a great impediment to commerce. Other nations 
 adopt a more convenient practice. They cut the Bullion into 
 pieces of a certain definite weight, and affix a public stamp upon 
 it, to cevtify to the public that these pieces of Bullion are of a 
 certain weight and fineness. These pieces of BulKon with a public 
 stamp upon them, to certify their weight and fineness, and called 
 by a publicly recognised name, and intended to be used in com- 
 merce without further examination, are called Coins 
 
 5. The inconvenience of using masses of Bullion as money 
 is so obvious, and the expedient of cutting it into pieces of definite 
 weight and fineness, seems so simple^ that we should naturally 
 have expected that it must have been quickly invented by those 
 nations who first began to use Gold and Silver Bullion as money. 
 This, however, was certainly not the case. Silver and Gold were 
 
144 THEORY AND PEACTICE OF BANKING 
 
 used as money for ages before coining was thought of : and there 
 is every reason to believe that coining was invented by a people 
 ■who, before the invention, did not use gold and silver as money ; 
 and coining was practised by them for centuries before it was 
 adopted by nations who had used these metals as money for ages 
 
 This stamp or certificate, of course, in no way affects the Value 
 of the metal, or the Quantity of things it will exchange for. -Its 
 only object is to save the trouble of weighing and assaying the 
 Bullion in commercial transactions. Nor can the Name of the 
 Coin in any way affect its Value. Values, it is true, are estimated 
 in the number of these pieces of Bullion, or Coins : but it is 
 necessarily implied in the bargain that these Coins contain a 
 definite quantity of Bullion 
 
 It is also perfectly evident that if this process of stamping 
 Bullion, and so turning it into Coin, is done free of all expense: at 
 the will of any one who chooses to present Bullion and demand to 
 have it stamped: and also without any delay: the Value of metal 
 as Bullion must be exactly the same as the Value of the metal 
 as Coin 
 
 If, however, 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 any delay takes place in doing so, there will be a difference 
 between the Value of the metal as Bullion and as Coin, equal to 
 the charge for workmanship, the tax, and the amount of interest 
 accruing during the period of delay 
 
 These, however, are all fixed or constant quantities, which may 
 be ascertained, and they form the limits of the variation of the 
 Value of the metal in one form from its Value in the other form 
 
 In the following remarks we shall assume that there is no 
 charge for the workmanship, no tax, and no delay in doing it : no 
 obstruction, in short, of any form to changing the metal from one 
 form to the other 
 
 Upon these assumptions, then, we have this fundamental 
 principle of the Coinage — 
 
 Any quantity of Metal in the form of BulKon must be of 
 exactly the same Value a.i the same quantity of Metal in the form 
 of Coin 
 
 In the case of the Coinage, of England, no charge of any sort 
 is made for coining Gold Bullion : but as a considerable delay 
 
INVENTION OF COINING 145 
 
 may take place before any one who brings Bullion to the Mint 
 can have it coined, the 7 & 8 Vict. (1844), o. 32, s. 4, enacts that 
 every person may take standard Bullion to the Bank of England, 
 and that the Bank shall be obliged to give him Notes to the 
 amount of £3 17s. 9^. for every ounce of such Bullion. And as 
 the holder of Notes may demand legal coin for them, at the rate 
 of £3 17s. 10^^. per ounce, there is thus practically a difference 
 of l^d. per ounce between Gold Bullion and Gold Coin 
 
 6. In the times of the Homeric poems there was certainly 
 no money in use. And the words significative of wealth in Homer 
 give no preference to gold and silver above other things. On the 
 contrary, they are comparatively seldom mentioned. The Homeric 
 words expressive of wealth more frequently refer to cattle, or 
 horses, or agriculture. Thus we have iroX-ipp-qv, -TroXvySouVr/s, 
 
 TToXuiTnTOS, <j>i\oKT€avo'i, TToXyTTafjiMV, atj^veioi, TTokvKTqixoyv, TvoXvXyjlo';. 
 
 In Iliad vii. 180, and xi. 46, are almost the only instances in 
 which gold is especially alluded to as Wealth, ttoA.vxp'j'o-oio MuKiyVr;?. 
 When the Greek and Trojan leaders send spies to discover the 
 plans of the enemy, neither of them promises money as a reward. 
 Nestor, Iliad x. 215, promises the successful spy a black ewe 
 with its young, a matchless gift ; and Hector, x. 35, promises on 
 his side a chariot and a pair of horses 
 
 Most authorities consider that the Homeric poems were written 
 about the ninth century B.C. ; though many would place their 
 origin, at least, at a much more remote date. At that period, 
 therefore, there was no money of any sort in Greece, nor were 
 gold and silver ever referred to as measures of value ; when the 
 convenience of referring things to a common measure of value 
 was first thought of, oxen were used for that purpose, as we have 
 seen in the previous chapter. But some time after the Homeric 
 poems, though we have no means of conjecturing when, a money 
 of a curious nature came into general use throughout Greece. 
 Large iron or copper nails, called o/3eA.tcr/cot, of such a size that 
 six of them constituted a handful, were used as money 
 
 In the eighth century B.C. Argos was the most powerful State 
 in Greece, and was the metropolis both of the Pelopennesian and 
 Asiatic Dorians. At this period Pheidon of Argos was the most 
 powerful sovereign of Greece, and held the iland of ^gina in his 
 
146 THEORY AND PRACTICE OF BANKING 
 
 dominion. The Dorians carried on a very extensive commerce 
 with the Phenioians, and Pheidon adopted a system of weights from 
 them, which were afterwards called the ^gin^an. At the same 
 time he replaced the clumsy iron and copper nails in use as money 
 by a silyer coinage. He struck a coinage of silver to represent the 
 value of a handful of these clumsy nails: hence it was called 
 Apaxfi.-r]. Hence the standard unit of the Grecian coinage was 
 always called a drachma, and the smaller coins were o^eXoi. 
 Pheidon collected a number of these iron and copper nails, and 
 laid them up in the Temple of Juno, at Argos, as a curiosity 
 
 The Spartans, probably out of jealousy of the Argives, steadily 
 resisted the use of silver money, and adhered to the use of their 
 old iron nails 
 
 Herodotus says that the Lydians were the iirst nation who 
 coined money of a mixture of gold and silver. This mixture was 
 called ■^XcKTpov, and was composed of different proportions of 
 gold and silver, but usually three parts of gold to one of silver. 
 The coins of the western States of Asia were of this material. 
 There are several of these electrum coins in the British Museum 
 
 On the Meaning of the Mint Price of Gold and Silver 
 
 7. As the very purpose of coining is to certify that the pieces 
 of Bullion are of a certain definite weight and iineness, it is evi- 
 dent that a fixed quantity of Bullion, such as a pound weight, 
 must be divided into a fixed number of coins 
 
 The Number of Coins info which a given quantity of 
 Bullion is divided by Law, is called the Mint Price of that 
 quantity of Bullion 
 
 The Mint Price of Bullion is thus simply the amount of coin 
 which is equal to any quantity of Bullion, weight for weight 
 
 By the Law at present in force forty pounds weight of stan- 
 dard Gold Bullion are divided into 1,869 coins, called Pounds or 
 Sovereigns ; hence one pound weight of Gold BuUion is coined 
 into £46 14s. 6d. : or, as the value of Gold is estimated by the 
 ounce, one ounce of Gold Bullion is coined into £3 17«. lO^i: 
 and this is termed the Mint Price of Gold 
 
 The legal weight of the Pound or Sovereign is 5 dwts. SiJigrs. 
 containing 11 StIt grains of pure gold. Sovereigns which fall 
 
MINT PRICE OF BULLION 147 
 
 below 5dwfcs. 2| grains, and half Sovereigns which fall below 
 2 dwts. 1 3^ grains, cease to be legal tender 
 
 In the time of William the Conqueror the pound weight of 
 Silver Bullion was coined into 240 pence : hence the Mint Price 
 of Silver was £1 per pound ; but in the time of Elizabeth the 
 pound weight of Silver Bullion was coined into 744 pence : or the 
 ounce weight of Silver was coined into 62 pence : hence, as 240 
 pence are still called a Pound, the Mini Price of Silver Bullion 
 was £3 2s. per pound, or 5s. 2d. per ounce 
 
 To alter the Mint Price of Bullion is merely an expression 
 which means an Alteration of the Legal Weight of the 
 Coinage 
 
 To suppose that the Mint Price of Bullion could vary is mani- 
 festly as great an error as to suppose that a hundredweight of 
 sugar can be a different weight from 112 separate pounds weight 
 of sugar ; or that any quantity of wine in a hogshead could differ 
 in quantity from the same quantity of wine in bottles ; or that a 
 loaf of bread could alter its weight by being cut up into slices 
 
 It is not an Economic Error to fix tM Mint Price of Bullion 
 
 8. We must now say a few words with respect to an error 
 which is by no means infrequent. It is now acknowledged by 
 every one that it is a great -Economic error to fix the Price of any 
 articles. It used formerly to be the custom to fix wages and the 
 prices of various commodities ; but such attempts have long been 
 abandoned as futile and mischievous. It is sometimes contended 
 that it is an equal error to fix the price of Gold. But those who 
 affirm this, overlook a very important consideration. The word 
 "Price" except in the single instance of " Mint Price," always 
 denotes the quantity of an article which is used as a measure, 
 which is given for another article of a different nature. Thus we 
 say that the Price of a bushel of corn is 6s. ; where the Silver, 
 the substance in which prices are measured, is of a different nature 
 from the corn. But in the expression " Mint Price " of BuUion, 
 it always means the value of Bullion in coin of the same metal. 
 Thus the Mint Price of Gold Bullion means its weight in gold 
 coin ; the Mint Price of Silver Bullion means its weight in silver 
 eom. 
 
 L 2 
 
148 THEORY AND PRACTICE OF BANKING 
 
 Hence, by the very definition, the Mint Price of Gold Bullion 
 merely means the identical quantity or weight of Gold Bullion in 
 another form : aad by the very nature of things the Mint Price 
 of Bullion is a fixed quantity. If the law requires an ounce of 
 gold to be coined into £3 17s. lO^d., that amount of coin must 
 be exactly of the same value as an ounce of gold, no matter 
 whether gold becomes as plentiful as iron or as scarce as diamonds; 
 for that quantity of coin is always exactly equal to an ounce of 
 gold ; whatever be the scarcity or the abundance of Bullion. The 
 value of gold may vary with respect to other things ; it may pur- 
 chase more or less bread, or wine, or meat, at one time than 
 another ; but it is absolutely impossible that an ounce weight of 
 gold in the form of coin can differ in value from an ounce weight 
 of gold in the form of Bullion. To suppose that it could, would 
 be as irrational as to suppose that because bread became very 
 abundant or very scarce, a loaf of bread could differ from itself in 
 weight when cut up into slices, or that a cask of wine could differ 
 from itself when drawn off into bottles 
 
 The Mint Price of Gold, therefore, is nothing more than a 
 public declaration of the weight of metal the law requires to be 
 in the Coin. An alteration of the Mint Price of Bullion means 
 an alteration in the standard weight of the Coin, and would be the 
 same thing in principle as an alteration in the standard yard 
 measure. Those who ridicule the idea of having the Mint Price 
 of Gold fixed, should, to be consistent, ridicule the idea of having 
 the standard yard measure fixed 
 
 On the Meaning of the Market Price of Gold and Silver 
 
 9. The Mint Price of Bullion is, as we have seen, simply the 
 number of Coins into which a certain quantity of Bullion is 
 coined ; consequently, so long as the coins continue of their full 
 legal weight, they are always of the value of that quantity of 
 Bullion. But when Coins have been some time in circulation they 
 must necessarily lose some of their weight from the wear and tear 
 of daily use, even if they be not subjected to any bad practices 
 such as clipping, which used to 1)0 done to a great extent formerly 
 in this country. But these coins may circulate for a considerable 
 time in a country, and lose a good deal of their weight, without 
 
MARKET PRICE OF BULLION 149 
 
 losing their value. People were so accustomed to the sight of a 
 particular coin, that unless they were money dealers, they did not 
 stop to inquire too curiously whether it were of the proper weight 
 or not. In fact, when coins have been some time in use, few 
 people know what their legal weight is. Many, for instance, do 
 not associate the idea of a pound with any particular weight of 
 BoUion ; and thus, in exchange for products and services, coins 
 may pass at their nominal value long after they have lost much of 
 their weight ; as Posthumus says, in Gymbeline — 
 
 " 'Tween man and man they weigli not every stamp, 
 Though light, take pieces for the figure's sake " 
 
 But when Coins are given in exchange for Bullion the case is 
 difierent. The Value of Bullion is measured weight for weight 
 with Coins ; consequently, if the Coins have lost their legal weight, 
 a greater numler of them must be given to purchase a given 
 amount of Bullion than if they were of fuU weight. Thus, if the 
 Mint Price of Silver is 5s. 2d. per ounce, that quantity of Coin 
 ought by law to weigh an ounce ; then, if the coins have lost 
 their proper weight, it is clear that more than 5s. 2d. must be 
 given to buy an ounce of Bullion. It might, perhaps, take 6s., 
 or even more, to buy an ounce of Bullion 
 
 The quantity of coin at its ftill legal weight which is equal in 
 weight to a given weight in Bullion, is called its Mint Price ; 
 but the quantity of the current coin, which is actually equal to it 
 in weight, is called the Market Price : and as, if the coins 
 have lost their legal weight, more of them must be given than if 
 they are of full weight, the Market Price will apparently be higher 
 than the Mint Price, and this is called a- Rise of the Market Price 
 above the Mint Price 
 
 Suppose that at any time the Mint Price of Silver were 5s. 2d. 
 an ounce : and the Market Price were Qs.; this would merely mean 
 that six shllings weighed no more than 5s. 2d, ought to do ; and 
 therefore that the current coinage is deficient of about 4 of its 
 legal weight. Thus, in reality, it is clear that the rise of the 
 Market Price is due to the Depreciation of the Coinage 
 
 Hence we obtain this fundamental law of the Coinage — When 
 the Market Price of Bullion rises above the Mint Price, the Excess 
 is the Proof and the Measure of the Depreciation of the 
 Coinage 
 
150 THEORY AND PRACTICE OF BANKING 
 
 In fact, the apparent rise of the Market Price of Bullion is 
 due to exactly the same cause as has made the Mint Price of 
 Silver apparently rise from £1 in the days of WUliam the Con- 
 queror to £3 2s. in the present day. It is merely that the same 
 quantity of Bullion is cut into a greater number of pieces ; and, 
 consequently, each piece must" be proportionably diminished in 
 weight, or depreciated 
 
 The Market Price of Bullion could never fall below the Mint 
 Price, unless there were more Bullion in the coin than there ought 
 to be ; and in such a case the difference of the Market Price below 
 the Mint Price would of course indicate the excess of the coin 
 above their legal weight 
 
 i/" a change takes place in the relative Value of the Gold and 
 Silver Coins, to determine whether it is due to an Alteration 
 in the Value of the two Metals, or to a Depreciation of the 
 Coinage 
 
 10. The considerations we have presented will enable us to 
 solve a question of great practical importance. When both metals 
 were used concurrently as Money, the value of the silver coinage 
 used to change with respect to the gold. Thus Guineas were 
 originally coined to be of the value of 20s. in silver : but, in the 
 reign of William III., guineas rose to 28s. and 30s. : and at the 
 same time Silver Bullion rose from 5s. 2d. to 7s. an ounce. One 
 party stoutly contended that this was due to the scarcity of silver. 
 Now this assertion was absurd on the face of it ; because if silver 
 had become very scarce as compared to gold, it is quite clear that 
 silver would have risen as compared to gold, and not fallen. That 
 is, instead of guineas being worth 28s., they ought to have been 
 worth less than 20s. From the figures given above, this assertion 
 was self-contradictory : because, as compared with gold, silver had 
 apparently /aZfen in value : and, as compared with silver money, it 
 had apparently risen in value 
 
 But as the variation might proceed either from a Diminution 
 in Value of Silver as compared to Gold : or from a Depreciation of 
 the Silver Coinage : ■ we are enabled to devise a test which will 
 enable us to decide to which of these causes it was due 
 
 It is quite clear that a Diminution An the Value of the coia 
 
gresham's law of the coinage 15X 
 
 cannot produce any difference between the Mint Price and the 
 Market Price of Bullion : because, by the very meaning of the 
 word Mint Price, however plentiful or however scarce Silver may 
 be, an ounce of it in coin must always be exactly equal in weight 
 or value to an ounce of it in Bullion 
 
 On the other hand, a Depreciation of the coinage must ine- 
 vitably produce a rise in the Market Price of Bullion above the 
 Mint Price : because, however plentiful or scarce Bullion may be, 
 I of an ounce of it in coin can never be equal in weight or value 
 to an ounce of it in BuUion 
 
 ; The case may be shortly stated thus — Guineas may rise to 28s. 
 in silver, either from a Diminution in the Value of Silver : or from 
 a Depreciation of the Silver Coinage. What is the test ? It is to 
 be found in the Market Price of Silver. If the Silver Coinage is 
 Depreciated, the Market Price of Silver will rise above the Mint 
 Price : if it is a mere Alteration in the Value of Silver, it wiU 
 not 
 
 Evidently, however, both circumstances may take place. There 
 may be an Alteration in the Value of the metals as well as a 
 Depreciation in the Silver Coinage at the same time. And it is 
 quite easy to devise a test in such a case ; because the Depreciation 
 in the Silver Coinage is measured by the difference between the 
 Market and the Mint Price of Silver : and thus the Value of the 
 Coinage being rectified, it is quite easy to see whether it has 
 changed in its relation to Gold 
 
 On Gresham's Law of the Coinage 
 
 11. We have now to notice a Law of fundamental importance 
 in the Theory of the Coinage 
 
 Aristophanes first noticed the fact at Athens that when a 
 debased Coinage was issued along with a good Coinage, the good 
 Coins all disappeared from circulation, and the debased ones alone 
 remained 
 
 This fact, which has been invariably observed in all countries 
 and ages, was long the puzzle of financiers and statesmen. For- 
 merly the Coinage in this country used to suffer very much from 
 clipping and other bad practices. Repeated attempts to remedy 
 the evil were made by issuing new Coin from the Mint without 
 
152 THEORY AND PBACTICK OF BANKING 
 
 withdrawing the debased Coin ; hut all these' efforts were tin- 
 availing : the good Coins invariably vanished from circulation, 
 and the bad ones alone remained. Sii; Thomas G-resham first 
 explained the cause to Queen Elizabeth ; hence we have called it 
 Gresham's Law of the Coinage 
 
 This Law is well expressed in an old pamphlet, thus — 
 
 " When two sorts of Coins are current in the same nation, of 
 like Value by denomination, hut not intrinsically, that which has 
 the least Value will be current, and the other as mmh as pos- 
 sible hoarded," or exported. Which may be expressed more 
 shortly thus : Bad money always drives good money out from 
 circulation 
 
 The reason of this is plain. If fall-weighted and depreciated 
 Coins are allowed to circulate together, one of two effects muBt 
 necessarily follow. Either those persons who have commodities 
 to sell will make a difference in their nominal price according as 
 they are paid in good or in light coin ; that is, the light coin will 
 be at a discount as compared with the good coin : or if there be a 
 law to prevent this, and to make both to pass at the same nominal 
 value, every one wiU endeavour to discharge his debt at the least 
 possible expense. He wiU always try to pay his debts in the light 
 coin. As values are always estimated by the weight of the metal, 
 a law which declares that light coin shall be of the same value as 
 heavy coin, is as great an anomaly as a law to declare that in 
 Arithmetic three shall be equal to four. But the consequence is 
 plain : if the Law of this country declares that four ounces of 
 silver shall be of the same value as three ounces, the possessors of 
 the light coins always pay them away in preference to the heavy 
 ones, and Bullion dealers collect all the full-weighted coins they 
 can, and export them to foreign countries, where the coin passes 
 at its full value. Thus the good coin quickly disappears from 
 circulation, and the bad alone remains 
 
 Moreover, no one will bring Bullion to be converted into Coin. 
 During the degraded state of the Silver Coinage during the last 
 century, the Market Price of Silver always exceeded the Mint 
 Price. Smith says that the Market Price of Silver ranged from 
 5s. id. to 5s. 8^. per ounce before the recoinage in 1 774 ; and 
 the second Eeport of the Lords' Committee of Secrecy, in 1797, 
 saysx— ''■ But as the Mint Price of Silver Bullion has been, during 
 
WHAT IS A POUND ? 153 
 
 the whole of the present century, considerably less than the 
 Market Price of this precious metal, the Silver Bullion imported 
 could not be converted into Coin, but, having left a quantity suffi- 
 cient for the use of our manufacturers, must have been again 
 exported, and did not contribute in the smallest degree to augment 
 the Coin of this kingdom" 
 
 It is from this principle that a Paper Currency is invariably 
 found to expel a Metallic Currency of the same denomination 
 from circulation. And to show the generality of the principle, it 
 was found in America that when a depreciated Paper Currency 
 had driven aU the Coin out of circulation, and a still more depre- 
 ciated Paper Currency was issued, the more depreciated paper 
 drove out the less depreciated paper from circulation 
 
 What is a Pound ? 
 
 12. Sir Eobert Peel once asked the question, " What is a 
 Pound ?" and he found many who could give him no answer. 
 We have now to explain how a certain weight of Gold Bullion has 
 come to be called a Pound 
 
 The original Measure of Value in all the countries of Western 
 Europe, France, England, Scotland, Italy, Spain, was the Pound 
 weight of Silver Bullion. No coin of this actual weight was ever 
 struck : but the Pound weight was divided into 240 coins called 
 Pence, Denarii ; twelve of these Pence were called a Shilling, or 
 Solidus; and, therefore, 20 Shillings, or Solidi, actually weighed a 
 Pound of Silver Bullion 
 
 Now let us denote the Pound weight of metal, in the form of 
 Bullion, by the symbol — lb : and the Pound weight of metal, in 
 the form of Coin, by the symbol — £ ; then we have — 
 
 240 pence = 20 shillings = £1 = 1 lb 
 
 Now, if the Pound weight of metal were divided into more 
 than 240 pieces, it is clear that the greater number of pieces 
 would stUl be equal to the Pound in weight : and if Ve denoted 
 240 pieces by the symbol — £, irrespective of their weight, we 
 should have the 1 lb ^ £1 -\- the number of pieces above 240 
 
 Now this is what has been done in the Coinage of all the 
 countries above-mentioned. The sovereigns of these various 
 
154 THEORY AND PliACTICE OF BANKING 
 
 countries were frequently in want of money to pursue their various 
 extravagances. As they could not increase the quantity of the 
 metal, they adopted the fraudulent plan of surreptitiously cutting 
 the Pound weight of Bullion into a greater number of pieces. 
 But they still called them by the same name. By this means 
 they gained an illusory augmentation of wealth. As they could 
 not increase the quantity of the metal, they, at various periods 
 falsified the certificate, while they still called the Coins by the 
 same name. Thus the quantity of Bullion in each penny was 
 diminished 
 
 The consequence of this was manifest. As 240 pence were 
 still called a Pound in money, or £, whatever their weight was : 
 and as more than 240 pence were coined out of the Pound weight 
 of Bullion, or lb. : the £, or Pound of metal in Coin, began to 
 vary from the lb. or Pound of metal in Bullion. Edward I. 
 began this bad practice in 1300, and coined 243 pence out of the 
 Pound weight of metal : in 1344 Edward III. coined 266 pence 
 out of the Pound of metal : in 1412 Henry V. coined the Pound 
 into 360 pence : and so it gradually crept up, until Elizabeth, in 
 1601, coined the Pound weight into 744 pence 
 
 Thus we have manifestly — 
 
 744 pence = 62 shillings = £3 2s, = 1 lb 
 
 As there are 12 ounces in one Pound weight of Bullion, it is 
 evident that each ounce was coined into 62 pence ; and as the 
 value of Bullion is measured by the ounce, the Mint Price of 
 Silver was said to be 5s. 2d. the ounce 
 
 In Scotland this Depreciation of the Coinage began about the 
 same period as in England, but it proceeded to much greater 
 lengths. In 1306 Robert Bruce coined the Pound weight into 
 252 pence ; in 1451 James II. coined the Pound weight into 
 '760 pence, or £3 4s. ; and this Depreciation was increased until 
 at last, in 1738, the Pound weight was coined into 8,928 pence, 
 or £37 4s. : and thus the Pound Scots became equal to. twenty 
 pence 
 
 In France and Italy the Depreciation proceeded twice as far 
 as in Scotland : the French Livre and the Italian Lira became at 
 last only equal to IQd. The French livre, which is now called a 
 franc, has been adopted as the basis of the decimal system of 
 
THE GOLD COINAGE 155 
 
 coinage ; and the original solidus has now dwindled to the sou, or 
 halfpenny 
 
 13. Henrj III. endeavoured to introduce a Gold Coinage, 
 but it failed. In 1344, however, Edward III. reintroduced it, 
 and since then Gold has been permanently coined in England. 
 But the Gold coins were always ordered to circulate at a fixed 
 ratio with respect to Silver : and as the ratio fixed by the Mint 
 seldom agreed with the ratio of gold and silver in the open market 
 of the world, the Gold Coinage constantly disappeared, in accord- 
 ance with Gresham's hitherto undiscovered law. In the reign of 
 Charles II. the African Company brought home a large quantity 
 of Gold from the Guinea coast. He coined this Gold into pieces 
 which he called Guineas, which were intended to be of the value 
 of 20s. in Silver, so as to represent the Pound. But the Mint 
 rating did not correspond with the Market Value of Gold and 
 Silver, and the Silver Coinage became exceedingly debased, so that 
 Guineas rose to 28s. and 30s., and rapidly disappeared. This 
 was to a certain extent rectified by the great recoinage of the 
 Silver Money in 1697 : but still a considerable error prevailed. 
 In 1717, Newton, Master of the Mint, reported to Parliament 
 that the true Value of. the Guinea was 20s. 8d. in Silver. Never- 
 theless, Guineas were declared to be current- at 21s. ; and then, in 
 the language of the Mint, Gold was fixed at £3 17s. lO^d. per 
 ounce 
 
 Gold and Silver Coin were then declared to be legal tender for 
 debts to any amount. But as Gold was overrated by id. in the £, 
 and Silver was underrated by the same amount, merchants, in the 
 course of the last century, universally adopted the plan of paying 
 their debts in Gold, in preference to Silver, as being the cheaper 
 medium. And, in accordance with Gresham's Law, the Silver 
 coins were exported, as being below their true value in this 
 country. Gold thus became the recognised measure of Value in 
 England, though the exchanges were reckoned in SUver : and for 
 exactly the opposite reason. Silver became the recognised measure 
 of Value in France 
 
 At the great recoinage in 1816, this custom was adopted as 
 Law: and Gold was declared to be the only legal measure of 
 
156 THEOEY AND PRACTICE OF BANKING 
 
 Value and legal tender to an unlimited amount : and the Sovereign 
 was struck to represent the value of 20s. in Silver, or the £ 
 
 14. Ever since the time of Charles II. the coinage of Gold 
 has been free to the public : but by the Act relating to the coinage 
 in 1816, the coinage of Silver and Bronze, is retained in the 
 hands of the Government. In order to obviate the effect of 
 Gresham's Law, the value of Silver is artificially raised. Since 
 1816 the Pound weight of Silver has been coined into 66 shillings; 
 but four of these are retained for the expenses of coinage : and 
 the 62 lighter shillings are declared to be of the same value as 
 the previous heavier ones. Thus 20 of them are declared to be 
 equal in value to the Sovereign : and thus their value is artificially 
 raised about 6 per cent. But to prevent injustice being done, 
 they are not legal tender for any sum above 4:0s.: it having been 
 intended to have made the Double Sovereign the monetary unit 
 
 The Bronze coins are only worth about one-fourth of their 
 nominal value : pence and halfpence are only legal tender for the 
 value of one shilling : and farthings to the value of sixpence 
 
THE THEORY OP CREDIT 157 
 
 CHAPTER IV 
 THE THEORY OF CREDIT 
 
 Preliminary Remarks 
 
 We have now arrived at the subject matter of this Work — 
 the exposition of the great System of Credit and Banking, 
 the marvel of modern Commerce. What the Steam Engine is in 
 Mechanism : what the Differential Calculus is in Mathematics : 
 that is Credit in Commerce 
 
 Daniel Webster, the eminent American Jurist and Statesman, 
 truly said — " Credit is the vital air of modern commerce. It 
 has done more, a thousand times, to enrich nations, than all the 
 mines of all the world. .... Credit is to Money what 
 
 Money is to articles of Merchandise It is very true 
 
 that Commercial Credit, and the system of Banking, as a part of 
 it, does furnish a substitute for Capital " 
 
 So, also, an able French writer, M. Gustave du Puynode, 
 Bays — "However fruitful have been the mines of Mexico and 
 Peru, in which, for a long time after Columbus, seemed buried 
 the fortunes of the world, there is yet a discovery more precious 
 for humanity, and which has already produced more Wealth than 
 that of America : that is, the discovery of Credit : a world 
 altogether imaginary, but vast as space ; as inexhaustible as the 
 resources of the mind " 
 
 At the present time Credit, in its various forms, is the most 
 gigantic species of Property in this country : inferior only, if it 
 be inferior, to the Land in magnitude : and the negotiation of 
 Debts is, beyond all comparison, the most colossal branch of 
 Commerce. The merchants who trade in Debts — namely, 
 Bankers — are now the Rulers and Regulators of Commerce — 
 they almost control the fortunes. of States 
 
158 THEOKT AND PRACTICE OF BANKING 
 
 As there are shops for dealing in bread, in furniture, in 
 clothes, in wine, and in every other species of Property, so there 
 are shops, some of the most palatial structures of modern times, 
 for the express purpose of dealing in Credits, or Debts. 
 And as there are corn markets, and fish markets, and poultry 
 markets, and many other sorts of markets, so there is a market 
 for buying and selling Foreign Debts— which is the Royal 
 Exchange. Thus Banks are nothing but Debt Shops, and 
 the Eoyal Exchange is the great Debt Market of Europe 
 
 The description of the powers of Credit given by "Webster and 
 du Puynode is undoubtedly true : but, unfortunately, there is a 
 reverse to the medal. If Credit, in modern times, when rightly 
 used has produced these wonderful effects, it has, when misused, 
 produced catastrophes of corresponding magnitude. False The- 
 ories of Credit, and the abuse of Credit have produced monetary 
 cataclysms which have shaken nations to their foundations, and 
 whose direful effects have only been equalled by those of the 
 earthquake and the volcano. It is, therefore, of the deepest 
 national importance to investigate and establish the true Theory 
 of Credit 
 
 It was out of discussions on the nature of Credit that the 
 modern science of Political Economy took its rise : and yet the 
 subject of Credit is the one which has been least understood by 
 Economical writers. Considering the mighty part which Credit 
 plays in modern Commerce, and the effects it has produced for 
 weal or woe upon nations, it might have been naturally expected 
 that Economists would have thoroughly worked out the subject : 
 and would have been unanimously agreed upon its nature and 
 effects. So far, however, from this being the case, there is no 
 subject whatever upon which they are more utterly at variance 
 with each other, and with themselves. To understand the subject 
 properly requires a thorough settlement of nearly all the Funda- 
 mental-Concepts of Economics : which has been entirely neglected. 
 It requires a thorough knowledge of some of the most abstruse 
 branches of Mercantile Law, and the mechanism of Commerce. 
 And, indeed, to explain some cases in Credit was too much for 
 some of the most eminent judges on the Bench. In one case 
 
ON CEEDIT 159 
 
 Lord Eldon said — " I think I argued the case of ex parte Walker, 
 and I must say that the speculations about Paper certainly outran 
 the grasp of the wits of the Courts of Justice. This sort of 
 Circulating Medium puzzled as able a man as ever sat here — 
 
 Lord Thurlow What was to be done, then ? The 
 
 Court was puzzled and distressed. At last we came to an anchor- 
 age in that case, ex parte Walker. I have no difBculty in saying 
 I never understood it. I am satisfied that though, no" doubt, the 
 Court understood that judgment, yet none of the Counsel did 
 
 As we have shewn in the following section, the whole of the 
 system of Credit, Banking, and Bills of Exchange was originated 
 by the Eomans : and a long series of illustrious Lawyers had 
 brought the Theory of Credit to a state of absolute perfection : 
 and their doctrines were embodied and declared to be Law in the 
 great Code, or Digest of Eoman Law, called the Pandects, pub- 
 lished by Justinian in the early part of the sixth century. They 
 were adopted and confirmed in the Basilica, the Eeformed 
 Code promulgated by the Basilian dynasty in the tenth century : 
 and they have been the Mercantile Law of all Europe, except 
 England, for 1,300 years. They are fully set forth in all the 
 great Continental Jurists : but, from that unfortunate aversion 
 which the Common Lawyers of England so long entertained 
 against the Civil Law, they were comparatively unknown in this 
 country : though adopted in Equity : and they have never yet 
 found their way into any treatise on Political Economy, either 
 Foreign or English 
 
 The Romans abandoned Britain in the beginning of the fifth 
 century : and the Common Law of England on the subject of 
 Credit was exactly the doctrine stated by Gains, which was the 
 text-book of Roman Law generally used throughout the Empire 
 at that period. The more advanced doctrines of the Pandects 
 have long been adopted in Scotland : and the Courts of Equity in 
 England. And by the Supreme Court of Judicature Act, which 
 came into operation on the 1st of November, 1875, it was enacted 
 that the doctrines of Equity should prevail over those of the 
 Common Law in all cases where they conflict 
 
 The investigation of this subject, moreover, opens up another 
 
160 THEORY AND PRACTICE OF BANKING 
 
 most interesting branch of inquiry. For a century and a half 
 Mathematicians have been in the habit of giving Debts as an 
 example of Negative Quantities. But very few have 
 given any explanation of what they mean by calling a Debt a 
 " Negative " Quantity : and those who have done so, from a 
 want of the knowledge of the principles of Mercantile Law, 
 and the facts of Commerce, have entirely failed in giving an 
 explanation which can be received as suitable for Economic 
 Science 
 
 It is well known that though Mathematicians have been in 
 the habit of using the Algebraical Signs for 1,600 years, and have 
 given the empirical rules for their combinations, it is only within 
 the present century that their scientific principles have been 
 understood. We must, therefore, explain the general Theory of 
 the Algebraical Signs, and the principles of their use in Mathe- 
 matics and Physical Science : and then give an exposition of the 
 principles of Mercantile Law, and the facts of Commerce : and 
 then discover what interpretation of these Signs is suitable for 
 the particular circumstances of Economics 
 
 The Eoman Lawyers brought the Theory of Credit to per- 
 fection in the early part of the sixth century. Their doctrines 
 are, of course, expressed in words. But we shall find that Jurists 
 working separately : Algebraists working separately : and the 
 practice of Mercantile men acting separately and independently 
 from their own instinct : are all in perfect harmony with each 
 other. And when we fuse these three together — an exposition of 
 the Facts of Commerce — an exposition of the Juridical Theory of 
 Credit — and show the appHcation of the Theory of Algebraical 
 Signs to these facts of Commerce and Juridical principles of 
 Credit, we shall find a most beautiful exemplification of the use of 
 these Signs strictly in accordance with their use in Mathematics 
 and Physical Science. We shall be able to carry the Theory of 
 Credit to a greater state of perfection even than it was left by the 
 Eoman Lawyers, by removing an obscurity which has puzzled 
 Jurists and Divines for centuries : and we shall be able, for the 
 first time, to bring Economic Theory to the level of Mercantile 
 Practice 
 
ORIGIN OF BANKING 161 
 
 Section I 
 
 On the Origin of the System of Credit, Banking, and Bills 
 of Exchange in Eurojpe 
 
 1. If it were asked how that wouderful people the Romans, 
 commeaoing with a petty village, gradually extended their empire 
 over so large a portion of the world, it would probably be said 
 that it was due to their hardihood and discipline. But, probably, 
 a cause which has been entirely overlooked, contributed in no 
 slight degree to the result. It was to their wonderful and 
 methodical habits of business. They were, as far as we are aware, 
 the inventors of the great system of Banking, Credit, and Bills of 
 Exchange 
 
 The Business of Banking invented ly the Romans 
 
 2. The business of Banking, as we understand it, was first 
 practised by the Romans in Europe 
 
 At an early period Rome began to gain an ascendency over 
 the neighbouring towns. Numerous strangers flocked to her, 
 bringing the coins of their native towns with them. For their 
 convenience the Government built several shops round the Forum, 
 and'let them out to private persons, for the purpose of exchanging 
 the Money of strangers for Roman Money. They were called 
 Argentarii : and these shops were called Tdbernm, Mensa and 
 Argentaria. The commission they charged for changing the 
 Money was called Gollyhus 
 
 On this species of business they subsequently engrafted others 
 It became the custom for private persons to place their Money 
 with them for the mere purpose of security. In this case they 
 acquired no Property in the Money: but they held it subject to the 
 directions of the depositor — The Money itself was termed a 
 Depositilm. The Banker paid no interest on this Deposit 
 
162 THEORY AND PBACTICE OF BANKING 
 
 because he was not allowed to trade with it : and it was called 
 vacua pecunia. When the Depositor wished the Argentarius to 
 make a payment for him, he either gave him personal directions 
 to whom it was to be paid : or he gave the payee a cheque 
 
 In process of time they added to these the species of business 
 which in modern language is technically termed "Banking:" 
 they received Money as a personal Loan to themselves : and they 
 paid interest for it. The Money, therefore, necessarily became 
 their own Property to trade with as they pleased : as modern 
 Bankers do 
 
 Hence the person who paid Money in this way into his 
 Banker's acquired a mere Eight of Action, or Credit, in his, 
 books. The earliest notice we have of these Banks, or Argentarice 
 is in Livy, vii., 21 : and ix., 40 : B.C., 350 and 308 ; where they 
 are spoken of, as established round the Forum where they always 
 continued. But he gives no account of the method in which they 
 conducted their business. The comedies of Plautus (B.C., 284— 
 184) contain several allusions to Bankers and their business 
 
 To give a customer Credit was termed scribere. Thus Leonida 
 says in the Asinaria of Plautus — 
 
 " Abducit domum ultro et scribit nummos " 
 
 " Of Ms own accord he takes him home and gives Mm a Credit 
 for the money " 
 
 Perscribere or rescribere was to give a cheque on one's account, 
 or to transfer a Credit for one account to another 
 
 As Demipho says, in the Fhormio of Terence — 
 
 " Sed transi sodes ad forum, atque illud mihi argentum rursam 
 jube rescribi, Phormio " 
 
 Phoem. " Quodne ego perscripsi porro, illis quibus debui " 
 
 "But, Phormio, pray go over to the Forum and order thatmoney 
 to be put to my account " ' 
 
 Phorm. " What I that for which I have already given Gheqmi 
 to my Creditors ? " 
 
 So Cicero says — " Qui de eccc. Hs. cc. presentia solverimus, 
 reliqua rescribamus " 
 
 " Of the remaining 400 sestertia T have paid 200 in cash, and 
 I shall send a Cheque for the rest " 
 
 So Horace — " Quod tu nunquam rescribere possis " 
 
 " Which you can never repay " 
 
THE LEDGERS OE EOMAN CITIZENS 163 
 
 Acceptum ferre was to Credit a customer with, money receiyed : 
 expmsum ferre to debit him with money paid 
 
 So Plautus says, in the Mostellaria — Eatio accepti et espensi 
 inter nos convenit " 
 
 " The accounts between us balance " 
 
 The Cheque that the customer gave was called atlributio or 
 prescriptio : we have no information as to whether the payee could 
 transfer this Cheque to any one else, or whether it was only 
 payable to himself 
 
 On the Family Ledgers of Roman Citizens 
 
 3, When the practice of writing became common at Eome, 
 it was established as a custom, or law, that every Dominus, or 
 head of a house, should keep a family Ledger as strict and exact 
 as those of a modern banker. In this he was obliged to enter all 
 his receipts and disbursements : all sums of money borrowed and 
 lent : all trade profits and losses : and these family Ledgers were 
 the only legal evidence of Debt among Roman citizens received 
 in Courts of Justice. And it was from these family Ledgers that 
 the whole modern system of Book-keeping and Credit has been 
 developed 
 
 It seems that every occurrence was noted down day by day iu 
 a waste or day-book termed Adversaria, and at the end of a month 
 the various items were arranged under their proper heads in the 
 Ledger, which was termed Taiula, or Codex accepti et expensi, 
 which was intended to be preserved as an heirloom in the family. 
 Every five years the Dominus had to swear to the truth of the 
 Codex before the Censors : and it was regarded almost with a 
 species of sanctity 
 
 A great difference was made between the Adversaria and the 
 Godex. Cicero says — " He acknowledges that he has not the sura 
 entered in his Ledger {Godex accepti et expensi), but he insists 
 that it is entered in his Day-book {Adversaria). Are you, then, 
 so fond of yourself, and have such an exalted opinion of yourself, 
 as to sue for money, not on the evidence of your Ledger, but of 
 your Day-book ? It is arrogant to bring forward your Ledger 
 instead of witnesses : but is it not simple madness to produce your 
 own scraps of writing and notes ? If these notes have the same 
 
 M 2 
 
164 THEORY AND. PRACTICE OF BANKING 
 
 force and weight and authority as the Ledger, what is the use of 
 making a Ledger ? to make entries in it ? or to keep it in regular 
 order ? to make a permanent record of old writings ? But if we 
 have an established custom to make a Ledger because we put no 
 trust in notes : is that to be considered of weight and approved of 
 before a Judge which we ourselves consider weak and unreliable ? 
 Why is it that we write notes without much care, and we write 
 the Ledger with great care ? For what reason ? because the one 
 is to last a month, and the other is to last for ever : the former 
 are soon erased, the others are preserved with religious care : the 
 former preserve the memory for a short time, the latter pledge the 
 good faith and honesty of a man for ever. Notes are thrown 
 away, the Ledger is kept in order. Therefore nobody produces 
 notes in evidence in a cause : but they do produce the Ledger and 
 read the entries 
 
 " You, Oaius Piso, a man of perfect good faith, virtue, 
 dignity, and authority would never venture to demand money on 
 the strength of notes " 
 
 This family Ledger was kept in or near the Area, the Chest 
 or Safe in the Tablinum, an apartment opposite the entrance door 
 of the Atrium, or central hall of a Eoman house, where all the 
 family records and archives were kept 
 
 On the Method, of Contracting a lioan ammig the 
 Romans 
 
 4. For many centuries the Eomans divided Property into 
 two sorts, according to the method by which it might be alienated, 
 sold, or transferred. That species of Property which they first 
 possessed, and were most accustomed to consider as the patrimony 
 of the Domus, they termed Res Mancipi : and this could only be 
 transferred or sold by certain very strict formahties. Other 
 Property, which they held in less esteem at first, or which they 
 acquired afterwards, might be transferred by simple delivery. 
 This kind of Property was termed Res nee Mancipi 
 
 The list of Property classed as Ees Mancipi seems to have 
 been formed in the earliest ages of the Republic ; and was never 
 extended beyond its first limits. All new species of Property was 
 classed under Res nee Mancipi. Thus, the Money of the early 
 
ROMAN METHOD OF CONTRACTING LOANS 165 
 
 Eomans was of Copper ; and, accordingly. Copper Money was 
 included under the Res Mancipi : but Gold and Silver Money 
 were of much later use ; and they were classed under Res nee 
 
 Kural servitudes in Italy were classed under the -Res Mancipi : 
 but the Eights of Obligations, as well as other Incorporeal 
 Property, were classed under Res nee Mancipi 
 
 The sale or alienation of a Res Mancipi, could only be effected 
 by certain very strict formalities, which were necessary in order 
 to ensure a good title, in an age before written conveyances were 
 invented. This form of Sale was termed Mancipium, or Man- 
 cipatio. G-aius says that it was effected in the presence of not less 
 than fire witnesses, Roman citizens of full age, and also in the 
 presence of another citizen who held a pair of bronze scales, and 
 hence called libripens. The purchaser, holding a bronze ingot, 
 says thus — " I say that this man is mine by the Common Law of 
 the Eomans, and that he is bought by me with this bronze ingot 
 and bronze scales." He then strikes the scales with the ingot, 
 and gives it to the seller as representing the price 
 
 As we have fully explained in a former chapter, every Loan of 
 Money is a Sale, in which the property in the Money is ceded 
 to the "borrower." The Money thus ceded was called Mutuum: 
 because it was given in exchange for the Eight to demand an 
 equal sum at a future time. As aes was a Res Mancipi, every 
 loan of Money required to be made by the Mancipium, or the sale 
 ■per aes et libram. But the Eight of the Obligation was Res nee 
 Mancipi, and therefore it might be transferred in other ways 
 
 The ^ond of Law created between the two parties by the Sale 
 or Loan of the Mutuum by the formality of the ces et libra, was 
 termed a Kexum, or Nexus, 4s : and Nexum, or Nexus, was the 
 only term in use in the time of the XII. Tables (451 B.C.) to 
 denote a Contract or Obligation 
 
 In course of time the cumbrous formalities of the weight and 
 scales were dispensed with, and a Contract or Obligation could be 
 created by simpler methods. These were the OHigatio re, the 
 ObUgation which was created by the Loan or advance of the thing 
 itself : the OUigatio verbis, or the verbal Contract, termed StipuMio: 
 
166 THEORY AND PRACTICE OE BANKING 
 
 and the OMigatio Ktteris; or the written Contract, created by 
 entries in the Codex : and iinally the OMigatio Consensu, or the 
 obligation by simple consent without any formalities 
 
 On the Stipulatio, or Verbal Contract 
 
 5. The Stipulatio, or verbal Contract, was made by solemn 
 question and answer in the presence of witnesses. It was the 
 most extensive form of making a contract in Eoman Law : and 
 all other obligations might be transformed into a Stipulation 
 
 Supposing that the Stipulation was employed to create an 
 Obligation of Debt, the lender delivered the sum to the borrower 
 and asked him — " Do you promise to deliver to me such a sum 
 at such a date?" the -kader answered"! do": and thus the 
 Obligation was created 
 
 It is said in the Institutes that Stiptilatio is derived from 
 Stipulus, an old word for firm, ascertained ; which may perhaps 
 come from stips 
 
 The person who asked the question was termed Stipulator, or 
 reus stijpukmdi 
 
 He who answers was termed Promittor or reus promittendi 
 
 The question or Stipulatio and answer could only form a Uni- 
 lateral Contract : or one in which only one side was bound : if a 
 Bilateral, or Synallagmatic, Contract was to be formed, it was 
 necessary to resolve it into two or more simple stipulations 
 
 Several examples of the Stipulation occur in Plautus : as in 
 Asinaria, ii., 4, 48. Pseudolus, i., 112 : iv., 6, 15. CUrcuEo, v., 
 2,68:3,31,33. Bacch.,iv., 8, il. Tri?iummus, y., 2, 3i, S9. 
 Rudens, v., 2, 47 
 
 An example of the Stipulatio occurs in the marriage Service 
 of the Church of England : which also shews that two stipulations 
 are necessary to form a Bilateral Contract such as Marriage 
 
 The Priest says to the man — " Wilt thou have this woman to 
 thy wedded wife?" &c. The man answers — "I will." The 
 Priest asks the woman — " Wilt thou have this man to thy wedded 
 husband ? " &c. The woman answers— "I will " 
 
 On Arcaria Nomina 
 
 6. We have seen that it was the duty of every Eoman 
 
THE OBLIGATIO LITTERIS 167 
 
 citizen i;o make an entry of all sums lent and borrowed in his 
 Ledger or Codex acceptt et expensi. If, therefore, he had lent a 
 sum of money by any of the methods of making a Loan, the 
 Creditor would of course duly enter it in his Ledger at the end of 
 the month. When he did that it was termed Arcarium Nomen. 
 But such an entry as this was not the Contract itself : it was only 
 evidence of the Contract. The Contract was created by the 
 actual advance of the money. It was of course absurd to suppose 
 that any person might create another person his Debtor by simply 
 making an entry against him in his Ledger. It was the duty of 
 the Debtor to make a corresponding entry of money borrowed in 
 his Ledger. Cicero says that it is equally disgraceful to make a 
 false entry of money lent, and not to make an entry of money 
 really borrowed, in the Ledger 
 
 On the Obligatio Litteris or "Written Contract 
 
 7. But an actual Contract might be made by an entry in the 
 Ledger. The borrower came to the lender, and the lender on 
 advancing the money said to him something of this sort — 
 " Centum aureos expenses tihi tuli?" "Have I weighed out and 
 given you 100 aurei?" The borrower said — "Expenses mihi 
 tulisti". " Tou have weighed out and given them to me " 
 
 The Creditor then, with the consent of the Debtor, made a 
 formal entry of the loan in his Ledger, which was termed 
 Expensilatio : the corresponding entry in the Debtor's 
 Ledger was termed Acceptilatio 
 
 An entry made with this formality with the consent of the 
 Debtor was absolutely conclusive, and could not be questioned. 
 It formed a valid contract, whether the money had actually been 
 advanced or not : and if an action was brought for the money, 
 the judge could make no inquiry into the actual facts. A solemn 
 entry made with the consent of the Debtor was equivalent to a 
 Stipuhtio 
 
 The Creditor made an entry of petunia expensa lata: the 
 Debtor made an entry of pecunia accepta relata-, and thus was 
 constituted the Ohligalio Litteris or Written Contract 
 
 The entry of the person's name in the Codex or Tabula was 
 termed Nomen. Hence Nomen became the general word for 
 
168 THEORY AND PEACTICE OF BANKING 
 
 a bebt. Nomina sua exigere is to get in one's Debts : nomina 
 locare is to borrow money : nomina facere, to lend money 
 
 Hence arose the technical terms expensum ferre, to lend 
 money : acceptum referre, to borrow money : and the Ledger was 
 called Godex accepti et expensi 
 
 A pre-existing Debt might be transformed into a new Contract 
 by such an entry in the Ledger. Suppose that a Debtor owed his 
 Creditor money for a hiring or sale, or for any cause which might 
 involve difficulty and expense in proving. If the Debtor consented, 
 an entry might be made of the fixed sum acknowledged as due by 
 the Debtor, and then an ObUgatio litteris was substituted for an 
 Obligatio re. This new Contract cancelled and extinguished the 
 old one, and was one form of Novatio, which we shall explain 
 afterwards. Making this entry with the Debtor's consent obviated 
 all risk of the claim being disputed. It was as if a Debtor at the 
 present day gives his Creditor a Bill in respect of a Debt due for 
 any cause. When this was done it was said a re in personam tran- 
 scriptio fit : and it was termed Nomen transcriptitium 
 
 When a new person was substituted for the original Debtor it 
 was said a persona in personam transcriptio fit 
 
 On the Obligatio Consensu or Consensual Contract 
 
 8. In the year 469 a.d. the Emperor Leo abolished the 
 strict formalities of the Stipulation, and enacted that a consent 
 given in any form whatever, so long as the parties agreed about it, 
 should be valid. There was no necessity for any writing nor any 
 witnesses 
 
 The Roman Bankers invented Bills of Exchange 
 
 9. It is to the Eoman Bankers that the invention of Bills 
 of Exchange is due. As the Romans extended their conquests, 
 the bankers established correspondents in foreign cities : and when 
 a Eoman wanted to travel, they gave him a Bill on their corre- 
 spondents. This system was well established in the time of Cicero': 
 and his letters contain many references to Bills of Exchange. 
 Thus he writes to Caninius Salustius — 
 
TRANSFERABLE DOCUMENTS OF DEBT 169 
 
 " Se ait curasse ut cum qusestu populi pecunia permutare.tur " 
 
 " He says that he has taken care that a Bill should be sent 
 for the money along with the people's share" 
 
 Permutare was to give a Bill of Exchange 
 
 So, when his son was going to Athens, which was the Uni- 
 versity of the Roman world, he writes to Atticus — 
 
 "Sed quaere quod opus sit Athenis, permutarine possit, an 
 ipsi ferendum est " 
 
 " But I wish to know whether he can take a Bill for the 
 money he will want at Athens, or whether he must take the money 
 itself with him?" 
 
 So, also — " Quare velim cures ut permutetur Athenis, quod 
 sit in annuum sumptum " 
 
 " Wherefore I wish you to take care that he has a Bill on 
 Athens for his yearly expenses " 
 
 So, again — " Ut vereor ne illud quod te permutavi, versur4 
 mihi solvendum est " 
 
 " So that I fear I must borrow money to pay the Bill you 
 cashed for me" 
 
 In classical Latin permutare is the only word that we are 
 aware of for drawing Bills of Exchange. But about the end of 
 the first century a provincial Latin word, camhio {-ire, or -iare), 
 which appears as campsare in Ennius, to exchange, began to be 
 used by Columella and Siculus Flaccus : it gradually came into 
 common use, and was used by Amuleius, Charisius, and Priscian. 
 In the middle ages it completely superseded permutare in its 
 meaning of exchanging money and bills. The words Cambitor, 
 Gambiator, and Gampsor gradually superseded Argentarius, Men- 
 sarius, and Nvmmularius: hence our word Cambist. In the 
 middle ages Bills of Exchange were called Litterm Cambitoria : 
 and when Bancherius came into use for a banker, they were called 
 LittercR Bancales, bankers' drafts 
 
 On Transferable Documents of Debt 
 
 10, The entries in the family ledgers were, as we have seen, 
 the only evidence of Debt among Eoman citizens receivable in 
 Courts of Law. Gains says that written Documents of Debt were 
 only used by foreigners 
 
170 THEORY AND PRACTICE OF BANKING 
 
 The Romans began, to a certain extent, to be familiar with 
 transferable Documents of Debt : because tbey were used to give 
 Cheques on their bankers : but, of course, these were mere Orders, 
 and not Obligations : and we are not aware how far such 
 documents were admissible in Courts of Law 
 
 When Gaius says that the Romans did not use written Obli- 
 gations, he most probably means that they were not recognised as 
 legal documents available as evidence in a Court of Law : for 
 there is abundant evidence that written Obligations were in 
 common use 
 
 The Greeks invented the plan of recording Obligations in a 
 written form. Thus x^'P°7P"<A°''j Ghdrographum, or Note of 
 hand, was a simple acknowledgement of a Debt subscribed by the 
 Debtor alone, and given as a security to the Creditor : hence 
 Gheirogapharius Gr editor was a Creditor who had written -security 
 for his Debt : and this term is used in French Jurisprudence. 
 %yyypa^-q, Syngrapha, was a Bond subscribed in duplicate by 
 both parties, and of which each had a copy. These words occur 
 frequently in Cicero's letters. Thus he says — • 
 
 " Quando vestrse cautiones infirmse sunt Grseculum tibi misi 
 cautionem cheirographi mei " 
 
 " Since your Securities are not valid, I have sent you as a 
 Security my Promissory Note in the Greek form " 
 
 The difference between a Gautio and a Gheirographum seems 
 at first to have been that the Gautio was a simple acknowledge- 
 ment of the Debt : whilst a Gheirographum was an actual 
 Obligation, and by itself formed a Contract, equivalent to the 
 Roman Stipulatio 
 
 In the times of the early Emperors the family ledgers had 
 begun to fall into disuse : and, by the time of Justinian, had 
 been entirely discontinued, except in the case of bankers. As the 
 family ledgers fell into disuse, the Gautiones acquired greater 
 force : and at last became legal documents upon which an action 
 might be founded 
 
 Thus the Title of Nomina transcriptitia, or Transferable Debts, 
 came to be exclusively applied to the Gautimies, Gheirographa, and 
 Syngrapha: and thus we have the complete modern system of Bills 
 of Exchange and Promissory Notes. And all the fundamental 
 
THE GREEK TEAPEZITJE 171 
 
 principles which govern these instruments are contained at length 
 in the Pandects 
 
 On the Greek Trapezitse 
 
 11. There were money dealers and money lenders at Athens: 
 hut we are not very well acquainted with their methods of doing 
 business. As far as we can judge from the scanty notices which 
 have come down to us, their business seems to have been more 
 analogous to that of Bill Discounters than that of " Bankers." 
 They were called Trapezitce, from the tables on which they kept 
 their cash, which were placed round the market place. Their 
 original business was changing foreign money. After this they 
 began to receive money at interest, which they lent out to other 
 persons. The father of Demosthenes kept part of his fortune at 
 a Trapezites. Though they were generally of low origin, such as 
 freedmen, aliens, or persons who had been admitted as citizens, 
 they gradually rose into great credit ; which, in the case of the 
 principal ones, extended throughout Grreece. They obtained so 
 much confidence that business was transacted without witnesses : 
 money and contracts of debts were deposited with them, and agree- 
 ments were concluded and cancelled in their presence. The 
 ordinary rates of interest at Athens varied from 10 to 36 per cent. 
 The only case in which legal interest was fixed by way of damages 
 was 18 per cent., which may be taken to have been the medium 
 rate in common use 
 
 They made the borrower give his ^(eipoypa^oy, Cheirographum^ 
 or note of hand : and sometimes his crvyypa.(j>rj, or bond. But 
 we have not been able to discover that they invented the method 
 of transferring debts from one customer's account to the other by 
 means of written orders, which is the essence of " banking " 
 
 Demosthenes says — " It is the practice of all our trapezitce, if 
 any private person places money with them which he desires to be 
 paid to any one else, first of all to write down the name of the 
 depositor and the amount of the money, then to write beside it — 
 ' This must be paid to such a one ' : and, if they knew the person 
 by sight to whom it is to be paid, they only wrote his name 
 down ; but if they do not know him, they also write beside it the 
 name of some person who can identify him." This passage shows 
 
172 THEORY AND PRACTICE OF BANKING 
 
 very clearly that the Greeks did not use cheques, or orders, for the 
 payment of money 
 
 These trapezita were the first that we are aware of who used 
 the method of discount which is now universally practised in 
 banking. That is, they retained the full profit at the time of 
 making the loan ; as we learn from Plutarch was their practice. 
 In his violent tirade against borrowing money he is particularly 
 severe against the method of discounting : — " It is said that hares 
 bring forth and nourish their young at the same time that they 
 conceive again : but the debts of these scoundrels and savages 
 bring forth iefore they conceive ! For they give and immediately 
 demand back : and take away their money at the time they place 
 it out : and they put out at interest what they receive as interest. 
 The Messenians have a proverb : — 
 
 , " ' There is a Pylos before Pylos, and yet another Pylos still' 
 But it may be said to the usurers — 
 
 " ' There is a Profit before a Profit, and yet another Profit 
 stiir 
 
 " And then, forsooth, they laugh at the physical philosophers 
 who say that Nothing can come from Nothing " 
 
 Notwithstanding the liberal rate of interest they received, and 
 the great credit and reputation which the more eminent of them 
 enjoyed, the details which we have respecting Pasion, who stood 
 in the highest credit for wealth and integrity, do not give us any 
 very exalted idea of their fortunes. "We are told that the profits 
 of his business were only 100 minse, or £406 5s. a year : which 
 seems nothing very great for one of the most eminent trapeziim in 
 Athens. It has also been sometimes alleged that these trapezitw 
 invented Bills of Exchange : but there is no sufiicient evidence 
 to prove this 
 
NATURE OF CREDIT 173 
 
 Section II 
 
 ON THE NATURE OP CREDIT 
 
 Personal Qualities are Wealth 
 
 13. It has been shown that in ancient times the author of 
 the Eryxias expressly classed Personal Qualities under the title of 
 Wealth (j(p)]ij,aTa, irXouTos), because persons can make an income 
 by their use 
 
 In modern times Smith, and all Economists of note since 
 his day, Say, Senior, Mill, and others, all agree that Personal 
 Qualities, Ability, Energy, Skill, and Character, 
 are Wealth. And the reason is, that persons can make an 
 income by trading with their Personal Qualities exactly in the 
 same way as they can by trading in material goods. Personal 
 Qualities may be called Moral, or Personal Capital 
 
 Personal Qualities may be used as Capital, or so as to produce 
 a Profit in two distinct ways — 
 
 1. By their direct exercise as Labour ; with which, how- 
 ever, we are not concerned in this work 
 
 2. They may be used as Purchasing Power : that is, 
 to purchase Goods or Labour, by giving a Promise to pay at a 
 future time, instead of actual money, in exchange for them. 
 Personal Character used in this way as Purchasing Power, 
 is, in popular language, termed Credit 
 
 All eminent writers recognise Personal Credit as Personal 
 Property, or Wealth 
 
 Thus Demosthenes says — 
 
 " Svoiv 'AyaOoLV ovtoiv ttXovtov re Kat tov wpos airavras 
 *i(rT£ueo-^ai, iJi,€lt,6v icm to njs iriVrews vTrap)(OV rjfuv 
 
 " There Mng two kinds of Property, Money and General 
 Credit, our greatest Property is Credit " 
 
174 THEORY AND PRACTICE OP BANKING 
 
 So also — " €1 Se TovTO ayVoeis oTt IltcrTts A(^op/Ai; t<Sv Trcwm 
 eoTt ixeyCa-TYj irpos ■)(fiy}li.a.Ti.iTii.6v, ■kS.v av dyvotjcreia's.'' 
 
 " If you were ignorant of this, that Credit is the greatesi 
 Capital of all towards the acquisition of Wealth, you would be 
 utterly ignorant" 
 
 So Bishop Berkeley, iu Ms Querist, asks — ^Whether Power 
 to command the Industry of others [i.e., Credit] be not real 
 Wealth ? 
 
 So Melon says — " To the calculation of Values in Money there 
 must be added the current Credit of the merchant, and his 
 possible Credit " 
 
 So Dutot says — "Since there has been regular commerce among 
 men, those who have need of money have made Bills, or Promises 
 to pay, money. The first use of Credit, therefore, is to represent 
 Money by Paper. The usage is very old : the first want gave rise 
 to it. It multiplies specie considerably : it supplies it where it is 
 wanting ; and which would never be sufiicient without the Credit : 
 because there is not sufficient Gold and Silver to circulate all the 
 products of nature and art. So there is in commerce a much 
 larger amount in Bills than there is in specie in the possession of 
 the merchants 
 
 " A well managed Credit amounts to tenfold the funds of a 
 merchant : and he gains as m.uch by his Credit as if he had ten 
 times as much Money. This maxim is generally received among 
 all merchants 
 
 " Credit is, therefore, the greatest "Wealth to every one 
 who carries on commerce " 
 
 So Smith says — " Trade can be extended as Stock increases : 
 and the Credit of a frugal and thriving man increases mueh 
 faster than his stock. His trade is extended in proportion to the 
 amount of Both [i.e., his Stock and his Credit], and the 
 sum or amount of his Profits, is in proportion to the extent of 
 his trade : and his annual accumulation in proportion to his 
 Profits" 
 
CEEDIT IS WEALTH 175 
 
 So Junius says—" Private Credit is Wealth. " 
 So Prankliu says — " Credit is Money " 
 
 No one is more emphatic than Mill in the assertion that 
 Credit is Wealth 
 
 In the beginning of his work he says — 
 
 " Everything forms, therefore, a part of Wealth which 
 has a Power of Purchasing " 
 
 He then says — "For Credit, though it is not productive 
 power, is Purchasing Power " 
 
 Also— "The amount of Purchasing Power which a 
 person can exercise is composed of all the Money in his possession, 
 or due to him \i.e., the Bank Notes, Credits, or Bills he has], and 
 of all his Credit" 
 
 Also — " Credit, in short, has exactly the same Pur- 
 chasing Pow^er with Money" 
 
 And he repeats the same thing in numerous other passages 
 
 Now, if Mill lays it down as the fundamental Definition of 
 Wealth that— 
 
 " Everything is Wealth that has Purchasing 
 Power" 
 
 And if he says that " Credit is Purchasing Power:" 
 then the necessary inference is that " Credit is Wealth " 
 
 That is a Syllogism in which Mill is safely padlocked, and 
 from which there is no escape 
 
 Hence it is seen, by the direct statement of all these writers — 
 and innumerable others might be cited, if necessary— that Mer- 
 cantile Character is Purchasing Pow^er, and is 
 Wealth, or Personal Capital ; because it can be used as 
 well as Money to purchase Goods and Labour with. And if a 
 man can purchase Goods, Labour, or Money with his Personal 
 Credit, then his Credit has a Yalue which is measured in Money, 
 as well as that of any material chattel 
 
 Hence, Mercantile Character is Wealth : Valuable 
 Property ; and may be used as Capital, as weU as any material 
 chattels 
 
176 THEORY AND PBACTICE OF BANKING 
 
 And a merchant's Character, or Credit, may be damaged and 
 injured by false reports just as his material chattels may be 
 damaged and injured by material violence. To damage a mer- 
 chant's Credit is to injure and destroy his Purchasing Power : 
 and as we have seen that everything which has Purchasing Power 
 is Wealth, to ruin a merchant's Credit is exactly the same injury 
 to him as to rob him of so much actual money. And he has an 
 action against any one who injures his Mercantile Character, or 
 Credit, equally as he has against any one who injures his material 
 chattels 
 
 So distinctly is Personal Character recognised as Property in 
 Roman Law, that it is classed under the Jura in re: and an attack 
 on it is an Injuria, or the infringement of a legal Right 
 
 Hence it must be carefully observed that Mercantile 
 Character, or Credit, is National "Wealth 
 
 On the Creation of Obligations 
 
 13. Mercantile Character, or Credit, then, is Purchasing 
 Power, and is now universally admitted to be Wealth. Bat as 
 Value does not enter into Economics unless a person manifests hia 
 Value, or Demand for something, by giving something in exchange 
 for it : so Mercantile Character, or Credit, does not enter into 
 Economics until the merchant actually exercises his Credit by 
 making a purchase with it 
 
 And when a merchant buys goods with his Credit, or " on 
 Credit," as it is often termed, it is an absolute Sale, just as much 
 as if the purchase had been effected with Money. He acquires 
 the absolute Property in the goods as fully and effectually as if he 
 had paid for them in Money 
 
 But at the very instant that the Property in the goods is ceded 
 to the merchant, a Contract, or Obligation, is created 
 between the two parties, the buyer and the seller of the goods, 
 which consists of two parts — 
 
 1. The Right to demand payment in the person of the 
 Seller, or Creditor 
 
 2. The Duty to pay in the person of the Buyer, or 
 Debtor 
 
THE DEBTOR IN AN OBLIGATION 177 
 
 These two Quantities constitute the Contract, or Obligation, 
 or the Bond of Law between the two parties 
 
 In this Contract, or Obligation, it is the Creditor's Right 
 of action to demand the Payment at a future time, which, in 
 Law, Commerce, and Economics, is termed the Credit 
 
 And this Right of action, or Credit, is the Price, or Payment, 
 for the goods. When a merchant takes a trader's Bill at three 
 months in exchange for goods, it is Payment for the goods, 
 just as much as if it were Money. The transaction is a Sale, or 
 aa Exchange. When the trader gives his BiU at three months, 
 the Bill is Payment for the goods : what he has to do is to pay 
 his BiU when it becomes due : which is another Exchange 
 
 Division of Opinion among Jurists as to the Case of the Debtor 
 in an Obligation 
 
 14. We hare now come to the most abstruse and subtle point 
 in all Economics, which will demand the student's most earnest 
 attention : because it is the great Serbonian bog in which multi- 
 tudes of writers, literary and mathematical, have been swallowed 
 up, from a want of knowledge of the most elementary principles 
 of Mercantile Law and practical business : and its rectification 
 and elucidation will open up a completely new branch of inquiry 
 of the greatest novelty and interest 
 
 When an Obligation has been created between two parties in 
 the manner described in the preceding paragraph, on the Sale of 
 Goods or the Loan of Money, the case of the Creditor is clear : 
 in exchange for the Goods or the Money he has received a Right 
 of action. This is his Property, which he can sell and exchange 
 for other Goods, or for Money 
 
 But a strong division of opinion exists among Jurists, as to the 
 case of the Debtor in the Obligation. When a merchant has 
 bought goods and given a Bill at three months in payment for 
 them — /* he in Debt at the Present time ? 
 
 The great Roman Lawyers held that he is in Debt at the 
 present time : but that the Remedy is deferred. The maxim of 
 Roman Law is Deiitum in presenti, sol/vendum in futuro 
 
 But English Law holds a differeat view. It holds that when 
 
 N 
 
178 THEORY AND PRACTICE OF BANKING 
 
 a merchant agrees to take a Bill at three months in exchange for 
 the goods, the Bill is payment for the goods : and that there 
 is no Duty to pay, and therefore no Debt, until the time 
 has come for the payment of the Bill 
 
 It is a maxim of English Law that " Credit unexpired may be 
 pleaded under the General Issue ;" which means, that if a trader 
 has bought goods at an agreed upon Credit, and an action is 
 brought against him for the money before the period of the Credit 
 has expired, he may reply that he is not in Debt at all 
 
 So Mr. Pitt Taylor says — " In addition to these examples, it 
 may be observed that whenever the Defendant can show that, in 
 fact, no Debt ever existed before action brought, he may do so 
 under the plea of ' never indebted.' Thus, for instance, if the 
 action be for goods sold and delivered, he may defend himself 
 under this plea, by proving that they were sold on Credit which 
 was unexpired when the action was commenced " 
 
 And this is undoubtedly the correct view : when a merchant 
 agrees to take a Bill at three months for his goods, he has received 
 what he agreed to take in exchange for them. He is, therefore. 
 Paid for them. It is the usual mercantile expression to say that 
 the goods have been paid for by Bill. Consequently, there is do 
 Debt, or Duty to pay money, until the Bill has become due 
 
 Analogous cases will prove the correctness of this view 
 
 Suppose that a tenant takes a house, or an apartment, and 
 agrees to pay the rent quarterly. Suppose that after be had 
 been a week in the house the landlord came and demanded his 
 Rent : the tenant would reply that he owed the landlord Nothing: 
 that the bargain was that the tenant was to have the use and 
 enjoyment of the house for three clear months before any Rent 
 became due : and consequently, that no Duty to pay, or Debt, 
 arose until that time had come 
 
 The case of a trader who gives a Bill at three months in 
 exchange for goods id exactly similar. The bargain is, that he 
 shall have possession of the goods for three months before the 
 Duty to pay for them comes into existence. Consequently until 
 the three months have expired there is no Duty to pay: 
 and therefore there is no Debt 
 
 So when a farmer takes a farm on a lease of 19 years, he 
 becomes bound to pay the Kent half yearly. But the agreement is 
 
ECONOMICS AS THE SCIENCE OF COMMERCE 179 
 
 that he shall have the use of the farm for intervals of six months 
 before each instalment of Rent becomes due. And it would be 
 just as absurd to say that a farmer is in Debt at the present time 
 for the Rent he has agreed to pay 1 9 years hence, as it is to say 
 that a merchant is in Debt at the present time for Money which 
 he has only agreed to pay three months hence 
 
 In each case the successive payments are intended and meant 
 by both parties to be paid out of the Profits which are to be 
 earned in the interval 
 
 The importance of the consideration consists in this — It is 
 often supposed that when a person is under an Obligation to pay a 
 sum of Money at a future time, the amount of the sum to be paid 
 in future is to be subtracted from his present Property : or that 
 it is a diminution of it ; and it is expressed by the sign Minus, 
 or — . But this is evidently a vital error. The Debtor's Duty to 
 pay has no present effect : it is no subtraction from his present 
 Property : it is a mere Memorandum that he has to make 
 an exchange at some given future time 
 
 Advantage of adopting the Conception of Economics 
 as the Science of Exchanges or of Commerce 
 
 15. We now see the advantage of adopting and firmly 
 grasping the conception of Economics as the Science of Com- 
 merce or Exchanges. Because all the phenomena of Credit : 
 which are a hopeless puzzle and perplexity while it is treated as 
 the " Production, Distribution and Consumption of Wealth," 
 become perfectly clear and simple when it is understood to be the 
 Science of Commerce or Exchanges 
 
 In every case of a " Loan " of Money, or a Sale of Goods 
 "on Credit," a Right of action is generated : which is a Saleable 
 Commodity : which may be bought and sold like any material 
 chattel : and it has Value, because it will be paid in money. 
 This Right of action may be exchanged for goods exactly like a 
 piece of money any number of times, and so effect any number 
 of exchanges : until it is paid off and extinguished : and when it 
 is so it is another exchange 
 
 And it may be sold and exchanged for other Rights of action : 
 as when a Bill at three months is sold to a banker in exchange 
 
 N 2 
 
180 THEORY AND PRACTICE OF BANKING 
 
 for his Credit, which is a Eight of action payable on Demand. 
 Debts are only generated by Exchanges : and after effecting any 
 number of Exchanges they are only extinguished by Exchanges. 
 Thus ■ the whole series of operations consist in Exchanges. 
 Debts, as we have over and over again pointed out, are a species 
 of merchandise : and are the subject of the most colossal com- 
 merce in modem times. "While they exist they are independent 
 Quantities as much as any other chattels : and Economics has 
 only to do with them while they exist 
 
 On an Erroneous Idea as to the Nature of Credit 
 
 16. The Three Ambiguities in the Theory of Credit which 
 we explained in the iirst chapter show how abstruse and compli- 
 cated the subject is. There are other forms of error respecting 
 it which now require the student's attention 
 
 It has been asserted that Credit adds nothing to the resoui'ces 
 of the world, because it is neutralised by something else 
 
 Any person practically conversant with commerce, and seeing 
 that the enormously greater portion of commercial operations are 
 effected by means of Credit, would think it strange doctrine that 
 Credit adds nothing to the resources of a nation, or of an indi- 
 'vidual : because Credit is exactly the Purchasing Power which an 
 individual or a nation has over and above Money 
 
 Some writers, however, have been misled by a very manifest 
 error 
 
 Thus Henry Thornton, an able man, a banker, and one of the 
 authors of the Bullion Report, says — " Paper constitutes, it is true, 
 an article on the Credit side of some men, but it forms an exactly 
 equal item on the Debit side of the books of others. It constitutes, 
 on the whole, neither a Debt nor a Credit " 
 
 So another eminent Banker, M. Cernuschi, says — "The balance 
 sheet of every individual contains three accounts : existing goods, 
 Credits, and Debts. But if we collected into one all the balance- 
 sheets of every one in the world, the Debts and the Credits 
 niutually neutralise each other, and there remains but a single 
 account : existing goods 
 
 " The totality of goods, therefore, forms the general inventory. 
 There is the first matter of exchange. The Debts and Credits are 
 subsidiary matters. Debts and Credits are reciprocally trans- 
 
EREONEOUS IDEAS ON CREDIT 181 
 
 mitted as goods are transmitted : but, however great or however 
 small they be, aud through whatever hands they may pass, 
 Credits for some. Debts for others, they add nothing to and take 
 nothing away from the general inventory " 
 
 The argument of Thornton and Cernuschi is simply this. 
 Suppose A to have £100 in Money, and also a three months' bill 
 of £50 on B. Suppose B to have £100 in money, but at the 
 same time to have accepted a bill of £50 at three months to A. 
 Then A's Property would be stated thus, £100 + £50 : B's 
 property would be stated thus, £100 — £50 : now the argument 
 of these writers is this — that the + £50 and the — £50 balance 
 and neutralise each other, and the result is : which according 
 to them, is the same thing as saying that these quantities do not 
 exist at all 
 
 This view might perhaps seem at first sight somewhat specious, 
 but a very little reflection will show that it is erroneous 
 
 It alleges that if there are two equal and opposite Quantities 
 in existence at any instant which neutralise each other's effects, 
 and the result is 0, that is the same thing as saying that these 
 two Quantities have no existence 
 
 Suppose that there are two equal and opposite forces acting 
 on a particle at any time : they neutralise each other's effect : but 
 it would be highly erroneous to say that for that reason they do 
 not exist at all 
 
 Suppose that the Government on a division has 345 supporters 
 and 300 opponents : the 300 members on each side neutralise each 
 other : and the result is that the force of the Grovernment is 45 : 
 but that is a very different thing from saying that the 600 mem- 
 bers do not exist at all 
 
 Hence, even if it were true that these equal and opposite 
 Quantities neutralised each other, it would be erroneous to say 
 that that is the same thing' as if they did not exist at all 
 
 We have already pointed out that in the case of Obligations 
 not yet due, while the Credit, or Eight of action of the Creditor, 
 is an existent Quantity, and may be bought and sold like Money 
 or any other chattel, the Duty to pay, or Debt, of the Debtor does 
 not come into existence until the Credit has expired and the time 
 of payment has come. Hence in this case there is no question of 
 one Quantity neutralising the other. 
 
182 THEORY AND PRACTICE 01" BANKING 
 
 But even in the case of the Debt being payable on demand, 
 and therefore actually existing, the Creditor's Eight of action is a 
 separate Quantity, until it is paid off and extinguished : and the 
 Debt is also extinguished at the same time : so that they are both 
 extinguished together. But until this is done the Debtor has the 
 full right to part with or pay away any money in his possession 
 
 The fact is that a person's Credit, as we have already explained, 
 is the Purchasing Power of his Character over and above the 
 Money he has : and as it is now agreed by Economists that any 
 thing which is Purchasing Power is Wealth, it follows 
 that Credit is Wealth over and above and additional to Money ; 
 and every one knows that a Merchant's Credit greatly exceeds his 
 Money ; and that immensely the greater portion of commerce is 
 carried on by Credit, and not by Money 
 
 On the Error made by some Mathematicians in terming 
 Debts Negative Quantities 
 
 17. We have now to commence a new and most interesting 
 branch of the Theory of Credit 
 
 Tor a century and a half since the days of Maclaurin, mathe- 
 maticians have been in the habit of giving Debts as an example 
 of "Negative" Quantities. But they have entirely failed in 
 giving a satisfactory explanation of the meaning of the term 
 " Negative " as applied to Debts 
 
 The explanation usually given is this — A man's Property may 
 be considered as Positive, and his Debts as Negative : subtract 
 his Debts from his Property, and the remainder, if any, is Ms 
 Capital. And as the national Capital is the aggregate Capital of 
 all the individuals in it, according to this doctrine, in order to 
 find the quantity of Property in the country, all the floating 
 Debts in it would have to be subtracted from all the Property in 
 it, and the remainder would be the amount of ^national Capital 
 
 So Peacock, the distinguished Algebraist, says — " If property 
 possessed or due, could be denoted by a number or symbol with a 
 positive sign, a debt would be indicated by a number, or symbol, 
 with a negative sign, or conversely : such affections of property 
 are correctly symbolised by the signs + and — : since they 
 
ERROR OF ALGEBRAISTS 183 
 
 possess the inverse relation to each other, which these signs 
 require : for if to a person A there be given a certain property or 
 sum of money with, or added to, a debt of equal amount, hia 
 wealth, or property, remains the same as before " 
 
 Now, in a certain sense, these modes of statement have a 
 semblance of truth. If a man were going to retire from business 
 he would call in and discharge his liabilities ; and the remainder, 
 if any, would be his fortiine 
 
 But such a mode of statement is quite unsuitable for Econo- 
 mics. Debts are a species of Property of the most colossal 
 magnitude, and are the subject of the most gigantic commerce. 
 So long as they exist they are Economic Quantities : and Eco- 
 nomics has only to do with them while they exist, and are the 
 subject of commerce. These Credits, or Debts, in their various 
 forms, are a Property, second only in magnitude to the land itself : 
 and what are they to be subtracted from ? 
 
 Two Algebraists of the highest eminence have attempted to 
 explain the application of the Negative Sign to the Theory of 
 Credit, or Debts, and we shall now show that they have both fallen 
 into error 
 
 Euler says — " The manner in which we calculate a person's 
 property is an apt illustration of what ha,s just been said. "We 
 denote what a man really possesses by Positive numbers, using or 
 understanding 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 owes 50, this means 
 that his real possessions amount to 100 — 50, that is to say, 50 
 crowns 
 
 " As negative numbers may be considered as Debts, because 
 Positive numbers represent real possessions, we may say that 
 Negative numbers are less than nothing. Thus, when a man has 
 nothing in the world and owes 50 crowns, 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 would still be at point 
 though really richer than before " 
 
 . It is quite easy to show that the first paragraph is not a 
 suitable mode of stating the question in Economics. For suppose 
 that a person has 100 crowns and is bound to pay 50 crowns a 
 
184 THEORY AND PRACTICE OF BANKING 
 
 year hence : then it is true that his Property might be stated as 
 
 100 50 : but it would be quite inaccurate to say that his 
 
 Property is only 50 crowns. Because he has 100 crowns, which 
 he may trade with and dispose of in any way he pleases in the 
 meantime : and he is only bound to have 50 crowns at the end of 
 the year to discharge his Debt 
 
 But the owner of the Debt may put it into circulation : and 
 it may be bought and sold, or exchanged any number of times, 
 and produce all the effects of Money until it is paid off. So there 
 may be the 100 crowns and the Debt, or the Eight to Demand 
 the 50 crowns, circulating simultaneously in commerce 
 
 Nevertheless, the Debtor's Property would be correctly stated 
 as 100 -^ 50 crowns. Hence, it is quite clear that the 50 crowns 
 are not to be subtracted from his present Property. Now, by the 
 Law of Continuity, this same principle must be true if we diminish 
 the period of payment gradually from one year by small gradations 
 of a day at a time, till we reduce it to 0, or make the Debt pay- 
 able on Demand. The fact is, the expression is to be read in this 
 way : he possesses 100 crowns, coupled with the Duty to pay 
 50 crowns at some given time 
 
 So in the second paragraph, when the Debtor possesses 
 crowns and owes 50 crowns, he is said to have 50 crowns less than 
 nothing. This clearly means that he has the Duty to pay 
 50 crowns : and has nothing to pay them with. Now suppose that 
 being in such a position, as Euler says, some one makes him a 
 present of 50 crowns to pay his Debt with : then he is clearly 50 
 crowns richer than he was before ; and yet his Property is now 
 only = : this is an example that + x + gives + 
 
 Thus Euler is right so far as he goes : but he has stated 
 only half of the case. Because there is another combination of 
 Algebraical symbols which gives + , namely — x — : and there 
 is another mode in commerce of arriving at the same practical 
 result 
 
 Suppose that his Creditor Keleases him from his Debt : 
 then his Property would also = : and, as in the former case, he 
 would be 50 crowns richer than before. Now, if crowns are +, 
 and to Give is also + : then a Debt is — , and to Release or 
 Take away is also — : consequently to Give Money is 
 represented by + X + : and to Release a Debt will be 
 
EEBOB OF ALGEBRAISTS 185 
 
 represented by — X — ; and the position, of the Debtor will be 
 exactly the same after each operation 
 
 Hence, to Release a Debtor from the Duty to pay Money is 
 exactly equivalent to making him a Gift of Money. This shows 
 that the Efilease ( — ) of a Debt ( — ) is exactly equivalent to the 
 Gift { + ) of Money (+): or that in Commercial Algebra 
 — X — :=+ X +,asin Common Algebra : an example of the 
 Permanence of Equivalent Forms : a principle of the most momen- 
 tous consequence in modem commerce 
 
 18, Peacock, Dean of Ely, to whom Algebraical Science is so 
 much indebted, has equally failed to give a correct interpretation 
 of the term Negative, as applied to Debts 
 
 He says — "A Merchant possesses a pounds and owes h pounds : 
 his substance is therefore a — I: when a is greater than l 
 
 But since a and i may possess every relation of value, we may 
 replace h hj a — c, or a + c ; according as a is greater or less 
 than I: in the first case we get 
 
 a — I ^^a — (a — c) ^ c 
 and in the second — 
 
 a — b = a — (a + c) = — c 
 
 " If c therefore expresses his substance or Property when sol- 
 vent, — c will express the amount of his Debts when insolvent : 
 and if from the use of + and — as signs of affection, or quality, 
 in this case, we pass to their use as signs of operation, then, in- 
 asmuch as 
 
 a+ ( — c)=a — c, and a — ( — c)^a + c, 
 
 it will follow that the addition of a Debt ( — c) is equivalent to the 
 subtraction of Property, c, of an equivalent amount, and the 
 nbtraction of a Debt ( — c) is equivalent to the addition of 
 Property, c, of an equal amount : and it consequently appears 
 that the subtraction of Debt, in the language of symbolical 
 Algebra, is not its Obliteration or Removal, but the change 
 of its affection or cha/raetefr from Money or Property owed to 
 Money or Property possessed" 
 
 Here we observe that Peacock arrives at the conclusion that 
 the subtraction of a Debt is equivalent to the addition of 
 Property : exactly as we have seen above : but his method of 
 arriving at the result is erroneous ; because he forms the same idea 
 
186 THEORY AND PKACTICE OF BANKING 
 
 of a Debt that Euler does : namely, it is Money in the possession 
 of the Debtor owed and pledged to the Creditor, and therefore 
 affected with Negative Sign : and that the Release of a Debt is 
 the change of the sign of affection of Money owed into Money 
 possessed 
 
 Now this is exactly the same error as Euler has fallen into ; 
 and is exactly the error which we have already shown is so care- 
 fully provided against in the Digest, and by Pothier, Austin, and 
 many other Jurists 
 
 If these distinguished mathematicians . had reilected, they 
 would have seen that their interpretation could not be correct. 
 Because the signs + and — always refer to similar Quantities, 
 but of opposite Qualities. Now the Creditor's Right is +, and 
 the inverse of a simple Right cannot be a simple quantity of 
 Money : it must be something which is the Inverse of a Right : 
 and the Inverse of a Hig^ht is a Duty. Besides, releasing an 
 insolvent Debtor from a Debt does not put him in possession of 
 any actual Money : it is only equivalent to it : but not identical 
 with it 
 
 The fact is that the Debt is not Money in the possession of 
 the Debtor, owed or pledged to the Creditor : but the abstract 
 Duty to pay Money : and the Negative Sign denotes the 
 Cancelling of the Duty, or Releasing the Debtor from 
 the Duty to pay 
 
 Hence the result is not produced in the way in which Peacock 
 says it is : but exactly in the way he says it is not 
 
 On the Application of the Theory of Algebraical Signs 
 
 to Economics 
 
 19, The perplexities of the Theory of Credit, which have 
 baffled all the the Economists in the world to explain, can only 
 be unraveled by the great modern doctrine of the Separation 
 of the Signs of Affection or Distinction and Operation 
 
 As the introduction of this great Doctrine into Economics is 
 perfectly hovel, we shall have to treat of it somewhat fnlly: 
 especially as there may be students of Economics who are not 
 very familiar with it in other sciences 
 
 It is a remarkable example of the almost universal truth that 
 
THEORY OF SIGNS 187 
 
 practice has always preceded theory, that even the Practice of 
 Science long- preceded the Theory of Science. Thus from the 
 days of Diophautus it was perfectly well understood as an empiri- 
 cal rule in Algebra that — x — gives + 
 
 Sixteen hundred years ago Diophantus said — 
 
 "Xiixj/il STrl Aeti/riv •jroXXaTrXacrtacr^eio-a Trotci virap^w" 
 
 " Defect multiplied into Defect gives Existence," 
 which is expressed in common language as two Negatives 
 make an Affirmative 
 
 When the great pioneers of Algebra in modern times, Harriot, 
 Permat, Vieta, Des Cartes, Cardan, Tartaglia, translated their 
 reasonings into general symbols, they found that they had created 
 a machine whose working they were unable fully to understand. 
 They found among other things that many problems pro- 
 duced Negative answers. Unable at first to apprehend the 
 meaning of Negative answers, they believed that they had no 
 real meaning : and they called Positive Eoots true (verm radices) 
 and Negative Eoots fictitious {fictce radices) 
 
 In the progress of Natural Philosophy the Negative Sign was 
 used to a vast variety of Quantities : but no general Theory of 
 Signs was devised, and the progress of Mathematics was much 
 impeded by the want of the generalisation. The rule that — x 
 — gives + was universally adopted in practice, because no other 
 produced right results. But Algrebraists were wholly unable to 
 explain it : it was wholly unknown to Newton : and when he 
 tried to explain it, the great Euler babbled like a child 
 
 Even so late as 1813, a distinguished mathematician at Cam- 
 bridge denied the existence and ridiculed the idea of there being 
 any such things as " Negative " Quantities 
 
 Many centuries ago, at least about 1100 A.D., the Hindoo 
 Algebraists had made considerable advances in explaining the 
 Theory of Signs : but nothing was done in Europe until nearly 
 the close of the last century. Since then a new spirit of philoso- 
 phy has been breathed into the old science: and a number of 
 distinguished Algebraists, Arbogast, Argand, Buee, Armand, 
 Camot, Warren, Peacock, De Morgan, and others, have com- 
 pletely established the Theory of Signs : and their labours 
 
188 THEORY AND PRACTICE OF BANKING 
 
 have resulted in the Doctrme of the Separation of the Sigas 
 of Affection or Distinction and Operation 
 
 In most of the common books on Algebra we are told that 
 the sign + means addition, and the sign — means subtraction 
 
 We are also told that + x + gives + : and that — x — 
 also gives + : a doctrine which, without farther explanation, is 
 simply an inscrutable mystery, not to say an absurdity 
 
 Writers who are not versed in Natural Philosophy have no 
 conception of the signs + and — meaning anything but addi- 
 tion and subtraction. It is no doubt perfectly true that in some 
 oases they have that meaning : but" that is only one of their 
 meanings. But every one who has any knowledge of Natural 
 Philosophy knows perfectly well that they have in reality an 
 immense variety of meaniags, according to the particular circum- 
 stances out of which they arise : or the body of facts to which 
 they relate : and that it is wholly impossible to determine their 
 meaning until we know the particular circumstances under which 
 they occur 
 
 We must now explain the general use of these signs in 
 Natural Philosophy, and show how they may be applied by analogy 
 to the particular facts of Economics 
 
 All Sciences deal with Quantities and Operations 
 
 SO. In order to explain the matter in the simp 
 possible it may be said that all Sciences deal with Quantities 
 and Operations : and that throughout all Nature there is 
 Opposition or Contrariety or Inverseness — both 
 Opposition or Contrariety of Quality, and Opposition or Con- 
 trariety of Operation 
 
 Quantities that are endowed with Opposite or Inverse' 
 Qualities are universally distinguished in Mathematics and 
 Natural Philosophy by the Signs + and — 
 
 These Signs so used in Natural Philosophy to denote Opposite 
 or Inverse Qualities in Quantities of a similar nature, no matter 
 what the Opposition or Inverseness may consist in, are usually 
 termed Signs of Affection or Position : or we may with i 
 equal propriety, term them Signs of Distinction : 
 
THEORY OF SIGNS 189 
 
 But also Opposite or Inverse Operations may be 
 
 performed on these Quantities endowed with Opposite or 
 Inverse Qualities : and these Operations of Opposite, 
 Inverse, or Contrary natures are also designated by the same 
 Signs + and — . And any Operations whatever of an Opposite, 
 Contrary, or Inverse Nature, no matter what the Opposition, 
 Contrariety or Inverseness may consist in, may be denoted by 
 these signs 
 
 They are then termed Signs of Operation 
 
 So in every new body of facts which are brought under 
 scientific control : and in every new science whatever, Opposi- 
 tion or Contrariety or Inverseness is sure to appear : 
 and consequently the Signs + and — receive new applications of 
 meaning in every new science : and it is quite impossible to 
 determine their meaning, unless we know the Quantities they 
 refer to, and the Operations they denote 
 
 As each one of the Physical Sciences has been brought 
 in succession under the control of Mathematics, these Signs 
 have received new meanings according to the Quantities and 
 Operations they denote. Consequently they have already received 
 an immense variety of meanings: and they will receive new 
 applications of meaning according as every new body of facts is 
 brought under scientific control : and we have now to investigate 
 and determine what is their true meaning and application in the 
 body of facts which we denominate the Science of Economics 
 
 And the Combination of these Opposite Signs, denoting 
 Opposite or Contrary Qualities with the same signs 
 denoting Opposite or Inverse Operations performed upon 
 them : that is, the Combination of the Signs of Distinc- 
 tion with the Signs of Operation, gives rise to the well 
 known Algebraical Eules 
 
 + X + gives + 
 
 + X — „ — 
 
 — X — „ + 
 
 — X + „ — 
 
 These Laws, which are universally applicable in Natural 
 
190 THEORY AND PRACTICE OF BANKING 
 
 Philosophy, are equally applicable in Economics : and amotig 
 other things are alone capable, by a due adaptation of their 
 general meaning to the particular facts of Economics, of giving 
 the complete solution of the Theory of Credit, which has 
 hitherto been the opprobrium of the science 
 
 There are Economic Quantities of Inverse or Opposite 
 Qualities or Properties : and therefore following the 
 strictest analogy of Physical Science, we shall distinguish them 
 by Opposite Signs. And also Opposite Operations 
 may be performed on these Opposite Quantities : bringing into 
 play the well known Algebraical Eules ; which will lead to con- 
 sequences which may surprise some students 
 
 Examples of the Algebraical Signs applied to Quantities 
 
 21. We will now give some examples of,the Signs + and — 
 applied to Quantities of a similar nature, but of Opposite 
 Qualities : to furnish us with analogies to guide us to their 
 application in Economics 
 
 If we take the meridian of Greenwich as 0, degrees of 
 Longitude East and West of Greenwich are Opposite to each 
 other: if therefore the ones are called +, the others 
 may be called — . So also taking the Equator as 0, degrees of 
 North and South Latitude are Opposite to each other : and if the 
 ones be denoted by +, the others will be denoted by — 
 
 So in Algebraical Geometry in which it is necessary to fix the 
 position of the lines, if' any given fixed point be taken, lines 
 drawn in Opposite directions from it, either to the Eight or to the 
 Left : or Upward or Downward from it : are distinguished by the 
 Signs + and — 
 
 So if a line revolving in one direction be denoted by +, then 
 when it revolves in the Opposite direction, it is denoted by — 
 
 If two Mechanical Forces act in Opposite directions they are 
 distinguished by the Opposite Signs + and — 
 
 If 1 be multiplied by powers of a, the results are termed 
 Positive powers of a : if 1 be divided by powers of a, the 
 results are termed Negative powers of a 
 
 In modern Kinematics an accelerating Force is one which 
 causes a body to change its Eate of Velocity : if it Increases the 
 
SIGNS APPLIED TO QUANTITIES 191 
 
 Rate of Velocity it is termed Positive : if it Diminishes the 
 Kate of Velocity, it is termed Negative 
 
 In errors of observing phenomena, if the Error is Greater than 
 the reality it is termed Positive : if it is Less than the reality 
 it is termed Negative 
 
 In the Mercantile papers, it is usual to compare the weekly 
 results of the railway traffic with the results of the corresponding 
 weeks of the preceding year : if the results of the present year 
 exceed last year's, the Difference is denoted by + : if they fall 
 short, the Difference is denoted by — 
 
 A curious instance of this principle may be cited from steam 
 navigation. Owing to the resistance of the water, the paddles or 
 the screw of a steamer do not in general propel the vessel through 
 the water so fast as they would do if there were no resistance. 
 This Loss of speed is termed the Slip. But in the case of the 
 screw, by giving the stern of the vessel a particular shape, the 
 paradoxical result may be obtained, that it may be made to go 
 through the water Faster than it would do if the screw were 
 working in a solid. In this case the difference between the 
 theoretical and the actual speed is a Gain instead of a Ijoss : 
 and the Gain is termed the Negative Slip 
 
 Now this idea of Opposition is applied to a continuous line : 
 or to Motion in a continuous line. If any point be taken as 0, 
 then the part of the line or one side may be denoted by +, and 
 the part on the other side by — 
 
 Thus in a thermometer some fixed point, as the freezing point, 
 is taken as ; and degrees above that are termed degrees of 
 Heat, and distinguished by + : degrees below the 0, are termed 
 degrees of Frost and distinguished by — 
 
 Now suppose that the mercury rises from 10" of Frost to 15" of 
 Heat, to find the total number of degrees passed over, the degrees 
 on loth sides of must be added together. That is the Negative 
 degrees must be added to the Positive ones : and not subtracted 
 from them 
 
 In Natural Philosophy Time is considered as Motion in a 
 continuous line. If therefore any point in Time be fixed on and 
 denoted by 0, then Time on Opposite sides of this point will 
 be denoted by Opposite Signs. If Time before this epoch be 
 denoted by -I-, then Time after this epoch will be denoted by 
 
192 THEORY AND PBACTICB OP BANKING 
 
 — : and the successive intervals of Time whether years, months, 
 weeks, days or hours, will be denoted thus — 
 
 +6, + 5,+4,+3,+2, + l, 0,-1 —2,— 3,— 4,— 5,-^6,. . . . 
 
 If the birth of Christ be taken as the era, or 0, then years 
 tefon Christ will be Positive : and years after Christ will be- 
 Negative. ,To find the total number of years from the 
 foundation of Rome to the present time we must aM + 753' 
 and — 1883 together : or 2636 years altogether 
 
 We might multiply examples of the meaning of the signs + 
 and — in the various sciences to an immense extent ; but that 
 would be superfluous : we have given a sufficient number to ex- 
 plain the general principle 
 
 In short, in the most general terms take any quantity, what- 
 ever it may be : and then take its Opposite, Contrary, or 
 Inverse : then if one of these is distinguished by -I-, then the 
 other is distinguished as — 
 
 Thus Up and Down : Eight and Left : Before and Behind : 
 Before and After : Time Past and Time Future : Above and 
 Below : Yes and No : Supporters and Opponents : Face to Faee : 
 Back to Back : Erect and Inverse : Concave and Oonrex : 
 Sympathy and Antipathy : Virtues and Vices : Rewards and 
 Punishments: Rights and Duties: Active and Passive: 
 and innumerable other things : are all Opposite, Contrary, 
 or Inverse to each other : and may all be distinguished by the 
 Signs + and — 
 
 Examples of the Algelraical Signs applied to Operations 
 
 82. The same Signs + and — are also applied to any 
 Operations of an Opposite, Contrary, or Inverse 
 
 Nature ; no matter what the Opposition, Contrariety, or Inverse- 
 ness, may consist in 
 
 Thus to Add and to Subtract : to Pay and to Receive : to go 
 Forward and to go Backwards : to Do and to Undo : to Build up 
 and to Pull down : and innumerable Operations of a Contrary- 
 or Inverse Nature are all distinguished by the Signs + and — 
 
 And as in the most general terms possible, any Operatio3». 
 
OPPOSITE SIGNS USED BY JURISTS 193 
 
 of an Opposite, or Contrary, or Inverse nature are dis- 
 tinguished by the Signs + and — : to Create, or to call into 
 existence out of the Absolute Nothing, and to Cancel, 
 Annihilate, or to Decreate into the Absolute Nothing, 
 are Operations of Opposite, Contrary, or Inverse 
 Natures : consequently, if to Create out of the Absolute 
 Nothing be denoted by the Positive Sign +, then to 
 Cancel, Annihilate, or Decreate into the Absolute 
 Nothing will be denoted by the Negative Sign — 
 
 The Terms Positive and Negative are also used by Jurists 
 to denote Opposition 
 
 S3. The terms Positive and Negative are also very com- 
 monly used by Jurists as well as by Mathematicians to denote 
 Opposition 
 
 Thus Ortolan uses the terms Positive Rights and Negative 
 Eights to denote Right to Acts and Rights to Forbearances 
 
 Jurists class Servitudes as Positive and Negative : or those 
 which consist in the Right to Use the given subject in a given 
 manner : and those which consist in the Right to a Forbearance on 
 the part of the owner from using the subject in a given manner 
 
 Ortolan calls the Omission or Refusal on the part of a man 
 to act or do something a Negative Fact 
 
 So Austin speaks of Positive and Negative Wrongs : or 
 Wrongs of commission and omission 
 
 So a Negative Virtue is the absence of a vice. Professor 
 Stubbs says of Edward II. — " His faults are quite as much 
 Negative as Positive : his character is not so much vicious 
 as devoid of virtue " 
 
 In Parliamentary language a Bill which is thrown out is said 
 to pass in the Negative 
 
 In its relation to a Right a Duty is Negative : but Duties 
 themselves are termed Positive and Negative : as there is the Duty 
 to do something and the Duty to abstain from doing something. 
 Thus we have, as it were, a Negative sign within a Negative 
 Sign : which we shall hereafter find to be also the case in 
 Economics 
 
 So Active and Passive are distinguished as Positive and 
 
194 THEOBY AND PRACTICE 01" BANKING 
 
 Negative : and Eights and Duties are frbciniently termed Active 
 Eights and Passive Eights 
 
 Arguing, then, from these analctgieS, we arfe quite at libferty in 
 Economics to apply the terms Positive and Negative to any 
 Quaiitities and Operations whatever of an Opposite 
 Inverse, or Contrary nature 
 
 Thus, if the Right to Demand £100 be denoted by (+£l06)j 
 then the Duty to pay £100 will be denoted by ( — £100); without 
 any reference to any specific £100 in cash 
 
 Example of the Application of the Positive 'anS, Negative 
 Signs to Time 
 
 84. We shall now give an example of the Application of 
 the Signs + and — to Time, which is of supreme importance 
 in elucidating the Theory of Credit 
 
 Suppose this question were asked — 
 
 A father's age is 40, and his son's 15; when was the father 
 twice the age of his son ? 
 
 Let x be the number of years before the present time when the 
 father was twice the age of his son 
 
 Then 40 — a; = 2 (15 — a) 
 or x^ — 10 
 
 What does this Negative answer mean ? 
 
 It means that the father never was twice the age of his Bon 
 in Time past, which is taken as Positive iu the question : the 
 epoch or event of his being twice the age of his son is to be 
 found in Time opposite to the past : that is in Time future. 
 He was not twice the age of his son ten years ago : but he 
 will be twice as old as his son ten years hence : as is very clear : 
 because in ten years the father will be 50 and the son 25 
 
 Hence if any event which has happened in Time past is 
 Positive : the same event if it is to happen in Time future 
 is negative 
 
 Thus if a Product or Profit which has ieeH realised in Time 
 
THEORY OF THE VALUE OF LAND 195 
 
 past is distinguished as Positive : then a Product or Profit 
 which is to be produced in Time future is Negative 
 
 Hence if any Economic Quantity, or Capital, of any form 
 whatever produces Profits in a continuous series: the Profits 
 which have been produced in Time past are Positive : and the 
 Profits which are to ie produced in Time future are Negative 
 
 And, consequently, the Right to the Profits already realised 
 in the past may be distinguished by the sign +, and termed 
 Positive : and the Right to the Profits which are to be pro- 
 duced in Time future may be distinguished by the sign — , and 
 termed Negative 
 
 And the total Value of the Economic Quantity, or the Capital, 
 comprehends both the Right to the profits already realised in 
 the past and also the Eight to the Profits to be produced in the 
 future : or both the Positive Right and the Negative 
 Right 
 
 The Theory of the Value of Land 
 
 25. Having now cleared away various misconceptions which 
 have obscured the true understanding of the Theory of Credit, 
 and explained the general principles of the use of the Algebraical 
 Signs in the various sciences : we are now in a condition to 
 perceive their application in Economics 
 
 We have already in Chapter I., explained the Theory of the 
 Value of Land : and shown that the total Value of Land consists 
 in the Right to the past products of the Land together with the 
 Right to a series of future products from the land for ever. 
 But though each of these future products, or profits, will only 
 come into existence at definite intervals of time, they have each a 
 Present Value : and the Value of the land is the sum of 
 this series of Present Values of the future products for ever 
 
 Now if we assume the products already realised to be Positive, 
 we have" seen that by the general principles of the Theory of 
 Signs the products to be produced in Time future wiU be 
 Negative. And consequently the Right to the products 
 already realised is Positive : and the Right to the products 
 or Profits to be produced in Time future is Negative : and 
 may be called the Credit of the Land : because the owner has 
 
 o 2 
 
196 THEORY AND PRACTICE OF BANKING 
 
 merely the abstract Right to the products when they are produced. 
 And if any one buys this abstract Right, he merely does so in the 
 Belief or Expectation that the land will produce them 
 
 A Person exercising any Profitable Business is an 
 Economic Quantity analogous to Land 
 
 26. A merchant or trader of any sort exercising a profitable 
 business is an Economic Quantity analogous to Land. He may 
 have accumulated Money, the fruits of his past industry ; but 
 besides his accumulated Money, he possesses his Skill, 
 Energy, Abilities, and Character: his Personal 
 Capital or Mercantile Character, his Capacity to 
 earn Profits in the future, as he has already done in the past: 
 exactly as the Land has not only produced profits in the past, but 
 has also the Capacity to produce profits in the future 
 
 The trader has also the Right to the profits of his future 
 industry : and if the Right to the profits he has already earned 
 is Positive : his Right to the profits he will earn in future is 
 Negative 
 
 The Value, Wealth, or Purchasing Power of the 
 trader, like the Value of Land, consists in his Property in the 
 realised Profits of his past industry together with the Right to 
 the expected Profits of his future industry : which of course are 
 Inverse or Opposite to each other 
 
 And there are two ways in which a merchant may trade. He 
 may buy goods with Money, the fruits of his past industry : or he 
 may buy goods by giving in exchange for them a Promise to 
 pay, or the Right to demand money at a future time, 
 which is intended to be earned by his future industry 
 
 Personal or Mercantile Character used in this way 
 is, as we have seen, in popular language termed Credit : and as 
 anything which has Purchasing Power is Wealth: 
 it evidently follows that Money and Credit are equally 
 Wealth 
 
 When a merchant buys goods with his Promise to pay in 
 future, it is a mere abstract Right, quite separate from any specific 
 Money : it is therefore Credit : because the person who buys it 
 
CREDIT IS NEGATIVE CAPITAL 197 
 
 buys a mere abstract Right : in the lelief or confidence that it 
 will be paid in Money 
 
 Hence Mercantile Skill, Capacity, or Character, 
 may be called Personal Credit 
 
 But as we have already seen that Capital is any Wealth, 
 or Economic Quantity used for the purpose of Profit, it follows 
 that Money and Credit may be equally used as Capital 
 
 If Money is termed Positive Capital, Credit may be 
 termed Negative Capital 
 
 27. A merchant's Purchasing Power consists of his Money, 
 his Eights to demand Money (i.e., any Bank Notes, Credit, or Bills 
 he may possess) and his Credit 
 
 If he buys goods with Money and sells them with a profit, he 
 first replaces the Money he has expended : and the surplus is his 
 Profit 
 
 If he buys goods with his Credit he incurs a Debt : when he 
 sells the goods he first discharges the Debt he has incurred : and 
 the surplus is his Profit 
 
 In either case the Profit consists in the excess of his Property 
 at the end of the operation above what it was at the beginning 
 
 If he buys goods with Money, he makes Capital of the 
 realised Profits of the past : if he buys them with Credit he 
 makes Capital of the expected Profits of the future 
 
 In each case he makes a Profit : hence, by the definition. 
 Money and Credit are equally Capital : but as they are 
 inverse and opposite to each other, if Money is termed 
 Positive Capital, Credit may be termed Negative 
 Capital 
 
 By a somewhat curious coincidence of thought, the early 
 Algebraists, not apprehending the meaning of the Negative roots 
 of equations called them fictitious roots. Thus in the problem we 
 gave of the father's and son's ages the answer came out Nega- 
 tive : which merely showed that the question should have been 
 stated in the opposite way to which it was done : it should 
 have been asked when the father's age would be twice that of 
 his son, instead of when it had been : and therefore as the 
 
IJJ« THEORY AND PRACTICE OF BANKING 
 
 Positive sign in that problem meant past time, the Negative sign 
 meant future time. But this root though Negative, is equally a 
 real root of the equation as the Positive one. So also many 
 •writers, seeing clearly the effects of Credit, call Money real Capital, 
 and Credit fictitious Capital. But the fact is that like the 
 Negative or fictitious root of the equation, it is equally real as 
 the Positive one : only it is inverse or opposite to it. By 
 using Money, the trader makes Capital of the realised Profits of 
 the past : by using Credit he makes Capital of the expected 
 Profits of the future 
 
 On Debts as Negative Quantities 
 
 28. We have seen that mathematicians call Debts 
 " Negative " Quantities ; but they are completely mistaken 
 in their application of the term Negative ia this instance. After 
 the considerations we have presented, the real meaning of the 
 term " Negative " as applied to Debts is perfectly clear and 
 simple 
 
 An Obligation consists of two parts — 
 
 1. The Creditor's Right to demand 
 
 2. The Debtor's Duty to pay 
 
 These two Quantities are Opposite or Inverse to each 
 other : the first is Active or Positive : and the second is 
 Passive or Negative 
 
 Hence the Creditor's Eight of action is the Positive 
 Quantity, and the Debtor's Duty to pay is the "Negativ-e" 
 Quantity 
 
 Hence if a person has a balance of £500 at his banker's : and 
 is bound to pay £50 at some given time : and therefore his 
 Property may be represented by £500 — £50 : it is not to be 
 read as if he had only £450 at his banker's : but it is to be read 
 in this way — he possesses £500, but coupled with the Duty to 
 pay £50 at some given time 
 
 Hence in Economics the symbol (+ £100) always means 
 actual money : or the Eight to demand money, such as Bills or 
 Notes : and the symbol ( — £100) always means the Duty to 
 pay money 
 
 We now clearly perceive the meaning of saying that 
 
DEBTS AS NEGATIVE QUANTITIES 199 
 
 Money is a Positive Quantity : and Debt a Negative Quantity : 
 it means that Money is a Right : but Debt is a Duty. 
 And this exactly corresponds with the common Algebraical 
 doctrine that Quantities passing through change their sign. 
 Because when a man has spent all his Money and his Property 
 is then 0, and then runs into Debt, he has exhausted his Right 
 and incurred a Duty 
 
 And an Obligation consists of two Opposite or Inverse 
 Quantities, the Creditor's Eight of. Action (+ £100), and the 
 Debtor's Duty to pay ( — £100) : and it may be conveniently 
 denoted by this symbol 
 
 + £100 : 
 £100 
 
 In this case the Debt means the Duty to pay 
 
 It is now seen how necessary it is to observe the double 
 meaning of the word Debt in Law and common usage : because 
 when a Debt is called "Goods and Chattels," "Merchan- 
 dise " or a " Commodity," it means the Creditor's Right 
 of action : but when a Debt is termed a Negative Quantity 
 it means the Debtor's Duty to pay 
 
 And as the Opposite or Inverse Quantities in an Obligation 
 are created together : can only exist together : and vanish 
 together : they are exactly analogous to Polar Forces 
 
 {. 
 
200 THEORY AND PRACTICE OF BANKING 
 
 Section III 
 
 On the Transfer of Credit or Debts 
 
 29. We have now explained the real nature of Credit, 
 and shown that it is the Name of a species of Incorporeal 
 Property, which in Law, Commerce, and Economics, and in 
 common usage is also called a Debt. And because it can be 
 bought and sold, transferred, or exchanged, it is classed under 
 Pecunia, Res, Bona, Merx, in Roman Law : under -xfrtj /lara, 
 
 dyaOd, ■Trpdy/iara, oTkos, VTrdp^ov, ovcria, d^opfir), in Greek Law : 
 
 under Goods and Chattels, Merchandise, Vendible Commodities, 
 in English Law : and therefore under the term "Wealth in 
 Economics. This Species of Property in this country exceeds 
 any other, except the land : and we have now to explain how it 
 is bought and sold, transferred or exchanged 
 
 When it is seen that a Bank Note is transferred from hand to 
 hand like a piece of money, it might be supposed that any Debt 
 might be sold and transferred with equal facility. There is, how- 
 ever, very considerable subtlety regarding the sale of Debts : and 
 it is only by very slow and gradual degrees that they have 
 become capable of being freely sold 
 
 If it were asked what discovery has most deeply affected the 
 fortunes of the human race, it might probably be said with truth 
 — The discovery that a Debt is a Saleable Commodity 
 
 When Daniel Webster said that Credit has done more a thou- 
 sand times to enrich nations than all the minesxrf all the world, _ 
 he meant the discovery that a Debt is a SaleableN Commodity or 
 Chattel : and that it may be used like Money : and pi-oduce all 
 the effects of Money 
 
 We must now trace the origin and progress of the power of 
 selling and transferring Debts, and place this branch of Mercan- 
 tile Law on a solid foundation 
 
ON JURA IN PERSONAM 201 
 
 On Property held in Contract or on Jura in 
 Personam 
 
 30. We have observed in the first chapter that Property or 
 Eights are of two species 
 
 1. The Property or Right in a specific Chattel : termed in 
 Eoman Law Jus in Re, or in Rem, without being related to any 
 one else : this kind of Eight is also called Dominium. When a 
 person has such a sole and exclusive Right in any chattel, he may 
 sell and transfer it to any one else at his own good will and 
 pleasure, and without asking the consent of any one else. Money, 
 cattle, timber, &c., are subject to this kind of Property : and 
 hence the Proprietor of such chattels may freely alienate or sell 
 them to any one else he pleases 
 
 2. Property held in Contract, or Obligation, called in Roman 
 Law Jus in Personam : or a Jus ad rem {acquirendam) : where a 
 person has a Right, not to any specific Thing : but only against 
 a Person to pay or do something 
 
 A simple example of this kind of Property or Right, is 
 the Contract or Obligation of Debt : where one person, the 
 Creditor, has the Right to demand a sum of Money or any other 
 Chattel from some Person the Debtor : or has the Right to 
 compel him to do something. In such a case he has no Right to 
 any Money or Chattel in the Debtor's possession : and in fact the 
 Eight of the Creditor against the Debtor exists whether the 
 Debtor has any Money or not : and equally the Debtor's Duty 
 to pay exists whether he has any Money or not. That is, the 
 Contract or Obligation between the parties exists without any 
 reference to any specific Money or Chattel 
 
 The former kind of Rights are called Real Rights or Corporeal 
 Property -. because they are the Right to certain specific Things 
 or Chattels : the latter are called Personal Rights, because they 
 are mere abstract Rights against a Person : and as the Person 
 is always specified and definite, they may also be called Nomi- 
 nate Bights. But as they are wholly severed from any 
 specific Chattels, they are a species of Incorporeal Property 
 
202 THEORY AND PRACTICE OF BANKING 
 
 31. Bat Property, or Rights held in Contract, or Obliga- 
 tion are of two kinds 
 
 (a) Where there is a Eight to demand on one side, and 
 Duty to perform on the other : such as the relation between 
 Creditor and Debtor ; or between Landlord and Tenant in 
 modern times. Such a relation is termed a TTnilateral 
 Contract 
 
 {b) "Where each party to the Contract has a Eight tp 
 demand and also a Duty to perform:. Such as the Nexum, or 
 Obligation, between Lord and Vassal in Feudal Law: or that 
 between Master and Servant at the present time. Such a relation 
 is termed a Bilateral or Synallagmatic Contract 
 
 Formerly it was held universally that when Property was held 
 in Contract of either sort. Unilateral or Bilateral, neither party 
 could substitute another person for himself, without the consent 
 of the other party to the Contract 
 
 This rule must manifestly hold good in all Bilateral Contracts, 
 where each party has a Duty to perform. When one person 
 agrees to accept a Duty from another person, he of course believes 
 that that person can perform the Duty. But he cannot be comr 
 palled to accept another person to perform that Duty without his 
 own consent. Neither if a person has undertaken to perform ^ 
 Duty to one person can he be compelled to perforin it to another 
 person without his own consent 
 
 Thus so long as the Feudal Law retained its pristine rigour, 
 neither the Lord nor the Vassal could substitute any one else for 
 himself without the consent of the other party. Each of the 
 parties had Duties to perform : the Vassal to render true and 
 loyal service : and the Lord to render due protection and defence. 
 And neither party could attorn the other, or turn him over to any 
 one else without his own consent. As Sir Martin Wright says— 
 ■'As the feudatary could not alien the feud without the consent 
 Df the Lord, so neither could the Lord ahen or transfer his 
 seignory or superiority to another without the consent of the 
 feudatary. For the obligations of the superior and inferior were 
 mutual and reciprocal : the feudatary was really as much ijitejested 
 in the conduct and ability of the Lord, as the Lord was in 
 the qualification and abihty of his feudatary. And as the Lprd 
 3ould not alien, so neither could he exchange, mortgage, or other- 
 
ON JURA IN PERSONAM 203 
 
 wise dispose of his seignory without the consent of his Vassal. 
 Again, as the vassal or feudatary could not alien, so neither could 
 he devise or dispose of the feud by will, or by any means (when 
 feuds were become hereditary) prevent or vary the feudal course 
 of succession" 
 
 So in the case of Master and Servant at the present day : a 
 master cannot transfer his household to any one else without their 
 own consent, as if they were cattle or slaves. Neither can a 
 servant substitute some one else in his place without his master's 
 conseat. So if any person contracts to do any work for another, 
 he cannot substitute another person in his place without the con- 
 sent of the other party 
 
 The same principle formerly held good when the Contract was 
 Unilateral, as in the case of Creditor and Debtor. The Creditor 
 could not transfer his Right of action against the Debtor in any 
 one else : because the Debtor never agreed to pay any one else 
 than his own Creditor. It is a rule of law as well as of common 
 sense that no man can be made a party to a contract without his 
 own consent : and that no one can stipulate for another without 
 his authority 
 
 Thus the Digest says — " Alteri stipulari nemo potest " 
 
 " No one can stipulate for another'" 
 
 Unless, therefore, the Debtor had agreed with the Creditor 
 that he might transfer his claim, the Creditor had no power to 
 guarantee his Transferee that the Debtor would pay him. Ac- 
 cordingly, both in Eoman and English Law for a long period the 
 Creditor could not transfer his Eight of action against his Debtor, 
 without the Debtor's consent, so as to enable the Transferee to 
 sue the original Debtor 
 
 But both in Eoman and English Law the Creditor might 
 transfer his Debt, if the Debtor consented to it. If the three 
 parties, the Debtor, the Creditor and the Transferee met together, 
 the Creditor might transfer his Eight to the Transferee, 
 and the Debtor might agree to pay the Transferee. In such 
 a case, the Transferee acquired a Eight of action against the 
 Debtor : the Debtor was released from the Debt to the original 
 Creditor : and the Creditor was released from his Debt to the 
 Transferee 
 
 This was one form of the Contract termed Novatio : because 
 
204 THEORY AND PRACTICE OF BANKING 
 
 a New Contract was made, which cancelled, discharged, and 
 extinguished the old one 
 
 But nevertheless, though it may be true in theory that a 
 Creditor cannot transfer his Eight of action without the consent 
 of the Debtor, the Creditor soon begins to insist upon the power 
 of transferring his Eight like any other Property. And there is 
 a very good reason for this : because in the Obligation or Contract 
 of Debt, there is manifestly a strong distinction between the 
 parties, the Creditor and the Debtor. The Debtor cannot sub- 
 stitute another Debtor for himself, because the Creditor may not 
 have the means of knowing the solvency of the substituted 
 Debtor : as for instance no one can compel his Creditor to take 
 payment of a Debt in the Notes of a country banker 
 
 Therefore, by the very nature of things, the consent of the 
 Creditor is indispensible to the substitution of a new Debtor 
 
 But the case of the Debtor is different. If a person really 
 owes a Debt and has the means of paying it, it cannot make the 
 slightest difference to I^'m whether he pays it to A or to B, so 
 long as he can get a discharge for it : and is not liable to be 
 called upon to pay it twice over 
 
 Hence it is evident that while the assignment of a new Debtor 
 might seriously prejudice the Creditor : the assignment of a new 
 Creditor can be no real prejudice to the Debtor 
 
 Both in Eoman and English Law Creditors began to sell their 
 Debts, and adopted certain legal devices to enable the Transferee 
 to obtain payment from the Debtor, without his having consented 
 to the transfer of the Debt : till at last they finally established 
 their Absolute Eight to do so without the consent of the Debtor. 
 And thus Credits or Debts came to be included among Eights 
 held in Dominion : and became as freely saleable as any other 
 chattels 
 
 On the Sale or Transfer of Debts in Roman Law 
 
 32. It has been seen in the preceding paragraph that origi- 
 nally, whenever Property was held in Contract or Obligation, 
 either Unilateral or Bilateral, neither party to the Contract 
 could substitute another person for himself, without the consent 
 of the other party 
 
SALE OF DEBTS IN EOMAN LAW 205 
 
 Thus in the Unilateral Contract of Debt, the Creditor could 
 not sell or transfer his Eight to any one else so as to enable the 
 Transferee to sue the original Debtor without his consent. The 
 Transferee could not sue the Debtor because he never made any 
 promise that he would pay the Transferee ; and thus there was 
 no privity of Contract between them. The Transferor could 
 make no engagement that the Debtor should pay the Transferee : 
 because no person can stipulate, or make a contract, for another 
 person without his consent 
 
 If, however, the Debtor consented and agreed that his 
 Creditor might transfer his Right of action, it might be done. 
 As, however. Debts are mere abstract Rights of action, not capable 
 of manual delivery like material chattels, it was necessary for the 
 three parties to meet together. With the consent of the Debtor, 
 his Creditor transferred his Right of action to the Transferee, 
 and the Debtor then promised to pay the Transferee. "When this 
 was done the Transferee acquired a Right of action against the 
 Debtor : the Debtor was released from his Debt to his Creditor : 
 and the Creditor was released from his Debt to the Transferee. 
 A new Contract was created, which cancelled and extinguished 
 the two preceding ones : and it was therefore called Novatio : 
 and the assignment of the Debtor to the Transferee was termed 
 a Delegatio. When this solemn Stipulation was completed, the 
 Transferee might sue the Debtor in Ms own name, because there 
 was now a privity of Contract between them 
 
 Creditors, however, at Rome perceived the convenience of 
 being able to sell their Debts like other chattels, as it involved 
 no real detriment to the Debtor. Accordingly, though they 
 could not devest themselves of the legal estate in the Debt so 
 as to enable the Transferee to sue the Debtor in his own name, 
 in course of time certain legal devices were adopted so as to 
 enable the Transferee to recover the amount of the Debt from 
 the Debtor ; even though the Debtor had not consented to the 
 transfer of the Debt : so that the Transferee could not sue him 
 in his own name. We have now to trace the steps by which a 
 Creditor came at last to have the absolute Right to sell his Debt, 
 without the consent or even the knowledge of the Debtor 
 
 33. The early simplicity of the Code of the XII. Tables 
 
206 THEORY AND PRACTICE OF BANKING 
 
 knew nothing of Trustees or Attornies. Every man was either 
 the absolute Proprietor of a thing, or he was not. He in whom the 
 legal estate was vested was termed Dominus ex jure Qumtium, 
 or Proprietor by the Common Law of the Eomans. It knew 
 nothing of double or subordinate Eights. The Code of the XII. 
 Tables allowed no man to sue in the name of another in private 
 cases. He alone who was Dominus ex jure Quirilium might 
 sue, and that in person. And as no man could sue another 
 unless there was some Contract, Nexum, or Eelatiou between 
 them, the Transferee of a Debt could not sue the Debtor because 
 there was no privity of contract between them 
 
 The Code of the XII. Tables was maintained in all its strict- 
 ness for about 277 years. During this period the forms of writs 
 were defined with great strictness. T-hey were called Lrju 
 adiones, or, as we might say, Common Law writs : and as long 
 as these lasted no one could sue on behalf of another, or in the 
 name of another. Consequently, so far as we can understand, 
 the Transferee of a Debt could maintain no action against the 
 Debtor 
 
 But in the progress of time new wants, new rights, new in- 
 terests, and new ideas grew up ; and a great Equitable Jurisdic- 
 tion came into existence to meet the new requirements. The 
 supreme judicial Magistrates, the City and Foreign Prsetora, 
 were clothed with the power adjuvcmdi; vel supplentM; ml 
 corrigendi juris civilis gratia, propter utilitatem publicam. The 
 Eomans had too deep a reverence for their Code, which Cicero 
 declared to contain more utility in one chapter than all the 
 libraries of the Philosophers, to permit the Prsetor actually to 
 'abolish any of its Laws ; but only to supply their defects, aiid 
 'extend their meaning. But new Eights and new Interests had 
 grown up, which were not capable of being protected directly by 
 the laws of the XII. Tables 
 
 Among these new Eights were Equitable Interests : one 
 person might be possessed of the legal estate in certain things, 
 but permit another person to enjoy their use or profit, without 
 ■undergoing the formal solemnity of the transfer by mancipation 
 or the cessio in jure. The original owner, therefore, possessed 
 the nudum jus Quiritium, the mere legal, right, while the 
 
SALE OF DEBTS IN ROMAN LAW 207 
 
 grantee possessed the profitable, equitable, or, as it was after- 
 wards termed, the honitarian, use 
 
 Thus, if a Creditor sold or transferred a Debt or Eight of 
 action, without the consent of the Debtor, he alone possessed 
 the nudum jus Quiritium, but the Transferee possessed the 
 Equitable Eight to it : but he l^ad no Eight of action by the 
 Code of the XII. Tables 
 
 In order to protect these Equitable Interests without directly 
 contravening the fundamental laws of the XII. Tables, the Praetors 
 gradually created the great system of Legal Fictions : and these 
 Fictions were applied to protect the Equitable Eights of the 
 Transferees of Debts 
 
 About the year 577 A.tj.C, or 176 B.C., the Lex ^butia 
 abolished the old Legis actiones, which were not part of the 
 Code of the XII. Tables, but only a series of writs framed by the 
 Magistrates, so as to be adapted to them. New forms of writs 
 were prepared by the authority of the Pr^tors, called Formulm : 
 and these were adopted and extended by two Leges Julim 
 
 By these new Formula parties were allowed to be represented 
 by Gognitores or Procuratores, that is Attornies, who were allowed 
 to sue for their clients. The Transferee was then allowed to sue 
 as the Procurator or Attorney of the Transferee. Gains gives 
 the formula of the writ in such a case 
 
 The Prffitor could only grant an actio direda or vulgaris, or 
 common law writ, to the original Creditor : but he could grant 
 an actio utilis oifictitia, or an equitable writ, to the Transferee of 
 the Debt 
 
 When a Creditor sold or transferred his action, he was said 
 bedere or mandare actionem. The Transferee was called Pro- 
 curator in rem suam, or Attorney on his own behalf: he was 
 acknowledged as the real plaintiff, si in rem suam datus sit 
 procurator, loco Domini haletur : his mandate could not be 
 revoked, and he owed no account to his principal 
 
 Such was the state of the Law regarding the sale or transfer 
 of Debts in the time of Gaius, who is generally supposed to 
 have written his Institutes in the time of the Antonines. They 
 were the text-book of Eoman Law throughout the whole Eoman 
 Empire when the Eomans left Britain : and it is now supposed 
 by many high authorities that they were to a great extent the 
 
208 THEORY AND PRACTICE OF BANKING 
 
 source aud original of the Common Law of England. And the 
 Common Law of England with regard to the Sale of Dehts was 
 exactly as is stated by Gains : until it was superseded by the 
 recent Supreme Court of Judicature Act 
 
 34. Some time after Gains, the Emperor Alexander Severus, 
 acting probably under the advice of Ulpian, published a con- 
 stitution in the year 224 a.d., by which the absolute freedom of 
 the Sale of Debts without the knowledge or consent of the 
 Debtor was recognised and allowed 
 
 " Omnium rerum quas quis habere, vel possidere, vel 
 persequi potest venditio recte fit " 
 
 " Everything may ie sold which one may have or possess, or 
 has the Eight to sue for " 
 
 " Nomina quoque in diem vel sub conditione contracta 
 veneunt " 
 
 " Debts contracted to ie paid at a certain day or at a certain 
 event are saleable " 
 
 " Nomina eorum qui sub conditione vel in diem debent, et 
 emere et vendere solemus. Ea enim res est quEe emi et venire 
 potest " 
 
 " We are accustomed to buy and sell Debts payable on a 
 certain event or on a certain day. For that is Wealth which 
 can be bought and sold " 
 
 " Nominis venditio etiam ignorante vel invito eo adversus 
 quern actiones mandantur, contrahi solet " 
 
 "It is usual to sell a Debt without the Jmowledge or even 
 against the consent of tlie DeltiOr" 
 
 " Certi et indubitati juris est ad similitudinem ejus qui per- 
 Bonalem redemerit actionem, et utiliter eam movere suo nomine 
 conceditur, etiam eum qui in rem actiones comparaverit, eadem 
 uti posse facultate " 
 
 " It is clear and undoubted law that, just as he who has 
 bought a Personal action may sue out a writ in his own name ; 
 so he who has bought a Real action has the same power " 
 
 In the time of Gains, the Transferee of the Debt could only 
 sue as the Attorney of the Creditor or Transferor, as he was 
 obliged to allege the jus Quiritium, or the legal estate of the 
 Transferor : but the necessity of this was taken away by Jus- 
 
SALE OF DEBTS IN ROMAN LAW 209 
 
 fcinian, who abolished the nudum jus Quiritium, which had 
 become an absurd enigma which puzzled Law students, and 
 then the Ti-ansferee could sue in his own name 
 
 " Ordinarium visum est post nominis venditionem utiles 
 emptori (sicut responsum est) vel ipsi creditori postulanti 
 dandae actiones" . 
 
 " It is seen that it is usual to grant a writ on the sale of a 
 Belt, either on the demand of the buyer (as has been, decided) or 
 of the Creditor himself " 
 
 Thus, at length, the complete emancipation of a Debt from 
 the general rule of law affecting Property held in Contract was 
 effected : and it was made as completely and freely saleable as 
 any other material chattel : and thus a Debt was removed from 
 the category of Property held in Contract to that of Property 
 held in Dominion 
 
 35. The Laws regarding the Sale of Debts enacted in the 
 Pandects were fully adopted and confirmed in the Basilica : 
 and thus they have ever since been the general Mercantile Law of 
 Europe, except England, to which the legislation of Justinian 
 never extended 
 
 Thus Azo, one of the earliest legal luminaries on the revival of 
 learning in the "West, says — 
 
 " De Actionibus autem venditis sciendum est quod omnes 
 Actiones vendi possunt, sive sunt purse, sive conditionales, sive 
 Fersonales " 
 
 "But with respect to the Sale of Actions it must he understood 
 that all Rights of action, whether simple, or conditional, or real, or 
 Personal, may be sold" 
 
 36. This investigation clears up a difficulty which has 
 puzzled some modern writers. The earliest Bills of Exchange 
 extant contain no words of negotiability : and yet we know as 
 a fact that they were negotiated. And several writers have 
 endeavoured to discover when Bills of Exchange were first made 
 negotiable. Some have supposed that it was done by Cardinal 
 Richelieu. But all obscurity and doubt has now been cleared 
 away. Bills of Exchange required no words of negotiability, 
 because they were so in their very nature by the general Mercan- 
 tile Law of Europe 
 
210 THEORY AND PRACTICE OF BANKING 
 
 And this continued to be the general Law of Europe, as may 
 be seen in any of the great Civihans, from whom we need not 
 quote. As an instance of this, we may mention the trouble which 
 the irascible Florentine artist, Benvenuto Cellini, met with in his 
 visit to Paris. " It is customary in France to make the most of 
 a suit which they commence with a foreigner or with any person 
 who is not used to law transactions : as soon as they have any 
 advantage in the process, they find means to sell it to certain 
 persons, who make a trade of buying lawsuits." This passage 
 shows that the law was not a dead letter 
 
 This also explains a fundamental distinction between the 
 Common Law of Scotland and England as to Bills of Exchange. 
 By the usual Mercantile Law of England, unless a Bill of Ex- 
 change was drawn payable to " order " or to " bearer " : that is, 
 made transferable by the express consent of the Debtor, it could 
 not be transferred so as to enable the Transferee to sue in his 
 own name. But by the Common Law of Scotland a Bill of 
 Exchange does not require any words of negotiability to be 
 inserted in it : it is transferable and negotiable by its very nature. 
 And a Scotch Bill of Exchange is negotiable in England without 
 any words of Negotiability : and the reason of this difference is, 
 that the Common Law of Scotland is the Eoman Law of the 
 Pandects and the Basilica, which is the general Law of Europe : 
 while the Common Law of England is the Eoman Law of Gaius 
 
 Equity however, as we shaU see in the next section, always 
 adopted the Law of the Pandects, which allowed the free Sale of 
 Debts : and, consequently, though the Transferee of a Bill of 
 Exchange containing no words of negotiability could not have 
 an Action of Law against the acceptor, he might always sue 
 him in Equity, in case of need. But by the Supreme Court of 
 Judicature Act, it is enacted that the Rules of Equity shall prevail 
 over those of Common Law whenever they conflict : and, con- 
 sequently, Bills of Exchange are now negotiable in their very 
 nature, and do not require words of negotiabihty 
 
 Moreover, by the Common Law of Scotland, a Debtor is bound 
 to accept a Bill drawn upon him by his Creditor, and is liable 
 to an action for non-acceptance. But. of course this was never 
 
SALE OF DEBTS IN ENGLISH LAW 211 
 
 the case in England : and this distinction is preserved by the 
 Bills of Exchange Act of 1882 
 
 On the Principles of English. Law and Equity 
 relating to the Sale or Transfer of Debts 
 
 37. We have now to investigate the Principles of English 
 Law and Equity relating to the Sale or Transfer of that 
 stupendous mass of Property which consists of Ohoses-in-action, 
 which in its various forms is second only to the land in magni- 
 tude. And we shall have to do this with some fnlness, as in the 
 case of Goodwin v. Roiarts, the greatest Mercantile case of 
 modem times, the Court of Exchequer Chamber unanimously 
 held that the whole Judges of England had been mistaken as to 
 the fundamental principles of the Common Law of England 
 relating to the Transfer, or Sale, of Choses-in-action. This case 
 reversed and annulled a whole series of cases decided by Lord 
 Holt and the Court of King's Bench from 1692 to 1704, upon 
 which the opinion of all modern Judges had been based ; and 
 which had been assumed as correct by all the standard writers on 
 Mercantile Law. And we shall have to be the more explicit on 
 this subject, because the effect of the case seems to be hardly 
 even yet understood : and it has not yet made its way into the 
 text-books of Mercantile Law 
 
 Every Lawyer knows the oft quoted saying of Lord Coke in 
 Lampet v. Starkey (10 Coke, 46 b) — "And first was observed the 
 great wisdom and policy of the sages and founders of our Law, 
 who have provided that no Possibility, Eight, Title, nor Thing-in- 
 action shall be granted or assigned to ' Strangers,' for that 
 would be the occasion of multiplying of contentions and suits, 
 of great oppression of the people, and chiefly of the terre-tenants, 
 and the subversion of the due and equal execution of justice " 
 
 Now without inquiring yet what Lord Coke's qualification of 
 a " Stranger " may mean, this Dictum has been repeated a 
 multitude of times by a long line of Judges both at Law and in 
 Equity, usually with the qualification omitted, so that it has been 
 made to appear in the broadest and most unqualified manner 
 possible that a Ghose-in-action, or a Debt, cannot, by the Com- 
 mon Law of England, under any circumstances be assigned so as 
 
 P 2 
 
212 THEORY AND PEACTICE OP BANKING 
 
 to enable the Transferee to sue the Debtor in his own name. And 
 also as if there were some peculiarity as to the non-alienability of 
 Ghoses-in-aciion, distinguishing them from other Property in 
 this respect 
 
 38. In the first place it may be said with all due regard to 
 the fame of Lord Coke that the reason he assigns for the non- 
 alienability of Debts, that it was on account of the litigation it 
 might give rise to, and the subversion of the due and equal 
 administration of justice, cannot be received as a satisfactory 
 ground at the present day 
 
 The true reason was far deeper, and of a far more general 
 application, and has already been sufficiently explained. It was 
 simply thus — " That whenever Property is held in Contract, or 
 by parties related to each other by any Bond, Nexum, or Obliga- 
 tion, neither party can substitute another person for himself, at 
 his own mere will and pleasure, and without the consent of the 
 other party. Futhermore, that if a Debtor has promised that he 
 will pay a sum of money or anything else, or do some service to 
 his Creditor, the Creditor cannot stipulate, or Contract, that his 
 Debtor shall pay that something, or do that service, to any one 
 else, without that Debtor's authority and consent " 
 
 39. Moreover, so far from the non-alienability of Choses-in- 
 action being an exceptional rule of Property, as it was in Eoman 
 Law, the fact was that it was the rule applicable to the 
 enormously greater proportion of Property under the Feudal 
 System : and the rule of free alienability only applied to the 
 comparatively insignificant amount of Personal Property 
 
 The essence of the Eoman polity was equality and absolute 
 dominion. By the Common Law of the Eomans every man was 
 the absolute proprietor of his possessions, including his wife, 
 children, and slaves. He did not live in a state of contract with 
 them or with any one else. As regarded his familia, he was 
 Dominus ex jure Quiritium : as regarded his fellow citizens, he 
 ivas their equal. Consequently, the state of Contract between 
 Roman Citizens was comparatively rare : principally confined to 
 the case of Creditor and Debtor ; and as we have already seen, 
 Debts, by the early Eoman Law, were not assignable without the 
 consent of the Debtor 
 
SALE OF DEBTS IN ENGLISH LAW 213 
 
 But the whole structure of Feudal Society was essentially 
 different from Eomau Equality and Dominion. The very essence 
 of Feudalism was that the Dominion of the soil vested in the 
 Sovereign, as the representative of the nation. Absolute Pro- 
 perty in the soil, either the Dominion of the Eomans, or the 
 Allod of the Germans, was impossible in a private person — " It 
 is so absolute a maxim, or principle, of the Law of Tenures, that 
 all the lands in England are holden either mediately or imme- 
 diately of the King, that even the King himself cannot' give 
 lands in so absolute and unconditional a manner, as to set them 
 free from tenure," says Wright 
 
 The Sovereign granted Feuds to his followers, first during 
 pleasure, then for life, and then in perpetuity, but always on the 
 express condition of certain definite services being rendered. 
 The tenants were consequently in a state of contract with him. 
 They, in hke manner, granted out parcels of their tenures to their 
 vassals on certain specified conditions: and these vassals again 
 would have still further divided their grants if they had not been 
 restrained by Law 
 
 40. The result of this was that the whole State of Society 
 was one of Contract. The structure of Roman Society was 
 essentially level ; the structure of Feudal Society was essen- 
 tially pyramidal. Every one from the highest to the lowest was 
 fixed in a state of Contract. The intermediate ones were in a 
 state of double contract, both with those above them and those 
 below them. All Feudal property was, therefore, of the nature of 
 Ghoses-in-action. The consequence was that no one could change 
 his position, or alienate his property, by substituting a stranger 
 for himself, without the consent of the other parties to the con- 
 tract, as we have seen was said by Sir 'Martin Wright 
 
 Thus in a state of pure feudaUsm, the tenant of land could 
 not substitute another person for himself at his own will and 
 pleasure, without the consent of the other party, any more than a 
 Creditor or Debtor could substitute another person for himself 
 without the consent of the other party, and for the very same 
 reason — that it was Property held in Contract, or Obligation 
 
 Hence, the law relating to Choses-in-adion was not peculiar to 
 them : it was exactly the same as applied to the whole land of the 
 
214 THEORY AND PRACTICE OE BANKING 
 
 kingdom, and for the very same reason. It was simply one ex- 
 ample of a universal principle which might be illustrated from 
 many other countries if necessary 
 
 Appointment of a Royal Commission to prepare a Digest 
 of the Law 
 
 41. In 1867, the Government of the day appointed a Eoyal 
 Commission to take measures to prepare a Digest of the Law 
 for the guidance of the Courts of Law, in contemplation of the 
 fusion of Law and Equity, which was subsequently enacted by the 
 Supreme Court of Judicature Act, in 1873, which came into 
 operation on the first November, 1875 
 
 Among the Commissioners wei'e Lord Chancellor Cranworth, 
 Lord Westbury, Lord Cairns, Lord Hatherley, Lord Selborne, and 
 Lord Penzance — to mention those only of Judicial rank. The 
 Commissioners determined to prepare Digests of three branches 
 of the Law as specimens of a Digest of the whole Law : and they 
 invited members of the Bar to offer themselves to prepare these 
 specimen Digests under their superintendence. One of the 
 branches of Law selected was Bills of Exchange, Bank Notes, &c. 
 
 This Digest was not to be a mere register of decisions. It 
 was expressly intended to be a declaration of the Law on all 
 points it referred to : and, consequently, it necessarily involved the 
 investigation and final settlement of all disputed points, contra- 
 dictory doctrines, and conflicting cases 
 
 The author entered into this competition, and in preparing 
 his paper for the consideration of the Commissioners, it occurred 
 bo him that the doctrines generally current in the profession as to 
 the Eight of Transferring Ghoses-in-action, or Debts, at Common 
 Law, were contradictory 
 
 While it was strenuously asserted that Choses-in-adion, or 
 Debts, were absolutely inalienable at Common Law, so as to enable 
 the Transferee to sue the original debtor, it was perfectly acknow- 
 ledged that, in some cases, it was quite legal to Transfer a Debt : 
 md that the Transferee might sue the original Debtor 
 
 Thus it was perfectly acknowledged that if the Debtor, his 
 Creditor, and the Transferee met together ; -the Creditor might, 
 ivith the Debtor's consent, transfer his Eight of action to thef 
 
SALE OF DEBTS IN ENGLISH LAW 215 
 
 Transferee : the Debtor might then agree to pay the Transferee 
 instead of his primary Creditor. When this was done, a valid 
 Contract was created between the original Debtor and the Trans- 
 feree, which cancelled and extinguished the two preceding con- 
 tracts between the Debtor and his Creditor : and between the 
 Creditor and the Transferee : and the Transferee might then sue 
 the original Debtor, because there was now a privity of Contract 
 between them 
 
 This was exactly the mode of transferring a Debt laid down in 
 G-aius : it is described by Bracton as a Novation : and it is 
 affirmed in the case of TatlocJc v. Harris (3 T.E., 180). Bdler, 
 J., said—" If A owes B £100 : and B owes C £100, and the 
 three meet : and it is agreed between them that A shall pay 
 the £100, B's Debt is extinguished : and C may recover that 
 debt against A." And this doctrine was affirmed in several other 
 cases : and is undoubted Law 
 
 Thus it was clear that the broad unqualified doctrine that 
 Debts were absolutely incapable of being aliened at Common Law 
 was untenable 
 
 But though it was admitted that a Debt might be sold and 
 alienated to a certain definite and specified person with whom the 
 original Debtor entered into a contract, it was strenuously main- 
 tained that it was contrary to Law to issue an Obligation payable 
 only to some unspecified and indefinite person, such as the 
 "bearer": it was alleged that no contract could be created between 
 the original Debtor and such indefinite " bearer," or " assignee," 
 giving the latter an action against the Debtor 
 
 As the very purpose of the Digest was to declare authorita- 
 tively the true doctrine of the Common Law on this point, it 
 became necessary to trace this doctrine through the whole series 
 of Reports to their earliest sources 
 
 This involved the general Question — " In what cases can the 
 party to a Contract transfer his Right to a third person, so as to 
 enable the Transferee to sue the original Debtor ? " 
 
 Now, as we have already observed, that under the Feudal 
 System almost every person was fixed in a state of Contract with 
 some one else, English Law is peculiarly rich in cases which 
 determine this question 
 
216 THEORY AND PRACTICE OF BANKING 
 
 In a state of pure Feudalism the tenant of land could not 
 substitute another person for himself at his own will, and without 
 the consent of the other partj : any more than a Creditor or 
 Debtor could substitute another person for himself without the 
 consent of the other party : and for the very same reason— that it 
 was Property held in Contract, or Obligation 
 
 Hence, the Law relating to Ghoses-in-action was not peculiar 
 to them : it was exactly the same as applied to the whole land of 
 the kingdom 
 
 A strict Military Tend was, by its very essence and nature, 
 inalienable : and such only are called proper Feuds by Feudal 
 writers. But gradually this rigour was relaxed, and Feuds were 
 created alienable and saleable. Wright says — " AU Feuds, there- 
 fore, that are sold or bartered for any immediate or contracted 
 equivalent ; or are granted free of all services : or in consideration 
 of one or more certain services (whether military or non-mihtary): 
 or upon a Cens : or Eent : in lieu of services : and all such Feuds 
 as are by express words in their creation, or constitution, alien- 
 able, are improper Feuds, and are severally treated of by the 
 Feudists under the head of Feuda emtitia, franca, censualia, 
 emptitoria, alienabilia, &c." 
 
 Thus, though no doubt a Feud was not originally alienable, 
 yet wherever the Grantor created or constituted the Feud alien- 
 able, by granting it to the Grantee and his Assigns, it was 
 assignable, and the Assignee might sue the Grantor in his own 
 name 
 
 Thus, in Mallm-y v. Symond (Y. B. 9, Edw. II., p. 292, 443), 
 the Assignee of a Charter was found to have a Right of action 
 against the Grantor, who granted it to the Grantee and his 
 Assigns 
 
 It also became common for a lessor to grant leases to the lessee, 
 and his assigns, and such leases were assignable 
 
 4S. The original contract between Lord and Vassal was 
 Bilateral : because it involved Rights and Duties on both sides : 
 and, consequently, the Lord could not alienate his seignoiy without 
 the consent of his Vassal : he could not turn over, or Attorn, 
 as it was termed, the homage or service of his Vassal to another 
 
SALE OF DEBTS IN ENGLISH LAW 217 
 
 person against his will : and if the tenant refused to attorn, the 
 grant was void. Just as a Creditor could not attorn his Debtor 
 to another person without his consent. But if the vassal agreed 
 to the transfer of the seignory, he was said to Attorn to the new 
 seignor. By this public declaration he recognised the right of 
 the new seignor to his homage or service 
 
 But when internal peace and security were established, the 
 relation between Lord and Vassal gradually changed from a Bi- 
 lateral to a Unilateral contract. The vassal came to look to the 
 general law of the land for protection to his person and property, 
 instead of to his immediate lord : and all the various services of 
 the vassal were reduced to the simple payment of Rent 
 
 Consequently, the relation between Lord and Vassal was 
 reduced to the simple one of Creditor and Debtor : or that of 
 Landlord and Tenant at the present day 
 
 When, then, the relation between Landlord and Tenant was 
 reduced to a simple Unilateral contract, the same principle began 
 to be applied to it as had already been applied in Koman Law to 
 that of Creditor and Debtor. It was no real prejudice to a Debtor 
 to whom he paid his Debt ; as long as he was not called upon to 
 pay it twice over. So it was no real prejudice to a Tenant to 
 whom he paid his Eent : so long as he was not called upon to pay 
 it twice over. The doctrine of Attornment came to be felt to be 
 a burdensome restraint on the alienation of land : and several 
 methods were adopted to evade it. In all cases where the Statute 
 of Wills and the Statute of Uses applied, attornment was declared 
 to be unnecessary. And many other cases are given in Comyn's 
 Digest Attornment L 
 
 Between the time of Littleton and Coke a further step was 
 made : for, in several cases, if the tenant refused he might be 
 compelled to attorn 
 
 At last, the doctrine of attornment, as regarded grants and 
 conveyances, was entirely swept away and abolished by the Act, 
 Statute of Anne, 1705, c. 16, ss. 9, 10 : which was drawn by the 
 great Lord Somers : and estates in Land were made freely trans- 
 ferable without the consent of the tenant 
 
 This Act of Anne is exactly parallel with the Statute or Con- 
 stitution of Alexander Severus, already mentioned, declaring that 
 
218 THEORY AND PRACTICE OF BANKING 
 
 a Creditor might freely sell Ms Debt with the knowledge or evea 
 against the consent of his Debtor 
 
 By these means, in the course of many centuries, a complete 
 revolution was ' effected in the Law relating to estates in land. 
 Whereas they were originally inalienable, unless specially created 
 so : at the present day all estates in land are freely alienable 
 unless granted with an express stipulation to the contraryj and 
 even in many cases such a stipulation is void 
 
 On the Bules of the Common La^sr of England relating to 
 the Transfer of Choses-in-action 
 
 43. We have now to investigate the Rules of the Common 
 Law of England relating to the Transfer of Credits, Debts, or 
 Ghoses-in-action 
 
 Glanville, the earliest writer on the Common Law, gives us 
 much information as to the mode of proceeding for the recovery 
 of Debts in the King's Court, but says nothing of their transfer 
 
 Bracton adopts the division of Property into Corporeal and 
 Incorporeal : and afterwards considers Obligations. He says : — 
 " We must consider, in the first place, what an Obligation 
 is, and how it is contracted : and through what words and 
 through what persons an Obligation is acquired : and in what, 
 way it is dissolved and got rid of : and in what way after it has 
 been dissolved it may be renewed : and how it may be Trans- 
 ferred to another party : and how one Obligation may be 
 changed into another " 
 
 And in describing the various methods by which an Obligation 
 is extinguished, he says : — " Likewise by Novation : as if the 
 Obligation has been Transferred from one person to another 
 who has taken the Obligation on himself. For by the intervention 
 of a new Person, a new Obligation arises, and the first is 
 extinguished by agreement : as when a person has taken upon 
 himself the Obligation of another " 
 
 Thus, Bracton distinctly provides for the Transfer of 
 Obligations : and lays down that it can be done by the consent of 
 the parties : and it is clear that if it be admitted that Obligations 
 may be transferred by the consent of the parties to them, it is 
 
SALE OF DEBTS IN ENGLISH LAW 219 
 
 wholly immaterial whether that consent ia given orally or in 
 writing 
 
 Thus, Bracton expressly states that if the Debtor, the Creditor, 
 and the Transferee agree to it, the Debt or Chose-in-action may be 
 transferred. And this is exactly the Doctrine laid down in Gains, 
 which was the text-book of Law at the time the Romans abandoned 
 Britain. But from the entire omission by Bracton of the whole 
 of the Roman Doctrine of the Pandects and the Basilica, that 
 Debts, or Choses-in-action might be freely sold and transferred 
 without the knowledge, and even against the consent, of the 
 Debtor, we may be sure that this was not allowed by the Common 
 Law of England 
 
 44. As Feuds and Charters came to be granted to the 
 Grantee and his Assigns, which were held to be assignable, so as 
 to give the Assignee a Right of action in his own name against 
 the Grantor : so Personal Annuities, which were more distinctly 
 recognised as Choses-in-action, came to be granted in exactly the 
 same form : and it was expressly decided in a long series of cases 
 that the Asignee of an Annuity created assignable by the words of 
 the Grantor, or Obligor, had a Right of action in his own name 
 
 Thus, in 1368, three priests, the Assignees of John Bishop 
 of Hereford, brought an action against the Abbot of T. for arrears 
 of an Annuity, which he had granted to the grantee and his 
 assigns. It was pleaded at the bar that Choses-in-action were not 
 assignable at Common Law (Y. B., 41 Edw. III., p. 27) : but the 
 Court held that they might : and that the Assignees had a Right 
 of action 
 
 In the reign of Edward IV. it was held in two cases (Y. B. 5, 
 Edw. IV., long quinto : p. 42), and (Y. B. 21, Edw. IV., p. 20, c. 28) 
 that the Grantee of an Annuity had the right to grant it over 
 
 In the case of Baher v. Brook (Benloes, c. 55., Dyer, 65. 1) 
 Brook, the parson of Bosworth, granted an Annuity to the 
 Grantee and his Assigns during his lifetime. The Grantee 
 assigned it, and the Assignee brought an action against the 
 Grantor for arrears. The defendant demurred, alleging that 
 such an Annuity could not be granted over. It was argued that 
 it was against the very nature of an Annuity to be assignable over : 
 and that it was a matter of common learning that a Chose-in-action 
 
220 THEORY AND PRACTICE OP BANKING 
 
 could not be granted over by a private person. But Montague, 
 Chief Justice, said that the Court were unanimously of opinion 
 that the count was good, and the Assignee might sue the Grantor 
 
 And, referring to this case. Coke says (Co. Litt., 144 c):— "A 
 writ of Annuity is a writ for the recovery of an Annuity. An 
 annuity is a yearly payment of a sum of money granted to 
 another, in fee, for life, or years, charging the person of the 
 grantor only. But not only the Grantee, but his heir, and his 
 and their Grantee also, shall have a writ of annuity " 
 
 Thus, Coke evidently considered that the case was decisive of 
 the question that the Assignee of an annuity, created assignable 
 by the grantor himself, may sue the grantor in his own name 
 
 This doctrine was again affirmed by the Common Pleas in a 
 case in his own reports. In Maund v. Gregory (7 Co. Kep., 28 b), 
 in 1602, Gregory had by deed granted a rent-charge for his life to 
 one and his assigns. The grantee assigned it over, and the 
 assignee distrained for arrears. It was resolved by the Court that 
 a Eent-charge, or Ghose-in-action, granted to one and his assigns, 
 may be assigned over by the express words of the grantor who 
 granted it to him and his assigns ; for modus et conventio vincunt 
 legem 
 
 This doctrine was again affirmed by the Common Pleas in 
 Gerrard v. Boden (Hetley, 80), in 1628. Gerrard, the assignee of 
 an annuity, sued Boden, who had granted the annuity to a person 
 and his assignees. It was argued that it was merely contrary 
 to the ' nature of an annuity to be assigned over to another : and 
 that it is common learning that a thing-in-action cannot be 
 assigned over : unless it be the grant of the King. But Button, 
 J., said — " We are agreed that the annuity may be granted over." 
 And since this case the doctrine has never been questioned, till in 
 some recent cases, which we shall reserve for future discussion • 
 
 All these Annuities were, of course, deeds under seal : and, 
 consequently, this uniform series of decisions held that a sealed 
 instrument was transferable to assignees, when expressly created 
 so by the Obligor" 
 
 An annuity is the Promise to pay a series of payments ; but 
 with the rise of Banking, in the time of the Commonwealth, 
 sealed Notes of the bankers, promising to pay a single sum to 
 payee, " or bearer," came iato general use. In Shelden v. Hentlmj 
 
SALE OF DEBTS IN ENGLISH LAW 221 
 
 (2 Show., 1601), in 1680, an action was brought on one of these 
 sealed Notes payable to bearer : and its legality was fully recog- 
 nised by the Court. The Court said — " When a man promises to 
 pay ' the bearer ' of the Note, any one that brings the Note shall 
 lie paid " : and Jones, J., said — " The custom of merchants made 
 that good " 
 
 In Hinton's case (2 Show., 235), in 1681, the bearer of a Bill 
 of Exchange, payable to bearer, was held entitled to recover on 
 proving consideration 
 
 In Williams v. Williams (Carth., 269), in 1693, a Promissory 
 Note was declared upon as Billa, or Nota, and within the custom 
 of merchants, and the declaration was held good 
 
 laLamb^t v. Oakes (1 Ld. Raym., 443), in 1699, a Promissory 
 Note, payable to payee or order, was acknowledged to be legal 
 
 In Carter v. Palmer (12 Mod., 380), the Court agreed that a 
 Promissory Note, made payable to payee or order, was legal : 
 although they would not allow a Note made payable to " bearer " 
 only, to be so 
 
 In Bromwich v. Loyd (2 Lutw., 1583), a Promissory Note, pay- 
 able on demand, was declared upon as a Bill of Exchange ; and 
 Treby, C. J., fully recognised it as such, and said it was legal 
 
 Having now brought the subject to this point, at which, by a 
 uniform series of decisions, extending through 350 years, the 
 Courts had decided that Obligations in either form of Orders to 
 , pay, or Promises to pay, when made payable to the payee and his 
 assigns, or to order, were legal documents, and that the Assignee 
 or Transferee might sue the Obligor in his own name, we have to 
 consider the case in which the Obligor had not given this consent 
 
 Case in which the Debtor had not assented to the Transfer 
 of the Debt 
 
 45. The next point to be considered is how the difficulty, 
 where the Debtor had not given his consent to the Transfer of the 
 Debt, was overcome at Common Law. In Roman Law, as we 
 have seen, the Transferee was not able to sue, so long as all 
 claimants were obliged to sue in person. But when persons were 
 allowed to sue by Attornies, the Praetor, or Equity Judge, allowed 
 
222 THEORY AND PKACTICB OF BANKING 
 
 the Transferee to sue as the Attorney of the Transferor : and to 
 retain the proceeds for himself 
 
 But English Law never had such a restriction : and as early 
 as Henry VI., we find that the Assignee might sue in the name of 
 the Assignor : or the Assignor might sue as Trustee for the 
 Assignee. And both Law and Equity compelled the Assignor to 
 allow the Assignee to use his name 
 
 General Results of the freceding Cases 
 
 46. Having arrived at this stage of the question it is ad- 
 visable to understand clearly the results which they establish. 
 They are these — 
 
 1. That at Common Law a Creditor cannot transfer his Debt, 
 or Chose-in-aotion, to a third person without the consent of the 
 Debtor, so as to enable the Transferee to sue the Debtor in his 
 own name 
 
 2. That whenever the Debtor, or Obligor, consents to the 
 transfer of the Debt, or Ghose-in-action, either Orally (i.e., 
 either by simple verbal consent, or in a simple writing, such as an 
 ordinary Bill or Note), or in Writing (which, in Law, always 
 means a Deed, Bond, or Specialty), the Creditor' may 
 Assign or Transfer it, and the Assignee or Transferee may sue ia 
 his own name 
 
 "We can now perceive, we think, the true meaning of Coke's 
 expression, — that a Ghose-in-action could not be assigned to a 
 " stranger." Considering that he himself declares in his Institutes 
 that the Assignee of an Annuity created assignable could sue the 
 Grantor, it seems to be clear that he did not consider such an 
 Assignee as a "stranger" to the original Grantor. That by him- 
 self creating the Obligation in such a form, he acknowledged the 
 Contract made with the Transferee : and that the word "stranger," 
 in Coke's sense, can only refer to Obligations not created . trans- 
 ferable by the Obligor. And that this doctrine, which is simple 
 common sense, has been magnified and exaggerated into the dogma 
 that at Common Law it is illegal to create transferable Obligations, 
 or floating Eights of action, in any form 
 
SALE OF DEBTS IN ENGLISH LAW 223 
 
 Dedsions in the Court of King's Bench and the Court of Session 
 that Promissory Notes were not included under Bills of 
 Exchange: and were illegal at Common Law 
 
 47. But soon a strange conflict of decisions arose : and in a 
 series of decisions it was held that the " bearer " had no Right of 
 action against the Acceptor of a Bill or the Maker of a Note, 
 made payable to " bearer " : that Promissory Notes were not 
 within the custom of merchants : and could not be declared upon 
 as Bills of Exchange : and that they were illegal at Common Law 
 
 In Hodges v. Steward (1 Salk., 125), in 1691, it was held that 
 the " bearer " of a Bill (which in this case was evidently a Note) 
 made payable to A. B. or bearer, had no action against the maker 
 
 In Horton v. Coggs (3 Lev., 299), in 1691, it was held that a 
 Promissory Note made payable to A or "bearer" was not valid 
 in the hands of the bearer against the maker 
 
 In Nicholson v. Sedgwick (1 Ld. Eaym., 18), in 1698, this 
 doctrine was again held 
 
 In Gogg's case (Comber., 406), in 1699, it was again held that 
 the " bearer " of a Note payable to bearer had no action 
 
 In Garter v. Palmer (12 Mod., 380), in 1701, it was held that 
 a Promissory Note made payable to "bearer" only was not 
 negotiable, and not within the custom of merchants : but Holt, C.J., 
 and the Court agreed that a Promissory Note drawn payable to 
 A. or "order," was negotiable within the custom 
 
 In Jordan v. Barloe (3 Salk.,- 67), in 1701, the same doctrine 
 was afBrmed 
 
 Up to this time, the legality of Promissory Notes made pay- 
 able to A. or " order " had not been questioned. It was only the 
 legality of those drawn payable to A. or "bearer" : because it was 
 held that a Note delivered in that form conferred no right to A. 
 to indorse it away. The Courts, after allowing that the " bearer " 
 had the right to sue the maker in some cases, at last reversed this 
 opinion, and held that the " bearer " had no action against the 
 maker : but they held that an Indorsee might sue his Indorser : 
 because every Indorsement is a new drawing 
 
 Moreover, up to this time Promissory Notes had been 
 usually declared upon as Bills of Exchange : and in the legal 
 phraseology of those times which had not been as yet definitively 
 
224 THEORY AND PRACTICE Of BANKING 
 
 settled, what in modern languages is inTariably termed Making 
 a Note, was very frequently termed Drawing a Bill ; and the 
 Maker of the Note was termed the Drawer 
 
 But in GUrhe v. Martin (2 Ld. Eaym., 787), in 1703, Lord Holt 
 laid down the doctrine that Promissory Notes in any form 
 whatever were illegal. In this case a Promissory Note, drawn 
 payable to A. B. or order, was declared upon as a Bill of Exchange, 
 as was then the usual practice ; and had been admitted by Holt 
 himself in several cases 
 
 But now he set his face entirely against Promissory li^tes in 
 any form whatever. The report says : — " But Holt, C.J., was 
 totis viribus against the action, and said this note could not be a 
 Bill of Exchange : that the maintaining of these actions upon 
 such Notes were innovations upon the rules of the Common Law, 
 and that it amounted to setting a new sect of Specialty, 
 unknown to the Common Law, and invented in Lombard Street, 
 which attempted in these matters of Bills of Exchange to give 
 laws to Westminster Hall : that the continuing to declare upon 
 these Notes upon the custom of merchants proceeded from 
 obstinacy and opinionativeness." And the whole Court agreed 
 that Promissory Notes of any form were illegal at Common Law 
 
 In Gutting v. Williams (7 Mod., 155), in 1703, the Court 
 unanimously adhered to the decision in Glerlce v. Martin. Holt 
 said that he had proposed it to all the Judges whether a declara- 
 tion upon a Promissory Note could be supported : and they 
 were all of opinion that a Declaration upon a Promissory Note 
 upon the custom of merchants was void, as it made a Note 
 amount to a Specialty 
 
 The last case is that of Butler v. Grips (6 Mod., 29) in 1704. 
 The Indorsee of a Note drawn payable to A. B. or order, brought 
 an action against the Maker or Drawer, and declared upon it as a 
 Bill of Exchange within the custom of merchants. But Holt had 
 now decidedly put his foot down, and had drawn aU the other 
 Judges over to his opinion. He said : " The notes in question 
 are only an invention of the goldsmiths in Lombard Street, who 
 had a mind to make a law to bind all those who did deal with 
 them : and sure to allow such a note to carry any lien with it, 
 were to turn a piece of paper, which in law is hut evidence of a 
 parol contract into a Specialty : and besides, it would empower 
 
SALE OF DEBTS IN ENGLISH LAW 225 
 
 one to assign that to another which he could not have himself : 
 for since he to whom this note was made could not have this 
 action, how can his Assignee have it ? And these notes are not of 
 the nature of Bills of Exchange : for the reason of the custom of 
 Bills of Exchange is for the expedition of trade and its safety, and 
 likewise it hinders the exportation of money out of the realm" 
 
 On a subsequent day, Lord Holt said that he had desired to 
 speak with two of the most famous merchants in London to be 
 informed of the mighty ill consequences that it was pretended 
 would ensue by obstructing this course, and that they had told 
 him it was very frequent with them to make such Notes : and 
 that they looked upon them as BOls of Exchange ; and that they 
 had been used for a matter of thirty years : and that not only 
 Notes, but Bonds for money were transferred frequently, and 
 indorsed as Bills of Exchange 
 
 As the decision of the Judges that Promissory Notes were 
 illegal in any form whatever now seemed unalterable, the Act 
 Statute, 1705, c. 7, was passed, which having recited that it had 
 been held that Notes in writing, signed by the party who makes 
 the same, whereby such party promises to pay to any other person 
 or his order, any sum of money therein mentioned, are not assign- 
 able or indorsable over within the custom of merchants ; and that 
 neither the payee himself nor his indorsees could maintain an 
 action on such notes ; it enacted that all Promissory Notes made 
 payable to any person or to order, or to bearer, should be placed 
 in all respects on the same footing as Inland Bills of Exchange. 
 And it has been frequently supposed since that Promissory Notes 
 were first legalised by this Act 
 
 48. In Scotland the Court of Session adopted the doctrine of 
 the King's Bench, that Promissory Notes were not Bills of 
 Exchange : and were illegal at Common Law. In order to 
 remedy this, the Act Statute, 1772, c. 72, placed Promissory Notes 
 in Scotland on the same footing as Bills of Exchange 
 
 49. Having now detailed these celebrated cases, we must state 
 the ground upon which they were founded 
 
 Lord Holt distinctly admitted that Deeds, Bonds, or 
 Specialties were assignable or indorsable ; and that the 
 
226 THEORY AND PRACTICE OB" BANKING 
 
 Assignee or Indorsee might sue upon them in his own name ; 
 thereby confirming the whole series of cases we have adduced from 
 1368 downwards 
 
 His objection was, that by admitting simple Promissory Notes 
 to be transferable, it was giving a mere parol contract the same 
 rights as a Specialty, to which it might be said — Why not ? 
 
 A Specialty doubtless does not require a Consideration : and a 
 Parol Contract does: but why should that affect their Trans- 
 ferability ? 
 
 At this time there was a great conflict of opinion as to whether 
 Indorsement was necessary to transfer the title or the Property in 
 the instrument. By some incomprehensible subtlety it was held 
 that a Note made payable to A. or bearer gave the payee no 
 authority to indorse. But this was obviously untenable 
 
 It is also to be observed that the merchants whom Lord Holt 
 consulted, testified that it was then usual in the City to transfer 
 Bonds by Indorsement exactly as if they were Bills of Exchange 
 
 "We shall presently see the important bearing these facts and 
 doctrines have with respect to the dogmas held by the judges in 
 recent times 
 
 50. Although Lord Holt's authority had induced all the 
 judges to yield to his opinion — against their own former opinions 
 — these cases were subsequently challenged by the highest 
 authority in Mercantile Ijaw of the day. In Grant v. VaugJian 
 (1 Black., 485), in 1764, Lord Mansfield said— "I think, upon 
 the merits, all the cases in King William's time are founded on 
 mistaken principles. The first struggle of the merchants, which 
 made Holt so angry with them, to make inland bills of exchange in 
 the nature of Specialties, and to declare upon them as such, was 
 certainly wrong on their parts. But the reasons given by the Judges 
 who held that no action can be brought by the holder of such a bill 
 payable to bearer, are equally ill-founded. First, it is said they 
 were never intended to be negotiablg : Cm/ms contrarivm est verwm. 
 For when payable to ' A. B. or bearer ' they are clearly intended 
 to be transferred in the most easy manner possible even without 
 indorsement. ... In Hinton's case, 2 Show., 235, in the 
 latter end of Charles II.'s time, it is taken for granted that such 
 bills are recoverable by the bearer if he comes to them lona fide. 
 
SALE OE DEBTS IN ENGLISH LAW 227 
 
 To this succeeded all the cases in King William's time, which 
 adopted the other erroneous principle " 
 
 Wilmot, J., said — " The word dearer is only a description of 
 the person with whom you contract. A name is only a like 
 description. The contract is to pay the bill, either to you or to 
 the person to whom you shall deliver it, or to whom he shall 
 deliver it in infinitum. The case in Shower is a clear authority 
 that a lon&fide holder may recover. The subsequent cases are ill 
 founded and strike at the root of credit " 
 
 Thus it is clear that the case of Grant v. Vaughan distinctly 
 and directly over-ruled the whole of the cases decided by Lord 
 Holt. And in his judgment Lord Mansfield especially allowed that 
 Specialties, or Deeds, or Bonds were capable of being made assign- 
 able or indorsable, and that the Assignee or Indorsee might sue 
 upon them. But he also declared that the same principle held 
 good respecting mere parol contracts like ordinary Bills of 
 Exchange and Promissory Notes 
 
 The effect of the case of Grant v. Vaughan is to reverse and 
 over-rule all the cases decided by Lord Holt, and to rehabiUtate 
 and restore the authority of the preceding cases, and to restore the 
 doctrine of the Common Law, as it was before Holt's cases — 
 namely, that it was strictly legal at Common Law for any person 
 whatever to issue transferable Obligations either in the form of 
 Bonds, Deeds, or Specialties, or that of Simple Contracts : that 
 they were equally transferable : and that the Transferee might 
 sue in his own name equally in either case 
 
 51. Even Lord Kenyon, who was a well-known stickler for 
 the most rigid principles of the Common Law said, in Brown v. 
 Harraden (4 T. R., 148) in 1791— "It is not necessary now to 
 consider whether or not Lord Holt was right in so pertinaciously 
 adhering to his opinion that before the Statute of Anne no action 
 could be maintained on Promissory Notes as Instruments, but 
 that they were only to be considered as evidence of the Debt. . . 
 The authority which his opinion had in "Westminster Hall made 
 others yield to him " 
 
 Notwithstanding that the case of Grant v. Vaughan distinctly 
 reversed and overruled Lord Holt's cases, it has been supposed by 
 
 q2 
 
228 THEOEY AND PEACTICE OF BANKING 
 
 all modern Judges and text writers that they were correct, and 
 that Promissory Notes are purely the creation of the Act of Anne 
 in England and of the Act of George III. in Scotland 
 
 5S. In Fenn&r v. Meares (2 W. Black., 1269), in 1779, Meares 
 had granted a Respondentia Bond to Cox, assignable by Indorse- 
 ment. Cox indorsed it to Fanner ; and Fenner sued the Obhgor. 
 It was the first instance of the Indorsee of a Eespondentia Bond 
 sueing the Grantor 
 
 Blackstone, J., said — "The promise made by Meares is 
 BufiBcient. Whatever would have been due to Cox is by the 
 assignment transferred to Fenner. He ran the same hazard and 
 is entitled to the same benefit. And I see no reason why Meares 
 should be in a better condition merely because his Creditor is 
 changed" 
 
 Nares, J., — "I think this is a particular promise to the 
 Assignee whenever any such should be " 
 
 De Grey, C. J., — "At the trial I gave an opinion that in point 
 of Law this action was maintainable : and I have seen no reason 
 to change it. It would clog these securities, and be productive of 
 great inconvenience, if they were obliged to remain in the hands 
 of the first Obligee. This contract is, therefore, devised to operate 
 upon subsequent assignments ; and amounts to a declaration that 
 upon such assignment the money which I have so borrowed shall 
 be no longer the money of A., but of B. his substitute. The 
 Plaintiff is certainly, I think, entitled to the money in conscience, 
 and, therefore, I think, entitled also in Law : for the Defendant has 
 promised to pay any person that shall be entitled to the money " 
 
 Thus the Court unanimously held that the Obligor having 
 granted a Bond transferable to any one else, by indorsement, 
 any Indorsee might enforce it against him : in strict conformity 
 with the invariable decisions of the Courts in all former similar 
 cases 
 
 The Opinion of some Judges on the Transfer of Choses-in-action 
 
 53. Equity had from its earliest institution adopted the Law 
 of the Pandects and the Basilica, that a Creditor had the absolute 
 Right to transfer his Right or Debt without the consent of the 
 Debtor : and some eminent judges^mbued with the spirit of Lord 
 
SALE OF DEBTS IN ENGLISH LAW 229 
 
 Mansfield, held that the Courts of Common Law might, and ought 
 to, adopt this principle of their own authority. Thus in Winch v. 
 Eeely (1 T. E., 619), in 1787, Ashhurst, J., said— "It is true that 
 formerly the Courts of Law did not take notice of an Equity or a 
 Trust : for Trusts are within the original jurisdiction of a Court 
 of Equity : but of late years it has been found productive of great 
 expense to send the parties to the other side of the Hall. Where- 
 ever this Court have seen the justice of the case has been clearly 
 with the plaintiff, they have not turned him round upon this 
 objection. Then if this Court will take notice of a Trust, why 
 not of an Equity ? " 
 
 In another well known case, Buller, J., who may be considered 
 as the adlatus of Lord Mansfield, said — " It is laid down in our 
 old books that for avoiding maintenance, a chose-in-action cannot 
 be assigned, or granted over to another (Co. Litt., 214 a, 266 a : 
 2 EoU. 45, 1. 40). The good sense of that rule seems to me to 
 be very questionable : and in early as well as modern times it has 
 been so explained away, that it remains at most only an objection 
 to the form of action in any case. In 2 EoU., Abr. 45 and 46, it is 
 admitted that an Obligation or other deed may be granted, so that 
 the writing passes : but it is said that the grantee cannot sue for 
 it in his own name. If a third person be permitted to acquire 
 the interest in a thing, whether he is to bring the action in his 
 own name, or in the name of the grantor, does not seem to me to 
 
 affect the question of maintenance Courts of Equity 
 
 from the earliest times thought the doctrine too absurd for them 
 to adopt, and therefore they always acted in contradiction to it : 
 and we shall soon see that Courts of Law also altered their 
 language on the subject very much. In 12 Mod., 554, the Court 
 speaks of the assignment of an apprentice, or an assignment of a 
 bond as things which are good between the parties, and to which 
 they must give their sanction and act upon. So the assignment 
 of a chose-in-action has always been held a good consideration for 
 a promise. . .- After these cases we may venture to say that 
 the maxim was a bad one, and that it proceeded on a foundation 
 which fails. But still it must be admitted that though the Courts 
 of Law have gone the length of taking notice of assignments of 
 choses-in-adion, and of acting on them, yet in many cases they 
 have adhered to the formal objection that the action shall be 
 
230 THEOEY AND PRACTICE OE BANKING 
 
 brought in the name of the assignor, and not in the name of the 
 assignee. I see no use or convenience in preserving the shadow 
 when the substance is gone : and that it is merely a shadow, is 
 apparent from the latter cases, in which the Court have taken care 
 
 that it shall never work injustice But admitting 
 
 that on account of this quaint maxim an action cannot be main- 
 tained by an assignee of a chose-in-action in his own name, it 
 remains to be considered whether that objection ever did hold, or 
 ever can hold, in the case of a mercantile instrument or transaction. 
 The Law merchant is a system of equity, founded on the rules of 
 equity, and governed in all its parts by plain justice and good 
 faith. ... I can find no instance in which the objection has 
 prevailed in a mercantile case : and in the two instances most 
 universally in use, it undoubtedly does not hold : that is in the 
 cases of Bills of Exchange and Policies of Insurance. The first is 
 the present case : and bills are assignable by the custom of 
 merchants : so in the case of Policies of Insurance, tiU the late 
 Act was made requiring that the name of the person interested 
 should be inserted in the Policy, the constant course was to make 
 the policy in the name of the broker : and yet the owner of the 
 goods maintained an action upon it. Circulation and the Transfer 
 of Property are the life and soul of trade, and must not be checked 
 in any instance : " and then he cited the case of Fenner v. Meares 
 In Tooke v. Hollingworth (5 T. E., 215), in 1793, the same 
 Judge said — " During the fifteen years that I have sat on this 
 bench, I have never known any case which established a distinction 
 between Courts of Equity and Law on subjects of this kind. I 
 have always thought it highly injurious to the public that different 
 rules should prevail in the different courts on the same mercantile 
 case. My opinion has been uniform on that subject. It some- 
 times, indeed, happens that in questions of real property, courts 
 of law find themselves fettered with rules from which they cannot 
 depart, because they are fixed and established rules : though equity 
 may interpose, not to contradict but to correct, the strict and 
 rigid rules of law. But in mercantile questions no distinction 
 ought to prevail. The mercantile Law of this country is 
 founded on principles of Equity : and when once a rule is. 
 established iti that Court as a rule of property, it ought to ie adopted 
 in a Court of Law " 
 
SALE OF DEBTS IN ENGLISH LAW 231 
 
 Although these emment. Judges clearly announced their 
 opinion that it was perfectly within the competence of the Courts 
 of Law to shake off the antiquated fiction that Ghoses-in-action are 
 not assignable in Law, they never had the boldness to carry out 
 this suggestion : and the doctrine continued to haunt the Courts 
 of Law for nearly a century later with the most pernicious conse- 
 quences : and the only sense in which the doctrine ever was true 
 that the Transferee of a Gliose-in-action, which is assigned without 
 the consent of the Debtor, cannot sue the Debtor in his own name ; 
 but must sue in the name of the Transferor : for which there is 
 good reason in law : became magnified and exaggerated that it 
 was contrary to the Common Law to create Obligations or Ghoses- 
 in-adwn transferable even by the consent of the Obligor: for 
 which there never was the shadow of a foundation 
 
 Of the Property of the Transferee in Instruments 
 Lost or Stolen 
 
 64. We have now shown that it was perfectly well settled 
 that all Obligations might be created and issued Assignable by 
 the Obligor : that is, they were Transferable by sale, like any 
 material Chattel. But that only went so far as to say that they 
 might be transferred by a due and lawful sale. And so long as 
 Indorsement was held to be necessary on each Transfer to transfer 
 the Property in .them, it was quite easy to ascertain the title of 
 each Transferor 
 
 But when Obligations were created and issued by the Obligor 
 payable to " bearer " only : and when it was held that the mere 
 Indorsement of the first Payee rendered the Instrument payable 
 to bearer without any further Indorsement : a new question arose 
 
 Small and portable Instruments like Bills of Exchange, Bank 
 Notes and Cheques, which are used in the daily practice of com- 
 merce, are peculiarly liable to be lost or stolen. Now, suppose 
 that one of these Instruments was lost or stolen : and the finder 
 or thief passed it away in the usual course of business ; and the 
 Purchaser, or Transferee, bought it honestly, and without know- 
 ing that the Transferor had no real Property in it ; and gave full 
 value for it— What were his Rights in the Instrument ? 
 
 We have said in Chapter I. that if the owner of any chattel 
 
232 THEORY AND PRACTICE OE BANKING 
 
 loses it, or has it stolen from bim, he does not thereby lose his 
 Property in it : and that he can reclaim, or vindicate, it from 
 any person in whose possession he may find it ; no matter how 
 many hands it may have passed through : and even if he gave 
 full value for it : and had no knowledge that it had been stolen. 
 The maxim of law is that no one can convey a Eight he does not 
 possess : and, therefore, he cannot convey any better title to a 
 chattel than he himself possesses. Consequently, no person who 
 possesses any chattel can have any better title to it than any of 
 the previous Transferors 
 
 But, from the very necessity of the case, Money was always 
 an exception to this rule. It has always been law that if a 
 person loses a sum of money, or has it stolen from him, he can 
 reclaim, or vindicate, it if he finds it in the possession of the 
 finder or thief. But if the finder or thief goes into a shop and 
 buys goods with it : or passes it away in the usual course of 
 business : and the seller of the goods takes it honestly in the 
 nsual way of business, and without knowing it has been stolen, he 
 acquires an absolute Property in it, notwithstanding the defect of 
 the title of his Transferor : and can retain it against the true 
 owner. This is expressed by saying that in all honest transactions, 
 the Pro2Jerty in the Money passes ly Delivery. It is this peculiarity 
 which in law is denoted by the term " Currency " : and the 
 legal term " Current " is applied to any Property to which the 
 Transferee acquires an absolute title by delivery, notwithstanding 
 the infirmity of the Title of the Transferor 
 
 Now the question arose very early in the case of Securities for 
 Money, lost or stolen, and passed away in commerce and honestly 
 purchased for fuU value — What is the Title of the Transferee in 
 an instrument acquired in such a way ? Does it follow the law 
 of ordinary chattels ? or does it foUow the law of Money ? and, 
 do such securities possess the attribute of " Currency " ? 
 
 It has been decided in a long series of cases, that all Securities 
 for Money created and issued by the Obligor, transferable, and 
 therefore intended by him to circulate like Money, follow the 
 law of Money : and, therefore, they possess the attribute of 
 " Currency " 
 
 But Obligations which are created and issued by the Obligor 
 payable only to a definite person, and therefore not intended by 
 
SALE OP DEBTS IN ENGLISH LAW 233^ 
 
 him to circulate like Money, follow the Law of Goods : and, 
 therefore, do not possess the attribute of " Currency." Every 
 person, therefore, who purchases such an Instrument has full 
 warning that he takes it subject to the title of all preceding 
 Transferors 
 
 Instruments which possess the attribute of "Currency" 
 are also termed Negotiable 
 
 The student must carefully observe the distinction between 
 Assignable Instruments and Negotiable Instruments 
 
 Assignable Instruments are those which may be freely 
 sold : but whose Transfer follows the Law of Goods : and the 
 Title of the last Transferee depends on the title of all the pre- 
 ceeding Transferors 
 
 Negotiable Instruments are those which may also be 
 fteely sold : but whose Transfer follows the Law of Money : 
 the last Transferee, if he acquires them honestly and for full 
 value, acquires complete Property in them : may retain them 
 against the true owner, if they are lost or stolen : and may sue all 
 the parties to them 
 
 Thus every Negotiable Instrument is ipso facto Assignable : 
 but every Assignable Instrument is not Negotiable 
 
 And a Negotiable Instrument may be deprived of its attribute 
 of Negotiability, or Currency, and reduced to an Assignable 
 Instrument 
 
 Thus, if the holder of a Bill of Exchange made payable to 
 " bearer," or indorsed in blank, and, therefore, become payable to 
 bearer, indorses it specially to another person only, the Instrument 
 has ceased to be Negotialle, and become only Assignable 
 against the person who has qiecially indorsed it ; though it 
 remains Negotiaile against the Drawer, Acceptor, and all Indorsers 
 who indorsed it generally 
 
 So an ordinary Cheque payable to " bearer " or to order is a 
 Negotiable Instrument : but by a recent Act the holder may 
 write the words " Non-Negotiable " across it : and then it is 
 reduced to an Assignable Instrument : and aU Transferees 
 take it subject to the title of all the preceeding transferors 
 
 So an overdue Bill or Note loses its attribute of Negotiability 
 or Currency, and is reduced to an Assignable Instrument : and all 
 Transferees take it subject to the title of the Transferors after it 
 became overdue 
 
234 THEORY AND PRACTICE OF BANKING 
 
 "We shall not give any account here of the series of decisions 
 which have established that all securities for Money, created and 
 lssue4 by the Obligor himself, payable to "bearer" or indorsed iu 
 blank, are Negotiable Instruments : and, therefore, possess the 
 attribute of Currency. The Bank Charter Act of 1844, and the 
 monetary legislation of the country is founded entirely on a 
 particular definition of the word " Currency " : and its 
 exposition is so important that it will require a chapter to itself 
 
 On the Origin of the Dogma that " Choses-in-action 
 are not Assignable at Common Law" 
 
 55. Bracton, the Prince of English Juridical writers — whose 
 long-neglected work has now, we are happy to say, been republished 
 under the direction of the Master of the Eolls, in a magnificent 
 edition which leaves nothing to be desired; — states, as we have 
 seen, in the most general words possible, that Any Obligation 
 may be Transferred or Assigned by the consent of the 
 parties to it 
 
 Now, as we have already explained, an Obligation is the Bond 
 of Law between two persons, by which one Person, the Creditor, 
 has the Eight to compel another Person, the Debtor, to render 
 him Any material chattel, such as money, iron, corn, timber, 
 or any other : or to render him a service of Any description 
 whatever (ad Aliquid dandum aut faciendum) 
 
 "We have shown in Chapter I. that in Roman Law the word 
 Res includes everything which can be the subject of a Eight. 
 Consequently, Jurists have shown that as one person may have the 
 Eight to demand some service from another, the word Ees 
 includes human actions, services, or labour of any sort 
 
 Consequently, the term Ghose-in-action must include the Eight 
 to demand any Service or Labour : as well as the Eight to demand 
 a material chattel 
 
 Moreover, an Obligation may be contracted in four forms; 
 either by the delivery of the thing : in writing : by words : or by 
 mutual consent 
 
 It may be as well to explain for the benefit of lay readers, that 
 in English Law " writing " always used to mean a writingunder 
 Seal. Very few persons in those days were able to write: 
 
SALE OF DEBTS IN ENGLISH LAW 235 
 
 consequently, when it was necessary to enter into a written 
 Contract, the Contract had to be written by a Olericus, or Clerk, 
 and the parties signified their assent to it by appending their 
 Seal. So a writing with the Seals of the parties to it was termed 
 a Bond, Deed, or Specialty 
 
 All contracts in writing without the formality of the seal 
 appended, are treated as mere Oral, or Parol Contracts 
 
 Hence, as Bracton states, ObUgations relating to any matter, 
 either a material chattel, or a service : and contracted in any form, 
 either in writing or by words, might be Assigned and Transferred 
 by the consent of the parties to them 
 
 56. In the time of Bracton, when the Feudal system was at 
 its height, and every person connected with land lived in a state 
 of Contract, or Obligation, the chief portion of Obligations 
 probably consisted in the Obligation to render services. Eents 
 were created payable in money : in kind : that is, natural products, 
 such as corn or cattle or poultry : or in services 
 
 And we have seen that the principles relating to the Transfer 
 or Assignment of Obligations to render services were identically 
 the same as those relating to the Transfer of Obligations to 
 render material chattels. Consequently, we can always argue 
 from Obligations of one sort to those of the other 
 
 57. Not only does Bracton lay down in the most general 
 terms possible, without any qualification or exception, that any 
 Obligation may be assigned or transferred with the consent of the 
 parties, but by a uniform series of decisions extending through 
 550 years every new species of Obligation, as it came into 
 existence according to the increasing wants and necessities of 
 society, was declared by the Courts of Law to be Transferable and 
 Assignable— with one unfortunate exception 
 
 Thus Feuds, Charters, and Leases were first granted to the 
 Grantee alone : but in process of time they were granted to Grantee 
 and his Assigns. We find in Bracton that it w'as already usual to 
 grant feoffments to the Donee, his heirs, and his Assigns 
 (Libr. ii., c. 6, 16). And the Courts of Law held that the Assignee 
 might sue the. Grantee in his own name 
 
 Then Personal Annuities were created Assignable ; and by a.- 
 
236 THEOBY AND PRACTICE OF BANKING 
 
 decision as early at least as 1368, it was held that the Assignee 
 might sue the Grantor in his own name. This decision was 
 affirmed in cases which were expressly approved of by Lord Coke : 
 and the doctrine at last ceased to be questioned 
 
 All these different Obligations were Deeds or Specialties ; 
 and though they were intended to be freely Sold and Assigned at 
 the will of the Grantee : they were -neyer intended or expected to 
 circulate in commerce like Money 
 
 58. We have now to consider a different kind of Deed or 
 Specialty, of mercantile origin, which was expressly intended 
 to record and transfer mercantile Debts, and to pass from hand to 
 hand like Money 
 
 It has been shown that written documents of Debt were in 
 common use at Eome in the time of Cicero : and allowed to be 
 used as evidence of Debt between foreigners : though not between 
 Eoman citizens. In process of time these came to be acknow- 
 ledged as evidences of Debt among Eoman citizens, when the 
 Family Ledgers had fallen into desuetude 
 
 These Cheirographa, Gains tells us (iii., 134), were in the form 
 of acknowledgments and Promises to pay : and by the time of 
 Justinian had acquired all the validity of a modern Promissory 
 Note. They formed a valid contract in themselves, just like the 
 Stipulatio and the Expensilatio : and, consequently, they required 
 no consideration to support their validity. Moreover, they were 
 transferable by the general Law of the Empire, that all Actions of 
 every sort might be sold at the will of the Creditor 
 
 Hence we see that Obligations in both forms— of Orders to 
 pay and Promises to pay — have come down to us from the 
 Eomans. No doubt their use was greatly diminished during the 
 commotion caused by the fall of the Eoman Empire : but their 
 use revived when Europe became more settled. Their use of 
 course extended to England : but the first notice of them, that we 
 are aware of, is in the Statute of Merchants, 11 Edw. I., in 1283. 
 It is there enacted that because there was no speedy recovery at 
 Law for mercantile Debts, any merchant which would be sure of 
 his Debt might cause his Debtor to come before the Mayor of 
 London, York, or Bristol, and the Clerk should write an "Escrit 
 de Obligacioa" or Bill ObUgatory, as it is termed in the 
 
SALE OF DEBTS IN ENGLISH LAW 237 
 
 official translation of the Statutes, binding the Debtor to pay his 
 Debt on a given fixed day : to which he was to affix his seal 
 
 Written Obligations are also described by Britton 
 
 Now it must be observed that these written Obligations were 
 necessarily Sealed — that is, they were Deeds or Specialties 
 
 No doubt Obligations of Debt were at first created payable to 
 the Creditor only. But it is natural to suppose that merchants 
 soon perceived the advantage of making them Transferable. 
 Moreover, foreign bills were transferable in their very nature by 
 the general mercantile law of Europe. It is therefore natural to 
 suppose that at a very early period, though we cannot tell when, 
 merchants adopted the form of creating their Obligations payable 
 to Assigns, or Bearer. Accordingly we find that Bills of Exchange 
 and Promissory Notes, sealed as Deeds payable to Assigns and 
 to Bearer, were in common use in 1482. And, of course, if 
 common forms of these documents are given in 1482, they must 
 have been in common use for a long time previously 
 
 It is also seen that in 1587 Bills of Exchange were drawn in 
 the form of Promises to pay ; were sealed : and, delivered as 
 Deeds or Specialties : and, by the case of Shelden v. Eentley, 
 that the practice of sealing Bills or Notes was still in use in 1680 
 
 Moreover, both in Law and common usage the word " Bill " 
 meant any writing whether sealed as a Specialty or not. As is 
 seen in the next section, these sealed Instruments were termed 
 "By Us" : and Ben Johnson uses the word Bill as synonymous 
 with Deed 
 
 59. With these unquestionable facts before us it is easy to 
 perceive the true course of events 
 
 For many centuries Bills and Notes were exclusively 
 sealed Instruments, Deeds or Specialties. In process of 
 time, as writing became common, merchants began gradually to 
 discontinue the formality of sealing, and used their simple 
 signature. For a considerable time bills sealed and unsealed 
 circulated together, and were considered equally valid 
 
 This was exactly the case with Cheques, which originated with 
 Banking. It is seen by a number of Cheques which have recently 
 been brought to Kght, that they were sealed or not sealed at the 
 
238 THEORY AND PRACTICE OF BANKING 
 
 pleasure of the drawer : the last instance of a sealed Cheque that 
 we have seen is dated in 1707 
 
 So in the edition of les Termes de la Ley, published in 1708, 
 it is said — " But of late times it is used in London that merchants 
 and others there who have Bills without Seals for payment of 
 money, assign them to others, who bring actions in their own 
 names." Which proves, as we have shown, that the ancient and 
 usual custom was to seal Bills : but that the custom of merchants 
 had made signed Bills of the same validity 
 
 60. Accordingly, we have seen that when these unsealed 
 Bills and Notes came before the Courts, they at first did not 
 hesitate to recognise the new form of Obligation as perfectly valid : 
 until at last in a most unfortunate moment Lord Holt determined 
 to set his face against them ; and at last brought the whole of the 
 Judges round to his opinion 
 
 But the student must carefully observe the ground upon which 
 his decision was based : it was that by recognising their vahdity 
 it would be putting a parol Contract or a mere piece of 
 paper on the same level as a Specialty 
 
 Hence, in the very terms in which the judgments were given, 
 it was expressly acknowledged and admitted that Any Specialty 
 was assignable and transferable 
 
 So, also, after this judgment, new Specialties were recognised 
 and admitted by the Courts of Law as assignable and transferable, 
 namely, Respondentia Bonds and Policies of Insurance 
 
 From about the year 1250, then, the period when we may 
 suppose that Bracton wrote his work, to the year 1800 — a period 
 of 650 years — it was allowed by text writers of the highest 
 authority, and by a regular series of decisions of the Courts, that 
 Obligations of all sorts were transferable and assignable. Thus 
 the Courts of Law had uniformly adapted themselves to the 
 progress of the times ; and — with one unfortunate exception- 
 recognised the assignability of every new species of Obhgation as 
 it came into existence. It is true that in early times it had been 
 the babble of the Bar that Ghoses-in-adion were not assignable : 
 but on every occasion on which it was brought forward, it was 
 unanimously rejected by the Court : till at last it ceased to be 
 brought forward at all. It would be impossible to conceive any 
 
SALE OF DEBTS IN ENGLISH LAW 239 
 
 doctriae to be more thoroughly discredited and exploded than that 
 " Ghoses-in-action are not Assignable at Common Law." How 
 then did this doctrine, scouted and rejected by the Courts for 
 centuries, at length rise, with twenty mortal murders on its head, 
 gain possession of our Courts of Law, be found at every turn in 
 our standard text-books of Mercantile Law, and became, as it 
 were, ingrained in the minds -of Modern Lawyers as a cardinal 
 maxim of the Common Law ? 
 
 We believe it is entirely due to Lord Kenyon 
 
 61. In the case of Johnson v. Collings (1 East, 98), in 1800, 
 Lord Kenyon held that a promise given by a merchant to accept a 
 bill before it was drawn, was not a valid acceptance of the Bill, 
 contrary to the doctrine of Lord Mansfield in Pillans v. Van Mierop. 
 In his judgment, he said " that to allow this would be to say that 
 a Ghose-in-action is assignable : a doctrine to which I will never 
 subscribe. I cannot, as at present advised, and upon a general 
 view of it, agree with the case of Fenner v. Meares " 
 
 So Grose, J., said — " By the general rule a Ghose-in-action is 
 not assignable, except by the custom of merchants. The assign- 
 ment of a Ghose-in-action by a Bill of Exchange is founded on 
 that law : and cannot be carried further than that law will 
 warrant it " 
 
 Now, with respect to the case of Fenner v. Meares, we may 
 observe that it was the unanimous judgment of the Common 
 Pleas of which Blaclsstone was a member : and that it was strictly 
 in accordance with the judgments of all the Courts for upwards of 
 500 years. Therefore, at this time the King's Bench and Common 
 Pleas were unanimous that a Bond made assignable to any holder 
 might be transferred : and that the holder might sue the Debtor 
 
 62. Next, with respect to the broad and sweeping dogma that 
 " Ghoses-in-action are not assignable at Common Law," it is 
 evident that in its brute generality it comprehends the four 
 following propositions — 
 
 1. That Obligations or Choses-in-action cannot at Common 
 Law be made Assignable or Transferable, even with the consent of 
 the parties to them 
 
 2. That it is illegal at Common Law for an Obligor to create 
 
240 THEORY AND PRACTICE OF BANKING 
 
 an Obligation Assignable or Transferable to assignees, or the 
 bearer 
 
 3. That the Creditor in an Obligation cannot Transfer his 
 Eight of action even with the consent of the Debtor 
 
 4. And lastly, a fortiori, a Creditor cannot transfer his Right 
 without the consent of the Debtor, so as so enable the Transferee 
 to sue the Debtor in his own name 
 
 Of these four propositions the first three are absolutely 
 destitute of any foundation in truth : the last only was technically 
 true : and already in the time of Henry VI. it was perfectly well 
 established that the Debt might be assigned : but that the 
 Transferee must sue in the name of the original Creditor : so that 
 for more than four centuries it had been reduced to a mere legal 
 fiction : or as BuUer said, a mere objection to the form of action, 
 which he and other enlightened Judges wished to see discontinued 
 by the Courts of Law 
 
 63. For thirty years, from 1756 to 1786, the Court of King's 
 Bench had been presided over by a chief who, take him all in all, 
 may probably be said with truth to have been the most acoom- 
 phshed person who ever adorned the Judicial Bench of England,, 
 or of any country : and who was exactly fitted for the times in 
 which he appeared. William Murray, the eleventh child of a poor 
 Scotch peer, had been till past thirteen at the grammar school at 
 Perth, where he distinguished himself for his progress in the 
 humanities. In 1718, by the advice of Atterbury, Dean of 
 "Westminster, he was transferred to Westminster School, then in 
 the height of its reputation. Always dux of his class at Perth, 
 he gained a King's Scholarship at Westminster in 1719, and 
 distinguished himself above all his competitors. In 1723, after 
 an examination conducted by Atterbury, Bentley, and the Dean of 
 Christ Church, he was placed first in the list of scholars sent to 
 Christ Church. Being miserably poor, and unable to afford the 
 education necessary for the English Bar, he had intended to take 
 orders in the Enghsh Church : but a wealthy nobleman, the father 
 of one of his schoolfriends, at whose house he visited, was so struck 
 by his abilities that he took upon himself the cost of his education 
 for the bar. Stimulated partly by his own innate ambition to 
 distinguish himself in the profession to which his own genius led 
 
SALE OF DEBTS IN ENGLISH LAW 241 
 
 him, and partly, no doubt, by his sense of the obligation which 
 he had incurred to his generous patron, he continued his studies 
 with unfl!}gging industry at Oxford : and attended lectures there 
 on the Pandects of Justinian, which laid the foundation of his 
 future fame as a Commercial Lawyer 
 
 While studying for the bar, Murray continued his course of 
 almost unparalleled industry. He first mastered Eoman Law, 
 which he justly considered as the foundation of all scientific 
 jurisprudence ; then international law ; then the feudal law and 
 the Common Law of England ; then the great jurists of France, 
 and especially the Ordinance de la Marine, the great Code of 
 Mercantile Law, then recently published. He also studied ancient 
 and modern history : and, notwithstanding all this course of severe 
 labour, he mingled in the gayest society, and was the intimate 
 friend of Pope. He was certainly the most extraordinary combina- 
 tion of forensic, political, literary, and social qualities, that ever 
 was seen. Having long been at the head of the bar, he became 
 Solicitor Ueneral in 1742 : Attorney General in 1754= : and Chief 
 Justice of the King's Bench in 1756 
 
 Towards the end of the reign of Charles II., the commerce of 
 the country began to expand, and more attention was paid to 
 industrial and economical questions than had ever been done 
 before. Although Bills of Exchange and Promissory Notes under 
 the name of Bills of Debt had been in common use for centuries, 
 it is very remarkable that no case on a Bill of Exchange occurs in 
 the Law Eeports till 1602. But banking originated during the 
 Commonwealth, and bankers introduced Promissory Notes payable 
 to bearer on demand. From this time cases on Bills and Notes 
 began to multiply 
 
 The extension of our commerce and colonies gave rise to an 
 immense mass of new mercantile cases. And, fortunately, just at 
 this period there was a chief justice who was pre-eminently fitted to 
 deal with them. All the fundamental principles of the Law of Cre- 
 ditor and Debtor, Principal and Surety, and Principal and Agent, 
 are clearly worked out in Eoman Law ; and Lord Mansfield had 
 simply to apply these well-settled principles to the vast mass of 
 mercantile cases which were brought for the first time into a 
 Court of Law. For these reasons Lord Mansfield has been called 
 the founder of our Mercantile Jurisprudence. In Lichbarroiv v. 
 
242 THEORY AND PRACTICE OF BANKING 
 
 Mason, BuUer, J., said — "'Wlthiii these thirty years the Commercial 
 Law of this country has taken a very different turn from what it 
 had before. Lord Hardwicke himself was proceeding with great 
 caution, not establishing any general principle, but decreeing on 
 all the circumstances put together. Before that period we find 
 that in Courts of Law all the evidence in mercantile cases was 
 thrown together : they were left generally to a jury : and they 
 produced no established principle. From that time we all know, the 
 great study has been to find some certain general principles, which 
 shall be known to all mankind, not only to rule the particular 
 case then under consideration, but to serve as a guide for the 
 future. Most of us have heard these principles stated, reasoned- 
 upon, enlarged and explained, till we have been lost in admiration 
 at the strength and stretch of the understanding. And I should 
 be very sorry to find myself under a necessity of differing from 
 any case upon this subject which has been decided by Lord 
 Mansfield, who may be truly said to be the founder of the com- 
 mercial law of this country " 
 
 The frequent references Lord Mansfield made to the Koman 
 and other foreign Law gave his enemies a handle to assert that 
 he was overthrowing the old Common Law of England, and 
 confounding the distinction between Law and Equity : and he 
 was succeeded by a chief who was in every respect a contrast to 
 himself. With a very imperfect education, Lord Kenyon knew 
 no other jurisprudence but that of England. Articled to an 
 attorney at 14, he was intended for that branch of the profession, 
 when the death of an elder brother made him heir to a small 
 estate in Wales. He then determined to go to the bar. During 
 the five years he was obliged to spend before he could be called, it 
 is said that he pored over his law books day and night, and made 
 himself a consummate lawyer. "He acquired a great reputation as 
 an answerer of cases : but while these were clear, practical, and 
 sound, he was singularly deficient in the power of explaining the 
 reasons upon which they were founded, and he cited no authorities. 
 And he was always more attached to dogma and precedent than to 
 scientific reasoning 
 
 It was supposed that Lord Kenyon was the restorer of the 
 true principles of the Common Law, in opposition to the Equitable 
 principles which had been introduced into it by his predecessor. 
 
SALE OF DEBTS IN ENGLISH LAW 243 
 
 But the present was a most nnfortunate example of it. When he 
 revived the dogma that " Ghoses-in-action are not assignable," he 
 for the first time asserted a dogma from the Bench that had been 
 expressly rejected in a series of decisions extending from 1368 to 
 1628. In fact it had ceased to be urged in argument since that 
 date. Lord Kenyon might have read in Noy, p. 72— "A thing- 
 iu-action may be assigned over for a good-cause, as just 
 debt : as where a man is indebted to me twenty pounds ; and 
 another owes him twenty pounds, he may Assign over his 
 ObHgation to me in satisfaction of my debt : and I may justify 
 the suing for the same in the name of my debtor at my own proper 
 costs and charges " 
 
 He might also have read in Jenkins's Centuries, III., c. 9 — 
 "A. is indebted to B., and C. to A.: A. assigns the debt due to him 
 by C. to B. in satisfaction for the debt due by A. to B. This is not 
 maintenance." And he might also have seen that so long ago as 
 37 Hen. VI. it was established that the Assignee of the debt 
 might sue in the name of the Assignor 
 
 He might also have seen by the judgments in Lord Holt's 
 cases that the judges tmanimously allowed that Specialties were 
 assignable : but they would not allow parol contracts to be so : 
 and that the ground of their holding Promissory Notes to be 
 illegal at Common Law was that it was putting a piece of paper 
 on the same level as a Specialty 
 
 He might also have read in Blackstone, II., c. 30, Edit. 1770 
 — "No chose-in-action could be assigned or granted over (at 
 Common Law) because it was thought to be a great encouragement 
 to litigiousness, if a man were to make over to a stranger his 
 right of going to law. But this nicety is now disregarded : though 
 in compliance with the ancient principle, the form of assigning a 
 chose-in-action is in the nature of a declaration of trust, and an 
 agreement to permit the assignee to make use of the name of the 
 assignor, in order to recover the possession." And also IV., c. 33 
 — "The introduction and establishment of paper credit, by indorse- 
 ments on bills and notes, which have shown the possibility (so 
 long doubted) of assigning a chose-in-action " . 
 
 When, therefore, liord Kenyon uttered the dogma that "Choses- 
 in-action are not assignable," and Grose said — " Choses-in-action 
 were not assignable except by the custom of merchants, and only 
 
 E 2 
 
244 THEOBY AND PRACTICE OE BANKING 
 
 extended to Bills of. Exchange," they were uttering dicta which 
 were in direct contradiction of all authorities on the Common Law 
 and the decisions of the Courts of Law for 650 years 
 
 It is only from this case in 1800 that this dogma has prevailed 
 in our text books. The ascendency which Lord Kenyon had 
 acquired. over his colleagues on the Bench, something similar to 
 that of Lord Holt, caused his dogma to be accepted as a cardinal 
 maxim of Common Law. And from that time it has been held 
 that Ghoses-i?i-action are incapable of being assigned at Common 
 Law : that the sole exception of this rule was Bills of Exchange 
 by the Law Merchant : and Promissory Notes by the Statute of 
 Anne. And that Deeds, Bonds, or Specialties were not assignable, 
 even if made so by the Obhgor 
 
 This erroneous dictum was not long in bearing fruit. In Glyn 
 V. Baker (13 East, 509), the East India Company had issued 
 Bonds payable to the payee, and his assigns. The Court held 
 them not negotiable. This, as Lord Blackburn said in a subse- 
 quent case, raised such a commotion that an Act was immediately 
 passed to render East India Bonds negotiable Hke Promissory 
 Notes 
 
 Oil the Case of Bovill v. Dixon 
 
 64. The Obligations we have hitherto considered were all 
 contracts to pay Money : we have now to discuss a case which 
 enlarged the discussion on the nature of Obligations : or the 
 Transfer of Ghoses-in-action 
 
 Credits in this country have been usually Eights to demand 
 Money : and it is often supposed that a Creditor has merely the 
 Eight to demand Money : but we have shown that a Credit in 
 general is the Eight to demand any chattel or product from a 
 person ; money being only one particular chattel : or the Eight 
 to compel him to perform some service or to Do something 
 
 In the south of Europe it is quite usual to grant Bills payable 
 in produce. In the Ionian Islands, mercantile BiUs are usually 
 made payable in oil : and in other parts Bills are drawn payable 
 in other products 
 
 In 1849, Dixon, an iron merchant in Glasgow, contracted in 
 London to deliver Iron at any time after a certain date : and in 
 exchange for Bills he gave documents in the following form— 
 
SALE OF DEBTS IN ENGLISH LAW 245 
 
 " Glasgow, 10th July, 1849 
 "I will deliver 1,000 tons No. 1 pig iron free on board here 
 when required after the 10th day of September next to the party 
 lodging this document with me 
 
 "For William Dixon, 
 
 "John Campbell" 
 
 This document having passed into the hands of a third party 
 for value, who became bankrupt, his assignees sued Dixon for the 
 delivery of the iron in terms of his undertaking 
 
 The question arose whether the above was a valid and legal 
 document by the Common Law of Scotland, and enforceable by a 
 bond fide Transferee for Value. In fact it was nothing but a 
 Promise to pay in Iron instead of Money. It was known in the 
 trade by the name of Iron Scrip 
 
 The Lord Ordinary, Eutherfiird, said — " It seems impossible 
 to doubt that a party may undertake such an Obligation. . . 
 He sees no objection in point of law to such a document " 
 
 The Lord Justice Clerk said it was the first time that such a 
 document had been considered by a Court of Law : but held it 
 to be perfectly legal and to give theholder a right of action against 
 the maker 
 
 Lord Cockburn held that the writing bound the seller to give 
 the iron " to the party lodging this document with me." . . . 
 "That it is competent to a party to issue such an Obligation, I 
 cannot doubt. Whether for a price or no price, or for any or for 
 no consideration, if a party chooses to bind himself in favour of 
 the mere holder of such a document, I am not aware of there 
 being anything in law to prevent him." The other two judges 
 were equally decided in their opinion that it was a perfectly legal 
 and negotiable document 
 
 The case was taken by appeal to the House of Lords : but in 
 the meantime a similar document granted by the same person to 
 another merchant came before the first division of the Court, and 
 it is as well to consider their opinion as to the legality of the 
 document 
 
 In the case, Dimmack v. Dixon (cases in the Court of Session, 
 4th Series, vol. 18, p. 128), the Court considered that it was of 
 
246 THEORY AND PRACTICE OF BANKING 
 
 such great importance as a point of mercantile law to determine 
 the validity of such documents, that, as is usual in points of great 
 importance in Scotland, they took the opinion of all the other 
 Judges. The result was that the Judges of the Second Division 
 unanimously adhered to their former opinion that the document 
 was perfectly legal and valid : and of the remaining Judges, six 
 were of opinion that it was legal : and three were of opinion that 
 it was not. ; Thus, upon the whole, ten Judges were of opinion 
 that the document was legal : and three were of opinion that it 
 was not ' 
 
 The judgment in the case of Bovill v. Dixon was given in the 
 House of Lords, July 29, 1856. The only Law Lord who gave an 
 opinion was Lord Chancellor Cranworth ; and his observations are 
 so important, as giving a statement of what was then considered to 
 be Law, that we must give them at some length. He said — 
 
 " If the question had turned exclusively upon the validity or 
 invalidity of this document, I am bound to say that I should not 
 have concurred with the Court of Session. I think that the docu- 
 ment is invalid. The effect of such a document, if valid, is to give a 
 floating right of action to any person who may hec-ome possessed of it. 
 Now, I am prepared to say that this cannot be tolerated either by 
 the Law of Scotland or of England. The only cases in which such 
 an action can be sustained are those of Bills of Exchange and 
 Promissory Notes, depending on the Law Merchant in the case of 
 Bills of Exchange : and on the Statute of 12 George III., c. 72, s. 
 36, in the case of Promissory Notes. No evidence was given to 
 show any general mercantile usage affecting such instrument as 
 that now in question : indeed, it was impliedly admitted at the 
 trial that no such usage could be estabUshed by evidence : and I 
 must, therefore, assume that no such usage exists : that is, there 
 is nothing in the Law Merchant to warrant what is now contended 
 for 
 
 " Bills of Lading, I may observe, afford no analogy whatever. 
 A Bin of Lading is a mere symbol of property : no right of action 
 passed by indorsement previously to the Act of last session, which 
 caused a Eight of action to pass as well as a right of property. No 
 authority for such transferable right of action has been adduced 
 in argument before your Lordships, and &\\ principle is against its 
 validity 
 
SALE OF DEBTS IN ENGLISH LAW 247 
 
 "The rule preventing such actions is by no means one of a 
 technical nature. It is a rule founded in extremely good sense. 
 In England, a plaintiff suing on a contract, unless it be a contract 
 under seal, must prove a consideration. That indeed is not the 
 case in Scotland. But in Scotland as well as in England, it is a 
 perfectly good defence to show illegality of consideration : tarpis 
 causa for instance ; or that the instrument in question was given 
 to induce a violation of the law : or that it was an instrument 
 tending to restrain freedom of action in cases where, on grounds 
 of public policy, every one ought to be free and the like. I give 
 these instances merely as illustrations. Where an action is 
 brought by one of the contracting parties, illegality of considera- 
 tion, can alwayg be pleaded as a defence. So also where an action 
 is brought by the assignee, of the original contract, which may be 
 done directly in Scotland, and indirectly by means of a Court of 
 Equity in England, the illegality of the original contract affords a 
 good defence. It is the policy of the law to preserve this principle 
 intact, in order to prevent Courts being made ancillary to viola- 
 tion of the law. Now this principle is entirely defeated if a 
 contracting party can make a floating contract enforceable by 
 bearer : for the bearer does not sue as the assignee of the original 
 contracting party. He may be, and probably is, a stranger to the 
 original contract. His right, if any, is under an independent 
 contract with himself, against which no illegality as between 
 original parties can be set up. Bills of Exchange have been made 
 an exception for the convenience of trade, but it is an exception 
 not to be extended. The drawer of the bill gives to the indorsee a 
 better title than his own : and thiB leads, or may lead to, many 
 ill consequences : but mercantile convenience has sanctioned it. 
 No such necessity exists in the case of other contracts, and there is 
 no authority to warrant it. Indeed, I may observe that the 
 Statute of the 12th George III., c. 72, s. 36, affords statutable 
 authority by analogy against the present claim : for if a Promissory 
 Note could have been made transferable by indorsement at Common 
 Law, there would have been no necessity for that Statute. . . . 
 
 " If the convenience of those engaged in trade and commerce 
 requires that scrip notes of this description should be made legal 
 and vaUd, that must be effected, if at all, by the legislature : and 
 in any measure being introduced for such an object, it will be for 
 
248 THEORY AND PRACTICE O'E BANKING 
 
 your Lordships and the other House of Parliament to consider and 
 weigh well the social benefits and evils likely to result from the 
 sanctioning of the proposed change. It may be that the general 
 adoption and use of these scrip notes would afford safe facilities to 
 commercial enterprise. It may be, on the other hand, that such a 
 practice would tend to produce and keep alive a restless spirit of 
 inordinate speculation, and so be injurious to those engaged in 
 wholesome commerce. But these are all questions for your Lord- 
 ships in your legislative, not in your judicial capacity. Looking 
 at the matter merely as' advising your Lordships as a Court of 
 Appeal, I have no hesitation in saying that, independently of the 
 Law Merchant and of positive Statute, within neither of which 
 classes do these scrip notes range themselves, the Law does not 
 either in Scotland or in England, enable any man ly a written 
 engagement to give a floating Right of action at the suit of any 
 one into zvhose hands the writing may come, and who may thus 
 acquire a Right of Inaction better than the right of him under 
 whom he derives title " 
 
 The Author selected hy the Law Digest Commissioners to prepare 
 the Digest of the Law of Bills of Exchange 
 
 65. The doctrines laid down by Lord Cranworth in Bovill v. 
 Dixon were undoubtedly supposed to be Law at the time. They 
 were to be found in all the usual text books of Mercantile Law, 
 were taught in every special pleader's chambers, and they were 
 set forth in the earlier editions of this work. But when the 
 competition for the Digest of the Law was invited, it occurred to 
 the author that the doctrines then current as to the transfer of 
 Ohoses-in-action at law were contradictory : because it was perfectly 
 admitted that it was legal to transfer a Chose-in-action. It 
 became necessary, therefore, to investigate what was the true 
 doctrine of the Common Law on the subject. The result of that 
 investigation has been given in the preceding paragraphs : and an 
 important part of the author's paper was an argument founded on 
 a series of cases, extending through several centuries, that it was an 
 error to suppose that the Common Law absolutely prohibited the 
 Transfer of Ghoses-in-action. That the Courts had in fact 
 uniformly held that when an Obligation had been created by the 
 
SALE OF DEBTS IK ENGLISH LAW 249 
 
 Obligor himself assigaable, it might be assigned : and that the 
 assignee might sue the Obligor in his own name 
 
 After reciting the cases quoted above, he said — 
 
 " The preceding cases seem to establish incontestably the 
 following as the true Common Law doctrine as to the Trans- 
 ferability of Debts or Ghoses-in-action 
 
 " I. Where the Obligor granted the Obligation to the Obligee 
 alone, an assignee of the Obligation could not sue the Obligor in 
 his own name 
 
 " II. But wherever the Obligor granted the Obligation to the 
 Obligee and his Assigns, or to ' bearer,' thereby giving his express 
 consent to its alienation, the Obhgee might freely assign it, and 
 the holder of it had a Right of action against the Obligor : for he 
 was bound by his contract : and modus et conventio viiicunt legem" 
 
 He then showed that the Common Law having perfectly 
 allowed Obligations to be created Transferable, the form of the 
 Obligation was a matter of indifference. That Obligations in 
 both forms of orders to pay money and of promises to pay money 
 had been in common use for centuries longer than had been usually 
 supposed : and they were made payable to assigns or to bearer : 
 and furthermore that they were sealed as Deeds 
 
 Upon the examination of this paper the Commissioners 
 unanimously selected the author to prepare the Digest of the Law 
 of Bills of Exchange ; and he was invested with the duty of 
 reducing into systematic and scientific order the whole mass of 
 cases on the subject both at Law and in Equity. He was 
 instructed that he was not to pay any regard to any text book, or 
 to what any Judge or Court of Law said : but that it was his 
 duty to declare "the Law" on every point in the subject. 
 This, therefore, involved the duty of examining and approving, 
 confirming, modifying, or reversing the decisions of all the Courts 
 of Law and Equity in England, on this subject 
 
 Accordingly he began the Digest by setting aside as erroneous 
 the whole of Lord Holt's cases, upon which the modern doctrine 
 had been founded ; and stated the true Common Law doctrine 
 thus — 
 
 " 2. At Common Law a Creditor cannot transfer his Debt or 
 Right of action to a third person without the consent of the 
 
250 THEORY AND PRACTICE OF BANKING 
 
 Debtor, so as to enable the Transferee to sue the Debtor in his 
 own name 
 
 " 3. But wherever the Debtor assents to the transfer of the 
 Debt, either Orally or in Writing : the assignment of it by 
 the Creditor is irrevocable ; a trust is created ; and the assignee 
 may sue the Debtor in his own name " 
 
 Moreover he said in a note— "The legality of Promissory 
 Notes is sometimes supposed to rest solely upon this Act {i.e., of 
 Anne) : but there can be no doubt whatever that the series of 
 decisions which were the cause of the Act being passed were 
 erroneous : and that the Act was superfluous " 
 
 In 1870, the Commissioners discontinued the work of the 
 Digest : so that the author's digest was never published. But his 
 selection by the Commissioners was in effect equivalent to the 
 judgment of the House of Lords in his favour : because the Com- 
 missioners comprised all the Law Lords except one : and if upon 
 examining the author's written argument in their character of 
 Commissioners, they approved of his doctrines in preference to . 
 those generally current in the profession, they must equally have 
 done the same if he had had the opportunity of arguing the 
 question before them in their character of Law Lords. Moreover 
 Lord Cranworth, whose doctrine the author impugned, was chair- 
 man of the Commissioners 
 
 Accordingly, the author introduced the new doctrines into his 
 Prinoiphs of Economical Philoso;phy, published in 1872. In vol. L, 
 p. 510, of that work, he said — • 
 
 "If any readers of this work should happen to be acquainted 
 with our Theory and Practice of Banking, second Edition, 1866, 
 they may, perhaps, be greatly surprised to see that, though the 
 facts and the system of credit given here are the same as those 
 set forth in that work, yet our statement of the Law of the subject 
 is perfectly different now to what it was then. The explanation 
 of this extraordinary difference is this : that in the former work we 
 stated the Law according to the current doctrine which may be 
 heard in Westminster Hall, in a special pleader's chamb ers, or in 
 the text books. But since that work was published we were 
 selected by the Eoyal Commissioners for the Digest of the Law to 
 prepare the National Digest of the Law of Credit. In the 
 preparation of this great national work, we could not rest satisfied 
 
SALE OF DEBTS IN ENGLISH LAW 251 
 
 with the loose, vague, ill-defined notions floating about West- 
 minster Hall. It became necessary to trace every principle 
 through the whole course of English Law to its very sources : and 
 to reduce to absolute precision the shifting and conflicting 
 doctrines in the various cases. It was also necessary to investigate 
 thoroughly the Theory of Credit as developed in Eoman Law. 
 The result of this investigation was to show that the common 
 notions on the subject prevalent among English lawyers are 
 completely erroneous both iij Fact and Law. Pages of our 
 common text books must be scored out. All that we find in them 
 stated about the transfer of Ghoses-in-action being contrary to 
 the Common Law, and only adopted from the Law Merchant, is 
 pure rubbish, and must be consigned in future to the limbo of 
 myths. We proved by a series of cases traced through 500 years 
 that in every case where a Ghose-in-action was originally created 
 transferable by the consent of the Obligor, the Courts of Law 
 have invariably held that the Transferee might sue the Obligor 
 in his own name. Yet such is the vitality of error, that it is one 
 of the stock dida of Westminster Hall, that Ghoses-in-action are 
 not assignable at Common Law. Not only was the series of cases 
 in which Lord Holt refused to recognise Promissory Notes as 
 legal documents quite contrary to the principles which had been 
 invariably followed for three centuries : but Lord Mansfield 
 expressly declared them to be founded on erroneous principles : 
 and Lord Kenyon, well known as a stickler for the strictest rigour 
 of the Common Law, concurred in this opinion. The whole 
 system of Bills and Notes is strictly legal at Common Law. 
 Moreover, it is quite evident that the flimsy reason given by Lord 
 Coke was quite inadequate to explain the case. The law affecting 
 the transfer of Credit is only an example of a very wide principle 
 of Jurisprudence, founded on the very nature of things. Eoman 
 Law went through exactly the same phases as English Law is 
 doing : and it seems somewhat strange that the Law of the 
 Romans, who were not a commercial people, reached a much 
 greater state of perfection than the Law of a great commercial 
 people like the English. And the reason is, that the Eomau Law 
 was worked out by a series of illustrious Jurists, with whom we 
 have none to compare. Where is our Gains, or our Modestinus, 
 our Javolenus, our Ulpian, or our Papinian ? Alas ! we have 
 
252 THEOBY AND PRACTICE OF BANKING 
 
 none such. We haye no philosophic Jurists, only matchless legal 
 practitioners " 
 
 On the Case of Crouch v. The Credit Fongier of 
 
 England 
 
 66. We now come to the last case in which, we hope, the 
 dogmas we have been discussing at so great length will make 
 their appearance 
 
 The Credit Fon^ier of England issued an Obligation, which 
 they termed a Debenture, by which they promised to pay the 
 Bearer the sum of £100 on the 1st day of May, 1872, or upon 
 any earlier day upon which the Bond should be entitled to be 
 paid ofF, or redeemed, according to certain conditions printed on it 
 
 The Bond further promised to bear interest at 8 per cent., 
 payable half-yearly on the 1st November and 1st day of May in 
 each year, from the 1st November, 1869 to the 1st May, 1872 : 
 unless it should be drawn for payment before the 1st May, 1872 : 
 in which case, interest was to cease from the day it was drawn 
 
 One Macken bought ten of these debentures. In July, 1869, his 
 house was broken into and they were stolen. The Bond in 
 question was drawn for payment on the 1st November, 1870. 
 Macken having received substituted Bonds, on giving notice of 
 his loss to the Company, and an indemnity, received payment of 
 the Debenture 
 
 At the end of 1871 the Plaintiff bought the Debenture from a 
 person who afterwards disappeared : and sued the Company for 
 payment of it 
 
 It was not disputed that he gave value for the Bond without 
 notice, and at the trial before Bramwell, B., he gained the verdict 
 
 The questions before the Court in Banc were — ■ 
 
 1. Whether the Debenture was a Negotiable Instrument 
 
 2. Whether if it were so, it was not overdue and so ha,d lost 
 its attribute of " Currency " or Negotiability 
 
 The Judgment of the Court of Queen's Bench was delivered 
 by Blackburn, J., in the absence of the Chief Justice 
 
 He began by allowing that such Instruments had been for 
 some time treated as Negotiable 
 
 He then said (L. E., 8 Q. B., 374)—" The general rule is not 
 
SALE OF DEBTS IN ENGLISH LAW 253 
 
 disputed that a Chose -in -action cannot be transferred 
 
 at law at all : but that in Equity it may be assigned, though 
 the action at law must be brought by the Assignee in the name of 
 the original contractee : in this case, Macken. Equity will 
 compel the contractee, if he has assigned the contract, to allow 
 his name to be used for this purpose on an indemnity against 
 costs. Had Macken assigned this contract to the plaintiff, either 
 directly or through the medium of intervening assignees, the 
 question whether the plaintiff was able to sue in his own name, or 
 was obliged to sue in the name of Macken, would have been purely 
 technical. But the general rule, both at law and in equity, is that 
 no person can acquire title either to a G hose-in- action, or to any 
 other property, from one who has himself no title to it : and, 
 therefore, the plaintiff could not in equity have compelled Macken 
 to permit his name to be used, unless to borrow the language of 
 Tindal, G. J., in Brandao v. Barmtt, such an instrument as this 
 ' falls within that description of property to which a good title 
 may be acquired by a party who takes it bona fide for value, not- 
 withstanding any defect of title in the party from whom it is 
 taken ' 
 
 " In the present case, the plaintiff has taken upon himself the 
 burden of establishing both that the Property in the debenture 
 passed to him by delivery ; and that the right to sue in his own 
 name was transferred to him 
 
 " The two propositions are very much connected, hut not 
 identical. The holder of an overdue bill or note may confer the 
 right on the Transferee to sue in his own name, but he conveys 
 no better title than he had himself. So the assignee of a Scotch 
 Bond, which is assignable by the law of Scotland, may sue in his 
 own name in the Courts of this country : but he has not a better 
 title than those from whom he took the Bond, unless, perhaps, if 
 the contract is by the law of Scotland not merely assignable but 
 negotiable. As to this in Dixon v. Bovill, Lord Cranworth, then 
 Lord Chancellor, in delivering the judgment of the House of 
 Lords, in a Scotch case, as to iron scrip notes says — ' I have no 
 hesitation,' &c. (as alluded above) 
 
 " But the two questions go very much together': and indeed in 
 the notes to Miller v. Race, where all the authorities are collected, 
 the very learned author says : ' It may, therefore, be laid down 
 
254 THEORY AND PBACTICB OP BANKING 
 
 as a safe rule that where an instrument is by the custom of trade 
 transferable, like cash, by delivery, and is also capable of being 
 sued upon by the person holding it pro tempore, then it is entitled 
 to the name of a Negotiable Instrument, and the property in it 
 passes to a lonafide Transferee for value, though the transfer may 
 not have taken place in market overt. But that if either of the 
 above requisites be wanting, i.e. — if it be either not accustomably 
 transferable : or though it be accustomably transferable, yet, if its 
 nature be such as to render it incapable of being put in suit by 
 the party holding it pro tempore, it is not a Negotiable Instrument: 
 nor will delivery of it pass the property of it to a vendee, however 
 lona fide, if the Transferee himself have not a good title to it, 
 and the transfer be made out of market overt 
 
 " Bills of Exchange and Promissory Notes, whether payable 
 to order or to bearer, are by the Law Merchant Negotiable in both 
 senses of the word. The person who, by a genuine indorsement, 
 or where it is payable to bearer, by a delivery, becomes holder, 
 may sue in his own name on the contract, and if he is a bona fide 
 holder for value, he has a good title, notwithstanding any defect 
 of title in the party whether Indorser or Deliverer, from which he 
 took it. The first question is, therefore, whether this Instrument 
 is a Promissory Note. It is under seal, and therefore is prirrM 
 facie a Covenant, not a Pl-omise : and it is quite clear that 
 a Covenant to pay money is not Negotiable by the custom of 
 merchants 
 
 " When a corporation is established for trading purposes, it is 
 from its nature capable of drawing a Bill of Exchange and 
 making the Promise implied iby law from making a Bill, and is 
 liable to be sued in assumpsifei though a body corporate. This is 
 not by virtue of any Statute but from the Common Law. But 
 all such Bills of Exchange in practice always have been made 
 under hand, by an agent authorised to draw or accept as the case 
 may be. The East India Company, by their secretary, the Bank 
 of England, as anyone who looks at -a Bank of England Note may 
 see, make their notes by an agent : and there is no case in the 
 books where a Bill of Exchange made under seal has been swd 
 upon 
 
 " The Negotiability of Promissory Notes depends in part at 
 least upon the Statute 3 and 4 Anne, c. 9 : and it seems to have 
 
SALE OP DEBTS IN ENGLISH LAW 255 
 
 been the opinion of Lord Justice Wood, in Re General Estates Co.; 
 and of Malins, V.C., in Re Imperial Land Go. of Marseilles, that 
 inasmuch as that Act enacts that Promissory Notes in writing, 
 &c., it follows that a Corporation fixing its seal to a written 
 promise to pay must be considered as signing the promise, not as 
 covenanting under seal to fulfil it : and so that Statute by 
 implication enacts that, what would at Common Law be their 
 Covenant to pay, is their Promise to pay. But although intimating 
 their opinion, neither of the learned persons referred to gave any 
 decision on the point, as it was not necessary for the purpose of 
 the cases before them. Neither is it necessary for us to decide the 
 point, as, for reasons which will presently be given, the Instrument 
 in question, even if under hand, could not be a Promissory Note ; 
 but we wish to point out that in Glyn v. Baker the form of the 
 East India Bond was that the Bast India Company acknowledged 
 to have received of W. G. Sibley £100, which the Company 
 promised to prepay to Sibley, his executors, or assigns, by indorse- 
 ment. It was therefore' in form a Promissory Note for value 
 received, payable to order, and had it been signed as such by an 
 agent of the East India Company, would have been negotiable. 
 But it was a bond under the seal of the East India Company and 
 Le Blanc, J., says — ' It is clear that no action could have been 
 brought on this bond but by Sibley the Obligee, or in his name : 
 or if he died, in the name of his executors ' 
 
 "The alarm occasioned by this decision was so great that 
 within a month afterwards an Act, 51 Geo. 3, c. 64, was passed 
 to make East India Bonds negotiable hke Promissory Notes. It 
 seems not to have occurred to any one that it could be said that 
 this was already done by virtue of the Statute of Anne, the 
 promise in writing being signed by the East India Company's 
 seal 
 
 " This seems a strong authority for saying that instruments 
 tnder the seal of a body corporate are not exceptions from the 
 general rale laid down in Byles on Bills that ' at Common Law, 
 Bills of Exchange and Promissory Notes, being simple contracts, 
 can not be under seal, at least so as to retain their negotiable 
 qualities.' And certainly it is very desirable that it should not 
 be left doubtful on the face of an instrument whether it is a 
 covenant or a promise 
 
256 THEORY AND PRACTICE OF BANKING 
 
 " But it is not necessary to decide in the present case whether 
 an instrument under the seal of a Corporation can be a Promissory 
 Note : for the contract of the Credit Fongier is not merely to pay 
 the money, but also to cause a portion of the bonds to be drawn 
 in the stipulated manner : and any one entitled to sue on the 
 contract contained in the instrument would be entitled to sue for 
 damages if the company did not fairly give him his chance of 
 having his bond drawn according to the stipulated conditions. 
 And it is obvious that such a contract as that cannot be a 
 Promissory Note 
 
 " He is also obliged to contend that tJiey could give a Right of 
 action in his oiun name to any holder, though the general law 
 ■would, give no such Eight of action to the holders. 
 There is no decision or authority that it is competent to a party to 
 create by his own act a transferable Right of action on a Contract. 
 It is enough to refer to Dixon v. Bovill and Thompson v. Doming 
 as authorities that he cannot, irrespective of custonq^ so create it 
 
 "We have already intimated an opinion that it is beyond the 
 competency of the parties to a contract to confer on the assignee 
 of that contract a Right to sue in his own name " 
 
 The Court then made the rule absolute to enter the verdict 
 for the defendants : but giving a Right to appeal. No appeal, 
 however, was made : and we have only to consider how the 
 doctrines laid down in it are affected by another case 
 
 Points of Conflict between the Principles laid down in this Case, 
 and those laid down in the Author's Digest 
 
 67, It will be seen that the principles laid down in this case 
 directly conflict with the principles laid down in the author's 
 Digest, with the private approval of the Law Digest Commissioners, 
 in the following points — 
 
 I. " The general rule is that a Ghose-in-action cannot be 
 transferred at law at all " 
 
 It has been sh6wn that this general assertion comprehends 
 four distinct propositions : the first three of which are absolutely 
 unfounded : and the fourth had been reduced to a mere technical 
 objection for centuries 
 
SALE OF DEBTS IN ENGLISH LAW 257 
 
 It may well excite surprise that a Judge of the legal fame of 
 Lord Blackbura should, in the year 1873, lay down the broad 
 sweeping doctrine that " A Chose-in -action cannot be transferred 
 in law at all " 
 
 It is a principle of law as well established as the Great Pyra- 
 mid, that if a Creditor directs, or authorises, his Debtor to pay 
 his debt to a third person, and if the Debtor assents to the ar- 
 rangement, and communicates such assent to the third person, an 
 irrevocable contract is created, which cannot be broken without 
 the consent of all the the parties to it : and then the third person 
 can sue the Debtor in his own name 
 
 This principle was expressly stated in many cases ; among 
 others in Tatloch v. Harris (3 T. R., 174). Fairlie v. Denton 
 (8 B. & C, 395). Williams v. Everett (14 East, 582). Hodgson 
 V. Anderson (3 B. & C, 482). Lilly v. Hays (5 A. & E., 648). 
 Walker v. Rostron (9 M. & W., 411). Hamilton v. Spottiswoode 
 (4 Ex., 200). Griffin v. Weatherby (L. E., 8 Q. B., 753) 
 
 In this last case Lord Blackburn said — " Ever since the case 
 of Walker v. Rostron, it has been considered as settled law that 
 where a person transfers to a Creditor, on account of a debt, 
 whether due or not, a fund actually existing or accruing in the 
 hands of a third person, and notifies the transfer of it to the 
 holder of the fund, although there is no legal obligation on the 
 holder to pay the amount of the debt to the Transferee, yet 
 the holder of the fund may, and if he does, promise to pay to the 
 Transferee, then that which was merely an equitable right becomes 
 a legal right in the Transferee, founded on the promise : and the 
 money becomes a fund received, or to be received for and payable 
 to the Transferee : and when it has been received an action for 
 money had and received to the use of the Transferee lies at his 
 suit against the holder " 
 
 Now, how is the doctrine assented to by Lord Blackburn in 
 Griffin v. Weatherly reconcilable with his dictum in Grouch v. 
 Credit Fongier of England? 
 
 Lord Blackburn's dictum would assert that the principle of 
 Novatio is not allowed by the Law of England. But this is 
 expressly described by Bracton as part of the Law : and was 
 always recognised by the Courts. In Bracton's times, no action 
 could be founded on a contract unless it was reduced to writing ; 
 
258. THEORY AND PRACTICE OF BANKING 
 
 i.e., a Deed or Specialty ; and, in 1292, we find an action brought 
 by the Assignee of a Specialty : and actions by Assignees of Spe- 
 cialties made assignable by the Obligor were uniformly allowed by 
 the Courts until they fell under the sway of the dogmatism of 
 Lord Kenyon. The case of Olyn v. Baker, in 1810, was the 
 first case in Law in which it was held that the Assignee of a Bond 
 had no action against the Obhgor : and the case of Crouch v. The 
 Credit Foncier of England, in 1873, will be the last 
 
 In 1857, Willes, J., a judge second to few, said in Balfour v. 
 The Sea Fire Life Assoc., (3 0. B. N. S., 308)— " The Court 
 there (in a case 37 Hen. VL) seem to have considered that there 
 could not be an sissignment of a Debt. That doctrine has, as 
 every one must know, long since exploded, certainly so long since 
 as the year 1791, and probably two hundred years before" 
 
 II. " It is quite clear that a Covenant to pay money is not 
 Negotiable by the Custom of merchants " 
 
 It has been shown that by a uniform series of decisions for 
 centuries, the Courts of Law. had held that wherever an Obligor 
 created an Obligation payable to payee and assignee, the assignee 
 might sue the Obligor in his own name. And it has further been 
 shown that the merchants whom Lord Holt consulted said that 
 it was the custom among merchants to transfer Bonds by Indorse- 
 ment like Bills of Exchange 
 
 III. " And there is no case in the books where a Bill of 
 Exchange made under Seal has been sued upon " 
 
 We have shown in the next section that for many centuries 
 Bills of Exchange and Promissory Notes were sealed and delivered 
 as deeds. It was only during the seventeenth century that 
 merchants began to use signed Bills and Notes : and for a con- 
 siderable time bills sealed or signed were used indifferently and 
 considered of equal validity 
 
 In Vanheath v. Turner (Winch, 24), in 1621, Vanheath brought 
 an action against Turner, and declared upon the Custom of 
 Merchants that if any merchant over sea deliver money to a 
 factor, and make a Bill of Exchange under his Seal, &c. 
 
 Also in Shelden v. Hentley (2 Show., 160), in 1680, the 
 Declaration was on a note under Seal. Jones, J., "At the time 
 of the seaUng whose Deed was it ? " The Court said—" The 
 
SALE OP DEBTS IN ENGLISH LAW 259 
 
 person seems sufficiently described at the time that it is made a 
 Deed " 
 
 So also in Us Termes de la Ley, published in 1708, it is said 
 that merchants were claiming the same right to bring action on 
 Signed bills as on Sealed Bills 
 
 Moreover, the Judges in Lord Holt's cases unanimously 
 admitted that Bills and Notes under seal were legal : their objec- 
 tion to signed notes was that it was making a mere piece of paper 
 equal to a specialty 
 
 IV. The case of Glyn v. Baker is quoted as an authority : but 
 this case is the direct result of Lord Kenyon's ruling : and is 
 directly in conflict with all preceding cases : and is certainly not 
 law 
 
 V. " There is no decision or authority that it is competent 
 to a party to create iy his own act a transferable Right of 
 Action on a Contract" 
 
 This is a repetition of the dogma of Lord Crahworth in Bovill 
 V. Dixon : and of Parke, B., in Thompson y. Dominy (14 M. and 
 W., 407)—" I never heard it argued that a contract was transfer- 
 able, except by the Law Merchant " 
 
 In answer to this we can only express our astonishment that 
 Judges of such experience should give utterance to such senti- 
 meuts in the nineteenth century : cujus contrarium est verum 
 
 VI. The judgment that the document declared upon was not 
 a Promissory Note. It may not have been a Promissory Note in 
 the strict and technical sense in which the word is now used • but 
 it was an Obligation, and therefore transferable by the general 
 principle of Law applicable to all Obligations 
 
 On the Case of Goodwin v. Eobarts 
 
 68. At" length this great quarrel was brought to a final set- 
 tlement and determination in the case of Ooodivin v. Roharts 
 (L. E., 10 Exch., 337), beyond all comparison the most important 
 Mercantile case in modern times ; or, indeed, of any time 
 
 The Russian Government, being about to raise a loan on 
 Bonds, appointed Messrs. Rothschild their agents 
 
 s 2 
 
260 THEORY AND PRACTICE OF BANKING 
 
 Messrs. Rothschild issued Scrip for these £100 Bonds, as a 
 Eeceipt for £20 paid on account of the Bonds : and as payment 
 of the successive instalments at the times specified, the Bearer 
 was to receive the definitive Bonds 
 
 In February, 1874, the plaintiff purchased £200 of the Rus- 
 sian scrip on which the instalments were fully paid up in advance; 
 and left it in the hands of his broker ; who improperly, and con- 
 trary to good faith, pledged it with the defendants as security for 
 a loan 
 
 The broker became bankrupt, and the defendants sold the 
 Scrip, in the usual way of business, and in ignorance of the 
 plaintiff's title 
 
 It was proved that such Scrip for Loans to foreign govern- 
 ments, entitling the bearers thereof to Bonds, had been well 
 known to, and largely dealt in by bankers, money dealers, and 
 members of the ^tock Exchanges, English and Foreign, for above 
 fifty years : and such persons had, during that period, bought and 
 sold such Scrip, and lent money on it ; and dealt with it in every 
 way as a Negotiable Instrument, transferable by delivery 
 
 The question was whether such Scrip was, in point of law. 
 Negotiable : so that the defendants, the innocent holders for 
 value, might retain the proceeds from the true owners of it 
 
 This case, it will be observed, extended the question of Nego- 
 tiable Instruments : because all Instruments hitherto found to be 
 Negotiable, had been actual Obligations to pay Money : but this 
 was only a Promise to deliver an Obligation to pay Money 
 
 The Court of Exchequer unhesitatingly gave judgment for the 
 defendants 
 
 The case was then taken by Appeal to the Court of Exchequer 
 Chamber, and Judgment was given by the Lord Chief Justice 
 Cockburn on the last day of its existence, July 7, 1875 
 
 In the course of the argument before the Court, Lord Holt's 
 cases, so often alluded to, had been cited, and the Lord Chief 
 Justice spoke of them in terms of the strongest condemnation, 
 and said that they were a blot upon our judicial history 
 
 The Lord Chief Justice, having reviewed all the arguments 
 against the negotiability of the Scrip, especially the views expressed 
 in the preceding case of Grouch v. The Credit Fancier of England, 
 
SALE OF DEBTS IN ENGLISH LAW 261 
 
 that it is not competent for any one to create floating rights of 
 action against himself, said — 
 
 " Having given the fullest consideration to this argument, we 
 are of opinion that it cannot prevail. It is founded on the view 
 that the Law Merchant thus referred to, is fixed and stereotyped, 
 and incapable of being expanded and enlarged so as to meet the 
 wants and requirements of trade in the varying circumstances of 
 commerce. It is true that the Law Merchant is sometimes spoken 
 of as a fixed body of law, forming part of the Common Law, and, 
 as it were, coeval with it. But as a matter of legal history, this 
 view is altogether incorrect " 
 
 The Lord Chief Justice then proceeded to speak of Bills of 
 Exchange and Promissory Notes, and said that the common notion 
 that Promissory Notes were not used in England till the end of 
 the seventeenth century was a mistake. " Mr. Macleod shews 
 that Promissory Notes payable to bearer, or to a man and his 
 assigns, were known in the time of Edward IV " 
 
 After referring to several of the cases before cited, he said — 
 " Thus far the practice of merchants, traders, and others, of 
 treating Promissory Notes, whether payable to order or to bearer, 
 on the same footing as Bills of Exchange, had received the sanction 
 of the Courts, but Holt having become Chief Justice, a somewhat 
 unseemly conflict arose between him and the merchants as to the 
 Negotiability of Promissory Notes, whether payable to order or to 
 bearer : the Chief Justice, taking what must now be admitted to 
 have been a narrow-minded view of the matter, setting his face 
 strongly against the negotiability of these instruments, contrary, 
 as we are told by authority, to the opinion of Westminster Hall : 
 and in a series of successive cases persisting in holding them not 
 to be negotiable by indorsement or delivery. The inconvenience 
 of trade arising therefrom led to the passing of the Statute of 
 3 & 4 Anne, c. 9, whereby Promissory Notes were made capable of 
 being assigned by indorsement, or made payable to bearer, and 
 such assignment was thus rendered valid beyond dispute or 
 difficulty 
 
 " It is obvious from the preamble of the Statute, which recites 
 that ' it had ieen field that such Notes were not within the custom 
 of merchants ' that these decisions were not acceptable to the 
 profession or the country. Nor can there be much doubt that by 
 
262 THEORY AND PRACTICE OF BANKING 
 
 the usage prevalent among merchants, these Notes had been treated 
 as securities negotiable by the customary method of assignment, as 
 much as Bills of Exchange properly so, called. The Statute of 
 Anne may, indeed, practically speaking, be looked upon as a 
 Declaratory Statute, confirming the decisions prior to the 
 time of Lord Holt " 
 
 The Lord Chief Justice then, having reviewed several other 
 cases, came to the case of Grouch v. The Credit Fonpier of England, 
 in his own Court, but decided in his absence. He expressed dis- 
 approval of the reasons given for the judgment, that it was not 
 competent for the Company to make instruments negotiable 
 which were not negotiable at Common Law : though, he said, the 
 judgment might be supported on the ground that the usage was 
 not proved to be general. " We cannot concur in thinking that 
 if proof of general usage had been established, it would have 
 been a sufficient ground for refusing to give effect to it that it did 
 not form part of what is°'called the ancient Law Merchant . . , 
 
 " If we could see 'our way to the conclusion that in holding 
 the scrip in question to pass by delivery, and to be available tO 
 bearer, we were giving effect to a usage incompatible either with 
 the Common Law or with the Law Merchant as incorporated into 
 and embodied in it, our decision would be a very different one 
 from that which we are about to pronounce. But so far from this 
 being the case, we are, on the contrary, in our opinion only acting 
 on an established principle of that law in giving legal effect to a 
 usage, now become universal, to treat this form of security, being 
 on the face of it expressly made transferable to bearer, as the 
 representative of money, and, as such, being made to bearer, as 
 assignable by delivery " 
 
 The Courb then affirmed the Judgment of the Court of Ex- 
 chequer. Thus all the Courts of Common Law held that the 
 Scrip was a Negotiable Instrument 
 
 The Lord Chief Justice had the Paper we prepared for the 
 Law Digest competition before him, and, in the course of the- 
 Judgment, he did the author the very high honour to refer to it 
 as follows — 
 
 " We find it stated in a Law Tract by Mr. Macleod, entitled 
 ' Specimen of a Digest of the Law of Bills of Exchange,' printed, 
 we believe, as a Report to the Government, but which, from its 
 
SALE OF DEBTS IN ENGLISH LAW 263 
 
 research and ability, deserves to be produced in a form calculated 
 to ensure a wider circulation," &c. From these terms it is evident 
 that he assented to^the course of the argument taken in it 
 
 Choses-in-action made Transferable ly Statute, without 
 the Consent of the Debtor 
 
 69. The Courts of Law never adopted the suggestion of 
 Ashhurst and BuUer, that they should drop the formality of 
 requiring the Transferee of a Debt to sue in the name of the 
 Transferor. But this has at length been done by the Act, 
 Statute 1873, c. 66 : in sect. 25, § 6 of that Act it enacted — 
 
 " Any absolute assignment by writing, under the hand of the 
 assignor (not purporting to be by way of charge only) of any Debt 
 or other legal chose-in-action, of which express notice in writing 
 shall have been given to the Debtor, Trustee, or other person from 
 whom the Assignor would have been entitled to receive or claim 
 such debt, or chose-in-action, shall be, and be deemed to have been 
 effectual in law (subject to all equities which would have been 
 entitled to priority over the right of the assignee, if this Act had 
 not passed), to pass and transfer the legal right to such Debt, or 
 chose-in-action, from the date of such notice, and all legal and 
 other remedies for the same, and the power to give a good dis- 
 charge for the same, without the concourse of the assignor : 
 provided always, that if the Debtor, Trustee or other person 
 liable in respect of such Debt, or chose-in-action, shall have had 
 notice that such assignment is disputed by the assignor, or any 
 one claiming under him, or of any other opposing or conflicting 
 claims to such Debt, or chose-in-action, he shall be entitled, if he 
 think fit, to call upon the several persons making claim thereto to 
 interplead concerning the same, or he may, if he think fit, pay the 
 same into the High Court of Justice, under, and in conformity 
 with, the provisions of the Acts for the relief of Trustees " 
 
 It will be seen that this clause confers the Eight upon Creditors 
 to transfer their Debts, or choses-in-action, without the consent of 
 the Debtor ; and, consequently, if the holder of an obligation not 
 made transferable by the express will of the obligor, gives notice 
 to the Debtor in terms of this clause, he can maintain an action 
 on it. But it still leaves untouched the case of an Obligation 
 
264 THEORY AND PRACTICE OF BANKING 
 
 created transferable with the express consent of the Obligor, which 
 is transferred without a written notice to the Debtor, and in such 
 cases, which form the great majority of sucfe transactions, the 
 Eules of the Common Law still apply. But if there should be any 
 doubt on the point, which we contend there never was, it is 
 provided for in § 11 of the same section, which says — 
 
 " Generally in all matters not hereinbefore particularly men- 
 tioned, in which there is any conflict or variance between the 
 Eules of Equity and the Rules of the Common Law with reference 
 to the same matter, the Eules of Equity shall prevail " 
 
 Thus the Mercantile Law of England is now assimilated with 
 that of all Europe 
 
ON INSTRUMENTS OF CREDIT 265 
 
 Section IV 
 U;pon Instruments of Credit 
 
 70. Credits or Debts, then, being Commodities, or Merchan- 
 dise, may be sold or transferred as freely as any material chattels: 
 but so long as they remain in the mere invisible and intangible 
 form of a Eight of action, they cannot be the subject of manual 
 dehvery 
 
 But we have seen that the Greeks hit upon the plan of 
 recording this Eight upon some material : and when this was 
 done the Eight itself became capable of manual delivery like any 
 material chattel 
 
 When the Credit or Debt is recorded on paper or other 
 material, it is termed an Instrument of Credit, or of 
 Debt : and it must be observed that when used in this sense 
 the word Instrument has a technical meaning which is often 
 overlooked 
 
 The word Instrument has two distinct meanings — 
 
 1. Sometimes it means a tool, or implement, or means by 
 which some purpose is effected. Thus Edgar says in Lear — 
 
 " The Gods are just, and of our pleasant vices 
 Make Instruments to plague us " 
 
 So Smith speaks of Money as the " Great Instrument of 
 Exchange " or " Instrument of Commerce " 
 
 2. But when Bills and Notes are termed Instruments 
 of Credit or of Debt, the word has quite a different meaning 
 from what it has in the phrase Instrument of Exchange 
 
 The term Instrument of Exchange denotes the means by 
 which exchanges are affected : the term Instrument of Credit 
 means the Eecord or Document, or written evidence of the Debt 
 
 In Eoman Law, Instrumentum means any evidence, 
 whether oral or written, by which a Court or Judge was in- 
 
266 THEORY AND PRACTICE OF BANKING 
 
 formed of a fact : or of the merits of the case. Thus Suetonius 
 speaks of the Instrumenta Imperii, the written records of 
 the Empire : Qaintilian speaks of Instrumenta Litis, the papers 
 or documents relating to a cause : TertuUian and Erasmus call 
 the Christian Scriptures the Novum Instrumentum- 
 
 This meaning is very common in English. Thus out of in- 
 numerable examples we may quote from Hallam— "Is abundantly 
 manifest by the Instruments of both the Kings" . . . . " by 
 mutual Instruments executed at Calais '' : so Brougham, speaking 
 of the Declaratiou of American Independence, says— "as the 
 clock struck the hour when that mighty Instrument was 
 signed " 
 
 In these and similar cases the word Instrument means a 
 written Docament or Record 
 
 In English Law the word Instrument is restricted to written 
 evidence : and is thus equivalent to Document : which is any 
 ■writing which teaches or informs the Court of a fact : it means 
 simply a written record 
 
 Hence an Instrument of Credit, or of Debt, means any 
 written evidence of Debt. In Courts of Law and legal treatises 
 these documents are invariably termed Instruments 
 
 Instruments of Credit are usually said to be of three forms — 
 
 1. Orders to pay money 
 
 2. Promises to pay money 
 
 8. Mere acknowledgements of Debt : such as an I U 
 But besides these there is a fourth form, though it is not 
 usually classed under that term, namely. Credits or Debts re- 
 corded in the books of Bankers, termed in banking language. 
 Deposits. All these are written evidences or record of Debts 
 
 71. It is well known that for a long time the origin of Bills 
 of Exchange was involved in great obscurity. Many writers attri- 
 buted them to the Jews, who were severely persecuted and 
 expelled from France in 1181 by Philip Augustus. It has been 
 repeated by multitudes of writers that the Jews invented Bills 
 of Exchange at this period in order to transmit their effects to 
 foreign countries. But such an idea could only have arisen 
 from an entire misconception of the nature of Bills of Exchange, 
 and of an Exchange. However, the mystery is now completely 
 
ON INSTEUMENTS OF CREDIT 267 
 
 cleared up. We have seen that they were the invention of the 
 Eoman bankers, and that their use was quite common in the 
 time of Cicero : and their use never died out : although from 
 the troubled state of the countries involved in the fall of the 
 .Eoman empire, dealings in Credit between distant towns almost 
 ceased : and the use of Bills of Exchange may have fallen into 
 abeyance 
 
 An Austrian friend of ours has informed us that in a Sclavonic 
 chronicle of the fifth century, he has found a provision that if 
 Eussian merchants died at Constantinople, the value of their 
 property should be remitted to Russia by Bills 
 
 73. In the eleventh century Europe had again begun to 
 assume a somewhat more settled state. The cities of Lombardy 
 especially devoted themselves to commerce : and Gallenga says 
 that a treaty between the city of Asti and Humbert . II. of 
 Savoy in 1095 shows that the cities of the Asti and Chieri had 
 already begun to introduce the system of Bills of Exchange and 
 Banking into France and England 
 
 Weber says that Bills were in common use in Venice in 
 1171. A charter granted to the city of Hamburg in 1189 
 authorised them to deal in Bills. In 1243 a statute of Avignon 
 relates to litterm cambii -. and one of Venice in 1272 
 
 About this period the system of Bills of Exchange received 
 an immense extension. In the times of the Crusades, the Popes 
 claimed the right to tax all Christendom for their support. 
 They had their own money dealers termed Oanibiatores, who 
 kept tables in the Cathedrals to exchange the money of foreigners 
 who came to worship. These persons sent their own agents 
 into different countries to collect the Papal tribute. As soon as 
 they collected a sum they sent the Pope Bills upon their prin- 
 cipals and correspondents. These Bills were called Litterm 
 GambitoricR. In the twelfth century Florence became very 
 famous for this " banking " business, as it was called. Lucca, 
 Siena, Milan, Placentia, and other towns, were also famous for 
 it. Cahors, in France, also became a great Monetary or Bank- 
 ing centre : and the name of Gaorsini became synonymous with 
 usurers : and Dante places them in the Inferno in very strange 
 companioTiship for this imaginary crime 
 
268 THEORY AND PRACTICE OF BANKING 
 
 In 1229 these persons were first introduced into England. 
 The Pope sent his chaplain Stephen and a nuncio to demand a 
 tenth part of all the moveable goods of all persons, lay and 
 clerical, in England, Ireland, and Wales to support his war 
 against Frederick Barbarossa. The feeble king agreed to this 
 extraordinary demand : but in a Parliament held to consider it, 
 the lay lords indignantly refused to subject their lands to the 
 Pope. The unfortunate ecclesiastics had no resource but to 
 yield. The Pope drew bills upon all the bishops and abbots, 
 which they were obliged to honour under the threat of excom- 
 munication. A detachment of Caorsini came over with the 
 nuncio to London, and settled there in order to lend money at 
 heavy interest to the bishops to enable them to meet the Pope's 
 drafts 
 
 Eanke says — " As it has been observed that the business of 
 exchange, or banking, in the middle ages received its chief ex- 
 tension from the nature of the Papal revenues, which, falling due 
 throughout the world, had to be remitted from aU quarters to 
 the Curia " 
 
 We have no notices as to when the use of Bills of Exchange 
 by merchants became general. The oldest Commercial Bill of 
 Exchange known to exist is dated 1381, in the following terms — 
 
 " Al nome di Dio. Amen. A primo di Februario, MCCCLXXXL, 
 pagate per questa prima lettera ad usanza, da voi medesimo libre 
 43 de' grossi, sono per cambio de' ducati 440, che questi chi hone 
 recevuto da Sejo el Compagni attramente le pagate " 
 
 Another is quoted by Capmany, an eminent Spanish writer, 
 which was drawn in 1404 by a Lucchese merchant of Bruges on 
 his correspondent at Barcelona, and negotiated at Bruges, but 
 dishonoured at Barcelona. It is in these terms — 
 
 " Al nome di Dio, Amen. A di Aprile xxviii., 1404. Pagate' 
 per questa prima di camb. a usanza, a Pietro Gilberte e Pietro 
 Olivo, scuti mile a sold. x. Barcelonesi per scuto: e quah scuti 
 mille sono per cambio che con Giovanni Colombo a Gressi xxii de 
 gresso per scuto, et Pon. a nostro conto : et Christo vi guardi 
 
 " Antonio quart. Sab. di Brugis " 
 
 From the terms in which these Bills are drawn it is quite 
 evident that they must have been long in use. In the Archives 
 of Venice there are a considerable number of Bills of Exchange of 
 
ON INSTRUMENTS OF CREDIT 269 
 
 the 15tli century, drawn by Venetian merchants on their corre- 
 spondents in London, but sent back protested for non-payment. 
 In none of these Bills are there any words of negotiability, just as 
 there need not be in a Scotch bill at the present day. Many 
 writers have been puzzled to know when Bills of Exchange 
 became negotiable. Some attribute this invention to Cardinal 
 Eichelieu. But the investigation in the preceding section has 
 cleared away all mystery on the subject. They were negotiable by 
 the general Law of the Empire, which enacted that all Debts and 
 Eights of action were as saleable as any other chattel 
 
 73. Obligations, by the Common Law of England, were not 
 payable to any one but the payee, without the consent of the 
 Obligor. Accordingly at a very early period it was usual to 
 make obligations payable to the payee, or his attorney, equiva- 
 lent to the modern or "order." Matthew Paris quotes an 
 obligation of the Prior and convent of N., dated 1235, and 
 made payable to certain Milanese merchants in London, aut 
 uni eorum vel eorum certo nuncio 
 
 The Statute of Merchants, 11 Edward I. (1283), is the first 
 law noticing mercantile Obligations. It enacts that, if their 
 debtors did not pay at the agreed upon time, the merchants 
 might bring them before the proper authorities, and the clerk 
 should draw up an " escrit de Obligation " or a " lettre de Obli- 
 gation," which the official translation renders Bill Obligatory, to 
 which the Debtor was to affix his seal ; binding him to pay on 
 a certain day 
 
 In the thirty-first year of his reign, Edward I. granted a 
 Statute to the City of London for the protection of foreign 
 merchants, which enacted that they might pay the customs 
 duties on their exports by Bills on their principals or partners 
 
 74, It has been very generally supposed that Bills of Ex- 
 change were only in use among foreign merchants, and that 
 Obligations in the form of Promises to pay were wholly un- 
 known to commercial usage and the Common Law. This, 
 however, is erroneous. There exists a work called Arnold's 
 Chronicle, first published in 1502, but supposed to have been 
 taken from an earlier work, containing many of the customs of 
 
270 THEORY AND PRACTICE OF BANKING 
 
 the city of London in the reigns of Edward IV. and Henry VII. 
 Several forms of Obligation are given in this work as being in 
 common use. There are several forms of Bills of Payment, i.e., 
 Promissory Notes made payable to payee or his "atturnai," 
 equivalent to " or order." One form is thus given — 
 
 Byll of Payment 
 
 " Be it knowen to all men, me A. B. de civitat. L. in countee 
 of M. marchaunt, to be bounde be thes present obligacion to F. 
 G. of 0. in ye coiinte of K. 1. xii. li lawful money of England to 
 be paid to ye said F. G. or to his cerfeym atturnai, his eiers or 
 executurs, at the fest of Sanct. M. tarchaungel next comyng 
 aft' ye date of this present without further delai, to the which 
 paiment wel and truli to be made, I bynde me my eiers and mya 
 executors be theis presents sealed with my scale yeven ye furst 
 day of ye monethe of M. ye yere of ye regne of K. H. ye VII. 
 after ye conquest ye fust " 
 
 Another is made payable to assigns — 
 
 Byll of Payment 
 
 " Memerand' this byll made the iiij day of Julij in ye xix. yere 
 of the reigne of Kyng Edward the iiij beryth wytnesse yt we Ric. 
 Shirlee of London grocer and Thomas Shirlee of London haburd' 
 owen unto W. Warboys and John Benson of London haburd' 
 xxxviij s. ij d. stg. to be payd to the said W. and J. or to ether 
 of them, to their eyers ther executors, or to their ASSIGNES, ye furst 
 day of Julij next comyng wythout ony delay, to the whiche pay- 
 ment -wel and truly to be made we binde us our eyers, executors, 
 and our assignes, and eche of us in the hoole. In wytness wherof 
 we set to oure scales the day and tyme afore rehersed " 
 
 A form also is given of a Bill of Exchange payable to bearer— 
 
 Lettre of Exchaunge 
 
 " Be it knowen to alle men yt I E. A. citezen and habd' of 
 London have ressd by exchaunge of N. A. mercer of the same cite 
 
ON INSTRUMENTS OF. CREDIT 271 
 
 XX. li. stg. whiohe twenty ponds stg. to be paid to the said N. or 
 to the BRINGER OF THIS BYLL, in synxten marte next comyng for 
 vi. s. viij. d. stg. ix. s. iiij. g. fllg. money currant in the said mart, 
 and yf ony defaut of payment be at the day in alle or ony part 
 yerof that I promyse to make good all costis and scatlies that may 
 grow therby for defaut off payment as well as the principal some 
 bee this my furst and second lettur of payment and herto I bynde 
 me myn executors and alle my goodis whersoever they may be 
 founde. In wytnesse wherof I have written and sealyd this byll 
 J of Marche Ao. Dni. MCOOC. kx#tl"" 
 
 the X day i 
 
 These common forms establish the fact that in the time of 
 Edward IV. it was usual to draw Bills of Exchange in the form 
 of Promissory Notes, and to make them payable to bearer ; and 
 also that Promissory Notes payable to " order " or to " assigns " 
 were in common use. And as they were given as common forms 
 at that period, they must have originated long before, but how 
 long it is impossible to say. There is no instance, however, of 
 such documents having been brought before a Court of Law, 
 which may shew that our ancestors were more punctual in their 
 payments or less litigious than their descendants. If one of these 
 documents had come before a Court of Law, we may be certain 
 that it would have recognised its validity, just as annuities mads 
 assignable by the grantor were recognised 
 
 Mr. Lawson also gives a copy of a Bill of Exchange drawn in 
 the form of a Promissory Note in the reign of Elizabeth — 
 
 "Witnesseth this present bill of exchange that I, Robert 
 Anderson, merchant of the city of Bristowe, doe owe unto Thomas 
 Mun, Merchant of the said city, the sum of 100 ducats ; I say 
 an hundred duckets of current monie of Spain, accompting after 
 11 rials of plate to the ducket ; to be paid into the said Thomas 
 Mun, or his assignes, within 10 daies next and yemediately after 
 the safe arrivall of the good ship called the Gabriel of Bristowe to 
 the port of S. Lucai in Andalonsia in Spaine, or any port of the 
 discharge. And for the true paiment thereof, I, the above named 
 Robert Anderson do bind me, my goods, my heirs, executors, and 
 assignes, firmly by these presents. In witness of the truth, I 
 have caused two of these bills to be made (the which the one being 
 
272 THEORY AND PRACTICE OF BANKING 
 
 paied, the other to be voide) and have put my firme and seale into 
 them, and dehvered them as my deed in Bristowe, the 15th day of 
 September, 1589, and in the 31 yeere of our Sovereign Queen 
 Elizabeth her Majesties reigne " 
 
 The first observation we have to make on this document is 
 that in the present day it would not be recognised as a Bill of 
 Exchange at all, as it is made to depend upon an uncertain event, 
 the arrival of the ship in harbour. 
 
 We next observe that all these Obligations, Bills of Exchange, 
 Bills of Payment, Bills Obligatory, &c., were specialties or deeds, 
 and not mere parol contracts, as they are considered at present, and 
 therefore they required no consideration to make them valid. It 
 was enacted, as we have seen, by Justinian, that any obligation 
 in writing should bind the obligor ; consequently a written obli- 
 gation in Eoman Law had the same effect as a deed or specialty 
 in English Law. In process of time the formality of sealing was 
 discontinued in England, but it must be observed that Bills and 
 Notes are not merely simple contracts in English Law as is so often 
 said. They are, in reality, in their origin, deeds with the for- 
 mality of sealing thrown off 
 
 75. At this time it was perfectly indifferent whether Ob- 
 ligations were drawn in the form of Orders to pay or of Promises 
 to pay : they were equally valid at Common Law : " non figurS, 
 Utierarum, sed oratione quam exprimunt, obligamur." "We are 
 not bound by the form of the writing, but by the intention which 
 it expresses," is equally common sense, and Roman and Enghsh 
 Law 
 
 A Bill of Exchange in former times meant an Obligation to 
 pay the Value of a certain amount of the Money of one country 
 in the Money of another, at a certain rate of exchange. It was 
 usual to draw the Obligation in the form either of an Order to 
 pay, or of a Promise to pay. When the Obligation originated 
 with the Creditor, it naturally was in the form of an Order to pay : 
 when it originated with the Debtor, it was naturally in the form 
 of a Promise to pay. An Obligation- payable within the country 
 itself was called an Inland Bill 
 
 The word Bill meant any writing whatever, including 
 
MEANING OF BILL 273 
 
 Deeds. In Marlowe's Faustus, when Faustus is selling his soul 
 to Mephistopheles, he tells Faustus that he 
 
 " Must write it down 
 In manner of a Deed of Gift " 
 
 Faustus, seeing his blood stop flowing, says — 
 
 " Is it unwilling I should write this Bill P " 
 and then — 
 
 " Consummatmn est : this Bill is ended " 
 Then says Mephistopheles — 
 
 " Speak, Faustus, do you deliver this as your Deed P " 
 
 The word Note had exactly the same meaning. So that the 
 words Billa and Nota meant any writing, whatever its form 
 might be 
 
 The name of Promissory Note seems only to have been adopted 
 if, indeed, it was not first given, by the Statute of Anne. Before 
 that time such Documents were called " Bills of Payment," "Bills 
 of Debt," "BiUs of Credit," " Bills of Obhgation." Bank Notes 
 were called " Bank Bills." In the Act establishing the Bank of 
 England, its Notes are termed " Bills of Credit," and " Bills 
 Obligatory." In one case, a Note for the payment of Money was 
 termed an Inland Bill by the Court. In another case, two Gold- 
 smith's or Banker's Notes were declared upon as Bills of Exchange: 
 and they were called Bills throughout the case. In another case 
 it is said — " If a merchant's apprentice draws a Bill (as I do 
 promise to pay such a sum for my master) to charge the master 
 with the Nole." So, in several cases. Bank Notes are called Bills. 
 In many parts of the country at the present day, Bank Notes are 
 still called Bank Bills : and the words Bank Notes would not be 
 understood 
 
 It has now been clearly shown that the opinion which pre- 
 vailed so long in our Courts of Law that Promissory Notes are 
 not transferable at Common Law : and that they were unknown 
 to Mercantile usage until the end of the seventeenth century, is 
 entirely erroneous, both in Law and Fact 
 
274 THEORY AND PRACTICE OF BANKING 
 
 Since, however, the series of erroneous decisions in the King's 
 Bench, which gave rise to the Statute of Queen Anne, the word 
 Bill has been restricted to Orders to Pay i and the word Note 
 to Promises to Pay. Hence, in reading old cases and books, it 
 must be observed that the wojds Bill and Note were used quite 
 synonymously to mean an Obligation in either form : since the 
 word Bill is restricted and appropriated to Orders to pay : 
 and the word Note to Promises to pay 
 
 76. Considerable obscurity prevails as to the subsequent his- 
 tory of Instruments of Credit in England. The next writer on 
 the subject is Gerald Malynes, a London merchant, who pubhshed 
 his L&x M^Tcatoria in 1622. It is remarkable that he expressly 
 says that Bills Obligatory, or of Debt, which (as has been shown 
 above) were in common use in the reign of Edward IV., were not 
 used in England. In chapters 1], 12, and 13, he gives a full 
 account of these Bills, which were used by the merchants of Am- 
 sterdam, Hamburg, Middleborough, and other places, and explains 
 their great convenience ; but he sayS; — " The Common Law of 
 England is directly against this course, for they say there can be 
 no alienation from one man to another of debts, because they are 
 held choses-in-action, and such whereof no property can pass by 
 assignment or alienation." So also — *' This laudable custom is 
 not practised in England " 
 
 Marius, the next writer of authority, in 1651, gives several 
 forms of Bills of Exchange, all in the form of orders to pay. He 
 takes no notice of the Goldsmiths' or Bankers' Notes, which were 
 certainly then in circulation ; but at p. 6 he speaks of the custom 
 of offering payment of an acceptance by a "note on a Goldsmith" 
 
 These " notes," or " cash notes," as they were called, were the 
 origin of the modern Cheque 
 
 How the strange facts are to. be accounted for — that Bills of 
 Exchange in the form of Promissory Notes payable to "bearer" and 
 Bills of Payment or Notes payable to " assigns " or " order," were 
 in common use in London in the 15th and l'6th centuries, and 
 then had totally disappeared at the beginning of the 17th century, 
 and reappeared at its close, but supposed to be then a new species 
 of document, so that their former use was not known — it is not 
 easy to say 
 
ON BILLS OP EXCHANGE 275 
 
 Oae great establishment still keeps up the old hybrid form of 
 the obligation, in a species of paper it issues. The following is 
 the form of a 
 
 Bank of England Post Bill 
 I 
 No London, 18 
 
 At seven days sight I promise to pay this my sola Bill 6/ 
 
 E^Mnge, to or order, One Hundred 
 
 sterling value received of . 
 
 For the Governor and Company of 
 £, One Hundred the Bank of England 
 
 Entd 
 
 On Bills of Exchange, Drafts, and Promissory 
 Notes 
 
 77. A "Written Contract by which one person is bound 
 to pay : (1) a certain sum of Money : (2) to a certain Person : (3) 
 at a certain Event : is termed an Obligation : a Security 
 for Money : or a Valuable Security 
 
 Definition of a Bill of Exchange 
 
 A written Order from one person to another who Owes, or 
 appears to owe him Money as a Debtor, directing him to pay 
 absolutely at all events : (1) a; certain sum of Money : (2) to 
 a certain pierson : (3) at a certain event : is in modern language 
 termed aJBill of Exchange : or, shortly, a Bill 
 
 The following is the usual form of a Bill of Exchange :— 
 
 £248 14 6 London, May 4, 1883 
 
 Three months after date pay to A. B. (or to myself) or order, the 
 sum of two hundred and fifty -ei^M pounds, fourteen shillings and 
 sixpence, for value received 
 
 To Mr. John Cox, William Smith 
 
 Strand, London 
 
 T 2 
 
276 THEORY AND PRACTICE OF BANKING 
 
 The person who addresses the letter is termed the Drawer : 
 the person to whom it is addressed is termed the Drawee : the 
 person to whom it is to be paid is termed the Payee 
 
 If the Drawee has not already agreed to pay the bill, when it 
 comes into the hands of the Payee, the Paye^ should take it 
 once to the Drawee, and request him to agree to pay it. If the 
 Drawee agrees to pay the Bill he must write his name across the 
 face of it, usually, but not necessarily, with the word "Accepted " : 
 he is then called the Acceptor 
 
 The Drawer may make the Bill payable to himself ; or to A. 
 B. only : or to himself, or to A. B., or order 
 
 In England, an ordinary Debtor was never compellable to 
 accept a Bill drawn upon him by his Creditor 
 
 But in Scotland, which adopts the Law of Justinian and the 
 Basilica, that a Creditor has the absolute Eight to sell his Debt 
 against the consent of his Debtor : a Debtor is bound to accept a 
 Bill drawn on him by his Creditor : and is liable to an action for 
 non-acceptance 
 
 This distinction is maintained by the Bills of Exchange Act 
 of 1882 
 
 By the Common Law of England, eyen if a Debtor had accepted 
 a Bill payable to the drawer, or other payee simply, and without 
 the words "or order": the Creditor could not transfer it to 
 another person so as to enable the Transferee to sue the Debtor 
 on his own name 
 
 And the Transferee could acquire no better title to it than 
 that of the Transferor : consequently the Bill did not possess the 
 attribute of Currency, or Negotiability 
 
 But in Scotland, Bills of Exchange are transferable and 
 negotiable by their very nature : consequently, they do not require 
 any such words as "or order" to make them Current and 
 Negotiable. And a Bill drawn payable only to the payee in 
 Scotland, being current and Negotiable by the Lex loci contractus, 
 is cnn-ent and negotiable in England 
 
 And since the Supreme Court of Judicature Act, Bills drawn 
 without the words " or order " are also current and negotiable in 
 England : and the presentation of the biU by the Transferee to 
 the Acceptor is a sufficient notice of the Transfer of the Debt 
 
MEANING OF DRAFT 277 
 
 Even if the Drawee refuses to accept the bill, presentment of 
 it to him is sufficient notice of the Transfer of the Debt 
 
 But in this case the Eight of the Transferee would be 
 dependent on the general state of accounts between the Drawer 
 . and the Drawee. If the Drawee had accepted the Bill, he would 
 be absolutely bound to pay it : whatever might be the state of 
 account between the Drawer and himself 
 
 Definition of a Draft 
 
 78. A written Order from one person to another, who Holds 
 a sum of Money as a Depositum, as the Bailee, Trustee, 
 Agent, or Servant, of the drawer is termed a Draft, or 
 Order for the payment of Money 
 
 Bills of Exchange and Drafts are of exactly the same form 
 and external appearance. The distinction between them arises 
 from the difference between the relations of the two parties in the 
 two Instruments 
 
 In a Bill of Exchange the Drawee is simply the Debtor of the 
 Drawer : the Property in the Money drawn for resides in the 
 Drawee : and the Drawer is his Creditor : that is, he has only a 
 Eight of action to compel the Drawee to pay a sum of Money : 
 but he has no Right to any specific money in the Drawee's 
 possession. 
 
 But in a Draft, the Property in the Money resides in the 
 Drawee : and the Drawee holds it merely in his custody as a 
 Depositum : and he has possession of it merely as the Bailee, 
 Trustee, Agent, or Servant of the Drawer : and if he appropriated 
 it to his own purposes it would be embezzlement 
 
 Thus the Chancellor of the Exchequer is the Treasurer of the 
 nation : and the Money he holds belongs to the nation and not to 
 himself. So every great Institution, as a hospital, &c., has a 
 Treasurer who is entrusted with the custody and safekeeping of 
 the money of the Institution. But the moneys in his possession 
 belong to the authorities of the institution : and are only 
 entrusted to him as a Depositum : and not lent to him as a 
 Mutuum : and he is not their Debtor 
 
 When, therefore, the authorities of the institution give an 
 Order upon the Trustee to another person, they are not trans- 
 
278 THEORY AND PRACTICE OF BANKING 
 
 ferring a Debt due to them : they-are directing their servant to 
 dehver to a. certain person, certain portions of their oTyn money : 
 which is in th,e safekeeping of tlieif serv^pt 
 
 Also the Treasurer is ij,ot perspually liable on, such orders oi; 
 Drafts : he is only boun,d to pay them if he has any money of hisi 
 masters' in his ppssessioa. pons.eq,uently, such e\, Draft or Ordei; 
 is not a Credit, or Personal Qbyg^tioa: it, is a Tiitleto a portioft 
 of some specific money 
 
 Such an Order is not a. Bill, of Exchange, and is contrary to 
 the fundamental nature of a Bill of Exchange 
 
 So, i^ a Bank has several branches, the Orders granted by the 
 branches upon the Hea^ Office are not BilJis of Exchange buti 
 brafts. 
 
 Thus the definition of a Bpl of Exchange, which ig usually 
 given in law books and in the Bills of Exchange Act pf 1882, is 
 essentially defective. In that Act, a BUI of Exchange is definedi 
 thus :— 
 
 " A Bill of Exchange is an unconditional Order in writing) 
 addressed by one person to another, signed by, t.he p^rspn giving 
 iji, reqpiring the person tp wbom it is ad^rpssed.tp pay on demand, 
 (|r at, a fixed or determinable future, time, a, sum certain in money, 
 tp, or tp the order of, a specified person, pr to bearer " 
 
 Now it. is true that every Bill of Eiphange is an Order to pay, 
 money : but every Order to pay money is not a Bill : the wordj 
 Order,. to pay money includes, both Bills and Drafts 
 
 Defi.uitio)i of- a Promissory Note 
 
 79. An unconditional written Promise made by a person, 
 to pay, absolutely and at all events : (1) a certain sum of Money : 
 (2) to a certain Person :, (3) at a certain Event : is in modern 
 language termed a Promissory Note : pr shortly a Note 
 
 The following is the usual form of a Promissory Note :— 
 
 ^1*8 9 10 London, Ma-y 4tb, 1883 
 
 Thfee, Months after date. I pr:om,i&ei0,'pay John Jones or ordier^- 
 the sum of one hundred and forty-three j^^ndtS, four.shUlmgs, mc^ 
 nin^epe^f0^ for value -reeled. 
 
 William Johnsqn 
 
UPON INDORSEMENT 279 
 
 "William Johnson is termed the Maker of the Note : and 
 John Jones the Payee 
 
 Upon Indorsement 
 
 80. When a Bill or Note is made payable to the Payee "or 
 order," the Payee must, when he transfers the Instrument to any 
 one else, write his name on the back of it : hence it is termed an 
 indorsement : the Payee is called the Indorser : and the 
 Transferee is termed the Indorsee 
 
 The Indorser may make the Instrument payable to some 
 special Indorsee only : if he does so it is termed a Special 
 indorsement : and the Instrument can only be paid to that 
 Indorsee 
 
 If, however, the Indorser simply signs his own name, and 
 then delivers the Instrument to the Indorsee, it is termed a 
 General Indorsement, or an Indorsement in blank. The 
 Instrument is then transferable by mere delivery, without any 
 further Indorsement : exactly like a Bank. Note or Money : and 
 the Instrument is payable to bearer like a Bank Note 
 
 Formerly Indersement was in all cases necessary to transfer 
 the Property in a Bill or Note : but this has long ceased to be the 
 case in English Law. It became the custom of merchants, which 
 has long acquired the force of Law, that any Instrument of Credit 
 indorsed in blank, may be transferred by simple delivery, without 
 any further indorsement 
 
 It is, however, the general custom for the Transferee to require 
 the Indorsement of the Transferor ; not for the purpose of trans- 
 ferring the title or the Property in the Bill, after the first 
 indorsement: but to retain the Transferor as a security or guarantee 
 for the Payment of the Bill 
 
 The effect of the Indorsement is, that if the Acceptor or 
 Principal Debtor does not pay the Bill or Note at maturity : and 
 the owner or holder gives immediate notice to the Indorsers, he 
 can enforce payment from them 
 
 But the demand for payment must be made without delay : in 
 almost all cases within twenty-four hours after the fact of non- 
 payment. If the holder of the Instrument delays giving notice 
 he loses his remedy, and the Indorsers are absolved 
 
280 THEORY AND PRACTICE OF BANKING 
 
 In modern practice, then, the Indorsement is merely a limiled 
 warranty of soundness. The difference between buying goods or 
 money with a Bill, with or without Indorsement, is just the same 
 as that of buying a horse, a watch, a carriage, with or without a 
 limited warranty. In all cases of the sale of a horse, or a watch, 
 without a warranty : or, of goods, for a Bill, without the Indorse- 
 ment of the Transferor, it is an absolute and final sale. If a horse, 
 or a watch, is bought with a hmited warranty, and if a defect be 
 discovered and a demand is made within the time limited by the 
 warranty,' the sale may be cancelled and the money restored 
 
 When the transferor indorses the Instrument he says in effect 
 — " I warrant the soundness of the Debt for twenty-four hours, 
 and no longer " 
 
 The general rule of English Law now is that if any Instrument 
 of Credit be taken in exchange for goods or money without In- 
 dorsement : or if the period allowed for making the claim in the 
 case of an indorsed and unpaid Bill be allowed to elapse without 
 making the claim : it is a final closing of the transaction. The 
 payment is, in fact, as valid and final as if it were money 
 
 Except only in the case of fraud : as if the Transferor knew at 
 the time that he tendered the Instrument that the acceptor, or 
 maker, was bankrupt or insolvent 
 
 If, however, the Transferor did not know that the Debtor on 
 the Bill or Note was bankrupt at the time he transferred it in 
 payment, the loss will fall upon the Transferee : because he might 
 have insisted on the Transferor's Indorsement : and if he neglects 
 to do so, he must suffer for his own laches 
 
 At the time when the Bank of England was founded, the 
 Court of King's Bench had decided that Promissory Notes were 
 illegal at Common Law : consequently, in the Act Statute, 1694, 
 c. 20, s. 29, founding the Bank of England : and in the Act 
 Statute, 1704, c. 8, it was enacted that Bank Notes and Promissory 
 Notes might be transferred by Indorsement on each transfer 
 
 In the case, however, of Bank Notes, as their payment was 
 always quite secure, the practice of Indorsement soon fell into 
 disuse. In the case of private bankers of good credit, the indorse- 
 ment was often omitted. But though the Indorsement was often 
 omitted as superfluous, that in no way altered the character of the 
 
ON CHEQUES AND BANKERS' NOTES 281 
 
 Instrament : and the receiver of the Note took it entirely at his 
 own peril : and ran exactly the same risk as if he took any other 
 Instrument without Indorsement 
 
 It is usual in English Bills and Notes to insert the words " for 
 value received " : but it is not necessary. In a recent case it was 
 said that they meant nothing more thaa " your obedient servant " 
 at the end of a letter. And it is quite usual to omit them 
 
 On Banking Instruments of Credit 
 
 81. The Instraments of Credit which we have described 
 above may be called Commercial Instruments, because they arise 
 out of the transactions of merchants. The introduction of 
 Banking into England gave rise to two new forms of paper, 
 which may be called Banking Instruments of Credit 
 
 The essential nature of " banking " is, as we have shewn, to 
 create Credit in exchange for money and commercial debts. 
 When a customer pays in money to his account with his banker, 
 the property in the money passes to the banker, and in exchange 
 for it he creates a Credit in his favour in his books, which is 
 repayable on demand ; or if he discounts a bill for his customer, 
 he also creates a Credit in his favour. The customer then having 
 so much Credit at his account, if he wished to make a payment, 
 might write a note to his banker desiring him to pay so much to 
 the payee. These Notes, or Cash Notes, as they were called, were 
 the origin of the modern Cheque. They were in various forms ; 
 sometimes they were made payable to a particular person — 
 
 16th Nov., 1689 
 
 Mr. Jackson, — Pray pay to the leaver hereof, Mr. Daniel 
 Groher, Jive pounds, and place it to the accompt of 
 
 Tour loving friend, 
 To Mr. Roger Jackson, John Wtnyabdb 
 
 At Sir Francis Child's, Goldsmith, 
 just within Temple Barr 
 
282 THEORY AND PKACTICE OF EANlcrNG 
 
 Sometimes they were simply payable to " bearer " — 
 
 Mr. Childe, — Pray pay unto the hearer the Sum of twenty 
 pounds and place it to the account of 
 
 London, Ang. 29, 1689 E. Pollexfbn 
 
 Sometimes they were payable at sight — 
 
 Bolton, 4th March, 1-684 
 At sight hereof pray pay unto Gharlen Duncomhe, Esq., 
 or order, the sum of four hundred pounds, and place it to the 
 accompt of 
 
 Your assured friend-,. 
 To Captain Francis Child, Winchester 
 
 near Temple' Barre 
 
 In many cases they were sealed — 
 
 Pray, Mr. Child, pay to Mr. Earrison the sum of a 
 hundred pounds 
 
 (Seal), D. Tykwhitt 
 
 Sir, — / prajy pay unto Mrs. Ann Richards, or her order,, 
 the sum- of £15, for your to : friend, 
 
 To Mr. Child, or Mr. Rogers, Thos. Mbees 
 
 Goldsmiths, near Temple Barr, 
 
 2 Sept., '89 (Seal) 
 
 Sometimes they were payable to payee, or bearer — 
 
 To Mr. Child and Mr. Rogers July 20thj 1688 
 
 Pray pay unto the honorable Dudley North, or tearer, 
 the sum of one thousand pounds, and he pleased to place it to 
 the account of 
 
 Your friend and Servant, 
 
 YabmoUth 
 
 Sometimes they were payable to order — 
 
 3d June, 1683 
 
 Pray pay unto the Bearer hei-eof^ Mr. Thomas Dickenson, 
 
ON CHEQUES AND BANKERS' NOTES 283 
 
 or order, the sum of thirty pounds, and place it to the accompt 
 
 of 
 
 Your lo .- friend, 
 
 Paul 'Whichcott 
 The Duke of Ancaster wrote his " Notes " as follows — 
 
 Mr. Robert Child, 
 
 Pray pay to my servant^ Thos. B., the sum of seventeen 
 pounds, and for so doing this shall be your order under my hand 
 and seal, this nth day of Octoier, 1707 
 
 Ancastbe, G. C. (Seal) 
 
 Thus we see that the practice of sealing had not been entirely 
 discontinued then 
 
 83. But if the customers wished it the banker gave them 
 his own Promissory Notes for such sums as they pleased. These 
 early Goldsmiths' or Bankers' Notes were not printed, but were 
 just written on plain pieces of paper like the Promissory Notes of 
 private persons. The following is a specimen — 
 
 Ifov. 28, 1684 
 I promise to pay unto the Bt. honble. ye Lord North and 
 Grey, or bearer, ninety -.pounds at. demand.. 
 
 For Mr. Francis Child and myself, 
 
 S-SO. KOGBRS 
 
 In July, 1729, Messrs. Child & Co. were the first bankers to 
 adopt printed forms for their Notes. But they were not printed 
 for definite sums like Bank of England Notes, but only like 
 modern cheques — they were partly printed, and the name of the 
 payee and the sum payable were filled in in writing. Sometimes 
 they were payable to bearer, and sometimes to order thus — 
 
 Picture of | No. 921 London, Oct. 20, 1729 
 
 Temple Bar. j I promise to pay to Mr. Richard, Bannister, or 
 order, on demand, tiventy pounds 
 
 For Fras. Child, Esq., 
 
 £20 Sam. Child 
 
284 THEORY AND PRACTICE OV BANKING 
 
 Picture of | No. 1792 London, 8 Decemh., 1729 
 
 Temple Bar. j / promise to pay to Mr. Ghr. Diggs, or hearer, 
 on demand, thirty pounds. 
 
 For Fras. Child, self & Co., 
 £30 Sam. Child 
 
 There has been considerable doubt as to when London 
 bankers discontinued the issue of Notes. The latest specimen 
 preserved is dated April 12, 1793 
 
 These documents are not merely mercantile curiosities ; they 
 possess great legal and historical interest. We shall find that 
 when a monopoly was created in favour of the Bank of England, 
 the Act was framed specially in reference to one form only of these 
 banking documents, and left the other wholly unnoticed. And it 
 was entirely this omission which left a loophole open in the 
 monopoly clauses of the Act, which, confirmed by a declaratory 
 clause in the Bank Charter Act of 1832, enabled Joint Stock 
 Banks to be founded in London ^ 
 
 ' We are indebted to the kindness of F. G. H. Price, Esq., of the firm of 
 Child & Co., the oldest banking firm in London, for a sight of these 
 Documents. Temple Bar having shown signs of giving way, in 
 consequence of the excavations made for the foundations of the New 
 Law Courts, the room in it which was rented by Child & Co., and in 
 which the ancient records of the firm were kept, had to be cleared 
 out, .when these documents — which cleared up several doubtful points 
 in early Banking — came to light 
 
EXTINCTION OP OBLIGATIONS 285 
 
 Section V 
 
 On the Extinction of Obligations 
 On the Limits of Credit 
 
 83. It has been seen in the preceding sections that Credit is 
 the name of a species of Incorporeal Property of the same nature 
 as, but inferior in degree, to Money : and that it fulfils exactly 
 the same functions as Money, as a Medium of Exchange or Circu- 
 lation. Also that it is Property cumulative to Money : that is, it 
 is over and above Money. Credit is in fact to Money what steam 
 is to water : and while, like that power, its use within proper 
 limits is one of the most beneficial inventions ever devised by the 
 ingenuity of man : its misuse by unskilful hands leads to the most 
 fearful calamities. Credit like steam has its Limits : and we have 
 now to investigate the proper Limits of Credit, and to explain the 
 various methods by which it is extinguished. Because, by its very 
 name and nature, it is always created with the express intention 
 either of being, or of being capable of being, extinguished. It is 
 Unextinguished Credit which produces those terrible 
 monetary cataclysms .which scatter ruin and misery among 
 nations. It is chiefly by the excessive use of Credit that over- 
 production is brought about, which causes those terrible catastro- 
 phes called Commercial Crises : and the inability of Credit shops 
 to extinguish the Credit they have created — commonly called the 
 failures of Banks — is the cause of the most terrible social 
 calamities of modern times 
 
 The true Limits of Credit may be seen by the etymology of the 
 word. Because all Credit is a promise to pay or do something in 
 future : and that something, whatever it may be, is the Value of 
 the promise. That "-something" need not necessarily be money. 
 It may be anything else. It may be a promise to do something 
 
 The only real difficulty in the case is, as has been before ob- 
 
286 THEOBY AND PRACTICE OF BANKING 
 
 served, to understand that the mere abstract " Promise to pay" is 
 independent and exchangeable Property, quite distinct from the 
 thing itself, and it circulates in commerce by itself 
 
 But of course it is manifest that the Value of the Promise is 
 the Thing itself : and, consequently, if the Thing itself fails, the 
 Promise has lost its Value. This consideration at once shows the 
 Limit of Credit. Assuming the Credit to be, what it is in its 
 best known form in this country, the Promise to pay Money, it is 
 quite clear that so long as a person is in possession of suificient 
 Money to pay his promise when it falls due, the Credit has not 
 been excessive 
 
 Commercial Credit, however, does not rest upon so solid a 
 basis as the certainty of being in the possession of money : for 
 then it would be as safe as Money itself, and then losses would be 
 unknown. It is based upon the expectation of being in the 
 possession of Money at a certain time. A trader buys goods, and 
 in exchange for them he gives his Promise to pay money, upon 
 the expectation that he will be able to sell the goods for money 
 before the bill becomes due : or at least that he will be in 
 possession of Money before that time. That is, he produces or 
 brings the goods to market, and offers them for sale, in the hope 
 that they will be consumed or bought. If he brings forwaird for 
 Sale more of any species of goods than are wanted at that time, 
 so that they cannot be sold at all : or if they are sold, at a lower 
 price than they cost : it is oi)er-production. He must then pay 
 his' bills out of any other funds in his possession ; or sell other 
 property to meet them : and if he cannot do so he is ruined 
 
 In times of great speculation and rapid fluctuations of prices, 
 there is exceeding danger of over-production by means of Credit : 
 especially that abuse of it called Accommodation Paper, which 
 we shall describe hereafter. A new channel of trade perhaps iff 
 Opened, and the first to take advantage of it make great profiis. 
 Multitudes of others hearing of these 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 
 
 Or perhaps a great failure of the food of the people takes 
 place : merchants expecting thdt food will rise Very high, buy on 
 Credit at higher prices than usual. If their calculaitions are 
 
EXTINCTION OF OBLIGATIONS 287 
 
 Bound, and the price of corn rises: to the expected height, they 
 pay their bills and all is well. But in all such cases there is the 
 danger of too many merchants speculating in corn, and that such 
 vast Quantities may be poured in sto that the price may fall 
 
 Similarly in all changes from peace to war, or from long con- 
 tinued war to peace, great changes in prices take place, producing 
 great destruction of Credit : and at such periods usually many 
 failures occur 
 
 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 yet the 
 Principle of the Limit remains the same. Credit always has to 
 ^e redeemed : and if this can be done the Credit has been sound. 
 Hence Credit is never excessive, whatever may be its absolute 
 amount, so long as it always returns into itself 
 
 On the Extinction of Obligations 
 
 84. We have now to consider the various methods by which 
 Obligations are extinguished. Credit being the Right to demand 
 something to be paid or done, and the Debt being the Duty to 
 pay or do that something, of course that Payment or the Per- 
 formance of the thing promised fulfils, discharges, and extin- 
 guishes the Right as well as the Duty : and thus the Obligation 
 is absolutely annihilated and extinguished. Commercial Credit 
 in this country is always expressed to be payable in money : and 
 it is sometimes supposed that Bills of Exchange 'are always paid 
 in Money or in Bank Notes. This, however, is a great error. 
 There are other methods by which Obligations are extinguished, 
 besides Payment in Money. And in this country, the amount 
 of Bills which are paid in money, is infinitesimal compared to 
 those which are paid in other ways 
 
 There are four different methods by which Obligations may 
 be extinguished : these are — 
 
 1. By Release : or Aec&ptilation 
 
 2. By Payment in Money 
 
 3. By Renewal, or Transfer : or Novation 
 
 4. By Set off : or Compensation 
 
288 THEOEY AND PRACTICE OE BANKING 
 
 On Release : or Aceeptilatio 
 
 85. We have in a preceding paragraph described how the 
 OUigatio litteris, or Written Contract, termed Expensilatio, 
 was created. The Creditor, or Lender, having delivered the 
 money to the borrower, asked him if he had weighed out and 
 given him the money. The borrower, or Debtor, acknowledged 
 that he had, and the lender, with the borrower's consent, made a 
 formal entry of the Loan in his Ledger which was termed 
 Expensilatio : and the formal entry of the Loan or money 
 received in the borrower's Ledger was termed Aceeptilatio 
 
 When the borrower, or the Debtor, came to repay the Loan 
 the proceedings were reversed. He brought the money to his 
 Creditor and said something of this sort — 
 
 " Qaod ego tibi promisi, habesne acceptum ? " 
 
 " Have you received what I promised you ? " 
 
 The Creditor answered — " Habeo, acceptumque tuli " 
 
 " I have, and have entered it as received " 
 
 He then made a formal entry in his Ledger, of " Money 
 received : " and this was termed Aceeptilatio 
 
 As in the case of the Expgiisilatio, this entry when once 
 formally made in the -LedgelpI^W-%iiar and ■ conclusive : and 
 could not be questioned 
 
 All Contracts or Obligations created by the mutual consent of 
 parties may be extinguished and cancelled or dissolved, by the 
 same mutual consent by which they are created 
 
 Consequently, if for any reason whatever the Creditor chose 
 to release the Debtor from his Debt, it was done by the solemn 
 form of Aceeptilatio 
 
 The Debtor went through the legal form of question ; and the 
 Creditor made the formal legal answer : and then made the formal 
 entry, Aceeptilatio, in the Ledger: it was then a valid and 
 final form of Release : and it could not be questioned or 
 disputed 
 
 Example of the Application of the Principles of Algebra 
 and LaAV to Commerce 
 
 86. We shaU now show how the Algebraical doctrine that 
 
RELEASE OS A DEBT 289 
 
 — X — = + X + : and its Legal Equivalent that the Re- 
 lease of a Debt is in all cases equivalent to a Payment or 
 Gift of Money : are applied in Commerce 
 
 Suppose that I owe £100 to a Banker, in how many ways can 
 I pay him ? 
 
 1. I may pay him in actual Money : that is + X + 
 
 2. If I have £100 of his Notes : or have an account with 
 him ; I may tender him his own Notes : or I may give him a 
 Cheque on my account : that is, in either case, I Helease him 
 from his Debt to me : that is — x — 
 
 That is, Releasing the Banker from his Debt to me is 
 Paying my Debt to him 
 
 3. I may pay him £50 in Money : and also £50 in his own 
 Notes ; or by Cheque on my account : Paying him in Money is 
 + X + : tendering him his own Notes, or giving him a Cheque 
 on my account, is — X — : and the combined effect of the two 
 is to discharge and extinguish my Debt of £100 
 
 Thus I may pay a Debt to a Banker entirely in Money : 
 entirely in his own Notes, or by Cheque : or partly in Money and 
 partly in his Notes or by Cheque ; and the effect of these several 
 modes of Payment is absolutely identical 
 
 In the Chapter on Banking we shall give an example of the 
 apphcation of this principle, which may perhaps surprise some 
 students 
 
 Thus we see that the doctrine that Taking Away a Ne- 
 gative Quantity is absolutely equivalent to Adding a 
 Positive Quantity : or that — x — =-Hx+:is 
 universally true in all branches of science 
 
 As the Basilica expresses it — 
 
 " Svo dpv^aus fjiiav Troiovcnv KaTa.6e(7iv " 
 
 " Two Negatives make an Affirmative " 
 
 The Release of a Debt is in all cases Equivalent to a 
 Donation or Payment in Money 
 
 87. Euler, as we have seen above, says that if a man has 
 nothing, and even owes 50 crowns, he has 50 crowns less than 
 
 U 
 
290 THEORY AND PRACTICE OP BANKING 
 
 nothing. His Property is ( — 50) crowns, i.e., he has the Duty to 
 pay 50 crowns, and nothing to pay them with 
 
 Euler also says that if any one made the Debtor a present of 
 50 crowns to pay his Debt with, though his Property then would 
 only be at the point 0, he would be 50 crowns richer than before 
 
 Euler is right so far as he goes : but he has only stated one- 
 half of the case. Because the same result may be arrived at in 
 another way. As the same result follows whoever gives him 
 the 50 crowns, we may suppose that his Creditor makes him a 
 gift of 50 crowns. The Debtor may then pay the Debt by 
 giving the Creditor back his 50 crowns : and the Debt is dis- 
 charged : and the Debtor, though now possessing 0, is 50 crowns 
 richer than before 
 
 The same result may be obtained in a quicker way : suppose 
 that, instead of the double operation of the Creditor first giving 
 the Debtor 50 crowns, and then receiving them back, he simply 
 Releases the Debtor from the Debt. Then the Debtor's 
 Property would be 0, and he would still be 50 crowns richer than 
 he was before 
 
 Now, if Money be Positive (-I-), the Gift ( + ) of Money is 
 + X + : and if the Debt be Negative ( — ), the Taking aAvay or 
 Pelease ( — ) of the Debt is — x — : which shows that 
 + X + = — X — in Economics ; as it does in every other 
 branch of science 
 
 This example shows that the Release of a Debt is in all 
 cases exactly equivalent to a Donation or Gift of Money : 
 or to a Payment in Money : a principle of immense im- 
 portance in commerce : and the application of which may surprise 
 the student 
 
 88. So the Digest says — 
 
 " Qui Obhgatione Uberatur videtnr cepisse quid " 
 
 " Ee ivho is Released from an Obligah'm has gained " 
 
 And the Basilica — "d eAeu^epov'/xevos ivoxO'S SoKel n dX-qif)€vai:' 
 
 So the Digest—" Per accepti quoque lationem egens Debitor 
 etiam earn pecuniam qug, liberatus est, cepisse videtur" 
 
 "An insolvent Debtor being freed by a Release, has gained the 
 full amount of what he is Released from " 
 
 So Pothier says-" A Release is a Donation" 
 
ON CONFUSIO 291 
 
 So Ortolan — " The Kelease from a Debt is always classed 
 as a Donation in Eoman Law" 
 
 So Voa Savigny — " A Simple Contract, or the Release of a 
 Debt, may be the subject of a Donation " 
 
 " The increase of wealth may result from a Credit given to 
 the Debtor, or the Release of a Debt 
 
 " Every Eelease of a Debt enriches the Debtor. The amount 
 of the Donation is always equal to that of the Debt, even though 
 the Debtor is insolvent. Although the Eelease from a Debt 
 destined never to be paid seems a thing of no consequence, the 
 increase of Property does not the less exist. In effect not only 
 does Property represent a quantity always indeterminate, but its 
 total Value also may be either Positive or Negative. [Nega- 
 tive Property is a Negative Eight, ».«., a Debt or Duty]. If, 
 then, Property is reduced to a Negative Value, the Diminution 
 of Minus is in Law a change identical with the increase of Plus 
 for a Positive Value 
 
 " The Eelease of a Debt always constitutes a Gift equal to the 
 amount of the Debt, even though the Debtor is insolvent" 
 
 So the Eelease of a Debt to a Debtor may be a Legacy 
 
 89. This vesting of the Ri,gM to demand and the Duty to 
 pay in the same person was called Gonfisio in Roman -Law 
 
 How Gonfusio extinguishes a Debt has given rise to much 
 subtle speculation ; and for centuries puzzled Jurists and 
 Divines : for the Divines alleged that a Eight once created 
 could never be destroyed : and the Jurists said that, the Eight 
 being transferred to the Debtor, he cannot sue himself ; and 
 therefore that the Debt is extinguished 
 
 This explanation, however, is not satisfactory, because in 
 some cases a man can sue himself. He may fulfil two charac- 
 ters or persons : and in one character he may sue himself in 
 another. And, moreover, this would only show that the Eight 
 is in abeyance, not that it is actually extinguished : and Jurists 
 have shown that in several cases the Eight and the Duty have 
 separated, although they have vested in the same person. The 
 considerations, however, which we have presented will give a 
 complete solution of the case 
 
 U 2 
 
292 THEORY AND PRACTICE OF BANKING 
 
 The Release of a Debt may Extinguish an Obligation 
 
 in Two ways 
 
 90. The Eelease of a Debt may be considered to Extinguish 
 an Obligation in two ways — ' ■ 
 
 First Method. — As the Obligation was created by the mu- 
 tual consent of the two parties : so it may be cancelled or 
 annihilated by the same mutual consent which called it into 
 existence 
 
 Now, by the general principles of the Theory of Signs, if to 
 
 Create an Obligation be denoted ^7 + ] 0,^,0 r • then to 
 
 Cancel, Annihilate or Decreate an Obligation may be 
 denoted by -j+"^10n 
 ^ \— £100 J 
 
 Let us now observe the effect of the Negative Sign on each 
 of the parties to the Obligation 
 
 The Creditor's Property becomes — ( + £100), or — £100 : 
 that is, he has lost £100 
 
 The Debtor's Property becomes — (— £100) : but — (— £100) 
 = + £100 : that is, the Debtor has gained £100 : exactly as 
 explained above 
 
 Which shows that to Cancel a Debt is exactly equivalent 
 to making a Gift of Money 
 
 Second Ilethod. — The Creditor's Right of action being a 
 Chattel, Goods, or a Commodity, may be the subject of a Dona- 
 tion, or Gift, exactly like any other Chattel. He may present it 
 as a Gift to any one he pleases ; and to the Debtor himself as 
 well as to any one else. Then the Debtor's Property will be 
 + £100 — £100 
 
 These two Quantities cancel each other like + a and — a on 
 the same side of an equation. They vanish together : the Right 
 is not in abeyance : it is absolutely extinguished. The + £100 
 ceases to exist as well as the — £100 : and thus the Obligation 
 is absolutely extinguished 
 
 When + £100 Cancels — £100 : and when it does not 
 
 91. It must be carefully observed that + £100 and — £100 
 
ON PAYMENT IN MONEY 293 
 
 in the same person do not always cancel each other in Economics : 
 it is only in the case where the person has the Right to demand 
 from himself, and the Duty to -pay to himself, that the two Quan- 
 tities vanish, and the Contract or Obligation is extinguished. 
 Because a person's Property may be represented by + £100 
 
 — £100: and therefore for practical purposes be equal to : and 
 yet these two Quantities do not cancel each other 
 
 Suppose that a person has £100 in Banker's notes, and at 
 the same time owes some one else £100. Then his Property 
 will be + £100 — £100, and in substance = ; but in this 
 case the + £100 and the — £100 do not cancel each other : 
 and the £100 is not extinguished as an Economic Quantity, 
 because the Debtor may leave his Debt unpaid, and pay away the 
 notes in commerce 
 
 Suppose that two bankers each hold £100 of the other's 
 Notes: then the Property of each banker is £100 — £100, and 
 in substance equals 0. But in this case the + £100 and the 
 
 — £100 do not cancel each other : and there are £200 of Eco- 
 nomic Quantities in existence : and each banker may pay away 
 the notes of the other 
 
 If, however, they exchange Notes, then each banker has the 
 UigM to demand £100 from himself, and the Duty to pay £100 
 to himself : and then each of the Obligations is simultaneously 
 extinguished : because each has performed his Duty of paying 
 the other by Releasing him from a Debt 
 
 The reason of this is obvious : because if a person possesses 
 a Right of action against A., that is no fulfilment of his Duty to 
 payB. 
 
 Hence, it is only when the Right and the Duty emanate from 
 the same source, and are again revested in the same source from 
 which they emanated, that they are cancelled, and the Obligation 
 extinguished 
 
 On Payment in Money- 
 OS. The preceding considerations will explain how a Pay- 
 ment in Money extinguishes a Debt : which few persons have 
 ever thought of 
 
 Suppose that a person possesses £100 in money and owes 
 
294 THEORY AND PKACTICE OF BANKING 
 
 £30 : then his Property will be £100 — £30 : i.e., he possesses 
 £100, but coupled with the Duty to pay £30 at some giren time 
 
 His Creditor's Right to demand is ( + £30) 
 
 When the Debtor pays the Debt in Money, it may be con- 
 sidered to take effect in two ways — 
 
 1. The Debtor gives the Creditor £30 in Money: and the 
 Creditor gives him in exchange for it the Right of action. The 
 Debtor now possesses the Right to demand £30 from himself, 
 and the Duty to pay £30 to himself : thus the + £30 and the 
 — £30 cancel each other : the Obligation is extinguished : and 
 the Debtor's Property is now £70 
 
 2. The ( — £30)' denotes the Debtor's Duty to pay : and 
 when he has paid, the Duty is performed and extinguished : the 
 Creditor's Eight to receive the £30 is also satisfied and ex- 
 tinguished : and thus both Quantities are extinguished, and the 
 Obligation is extinguished 
 
 The transaction is therefore seen to be an Exchange or Sale 
 Thus the Obligation or Contract was originally created by 
 the Sale or Loan of the Mutuum : and it is annihilated by the 
 Sale or Exchange called Payment. Hence the Obligation is 
 created by one Exchange and is annihilated by another 
 
 On Renewal and Transfer : or Novatio 
 
 93. The term Novatio in Roman Law meant substituting a 
 new Obligation for the former one : so that the former one was 
 extinguished. It was also called Transfusio or Translatio 
 
 Bat this took place in two ways — 
 
 1. When the Debtor himself gave the Creditor a new Obli- 
 gation, which he accepted in lieu and substitution of the previous 
 one, which was thereby extinguished. The new Obligation is 
 the Price or Payment of the old one. This is called by us 
 Renewal 
 
 As, for example, when a Banker agrees to renew a Promissory 
 Note of his Customer : the new Note is Payment of, and ex- 
 tinguishes, the former one 
 
 Or when a Creditor has a Debt owing to him payable on 
 demand : and he agrees to take a Promissory Note from his 
 
ON DELEGATIO 295 
 
 Debtor payable in three months : the Promissory Note is Payment 
 of, and extinguishes, the Debt payable on Demand : and no new 
 Debt arises until the time comes for payment of the Note 
 
 2. "When the Debtor transferred to his Creditor an Obli- 
 gation, or Debt, due to him from some one else. If the Creditor 
 agreed to receive this new Debt in payment of his Debt, he 
 thereby discharged his own Debtor, and agreed to receive his 
 Debtor's Debtor as his new Debtor. But he might retain his 
 original Debtor as a Surety in case of failure of Payment by the 
 new Debtor 
 
 A familiar instance of this is where a Debtor pays his 
 Creditor in Bank Notes. If the Creditor accepts these Notes 
 in payment of his Debt, the Debtor is discharged, and the 
 Creditor agrees to take the Banker as his new Debtor 
 
 So also when a Debtor gives his Creditor a Bill of Exchange 
 on another person 
 
 Or if the Creditor and Debtor are both customers of the 
 same bank, the Debtor may give his Creditor a cheque on his 
 account ; the Creditor pays in the cheque to his own account ; 
 and the banker transfers the Credit from one account to the 
 other. The banker is now freed from his Debt to the Transferor, 
 and becomes Debtor to the Transferee 
 
 94. When the new Debtor expressly consented to the 
 transfer of the Debt he was said to be Delegatus : and the 
 Transfer of the Credit was termed Delegatio 
 
 This Novalio or Delegatio was equivalent to a Payment in 
 money 
 
 The Digest says — "Verbum exactse pecuniiB non solum ad 
 Solutionem referendum est sed etiam ad Delegationem " 
 
 So the Basilica — " to p'rjjj.a twv airaLrqOivTwv y(pr]iJ.a.rtx}V ov 
 li,6vov eis Kara^oXrjv dvat^ipmOaL heZ, aXka Kat es eKTa$LV 
 
 " The word Payment includes not only Payment in Money, 
 but also the Transfer of a Credit " 
 
 So the Digest—" Solvit et qui reum Delegat " 
 
 " Repays who Transfers another Debtor " 
 
 So — " Delegare est vice sua alium reum dare Creditori, vel 
 cui jusserit" 
 
296 THEORY AND PKACTICE OF BANKING 
 
 " To Delegate is to give another Debtor instead of one's self to 
 the Creditor or to whomsoever he pleases" 
 
 In modem commerce this kind of Novatio is also called an 
 " Exchange" when effected by persons living in different places. 
 A person living in one place may be Creditor to one person and 
 Debtor to another person in some other place. If these two 
 debts were settled in money, they would evidently require two 
 transmissions at some expense and trouble. The matter may 
 evidently be settled by the Debtor living in one place giving 
 his Creditor living in the other an Order on his Debtor living 
 in the same place : and thus both Debts will be discharged by 
 the simple expedient of one person paying the money to his 
 neighbour in the same place. It is just like a person paying a 
 Debt by giving his Creditor a Cheque on his banker. The mass 
 of reciprocal transactions of this nature which take place between 
 different countries is called the Foreign Exchanges : a subject 
 we shall have to investigate fuUy in a future chapter 
 
 On Set Off : or Compensation 
 
 95. If two persons are mutually indebted, each may claim 
 that the Debt he has against the other shall be taken in payment 
 of the Debt he owes 
 
 If the mutual Debts are equal, each is Payment in full of the 
 other : they are ■weighed, and set off against each other. This 
 is called Set Off or Compensation 
 
 If one Debt is greater than the other, equal amounts 
 Compensate each other, and the Balance only is paid in 
 Money 
 
 96, Simple as this principle seems, it took a very long time 
 both in Roman and English Law to arrive at it 
 
 In early Roman Law Compensation, or Set Off, was not 
 allowed as a matter of right. Each Creditor had a right of 
 action against the other 
 
 Afterwards, in the time of Gains, Compensation was not held 
 to be Payment ; but the Praetor, or Equity Judge, allowed a 
 counter debt to be pleaded as a defence to an action of Debt 
 
 Marcus Aurelius allowed it as a matter of right 
 
ON COMPENSATION 297 
 
 Bankers, however, were always obliged to allow set off for 
 couater claims, and sue only for the balance. In other cases the 
 Judge was allowed at his own discretion to allow cross claims 
 
 97. The principle of the early Common Law of England 
 was exactly the same as the early law of Rome. If two persons 
 were mutually indebted, each must bring his action against the 
 other. Equity, however, always allowed Set Off 
 
 In many cases, however, the want of such a legal principle 
 led to great injustice, and an Act, Stat. 4 Anne, c. 17, allowed set 
 off in cases of bankruptcy : and this was extended by statutes 
 2 Geo. II., c. 22, s. 12, and 8 Geo. II., c. 24, s. 4. Now by the 
 Supreme Court of Judicature Act, where the rules of Equity are 
 adopted in full. Compensation is a complete answer in all cases : 
 hence if two persons are mutually indebted, each Debt is Legal 
 Tender, or Money, for the Payment of the other 
 
 Both Debts, however, must have actually accrued due at the 
 time of Set off or Compensation 
 
 As, for instance, if a banker holds the acceptance of his 
 customer not yet due, he cannot retain a balance on his current 
 account to meet it 
 
 So if two merchants hold each other's acceptances, one of 
 which is due and the other not due, they cannot be set off against 
 each other 
 
 98. The following are examples of Set off or Compensation 
 
 1. Suppose two bankers issue Notes, and each has got pos-i 
 session of an equal amount of the other's Notes, say £100. 
 Then each has a Right of action (+ £100) against the other: 
 and at the same time a Duty to fay ( — £100) his own Notes 
 
 While the Notes of each are in the hands of other, there 
 are of course £200 of Rights of action, Credits, or Debts, or 
 Economic Quantities in existence. But when they meet to 
 adjust the Payment, each tenders to the other the Rights of 
 action he has against him in payment of the Debt due from 
 himself. By this operation each has performed his Duty, and 
 paid his own Debt by Releasing the other from his Debt. Each 
 
298 THEORY AND PRACTICE OF BANICING 
 
 banker has now the Right to demand from himself and the 
 Duty to pay himself. Thus both Contracts or Obligations are ex- 
 tinguished ; and the £200 cease to exist as Economic Quantities 
 
 2. Suppose a banker holds a merchant's acceptance for £100, 
 which has become due : and suppose the merchant holds £100 
 of the banker's notes. When the banker demands payment of 
 the merchant's acceptance, the merchant tenders him his own 
 notes in payment : and, as before, both Obligations are extin- 
 guished 
 
 3. Suppose two merchants have issued acceptances of equal 
 amounts, due the same day : and that the acceptance of each 
 merchant comes into the hands of the other. On the day of 
 payment, each tenders to the other his own acceptance in pay- 
 ment of the Debt due from himself. And so both Obligations 
 are extinguished. ' We shall give a very striking instance of 
 this in the next chapter 
 
 4. Suppose a banker holds the acceptance, or discounts the 
 note of a customer. On the day the biU or note falls due, he 
 simply writes off from his customer's account the amount of 
 the bill or note : and thus the mutual Debts are extinguished as 
 before 
 
 Thus we see what a prodigious extension of Credit and Com- 
 merce is effected by the system of Payment without the use of 
 Money : in fact, Money is never used now in commerce except to 
 pay the balances which arise from the unequal exchanges of Debts 
 
 We have now developed the complete Theory of Credit : and 
 explained the great Juridical and Mathematical principles it is 
 based upon. It is shown that the principles of commerce are 
 capable of the strictest scientific demonstration : an example of 
 Voltaire's aphorism that " All Nature is nothing but Mathematics" 
 
 In the next two chapters we shall show how the great scientific 
 principles of Credit are exemplified in the mechanism of Commerce 
 and the great business of Banking 
 
RATIO OF CREDIT TO MONEY 299 
 
 On the Quantity of Credit compared, to the Quantity 
 of Money 
 
 99. Credit then being distinctly shown to be a mass of 
 independent exchangeable Property, it is of considerable interest 
 to discover the Ratio which Credit and Money bear to each 
 other in modern commerce. The diflficulties which prevent 
 private inquiries from arriving at any reliable result are very 
 great : and the opportunities which are presented by Parlia- 
 mentary inquiries into Commercial Crises are very rarely made 
 use of for any but their immediate purpose. In the Report, 
 however, of the Committee of the House of Commons on the 
 crisis of 1857, there is given an interesting statement by Mr. 
 Slater. Having analysed the operations of his house for 1856, he 
 gave in the following table as showing the proportion in which 
 each million of- payments and receipts were made in Money 
 and various forms of Credit 
 
 Receipts 
 
 In Bankers' drafts, and Mercantile Bills payable after £ £ 
 
 date 533,596 
 
 Cheques payable on demand 357,715 
 
 Country Bankers' Notes 9,627 
 
 900,938 
 
 Bank of England Notes 68,554 
 
 Gold 28,089 
 
 Silver and Copper 1,486 
 
 Post Office Orders . 933 
 
 99,062 
 
 £1,000,000 
 
 Payments 
 
 £ £ 
 
 By Bffls of Exchange 302,674 
 
 Cheques on London Bankers 663,672 
 
 966,346 
 
 Bank of England Notes 22,743 
 
 Gold 9,427 
 
 SUver and Copper 1,484 
 
 33,654 
 
 £1,000,000 
 
300 THEORY AND PRACTICE OF BANKING 
 
 Here it is shown that in this great house, which may be 
 reasonably supposed to represent commerce in general, Gold 
 did not enter into their operations to even so much as 2 per 
 cent. And this may furnish a clue by which we may obtain a 
 rough estimate of the amount of Credit. It is usually estimated' 
 that the Gold in the country is somewhat about £120,000,000 ; 
 and if there is 50 times as much Credit in the country as the 
 above figures would seem to indicate, it would appear that there 
 must be somewhat about £6,000,000,000 in Credit in the country' 
 
 This of course is only a rough approximate estimate, but it 
 is sufficient to show the enormous magnitude of this species of 
 Property, and its supreme importance in modern times. This 
 Credit produces exactly the same efiects, and affects Prices 
 exactly as so much Gold : and it is through the excessive' 
 creation of this kind of Property that all Commercial Crises are 
 brought about 
 
 Moreover, when we grasp the conception, that all the mass 
 of Credit is so much exchangeable Property which can be bought 
 and sold like any material chattels, it compels a thorough re- 
 investigation of all the Fundamental Conceptions of Economics : 
 and shows how erroneous the doctrine is that Labour and 
 Materiality are necessary to Value 
 
 Two Branches of the System of Credit 
 
 100. Having now developed the complete Theory of Credit, 
 that is, explained how Credits, or Debts, are created, exchanged, 
 or sold, and extinguished, we shall in the two following chapters 
 exhibit the actual mechanism of the great System of Credit 
 
 The system of Credit is divided into two great branches- 
 Commercial Credit and Banking Credit. In the first, merchants 
 buy Commodities by means of Credit or Debts payable at a 
 certain time after date : and these Debts may circulate in com- 
 merce and effect exchanges exactly like Money, imtil they are 
 paid off and extinguished. And Commercial Debts are always 
 extinguished when they become due 
 
 The second branch is where bankers buy these Commercial 
 Debts by creating Credits, or Debts of their own, payable on 
 demand. Banking Credits are created payable on demand, and 
 
THE SYSTEM OF CREDIT 301 
 
 must be paid if demanded. But they are not intended to be 
 paid and extinguished. On tlie contrary, they are created with 
 the hope and expectation that they will not be demanded and 
 extinguished : but continue in existence and do duty as Money. 
 There is no necessity that Banking Credit should ever be 
 extinguished. It may be transferred from one account to 
 another in the same bank, and from one bank to another to the 
 end of time. It is quite possible that much of the Banking 
 Credit which exists at the present day may have been originally 
 created by the very first banks founded in this country: and 
 there is no necessary reason why it should not continue to the 
 end of time. Money is a very expensive machine to purchase 
 and keep up : bi\t Banking Credits cost nothing to create, and 
 they may endure for ever 
 
 These two departments of Credit are perfectly distinct, are 
 governed by different principles, and are in some respects 
 antagonistic to each other. The same person should never carry 
 on both : that is, great bankers should not be merchants, and 
 great merchants should not be bankers : for the duty of a banker 
 is often contrary to the interest of a merchant 
 
302 THEORY AND PRACTICE OE BANKING 
 
 CHAPTER V 
 
 ON COMMERCIAL CREDIT 
 
 1. Having in the preceding chapter investigated the Juri- 
 dical Theory of the Creation, Transfer, and Extinction of the 
 Merchandise, or Economic Qnantities, termed Credit or Debts, 
 -we have now to exhibit its practical application in Commerce 
 in the two following chapters. In this chapter we shall explain 
 the mechanism of Commercial Credit ; i.e., when Credit is used 
 to transfer commodities or to produce them 
 
 On the System of Credit based upon simultaneous Transfers 
 of Commodities 
 
 2. Goods or commodities in the ordinary course of business 
 pass through the following hands — 
 
 1. The grower or foreign importer 
 
 2. The manufacturer 
 
 3. The wholesale dealer 
 
 4. The retail dealer 
 
 5. The customer orjjonsumer 
 
 To the first four of these persons the Goods are Capital : 
 because they grow or obtain them, manufacture or deal in them, 
 for the sake of profit : the fifth buys them for the sake of use 
 and enjoyment. The price the ultimate consumer pays for them 
 must evidently be sufficient to reimburse the original expenses 
 of production 
 
 Now, leaving out of consideration for the present how the 
 importer of the goods obtained them, which concerns the foreign 
 trade of the country, which we do not touch upon here— if he 
 sells the goods for ready money to the wholesale Dealer, he can 
 of course immediately import or produce a further supply of 
 goods in the room of those he has disposed of. In a similar 
 
ON COMMEECIAL CREDIT 303 
 
 way, the wholesale dealer sells to the retail dealer, and if he 
 were paid in ready money he might immediately effect further 
 purchases from the merchant, to supply the place of the goods 
 he had sold. So, also, if the retail dealer were always paid in 
 ready money by his customer, he might replace the part 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 Consumption or Demand 
 might allow 
 
 This, however, is not the case. Few 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 Pro- 
 duction, were to stop until the Consumers had paid for the goods 
 in money, it would be vastly diminished 
 
 Now, if the wholesale dealer sees that there is a certain de- 
 mand for goods, if he has no money, and the merchant will not 
 sell the goods to him except for ready money, he cannot purchase 
 them — there will be no Circulation, and no Profits. But suppose 
 that the merchant has confidence in the wholesale dealer's 
 character and integrity, he sells the goods to the wholesale dealer 
 on Credit ; that is, he sells him the goods, and instead of actual 
 money he takes his Promise to pay three months after date. 
 That is, he sells the goods in exchange for a Credit or a Debt, 
 instead of for money. Now this case is a sale exactly as if the 
 goods were sold for Money. The merchant cedes the property in 
 the goods to the wholesale dealer exactly the same in the one case 
 as in the other. Hence we see that Credit has caused exactly the 
 same Circulation or Production as Money does. This Debt so 
 created may be recorded in two ways. (1) Either as a simple 
 entry, or Book Debt in the merchant's books. (2) It may be 
 recorded 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 the goods 
 on Credit to the retail dealer, and the Debts may also be 
 recorded in two different ways, either as Book Debts or as Bills 
 of Exchange. As in the former cases, the same Circulation or 
 Production has been caused by Credit as by Money 
 
304 THEORY AND PRACTICE OF BANKING 
 
 Lastly, the retail dealer may sell the goods on Credit to the 
 Consumer, or Customer: and this debt may also be recorded 
 in two forms, either as a Book Debt, or as a Bill of Exchange. 
 la this case the Debt most usually rests as a simple Book Debt ; 
 it is very seldom in the form of a Bill of Exchange. But in this 
 case, as in the preceding one. Credit has had precisely the same 
 effect 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 Customer 
 
 Moreover, at each transfer of the goods from one holder to 
 another, it has been necessary to create a fresh Debt ; thereby 
 exemplifying the distinction we have already pointed out between 
 Credit and Bills of Liading 5 because if the goods had passed 
 through so many transfers, the same BiU of Lading would 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. Similarly, the Debts for which 
 the other parties sold the goods are also valuable Property to 
 them. Credit, even so far as this, would be of great assistance to 
 Production ; and the vast amount of it generated in this way 
 would be valuable Property to its Owners. But in this state it 
 would be of no farther use to its owners. It might, therefore, be 
 aptly compared to so much dead stock 
 
 3. It appears from Sir Francis Child, that before the insti- 
 tution of Banks in this country commercial bills were not trans- 
 ferable ; as it was supposed that it was contrary to the Common 
 Law. He was very desirous of introducing the Dutch custom, 
 when every person who bought goods on Credit was obhged to 
 give a Note of hand, which the seller of the goods could put into 
 circulation like so much money, and make use of in further 
 purchases 
 
 The next step, therefore, is to make this dead stock negoti- 
 able or exchangeable ; i.e., to make the Debts themselves sale- 
 able commodities ; to seU them either for ready money, or for 
 other Debts for more convenient amounts, and immediately ex- 
 changeable for money on Demg,nd, and therefore equivalent to 
 money 
 
CREDIT OP FOREIGN MERCHANTS 305 
 
 There are two classes of traders whose especial business is to 
 buy these commercial Debts, and so to give activity and circula- 
 tion to this enormous mass of valuable Property, and convert it 
 from dead stock into further Productive Power 
 
 The first class of these traders are called Bill Discounters ; 
 i.e., buyers of Debts ; they buy these debts with money. The 
 second class are called Bankers ; they buy these commercial 
 Debts by creating other Debts payable on demand 
 
 The general practice of selling these Commercial Debts seems 
 to have arisen when the London goldsmiths began the trade of 
 banking. Having large sums deposited with them, for which 
 they agreed to pay interest, they were obliged to trade with them 
 to obtain the profit out of which they had to pay the interest 
 
 The merchant having drawn a Bill on the wholesale dealer, 
 Sells it to the banker, and receives in exchange for it a Credit 
 termed a Deposit, payable on demand, which has all the ad- 
 vantages of ready money. Thus, the banker buys one Debt, 
 which is a valuable Property, by creating another Debt, which 
 is also valuable Property ; and it must be carefully observed that 
 these two operations are not a cancelment of Debts, as' many sup- 
 pose, but an Exchange of valuable Properties 
 
 In a similar way the other parties, manufacturers and whole- 
 sale dealers, have Debts which they also sell to their bankers for 
 Credit, or Deposits, payable on demand, and thus the whole mass 
 of commercial Debts is converted into Productive Capital. The 
 different parties have now the full command of ready money for 
 any purposes they require ; and can continue the stream of pro- 
 duction without interruption ; and as their bills fall due they 
 have only to give an order on their banker 
 
 Credit used hy Foreign Merchants 
 
 4. The supposed non-alienability, of Debts in English Common 
 Law impeded the circulation of Bills in this country for a long 
 time ; but there was no such restraint on the Continent, where 
 Debts were as saleable as any other property 
 
 • This was strikingly exhibited on the Continent before Banks 
 undertook the discounting of Mercantile Bills ; and the power of 
 
306 THEORY AND PEACTICE OF BANKING 
 
 ' Credit, or Purchasing Power, independent of, and over and above 
 money, was strikingly exemplified 
 
 At several great centres of Commerce, Antwerp, Lyons, 
 Brussels, and many others, there were held great fairs at certain 
 periods. The Continental merchants, instead of making their 
 bills payable at their own houses, where they must have kept cash 
 to meet them, made them payable only at these fairs. In the 
 meantime their bills circulated throughout the country like money, 
 and got covered with indorsements. On a certain day of the fair 
 the merchants met and adjusted their mutual claims, and if their 
 claims were equal, they were of course balanced and paid by being 
 exchanged against one another, by the principle of Compensation. 
 By this means an enormous Commerce was carried on without 
 any specie. Boisguillebert, one of the morning stars of modern 
 Economic Science, says that at the fair of Lyons, transactions to 
 the amount of 80,000,000 were settled without the use of a single 
 coin 
 
 Exaggerated Ideas of the Security of Real Bills 
 
 5. The above are the fewest number of hands, that goods in 
 the ordinary course of business pass through, and it is clear that 
 on their passage from the manufacturer or importer to the 
 customer, they will give rise to at least two bills, if not to three. 
 They are all regular business bills ; they originate from real 
 transactions ; they are what are called Ileal or Value Bills : 
 and they are what arise out of the regular and legitimate course of 
 business, and they are the great staple of what bankers purchase. 
 It is a . very prevalent opinion even among men of business that 
 Eeal bills are essentially safe, because they are based upon real 
 transactions, and always represent property. But the foregoing 
 considerations will dispel much of the security supposed to reside 
 in real bills on that account ; because we have seen that in the 
 most legitimate course of ■business, there will generally be two 
 bills afloat originating out of the transfers of any given goods, so 
 ■that in the ordinary way there will be at least twice as many bills 
 afloat as there are goods to which they refer 
 
 The above operations are only what arise in the ordinai-y 
 course of business ; sometimes, however, goods may change hands 
 
ON ACCOMMODATION BILLS 307 
 
 much more frequently, and ab every transfer a bill may be created. 
 In times of speculation transfers are often much more numerous, 
 and all the bills created on these transfers are technically Keal 
 Bills, but it is evidently a delusion to suppose that there is any 
 security in them on that account. The whole misconception arises 
 from an error in the meaning of the word "refiresent." A Bill of 
 Lading does, as we have said above, represent goods ; and who- 
 ever has the BUI of Lading has the Property in some specified 
 goods. But a Bill of Exchange does not represent any goods 
 at all. It represents nothing but Debt ; not even any specified 
 money. It is created as a substitute for money to transfer goods, 
 but it does not represent the goods any more than Money 
 represents goods. This was long ago pointed out by 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 in the bill holder to prevent the property 
 which the bill represents from being turned to other purposes 
 than that of paying the bill in question. No such power exists ; 
 neither the man who holds the bill nor the man who discounts it 
 has any property in the specific goods for which it was given." 
 This is perfectly manifest ; it is contrary both to the law and 
 nature of Bills that they should be tied down to any specific goods. 
 The real security of the Bill consists in the general ability of the 
 parties to meet their engagements, and not in any specific goods it 
 is supposed to represent 
 
 On Accommodation Bills 
 
 6. In the case we examined of a bank buying the bill of A. 
 upon B., the transaction was already effected upon which it was 
 founded. A. had sold the goods to B. for which he was entitled to 
 be paid on a future day, before he drew the bill on him ; and 
 originally all Bills of Exchange represented previously existing 
 Debts, and they bore on their face the words " for value received " 
 to testify the fact. Consequently, when A. discounts the bill, 
 founded upon that transaction with the bank, it must be carefully 
 observed that he is simply selling a Debt which is his existing 
 property. And so long as Bills of Exchange are restricted to 
 representingj?as< transactions, their negotiation is not borrowing 
 
 X 2 
 
308 THEORY AND PRACTICE OF BANKING 
 
 money as is commonly understood. But the sharpness of traders 
 discoTered that they might be applied to future transactions. 
 
 In the case of a past transaction, A. simply sells his debt to 
 the bank and obtains the money to which he is entitled, and B. 
 pays to the bank the money he would have otherwise paid to A. 
 at the expiration of the Credit. But B. may lend his name to A, 
 without any real transaction having taken place between them. 
 Then, if B. accepts a bill to A., A. may discount that bill with the 
 bank, and with the proceeds he may purchase goods, sell them to 
 C. and take C.'s bill in payment of them, which would then be a 
 real transaction. Now, this not being based on any previous 
 transaction, is in itself a completely new transaction, and such a 
 Bill is called an Accommodation Bill 
 
 The practical effect of this transaction is 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 commercial transaction. A great 
 deal has been said and written about the difference between Eeal 
 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 accommodation bill is something 
 similar to the difference between a genuine coin and a counterfeit 
 one :" as if the fact 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 represent them. We have 
 already pointed out the error of this idea. In fact, both Real and 
 Accommodation Bills have exactly the same degree of security — 
 they constitute a general charge upon the whole estate of the 
 obligants upon them. The objection to Accommodation Bills, 
 therefore, on this ground is futile 
 
 The essential distinction between Real and Accommodation 
 Bills, is that one represents past, and the oth^v future transactions. 
 In a Real Bill goods have teen purchased which are to meet the 
 bill : in an Accommodation Bill goods are to he purchased which, 
 are to meet the bill. But this is no ground for preference of one 
 over the other. A transaction which has been done may he just 
 as wild, foolish, and absurd as one that has to he done. The 
 
BILLS OF EXCHANGE 309 
 
 iatentioa of engaging in any mercantile transaction is that tlie 
 result should repay the outlay with profit. There is no other test 
 of its propriety but this in a mercantile sense 
 
 The common objections against Accommodation Bills are 
 futile and wide of the mark. Whether a Bill be a good and a 
 safe one, has no reference to whether it represents a Past or a 
 Future transaction, but whether it be a safe and judicious one 
 in itself, and the parties to it respectable and of sufficient means 
 to meet their liabilities 
 
 The true objections to Accommodation Paper are of a different 
 nature. As Real Bills only arise out of the transfers of property, 
 the number of them must be limited in the very nature of things. 
 However bad and worthless they may be individually, they cannot 
 be multiplied beyond a certain extent. There is therefore a limit 
 to the calamities they cause. But Accommodation Bills are means 
 devised to extract funds from bankers to speculate with; and 
 consequently these speculations may be continued as long as these 
 funds can be extracted 
 
 This system of Accommodation Paper of different descriptions 
 is one of immense importance in modern commerce, and has 
 produced great calamities, which are so intimately interwoven 
 with banking, that we shall defer further consideration of it till 
 the next chapter, which treats of the operations of Banking 
 
 Distindim between Bills of Exchange and Bills of Lading 
 
 7. The distinction between Bills of Exchange which are 
 Credit, and Bills of Lading which are Documents of Title, 
 is of so subtle a nature, and of such momentous consequence, that 
 it will be well to illustrate it further. It has been seen that any 
 amount of Property may, by repeated transfers, give rise to any 
 number of Bills of Exchange, which are all hona fide ; just for 
 the same reason that every transfer would require a quantity of 
 Money equal to the Property to transfer it. Even supposing 
 that the price remained the same at each transfer, it would 
 require 20 times £20 to circulate goods to the value of £20 
 twenty times. But also £20 by twenty transfers may circulate 
 goods to the value of twenty times £20. So a Bill of Exchange 
 may represent the transfers of many times the value of goods ex- 
 
810 THEORY AND PRACTICE OF BANKING 
 
 pressed on its face. This is the case whenever a Bill is indorsed 
 or passed away for value : and the Bill represents as many 
 additional values expressed on the face of it as there are indorser 
 ments 
 
 1'hus, suppose a real transaction between A. and B. : A draws 
 upon B. : that represents one transaction, or transfer of goods. 
 A. then buys something from C. : and in payment of these goods 
 C. might draw upon A. : in a similar way as A. drew upon B, 
 But instead of this A. may pay for the goods bought from 0. by 
 selling to him the Bill he drew upon .B. : at the same time in- 
 dorsing it. The Bill has now effected two transfers of goods. 
 In a similar way C. may buy goods from D., and pay for them by 
 indorsing over the Bill he received from A. The bill has then 
 two indorsements and represents three transfers of goods. In a 
 similar way it may pass through any number of hands and effect 
 any number of exchanges. When C. indorsed over the bill to D., 
 he merely sold him the Debt which A. had previously sold to him. 
 Now that may be djne either by drawing a fresh bill on B., 
 cancelling the first, or simply indorsing over the bill he received 
 from A. Hence every indorsement is equivalent to a fresh 
 drawing. But if he draws a fresh bill on B., it will represent 
 nothing but B.'s debt to him : whereas if he indorses over the 
 bill he received from A., it will represent B.'s debt to A.; A.'s debt 
 to C; and C.'s debt to D.: and consequently it will be much more 
 desirable for D. to receive a bill which represents the sum of so 
 many previous transactions, and for the payment of' which so 
 many parties are bound to the whole extent of their estates. 
 About sixty years ago the Circulating Medium of Lancashire 
 consisted almost exclusively of Bills of Exchange, which had 
 sometimes as many aS 150 indorsement on them before they came 
 to maturity 
 
 This also shows that no true estimate of the effect of bills in 
 circulation can be formed from the returns to the Stamp Office, 
 as has sometimes been attempted to be done, as every indorse- 
 ment is in effect a new bill. So that the useful effect of a bill 
 is indicated by the number of indorsements on it, supposing that 
 every transfer is accompanied by an indorsement, which is not 
 always the case 
 
 But indorsements on a Bill of Lading have a different mean- 
 
CREDIT USKD TO FOUM NEW PRODUCTS 311 
 
 ing : because a Bill of Lading is bound down to the goods, and 
 accompanies them however many the transfers may be. Hence 
 ten indorsements on a Bill of Lading denote that the same goods 
 have been transferred ten times : ten indorsements on a Bill of 
 Exchange denote that eleven times the amount of goods have 
 been transferred once 
 
 On Credit created for the purpose of being applied to the 
 _ Formation o/New Products 
 
 8. The operations of Credit we have considered were for the 
 purpose of transferring commodities, either which had been 
 purchased, or which were to be purchased : but which might be 
 supposed to be already in existence 
 
 But since Credit is, as we have seen, Exchangeable Property, 
 and a substitute for Money, it is clear that it may be applied- 
 equally as well as Money, to bring new products into existence. 
 The limits of Credit in this case are exactly the same as in the 
 former 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 this — 
 
 Suppose that the Corporation 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 workmen's wages. It may be a matter 
 of certainty that if the Market hall were once built, the stalls 
 in it would be taken up, and the rents received would liquidate 
 the Debt incurred in erecting it. But as the workmen cannot 
 wait until that time, but require immediate cash to purchase 
 necessaries, it is clear that unless there is some method of provid- 
 ing ready payment, they cannot be employed. In such a case 
 the Corporation might borrow money on their own bonds, repay- 
 able at a future period. These bonds would be 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 
 
 But the Corporation need not borrow money. They might 
 create their own Obligations, payable after a certain time, small 
 enough to be received in payment of wages, and be readily 
 
312 THEOKY AND PRACTICE OF BANKING 
 
 received by the dealers ia the town, and perform all the functions 
 of a Carreacy, and be equivalent to Money. They would be 
 equally efficacious in producing or forming the Market, hall as so 
 much Money. And the Market hall itself would be Capital, 
 because it would produce a profit. As the stalls were let and the 
 rents received for them, the bonds might be redeemed, and the 
 Debt cleared off. It is said that several Market halls have been 
 built by adopting this plan 
 
 Credit, in fact, being Purchasing Power, may be used to 
 purchase Labour as well as Commodities : and that Labour may 
 be employed in forming or producing things as well as in 
 circulating them 
 
 In the next chapter we shall show that Companies have been 
 formed on the Continent for the express purpose of promoting 
 improvements in agriculture on this principle, and have been the 
 main cause of the prosperity of these countries 
 
 But where institutions are very solid and enjoy high Credit, 
 they may issue Notes payable on demand for the express purpose 
 of such operations. The immense improvements in agriculture 
 and all public works in Scotland have been effected by the Scotch 
 Banks issuing £1 notes : and such is their solidity that their £1 
 notes are as readily received in Scotland as money, and produce 
 exactly the same effects as so much money 
 
 In all cases whatever Credit is merely the Present 
 Value of the future payment, and if it is profitable to advance 
 Money for any operation to be replaced with a profit by the 'result 
 of the operation, it is of course equally profitable to create an 
 equal amount of Credit, which will be redeemed with a profit by 
 the result of the operation 
 
 Thus Money and Credit have exactly the same effects on 
 the Production of commodities, which by the unanimous consent 
 of Economists includes both' their' formation and their transfer: 
 and therefore Credit is Productive Capital exactly in the 
 same way and in the same sense as Money is 
 
THE THEORY OF BANKING 313 
 
 CHAPTEE VI 
 THE THEOEY OF BANKINQ 
 
 1. "We have now to show how the Juridical Theory of Credit, 
 which has been fully explained in the preceding chapters, is 
 practically exemplified in the great business of Banking 
 
 The subject of Banking is often supposed to be peculiarly^ 
 mysterious and difficult : but the sole diflBculty in the case con- 
 sists in understanding and retaining a firm grasp of the conception 
 that a Credit is the Present Bight, or the Present 
 Value of a Future Payment : that this Eight is not a 
 Eight or Title to any specific Money : but is only an abstract 
 Eight against a Person, to compel him to pay a sum of money 
 at some agreed upon time 
 
 Moreover, that this Eight of action may be bought and sold, 
 or exchanged, like any material chattel : and for this reason it is 
 termed Pecunia, Res, Bona, Merx, in Eoman Law : xPVf^t 
 TTpay/jLara, o'kos, ovctm, d<f>op[JLii], vTrap^ov, in Greek Law : Goods 
 and Chattels, Merchandise, a Vendible or Marketable Commo- 
 dity, or an article of Commerce, in English Law : and is included 
 under the title of Circulating Capital by Economists 
 
 So, also, this Eight of action has Value for exactly the same 
 reason that any other Economic Quantity has Value ; because it 
 will be exchanged for Money at the agreed upon time 
 
 And as these Credits, or Debts, are themselves Saleable Com- 
 modities, Goods and Chattels, or Merchandise, they can be sold or 
 exchanged against each other, just in the same way as material 
 chattels are sold or exchanged for each other 
 
 The business of Banking consists exclusively in buying and 
 selling Money, and these Goods and Chattels, Merchandise, or 
 Commodities termed Credits or Debts 
 
 As a Credit, or Debt, is the Present Eight, or Present Value 
 of a Future Profit : so every Future Profit, or Payment, from 
 
814 THKORY AND PRACTICE OF BANKING 
 
 whatever source arising, has a Present Value which may he bought 
 and sold 
 
 It has been shown that the Land is an Economic Quantity, 
 producing a continuous series of Profits : and also that every 
 merchant is also an Economic Quantity producing Profits 
 
 The profitable business of Banking consists in buying up, or 
 Discounting, as it is technically termed, the Present Values 
 of these Future Profits 
 
 Banks which carry on business for Profit are divided into two 
 great classes : those whose business it is to discount Mercantile 
 Profits, and those whose business it is to discount Agricultural 
 Profits 
 
 In this chapter we shall fully explain the Theory and the 
 Mechanism of both of these kinds of Banks 
 
 On the Meaning of the word Bank 
 
 2. Before we proceed to explain the Mechanism and Effects 
 of Banking, we must ascertain the true meaning of the word 
 Bank ; because great misconception prevails respecting it 
 
 If we take up the most common works on Banking we find it 
 stated — 
 
 1. That the word Bank comes from the Italian word Banco, 
 a bench : because it is alleged that the Italian money dealers, or 
 money changers, kept a bench, on which their money was piled ; 
 whence they are said to have been called Banchieri 
 
 2. That the business of a banker consists in acting as an 
 intermediate agent between persons who want to lend and those 
 who want to borrow 
 
 3. That the Profits of a banker consist in the difference 
 between the interest he pays for the money he borrows, and the 
 interest he charges for the money he lends 
 
 This description, however, of a bank, and the nature of banking 
 business, is entirely erroneous : for the Italian money changers, 
 as such, were never called Banchieri in the middle ages : - and 
 their places of business were never called hanchi. The money 
 dealers were called Gambiatores, Oambitores, Gampsores, Speci- 
 arii, Argentarii, Nwmmularii, Trapezitm, Danista, Collyhista, 
 and Mutuatores : and their places of business were called Gasane 
 
MEANING OF BANK 315 
 
 Mnratori, after noticing the absurd derivation of the word 
 Bank from abacus, says — " To me, on the contrary, the word 
 seems to have come from the German word Banck, which is a 
 very ancient word in that language " : and, he says, that the word 
 ianco was first used as a store in the town of Brescia 
 
 Ducange "also says — " Bank is, therefore, of Franco-German 
 or Saxon origin : no other is to be sought for " 
 
 There is no doubt whatever that these learned authors are 
 right : and the word Bank originated in this way — 
 
 The Eoman State made it a cardinal maxim of their policy 
 not to carry on more than one war at a time. In 1171, the City 
 of Venice was at war both with the Empires of the East and of 
 the West. Its finances were in a state of great disorder ; and 
 the Great Council levied a forced loan of one per cent, on the 
 property of all the citizens, and promised them interest at five per 
 cent. Commissioners were appointed to manage the loan, who 
 were called the Camera degli Imp7-estiti. Such a loan has several 
 names in Italian ; such as Gompera, Mutuo, &c. : but the most 
 usual is Monte, a joint stock fund. This first loan was called 
 the Monte Yecchio — the old loan : subsequently, two other 
 similar loans were contracted, and called llonte Niwvo and Monte 
 JSfuovissimo. In exchange for the money, the citizens received 
 Stock Certificates, or Credits, which they might transfer 
 to any one else : and the Commissioners kept an olfice for the 
 transfer of the stock, and the payment of the dividends 
 
 At this time the Germans were masters of a great part of 
 Italy : and the German word Banck came to be used as 
 synonymous with Monte : and was Italianised into Banco : and 
 the loans, or public debts, were called indifferently, Monti, or 
 Banchi 
 
 Thus an English writer, Benbrigge, in 1646, speaks of the 
 " three Bankes " at Venice ; meaning the three public loans, or 
 Monti 
 
 That the word Banco, in Itahan, means a Pubhc Debt, might 
 be proved by numberless quotations 
 
 In an Italian dictionary, pubHshed in 1659, it says—" Monte, 
 a standing Bank, or Mount of money, as they have in divers 
 cities of Italy " 
 
 So, a recent Italian writer, Cibrario, says—" Regarding the 
 
316 THEOEY AND PKACTICE OF BANKING 
 
 Theory of Credit, which I have said was invented by the Italian 
 cities, it is known that the first Bank, or Public Debt (il 
 primo Banco o Debito Pubblico), was erected at Venice, 
 in 1171. In the thirteenth century, paper money is mentioned 
 at Milan : the credit was paid off. A Monte, or Public 
 Debt (un Monte o Debito PubblicoJ, was founded at 
 Florence, in 1336 
 
 " At Genoa, during the wars of the fourteenth century, the 
 Bank of St. George was established, formed of the Creditors of 
 the State " 
 
 These, as well as numberless examples which might be cited, 
 show that Monte and Banco are synonymous ; and mean a 
 Heap or Mount, or a Joint Stock Fund formed by the contributions 
 of a number of persons 
 
 The Bank of Venice was, in reality, the origin of the Funding 
 system, or the system of Pnblio Debts : it did not for many 
 centuries do any of what we call banking business 
 
 3. And this was the meaning of the word Bank when it 
 was first introduced into English 
 
 Thus Bacon says — " Let it be no Bank, or Common 
 Stock : but every man be master of his own money " 
 
 So Gerard Malynes, in 1622, speaks of Mons Pietatis, or 
 Banke of Charity : and says, that in Italy there " are 
 Montes Pietatis, that is. Mounts or Bankes of Charity " 
 
 So Benbrigge, in his Usura Acc-ommodata, published in 1646, 
 says — " For their rescue may be collected Mons pietatis sive 
 charitatis, or Banke of piety or charity, as they of Trent fitly 
 call it." Again — " For borrowers in trade, for their supply as 
 their occasion shall require, may be erected Mons Negotiationis, 
 or Banke of Trade.'" He also quotes from Tolet, who speaks 
 of .two kinds of Banks, namely, Mons Fidei, or Banke of Truste, 
 which Clement XII. instituted at Eome : he that put his money 
 into this bank was never to take it out again, and received seven 
 per cent. : and of Mons Reeuperalionis, or Banke of Reco- 
 very, in which the interest was twelve per cent. These were 
 simply perpetual and terminable annuities, where the higher 
 interest of the latter was, in fact, repayment of the principal 
 
MEANING OF BANK 317 
 
 Ben Jonson, in his Volpone, the scene of which is laid in 
 Venice, says — 
 
 " I make no Profit in the Public Bank " 
 
 meaning, I do not dabble in the Venetian Funds 
 
 In the time of Cromwell some proposals were made for erecting 
 Public Banks. Samuel Lambe, a London merchant, says, in 1658 
 — " A Bank is a certain number of sufficient men of estates and 
 credit joined together in Joint Stock : being, as it were, the 
 general cash keepers, or treasurers of that place where they are 
 settled, letting out imaginary money {i.e., Credit) at interest at 
 £2^ or £3 per cent, to tradesmen, or others that agree with them 
 for the same, and making payment thereof by assignation, and 
 passing each man's account from one to another with much 
 facility and ease " 
 
 So Francis Cradocke, a London merchant, who strongly advo- 
 cated the introduction of Banks into England, and who was 
 appointed a member of the Board of Trade by Charles II., says — 
 " A Banke is a certain number of sufficient men of Credit joyned 
 together in a stock, as it were, for keeping several men's cash in 
 one Treasury, and letting out imaginary inoney at interest, for 
 three or more in the hundred per annum, to tradesmen or others 
 that agree with them for the same : and making payment thereof 
 by assignation, passing each man's accompt from one to another, 
 yet paying little money." And he says that "the aforesaid 
 bankers may furnish another petty Bank (or Mount) of Charity " 
 
 In a little tract entitled "A Discourse concerning Banks," 
 published in 1697, and supposed to be by a Director of the Bank 
 of England, it says that there are three kinds of Banks : the first 
 for the mere Deposit of money ; the second for Profit—" The 
 Banks of the second kind, called in Italy Monti, which are 
 for the benefit of the income only, are the Banks of Eome, Bolo- 
 nia, and Milan. These banks were made up of a number of 
 persons who, in time of war, or other exigences of State, advanced 
 sums of money upon funds granted inperpetuum, but redeemable. 
 ... . . , The third kind of banks, which are both for the 
 convenience of the public, and the advantage of the undertakers, 
 are the several banks of Naples, the Bank of St. George at 
 Genoa, and one of the banks of Bolonia. These banks having 
 
318 THEORY AND PRACTICE OF BANKING 
 
 advanced sums of money at their establishment, did not only agree 
 for a fund of perpetual interest, but were allowed the privilege of 
 keeping cash." The Bank of England was of this last kind 
 
 So Evelyu speaks of the " Moate di Pieta, at Padaa, where 
 there is a continual bank of money to assist the poor " 
 
 So Blackstone says — "At Florence, in 1344, Government 
 owed £60,000, and being unable to pay it, formed the principal 
 into an aggregate sum, called, metaphorically, a Mount, or 
 Bank " 
 
 So the Bank of England was formed of a Company or Associa- 
 tion of persons, who advanced a sum of money to Government, 
 and received in exchange for it a perpetual annuity : a Eight to a 
 series of payments for ever from the State. This Annuity is, in 
 popular language, called the Funds : but the legal name is 
 " Consolidated Bank Annuities " 
 
 There has only been one instance in this country of a Bank 
 which did not receive deposits in cash. Soon after the foundation 
 of the Bank of England, a Company of persons united to advance 
 a million to the Government. They were incorporated as the 
 " Million Bank." This Company existed till nearly the end of 
 the last century, and it resembled the original Bank of Venice 
 
 The essential feature of all these Banks was this : the sub ■ 
 scribers advanced the Money as a Loan, or Mutuum : and 
 thus it became the absolute property of the borrowers : and in 
 exchange for their Money they received a Credit : i.e., a Cer- 
 tificate, or Promise to pay interest ; and the very essence of 
 " Banking " is to receive money as a Mutuum : and to 
 give in exchange for it Credits, Debts, Promises to pay, or Eights 
 of action to demand an equal sum back again when they please 
 
 On the Meaning of the word Banker 
 
 4. Equally great misconception prevails as to the mean- 
 ing of the word Banker, and the nature of the business of 
 Banking 
 
 Gilbart says — " A banker is a dealer in Capital : or, more, 
 properly, a dealer in Money. He is an intermediate party 
 between the borrower and the lender. He borrows of one party 
 and lends to another ; . and the difference between the terms at 
 
MEANING OF BANKER 319 
 
 which he borrows, and those at which he lends, forms the source 
 of his profit " 
 
 This extract shows the most profound misconception of the 
 nature of the business of Banking 
 
 In former times there were many persons who acted as inter- 
 mediaries between persons who wanted to lend, and persons who 
 wanted to borrow. They were called Money Scriveners. The 
 father of John MUton was a Money Scrivener. But nobody ever 
 called Money Scriveners Bankers 
 
 At the present day a firm of solicitors may have some clients 
 who wish to lend, and also other clients who wish to borrow : and 
 they may act as intermediaries between them. The first set may 
 entrust their money to the firm to lend to the second set : and the 
 solicitors receive a commission on the sums which pass through 
 their hands. But.no one ever called a firm of solicitors, who 
 transact such business, '' Bankers : " which shows that there 
 must be an essential distinction between the business of such 
 solicitors and the business of " banking " 
 
 Solicitors who transact such business do not acquire any Pro- 
 perty in the money which passes through their hands. They 
 receive it merely as a Depositum, or Bailment : they are 
 only the Custodians, or Trustees of the money : and 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 
 directly from the- lender to the borrower through the medium of 
 the Trustees or Bailees : and if the latter appropriated it in any 
 way to their own purposes, they would be liable to be punished 
 for embezzlement 
 
 The essential feature of a " Banker" is, that when his 
 customers pay in money to their accounts, they cede the Property 
 in the money to the Banker. The money placed with him is not a 
 Depositum, or Bailment ; but it is a Mutuum : it is a Loan, 
 or Sale, directly to himself. The " banker " buys the money from 
 his customer : and in exchange for it, he gives his customer a 
 Credit, or Right of action to demand back an equivalent amount 
 of money at any time he pleases ; which Right of action he is also 
 at liberty to transfer to any one else he pleases 
 
 Gahahi says—" Banks began when men saw, from experience, 
 
320 THEORY AND PRACTICE OE BANKING 
 
 that there was not sufficieut moaey in specie for great commerce 
 and great enterprises 
 
 " The first banks were in the hands of private persons, with 
 whom persons deposited money, and from whom they received 
 Bills of Credit (Jedi di Gredito) : and who were governed by the 
 same rules as the public banks now are. And thus the Italians 
 have been not only the fathers, and the masters, and the arbiters 
 of commerce, so that in all Europe they have been the depositaries 
 of money, and are called Bankers " 
 
 So Genovesi says — " These Monti were at first administered 
 with scrupulous fidelity, as are all human institutions made in the 
 heat of virtue. From which it came to pass that many placed 
 their money on deposit : and as 'a Security received paper which 
 was called, and is still called, Bills of Credit. Thus private Banks 
 were established among us, whose Bills of Credit acquired a great 
 circulation, and increased the quantity of signs and the velocity 
 of commerce " 
 
 And this was always regarded as the essential feature of 
 "banking." Thus Marquardus says — "And by "Bank- 
 ing " is meant a certain species of trading in money, under the 
 sanction of public authority, in which money is placed with 
 bankers (who are also cashiers and depositaries of money) for the 
 security of creditors, and the convenience of debtors, in such a 
 way that the Froperty in the money passes to them : but always 
 with the condition understood that any one who places his money 
 with them may have it back whenever he pleases " 
 
 A " Banker," therefore, always buys money with his own 
 Credit : or, by giving in exchange a Right of action to demand 
 back an equal sum at any time : and, moreover, when he buys 
 Commercial Debts, or discounts Commercial Bills of Exchange, 
 as it is technically termed, he does it in exactly a similar way : in 
 exchange for the Bill of Exchange he gives his customer a Credit 
 in his books ; or the Right to demand a sum of money from him. 
 Thus he buys one Debt, or Credit, by giving in exchange for it 
 another Debt, or Credit : and experience shows that his Credit 
 may several times exceed the cash in his possession. Thus the 
 business of a " banker " is essentially to Create Credit 
 
 The following is the true definition of a " Banker " — 
 
ON THE CURRBNCT PRINCIPLE 321 
 
 A Banker is a Trader whose business is to buy Money 
 and Debts by creating otfier Debts 
 
 As will be more fully exemplified in a subsequent section 
 
 On the Currency Principle 
 
 5. We must now explain the meaning of an expression which 
 has been frequently used in recent discussions, and which must be 
 clearly understood before we come to the exposition of the system 
 which the Bank Charter Act of 1844 is designed to carry out 
 
 The express function and purpose of a Bank being to create 
 Credit, it has been sometimes asserted that a Bank should only be 
 allowed to create exactly as much Credit as the specie paid in, 
 and no more. And that its sole function should be to exchange 
 Credit for Money and Money for Credit : and thus the quantity 
 of Credit would always be exactly equal to the Money it displaces 
 
 This doctrine is that which is distinctively known by the name 
 of the Currency Principle : it is the doctrine which the 
 supporters of the Bank Charter Act of 1844 asserted to be the 
 only true one : and which that Act was intended to carry out 
 
 This doctrine was first clearly formulated in China, in 1309. 
 That country had been plagued with excessive issues of incon- 
 vertible paper for nearly 500 years. The author of- a work, 
 Tsao-min, exhibiting the evil consequences of excessive issues of 
 Paper Money, and speaking of the times before such mischiefs 
 took place, said — " Then it was ordered that at the oflBces of the 
 rich merchants who managed the enterprise, when the Notes were 
 paid in the Money came out : when the Bills came out the Money 
 went in : the Money was the mother, the Note was the son. 
 The son and the mother were reciprocally exchanged for each 
 other " 
 
 Several Banks have been constructed on this principle : such 
 as those of Venice, Amsterdam, Hamburg, 'Nuremberg, and 
 others 
 
 These places, small in themselves, were the centres of a great 
 foreign commerce : and, as a necessary consequence, large quan- 
 tities of foreign coin of all sorts, of different countries and 
 denominations, were brought by foreigners who resorted to them. 
 These coins were, moreover, greatly clipped, worn, and diminished. 
 
322 THEORY AND PRACTICE OF BANKING 
 
 This degraded state of the current coins produced intolerable 
 inconvenience, disorder, and confusion among merchants, who, 
 when they paid or received payment of their bills, had to offer or 
 receive a bagful of all sorts of different coins. The settlement 
 of these bills, therefore, involved perpetual disputes — which coins 
 were to be received, and which were not, and how much each was 
 to count for. In order to remedy this intolerable inconvenience, 
 it became necessary to institute some fixed and uniform standard 
 of payment, so as to ensure regularity and a just discharge of 
 debts. In order to effect this, the Magistrates of these cities 
 instituted a Bank of Deposit, in which every merchant placed his 
 coins of different kinds and nations. These were aU weighed, and 
 ■the Bank gave him a Credit in its books for the exact Value of 
 the Bullion deposited. The owner of the Credit was entitled to 
 have it paid in full weighted coin on demand. These Credits, 
 therefore, insured a uniform standard of payment, and were called 
 Bank Money : and it was enacted that all Bills upon these 
 respective cities, above a certain amount, should be paid in Bank 
 Money only. As this Bank Credit, or Bank Money, was always 
 exchangeable for coin of full weight on demand, it was always at 
 a premium, or agio, as compared with the worn, clipped, and 
 degraded coin in circulation. The difference was usually from 
 6 to 9 per cent, in the different cities. The term agio, or pre- 
 mium, is misleading : because it is clear that the Bank Money 
 was the true standard, and the current coin was at a discount. 
 These Banks professed to keep all the coin and bullion deposited 
 with them in their vaults. They made no use of it in the way of 
 business, as by discounting bills. Thus the Credit created was 
 exactly equal to the specie deposited : and their sole function was 
 to exchange Specie for Credit, and Credit for Specie 
 
 These Banks were examples of the Currency Principle. 
 They were of no further use to commerce than that they served 
 as a safe place to keep the merchants' money in : and that they 
 insured a uniform standard of payment of debts. They made no 
 'profits by their business : and no Bank constructed on the 
 Currency Principle ever did, or ever could, by any possibility, 
 make profits by business. The merchants who kept their ac- 
 counts with them, paid certain fees to defray the expenses of the 
 establishment 
 
ON THE eUBRENGT PRINCIPLE :323 
 
 ■This Currency Principle is not only advocated as the sound 
 one by many influential writers, especially those to whom the 
 Bank Charter Act of 1844 is due, but Mill goes further : he 
 
 " Further consideration showed that the uses of money are in 
 jio 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 aggregate amount .... 
 
 "Another of the fallacies from which the advocates of an 
 inconvertible currency derive support, is the notion that an in- 
 crease of the currency quickens industry. This idea was set afloat 
 by Hume, in his Essay on Money, and has had many devoted 
 adherents since 
 
 " The substitution of Paper for Metallic Currency is a national 
 gain, any further increase of Paper beyond this 
 jls but a form of robbery 
 
 " An issue of notes is a manifest gain to the issuers, who, 
 jUntil the notes are returned for payment, obtain the use of them 
 as if they were real capital : and so lorig as the notes are no per- 
 manent addition to the currency, but merely supersede gold and 
 silver to the same amount, the gain to the issuer is a loss to np 
 one : it is obtained by saving the community the expense of the 
 more costly material. But if there is no gold and silver to be 
 superseded— if the notes are added to the currency, instead of 
 Mng substituted for the metallic part of it— ail holders of currency 
 lose by the depreciation of its value the exact equivalent of what 
 the issuer gains 
 
 "When metallic money has 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 be convertible, be a compMe 
 failure. The new .issue would again set in motion the same 
 train of consequences by which the gold coin had already been 
 expeUed. The metals would, as before, be required for exporta- 
 tion, and would be for that purpose demanded from the banks to 
 the fnU extent of the superfluous notes, which thus could not 
 possibly be retained in circulation " 
 
 We shall now proceed to give an exposition of the actual 
 
 y 2 
 
324 THEORY AND PRACTICE OF BANKINQ 
 
 mechanism of banking, and the student will see how far these 
 assertions are borne out by the facts 
 
 On the Mechanism of Banking 
 
 6. Banks, of the nature of those of Venice, Amsterdam, and 
 Hamburg, never existed in this country, and we must now explain 
 the mechanism of the great system of Banking, or the great 
 system of the commerce in Debts, Credits, or Ghoses-in-adion, as 
 it has been carried on in this country 
 
 It was during the great civil war, as we have explained else- 
 where, that the goldsmiths of London first began to receive the 
 cash of the merchants and country gentlemen for safe custody, on 
 condition of repaying'an equal sum on demand 
 
 Now this money was not placed in their hands to be locked 
 away idle in their cellars, as plate and jewelry are often given to 
 the care of a banker as a Depositum, and to be restored in 
 specie. The money was sold to the banker as a Mutuum : to 
 be restored only in genere. And they agreed not only to repay it 
 on demand, but to pay six per cent, interest for it : consequently^ 
 they were obliged to trade with it in order to make a profit 
 
 We must now explain how a banker trades with money 
 
 Suppose his customers pay in £10,000 to their accounts : then 
 the money becomes the banker's absolute property as a Mu- 
 tuum. In fact, he Buys the money from his customers, and 
 in exchange for it, he gives them a Credit in his books : that is, 
 he creates a Eight of action against himself for an equal amount. 
 This Eight of action, Credit, or Debt, in banking language, is 
 termed a Deposit 
 
 After such an operation, his accounts would stand thus — 
 
 Liabilities Assets 
 Deposits £10,000 | Cash £10,000 
 
 Now, though his customers have Eights of action against the 
 banker to demand back exactly an equal quantity of money as 
 they have paid in, yet persons would not place money with their 
 banker if they meant to draw it out again immediately : just as 
 no one would spend at once all the money he had. Nevertheless, 
 some will want to draw out part of their funds : but. if some 
 
THE MECHANISM OF BANKING 325 
 
 customers waat to draw out money, others will probably pay in 
 about an equal sum. It may be said that, in ordinary and quiet 
 times, a banker's balance ia cash will seldom differ by more than 
 one thirty-sixth part from day to day. So that if he retains one 
 tenth of his cash to meet any demands which may be made upon 
 him, that is ample and abundant in all ordinary times 
 
 If, then, in the above example, the banker retains £1,000 in 
 cash to meet any demands upon him, he has £9,000 to trade 
 with : and it is just in the method in which bankers trade that so 
 much misconception exists 
 
 It is commonly supposed that when a banker has the £9,000 to 
 trade with, he employs it in purchasing Bills of Exchange to that 
 amount : and that he receives a profit only on the £9,000 : but 
 that is a complete misconception of the nature of " Banking" 
 
 A " banker " never buys BiUs with money in the first instance: 
 that is the business of a Bill Discounter, or a Bill Broker 
 
 The way in which a " banker " trades is this. He sees that 
 £1,000 in cash is sufficient to support Liabilities of £10,000 in 
 Credit : consequently, he argues that £10,000 in cash will bear 
 Liabilities to several times that amount in Credit 
 
 One of the most eligible methods of trading for a banker is 
 to buy or discount good Commercial Bills. And he buys these 
 BiUs exactly in the same way as he bought the Cash : that is, by 
 creating Credits in his books ; or Debts : or Eights of action 
 against himself to the amount of the Bills — deducting, at the 
 same time, the Interest, or Profit agreed upon : which is called 
 the Discount 
 
 A " banker," therefore, never buys a Bill with Cash iu the 
 first instance. He buys the Bill, which is Debt payable at a" 
 future time, by giving his customer a Credit in his books for the 
 amount of the Debt, less the Discount : which is a Eight of 
 action the customer has to demand the money if he chooses. 
 That is, he buys a Eight of action, payable at a future time, by 
 creating or issuing a Eight of action, payable on demand. And 
 this Eight of action, Credit, or Debt, is equally, in banking lan- 
 guage, termed a Deposit, as the Eight of action he created to 
 buy the money 
 
 Suppose that the "banker" buys £40,000 of Commercial 
 Bills at three months, and that the agreed upon Profit was four 
 
326 THEORY AND PRACTICE OF BANKING 
 
 per cent. Then the sum to be retained on the Bills would be 
 £400. Consequently, in exchange for Bills to the amount of 
 £40,000, he would create Credits, Debts, or Eights of action 
 against hiinself— technically termed Deposits— to the amount 
 of £39,600 
 
 Hence, just after buying these Bills, and before his customers 
 begin to operate on their accounts, his accounts would stand 
 thus — 
 
 Liabilities Assets 
 
 Deposits £49,600 
 
 £49,600 
 
 Ciish £10,000 
 
 Bills of Bxdiange . ; 40,000 
 
 £50,000 
 
 The balance of £400 being his own Property, or Profit 
 
 By this process the " banker " has added or created £39,600 
 
 in Credit to the previously existing cash : and his Profit is clear : 
 
 he has not gained four per cent, on the £9,000 in cash : but four 
 
 per cent, on the £40,000 of Bills he has bought 
 
 Now this is what the business of " banking " essentially 
 
 consists in : and thus the correctness of the definition of a 
 
 '' Banker," given above, is manifest 
 
 A Banker is a Trader who luys Money and Debts 
 
 ly creating other Debts 
 
 Thus we see that the essential and distinctive feature of a 
 *' Bank " and a " Banker " is to Create and Issue 
 Credit payable on Demand : and this Credit is intended to be 
 jjut into circulation and serve all the purposes of money. A bank, 
 therefore, is not an office for borrowing and lending 
 iSIoney : but it is a Manufactory of Credit 
 
 It is thus seen how erroneous Cilbart's description of a banker 
 as " a person who deals in Capital, or rather in Money,"— 
 
 And also the description of Banking given in the Report of 
 the House of Commons on the commercial panic of 1858—" The 
 use of Money, and that Only, they regard as the province of a 
 bank, whether of a private person, or Incorporation, or the 
 banking department of the Bank of England" 
 
EBUOK RESPECTING DEPOSITS 327 
 
 On a Common Error respecting Deposits 
 
 7. We must now notice a very common error respecting 
 the meaning of the word Deposit : which will show how 
 necessary it is to understand the changes of meaning. which some 
 words, which have been adopted from Eoman Law, have undergone 
 in modern business 
 
 A Depositum, in Roman Law, means anything which is 
 placed in the charge or custody of a person for the mere purpose 
 of safe keeping : without the Property in it passing to him : or 
 his being allowed to use it for his own advantage 
 
 It is part of the duty of a London banker to take charge of 
 his customers' plate, jewelry, or securities, if required to do so. 
 This plate, jewelry, &c., so committed to the banker's charge for 
 safe keeping only, is a Depositum : but he acquires no 
 property in it : and he receives no remuneration for so doing 
 
 It is very often supposed that when a customer pays in money 
 to his account, that money is a Deposit. This is the first error 
 on the subject : because the money so paid in is not a Depo- 
 situm : it is a Mutuum. The money is in reality sold to 
 the banker : and it has become his actual property to deal with 
 as he pleases 
 
 In the next place, it is not the cash which is paid in which, 
 in banking language, is termed the Deposit : but the Credit, 
 or Riglit of action, which is created in exchange for it. So, 
 when a banker discounts a Bill of Exchange he buys a Eight of 
 action, by creating and giving a Credit, or Right of action in 
 exchange for it : and the Credit is also called a Deposit. The 
 Money, or Bill of Exchange, sold to the banker, are his Assets. 
 And the Deposits are his Liabilities : or the Price he 
 pays for his Assets 
 
 As the error respecting the meaning of the word Deposit is 
 almost universal among writers and speakers on banking, we may 
 mention one conspicuous instance of it 
 
 Mr. John Torr, a Liverpool merchant, was questioned by Mr. 
 Wilson before the Committee of the House of Commons, in 1858 
 
 4939. " I believe I am correct in the fact that all the trans- 
 actions of the banks in New York are published periodically, and 
 
328 THEORY AND PRACTICE OF BANKING 
 
 at very short intervals, by the banking department ?— I believe 
 they are published weekly " 
 
 4940. " These accounts, as they are published, show the cir- 
 culation of notes, the amount of specie held by the banks, the 
 amount of advances made by the banks, and all the items in great 
 detail, do they not ?— They do " 
 
 4941. "Are you aware that, during the last two or threes 
 years, while the circulation of notes had not increased at all, or 
 had increased to the very smallest possible amount, the amount of 
 advances, as shown by these amounts, had, as you have referred 
 to, increased to a very enormous amount ?-^Yes ; I must apologise 
 for the answer I gave ; I meant the advances when I said the 
 notes : I meant the hability of the bank from its advances made 
 on securities " 
 
 4942. Chairman (Mr. Gardwell). " The mere act of making 
 an advance does not render a person liable : of course, the 
 liability is the other way ?— Yes " 
 
 4243. " Will you trace the process by which the 'banks in- 
 creased their own liabilities by making advances to others ? — 
 Looking at the securities which they held from other parties, by 
 making advances to a number of merchants to a larger amount 
 than usual, they felt that the indebtedness of these parties to 
 them was more than was prudent " 
 
 4944. Mr. Wilson. " Do yon think that the banks had made" 
 undue and imprudent advances in the loan of their Capital and 
 Deposits ? — I apprehend that they thought so " . . . . 
 
 4945. " Are you aware that, during the last three or four 
 years, the amount of the Capital subscribed to the banks of New 
 York had very gi-eatly increased ? — I do not know it from my own 
 knowledge " 
 
 4947. " But it would be either from Deposits or from Capital 
 that increased advances could be made by the banks ? — Certainly" 
 
 4948i " Therefore, if you are aware that increased advances 
 were made to a large extent, it must have been either from an 
 increase of subscribed Capital, or from an increase of Deposits ? — 
 Yes ; I apprehend so " 
 
 The above extract shows how completely the chairman, Mr. 
 Cardwell, had misconceived the true nature and effects of banking. 
 Mr. Torr had a perception of the true nature of it : for he says 
 
EREOE RESPECTING DEPOSITS 329 
 
 that the banks had increased their liabilities by their adTances : 
 which was undoubtedly true : because banks make all advances 
 by creating Habilities. This, however, seemed a paradox to Mr. 
 Cardwell, who sneeringly asked the witness to explain how banks 
 increased their own liabilities by making advances to others. 
 Whereas, as we have seen, the only way a bank has of making an 
 advance is by creating a liability. Mr. Wilson asked him if the 
 banks made imprudent advances out of their Capital and Deposits^ 
 Banks do not make advances out of their Deposits : but they 
 make an advance by creating a Deposit : or Credit in their books 
 
 This misconception of the meaning of the word Deposit, leads 
 to a somewhat amusing error which is usually seen in the news- 
 papers every half-year, after the Joint Stock Banks publish 
 theu' accounts. Many papers give summaries of the accounts of 
 the London Joint Stock Banks, which show that they have 
 £200,000,000 of Deposits : and the writers enlarge on the 
 wonderful quantity of money which the banks have to lend out, 
 or trade with. As a matter of fact there are not two hundred 
 mUUons of sovereigns in the whole country. The best authorities 
 place the amount of sovereigns in the country at somewhere about 
 one hundred and twenty millions. Moreover, an eminent au- 
 thority has calculated that the " Deposits " in all the banks in the 
 kingdom may be estimated at about £800,000,000. Now, if there 
 are but £120,000,000 in sovereigns in the whole country, how 
 can there be £800,000,000 of Deposits in the banks ?■ Of course, 
 any one who knows the real meaning of Deposits, as a technical 
 .term in banking, knows well enough that it is a complete error 
 &nd delusion to suppose that the London banks have two hundred 
 milUons of actual money : as any one may see who looks at their 
 assets in cash. These Deposits are not. Deposits in cash at all : 
 they are nothing but Credit : and are merely so many bank 
 notes in disguise. They are nothing but an enormous super- 
 structure of Credit, reared up on a comparatively small basis of 
 bullion :■ exactly like the Issues of Notes. These figures do not 
 show the quantity of Cash the banks have at their command to 
 trade with : but they show the quantity of business they have 
 done : and the lialilities they have created. These apparent De- 
 posits, instead of being so much cash, are nothing but the 
 
330 THBOKY AND PRACTICE OF BANKING 
 
 Credits, or Rights of action, the banks have created as the 
 Price with which they have purchased the Cash and Bills which 
 figure on the other side as Assets. A sudden increase in 
 Banking Deposits is, in reality, nothing more than an inflation of 
 Credit : exactly similar to a sudden increase of Bank Notes. 
 After all the great monetary panics it is invariably observed that 
 the Deposits in banks greatly diminish. In July, 1858 and 1867,, 
 the aggregate of Deposits in the Joint Stock Banks appeared to 
 be considerably less than in July, 1857 and 1866 : and it is often 
 supposed that persons draw their money out of the banks at such 
 times. But such assertions are erroneous : the banks have then 
 just as much Cash as before : probably more. But the diminution 
 in Deposits arises from the fact that in times of commercial de- 
 pression there are fewer bills created through the operations of 
 commerce. Consequently, there are fewer bills for the banks to 
 purchase : and if they have no bills to buy, they cannot create 
 Deposits. Hence this diminution of Deposits is not a diminution 
 of Deposits in Gash: it is a Contraction of Credit 
 
 In Banking Language a Deposit and an Issue are the 
 
 same 
 
 8. The student must, therefore, carefully observe that, in the 
 language of banking, a Deposit and an Issue are the same 
 thing. A Deposit is simply a Credit in a banker's book, giving 
 the customer a Eight of action against him for a sum of money. 
 And as soon as the banker lias created a Credit, or Deposit, in hia 
 book in favour of his customer, he has Issued a Eight of action, 
 against himself. The word Issue comes from Exitus, a going 
 forth : and, in Mercantile Law, to Issue an instrument is to 
 deliver it to any one so as to give him a Eight of action against 
 the deliverer 
 
 It in no way increases the banker's liability to write the 
 liability down on paper. Such is only done for the convenience 
 of transferring the Eight of action to some one else. When the 
 Credit remains in the simple forili of a Deposit, the banker knows 
 who his Creditor is : when he gives the Promissory Note, and his 
 Creditor transfer it to some one else, the banker has no means of 
 knowing who his Creditor is. The same fchiiag, however, may 
 
ON UTILISING BANK CREDITS 331^ 
 
 happen in the case of a Deposit : because the Creditor may trans- 
 fer his Right of action by means of a Cheque to any one else : 
 and it may circulate exactly like a Bank Note. Hence, the banker 
 may be equally ignorant who his real Creditor is, in one case as 
 the other 
 
 It is, therefore, a fundamental error to divide banks into 
 " Banks of Deposit " and " Banks of Issue." All banks 
 are " Banks of Issue." The only distinction is, whether the 
 Credit they create is strictly confined to th© Money they buy with, 
 it : or whether they are allowed to create Credit in excess of the 
 Cash thfey hold, in order to buy Bills of Exchange with them, and 
 so make a profit by so doing 
 
 Whether the Credit they create is recorded on paper or not, in 
 no way alters the amount of their liabilities 
 
 On the method of tJtilising Banking Credits 
 
 9. The banker, then, having Issued these Credits, Deposits, 
 or Eights of action against himself to his customers, they, of 
 course, cannot transfer them to any one else by manual delivery. 
 In order to be capable of manual delivery, they must be recorded 
 on paper : and this might be done in two forms — 
 
 1. The banker might give him his own Note, promising to 
 pay a certain sum to the customer, or to " bearer " 
 
 2. The customer might write a note to the banker, desiring 
 him to pay the money to some particular person : or to his order, 
 or to bearer. These orders were formerly called Cash Notes : they 
 are now called Cheques 
 
 These paper documents neither create nor extinguish liabilities: 
 they merely record them on paper for the purpose of transferring 
 them to some one else 
 
 Bankers' Notes were at first merely written on paper, like any 
 ether Promissory Notes : and they were for any sums. In 1729, 
 Child & Co. introduced the practice of having their Notes partly 
 printed and partly written, like a modern cheque. But still they 
 were not like modern bank notes for even pounds : but just for 
 any odd sums that might be required, like a cheque 
 
 London bankers appear to have issued their own notes till 
 about 1793 : when^ perhaps, the panic of that year may have 
 
332 THEOEY AND PEACTICB OF BANKING 
 
 shown them the danger of having their notes in the hands of the 
 public : and it seems that they discontinued -issuing them about 
 that time. But they were never forbidden to issue notes till the 
 Bank Charter Act of 1844 
 
 Operations by means of Cheques 
 
 10. When, therefore, a banker has created a Credit, or De- 
 posit, in favour of a customer, he can put this Credit into cir- 
 culation either by means of the banker's own Note, or by means 
 of a Cheque : and, when he does so, the following different results 
 may take place — 
 
 1. The customer himself, or the holder of the Cheque or 
 Note, may draw out the actual money : if they do so, the banker's 
 liability is extinguished. It is a resale of money to the holder of 
 the Note or Cheque, and the banker buys up the Eight of action 
 against himself 
 
 2. The Cheque or Note may circulate in commerce, and effect 
 any number of payments, exactly like money : and it may, ulti- 
 mately, be paid into the account of another customer of the same 
 bank, and the series of transactions finally closed by the mere 
 transfer of Credit from one account to another 
 
 3. The Cheque or Note may, after performing a similar num- 
 ber of exchanges, fall into the hands of the customer of another 
 bank, and be paid into that bank. So the banker becomes debtor 
 to the customer of another bank. But if the banker A. becomes 
 debtor to the customers of the banker B., the chances are that 
 about an equal number of the customers of the banker A. will 
 have claims against the banker B. If the mutual claims of the 
 customers of each bank on the other are exactly equal, the re- 
 spective orders are interchanged, and the Credits re-adjusted to 
 the accounts of the different customers, without any payment in 
 money. Thus, if the mutual claims among any number of bankerS' 
 exactly balanced, any amount of business might be carried on 
 without requiring a single coin. Formerly, if the mutual claims 
 did not balance, the differences used to be paid in coin or bank 
 notes : but now, by an ingenious arrangement at the Clearing 
 House, the use of coin and bank notes is entirely dispensed with : 
 and aU the banks in the clearing are reaUy and practically formed 
 
BANKER AND CUSTOMER 333 
 
 iato one huge banking institution for the purpose of transferring 
 Credits amongst each other, just as Credits are usually transferred 
 from one account to another in the same bank without a single 
 coin being required 
 
 On the Legal Relation Miveen Banker and 
 Customer 
 
 11. It must be carefully observed that the Legal Relation 
 between Banker and Customer is simply that of Debtor and Cre- 
 ditor. When a customer pays in money to his account, he cedes 
 the absolute property in the money to his banker : and, in exchange 
 for it, he acquires nothing but a Right of action to demand 
 an equal sum at any time he pleases 
 
 There is so much misapprehension on this point, and in 
 speaking of banking business it is so often implied that the money 
 placed with a banker still belongs to the customer, that it may be 
 of advantage to quote the words of Lord Chancellor Oottenham, 
 in the case of Foley v. Hill, in the House of Lords (2 H. L., cases 
 28) — " Money, when paid into a bank, ceases altogether to be the 
 money of the principal : it is then the money of the banker, who 
 is then bound to return an equivalent, by paying a similar sum to 
 that deposited with him, when he is asked for it. The money 
 paid into the banker's, is money known by the principal to be 
 placed there for the purpose of being under the control of the 
 banker : it is then the banker's money : he is known to deal with 
 it as his own : he makes what profit of it he can : which profit 
 he retains to himself, paying back only the principal, according to 
 the custom of bankers in some places : or the principal and a 
 small rate of interest, according to the custom of bankers in other 
 places. The money placed in the custody of a banker is, to all 
 intents and purposes, the money of the banker, to do with as he 
 pleases : he is guilty of no breach of trust in employing it : he is 
 not answerable to the principal if he put it into jeopardy— if he 
 engages in a hazardous speculation : he is not bound to keep it, or 
 deal with it as the property of the principal : but he is, of course, 
 answerable for the amount, because he has contracted, having 
 received that money, to repay the principal when demanded, a 
 sum equivalent to that paid into his hands " 
 
334 THEORY AND PRACTICE OF BANKING 
 
 It must, therefore, be careflilly obsernred that a " banker " in 
 .no way resembles the treasurer of a public fund, or a solicitor, or 
 a money scrivener, who are mere trustees of the money entrusted 
 to them. If a " banker " wera the mere trustee of the money 
 placed with him, he would not be entitled to use it for his own 
 purposes 
 
 It is often the custom of persons to say that they have so 
 much " money " at their banker's : but such an expression is 
 entirely erroneous : they have no " money " at their banker's : 
 -they have nothing but a Eight of action to demand so much 
 ■money from their banker 
 
 As a consequence of this relation between banker and customer, 
 if a customer were to leave a balance at his banker's for six years, 
 without operating on his account, the banker might, if he chose, 
 rrefuseto pay the balance, under the Statute of Limitations : but 
 if it were a mere Trust, he could not refuse : because that Statute 
 ■does not apply to Trusts 
 
 Another consequence of this relation is that a Cheque is a Bijl 
 of Exchange, and not a Draft :' it is an Order addressed by a Ore- 
 rditor to his Debtor, and not to his Trustee or Bailee : to call a 
 (Cheque a Draft, as is often done, is to mistake the relation between 
 Banker and Customer 
 
 On the Legal Contract letwem Banker and 
 Customer 
 
 12. It has been shown that the Legal Eelation between 
 fBanker and Customer is simply that of Debtor and Creditor 
 
 Nevertheless, there is an important distinction between an 
 ordinary Debtor and a banker Debtor 
 
 An ordinary Debtor is not bound at Common Law to accept 
 or pay a bill drawn upon him by his Creditor without his own 
 consent ; even though he should admit that he possessed funds : 
 nor if his Creditor assigns his Debt is he bound, to pay the Transr 
 feree : nor has the Transferee an action against him in his own 
 name : because there is no privity of contract between the Debtor 
 ■and the Transferee : and the Creditor has no power to stipulate 
 that the Debtor should pay the Transferee : unless he expressly 
 consents to do so 
 
BANKEB AND CUSTOMEE 335 
 
 The Transferee can only sue the Debtor under the name of 
 the Transferor : or the Transferor can sue as the Trustee of the 
 Transferee 
 
 If, however, the Debtor had entered into an Obligation, under 
 seal, promising to pay an assignee, or bearer : or had accepted a 
 BiU of Exchange payable to order, or to bearer : then the Trans- 
 feree might sue him in his own name, because the consent of the 
 Debtor had created a privity of contract between himself and the 
 Transferee 
 
 But the case of a Banker Debtor has always been different. 
 In order to encourage persons to place their money with them, the 
 Goldsmith Bankers agreed that their customers should have, as 
 nearly as possible, the same facilities for transferring their Eights, 
 as if they had the money itself in their hands 
 
 Consequently, from the very first, it was always the Custom of 
 bankers that their customers might either demand payment them- 
 selves ; or they might transfer their Eights of action to any one 
 else they pleased, or to bearer 
 
 By the very nature, therefore, of the Consensual Contract, 
 termed the Custom of Bankers, a banker having funds of his 
 customer, is in the position of an ordinary Debtor who has 
 accepted a Bill payable to order, or to bearer 
 
 Hence, while no simple admission of the possession of funds 
 by an ordinary debtor can compel him to pay the holder of a Bill 
 drawn on him, without his own consent : the admission of the 
 possession of funds by a banker operates, ipso facto, as a legal 
 acceptance of any Cheques or Bills drawn on him by his customer : 
 and gives the holders of them a Eight of action against him 
 
 It has sometimes been supposed that the holder of a Cheque 
 has no action against a banker, even though he possesses fands of 
 his customer, because he has not accepted the Cheque 
 
 But this is to overlook the special conditions of the relation of 
 Banker and Customer. By that contract he specially agrees with 
 his customer to pay any one to whom his customer may transfer 
 his Eight of action : and, therefore, if the holder can prove that 
 he has funds of his customer in his hands, he has an action 
 'against him 
 
 •In Liversidge v. Broadhent (4 H. & N., 612), Martin, B., 
 
336 THEORY AND PRACTICE OF BANKING 
 
 said — " A banker is in the position of a person having in his 
 hands the money of another, which he is at any moment liable to 
 be called upon to pay : and" the Courts have grasped at that to 
 make a contract between the banker, his customer, and a third 
 party, for the payment of the money to the latter, operate as a 
 transfer of the money, so that an action for money had and 
 received can be maintained for it." It is not exactly that the 
 Courts have made the contract : they only give effect to the 
 fundamental contract which the banker has voluntarily entered 
 into with his customer 
 
 Error of the Common Description of Banking 
 
 13. From the preceding account of the actual mechanism of 
 Banking, it will be seen what a complete misconception it is of 
 the nature of Banking to say that bankers are merely agents or 
 intermediaries between persons who wish to lend and persons who 
 wish to horrow. This is entirely untrue in the ordinary sense of 
 " lending " and " borrowing : " because, in the ordinary case of 
 " lending,'' the lender deprives himself of the use of the thing 
 lent. But when a person pays in money to his banker, he has no 
 intention whatever of depriving himself of the use of it. On the 
 contrary, he means to have the same free command of it as if it 
 were in his own house. The customer, therefore, " lends " his 
 money to his banker, but at the same time has the free use of it. 
 The banker employs that money in promoting trade. Upon the 
 strength of it being deposited with him he buys Debts with his 
 Promises to pay, several times exceeding the amount of the cash 
 placed with him : and the persons who sell him their debts have 
 the free use of the very same coin which the " lender " has the 
 same right to dema,nd. Thus the " lender " and the " borrower " 
 have the same rights at the same time to demand the same coin. 
 And all banking depends on the calculation that only a certain 
 portion of each set of customers will demand the actual cash ; but 
 that the majority will be satisfied with the mere promise to pay, 
 ,or the Credit 
 
 Banking is a species of insurance : it is practically possible 
 that a banker may be called upon to pay all his liabilities on 
 demand at once, just as it is theoretically possible that all the 
 
: . ON THE CLEARING HOUSE 337 
 
 Jives insured in an office may drop at the same instant, as it is 
 theoretically possible that all the houses insured in an office may 
 ie burned down at the same instant. A large and sudden demand 
 .for money on a bank is termed a Run : and a run upon a Bank 
 is analogous to a pestilence or a conflagration to an Insurance 
 ■Office. But all Insurance and Banking is based upon the ex- 
 pectation that these contingencies will not happen. A banker 
 rmdlipUes his liabilities to pay on demand, and keeps by him a 
 sufficient amount of cash to ensure the immediate payment of all 
 claims which are likely to be demanded at one time. If a pressure 
 comes upon him, he must sell some of the securities he has bought, 
 or borrow money on them 
 
 On the Clearing House 
 
 14. We may say a few words here about the Clearing House, 
 respecting which, as in everything relating to banking, there is 
 great misconception 
 
 It is usually supposed that the Clearing House is an example 
 of the principle of (Compensation, and that the Credits exchanged 
 in it are extinguished. In foreign treatises it is usually called 
 Maison de Liquidation. This, however, is a complete error 
 
 It has been seen that if any number of the customers of the 
 same bank have transactions among themselves, and give each 
 other Cheques on their accounts, any amount of transactions may 
 be settled by the simple transfer of Credits from one account to 
 another, without a single coin being required, so long as the 
 receivers of the Cheques do not draw out the money 
 
 The Clearing system is a device by which all the banks which 
 join in it are formed, as it were, into one huge banking institution 
 for the purpose of transferring Credits from one bank to another, 
 just in the same way as Credits are transferred from one account 
 to another in the same bank, without the use of coin 
 
 ■-■ Suppose that a customer of the Commercial Bank has £100 
 la notes of the Eoyal Bank paid to him : then he is the Creditor 
 of the Eoyal Bank to that amount. If he pays these notes into 
 his account with the Commercial- Bank, he constitutes the Com- 
 mercial Bank his agent to obtain payment of these notes from 
 ihe Eoyal Bank, -and to place the proceeds to his account 
 
338 THEORY AND PRACTICE OF BANKING 
 
 Suppose that, in a similar way, a customer of the Koyal Bank 
 has been paid £100 in notes of the Commercial Bank, and pays 
 them in to his account. Then he constitutes the Eoyal Bank his 
 agent to obtain payment of the notes from the Commercial Bank, 
 and to place the proceeds to his account 
 
 Each bank, in such a case, is Debtor t(3 the customer of the 
 other 
 
 The full way of proceeding would be for each bank to send 
 a clerk to the other to obtain payment of its notes in cash. Bach 
 bank, then, having obtained payment, would carry the proceeds to 
 the Credit of its own customer. Thus each bank would pay away 
 £100 in cash : and it would require £200 in cash to settle the 
 business. When this was done, each bank would be Debtor to its 
 own customer : and the Quantity of Credit would be just the 
 same as before. The only difference would be that each bank, 
 instead of being Debtor to the customer of the other bank, would 
 be Debtor to its own customer 
 
 The transaction, however, may be effected in a much simpler 
 way. Let the agents of the two banks meet. The agent of the 
 Commercial Bank says—" In consideration of your giving up to 
 me the notes on which I am Debtor to your customer, I agree to 
 become Debtor to my own customer for their. amount." In exactly 
 similar way the agent of the Royal Bank says — ^" In consideration 
 of your giving up to me the notes upon which I am Debtor to 
 your customer, I agree to become Debtor to my own customer to 
 that amount." The agents of the two banks then exchange 
 notes : and each bank having received £100 in its notes — that is, 
 being released from its Debt to the customer of the other, which, 
 as we have already seen, is equivalent to a payment in money — 
 enters the amount to the Credit of its own customer 
 
 By this means each bank, instead of being Debtor to the 
 customer of the other, is now Debtor to its own customer : and 
 the use for £200 in cash is saved 
 
 However numerous the banks may be which join in this 
 system, the effect is exactly the same. Credits are not destroyed : 
 they are only transferred from one bank to the other, without the 
 use of coin. The importance of this method may be understood, 
 when Credits to the amount of about £6,000,000,000 are annually 
 transferred between the different banks which join in the Londou, 
 
MATHEMATICS APPLIED TO ECONOMICS 339 
 
 .Clearing House, withoufc the use of a single coin. And thus 
 is seen its great importance, in a national point of view, in 
 economising the use of coin 
 
 On the Caution Necessanj in applying Mathematics to 
 Economics 
 
 15. We now see how necessary it is to be cautious in applying 
 Mathematics to Economics : and how necessary it is to have a 
 precise and accurate statement of the facts : so that the Mathe- 
 matics may be subservient to the facts : and not the mistress 
 of them 
 
 Several distinguished Algebraists — Peacock, Balfour Stewart, 
 and Tait — in acknowledging that Debts are Negative Quantities, 
 put it in this way — " If property, possessed or due, could be 
 denoted by a number or symbol with a Positive sign, a Debt 
 would be indicated by a number or symbol with a Negative sign, 
 or conversely : such affections of property are correctly symbolised 
 by the signs + and — : since they possess the inverse relations 
 to each other which these signs require : for if to a person, A., 
 there be given a certain property, or sum of money, combined 
 with or added to a Debt of equal amount, his Wealth or Property 
 remains the same as before " 
 
 This mode of statement is correct in a certain sense : if a 
 person were going to retire from business he would call in and 
 discharge his liabilities, and the remainder, if any, would be his 
 fortune 
 
 But such a mode of statement is quite unsuitable for the 
 science of Economics : as is shown most clearly when it is applied 
 to Banking. Because, when a banker buys £10,000 in cash from 
 customers he is exactly in the position described by these Alge- 
 braists. He has bought £10,000 in cash from his customers by 
 creating an exactly equal amount of Rights of action, or Debts, 
 against himself: his property is, therefore, correctly stated as 
 £10,000 — £10,000 : and therefore, no doubt, substantially 
 he is exactly in the same position as he was before : he is neither 
 the richer nor the poorer 
 
 Bat that is an extremely incorrect view to take of the matter 
 as regards the science of Economics. Economics has only to do 
 
 % 2 
 
540 THEORY AND PRACTICE OF BANKING 
 
 with the number of Economic Quantities in existence at any given 
 instant, and with their exchangeable relations 
 
 Now, so long as the money is left in the banker's hands it is 
 his property. But his customers have at the same time an exactly 
 equal amount of Rights of action against him ; which they can 
 put into circulation, like money : and which may effect exchanges, 
 or payments, exactly in the same way as if they were actual 
 money 
 
 No doubt the banker is subject to an equal amount of 
 Debts ; but we have shown that the true interpretation of the 
 Negative sign, as applied to Debts, is a mere ^personal Duty 
 to pay : and that this has no effect in an Economical point of 
 Yiew until the Debtor is actually called upon to perform his duty: 
 and when he has done so the Eight of action is extinguished, and 
 ceases to exist as au Economic Quantity 
 
 The liabilities of a banker, or Banking Credits, are Exchange- 
 able Quantities, which may be sold or transferred : hence, all 
 these Eights of action, while they exist, are independent Ex- 
 changeable Quantities. When they are paid oif and extinguished 
 they, no doubt, cease to exist : but everything else, when it is 
 destroyed, ceases to be an Economic Quantity. These Rights of 
 action, while they exist, are governed by exactly the same rules as 
 any other Economic Quantities 
 
 To shew the subtle nature of the question, let us again con- 
 sider the accounts between a banker and his customers. From 
 the banker's point of view his Assets, whether Cash or Bills, are 
 his absolute Property ( + ) : and his Liabilities are his Debts (— ): 
 and his accounts would be stated thus — 
 
 Liabilities Assets 
 
 Deposits £49,600 
 
 £49,600 
 
 + 
 Cash £10,000 
 
 BUls of Exchange . . 40,000 
 
 £50,000 
 
 But, from the customers' point of view, the case is exactly 
 j-eversed. The banker's Liabilities are the absolute Property of 
 his customers ( + ) : and they have claims io that amount against 
 
SCOTCH SYSTEM OF BANKING 
 
 3-11 
 
 the banker's Assets (— ). Henoe, from the customers' point of 
 view, the accounts would stand thus — 
 
 EioHTs OF Action Banker's Assets 
 
 + 
 
 Deposits 
 
 £49,600 
 
 Cash 
 
 Bills of Exchange 
 
 Balance + 
 
 £9,600 
 40,000 
 
 £49,600 
 £400 
 
 Hence, generally, the accounts between a banker and his customers 
 may be stated thus — 
 
 + 
 
 Cash 
 BUls 
 
 . . £9,600 
 . . 40,000 
 
 Balance . . 
 
 £49,000 
 .. ' £400 
 
 + 
 
 Deposits £49,600 
 
 where the upper or lower signs are to be taken according as they 
 are regarded from the banker's or the customers' point of view 
 
 The fact is, that every Obligation bears the double sign + : 
 and these opposite signs do not cancel eacb other, as many sup- 
 pose : but the Obligation is a saleable and exchangeable Quantity 
 as long as it exists : and until it is paid off and extinguished 
 
 On the Scotch System of Banking 
 
 16. The Credit created by Bankers in the operations we have 
 been describing, was employed to buy Commercial Bills, which 
 arise out of the Transfer of commodities : and it has been seen 
 that they could create Credit to several times the amount of Cash 
 in their possession. And some writers imagine that this is the 
 limit of legitimate Credit. We have now to describe a species of 
 Credit- of a totally different species, invented in Scotland, and to 
 which the marvellous progress of that country is mainly due. It 
 is Credit created, not for the purpose of transferring commodities 
 already in existence ; but for the express purpose of calling New 
 products into existence. It is entirely of the nature of Accom- 
 modation Paper : and it will show decisively that there is 
 nothing in the nature of Accommodation Paper more dangerous 
 
342 THEORY AND I'RACTICE OIT BANKING 
 
 or objectionable than Real Paper : but that, on the contrary, they 
 stand on exactly the same footing of security : and also that 
 Credit is equally applicable to call new products into existence 
 as to Transfer those already existing 
 
 When, after a long period of inactivity, the energies of a people 
 are suddenly turned into an industrial direction, they find innu- 
 mei-able enterprises which would be profitable if only they possessed 
 the means of setting them a-going. The quantity of money which 
 was suificient for a non-industrial people is now found to be wholly 
 inadequate to the increased demand for it : and the only conse- 
 quence can be, that if there is a greatly increased demand for the 
 existing quantity of. money, the Bate of Interest will, rise pro- 
 portionally, and to such an extent as to preclude all possibility of 
 profit from such enterprises even if eifected 
 
 It is, . therefore, invariably found that whenever this takes 
 place, multitudes of schemes are set afloat for increasing the 
 quantity of money 
 
 For many centuries after the Conquest, England was essentially 
 a feudal and military nation. Its Law also was almost entirely 
 feudal, and related to the tenure of land. Merchants and commerce 
 were held in very subordinate esteem, and Commercial Law had 
 no existence. In the sixteenth century the energies of the nation 
 were absorbed in religious controversies ; and in the first half of 
 the next century in politics. At length, in the reign of Charles II., 
 men, weary of polemics and politics, began to devote themselves 
 more to industry, and commerce : and this was greatly stimulated' 
 by the manifest advantages of banking which had just been 
 introduced into England 
 
 Among fields of enterprise at that period, none seemed more 
 promising than agriculture. But, unfortunately, all the available 
 specie was absorbed in commerce : none was to be had for agri- 
 culture ; or, at least, only at such rates as to be practically 
 prohibitory 
 
 In no species of industry are the profits so moderate as in 
 agriculture. Hence, if Capital has to be borrowed to effect im- 
 provements in agriculture, it is requisite ;1;hat it should be at a 
 Tfry low rate of interest. The usual rate of interest in Charles 
 
SCOTCH SYSTEM OIT BANKING 343 
 
 II.'s reiga was ten per cent., and few improvements in agriculture 
 could bear that rate 
 
 It was this real want which gave rise to the schemes of Asgill, 
 Briscoe, Ghamberlen, Law, and others, for the purpose of turning 
 the I/and into Money, which were so rife at this period : and 
 which are described in a subsequent cliapter 
 
 One of these schemes was attempted to be carried out in 1696. 
 The Ministry of William III. was not, as is now the case, formed 
 exclusively of one party in the State : it was a partly Whig and 
 partly Tory. In 1694, the Whig portion of the Ministry suc- 
 ceeded in founding the Bank of England, which, besides assisting 
 the Government in the war with France, was specially intended to 
 benefit commerce 
 
 The immense benefit of the Bank of England was so evident 
 that the Tory portion of the Ministry endeavoured to found a 
 Bank which should also assist the Government, and be specially 
 for the benefit of agriculture. It was attempted to be founded in. 
 1696 ; and was called the Land Bank. But the attempt did not 
 succeed : and its failure was one of the causes which produced the 
 stoppage of the Bank in 1697. There were, no doubt, defects in 
 the scheme which fully accounted for its failure : but the want 
 was very real : and the idea was perfectly sound 
 
 Among the projectors of basing Paper Money on land, the 
 most celebrated was John Law : and he laid a scheme before the 
 Scotch Parhament in 1705 : which they, fortunately, rejected : 
 it was carried out in France, in 1721, under the name of the 
 Mississippi scheme 
 
 This is not the place to give an account of Law's scheme, 
 which is done in a future chapter : but, ten years after its failure 
 in France, the Scotch banks, by the admirable invention of Cash 
 Credits, pushed Credit to the utmost extent of its legitimate 
 limits, and realised all that was practicable in the schemes of 
 Asgill, Briscoe, Chamberlen, and Law. And it is to these Cash 
 Credits that the principal progress of Scotland in agriculture and 
 all public works is due 
 
 Moreover, after the end of the seven years' war, in. 1756, an 
 ingenious merchant devised a scheme for Land Banks, in Germany; 
 and it is to these Land Banks that the principal part of the 
 progress of agriculture in Central Europe is due 
 
3-i4 THEORY AND PKACTICE OF BANKING 
 
 On Cash. Credits 
 
 17, The Bauk of Scotland was founded in 1695, with powers 
 of unlimited issue, both in amount and denomination. At first it 
 only issued Notes of £100, £50, £10, and £5. Though several 
 times advised to do so, they did not, at first, issue £1 notes : but, 
 in 1704, they began to do so. The bank received a monopoly of 
 banking for 21 years : and, in 1727, after the expiry of the 
 monopoly, the proprietors of the Equivalent Fund were endowed 
 by Royal Charter with the powers of Banking, and they assumed 
 the name of the Royal Bank 
 
 In the very contracted sphere of commerce in Scotland at that 
 time there were not suflBcient Commercial Bills in circulation to 
 exhaust the Credit of the banks : they had, as it were, a superfiuity 
 of Credit on hand : and the new bank devised a new scheme for 
 getting its Credit into circulation 
 
 It agreed, on receiving sufiicient guarantees, to open Credits 
 to certain limited amounts in favour of respectable and trust- 
 worthy persons 
 
 A Cash Credit is, therefore, a Drawing Account created in 
 favour of a customer, upon which he may operate precisely in the 
 same manner as an ordinary account : the only difference being 
 that instead of receiving interest on the daily balance at his Credit, 
 he pays interest on the daily balance at his Debit. It is, therefore, 
 merely an Inverse drawing account 
 
 Cash Credits are applicable to a totally different class of transr 
 actions to those which give rise to Bills of Exchange : one 
 difference being that Bills of Exchange arise out of the transfer of 
 commodities, and are payable in one sum at a fixed date : while 
 Cash Credits are not issued on the transfer of commodities : or 
 on any previous transactions : and are not repayable in one sum 
 at a fixed date ; but are a continuous working account 
 
 All advances on Cash Credits are made exclusively in the 
 bank's own notes 
 
 18. In order to understand clearly the principles of the 
 system, it is only necessary to recur to our fundamental definition, 
 pr. concept : because a true fundamental definition, or concept, is 
 the polestar to guide, us through all difficulties and perplexities 
 
ON CASH CREDITS 345 
 
 It has been shown in the preceding chapters that the true 
 definition of Credit is the " Present Right, or the 
 Present Value, of a Future Profit : " and every future 
 Profit, from whatever source arising, or of whatsoever nature, has 
 a Present Value, which may be brought into commerce, and 
 may be bought and sold like any material chattel 
 
 It has been shown that the Land is an Economic Quantity, 
 which produces a continuous series of Profits : and that a Trader 
 exercising any profitable business is an Economic Quantity 
 analogous to land, as he produces a continuous series of profits 
 
 We have explained the system of Mercantile Credit : and 
 shown that its true limits are the future profits : that all Credit 
 is sound which is redeemed by the future profits : and that. Mer- 
 cantile Banking consists in buying the Present Values of these 
 Future Profits 
 
 Now, having argued from the Land to Commerce, let us 
 reverse the case, and argue from Commerce to Land 
 
 If every future Commercial Profit has a Present Value, which 
 can be brought into Commerce and exchanged, the same is equally 
 true of the Land. The Present Value of every future profit from 
 the Land may be equally brought into Commerce and exchanged. 
 And if the Credit be strictly limited to the future Profits of the 
 Land, Credit may, under certain conditions, be created in anti- 
 cipation of the future Profits from the Land, as safely as in 
 anticipation of the future Profits from Commerce 
 
 Cash Credits are are applied in two different ways : (1). To 
 aid private persons in different ways : (2). To promote agriculture 
 and all public works 
 
 Cash. Credits granted mi. aid of Persons 
 
 19. Every man in business, however humble, or however 
 extensive, must necessarily keep a certain portion of ready money 
 by him, to answer immediate demands for small daily expenses, 
 wages, and other things. This could, of course, be much more 
 profitably employed in his business, where it might produce a 
 profit of fifteen to twenty per cent., instead of lying idle. But, 
 unless the trader knew that he could command it at a moment's 
 notice, he would always be obliged to keep a certain portion of 
 
346 THEORY AND PRACTICE OF BANKING 
 
 ready money iu his own till, or be must Ije able to command the 
 use of some one's else till. Now, one object of a Cash Credit is to 
 supply this convenience to the trader, to enable him to invest 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, have occasion for 
 ready money from day to day, before they can get in payments 
 from their clients. It is a great bar to any young man to com- 
 mence the business of a solicitor without Capital, which must 
 either be his own, or furnished him by his friends. It is an 
 immense advantage to him and to them to have it supplied by a 
 bank, on a guarantee, a mere contingency, which they never 
 would give if they thought there was any danger of its being 
 enforced 
 
 These Credits are granted to all classes of society, to the poor 
 as freely as to the rich. Everything depends upon character. 
 Young men in the humblest walks of life begin by making a 
 trifle for themselves. This inspires their friends with confidence 
 in their steadiness and judgment, and they become sureties for 
 them on a Cash Credit. This is, in all respects, of equal value to 
 them as money, and thus they have the means placed within their 
 reach of rising to any extent that their abilities and industry per- 
 mit them. It is an undoubted fact, that multitudes of men who 
 have raised themselves to enormous wealth began life with nothing 
 but a Cash Credit. As one example among thousands, Mr. Mon- 
 teith, M.P., told the Comnaittee of the House of Commons, in 
 1826, that he was a manufacturer employing, at that time, four 
 thousand hands, and that except with the merest trifle of Capital 
 lent to him, and which he very soon paid off, he began the world 
 with nothing but a Cash Credit ! y 
 
 The banks usually limit their advances to a certain moderate 
 amount, varying from £100 to £1,000 in general, and they always 
 take several sureties in each case — never less than two — and fre- 
 quently many more, to cover any possible losses that might arise. 
 These cautioners, as they are termed in Scotch law, keep a watch^ 
 
ON CASH CREDITS 347 
 
 ful eye on the proceedings of the customer, and have always the 
 right of inspecting his account with the bank, and of stopping 
 it at any time, if irregular. These Credits are not meant to 
 degenerate into dead loans, but they are required to be constantly 
 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 effects, therefore, were exactly the same as 
 if there had been 1,000 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 country 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. Now, the 
 whole of these gigantic operations were transacted by creations of 
 pure Credit. At that time it was conjectured that there were 
 about twelve thousand Cash Credits guaranteed to pereons in 
 Scotland, and that there were about forty thousand persons as 
 sureties, who were interested in the integrity, prudence, and suc- 
 cess of the others. The witnesses before the Lords declared that 
 the effects of these were most remarkable on the morals of the 
 people 
 
 On Cash Credits granted to promote Agriculture, and 
 the Formation of Public Works 
 
 20. Every one having access to the arcana of the different 
 banks must be aware of countless numbers of persons whose rise 
 in life has been entirely due to the system of Cash Credits. But 
 we have now to consider their effects, as more visible to the public 
 eye— the way in which they have been applied to promote Agri- 
 culture, and the formation of all Public "Works 
 
 When, about the middle of the eighteenth century, the energies 
 of the Scotch were first directed to agricultural industry and com- 
 merce, there were, in every part of Scotland, large tracts of 
 reclaimable land, and abundance of people, but they remained 
 
3^8 THEORY AND PRACTICE OF BANKING 
 
 unemployed, because there was no Money to set tlieir industry in 
 motion 
 
 Now, suppose that a proprietor of some of these tracts of land 
 had had £10,000 in money : and that he had employed it in 
 paying wages to labourers to reclaim the land, buying seed to sow: 
 then, in course of time, the value of the produce of the laud would 
 replace the money expended in bringing the land into cultivation,' 
 with a profit. Then the money so employed would have been 
 used as Capital 
 
 But at that time there was, comparatively speaking, no money 
 in the country : but the Banks, having by this time habituated 
 the people to receive their £1 Notes in all respects as money, 
 threw out branches in all directions, and sent down boxes of their 
 £1 Notes 
 
 Farmers, at that time, had no votes in Scotland : consequently, 
 the landlords had no motives to keep their tenants in political 
 dependence, as was too much the case in England. They adopted 
 the best means possible to develope the resources of the soil. And 
 as it was not to be expected that farmers should lay out their 
 industry and capital without security of tenure, it became almost 
 universal in Scotland for the tenants to receive nineteen years 
 leases ; and, in many cases, much longer than that. Upon the 
 security of these leases, and also upon that of personal friends, the 
 Banks granted Cash Credits to the farmers : tlie advances being 
 made entirely in their own £1 Notes. From the strong constitu- 
 tion of the Banks their Notes were universally received as Cash : 
 and though they were demandable in Cash at the Head OflBce, no 
 one ever dreamt of dem-anding payment of them. With these £1 
 Notes the farmers employed the labourers in reclaiming the land, 
 and sowed the crops. The notes were employed in exactly the 
 same way as money would have been : and they produced exactly 
 the same effects as money would have done. The land was 
 reclaimed and sown and stocked : and, in a few years, bleak and 
 barren moors were everywhere changed into fields of waving corn: 
 and they produced a continuous series of profits. With the value 
 of the produce the farmers gradually repaid the loans, and reaped 
 a profit 
 
 Now if it be admitted that Money expended in agricultural 
 improvements is Productive Capital, it must be equally admitted 
 
ON CASH CREDITS 349 
 
 that Credit employed in the same way, which produces the same 
 effects as Money, is also Productive Capital. The only difference 
 being that in using Money, the employer makes Capital of 
 the Accumulated Profits of the Past : in using Credit, 
 he makes Capital of the Anticipated Profits of the 
 Future 
 
 Every one acquainted with Scotland knows that the prodigious 
 progress in agriculture made during the last 130 years, has been 
 almost entirely effected by means of these Cash Credits 
 
 21. Not only has almost the entire progress in agriculture 
 been effected by these Cash Credits, but all public works, of every 
 description — Roads, Canals, Docks, Harbours, Railways, Public 
 Buildings, &c., have also been made by means of these Cash Credits. 
 It was stated to the Committee of the House of Commons, in 
 1826, that the Forth and Clyde Canal was executed by means of a 
 Cash Credit of £40,000, granted by the Royal Bank. So, Docks, 
 Harbours, Railways, &c., are all made exactly in the same way. 
 When the Directors have got their Act they obtain a Cash Credit 
 at a bank which supplies the necessary funds in its own £1 Notes : 
 and the debt is paid off by the profits of the work 
 
 23. It is thus seen how Credit is applied to the formation of 
 New products equally well as to the Transfer of existing 
 ones. Credit is Purchasing Power equally as Money : and it may 
 be applied to the purchase of Labour to form New products 
 equally as well as to Transfer existing ones. The principle of 
 the Limit, however, is exactly the same in both cases : namely, 
 the Present Value of the Future Product 
 
 Thus it is seen that Credit may be used as Productive Capital 
 exactly in the same way and in the same sense that Money is 
 
 All these marvellous results, which have raised Scotland from 
 ±he lowest depths of bajrbarism up to her present proud position, 
 in the space of 170 years, are the children of pure Credit. It 
 is no exaggeration, but .a melancholy truth, that, at the period of 
 the revolution, in 1688, and the establishment of the Bank of 
 Scotland, that country, partly owing to such a series of disasters 
 as cannot be paralleled in the history of any other independent 
 
350 THEORY AND PRACTICE OF BANKING 
 
 nation ; and partly owing to its position at the very outskirts of 
 civilisation, and far removed from the humanising influences of 
 commerce ; divided into two nations, aliens in blood and language, 
 was the most utterly barbarous and lawless country in Europe. 
 And it is equally undeniable that the two great causes oi, her 
 rapid rise in civilisation and wealth have been her systems of 
 National Education and Banking 
 
 Her system of Banking has been of infinitely gx'eater service 
 to her than mines of gold and silver. Her banking system has 
 tended immensely to call forth every manly virtue : mines of the 
 precious metals would, probably, have demoralised her people. In 
 the Character of her own people, in their steadiness, their 
 industry, and their honour, Scotland has found "Wealth infir 
 nitely more beneficial to her than all 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 when they had performed their functions, vanishing 
 again into the Nothing from whence they sprang. And has 
 not this Credit been Capital P "Will any one, with these 
 results staring the world in the face, believe that it is maintained 
 by writers who are still supposed to be Economists, that the effects 
 of Credit are purely imaginary ! That Credit conduces nothing to 
 Production, and the increase of Wealth ! That Credit only 
 transfers existing Capital. But even if it did no more than that, 
 it has been shown that Circulation, or Transfer, is ad- 
 mitted by all Economists to be one form of Production. And 
 that those persons who say that Credit is Capital, are such puzzle- 
 headed dolts as to think that the same thing can be in two places 
 at once ! 
 
 Now, it must be carefully observed, that all these Cash Credit? 
 are for a distinct purpose, quite different from the discount of 
 Commercial Paper. The marvellous results they have produced 
 are due to Accommodation Paper. They are not founded 
 upon any previous transaction : nor upon the transfer of existing 
 commodities. They are created for the express purpose of forming 
 New products, which, but for them, would either have had no 
 existence at all : or, at all events, would have been deferred for a 
 very long period, mitil solid money could have been accumulated 
 
ON LAND BANKS 351 
 
 to produce them. The inTention of Cash Credits has advanced 
 the wealth of Scotland by centuries. Thus we have an enormous 
 mass of Exchangeable Property created out of Nothing by the 
 mere will of the bank and its customers, which produces all tlie 
 solid effects of gold and silver : and, when it has done its work, 
 it vanishes again into Nothing, at the will of the same persons 
 who called it into existence. Hence we see that the mere will of 
 man has created vast masses of Wealth out of Nothing : 
 and then, having served their purpose, they were Decreated 
 into Nothing : which are — 
 
 " Melted into air, into thja'aix " 
 
 But their solid results have by no means faded — 
 
 " Like the baseless fabric of a vision, 
 Leaving not a wreck behind " 
 
 On the contrary, their solid results have been vast tracts of barren 
 moor converted into fields of waving corn ; the manufactures of 
 Glasgow, Dundee, and Paisley ; the unrivaled steamships of the 
 Clyde ; great public works, of all sorts; roads ; canals ; bridges ; 
 harbours ; docks ; railroads : and poor young men converted into 
 princely merchants 
 
 What the Nile is to Egypt that has her Banking system been 
 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 : that no increase of 
 money can be of any use to a country : and before Mill had pro- 
 claimed to the world that to create Credit in excess of Specie is 
 robbery ! 
 
 On Banks of Credit Fongier : or Land Banks 
 
 23. At the close, of the seven years' war, in 1756, the 
 proprietors in Silesia found themselves in a state of inextricable 
 embarrassment. The ruin and destruction caused by the war, 
 and the low price of corn, caused by the general distress, made 
 them unable to meet their engagements. Interest and commission 
 rose to thirteen per cent. They obtained a respite of three years 
 to pay their debts. To alleviate the distress arising out of this 
 
352 THEORY AND PRACTICE QF BANKING 
 
 state of matters, a Berlin riierchaut, named' Biiring, invented a 
 system of Land Credit, which has been very extensively adopted 
 in Germany, Eussia, Poland, and, lastly, in France 
 
 Proprietors of laud can, no doubt, borrow money on mortgage : 
 but, in every country, such transactions are attended with many 
 inconveniences. . They have many expensive formalities to un- 
 dergo, such as investigation of title, &c. Moreover, the diflftculties 
 and expense of transfer are usually very great ; as each purchaser 
 has to undergo the same labour and expense. If the debtor fails 
 to pay, the process of obtaining redress, or possession of the land, 
 is usually very troublesome and expensive. The consequence of 
 all these obstacles is, of course, to raise greatly the terms on which 
 money can be" borrowed on mortgage 
 
 The system of Government Funds suggested to Biiring the 
 idea of creating a similar species of Land Stock. The Govern- 
 ment could usually borrow much cheaper than the landlords, 
 because the title was sure and indisputable, and there was no 
 impediment to the negotiability of their Debts 
 
 Biiring, therefore, conceived the idea of substituting the joint 
 guarantee of all the proprietors for that of individuals : and 
 establishing a book in which this Land Stock should be registered, 
 and be made transferable : and the dividends paid exactly in the 
 same way as in the Public Funds. The Credit of the Association 
 was, therefore, always interposed between the lenders and the 
 borrowers. Those who bought the Stock looked only to the Asso- 
 ciation for the payment of their dividends ; and the borrower? 
 paid all interest to the Association, which took upon itself all 
 questions of title and security. The whole of these Obligations 
 are turned into Stock, transferable, in all respects, like the Public 
 Funds. Such is the general design of these Associations : they 
 avoid the rock of creating Paper Money: while they greatly 
 facilitate the application of Capital to the land. They, in fact, do 
 nothing more than turn Mortgages into Stock 
 
 These Associations are divided into two classes. The first are 
 private Associations : and these again are divided into Companies 
 formed by borrowers : and those formed by lenders. The second 
 are founded by the State, or the provincia,! authorities 
 
 The system was introduced into Silesia in 1770; the March of 
 Brandenburg in 1777; Pomerania in 1781 ; Hamburgh in 1782 ; 
 
ON LAND BANKS 353 
 
 West Prussia in 1787 ; East Prussia in 1788; Luneburg in 1791; 
 Esthonia and Livonia in 1803 ; Schleswick Holstein in 1811 ; 
 Mecklenburg in 1818 ; Posen in 1822 ; Poland in 1825 ; Kalon- 
 berg, Grubenhagen, and Hildesheim in 1826 ; Wurtemberg in 
 1827 ; Hesse Cassel in 1832 ; Westphalia in 1835 ; Gallicia in 
 1841 ; Hanover in 1842 ; Saxony in 1844 : and France in 1852 
 
 The fullest information respecting these banks is to be found 
 in a work by M. Josseau, from which these details are taken, and 
 to which we may refer the reader who wants full information on 
 the different constitutions of these Associations 
 
 All these Land Banks make advances to about one-half the 
 value of the land, in small bonds, chiefly varying from £5 to 
 £100, bearing interest from three-and-a-haK to four per cent, 
 transferable by indorsement or delivery : together with a small 
 sum to form a sinking fund to redeem the principal, and defray 
 the expenses of management 
 
 The holder of the bonds has, as security for their payment, 
 the whole Capital of the Company, and the lands specially mort- 
 gaged to them 
 
 The borrowers may pay either in money, or in the bonds of 
 the Company, which they may purchase from the public : thus 
 exhibiting another example of the universal doctrine that the 
 Release of a Debt is equivalent to a Payment in Money 
 
 These institutions have had the most marvelous effects in 
 developing the agriculture of the countries in which they have 
 been formed : exactly similar to the effects of Cash Credits in 
 Scotland 
 
 Their Obligations have maintained through all crises — mo- 
 netary, war, and revolutionary — a steadiness of value far beyond 
 any other public securities whatever, either Government or Com- 
 mercial. Josseau says, that in a population of 27,827,990, 
 the negotiable Lettres de Gage, or Pfandhriefe, amounted to 
 540,423,158 francs. In the revolutionary period of 1848, while 
 the Prussian funds fell to 69 : the shares of the Bank of Prussia 
 to 63 : and the shares in Railroads 30 to 90 per cent. : the Land 
 Bank bonds, producing 3^ per cent, interest, stood at 93 in 
 Silesia and Pomerania ; at 83 in West Prussia ; and at 96 in 
 . East Prussia 
 
 AA 
 
354 THEORY AND PRACTICE OF BANKING 
 
 On the Economical Effects of Banking 
 
 24. Having now given an exposition of the actual mechanism 
 of banking, we can observe its Economical effects 
 
 We observe, that the business of banking is to build up a 
 superstructure of Credit several times exceeding the basis of 
 bullion : and this Credit is intended to circulate and produce all 
 the effects of money 
 
 And every one who has understood the mechanism of banking, 
 has seen that it practically augments the Capital of the country. 
 Thus, John Law says, that the Bank of Scotland, on a basis of 
 £10,000 in money, were able to maintain £50,000 of their notes 
 in circulation ; which, he says, was in effect so much additional 
 money to the country. He also says — " The introduction of 
 Credit, by means of a bank, augments the quantity of money more 
 in one year than a prosperous commerce would do in ten " 
 
 So, Bishop Berkeley, after proposing many wise queries on 
 Money and Credit, says that a bank is a gold mine, and asks, 
 whether it be not the true philosopher's stone ? 
 
 So, Alexander Hamilton, the eminent financier of the United 
 States, when called upon to present a report on the expediency of 
 establishing a National Bank, says — 
 
 " The following are among the principal advantages of a 
 Bank : — 
 
 '' First : the Augmentation of the active or productive 
 
 capital of a country It is a well-established fact that banks 
 
 in good credit can circulate a far greater sum than the actual 
 
 quautnm of their Capital in gold and silver This faculty 
 
 is produced in various ways — 
 
 " (1) A great portion of the notes which are issued and pass 
 current as cash are indefinitely suspended in circulation, from the 
 confidence which each holder has that he can, at any moment, turn 
 them into gold and silver 
 
 " (2) Every loan which a bank makes is, in its first shape, a 
 Credit given to the borrower on its books, the amount of which it 
 stands ready to pay, either in its own notes, or gold or silver, at 
 his option. But, in a great number of cases, no actual payment 
 
 is made in either The same circumstances illustrate the 
 
 truth of the position that it is one of the properties of banks to 
 
ECONOMICAL EFFECTS OF BANKING 355 
 
 increase the active Capital of a country. This additional employ- 
 ment given to money, and the faculty of a bank to lend and 
 circulate a greater sum than the amount of coin, are to all the 
 purposes of trade and industry an absolute Increase of Capi- 
 tal. Purchases, and undertakings in general, can be carried on 
 by means of Bank Paper, or Credit, as effectually as by an equal 
 sum of gold and silver. And thus, by contributing to enlarge the 
 mass of industrious and commercial enterprises, banks become 
 nurseries of national wealth, — a consequence as satisfactorily 
 verified by experience as it is clearly deducible in theory " 
 
 So, J. B. Say says — " If Bills of Credit could replace com- 
 pletely metallic money, it is evident that a Bank of Circulation 
 veritably augments the sum of National Wealth, because, in this 
 case, the metallic wealth, becoming superfluous as an agent of 
 circulation, and nevertheless preserving its own value, becomes 
 disposable, and can serve other purposes. But how does this sub- 
 stitution take place ? What are its limits ? What classes of 
 society make their profit of this interest of the new fund added to 
 the Capital of the nation ? 
 
 " According as a bank issues its notes, and the public consents 
 to receive them on the same footing as metallic money, the 
 number of monetary units increases 
 
 " If, suppose, it issues one hundred millions of notes, it will 
 withdraw, perhaps, forty millions in specie, which it will put in 
 reserve to meet the payments which may be demanded of it. 
 Therefore, if it adds to the quantity of money in circulation, and 
 if it withdraws forty millions from circulation, it is as if it added 
 only sixty millions 
 
 " We now wish to learn what class of society enjoys the use of 
 
 this New Capital" 
 
 Say then goes on to explain how this New Capital is 
 employed, and who reaps the profit of it 
 
 Thus, it is seen, that all these writers, and many more might 
 be cited if necessary, recognise the fact that banking augments 
 the Capital of the country 
 
 Gilbart, also, says—" Bankers also employ their own Credit 
 as Capital. They issue Notes promising to pay the bearer on 
 demand. As long as the public are wiHing to take these Notes as 
 gold, they produce the same effects. The banker who makes 
 
 AA 2 
 
356 THEORY AND PRACTICE OF BANKING 
 
 advances to the agriculturist, the manufacturer, or the merchant, 
 in his own notes, stimulates as much the productive powers of the' 
 country, and provides employment for as many labourers, as if, by 
 means of the philosopher's stone, he MA created an equal amount 
 of solid gold. It is this feature of our banking system that has 
 been most frequently assailed. It has been called a system of 
 fictitious Credit— a raising the wind— a system of bubbles. Call 
 it what you please, we will not quarrel with names : but by what- 
 ever name you please to call it, it is a powerful instrument of 
 production. If it be a fictitious system, its effects are not ficti- 
 tious : for it leads to the feeding, the clothing, and the employing 
 of a numerous population. If it be a raising the wind, it is the 
 wind of commerce, that bears to distant markets the produce of 
 our soil, and wafts to our shores the productions of every climate. 
 If it be a system of bubbles, they are bubbles which, like those of 
 steam, move the mighty engines that promote a nation's greatness 
 and a nation's wealth " 
 
 Not many persons are aware, probably, of the immense con- 
 sequences produced by Banking. We have shown, elsewhere, that' 
 in countries where there is no Credit, and advances are made in 
 actual money, the usual rate of interest varies from eighteen 
 to thirty-six per cent. When the London goldsmiths took to 
 banking, the ordinary rate of interest was ten per cent. But 
 when the bankers found that they could maintain a large amount 
 of their Credit in circulation, which served the purposes of money, 
 they found, as it were, that their resources were multiplied : and, 
 consequently, they began to bid against each other : and, in a 
 very short time, the average rate of interest was reduced from ten 
 to three per cent. When the Bank of England was founded, 
 Exchequer Bills and other Government Securities, were at a dis- 
 count of about forty per cent. In a very short time the Bank 
 brought down the rate of Government Securities to three per cent.,' 
 at about which they have remained ever since 
 
 One of the consequences of this was to triple the value of 
 Land : which depends chiefly on the current average rate of 
 interest. When the rate of interest, in the time of Charles II., 
 was ten per cent., the land was worth only ten years' purchase : 
 but now that the current rate of interest is reduced to three per 
 cent., the common value of land is about thirty years' purchase 
 
COMMON NOTIONS ABOUT BANKING 357 
 
 It has been calculated by an eminent authority that the amount 
 of Banking Credits, or Deposits, in all the banks of the country, 
 is about £800,000,000, while the cash held in reserve is, probably] 
 not more than £80,000,000— if so much. These Banking Credits 
 are, for all practical purposes, the current coin of Commerce. 
 They affect prices, and have all the practical effects of so much 
 gold 
 
 If it were possible to trace the effects of Banking through all 
 their ramifications, which would not be suitable for this work, it 
 ■would be clearly seen how true is the saying of the great American 
 Jurist and Statesman, Daniel Webster — " Credit has done more, 
 a thousand times, to enrich nations, than all the mines of all the 
 world " 
 
 Contrast between the Common Notions about 
 Banking^, and the Reality 
 
 25. Having now given an exposition of the actual facts aud 
 mechanism of Banking, it will be as well to contrast the Common 
 Notions respecting it with the Reality 
 
 I. It is commonly supposed that Bankers are dealers only in 
 Money 
 
 The fact is, that Bankers are dealers in Credit 
 
 II. It is commonly supposed that Bankers act only as inter- 
 mediaries between persons who want to lend and those who want 
 to borrow 
 
 The fact is, that a Banker is a Trader, whose business is to 
 buy Money and Debts, by creating other Debts 
 
 III. It is commonly supposed that a Banker's profit consists 
 in the Difference between the interest he pays for the Money he 
 borrows, and the interest he charges for the Money he lends 
 
 The fact is, that a Banker's profits consist exclusively in the 
 profits he can make by creating and issuing Credit in excess of 
 the specie he holds in reserve 
 
 A bank which issues Credit only in exchange for Money, never 
 made, and can by no possibility make, profits. It only begins to 
 make profits when it creates and issues Credit in exchange for 
 Debts payable at a future time : which, according to Mill, is 
 robbery ! 
 
 *t 
 
358 THEORY AND PKACTICE OF BANKING 
 
 How Credit is Capital to a Banher 
 
 26. It is now seen how Credit is Capital to a Banker 
 For what is the Commodity a banker deals in ? He opens his 
 place of business, and has an array of clerks, with their desks, 
 ledgers, &c. He then gives notice that he is ready to buy gold 
 from any one who has it to sell. And what does he buy the gold 
 with ? His own Credit. He then gives notice that he is 
 ready to buy any good Commercial Debts that any one has got to 
 sell. And what does he buy them with ? Nothing but his own 
 Credit. And he charges exactly the same price for his Credit 
 as if it were Money. The only Commodity, then, which he has 
 to sell is his own Credit. And he makes a Profit by selling his 
 Credit, exactly as any other trader makes Profits by selling the 
 goods he deals in. Therefore, by the very definition, we have 
 shown that all Economists are agreed in, a banker's Credit is 
 his Capital. It is the Commodity he deals in, and by which 
 he makes a Profit. He has no other means of making a Profit 
 than by selling his Credit : and just by so much as he can 
 maintain his Credit in circulation over and above the Cash he 
 keeps in reserve, he increases his Profit, and he practically 
 increases the Capital of the country 
 
 Again, what are the Commodities which a " banker " buys to 
 make a Profit of ? They are Commercial Debts. Now, in the 
 former chapters it has been shown, over and over again, that all 
 Jurists term Debts — Merchandise, Goods and Chattels, Vendible 
 Commodities. Adam Smith expressly classes Bills of Exchange 
 under the term Circulating Capital : and under the term Cir- 
 culating Capital he classes all the goods in a shop which the trader 
 makes a Profit of by selling. Now the Bills in the portfolio of a 
 banker are exactly similar to the ordinary goods in the shop of a 
 trader. A trader makes profits by buying goods at a lower price 
 from one person, and selling them at a higher price to another. 
 So a "banker" buys a Commercial Debt at a lower price from 
 one person — namely, his own customer — and sells it at a higher 
 price to another— namely, to the acceptor, or debtor. Thus the 
 Debt the banker buys is increasing in Value every day from the 
 time he buys it until it is paid off. It, therefore, produces a Profit, 
 and is, therefore, Circulating Capital, just in the same way, and 
 
ON ACCOMMODATION BILLS 359 
 
 for the same reason, that the ordinary goods in any trader's shop 
 are 
 
 On Accommodation Bills 
 
 S7. We must now examine a species of Credit which requires 
 great attention, because it is the curse and the bane of commerce ; 
 and it has been the great cause of those frightful commercial 
 crises which seem periodically to recur : and yet, though there 
 can be no doubt that it is, in many cases, essentially fraudulent, 
 yet it is of so subtle a nature as to defy all powers of legislation 
 to cope with it 
 
 We have shown, by the exposition of the system of Cash 
 Credits, that there is nothing essentially dangerous and fraudulent 
 in creating a Credit for the purpose of promoting future operations. 
 On the contrary, such Credits have been one of the most powerful 
 methods ever devised by the ingenuity of man to promote the 
 prosperity of the country. A certain species of this Credit, how- 
 ever, having been grossly misused for fraudulent purposes, and 
 having produced great calamities, we must now examine wherein 
 the fraud and the danger of this particular form of Credit consist 
 
 When a Bill of Exchange is given in exchange for goods 
 actually purchased at the time, it is called a Eeal Bill, and it is 
 often supposed that there is something essentially safe in it, be- 
 cause, as the goods have been received for it, it is supposed that 
 they are always ready to provide for the payment of it : and that 
 only so much Credit is created as there are goods to redeem It 
 
 This, however, is a very great error, and it is manifest from 
 the description of the system of Credit already given, that it is 
 quite erroneous to suppose that the quantity of Credit can only 
 equal in amount the goods bought. A bill, it is true, only arises 
 out of the transfer of goods : but then a fresh bill is created at 
 each transfer. In the ordinary course of business, there will 
 always be, in general, at least twice as many bills created as there 
 are goods. If twenty transfers took place, twenty bills must be 
 created. And it is only the last holder of the goods who would 
 have them, and be enabled to devote the proceeds to the payment 
 of the last bill only. The other nineteen bills must evidently 
 depend upon other sources of payment 
 
360 THEORY AND PRACTICE OF BANKING 
 
 The security, therefore, which is supposed to reside in real 
 bills, on account of their being founded on the transfer of goods, 
 is shown to be, to a great extent, deceptive. Let us suppose, 
 however, that A. sees that a profitable transaction may be done. 
 The Bank, however, will not, as traders do, make him an advance 
 on his own name alone. It must have two names. A. therefore 
 goes to B., and gets him to accept a bill for his accommodation, 
 and this bill may be taken to the bank to be discounted like any 
 other bill : goods may be bought with the proceeds : and if the 
 transaction is successful, the bill will be redeemed in due course 
 
 Stated, therefore, in this way, there is nothing more objection- 
 able in such an Accommodation bill than in any Real bill. The 
 security is exactly the same in the one case as in the other. In 
 the one case, goods have ieen purchased which will pay the bill : 
 in the other case, goods are to be purchased, whose proceeds will 
 pay the bill. In fact, we may say, that all Commercial Credit is 
 of this nature, because, in this case, a Credit is created to purchase 
 the goods whose proceeds are to pay it 
 
 There is, therefore, clearly nothing in the nature of this species 
 of paper worse than the other, and, when carefully used, nothing 
 more dangerous. Cash Credits, which have been one of the most 
 profitable and safest parts of Scotch banking, and have done so 
 much for the prosperity of the country, are all of this nature. 
 They are created, as we have seen, for the express purpose of 
 stimulating future operations, out of which the Credit is to be 
 redeemed. There is, therefore, nothing more atrocious, criminal, 
 and vicious in one system than in the other : or, if there is, it 
 must lie in the difference between have hem and is to be 
 
 Nevertheless, as it is indubitably certain that most of those 
 terrible commercial crises, which have so frequently convulsed the 
 nation, have sprung out of this species of paper, it does merit a 
 very considerable portion of the obloquy and vituperation heaped 
 upon it.. It is, therefore, now our duty to investigate the method 
 in which it is applied, and to point out wherein its true danger 
 consists 
 
 The security supposed to reside in Real bills as such, is, as we 
 have seen, exaggerated. But there is, at least, this in them, that 
 as they only arise out of real transfers of goods, their number 
 must be limited by the nature of things. However bad and 
 
ON ACCOMMODATION BILLS 361 
 
 worthless they may be individnally, they cannot be multiplied 
 beyond a certain limit. There is, therefore, a limit to the cala- 
 mities they cause. But we shall show that with Accommodation 
 Paper the hmits of disaster are immensely and indefinitely ex- 
 tended, frequently involving in utter ruin all who are brought 
 within their vortex 
 
 Explanation of the Real Danger of Accommodation 
 
 Bills. {Quoted by Mr. Commissioner Holroyd, in Ms judg- 
 ment in re Lawrence, Mortimer, and Sclirader.—" Standard," 
 March 7, 1861) 
 
 28. "We must now explain wherein the difference between 
 Eeal and Accommodation Paper consists, and wherein the true 
 danger lies 
 
 Suppose that a manufacturer or wholesale dealer has sold 
 goods to ten customers, and received ten lona fide trade bills for 
 them. He discounts these ten bills with his banker. The ten 
 acceptors of the bills, having received value for them, are the 
 principal debtors to the bank ; and are bound to meet them at 
 maturity, under the penalty of commercial ruin. The bank has 
 not only, their names on the bills, but also that of its own customer 
 as security. It moreover keeps a certain balance of its customer's 
 in its hands, proportional to the amount of the discount allowed 
 
 Even under the best of circumstances an acceptor may fail to 
 meet his bill- The banker debits his customer's account with the 
 bill, and gives it to him back. If there should not be enough, 
 the customer is called upon to pay the difference. If the worst 
 comes to the worst, and its customer fails, the bank can pursue 
 its legal remedy against the estates of both parties, without in any 
 way affecting the position of the nine remaining acceptors, who, 
 of course, are still bound to meet their own bills 
 
 In the case of Accommodation Bills there are very material 
 differences. To the eye of the banker there is no visible difference 
 between Eeal and Accommodation Bills. They are, nevertheless, 
 veiy different : and it is in these differences that the danger 
 consists 
 
 In Accommodation Bills, the person for whose accommodation 
 the drawing, indorsing, or accepting is done, is bound to pirovide 
 
362 THEORY AND PEACTICE OF BANKING 
 
 the funds to meet the bill, or to indemnify the person who gives 
 his name. In a Real bill the Acceptor is the principal Debtof, 
 who is bound to meet the bill, and the Drawer is a mere surety. 
 In the most usual form of Accommodation Paper, that of an 
 Acceptance, the Drawer is the real principal Debtor, who has to 
 provide funds to meet the bill : the Acceptor is a mere surety : 
 and if he is called upon to meet the bill, he is entitled to sue the 
 principal debtor for the amount 
 
 Now suppose, as before, A. gets ten of his friends to accom- 
 modate him with their names, and discounts these bills with his 
 banker : it is A.'s duty to provide funds to meet every one of 
 these bills at maturity. There is, in fact, only one tfeal Principal 
 Debtor, and ten sureties. Now these ten accommodation acceptors 
 are ignorant of each other's proceedings. They only give their 
 names on the express understanding that they are not to be called 
 upon to meet their bills : 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 meet his own engagements : in the case of 
 accommodation paper, there is only one person to meet the 
 engagements of ten 
 
 Furthermore, if one of ten real acceptors fails to meet his 
 bill, the bank can safely press the drawer : but if the drawer of 
 the accommodation bill fails to meet any one of the ten accept- 
 ances, 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 own safety, press the acceptor, because he will, of 
 course, have immediate recourse against his debtor ; and the 
 whole will probably tumble down like a house of cards. Hence 
 the chances of disaster are much greater when there is only ofie 
 person to meet so many engagements, than when there are Bo 
 many, each bound to meet his own 
 
 The real danger to a bank, then, in being led into discounting 
 accommodation paper, is that the position of principal and safety 
 is reversed. They are deceived as to who the real debtor is> arid 
 who the real surety is : being precisely the reverse to what tMy 
 appear to be, which makes a very great difference in th« security 
 of the holder of the bills. To advance money by way of ca^ 
 
ON ACCOMMODATION BILLS 363 
 
 credit, or loan with security, is quite a different affair : because 
 the bank then knows exactly what it is doing : and as soon as 
 anything occurs amiss, it knows the remedy to be adopted. More- 
 over, it never permits the advance to exceed a certain definite 
 amount : but it never can tell to what length it may be inveigled 
 into discounting accommodation paper, until some commercial 
 reverse happens, when it may discover that its customer has been 
 carrying on some great speculative operation with capital borrowed 
 from it alone 
 
 On the Danger of Accommodation Paper to a Bank 
 
 29. We have now to explain how very much more dangerous 
 this species of paper is to a bank than the worst calamities which 
 can happen from real paper 
 
 We have already pointed out the very common error that Bills 
 of Exchange are paid in money. Bills are very rarely paid in 
 money : they are paid by discounting fresh bills. Thus, in ordi- 
 nary times, previous Debts are always paid by creating new Debts. 
 No doubt if the banker refuses to discount the customer must 
 meet his bills in money : but then no trader expects to do that. 
 He usually has a fixed discount limit ; and if he brings good bills, 
 he has little less than an absolute right to have them discounted : 
 and if the banker calls upon him to meet his bills in money, it 
 might oblige him to sell goods at a great sacrifice, or might cause 
 his ruin 
 
 However, it is always supposed that the bills discounted are 
 good ones : that is, they could be paid in money, if required. 
 Thus, though in common practice very few bills are really paid in 
 money, it is manifest that the whole stability of the bank depends 
 upon the last bills discounted being good ones 
 
 Now, suppose that for some time a customer brings good bills 
 to his banker, and acquires a good character, and thus throws the 
 banker off his guard. Owing, perhaps, to some temporary em- 
 barrassment, or wishing to push his speculations, he goes to some 
 of his friends and gets them to accept bills without having any 
 property to meet them. He then takes these accommodation bills 
 to the banker. The banker buys them by giving him a credit in 
 his books. In course of time these accommodation bills must be 
 
364 THEORY AND PEACTICE OF BANKING 
 
 met ; and the way he meets them is to create more similar bills. 
 The drawer may be speculating in trade, and losing money every 
 day, but his bills must be met : and there is no other way of doing 
 it than by constantly creating fresh bills to meet the former ones. 
 By this means the customer may extract indefinite sums from his 
 banker, and give him, in exchange, so many pieces of paper. Now 
 when discounts are low and times are prosperous, this system may 
 go on for many years. But at last a crisis comes. The money 
 market becomes " tight." Bankers not only raise the rate of dis- 
 count, but they refuse to discount as freely as before : they con- 
 tract their issues. The accommodation bills are in the bank, and 
 must be met. But if the banker refuses to discount fresh bills, 
 they must be met in money. But all the property which the 
 speculators may have had may have been lost twenty times over : 
 and so, when the crisis comes, they have nothing to convert into 
 money. Then comes the crash. Directly the banker refuses to 
 meet his customer's bills by means of his own money, he wakes to 
 the pleasant discovery that, in return for the money he has paid, 
 he has got so many pieces of paper ! 
 
 This is the r'ationale of accommodation paper : and we see how 
 entirely it differs from real paper. Because, with real paper and 
 bona fide customers, though losses may come, yet directly the loss 
 occurs, there is an end of it. But, with accommodation paper, 
 the prospect of a loss is the very cause of a greater one being 
 made : and so on, in an ever widening circle, until the canker 
 may eat into the banker's assets to almost any amount 
 
 It is also clear that if a trader, having got a good character, 
 may sometimes do so much mischief to a single banker, his capa- 
 city for mischief is vastly increased if, from a high position and 
 old standing, he is able to discount with several banks : for then 
 he is able to diminish greatly the chances of detection 
 
 30. In the case above mentioned, Laurence, Mortimer & Co. 
 were of very high position and of old standing in the commercial 
 world. They were leather and hide factors, and the house was of 
 above fifty years' standing. They bought hides on commission 
 for tanners, and sold leather, and had leather consigned to them 
 for sale. The hides were paid for by the tanners' acceptances of 
 the factors' di'afts at four months. In the course of business they 
 
ON ACCOMMODATION BILLS 365' 
 
 got connected with a considerable number of houses whicli were in 
 a state of insolvency. To support these houses, and to extend 
 their own operations, they entered into an enormous system of 
 Accommodation Paper. They were in the habit of advancing 
 money to their customers at five per cent., and then discounting 
 these bills at their bankers at three per cent., thus making two 
 per cent, by the transaction. "When their customers often lost 
 the money, the bills were renewed, or new ones created of arbitrary 
 amounts, to conceal the loss. The house had an agency in Liver- 
 pool, which pursued exactly the same course. They set up people 
 ostensibly in business, for the purpose of drawing on them. And 
 these " dummies " drew upon the house, and these cross acceptances 
 were afloat to a large amount. This will be sufficient to give an 
 idea of this complicated net-work of cross transactions between 
 the house and its satellites. In the meantime heavy losses were 
 sustained in their trade transactions, which were, in fact, extracted 
 out of the bankers by the fraudulent concoction of bills among 
 the losers. The high standing of the house enabled them to 
 entangle no less than twenty-nine banks and discount houses in 
 their meshes. At the time of the stoppage the London house had 
 liabilities of £820,000, of which £620,000 consisted of these 
 fraudulent bills. The Liverpool house had liabilities of £158,750, 
 out of which £130,000 were fraudulent. Such is one example of 
 the mischief worked by this nefarious system 
 
 A still more terrible example is the case of the Western Bank 
 of Scotland, which is fully detailed in a subsequent chapter, which 
 was in great part caused by the fraudulent proceedings of four 
 houses. The cases there detailed show to what a gigantic length 
 these proceedings were carried. The Macdonalds had bills dis- 
 counted to the amount of £408,716, drawn upon one hundred and 
 twenty-four acceptors, of whom at least seventy were men of straw, 
 who made it a regular trade to accept bills for a small commission. 
 In fact, they kept an agent in London for the express purpose of 
 procuring accommodation acceptances 
 
 From these accommodation bills to forged bills there is but 
 one step. It is but a thin line of division betM'een drawing upon 
 a man who is notoriously utterly unable to pay, and drawing upon 
 a person who does not exist at all, or forging an acceptance. In 
 practical morality, and in its practical effects, there is none. 
 
366 THEORY AND PRACTICE OE BANKING 
 
 Traders sometimes do not even take the trouble to get a beggar 
 to write his name on their bills, but they invent one. The case of 
 traders dealing with a number of small country connections affords 
 facilities for such practices. They begin . by establishing a good 
 character for their bills. Their business gradually increases. 
 Their connections gradually extend over all the Kingdom. The 
 banker, satisfied with the regularity of the account, cannot take 
 the trouble of sending down to inquire as to the acceptor of every 
 bill. The circle gradually enlarges, until some fine morning the 
 whole affair blows up. The ingenuity sometimes exercised by 
 traders in carrying out such a system is absolutely marvelous 
 
 It is in times of speculation in great commodities that Accom- 
 modation Paper is particularly rife. In a great failure of the 
 harvest, when large importations are required, and it is expected 
 that prices will rise very high, every corn merchant wants to be 
 able to purchase as much as possible. But if no sales have taken 
 place, there can be no real trade bills. They, therefore, proceed to 
 manufacture them in order to extract funds from bankers to 
 speculate with. ¥0 banker in his senses would actually advance 
 money for them to speculate with, with his eyes open. Never- 
 theless, they must have the funds from the bankers, and this they 
 do by means of cross acceptances, which they go and discount 
 with their bankers. They then, perhaps, buy a certain amount of 
 corn, or any other goods, and many bankers will discount their 
 bills, with the collateral security of the bill of lading. And this 
 they may repeat many times over, till the quantity of Credit 
 created is something astonishing. In the Crimean war there was 
 a great demand for shipping, and there was an enormous amount 
 of accommodation bills manufactured by the Liverpool ship- 
 owners, and discounted all over the kingdom. The results were 
 frightfully disastrous 
 
 The insurmountable objection, therefore, to this species of 
 Paper, is the dangerous and boundless facility it affords for raising 
 money for speculative purposes. And there is much reason to 
 fear that this pernicious system prevails to a much greater extent 
 than is generally supposed. The Legislature has imposed bounds 
 upon the issue of notes by banks, but there is much greater reason 
 that some attempt should be made to curb the extravagant mag- 
 nitude to which this detestable practice has been developed. The 
 
ON ACCOMMODATION BILLS 367 
 
 . Bank of England is strictly forbidden to issue a single £5 note 
 of accommodation paper, and is it to be tolerated that any set of 
 adventurers may set afloat many hundred thousand pounds worth 
 of their accommodation paper ? 
 
 To deal, however, legislatively with fictitious paper, is the most 
 perplexing commercial problem of the day. The difficulty consists 
 in determining what is really an Accommodation Bill. An Ac- 
 commodation Bill is defined to be a Bill to which the acceptor, 
 drawer, or indorser, as the case may be, has put his name, without 
 consideration, for the purpose of benefiting, or accommodating, 
 some other party, who is to provide for the bill when due, But 
 the whole difficulty turns upon the consideration. The considera- 
 tion may be of many sorts, and does not by any means denote a 
 sale of goods at the time. Moreover, a bill may be an Accom- 
 modation Bill at its creation, but if any consideration be given 
 during the period of its cuiTency, it ceases to be an Accommodation 
 Bill 
 
 Moreover, the consideration may be of many sorts. If A. 
 draws a biU upon B., who accepts it for A.'s accommodation, for 
 the express purpose of enabling him to go to a bank and get 
 money for it, that is a pure Accommodation Bill, and manifestly 
 fraudulent. But if B. draws an exactly similar bill at the same 
 time on A., and A. accepts it for the accommodation of B., then, 
 neither of the bills are Accommodation Bills 
 
 To an unlearned reader this may seem a very strange doctrine. 
 It is, nevertheless, firmly-established law. In Rolfe v. Caslon (2 
 H. Black., 571), A. and B., being desirous to accommodate each 
 other, each drew a bill upon the other, and accepted one in return, 
 the two bills being precisely alike in the date, sum of money, and 
 times of payment — neither party having any effects of the other 
 in his hand. The Court were clearly of opinion that the two bills 
 were mutual engagements, constituting on each part a Debt, the 
 one being a consideration of the other. This doctrine was repeated 
 and confirmed in Cowley, v., Bunlop (7 T. R., 565), where Grose, 
 J., said, the instant the bills were exchanged each was indebted to 
 the other in the sum which was the amount of their respective 
 acceptances, for the counter acceptances were a good consideration 
 to found a Debt upon either side respectively. In the case of a 
 single accommodation acceptance, said the learned jjidge, thesre: i^ 
 
368 THEORY AND PRACTICE OF BANKING 
 
 no debt to the acceptor ; the Debt accrues only by payment of 
 the money. The acceptor, qua, acceptor, can never be a creditor ; 
 his acceptance imports the admission of a debt from him tO' 
 another, and when he has paid as acceptor, if he paid for any other 
 person in consequence of any request from that other, he becomes 
 a creditor, not on the face of the bill, but by a contract collateral 
 to the bill. When two persons exchange acceptances, each becomes 
 the debtor of the other upon his accepted bills.' But when a man 
 accepts without consideration, he is never a creditor of the person 
 from whom he accepts, till he pays ; from that payment arises the 
 debt ; but when the acceptance was exchanged, the debt arises 
 from these acceptances. This doctrine was repeated and confii'med 
 in the subsequent cases — Rose v. Sims (1 B. & Ad., 521) ; and 
 Buckler v. Bultivant (3 East, 72) ; when it was adopted by the 
 whole Court of King's Bench 
 
 This doctrine shows how utterly hopeless it is to deal legis- 
 latively with Accommodation Paper. At least, they must be very 
 poor rogues indeed who cannot manufacture any amount of real 
 lona fide bills they please. Two ragamuffins, who neither possess 
 one sixpence in the world, have only to get a quire of paper — if 
 they can pay for it. One engages to pay £1,000 to the order of 
 the other. That would be an Accommodation Bill. But the 
 second then engages to pay £1,000 to the order of the first. 
 These are no longer Accommodation Bills : but given for a con- 
 sider ation. If two such bills are good, then two thousand, or any 
 larger number, are equally good. We suspect that bankers would 
 look askance at such paper, but Westminster Hall declares them 
 all to be good lona fide bills, given for a good consideration 
 
 Stated in the above form, no doubt the doctrine may appear 
 somewhat startling to some ; but when we consider the principle, 
 and not the accidental circumstance that the persons who may do 
 it are insolvent, the difiBculty disappears. For it is just what 
 happens every day in banking. It is by no means unusual for 
 the customer of a banker to ask him to discount his promissory 
 note. If the banker does so, and gives him a Deposit, or Credit, 
 or his own Notes, this is an exchange of securities. It'is precisely 
 the same in the other case. Supposing that the holders of these 
 bills are enabled to purchase goods with them, they may be paid 
 off at maturity : if they cannot do so, then the re-exchange of - 
 
CREDIT TRANSFORMED INTO CAPITAL 369 
 
 the securities is the mutual payment of each debt, precisely in 
 the same manner as when two bankers exchange notes ; or as 
 when a merchant pays his own acceptance to a banker in the 
 banker's notes. The two contracts are extinguished. However, 
 we must defer saying more on this subject until we come to the 
 Consideration of Bills of Exchange 
 
 On the Transformation of Temporary Credit into 
 Permanent Capital 
 
 81. We shall now give an example of the application of the 
 doctrine that the Release of a Debt is, in all cases, equivalent to 
 a Payment in Money, which may surprise our readers, and of 
 which we have not seen any notice elsewhere 
 
 When it is published to the world that the Bank of England 
 has a paid-up Capital of £14,000,000, and that the various Joint 
 Stock Banks have paid-up Capitals of a million and upwards, most 
 persons take it for granted that these banks have these sums paid 
 up in hard cash 
 
 Nevertheless, it is a profound error. Of course it is impossible 
 for any stranger to have an accurate idea as to how much of these 
 amounts was ever paid up in actual money : but it may probably 
 be said with safety that not one half of these amounts was ever 
 paid up in real money : and that at least one half of these vast 
 amounts of " Capital " was never anything more than the BanVs 
 own Credit turned into Capital 
 
 To explain this, we may observe that the first subscription of 
 the Bank of England was £1,200,000, paid, of course, in actual 
 money. It was advanced to Government, and the Bank was 
 allowed to issue an equal amount in Notes 
 
 In 1696 the bank stopped payment ; and its notes fell to a 
 discount of 20 per cent. In 1697, Parliament undertook the 
 restoration of Pubhc Credit : and it was determined to increase 
 the Capital of the Bank by £1,000,000. But >one of this was 
 paid up in actual money. Four-fifths were paid up in Exchequer 
 Tallies, and one-fifth in the bank's own Notes. In pursuance 
 of this Act, £800,000 were paid up in Exchequer Tallies, and 
 £200,000 in the bank's own depreciated Notes, which were taken 
 at their full value in cash. Thus, of its first increase of Capital, 
 
 BB 
 
370 THEORY AND PRACTICE OF BANKING 
 
 £■200,000 .of tihe Capital iconsisbed of a*s own depreciated 
 Nates. Am.6. the bank was aubhorised to issue an amonnt of 
 Notes lequal to the increase of Capital. And ^at every subsequent 
 increase of Capital, the subscribers might pay up in the bank's 
 own Notes, lOr in money, whiehever they rpleased : and the effect 
 was exactly the same : the amount was added -to the 'Ca/pital 
 
 The same thing was done in Scotland. In 1727, the Bank 
 of Scotland increased its Capital. The subscription was paid up 
 partly in the bank's own notes. An outcry was made against 
 this, but the Directors justly answered — " But the objectors do 
 not at aU consider this point, for the payments are many of them 
 made in specie : and Bank Notes are justly reckoned the same as 
 specie when paid in on a call of Stock, because, when paid in U 
 lessens the Demand on the Bank " 
 
 Here we see that the Directors clearly understood that the 
 Release of a Debt is, in aU respects, equivalent to the Payment of 
 Money. The bank had issued its Notes, and were, of course, 
 Debtors to the holders of them : these Debts were Negative 
 Quantities : when the Call was made, the subscriber might either 
 Pay Money or Belease the bank from its Debts. At 
 every increase of Capital the very same operation would be 
 repeated : payment in Money and in the bank's own Notes would 
 always be treated as exactly equivalent : and hence we see that at 
 every fresh increase of Capital, a certain quantity of the bank's 
 own Temporary Credit would be turned into Permanent 
 Capital 
 
 Thus we see that the Parliament of England and the Di- 
 rectors of the Bank of Scotland, who were, probably, equally 
 innocent of Algebra and Roman Law, simply from their owli 
 mercantile instinct treated the Release of a Debt as exactly equi- 
 valent to a Payment in Money 
 
 Banks, therefore, which issue Notes may increase their Capital 
 by receiving their own Notes in payment. But banks which do 
 not issue Notes may increase their Capital in exactly a similar 
 way. For if the customer of the bank wishes to subscribe to the 
 increase of Capital, he may -give the bank a cheque on his account. 
 This, of course, is equally a Release from a Debt, and an increase 
 of Capital 
 
 If the customer has not sufficient on his account to pay for 
 
CREDIT TRANSFORMED INTO CAPITAL 371 
 
 the Stock he wishes to buy, he may bring the Bank Bills to dis- 
 count. The Bank discounts these Bills by creating a Credit, or 
 Debt, in his favour ; which is a Negative Quantity, exactly like a 
 Bank Note. The customer then gives the bank a cheque on his 
 account — that is, he releases the bank from the Debt it has 
 created : and that Debt released, then becomes increase of Capital 
 
 This is the way in which the Capital of all Joint Stock Banks 
 is increased, and it may go on to any extent without any payment 
 in Money 
 
 In a precisely similar way, when great public loans are con- 
 tracted for, a very large portion of them is always created by 
 means of Credit. The customers of a Bank wish to subscribe to 
 a loan. They bring it a batch of bills to discount. They draw 
 cheques against the deposits created on the discount of these bills. 
 These cheques may be paid into the credit of the great contractors, 
 at their bankers, and transferred an indefinite number of times, 
 without ever being required to be discharged in money ; they 
 inay, in fact, be discharged by being cancelled against other 
 'Credits 
 
 BB 2 
 
372 THEORY AND PRACTICE OF BANKING 
 
 CHAPTER VII 
 THE THEORY OF BANKING DISCOUNT 
 
 1. Profits made by a Loan of Money are made in two ways — 
 
 (1) By advancing the complete sum, and waiting till the end 
 of the year for the Profit. This is termed Interest 
 
 (2) By retaining the Profit at the time of the advance, and 
 advancing the difference. This is termed Discount 
 
 But there are two ways of making Profit by Discount 
 
 1. According to 'the ordinary works on Algebra, the sum 
 advanced should be such a sum as improved at the given interest 
 should amount to the given sum at the end of the time 
 
 The sum so advanced is called the Present Value of the 
 given sum 
 
 This species of Discount is used in certain branches of 
 commerce : and it may be called Algebraical Discount 
 
 But this species of Discount is never used in Banking 
 
 2. In. Banking the full sum charged as Profit is deducted, 
 and the difference only is advanced : thus, if a Banker discounts 
 a Bill at 5 per cent. : he gives his customer a Credit for £95, and 
 receives £100 at the end of the year 
 
 The Profits made by Interest and Algebraical Discount are 
 identical 
 
 But the Discount used in Banking is evidently more profitable 
 than Interest and Algebraical Discount: because the Banker 
 receives a profit of £5 on the advance of only £95 instead of 
 £100 
 
 So long as the rates are low there is not much difference : but 
 as these increase, the difference increases at a very rapid ratio : as 
 may easily be seen 
 
 If a person lends £100 at 20 per cent. Interest, he advances 
 £100, and at the end of the year he receives £120 : which is a 
 Profit of 20 per cent. : if he discounts a Bill for £100 at 20 per 
 cent., he advances only £80, and at the end of the year he receives 
 £100 : which is a Profit of 25 per cent. 
 
ON BANKING DISCOUNT 373 
 
 If he lends £100 at 50 per cent, interest, he advances £100 : 
 and at the end of the year he receives £150 : or his Profit is 
 50 per cent. 
 
 If he discounts a Bill at 50 per cent., he advances only £50, 
 and at the end of the year he receives £100 : i.e., he makes Profit 
 at the rate of 100 per cent. 
 
 So, discounting a Bill at 60 per cent., is Profit at 150 per 
 cent. 
 
 If a person lends £100 at 100 per cent. Interest he advances 
 £100, and at the end of the year he receives £200 : or his Profit 
 is 100 per cent. 
 
 If a person discounted a Bill at £100 per cent?; he would 
 advance Nothing : and at the end of the year he would receive 
 £100 : or his Profits would be Infinite 
 
 On Banking Discount 
 
 2, It is somewhat strange that this kind of Discount is 
 entirely . overlooked by Algebraists. We shall now trace the 
 relation, between Profits made by Interest and Banking 
 Discount : as this kmd of Discount may be termed 
 
 To find the Amount of a given Sum in any time at Simple 
 Banldng Discount 
 
 Let P = Principal Sum in £ 
 
 r = Rate of Interest on £1 for 1 Year 
 D = Discount on t 
 n = Number of Years 
 M = Amount of Principal and Discount 
 Then r? = Interest on P£ for 1 Year 
 and P — rP = Sum actually advanced = P (1 — »') 
 
 Let / = Profit by way of Banking Discount on each 
 £ of sum actually advanced 
 
 Then 
 
 / P 
 
 r/""P (1 — r) 
 
 .r = 
 
 r r 
 
 ■ : also r = ■ 
 
 1 — r 1 + «■ 
 
374 
 
 THEORY AND PRACTICE OF BANKING 
 
 Which is the relation which Banking Discount bears to In- 
 terest : and all Problems in Banking Discount may be solved by 
 
 substituting 
 
 and Compound 
 
 for r in the Problems in Interest, both Simple 
 
 Now, D = r'P =P £^3^ 
 M = P + D 
 
 n ' + f^.) 
 
 In n Years we have 
 
 D = P 
 
 nr 
 
 (a) 
 
 andM 
 
 = P + D_P(I + ^,) 
 
 «■ 
 
 These two Equations will; enable, us ^tp solve any question in the 
 subject 
 
 3. Adopting the Pormute for calculating Interest and' 
 Banking Discount, we have the following 
 
 Table showing the Profits per cent, and per annum at Interest 
 and BanJcing Discount 
 
 Interest 
 
 Discount 
 
 Interest 
 
 DiscoTiztt 
 
 , Interest 
 
 Disconnt 
 
 1 
 
 1-010101 
 
 6 
 
 6-382968 
 
 20 
 
 25- 
 
 u 
 
 1-522832 
 
 61 
 
 6-951871 
 
 30 
 
 42-857142 
 
 2 
 
 2-040816 
 
 7 
 
 7-526881 
 
 40 
 
 66-666666 
 
 2i 
 
 2-564102 
 
 7* 
 
 8-108108 
 
 50 
 
 100- 
 
 3 
 
 3-092783 
 
 8 
 
 8-695652 
 
 60 
 
 1,50-, 
 
 3i 
 
 3-626943 
 
 81 
 
 9-311475 
 
 ' 70 
 
 233-333333 
 
 4 
 
 4-166666 
 
 9 
 
 9-890109 
 
 80 
 
 400- 
 
 4^ 
 
 4-701570 
 
 91 
 
 10-496132 
 
 90 
 
 900- 
 
 5 
 
 5-263157 
 
 10 
 
 11-111111 
 
 100 
 
 Infinite 
 
 5i 
 
 5-820105 
 
 15 
 
 18-823529 
 
 — 
 
 — 
 
 A consideration of this Table wiU show how Bankers' profits 
 increase when Discount becomes high ; and also what discounting 
 a Bill at 50 and 60 per cent, (which we o.ccasiofially hear of in 
 Courts of Law) means 
 
PROBLEMS 
 
 375 
 
 To find in what Time a Sum of Money will douUe itself 
 at Simple Banking Discount 
 
 4. The General Formula is — 
 
 Let M = 2P 
 .-. P = P^ 
 
 or n =^ 
 
 nr 
 1 — r 
 1 — r 
 
 Let r = b per cent. = ^V 
 .• ■ n ^ — -Y — = 19 years 
 
 Hence a sum of money will double- itself 
 
 At 5 per cent. Simple 'Interest in 20 years 
 Discount in 19 „ 
 
 6. The Difference in Profit ini trading by Interest and 
 Discount being connected by this relation, may be exhibited by 
 either of the following figures 
 
 Let AB represent the given sum 
 Be the amount of Interest 
 
 Be' 
 
 Discount 
 
376 
 
 Then, 
 
 THEORY AND PEACTICE OF BANK IKG 
 
 and 
 
 • . r = Tan a 
 a = Tan -V 
 
 . • . a' = Tan 
 a == Tan 
 
 AB 
 
 r' = Tan a' 
 a' = Tan -V 
 
 1 — r 
 
 -1 r' 
 1 ■+ r' 
 
 Hence, if either of the Quantities be given on the line Be, a 
 portion representing the other may be found 
 
 Second method — 
 
 Then 
 
 Let A be the origin 
 AB any given sum, a 
 AC = amount of Profit = x 
 CY = «/ = Profit at Interest 
 CY' = i/ = Banking Discount 
 
PEOBLEMS ^ 377 
 
 For Interest we have in all cases 
 
 y = x 
 The Equation to a straight line passing through the origin at an 
 angle of 45° 
 
 For Banking Discount, 
 
 if r 
 
 V 
 
 
 1 
 
 — r 
 
 X 
 
 
 
 
 a 
 
 
 
 X 
 
 
 X 
 
 
 a — X 
 
 1 - 
 
 a 
 
 
 
 
 yx 
 
 
 X- 
 
 ■ '■y 
 
 ■^ a — X a — X 
 The Equation to a Hyperlola 
 
 When X = 0, y ^ Q : when x^ a,y' = aa : as it should be 
 
 To find the Amount of a given Sum in any Time at 
 GmniMunA Banking Discount 
 
 6. Let R denote the amount of £1 with its Interest for 
 one year 
 
 = 1 + '• 
 Let R' = amount of £1 with its Discount for one year 
 
 r 1 
 
 = 1 + r' = 1 + 
 
 1 — r 
 
 Then PE' = amount of P in One year 
 
 The amount of PE' in one year is PE'E' = PE'^ 
 
 ..-. PE'2 = amount of P in two years at Comp. Discount 
 so PE'^ = amount three „ „ „ 
 
 and PE'" = „ „ n „ „ „ 
 
 .: M = PE'» = P (l + r')" = P( 1 + ~-)« = P {l~y 
 ■ ■^— E'" 
 
378 THEORY AND PBACJTCE OF BANKING 
 
 Lc^ M — liOg. E 
 ^= LogR' 
 
 The Profits gained in n years =: M — P 
 
 = P ( E'"— 1 ) 
 
 To find in what Time a Sum of Money will double itself at 
 Gornpound Banking, Discount 
 
 7. We have M = PE'" 
 
 Let M = 2P 
 
 .•.2 = E' 
 
 _ Log 2 
 •■■'*-L5g^ 
 
 Log 2 
 
 Log (i + n^J 
 
 Let r = 5 per cent, per ann. = 5c 
 
 Log 2 
 
 .•.« = Log(l + _A_) 
 
 Log 2 
 = Log ( 1 + T^ ) 
 
 Log 
 
 = Log 20 — Log 19 
 ■3010300 
 
 = 1-1301030 — 1-2787&34: , 
 = 13-51 . . years: 
 
 Hence a sum of Money will double itself at 5. per cent, :— 
 At Simple Interest in 20 years 
 
 Discount 19 „ 
 
 Compound Interest 14-206609 years 
 ,, „ Discount 13-51 
 
PROBLEMS 379 
 
 8. The formulse for the Amount of a Sum in any given Time 
 at Simple Interest and Banking Discount : and Compound Interest 
 and Banking Discount are — 
 
 At Siniple Interest M = P T 1 + nr ) 
 
 Discount M = P ( 1 + ^-^ ) 
 At Compound Interest M- = P ( 1 + r j" 
 
 Discount 
 
 M:=B(l+T7^)=7r 
 
 P 
 
 (1-r)" 
 
 These four formulae will enable us to solve any Problems in 
 the subject 
 
 To find the Difference in Profit at the, end of the Year between 
 discounting one Bill for- £1,000 at twelve months, and dis- 
 counting four Bills of £1,000 at three months iti succession, 
 at 5 per cent. Compound Discount 
 
 9. M = PR' = P ( 1 + r' ) 
 
 Here r ^ 5 per cent. = tV 
 
 .■.m = p(i + j4t) 
 
 = P ( 1 + tV ) 
 
 = £1,000 ( 1 + -052631 ) 
 = £1052-631 
 
 For four Bills at 3 months we have— 
 
 M=p(i + -^ y 
 
 = p(l + iT^J 
 
380 THEORY AND PKACTICE OF BANKING 
 
 = P(l + iTVy=P (1+^)* 
 
 = P (1-013157V 
 
 = £1,000 (105367 . . by Logs) 
 
 = £1053-67 
 
 To find the Profit on discounting at more frequent intervals 
 than a year 
 
 r' 
 10. Suppose the interval is six months, then ^will be the 
 
 Discount of £1 for | year 
 
 At Compound Discount the amount of P in n years is 
 
 1 + -H" ) : because the amount is the same as if the number 
 
 r' 
 of years Were 2?j and the Discount -5- on £1 for one year 
 
 So for four months, or three intervals, the amount is — 
 For three months — 
 
 p(i+ir 
 
THE FOREIGN EXCHANGES 381 
 
 CHAPTER VIII 
 ON THE FOREIGN EXCHANaES 
 
 Definitwn of an Exchange 
 
 1. An " Exchange " in commerce is when a person pays 
 his Creditor by transferring to him a Debt due to him from some 
 one else 
 
 Thus, where a person pays a Debt by means of a Bank Note, 
 or a Cheque on his Banker, it is an " Exchange." It is an 
 example of Novatw or Dehgatio in Roman Law 
 
 Two passengers are travelling in an omnibus. The fare is 
 sixpence. One passenger pays the conductor a shilling. The 
 conductor is then indebted to that passenger in sixpence. Another 
 passenger has a sixpence in his hand ready to pay his fare. The 
 conductor, by a nod, tells him to give the sixpence to the first 
 passenger. Thus both Debts are paid. The Debt of the second 
 passenger to the conductor, and also the Debt of the conductor to 
 the first passenger, are both paid by the second passenger paying 
 the sixpence to the first passenger. The whole transaction is an 
 " Exchange " 
 
 Three parties and two Debts are thus necessary to an " Ex- 
 change " 
 
 The " Exchanges " is that branch of commerce which treats of 
 .the remission and settlement of Debts between parties living in 
 -different places by means of Paper Documents, and the Exchange 
 of the Money of one country for that of another 
 
 The state of the Exchanges between any two places or countries 
 depends upon two distinct things : — 
 
 1. The state of the Moneys of the two places 
 
 2. The state of Commercial dealings between the two places 
 The state of the Exchanges, which depends upon the state 
 
382 THEORY AND PEACtlCE OF BANKING 
 
 of the Moneys of tlie two places, is termed the Nominal 
 Exchange 
 
 The state of the Exchanges which depends upon the Com- 
 mercial dealings between the two countries is termed the B,eal 
 or the Commercial Exchange 
 
 On the Nominal Exchange 
 
 S, Suppose that the Coinages of two countries are of the 
 same metal, and the Coinage of one country is taken as the 
 standard : then the Quantity of the Coin of the other which 
 contains exactly the same quantity of pure metal is called the 
 Pal" of Exchange between the two countries 
 
 Suppose that the Exchanges between England and France 
 were estimated in Gold. There is as near as possible one- 
 fourth more pare Gold in an English sovereign than in a 
 Napoleon or the French 20 franc piece 
 
 If the English sovereign were taken as the standard, it woulA 
 be equal to 1'25 Napoleon: and 1"25 would be termed the Par 
 of Exchan'ge between England and France 
 
 The Exchanges between England and France are, however, 
 estimated in francs, which are a silver coin. Moreover, the 
 English sovereigii is not exactly 1'25 Napoleon : acoordingly 
 25'21 (francs) is usually considered as the Par of Exchangfe 
 between England and France 
 
 Effect of a Depreciated Coinage 
 
 3. We have observed in a former oha,pter that Coiiis may 
 circulate at par in their own country at their full nominal valtie 
 after they have lost a considerable amount of their weight by 
 wear and tear, because persons in ggneral are not very rigorous 
 in weighing every Coin they receive 
 
 But when- they are exchanged for Bullion, or for the Coins 
 of a foreign country, they are always weighed and exchanged 
 weight for weight. If, therefore, from any reason whatever, the 
 English coins have become degraded, worn, or clipped, and so 
 lost their proper weight for any reason, they will evidently not 
 buy so much bullion or full -weighted francs as if they were of 
 
ON A DEPRECIATED COINAGE 383 
 
 their fell legal weight. If English sovereigns were in this 
 Depreciated state they might perhaps only -purchase 24 francs 
 instead of 25-21. This would be called a Fall in the Foreign 
 Exchanges 
 
 Or if an English merchant were obliged to pay a Debt of 
 2,521 francs in Paris, he would have to give more than £100 to 
 purchase them. This would be called a Rise in the Foreign 
 Exchanges: and the Exchange would be said to be so much 
 against England by the amount of the difference 
 
 When English Coin is used to buy French Coins, it may be 
 looked at in two points of view — 
 
 1. A Fixed amount of English Coin may buy a certain 
 amount of Foreign Coin 
 
 2. A certain amount of English Coin may be required to 
 buy a Fixed amount of French Coin 
 
 In the first point of view, a Fixed amount of Depreciated 
 English Coin will buy a Less amount of French Coin 
 
 In the second point of view, it will require a Greater 
 amount of Depreciated English Coins to buy a Fixed amount of 
 French Coins 
 
 Hence, when a Depreciated Coinage is said to produce a Fall 
 in the Foreign Exchanges, it means that a Given Amount of 
 Home Coinage will purchase a Less Amount of Foreign Coin 
 
 When a Depreciated Coinage is said to produce a Kise in 
 the Foreign JExchanges, it means that it requires a Greater 
 Amount of Home Coinage to purchase a Fixed Amount of Foreign 
 Coin 
 
 A clear understanding of these expressions will prevent any 
 confusion arising when they are used indiscriminately, as they 
 often are, in discussions on the Exchanges : they are not con- 
 tradictory, as they might appear to be : they only refer to two 
 different methods of estima,ting the Coinage 
 
 It is evident that this adverse state of the Exchanges will 
 Continue as long as the Depreciation of the Home Coinage 
 ■exists :. and that a restoration of the Home Coinage to its proper 
 state will at once rectify the Exchanges 
 
 It is evident that a Depreciation of the Coinage by a Debase- 
 ment of its Purity will produce exactly the same effects 
 
384 THEORY AND PRACTICE OF BANKING 
 
 There can he no Par of Exchange letween countries 
 which use Different Metals as their Legal Standard 
 
 4. There can only be a Par of Exchange between two 
 countries when they both use the same Metal as their Legal 
 Standard 
 
 There can be no true Par of Exchange between countries 
 which use different Metals, such as Gold and Silver, as their 
 Legal standard. The relative Market Value of the two Metals 
 is always varying, from causes entirely beyond the control of any 
 law. It is no more possible to have a fixed price of one in terms 
 of the other than it is to have a fixed legal price for corn or for 
 any other commodity 
 
 In the year 1797, when the Bank of England stopped pay- 
 ment, the House of Lords appointed a Committee to investigate 
 the subject. The Committee among other things wished to 
 ascertain the Par of Exchange between London and Hamburg, 
 and they examined several merchants on the subject. But they 
 were quite unable to agree among themselves what the true Par 
 of Exchange between the two places was : and the Committee 
 reported that they were unable to come to a satisfactory con- 
 clusion on the subject. There cannot in the nature of things be 
 any fixed or true Par of Exchange between England and any 
 country which uses a silver standard. It is only possible to say 
 that such is the usual Rate of Exchange between them. Hence, 
 when it is said that 25"21 francs is the Par of Exchange between 
 England and France, it means that it is usually reckoned the 
 Bate of Exchange, at the present market values of Gold and 
 Silver : and even the best authorities differ by several centimes 
 in their estimate. And between such countries it is sometimes 
 impossible to decide certainly which way the Exchange is unless 
 the difference exceeds a certain amount 
 
 If the Coinage is in a Depreciated State, to Determine 
 whether the Exchange is Favourable, at Par, or 
 Adverse 
 
 5. Suppose that at any time when the English Coinage is 
 
A DEPRECIATED COINAGE 385 
 
 •at its full legal weight, £100 ia sovereigns will purchase 2,521 
 French silver francs 
 
 Suppose that the Coinage becomes Depreciated so that the 
 Market Price of Bullion rises to £4 3s. 
 
 Then the Market Price of £100 in full weighted Coin is 
 £106 lis. 7^d. 
 
 Suppose the Exchange on Paris is at 23-80 : or that £100 will 
 purchase 2,380 francs : then £106 Us. 7^d. will purchase 2536-63 
 francs 
 
 But as the Par at the Mint Price is 2,521 francs, it is evident 
 that the Difference between 2,521 francs and 2536-C3 francs is 
 the extent to which the Real Exchange is in favour of England. 
 Therefore the Real Exchange is 15-63 francs in favour of 
 England 
 
 It is also easy to see how much the Exchange is depressed.: 
 because £100 ought to purchase 2536-63 francs: but they will 
 only purchase 2,380 francs : consequently the Exchange is 
 depressed by 206-63 francs : or the 100 sovereigns are deficient in 
 that amount of their legal weight, and this will be found to tally 
 with the rise of their Market Price above their Mint Price 
 
 Hence, a Depreciated Coinage necessarily i^roduces a Rise of 
 the Market Price of Bullion above the Mint Price: and a Fall 
 in. the- Foreign Exchanges below Par 
 
 Because it will require a Greater amount of the Current Coin 
 to buy a Fixed amount of Bullion : and a Fixed amount of the 
 Carrent Coin will buy a Less amount of Foreign Coin 
 
 And, evidently, a Rise of the Market Price of Bullion above 
 the Mint Price : and a Fall of the Foreign Exchanges below 
 Par : Proves and Measures the Depreciation of the 
 English Coinage 
 
 Hence we have the following rule — 
 
 Find tlie Market Price in London compared to the Mint 
 Price : 
 
 Multiply the Market Price so found by the Rate of Exchange : 
 
 Then the Exchange is Favourable, at Par, m- Adverse, ac- 
 cording as the Result is A bove, A t, or Below Par 
 
 And the Depression- of the Exchange caused by the Deprecia- 
 tion of the Coinage is the Difference between the Sum so 
 
 cc 
 
386 THEOBY AND PRACTICE OE BANKING 
 
 expressed in the Mint and Market Prices, multiplied by the Eate 
 
 of Exchange 
 
 In the excellent state in which our Coinage now is, the 
 question of the Nominal Exchange is of little importance : but 
 it is impossible to understand the history of the Currency without 
 it. And it is essential as regards aU Foreign countries which use 
 an Inconvertible and Depreciated Paper Money 
 
 On Inconvertible Paper Money 
 
 6. The above considerations affect Coinages of Gold and 
 Silver : but in modern times a new species of Money has come 
 into use, and nearly every country has had recourse to it in times 
 of pubhc diflaculty— and that is Paper Money 
 
 While Paper is convertible — i.e., while the holder of it can 
 compel the issuer to give specie on demand in exchange for it — 
 it is evident that it cannot circulate at a discount ; because if it 
 fell to a discount, the holders of it would at once go and demand 
 Gold for it 
 
 In quiet and ordinary times a Bank can keep in circulation 
 a very much larger amount of Credit either in the form of Notes, 
 or simple Bank Credits, than the Bullion they are obliged to 
 retain. In fact, as has been seen in a former chapter, Bauking 
 profits can only be made by creating and issuing Credit in excess 
 of Bullion. And so long as there is confidence in the issuers, 
 this Credit circulates and produces in all respects identically the 
 same effects as so much Gold 
 
 But suppose some great public calamity happens such as war, 
 or an invasion, this confidence vanishes and numerous persons 
 would demand Gold for their Credit 
 
 Under these circumstances, and with the enormous quantity 
 of Paper in circulation in modern times, every country in Europe 
 has been compelled to suspend payments in cash ; and to give 
 an artificial value to the Paper by receiving it in payment for 
 taxes, &c., at its nominal value in specie : and by making it Legal 
 Tender. When this is done the Paper Money becomes in all 
 respects equivalent to a new standard, just as much as Gold and 
 Silver ; and its value is affected by exactly the same principles as 
 affect the value of Gold and Silver 
 
LORD king's law 387 
 
 Under the old system of attempting to fix the price of Gold 
 relatively to Silver, there was no power of convertibility of one 
 into the other, similar to the convertibility of the Bank Note. 
 If Silver fell to a discount as compared with Gold, no one could 
 demand as a right to have his Silver exchanged for Gold. Con- 
 sequently the inevitable result of a considerable change in the 
 Quantity of either metal was a change in their relative values. 
 In 1794, Gold rose to 84s, if purchased with Silver Bullion : but 
 if the Silver Coin had been convertible into Gold like a Bank 
 Note, this difference never could have arisen : any more than a 
 Bank Note convertible into Coin can circulate at a discount as 
 compared with Coin 
 
 Now Paper Money when issued as a substantive Coinage 
 follows exactly the same rules. If only the usual Quantity of 
 it be issued i.e., no greater quantity than would have leen issued 
 if it had leen convertible into Coin, it will continue to circulate at 
 its Par value. But if these issues be increased in Quantity, and 
 if the natural correction of excessive issues be taken away, viz., 
 payment in coin on demand, exactly the same result follows as 
 attends a greatly increased Quantity of Silver — it falls to a 
 Discount 
 
 Lord King's Law of Paper Money 
 
 7. When either of two metals as Coinage becomes greatly 
 increased in quantity, it Diminishes in Value as compared with the 
 other : and Gold and Silver Money not being convertible, if they 
 are compelled to circulate at a fixed ratio, in accordance with 
 Gresham's Law, the one which is underrated invariably disappears 
 from circulation and is exported to foreign countries, where it 
 may exchange for its true value 
 
 When one metal diminishes in Value with respect to the other 
 it is not Depreimtion, because it has a value of its own in the 
 market of the world. But when Paper Money is used in a 
 country which has no Value of its own, but merely an artificial 
 Value, and it becomes excessive in quantity, it cannot be ex- 
 ported ; because it has only a Local Value, and not a General 
 Value in the Market of the world. It falls to a discount as 
 compared with Coin : and in this case it is Depreciation : 
 
 cc 2 
 
388 THEORY AND PEACTICE OF BANKING 
 
 because it professes to be equal in Value to Coin, and it is 
 not so 
 
 If it is attempted to maintain a fixed ratio between Paper 
 Money and Coin after the Paper has fallen to a Discount, 
 exactly the same result follows as took place when Coin of 
 inferior value circulates at par with Coin of superior value. The 
 Coin is all hoarded or exported : it entirely disappears from 
 circulation : and nothing but Paper remains. As the quantity 
 of Paper is increased it falls in value : all Prices rise : the 
 Foreign Exchanges fall : and all the Foreign Trade of the 
 country is deranged 
 
 A few years after the Bank of England suspended payments 
 in 1797, the Price of Bullion rose and the Foreign Exchanges 
 fell : deranging the whole course of the Foreign trade. Some' able 
 writers, the most conspicuous of whom was Lord King, maintained 
 that this was due to the Depreciation of the Ba.nk Note. Strong 
 interests, however, contested this doctrine. The Bank contested , 
 it because it found it profitable to issue as much Paper as 
 possible : merchants contested it because they were afraid that 
 their accommodation would be restricted. After a short time the 
 value of the Bank Note improved, and the question slumbered 
 
 In 1809 the same phenomena recurred in a much more 
 exaggerated form, and gave rise to the appointment of the cele- 
 brated Bullion Committee. All the witnesses before this Com- 
 mittee except one maintained that it was not the Bank Note which 
 had fallen, but that Gold had risen 
 
 The Eeport, however, drawn up by Huskisson, Horner, and 
 Thornton, entirely disproved this assertion, and showed that the 
 Else of the Market Price of Bullion and the Fall of the Foreign 
 Exohar ges was due entirely to the Depreciation of the Bank Note 
 from Excessive quantity : and they recommended a Diminution 
 of its issues so as to restore the Yalue of the Bank Note 
 
 Resolutions in accordance with the report were moved by 
 Horner ; it was proved that there two prices in common use : 
 a Pa,per Price and a Money Price ; and that a £1 Bank Note 
 and 7s. were commonly given for a guinea. Nevertheless, under 
 the influence of party passion, the House of Commons voted that 
 a guinea was equal to a Bank Note and Is. in publie estimation : 
 or that 27= 21. Freed by this vote from all control, the Bank 
 
THE REAL EXCHANGE 389 
 
 made more extravagant issues than ever, so that in 1815 the Bank 
 Note was only equal to 14s. 6d. 
 
 However, the doctrine of the Bullion Report gradually con- 
 vinced the. Mercantile world : and in 1819 they were almost 
 unanimously in its favour 
 
 Lord King's Law is this — 
 
 A Rise of the Paper or Market Price of Bullion alove the 
 Mint Price: and a Fall of the Foreign Exchanges below the 
 Limits of the Real Exchange: is the Proof and the Measure of 
 the Depreciation of the Paper Money 
 
 This principle is so universally admitted now, and so perfectly 
 evident, that there is no use in wasting more words to prove it 
 
 It shows that Paper Money must always be restrained within 
 certain Limits to maintain a Par Value with Gold. But if 
 this be duly done. Inconvertible Paper Money may circulate along 
 with Bullion at par 
 
 If the Bank of England had duly limited its issues, its Notes 
 ■might have circulated at par with gold. In 1874 the Incon- 
 vertible Notes of the Bank of Prance circulated at par with Coin 
 because- they were carefully limited 
 
 This doctrine contains the principle by which all Credit and 
 Paper Currency, whether Convertible or Inconvertible, must 
 be regulated — namely, a strict attention to the Price of Bullion 
 and the state of the Foreign Exchanges 
 
 The demonstration of the Bulhon Committee was in course 
 of time universally accepted by the Banking and Mercantile 
 world ; the only difficulty left unsolved was the Practical Measures 
 to be adopted to carry it into effect 
 
 However, after several unsuccessful attempts to discover the 
 true method of giving effect to this doctrine, this problem has 
 now been successfully solved : and thus the Theory of the Paper 
 Currency is now complete 
 
 On the Keal or Commercial Exchange 
 
 8. We have now to explain the mechanism of the Eeal or 
 Commercial Exchange 
 
 Suppose A in London is Creditor to B and Debtor to B', both 
 in Edinburgh, in equal amounts 
 
390 THEORY AND PRACTICE OF BANKING 
 
 Then to settle these Debts it would be necessary for B in 
 Edinburgh to send the money to A in London : and A in London 
 would have to send an equal amount to B' in Edinburgh. This 
 would require two transmissions of specie between London and 
 Edinburgh, at some expense 
 
 The business may be settled much more easily and cheaply if 
 A sends B', his Creditor in Edinburgh, an order upon B, his 
 Debtor : by this means both Debts are discharged by B paying 
 over the money to B': that is, by the simple transfer of the 
 money from B to B' in the same place, instead of by two trans- 
 fers between London and Edinburgh. This order is termed a 
 Bill of Exchange: and the operation is exactly similar to a 
 person paying a Debt by a Cheque on his banker 
 
 Thus an " Exchange " requires at least three parties and two 
 Debts 
 
 On Exchange with Four Parties 
 
 9. But the course of trade between two places ogives rise to 
 more complicated transactions 
 
 In the above case we have supposed A to fulfil two characters : 
 to be Debtor to one party and to be Creditor to another in 
 Edinburgh 
 
 But in the Exchanges it more usually happens that there are 
 foxir parties 
 
 Suppose A in London is Creditor to B in Edinburgh : and 
 B' in Edinburgh is Creditor to A' in London 
 
 Then to settle these Debts two transmissions of specie are 
 necessary between London and Edinburgh 
 
 But suppose that A' in London goes to A and pays him the 
 money he owes to B' in Edinburgh, and buys from him his Debt 
 against B in Edinburgh. He then sends this order to his own 
 Creditor B' : and B' presents the order to B, and B pays him the 
 money : hence both these Debts are settled by two local transfers, 
 instead of by two transmissions of specie between the two places 
 
 When the Debts between London and Edinburgh are 
 exactly equal they may all be discharged by means of these 
 "Exchanges" without sending any specie. The Exchanges 
 are then said to be at Par 
 
TIME PAR OF EXCHANGE 391 
 
 The Time Par of Exchange 
 
 10. Suppose, however, that the Debts between London and 
 Edinburgh are not equal : and that Edinburgh wishes to send 
 more money to London than it has to receive from London. 
 Then the Demand for Bills is greater than the Supply 
 
 But as it is cheaper to send a Bill than the Cash, those who 
 are bound to send Money will bid against each other for the Bills 
 in the market as for any other merchandise : and the Price of 
 Bills will rise : or a Premium will have to be paid for a Bill on 
 London 
 
 London is the great centre of commerce. It is the seat of 
 Government, 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 revenues must be remitted to them 
 there. Hence there is always a much greater quantity of money 
 seeking to flow to London from the country than the contrary. 
 Consequently the Demand for Bills on London in the country is 
 always greater than the Supply : and therefore Inland Bills upon 
 London are always at a Premium 
 
 This Premium is computed by Time. It is an essential 
 part of the business of a banker to give these Bills. If a person 
 in Edinburgh wants a Bill at sight on London, he has to pay Is. 
 per cent., or four days' interest. This is termed the Time Par 
 of Exchange between Edinburgh and London. There is a 
 similar Premium on Bills on Time Par of Exchange between all 
 other towns in the country and London. This is termed Inland 
 Exchange 
 
 It appears from this that when in any place the Demand for 
 BiUs on any other place is greater than the Supply, and there- 
 fore wheji Bills rise to a Premium, the Exchanges are adverse 
 to the first place, because it has more money to pay than to 
 receive 
 
 But when the Supply is greater than the Demand, Bills fall 
 to a Discount, and the Exchanges are favourable to the 
 first place, because it has more money to receive than to pay 
 
 It must be observed, however, that the interests of Buyers 
 and Sellers are opposite : if the Exchange is unfavourable to the 
 
392 THEORY AND PRACTICE 01? BANKING 
 
 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 
 
 Buyers of Bills are also termed Remitters: and Sellers are 
 also termed Dratvers 
 
 On Foreign Exchange 
 
 11. The principle of Foreign Exchange is exactly the same 
 as that of Inland Exchange. But there is considerably more 
 complication, in consequence of different countries using different 
 Metals as legal standards and different Coinages 
 
 In Exchange between two foreign places, and of different 
 Moneys, the Money of one place is always taken as Fixed; 
 and the Exchange is always reckoned in the Variable Quan- 
 tity of the Money of the other place which is given for it 
 
 The former is termed the Fixed or Certain Price : and the 
 latter the Variable or Uncertain Price 
 
 Between London and Paris the £ is the Fixed Price, and 
 the Exchange is reckoned in the variable sum of francs and 
 cents given for it 
 
 On the contrary, between London and Spain the Dollar is the 
 Fixed Price, and the Exchange is reckoned in the Variable 
 number of Pence given for it 
 
 When any place is taken as a centre, if the Money of the 
 Place is the Fixed Price, it is said to Receive the Variable 
 
 Price 
 
 But when the Money of the place is the Variable Price, it- 
 is said to Give the Variable Price 
 
 Thus London receives froni Paris so many Francs and Cents; 
 for the £ : on the contrary, London Gives Spain so many Pence 
 for the Dollar 
 
 In the quotations of the Rates of Exchange it is usual to omit 
 the Fixed Price and name only the Variable Price : and then that 
 sum is termed the Rate or Course of Exchange 
 
 According to Tate's Modem Cambist the following are the 
 present Rates of Exchange between London and the principal 
 foreign cities : — 
 
ON FOREIGN EXCHANGE 
 
 393 
 
 Amsterdam 
 
 Germany . 
 
 Prance 
 
 Italy 
 
 Belgium 
 
 Switzerland 
 
 Austria 
 
 London Receives from 
 
 11-19 Florins and silver for £1 
 
 20-43 Imperial Marks and Pfennings for £1 
 
 ■ 25-30 Francs or Lire and Cents, for £1 
 10-35 Florins and Kreuzers for £1 
 
 London Gives to 
 
 Lisbon 
 Spain 
 Gibraltar . 
 St. Petersburg 
 Eio Janeiro 
 New York 
 Calcutta . 
 
 53J Pence for 1 Milreis 
 
 50i 
 
 m 
 
 37J 
 26i 
 49 
 23 
 
 1 Hard Dollar 
 
 1 Silver Bouble 
 1 Milreis 
 1 U.S. DoUar 
 1 Govt. Rupee 
 
 The above are the Mint Par Rates : but in some countries 
 they are deranged by Paper Money being the circulating Medium 
 of the country instead of specie 
 
 Effects of the Exchanges being Favourable ar Adverse to 
 
 London 
 
 12. As a General Rule, when the Exchanges at any place, 
 such as London, are Against the place, or Adverse, BUls on foreign 
 places are at a Preraium, because London has more money to 
 send than to receive 
 
 On the contrary, when the Exchanges are favourable to 
 London, foreign Bills fall to a Discount, because London has 
 more money to receive than she has to pay 
 
 But in consequence of the Opposite modes of reckoning the 
 Exchanges in London on different foreign countries, the very 
 same eifects will require to be expressed in Opposite terms, 
 according as London Receives or Gives the Variable Price 
 
 Exchange between London and Places from which it 
 Receives the Variable Price 
 
 13, If the Exchange of London and Paris is against London: 
 
39i THEORY AND PRACTICE OF BANKING 
 
 that is, if the Demand for Bills in London on Paris is greater 
 than the Supply, and therefore Bills rise to a Premium, it is clear 
 that they will purchase Fewer francs 
 
 Hence, between London and Paris, when the Exchange "is 
 against London, the Bate of Exchange will fall Below 
 Par 
 
 On the contrary, when the Exchange is favourable to London : 
 and the Supply of Bills is greater than the Demand, and there- 
 fore Bills fall to a Discount : the Bate of Exchange will Rise 
 Above Par 
 
 And the same is manifestly true with respect to all other 
 places from which London Eeceives the Variable Price 
 
 Exchanges between London and Places to which it Gives 
 the Variable Price 
 
 14. But of course the contrary takes place between London 
 and all places to which it Gives the Variable Price 
 
 If the Exchange between London and Spain is against 
 London : and Bills on Spain rise to a Premium ; London must 
 Give more Pence to buy a Spanish Dollar 
 
 Hence between London and Spain, when Exchange is Against 
 London ; the Bate of Exchange Rises Above Par 
 
 On the contrary, when the Exchange is Favourable to London, 
 she will Give Fewer Pence to buy the Dollar 
 
 Hence between London and Spain when the Exchange is 
 favourable to London, the Rate of Exchange Falls Below Par 
 
 And the same is manifestly true with respect to all other places 
 to which London gives the Variable Price 
 
 Hence, when the Rate of Exchange between London and any 
 other place varies from Par, in arder to determine whether the 
 Exchange is favourable or adverse, it is always necessary to con- 
 sider whether London gives the Variable Price to, or Receives the 
 Variable Price /j-oot, that place 
 
 One reason of the comphcation of the subject of Exchanges 
 is that London Gives the Variable Price to some places and 
 Receives it from others : consequently the same Real State of the 
 Exchanges requires opposite expressions in these opposite cases. 
 But it is exactly the same with aU the other great centres of 
 
LIMITS OF THE EXCHANGES 395 
 
 Exchange : they each give the Variable Price to some places and 
 Receive it from others 
 
 On the Limits of the Variations of the Exchanges 
 
 15. "When the Debts to be exchanged between any two places 
 are exactly equal, the Demand and Supply of Bills at each place is 
 exactly equal : and the Exchanges are at Par : because there is 
 no money to be remitted from either side 
 
 But if one place has to send more money than it has to 
 receive, the Demand for Bills will cau^e them to rise to a 
 premium 
 
 It is the duty of the Debtor to place the money on the spot 
 for the Creditor at his own risk and expense : consequently as it 
 it cheaper to send a Bill by post than to send the cash with all 
 the expenses of freight and insurance to pay, he would rather give 
 a little more than the nominal value of the bill in order to save 
 the expense of sending the cash 
 
 But he will not give more than the costof sending the Bullion : 
 because if the Price of Bills was higher than that, it would be 
 cheaper to send the money itself 
 
 Hence the Cost of sending the money is a Superior Limit 
 to the Variations of the Eeal Exchange 
 
 But the reverse case may also happen. The Supply of Bills 
 in London or Paris may exceed the Demand. In that case 
 London has more Money to receive than to pay. The Price of 
 BiUs wiU consequently fall. But for the same reason the Cost 
 of transmitting Bullion wiU be an Inferior Limit below which 
 the Price will not fall 
 
 Hence the Limits of the Variations of the Exchanges are 
 confined to Twice the cost of sending Bullion between the two 
 places 
 
 The Limits of the Variations of the Exchanges between two 
 places are termed Specie Points : because when the rates of 
 Exchange reach them, Bullion may be expected to flow in or out, 
 as the case may be 
 
 It must be observed, however, that these Limits of the Varia- 
 tions of the Exchange only apply to Bills payable at once, and to 
 considerable periods. During short periods, and for Bills which 
 
396 THEORY AND PRACTICE OF BANKING 
 
 have some time to ruii,fluctuations ia the Exchanges may greatly 
 exceed these Limits. 
 
 At the present time, the following are considered to b'e the 
 Specie Points between London and various centres of Exchange 
 
 Fbench 
 
 Pi'anca 
 
 25'32J — 4 per milleior us 
 
 26-22J— Par 
 
 25-12^ — 4 per mille against us 
 
 Gebman 
 
 Harks 
 
 20-52 — 5 per mille for us 
 
 20-43 —Par 
 
 20'33 — 5 per mille against us 
 
 Amekioan 
 
 Dollara 
 
 4-89 — 5 per mille for us 
 
 4'867— Par 
 
 4'827 — 8 per mille against us 
 
 Australian 
 £102 always for us 
 
 Effects of (he Eestoration of the Coinage on the- 
 Exchanges 
 
 16. In the preceding remarks on the Nominal Exchange, it 
 has been seen that the depreciation or degradation of the Coin in 
 which the Exchanges are reckoned, must necessarily derange all 
 the Exchanges of the country : and that the simple Restoration 
 of the Coinage to its due state will be sufficient to Rectify the 
 Exchange 
 
 But the state of any other portion of the Currency, or Cir- 
 culating Medium, than the one in which the Exchanges are 
 reckoned, will not affect them 
 
 In the early part of the reign of "William III., the Silver 
 Coinage, in which the Exchanges were then reckoned, had fallen 
 into a most disgraceful state from clipping, and other causes, On 
 collecting bags of coin, in different parts of the country, it was 
 found that their weight scarcely exceeded one-half of what it ought 
 to have been. In the beginning of 1696 the great work of re- 
 coinage began, and by the middle of July the new coin began to 
 be issued in considerable quantities. The state of the London 
 Exchange will exemplify our remarks — 
 
ON EXCHANGE OPERATIONS 
 
 397 
 
 STATEMENT OP THE RATES ON THE LONDON EXCHANGE 
 DURING 1695 — 1696 
 
 
 Amster- 
 
 Botter- 
 
 
 Aat- 
 
 Ham- 
 
 
 
 
 
 
 dam 
 
 G-enoa 
 
 ■werp 
 
 ■bur^ 
 
 CMlz 
 
 Madrid 
 
 Venice 
 
 April 23, 1695 , 
 
 31-2 
 
 31-4 
 
 56-29 
 
 30-11 
 
 29-11 
 
 56-2 
 
 56-1 
 
 59- 
 
 Jan. 24, 1696 . 
 
 310 
 
 31-2 
 
 60- 
 
 31- 
 
 29-9 
 
 600 
 
 60- 
 
 63- 
 
 May 2, „ . 
 
 30-1 
 
 30-2 
 
 64- 
 
 30- 
 
 28-8 
 
 60- 
 
 61- 
 
 61-2 
 
 July 19, „ . 
 
 29-3 
 
 30-6 
 
 65- 
 
 29- 
 
 — 
 
 60- 
 
 — 
 
 
 
 July 28, „ . 
 
 38-7 
 
 38-9 
 
 58- 
 
 33- 
 
 32-4 
 
 53- 
 
 58- 
 
 54- 
 
 Sept. 29, „ . 
 
 36-5 
 
 36-7 
 
 54- 
 
 36- 
 
 35- 
 
 48- 
 
 49- 
 
 51- 
 
 Octr. 6, „ . 
 
 36-8 
 
 36-10 
 
 53-2 
 
 35-7 
 
 35-8 
 
 48- 
 
 49- 
 
 
 
 Novr. 6, „ . 
 
 37-4 
 
 37-6 
 
 52-1 
 
 37-2 
 
 36-4 
 
 47- 
 
 48- 
 
 49- 
 
 Deer. 16, „ . 
 
 37-8 
 
 37-10 
 
 51- 
 
 37-8 
 
 36-8 
 
 46-2 
 
 47- 
 
 49- 
 
 On examiiiinf? this Table we see tha,t a great change in the 
 figures took place in July, 1696. Some rise very much, and 
 others fall. It was at this period that the new Coinage came out 
 in great abundance. This rectified the Exchanges : the Exchanges 
 on those places from which London received the Variable Price 
 rose, because the good English Coinage would purchase more 
 Foreign Coin. Those to which London gave the Variable Price 
 fell, because it required a less amount of good English Coinage to 
 purchase a fixed amount of Foreign Coin 
 
 Bank of England Notes, at this period, were at a heavy dis- 
 count, because the Bank had suspended cash payments : but that 
 produced no effect on the Exchanges, because they were not 
 reckoned in Bank Notes, but exclusively in Silver Coin 
 
 On Exchange Operations 
 
 17. Exchange operations consist in buying, selling, im- 
 porting and exporting Bullion, called " Bullion operations," 
 and buying and selling Bills, called " Banking operations " 
 
 The calculations necessary to ascertain the profit and loss on 
 such operations are given at length in various technical works on 
 the subject. Our object only is to examine the general causes 
 •which produce those movements of Bullion, which so sorely vex 
 the banking and commercial world 
 
 Exchange operations of both sorts may be either direct or 
 indirect ; that is,- they may take place directly between the two 
 
398 THEORY AND PRACTICE OF BANKING 
 
 countries, or the final operations may be effected through the 
 mediam of one or more intermediate countries 
 
 We have observed that for Bills payable at sight the limits of 
 the variations of the Exchange cannot exceed the cost of the 
 transmission 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 which 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 realise them, even at a considerable sacrifice, to 
 maintain their own position 
 
 2. The doubtful position of the acceptors, or the general 
 discredit of the place they are drawn upon 
 
 3. The differing relative Values of the precious metals which 
 are the standards of payment at each place 
 
 4. The respective Rates of Discount at each place 
 
 Now, it may very often happen that from these combined 
 causes, it may be considerably more profitable to possess Bulhon 
 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 
 BuUion is only exported to discharge a previous state of indebted- 
 ness : and that, consequently, a drain of Bullion comes to a natural 
 end, when the indebtedness is discharged. But this is a most 
 grievous error. The sufBcient difference of profit in possessing 
 Bullion at two places, will cause a fabrication of Bills for the 
 purpose of exporting Bullion, without any previous indebtedness : 
 and, of course, this will 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 annihilating 
 this profit is by raising the Eate of Discount 
 
 It is manifest that, in such operations, the difference of profit 
 between the two places must exceed twice the cost of transmitting 
 
ON EXCHANGE OPERATIONS 399 
 
 Bullion, because, in such cases, the cost of transmitting the Bullion 
 both ways will fall on those who originate them 
 
 Between countries in which there are no restraints upon trade, 
 the Exchanges will never vary much, except 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 
 nothing but Bullion for their commodities. Kussia is one of these 
 countries, and hence, if not modified by other circumstances. Bills 
 upon Kussia would always be at a premium ; but here, again, 
 the effect of trafficking steps in, which always has a tendency to 
 equalise 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 Rus- 
 sian Bills cheaper 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 contrary ; 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 instance — 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 countries 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 world 
 
 Supposing, however, a merchant has to remit money to Paris, 
 while the Exchange with Paris is unfavourable to England, he may 
 possibly discover a more advantageous way of remitting it than 
 by buying 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 discount in 
 Hamburg. So if the merchant buys a Bill on Hamburg, and 
 sends it to his agent there, and directs him to purchase a Bill on 
 Paris with the proceeds, he may be able to discharge his debt in 
 
400 THEORY AND PRACTICE OF BANKING 
 
 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 addi- 
 .tional charge for brokerage, commission, postage, &c., but the 
 effect of it is still further to equalise the exchanges between 
 London and all other countries. This circuitous method is called 
 the Arbitration of Exchanges, and the sum which is given in 
 London for the ultimate price it realises in Paris is called its 
 Arbitrated Price. When only three places are used in the opera- 
 tions above, it is called Simple Arbitration. When more than 
 .three are employed, it is called Gonipound Arbitration. The 
 .practical rules for working out these results are very simple, and 
 will be found in any technical book on the subject. But it is 
 very evident that the quicker, safer, and cheaper the communi- 
 cation between countries becomes, the less room will there be for 
 such operations, because the limits of the variations of the real 
 Exchanges, which are the margin which renders such transactions 
 ^possible, will constantly diminish 
 
 The scale on which these indirect operations of Exchange is 
 carried on is immense, and peculiarly affects the London Ex- 
 change. There is no Exchange between places to and from which 
 remittances 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 the 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 different countries, yet, if they can draw 
 upon London, their bills will be sure to find some purchasers 
 somewhere, to be remitted to England. Hence, Bills upon London 
 bear a higher 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 country, C, more than she imports ; and, con- 
 sequently, a debt is due from to B, and A may discharge its 
 debt to B, by transferring to it its claim against C 
 
 As many countries trade with one another, between which 
 
THE REAL EXCHANGE 401 
 
 there is no exchange, their claims are mutually adjusted by drafts 
 upon London, the commercial centre. Hence, the London Ex- 
 change is the most important in the world, and requires the 
 greatest attention to be paid 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 Heal or Commercial Exchange 
 
 18. We must now consider the causes that afFect the Eeal 
 ■Exchange, or the true Commercial one, which arises out of the 
 transactions between this and other countries. As the British 
 Hands do not produce the precious metals to any extent worth 
 considering, they are only to be obtained in this country by 
 importation, and we must now consider the various sources from 
 which they come, and the different causes that produce an influx 
 or efliux 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 two distinct branches: 
 the one where it is carried on directly with the countries in which 
 gold and silver are native products : and the other with those 
 countries which do not produce it ; but which, like our own, 
 have no means of supplying themselves with it except by foreign 
 commerce 
 
 I. With Bullion-producing 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 those 
 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, used to make a voyage 
 
402 THEORY AND PRACTICE OF BANKING 
 
 along the coast, before they return home, to collect Bullion froin 
 the merchants, and the captain received a commission on the 
 freight. In those countries Bullion is treated exactly like any other 
 commodity, such as tea, or wool, or wine, and the British gooda, 
 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 sufficient 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 mer- 
 cantile profit over and above all these expenses. Unless it does 
 that, the commerce is not profitable. If too many goods are 
 exported to those Bullion-producing countries, their exchangeable 
 value with Bullion falls, and they will not purchase a sufiBcient 
 quantity of Bullion to afford this profit, and the further exporta- 
 tion of such goods to those markets mast be discontinued until 
 the goods first sent out are consumed, and fresh ones required. 
 The purchase of Bullion, then, in those countries, is a very simple 
 affair, and requires no further notice 
 
 II. With countries which do not produce Bullimi. 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 contro- 
 versies. Taking this country 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 to 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 payments due to other countries 
 
 5. By the Political Security of this and neighbouring 
 countries 
 
 6. By the state of the Money Market, or the comparative 
 Eates of Interest in this and neighbouring countries 
 
 7. By the free or prohibitive Commercial Tariffs of this and 
 
THE REAL EXCHANGE 403 
 
 foreign countries, as they permit or forbid our manufactures to be 
 imported into them 
 
 There are, then, Seven different causes which act upon the 
 morements of Bullion ; and, in any case, it is necessary to ascer- 
 tain to which of these causes it is due. The inveterate error 
 of mercantile opinion for a long time was, that there is only one 
 cause which causes an export of Bullion, namely, a balance of 
 payments to be made 
 
 We have already shown that a degraded state of the Currency 
 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 ; but we may now proceed to develope the system 
 of the Foreign Exchanges 
 
 19. According to the crude ideas that were generally received 
 about two centuries 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 every country 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 tlie 
 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 imported into this one, was considered to be 
 a direct loss to the country. This was what was called the 
 mercantife 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 conclusion drawn was, 
 that the difference, 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 was called the "Balance of 
 Trade : " and, when this was in favour of England, the exchange 
 was said: to be favourable, because Bullion had to be paid to her ; 
 
 DD 2 
 
404 THEORY AND PRACTICE OF BANKING 
 
 on the contrary, when, on the result of trade, payments had to 
 be made "by her, the balance of trade was said to be against her, 
 and the exchange unfavourable, and then gold was sent out of the 
 country. According to this theory, the prosperity, or the 
 contrary, of the country, and the proiit 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 
 rev'erse 
 
 The admirable chapter of Adam Smith on the Principle of 
 the 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 far 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 
 JBullion will not he imported until it has become urvprojitahle 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 
 we 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 last said, and maintained the unprofitable 
 nature of gold and silver ; but, like others who are before their 
 age, their voice was unheeded, and the general object of com- 
 mercial ambition and legislation was to accumulate treasures of 
 gold and silver 
 
 20. There is no expression in commerce of more frequent 
 occurrence than the " Balance of Trade," and it may be as well 
 to give the interpretation of it generally received during the last 
 century, and which is not yet wholly extinguished. Mr. L'vingj 
 Inspector General of Imports and Exports in 1797, defined it thus 
 — " The common mode of considering that question has been, to 
 
THE REAL EXCHANGE 405 
 
 set off the value of the imports, as stated in the public accounts, 
 against the value of the exports, and the difference between the 
 one and the other has beea 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 consider the only proper 
 means of bringing gold and silver into this country to arise from 
 the surplus of our exports over our imports, and that ratio or 
 proportion which is not imported in goods, must be paid for in 
 BuUion. In the year 1796, the imports of this country appeared 
 to be £19,788,923, and the exports appear to be £33,454,583, 
 which ought to have brought to this country Bullion to the 
 amount of that difference, or £10,665,660 " 
 
 We have made these extracts because they convey, in the 
 fewest words possible, the whole ideas on the subject, and they 
 are made by persons of great commercial eminence before the 
 Committee of the House of Commons. It is true that Mr. Irving, 
 who was Inspeetor-G-eneral of the Exports and Imports of Great 
 Britain and the British Colonies, expressly states that the appli- 
 cation of this principle to the whole of the British trade would, in 
 his judgment, be extremely erroneous. We, therefore, do not 
 bring him forward as approving of the theory, but only as stating 
 distinctly and authoritatively what it was. But Mr. Hoare, a 
 banker of eminence and long experience, adopted it ; and we 
 believe that this theory of the balance of trade still retains a hold 
 on the minds "of great numbers of persons who do not give them- 
 selves the trouble to sift it thoroughly. Nevertheless, there never 
 existed a more complete chimera and pernicious delusion than 
 this said doctrine of the balance of trade, nor one which has 
 exercised so disastrous an influence on commercial legislation 
 
 21. It appears that the simplest way of arriving at an accurate 
 eonclusion on the subject, is to consider that the dealings between 
 nation and nation are only made up of the aggregate of deahngs 
 between individuals of the nations, and we have only to consider 
 the variety of methods in which an individual merchant may 
 trade, to have an accurate and comprehensive idea of the com- 
 merce of the nation. Instead of dealing with figures of vast 
 amount, which make no definite impression on the mind, and 
 which are produced by a number of complex causes, we shall now 
 
40 & THEORY AND PRACTICE OF BANKING 
 
 proceed to consider in how many different ways an individual 
 merchant may trade with foreign countries, and we shall show, by 
 considering the dealings of an individual, how utterly erroneous 
 it is to suppose that an influx of Bullion is, i^so.faiito, a proof 
 that commerce is flourishing and profitable to the country, and 
 that, whether it is so or not, depends very much as to where it 
 comes from, as well as a number of other circumstances 
 
 With respect to those countries in which Bullion is a native 
 product, and to which we trade for the express purpose of ob- 
 taining it, we have already shown 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 with 
 them must always be in our favour, it is no proof whatever of 
 prosperity or profit 
 
 Next, with respect to countries which do not produce Bullion, 
 it is easy to show the extreme fallacy of the opinion that our 
 exports should exceed our imports, and that the difference will be 
 iYiQ 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 which the imports exceed 
 the exports, or the excess of what we receive over what we give 
 
 To prove this, let us take a simple case. Suppose a merchant 
 in London sends out £1,000 of goods to Bordeaux '. by the tune 
 they arrive there, the mere addition of freight, insurancci and 
 other charges, will probably have increased their cost of produc- 
 tion, or the expense of placing them where they are, to £1,050, 
 supposing 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 realise a good profit, we may assume that the market 
 is favourable, and that they sell for' £1,50.0, and he would pro- 
 bably draw against his agent for £1,200. His coiTespondent 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 product, which would fetch a good price in England. The 
 chief native product of that country is wine, 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 
 
THE REAL EXCHANGE 407 
 
 England. This wine would probably 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 difference 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 charges both 
 ways : and just as this difference is the greater so is his gain 
 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 wine 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 the 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 
 was a failure of the crops, the price of wine at Bordeaux might 
 rule excessively high, but at the same time there might be a large 
 stock of wine 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 more 
 advantageous to remit specie, whatever he could sell the goods 
 for, and then the exchange would be in favour of London ; but, 
 before the London merchant could reckon his profits, he would 
 have to deduct the freight, insurance, &c., on the specie 
 
 Whether the transaction was profitable 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, and there was a 
 Bcardity of them at Bordeaux, he might realise high prices there, 
 which might leave him a good profit. It would be very 
 improbable that he could realise so much profit on that single 
 operation as in the double one of exporting goods and 
 importing wine. So that the import of the specie would be 
 
408 THEORY' AND PKACTICE OF BANKING 
 
 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 import 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 supply of them already in the 
 London market. Hence, we gather that the scarcity and dearne-ss 
 of native products is an infallible cause of the export of specie 
 from a country : on the contrary, an abundant supply of cheap 
 products of all sorts, both foreign and native, will cause an 
 importation of Bullion : and when products, both native 
 and foreign, are scarce and dear, it will cause an export of 
 Bullion 
 
 We have before observed that the exchange being in favour of 
 a country means nothing more than that BulHon has to be 
 remitted to it. In the case above described, the exchange at 
 Bordeaux would be in favour 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 
 
 22, The example given above is of the simplest description^ 
 and a merchant of eminence, who has 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 cor- 
 respondent there might invest the proceeds of the cargo of wine 
 in hides, which there might be a favourable opportunity 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 dispatch that to Canada, where 
 the merchant's correspondent there would dispose of it, and 
 purchase corn, which he would send to England 
 
THE REAL EXCHANGE 409 
 
 • In the case just described, we observe that there are fivedis- 
 fcinct operatious ; and, as we may suppose, that there is a profit 
 upon each of them, by the time the returns for the goods, which 
 Originally cost £1,000, are brought to England, it may very well 
 be that the corn, which forms the ultimate payment 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 
 More investing the proceeds in other articles, it is clear that the 
 merchant's profits upon the whole is exactly the difference in value 
 in England between the articles last purchased and sent home 
 and the original cargo, after deducting all the expenses of sending 
 home the last cargo ; and we also observe that no specie has been 
 sent from one country to the other in the whole course of the 
 extended operation 
 
 Tliis 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 unless the value of the 
 cargo which comes into England, in payment 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 otiiers 
 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 soui-ce of error 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 what it is upon their arrival here, including all their 
 diarges upon them 
 
 23. If we suppose that Bordeaux had but one native product 
 ---wine— the chances of finding the markets, both at Bordeaux and 
 London, in a favourable state for importing produce instead of 
 
410 THEORY AND PRACTICE OF BANKING 
 
 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 would 
 evidently be multiplied according to the number and variety of 
 its products 
 
 24. Let us take another example and let New York be the 
 starting place. The staple products of America are breadstuffs and 
 provisions. A merchant of New York sends a cargo of corn to 
 Liverpool, and his correspondent there will endeavour to invest 
 the proceeds of that in. British goods, if he finds the state of the 
 markets in England and New York will make such an operation 
 profitable. Suppose that the price of corn is very high here, and 
 British goods are also very high here, and very low in America, 
 it is clear that nothing but specie will be 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 being, because our necessity for 
 food is much~more pressing and immediate than their necessity 
 or capability of consuming our cotton or woollen goods. And the 
 only way to arrest such drain is to effect such a reduction in the 
 prices of British goods as shaU make it more profitable to export 
 goods than specie 
 
 25, In the cases we have hitherto been considering, we have 
 described the operations as if merchants were left perfectly free 
 to carry their goods whither they pleased, and were not met and 
 obstructed by artificial obstacles purposely devised for interfering 
 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 importation of foreign goods, and 
 imposed heavy duties for the specific 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 manufactures thereof, and greatly impoverished tho 
 
THE REAL EXCHANGE 411 
 
 English artificers and handicrafts, and caused great detriment 
 to the kingdom in general." If we consider the effect 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 customer must 
 ultimately pay all the expenses and charges on the goods, it will 
 have the effect of greatly raising the market price there, and 
 diminishing the number of persons who can afford to buy them : 
 and hence, as the market is so limited, a smaller quantity of 
 goods will overstock it than if it were more extended. This will 
 cause a much less quantity of goods to be sent from London, 
 and it wUl cause a much larger proportion of specie to be 
 remitted to pay for the productions of Bordeaux. This example 
 shows that the inevitable effect of high protecting duties between 
 country and country is to cause a much more frequent trans- 
 mission of Bullion from one to the other than would be the case 
 in an unfettered state of commerce ; unless, indeed, the smuggler 
 steps in, who is the corrector provided by nature against this 
 commercial insanity. The effect then, of prohibitive duties is 
 to cause an inflow of Bullion ; but we must carefully guard 
 against supposing that this inflow is a favourable sign, as it is 
 certainly the least profitable import a merchant can receive for his 
 goods ; and there is this very marked difference between an 
 inflow of Bullion under the Protectionist system and under a 
 Free Trade system, that the former is accompanied with a great 
 dearth of foreign commodities, but the latter is an infallible sign 
 of 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 
 
 26, The foregoing cases comprehend the different varieties of 
 commercial 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 low in England, and so high in the foreign 
 mariiet, 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 ia 
 
412 THEORY' AND PRACTICE OP BANKING 
 
 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 payment 
 fast enough, and so specie must be sent, and the greater the 
 difference in price the greater will be the drain of Bullion : or 
 that other markets 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 of 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 
 consequence that the prices of other commodities should be as low 
 as possible, to enable them to be sent in payment of the necessary 
 supplies of food, and prevent such a drain of Bullion as may 
 disturb tlifi whole monetary system of the country 
 
 27. Overtrading, 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 this 
 country is when both these circumstances happen concurrently. 
 It is like a spring tide of disaster. The most terribly disastrous 
 commercial crisis this country ever experienced was preceded by 
 some years of overtrading, followed by successive failures in the 
 staple support of the people of England and Ireland. These two 
 adverse events together produced the calamities of 1847. We 
 shall see that the intended effect 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 specie taking place, as to render it more profitable to 
 export them than Bullion, and so stop the drain. Whether the 
 Act is effective for this purpose is another question, which it is 
 not the praper place to discuss here 
 
THE REAL EXCHANGE 413 
 
 28. There 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 payment. 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 were unable 
 to send our own products in payment of these goods to anything 
 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 were other means of equalising the exchanges with 
 different countries, the exchange with Russia would always be 
 unfavourable to England. The chief export trade from Ireland 
 to England was in articles of food— pigs, cattle, oats, butter. 
 Great quantities of these came from Ireland, but the inhabitants 
 of that country were much too poor to be able to consume an 
 equivalent amount of English goods ; in consequence of which 
 the difference had to be remitted in specie, and so the exchanges 
 between England and Ireland were almost uniformly favourable 
 to Ireland. Now, if Ireland had been sufficiently wealthy to 
 have consumed English goods instead of specie, it is evident that 
 it would have been far more advantageous for both countries j 
 for English industry would have been promoted, and Ireland 
 would have gained a more valuable import. These two examples 
 offer a further illustration of what we said before, that the 
 frequent transmission of Bullion between countries which do not 
 produce it, is a symptom of a less profitable trade than it would 
 be if goods were transmitted 
 
 29. In the operation first described above, we have supposed 
 it to originate with the English merchant who remits his goods to 
 his correspondent abroad, and who reaps the profits, and the pror 
 ceeds must be remitted to him after deducting the freight, charges, 
 and commission of the agent there. But it is also probable that there 
 will be native merchants at Bordeaux, who will send wine to 
 England on their own account to their correspondents here, and 
 then the whole transaction will be reversed. The English cor- 
 respondent will endeavour to purchase English goods as low as he 
 can, and if he can get them low enough to realise a profit in the 
 Bordeaux market, he will send goods out ; but if the English 
 
414 THEORY AND PRACTICE OF BANKING 
 
 goods are too high for that purpose, he must send specie. It is 
 also evident that, even if the goods be at no unusual height in 
 England, still, if the market at Bordeaux be already overstocked 
 with them, or, as it is called, " glutted," it would be useless to 
 send more goods to force the price down still further, and the 
 consequence will be that nothing but specie will go 
 
 From this we see that if specie be coming in from a country, 
 it is a proof that we have already got so many of their goods 
 that it will not pay to import 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 country for the products of other 
 countries, and cause much fewer commodities to pass betweea 
 nations than otherwise would, and cause the markets of any 
 country to be much sooner overstocked than they would otherwise 
 be. By preventing this interchange of commodities which every 
 nation would naturally prefer, it necessitates payments in specie 
 to a much larger extent than would be the case if commerce were 
 free, to the common impoverishment of all parties 
 
 30. The foregoing considerations show 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 purchases goods and sends them to his 
 correspondent abroad, who realises them, and invests the proceeds 
 in that market, and sends them to England, and the Enghsh 
 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 correspondent 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, who gains his profit, 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 specie passes between the two. Nor is the result in any way 
 different if the trade be conducted by the more circuitous method 
 of three or more transactions. Hence, in a healthy state of 
 
THE REAL EXCHANGE 415 
 
 the markets of different countries, scarcely any specie will pass 
 ■between them : and the very fact of there being a necessity for 
 ■making frequent and large remittances of specie from one country 
 to another, is in itself a proof of there being something irregular 
 and unhealthy 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 between nation and 
 nation. Nothing can be more certain than that Bullion is the 
 least profitable of any article of commerce, except from Bullion- 
 producing countries : and that when merchants have recourse to 
 it, it is because some disturbance has taken place in the profitable 
 relations between supply and demand of other commodities 
 
 31. Now, supposing commerce to be in that desirable and 
 healthy state in which no specie passes between non-bullion-pro- 
 ducing countries, who could tell how what is called the Balance of 
 Trade is inclined ? Who can tell what the Balance of Trade is ? 
 Each country would show a favourable balance, taking the values of 
 the exports and the imports at their market prices in each country. 
 Each country would show that their imports exceeded their exports 
 in value : that is, each would show that 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 manifest that 
 trade could not be cai-ried 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 gain 
 by the transaction, commerce cannot be carried on. But this 
 shows that the expression "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 origin of incalcu- 
 able mischief to the .world, in the suicidal effort every nation 
 has made to secure to Itself that great chimera — a favourable 
 •^balance 
 
 The 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 
 
416 THEORY AND PEACTICE OF BANKING 
 
 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 
 prospect 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 the State were different and opposite to the interest? 
 of individuals. They seem to have entertained the idea that 
 every merchant had entered into a conspiracy to ruin the country^ 
 which he tried to carry into effect by becoming as prosperous 
 himself as he could. It seems most unaccountable how long they 
 missed the obvious truism, that the prosperity of the State ip 
 made up of the' prosperity of the individuals composing it, and 
 that every oiie is far keener in discerning what conduces to his 
 own prosperity than the State can 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 
 
 Notwithstanding the prevalent 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 balance of 
 trade, there were a few enlightened persons who saw through 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, Oraik well observes that 
 it would be irrational to suppose that the English must necessarily 
 be the chief gainers by this trade, as it would be to maintain that 
 the productive labourer must always be a greater gainer on the 
 article he produces than the capitalist who employs hini. Tiiat 
 the Dutch were in the position of the capitalist, and the English 
 of the labourer, and that while the Dutch had the goods the 
 English had the money ; just as while the master had the goods 
 the workman has his wages. But that the excess of profit, or real 
 advantage, should be with the labourer rather than with the 
 capitalist, may fairly be presumed to be as unusual, and as little 
 likely in the nature of things, in the case of nations as of 
 individuals 
 
 An attentive consideration of these various methods of trading 
 will shew, what ^a pomplete phantasy the old, and still too comraon-, 
 
THE RATE OF DISCOUNT 417 
 
 idea of the " Balance of Trade " is ; and, as nothing more 
 conduces to error and confusion in any science than a nomen- 
 clature and technical phrases which are founded upon misconcep- 
 tions of the principles of that science, so nothing has exercised a 
 more malignant influence upon legislation, and popular ideas 
 generally, 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 in one country having to make payments 
 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 
 
 38. We have now to treat of a cause of the moveinents of 
 bullion which has acquired an importance in modern times far ex- 
 ceeding what it ever did before ; in fact, it is now probably more 
 important than any other, namely, a difference in the Eates of 
 Interest or Discount between two countries 
 
 In former times, when the communication between different 
 places was slow and expensive, before the days of railroads 
 and steamers, a considerable difference might exist in the rates 
 of interest in two places, without causing any movement of 
 bullion from one place to the other. But that is not pos- 
 sible 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 price of the same article in any two markets 
 
 EE 
 
418 THEOEY AND PRACTICE OF BANKING 
 
 is more tlian sufficient to repay the cost of sending it from one to 
 the other, it will be sent ; and this movement will continue as 
 I long as the difference in price continues. Xow if the Rate of Dis- 
 ( 'count 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 will 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 goo(fi>. and that 
 therefore it must cease of itself whenever these payments were 
 made. But this is a profound delusion. When the Rates of 
 Discount differ so much as is supposed above between London and 
 Paris, persons in London fabricate lills upon 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 difference in the Rates of Discount is main- 
 tained. Moreover, merchants in Paris immediately send over 
 their bills to be discounted in London, and, of course, have the 
 cash remitted then. Now, the only way of arresting such a drain 
 is to equalise the Rates of Discount at 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 suppose that it is possible 
 to maintain a uniform Rate. Consequently, 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 neighbouring countries, and 
 to follow these variations so as to prevent its being profitable to 
 export bullion from this country 
 
 On Foreign Loans, Securities, and Remittances, as 
 
 affecting the Exchanges 
 
 33. Besides the state of national indebtedness arising out of 
 Oommercia,! operations, other causes may affect the Exchanges 
 
ON FOREIGN LOANS 419 
 
 Formsrly, during foreign wars, England, being more abundant 
 in money and material resources than in men, used to subsidise 
 foreign powers to a considerable extent: and the method of 
 transmitting such a loan to the best advantage to the remitting 
 country is an operation of considerable nicety and dehcacy. To 
 withdraw a very large amount of actual coin at any given tiiae 
 li-om a commercial counter might produce the most disastrous 
 consequences when so many fixed engagements had to be met at a 
 fixed time 
 
 The method of operating was simply an example of what we 
 have so fully illustrated in the preceding chapters, that the 
 Bekase of a Debt is in all cases equivalent to a' Payment in 
 Money ; or that — x — = + x + 
 
 Instead of transmitting vast amounts of Coin, the method 
 always adopted in such cases is by purchasing Bills of Exchange 
 on the place of Payment : and by operating on a number of 
 different centres to prevent the disturbances which would arise 
 from withdrawing too large an amount of Circulating Medium 
 irom any one place 
 
 In 1794 the English Government agreed to lend the Emperor 
 of Germany £4,000,000, and the problem was to send the money 
 from London to -Vienna with as little disturbance as possible to 
 the London money market 
 
 Mr. Boyd, who conducted .the operation, says — " The remit- 
 tance of so large a sum as £4,000,000 I considered a matter of 
 Mnite difficulty and delicacy, so as to prevent its producing 
 any remarkable effects upon the course of Exchange. It was 
 necessary to vary the modes of remitting, and to make use of 
 the various means for that purpose presented by all the different 
 Exchanges of Europe. It was not necessary to remit Bills upon 
 Hamburg only, because it frequently happened that it answered 
 better to remit to Hamburg upon other places, such as Madrid, 
 Cadiz,^ Leghorn, Lisbon, 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 necessary to take Bullion, Bills 
 direct upon Hambm-g, and Bills upon other places all into our 
 means of remittance, and to make the most of these modes, of 
 
 BE 2 
 
420 THEORY AND PRACTICE OF BANKING 
 
 remittance without giving the decided preference to that mode 
 which was the most favourable, because any one mode invariably 
 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 whole very favourable remittances " 
 
 McCulloch gives another example of a similar operation : 
 "In 1804 Spain was bound to pay France a large subsidy, and 
 in order to do this, three distinct methods presented themselves. 
 First, to send dollars to Paris by land : second, to remit Bills of 
 Exchange direct upon Paris : thirdly, to authorise Paris to draw 
 directly upon Spain. The first of these methods was tried, but 
 found too slow and expensive : and the second and third plans 
 were considered likely to turn the exchange against Spain. The 
 following method, by the indirect or circular exchange, was there- 
 fore adopted : — 
 
 " A merchant or banquier at Paris was appointed to manage 
 the operation which was thus conducted. He chose London, 
 Amsterdam, Hamburg, Cadiz, Madrid, and Paris as the principal 
 hinges on which the operation was to turn : and he engaged 
 correspondents in each of these cities to support the circulation. 
 Madrid and Cadiz were the places in Spain from whence 
 remittances were to be made, and dollars were, of course, to be 
 sent, when they bore the highest price, for which bills were 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 paper on Spain, and to give the circulation as much 
 support as possible from real business. With this view London 
 was chosen as a place to which the operation might be chiefly 
 directed, as the price of dollars was then high in England, a 
 circumstance which rendered the proportional exchange advan- 
 tageous to Spain 
 
 " The business commenced at Paris, where the negotiation 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 reimbursement on London, Madrid, 
 or Cadiz, according as the course of exchange was most favourable. 
 
THE FEENCH INDEMNIxr 421 
 
 The proceedings were all conducted with judgment and attended 
 with complete success" 
 
 34. The most gigantic operation, however, of this nature, 
 which ever took place, was the payment of the indemnity which 
 France was obliged to pay to Germany, in consequence of the un- 
 fortunate result to her of the war. A most minute account of this 
 operation was presented to the National Assembly by M. L^on Say, 
 from which we take the following details, sufficient, we hope, to 
 make a general outline of the operation intelligible 
 
 By the definitive treaty of peace between Germany and France, 
 signed at Frankfort, May 10, 1871, France became bound to pay 
 to Germany the sum of 5 milliards of francs, equal very nearly to 
 200 millions sterling, at the following dates — 500 millions thirty 
 days after the restoration of order in Paris ; 1,000 millions in the 
 course of 1871 ; 500 millions on May 1, 1872 ; and 3,000 millions 
 on March 2, 1874, together with 5 per cent, interest on the last 
 three milliards 
 
 Payment might be made in gold or silver, notes of the Banks 
 of England, Prussia, Holland, Belgium, or first class BiUs of 
 Exchange 
 
 The thaler was valued at 3-75 francs, and the German florin at 
 2' 15 francs 
 
 All bills not domiciled (t.e., made payable) in Germany, were 
 to be valued at their net proceeds, after deducting all costs of 
 collection 
 
 It was subsequently agreed that the portion of the Eastern 
 Railway of France, situated in Alsace, should be accepted in 
 compensation, or set off, to the debt to the amount of 325 millions ; 
 also that 125 millions should be received in notes of the Bank of 
 France ; and the sum of 98,400 francs, which remained due to 
 the city of Paris after the payment of the indemnity, should be 
 received as a set off against the debt of France 
 
 Besides the indemnity payable by France, the city of Paris 
 had to pay an indemnity of 200 millions of francs ; 50 miUions in 
 specie ; 50 millions in notes of the Bank of France ; 37i millions 
 in two months' bills on Berlin, at the exchange of 3-75 francs for 
 the thaler ; and 63 millions in bills upon London, at six and 
 
422 THEORY AND FEACTICE OF BANKING 
 
 fifteen days' sight, at the exchange of 25-20 francs for the pound 
 sterling 
 
 The bills upon London were bought at the exchange of 
 25'3488 ; and those on Berlin at an exchange of 3-7325 ; Paris, 
 therefore, lost 14-88 cents on each pound sterling, and gained 1-75 
 cent, on each thaler. The total cost of the indemnity was 
 1,965,240-30 francs, and, after it was all settled, there remained 
 a balance of 98,400 francs in favour of Paris, which, as above 
 said, was taken as a set off in favour of France 
 
 The total operation was divided into two parts ; the payment 
 of the first two milliards, and that of the last three 
 
 The first thing to be done was to put the Government in 
 funds to effect the payment. To do this they negotiated a loan 
 with the Bank of France of 1,530 millions, and created two public 
 debts of 2,225,994,045, and of 3,498,744,639 francs 
 
 The first loan was authorised by a law of June 21, 1871 ; it 
 was opened to public subscription on the 27th, and made payable 
 in 17 monthly instalments 
 
 The second loan was authorised by a law of July 15, 1872 ; 
 the subscription was opened on the 28th, and made payable in 
 21 monthly instalments 
 
 On July 31, 1874, the first loan was fully paid up, and of the 
 second only 7,136,000 francs remained due 
 
 The Government being thus in funds commenced its exchange 
 operations, and the debt was finally liquidated in the following 
 way:— 
 
 By Compensations .. .. : .. 325,098,400 francs 
 By Bank Notes and German Money . . 742,334,079 francs 
 By Bills of Exchange 4,248,326,374-26 francs 
 
 To effect this stupendous operation all the great bankers in 
 Europe were invited to assist, and in June, 1871, a London agency 
 ■was opened to assist and receive subscriptions and bills. Other 
 agencies were opened at Brussels, Amsterdam, Berlin, Frankfort, 
 and Hamburg. The Treasury gave its correspondents ^ to ^ per 
 cent, commission on its first loan, and on the second 1 per cent, 
 at first, which was reduced to i and i. In the first loan the 
 
THE FRENCH INDEMNITY 423 
 
 pound sfcerling was received at 25-30 ; the thaler at 375 ; the 
 Frankfort florin at 7 florins for 4 thalera ; the marc banco at 2 
 marcs for one thaler ; and Belgian paper at par. In the second 
 loan the pound sterling was received at 25-43 ; the thaler at 3'76 ; 
 the Frankfort florin at 2-14^ ; the marc banco at ISli for 1 
 thaler ; and Belgian paper at par 
 
 The exchange operations in London began in June, 1871, and 
 lasted till September, 1873. The exchange was at 25-21.:J- in 
 June, but, in consequence of acting somewhat too precipitately, it 
 rose to 26-18| in October. In 1872 the lowest was 25-26|^ in 
 April, and the highest 25-68^ in November. In 1873 the lowest 
 was 25'33 in March, and the highest 25'57i ^ June. The mean 
 average of the whole was 25"4943 
 
 In the course of the operation, the Treasury purchased 120,000 
 foreign bills, amounting in the whole to rather more than 4^ 
 milliards. It opened subscriptions in foreign countries, and 
 received foreign bills in payment of the loan opened in Paris. 
 The subscriptions to the first loan comprised 213 millions of 
 francs, and the subscriptions to the second 389 millions, in foreign 
 bills 
 
 M. L6on Say then gives some details respecting the three 
 classes of payments above named as compensations ; bank notes 
 and German money ; and Bills of Exchange 
 
 . The details respecting the compensations need not detain us ; 
 but with regard to the second, it comprised the following items : — 
 
 Notes of the Bank of Prance . . . . 125,000,000 francs 
 German Bank Notes and Money . . 105,039,145-18 francs 
 
 Frenoli Gold Money 273,003,058-10 francs 
 
 French Silver Money 239,291,875-75 francs 
 
 The German bank notes and money were collected from the 
 sums which the German armies had brought with them in the 
 invasion 
 
 The third class, viz., Bills of Exchange, included German 
 bills taken at their full value, 2,799,514,183'72 francs, and other 
 foreign bills taken at their net proceeds, after deducting all, 
 charges, 1,448,812,190-54 
 
 M. Leon Say then gives some details of the commercial 
 operations undertaken- to .support these gigantic payments, but 
 
424 THEORY AND PKACTICE OF BANKING 
 
 he at once ackaowledges that it is impossible to explain their 
 complete theory, on account of a new article of merchandise 
 which has only recently been introduced into commerce 
 
 " It is not possible to explain the operations of a portfolio 
 which contains 120,000 bills of a value exceeding 4 milliards 
 
 "There were all sorts of bills, from less than a thousand 
 ftancs to more than five millions ; some mentioned the purchase 
 of merchandise : others appeared only to be fabricated for the 
 purpose, and destined themselves to be covered at maturity by 
 biUs which were to be created to pay real transactions 
 
 " Bank Credits, the paper circulating between head oifices and 
 branches, circular exchanges, payments for invoices, the remission 
 of funds for the ultimate purchase of merchandise, the settlement 
 of debts abroad to France under the form of coupons, shares, and 
 commercial obligations, were all in these effects, making up the 
 most gigantic portfolio which was ever brought together 
 
 " After all this, to give a detailed classification is an absolutely 
 impossible task. One can do no more than determine the classes 
 of the operation, and make some general remarks on these classes, 
 and on the importance and meaning of the business effected on 
 each of them 
 
 " Fifty years ago there were no other international operations 
 than merchandise and money ; merchandise, gold, and silver, were 
 the only subjects of export and import ; the balance of commerce 
 was settled in gold and silver. Everything which was bought 
 from the foreigner was paid for in gold or silver, if not in 
 merchandise 
 
 " One might find, then, in the statistics of the Custom House 
 data more or less exact, but at least real data, of the course of 
 business between two countries ; but things have greatly changed 
 within fifty years 
 
 " There has appeared, especially within the last twenty-five 
 years, in international commerce, what may be called a new 
 article of export, an article which in every country has acquired 
 a greater importance than any other, and which has had the 
 result of completely distorting the meaning of Custom House 
 returns. This new article is Securities ; it is transmitting across 
 the frontiers of different States the property of Capital by 
 representation, which is easy to transport, viz., these Capitals of 
 
THK FRENCH INDEMNITY 
 
 425 
 
 the form of bills of exchange, public funds, shares and obligations 
 of railways and other companies 
 
 " To understand the real course of international business, it 
 is necessary to know not only the imports and exports of merchan- 
 dise, the imports and exports of specie, but also the imports and 
 essports of Securities ; and this last class, which is the most 
 important, and which is the key to the two others, escapes all 
 kinds of returns " 
 
 This is exactly the doctrine we have been enforcing for so 
 many years, and shows the profound error of those Economists 
 who exclude the Incorporeal Property from the Title of Wealth, 
 and of those who write books on Economics, and who are either 
 ignorant of, or who ignore, its existence ; for, as we have said, 
 in such a country as this it is the largest class of property of any. 
 M. Leon Say then gives some notices of the imports and exports 
 of merchandise, specie, and securities, which we need not enter on 
 
 We will give, however, the final result of the operations, 
 showing the pieces in which the debt was liquidated : — 
 
 
 Payment of Two 
 MilliardB 
 
 Payment of Three 
 MiUiards 
 
 Notes of Bank of France . . . . . . 
 
 French Gold 
 
 125,000,000 
 
 109,001,502-85 
 63,016,695- 
 62,554,115-93 
 
 312,650,50901 
 25,816,752-37 
 
 116,575,592-13 
 
 250,540,821-46 
 147,004,546-40 
 624,699,832-28 
 
 164,000,555-25 
 176,275,180-75 
 
 42,485,029-25 
 
 2,172,663,212-03 
 
 209,311,400-42 
 
 148,641,398-27 
 
 79,072,309-89 
 
 148,700,000 
 12,650,000 
 
 French Silver 
 
 German Money and Bank Notes . . 
 Thalera 
 
 Frankfort Fiorina 
 
 Marcs Banco . . . . 
 
 
 
 Belgian Francs 
 
 Pounds sterling 
 
 1,836,860,367-43 
 
 3,153,800,085-86 
 
 Now, we observe that the whole of the above sum that was 
 paid in French specie was 273 millions in gold, and 239 millions 
 in silver, being somewhat over 20 millions sterling, whereas 4^ 
 milliards, or 160 millions sterling, were paid by Bills of Exchange. 
 This fact is especially worthy of notice, because some financial 
 writers maintained that, if England had met with a similar mis- 
 fortune, she could not have paid such a ransom, on account of the 
 small quantity of specie in the country. These figures, however, 
 
426 THEORY AND PKACTICE OF BANKING 
 
 show that this is a complete delusion, as England could pay by 
 bills, if ever she were driven to such a dire extremity, to a far 
 larger amount than France ; and we see that in France herself, 
 where specie is alleged to abound, the part that was paid in specie 
 was less than an eighth part of the payment by bills 
 
 M. L6on Say notices, as one of the results of the war, the 
 liquidation of the famous Bank of Hamburg, founded in 1619, 
 in imitation of those of Venice and Amsterdam, for the purpose 
 of securing a uniform standard of mercantile payments, by means 
 of credit in its books, which was called the marc banco 
 
 After the establishment of the German Empire it was resolved 
 to adopt a gold currency ; and the marc banco of Hamburg (which 
 was absorbed in the Empire) violated the new Imperial system in 
 two ways ; first, it was a local money, and all local moneys were 
 to disappear before the Imperial currency ; and it was silver, 
 whereas the Imperial standard was gold 
 
 The marc banco, which was worth a half thaler, or 1'87^ franc, 
 was abolished by law, and the reichs thaler imperial, of 0"25 franc, 
 was substituted. The bank was ordered to liquidate all its 
 ax)counts in fine silver by February 15, 1873 ; and after that, any- 
 one who had claims against the bank was credited with a half 
 thaler for the marc 
 
 The preceding are examples of loans raised in this country 
 with the consent of the Government, and, consequently, every 
 care was taken to have them transmitted in such a way as to 
 produce 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 belh- 
 gerent 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 in England 
 
 There is, lastly, to be considered the sums required by resi- 
 dents abroad for their expenditure. The drafts of the great 
 English and Eussian families on theu' bankers at home affect the 
 exchanges exactly- in the sajne manner as any. other drafts 
 
THE INDIA COUNCIL BILLS 427. 
 
 The India Council Bills 
 
 35. The most extensive operatious of this sort are the ladia 
 Council Bills : or the Bills which the Council of India in London 
 draws upon the Governments of the different Presidencies 
 
 India has enocmous and continuous payments to make in 
 London on the following accounts : — 
 
 1. The establishment of the India Office in London, and of 
 the Engineering College at Cooper's Hill, is maintained by India 
 
 2. The interest on the Pablic Debt is chiefly payable in 
 London 
 
 3. The Military and Civil Pension List 
 
 4. The Military charges for the transport of British Troops 
 to India, and military stores of all sorts 
 
 5. Civil Stores of all sorts : materials for Kailways, Tele- 
 graphs, &c. 
 
 In 1880-81 the sum total of Disbursements to be made in 
 London exceeded 18 millions stcEling. And these charges are 
 all payable in fixed amounts in Gold 
 
 To meet these charges the Council of India in London draws 
 every Wednesday a certain amount of Bills on the Governments 
 of the different Presidencies 
 
 These sums are payable in Gold in London ; but the Govern- 
 ments in India pay in Silver Kupees : it is therefore requisite to 
 draw for such a sum in Rupees as shall produce the required 
 amount in Gold in London 
 
 It is for this reason that the relative Value of Gold and Silver 
 is of such deep importance to the Government of India 
 
 Every Wednesday the India Ofiice sends tenders to the Bank 
 of England — usually amounting at present to about 35 or 40 
 crores of rupees, or about £350,000, offering to sell that amount 
 of Bills at the Current Market Price of Silver 
 
 These tenders are open to all the world : just as the Mint is 
 open to any one to have his bullion coined ; but practically 
 speaking the tenders are confined to a certain number of Indian 
 Banks : who buy these Bills either on their own account, or on 
 account of their customers, who have payments to make in India. 
 And as a matter of fact, the balance of payments to be made by 
 the merchants usually agrees pretty nearly with the amount of 
 payments to be made by the Indian Government in London 
 
428 THEORY AND PEACTICE OF BANKING 
 
 The great importance of these Bills, however, is the effect they 
 have on the Market Price of Silver : and they have in fact been 
 one of the most potent factors in recent years in causing the 
 diminution in the Value of Silver' as compared to Gold 
 
 Selling Bills for Silver in the London Market is in reality 
 exactly the same thing as selling so much Silver itself. Conse- 
 quently, as Silver is nothing but a commodity in England, the 
 more of it which is pressed for sale, the lower the price must go 
 
 The Government Eupee, whi^h since 1862 has replaced the 
 old Company's Rupee, being however exactly of the same weight 
 and fineness, is 180 grains troy Silver H fine : or 165 grains fine 
 silver to 15 grains alloy 
 
 The British Shilling, coined at present at the rate of 66 to the 
 lb. weight of Silver Bullion, contains 80A grains of fine silver : 
 hence the Florin contains 161tt grains of fine silver 
 
 When the price of British standard Silver is 60^. per ounce 
 the Rupee is worth Is. 10'2973d., or nearly Is. 10'3d sterling 
 
 In recent years several causes have combined to reduce greatly 
 the Market Price of Silver : these are the greatly increased 
 production of the metal : the demonetisation of Silver by Germany: 
 the vast amount of Paper Money on the Continent : and the 
 greatly increased amount of the India Council Bills 
 
 The more India Council Bills are sold, the more the Dimi- 
 nution in the Value of Silver is increased : and as the Council 
 must sell a suSicient quantity to produce the required amount in 
 Gold : a still larger amount must be sold to make up for their 
 diminished Value : and consequently the heavier is the taxation 
 on the people of India to meet the deficiency 
 
 To estimate truly this deficiency it is necessary to consider the 
 relative Value of Gold and Silver at some fixed era 
 
 In converting Indian accounts into sterling, the Rupee is 
 conventionally valued at 2s., or the 10th of a £ : and from 1850 
 to 1857 did really continue about that price : but since then there 
 has been a rapid declension in its value, coincident with the 
 increased production of the metal : the demonetisation of silver 
 by Germany : and the great increase of the India Council Bills 
 
 It is evident that no correct estimate of the Diminution of the 
 Value of Silver as compared with Gold can be made unless the era 
 of their Value at Par be agreed upon 
 
THE INDIA COUNCIL BILLS 
 
 429 
 
 Statement showing the Disbursements in England made by the Government 
 of India : the Bills of Exchange drawn on India : the average rate 
 of the Rupee : and the Cash Balances of the Government of India 
 in England : and the average Price of Standard Bar Silver per 
 ounce : from 1834^35 to 1880-81. 
 
 Tear 
 
 Bisllursements 
 during the Yew 
 
 Bills of Exchange 
 drawn on India 
 
 Average 
 
 Uate 
 obtained for 
 
 Bills 
 on India 
 
 Gosh Balance 
 
 at the close of 
 
 the Tear 
 
 Average 
 
 Price of 
 
 Bar Silver 
 
 per oz. 
 
 
 £ 
 
 & 
 
 D. d. 
 
 £ 
 
 
 1833-84 . . 
 
 — 
 
 — 
 
 — 
 
 3,772,901 
 
 
 
 1834-35 . . 
 
 5,559,723 
 
 732,804 
 
 1 101 
 
 3,626,488 
 
 69 16-ietha. 
 
 1836-36 .. 
 
 8,367,983 
 
 2,045,254 
 
 1 io| 
 
 5,405,807 
 
 69 11-16 „ 
 
 1836-37 . . 
 
 8,476,317 
 
 2,042,232 
 
 1 10| 
 
 2,737,440 
 
 60 
 
 1837-38 .. 
 
 3,093,923 
 
 1,706,184 
 
 1 11 
 
 4,246,960 
 
 59 9-16 „ 
 
 1838-39 .. 
 
 5,905,984 
 
 2,346,692 
 
 1 1II 
 
 2,928,132 
 
 69^ 
 
 1839-40 .. 
 
 3,316,460 
 
 1,439,525 
 
 1 11 
 
 2,020,227 
 
 60* 
 
 1840-41 .. 
 
 3,356,741 
 
 1,174,450 
 
 1 11 
 
 1,038,299 
 
 60| 
 
 1841^2 .. 
 
 3,757,787 
 
 2,689,283 
 
 1 10 
 
 1,687,661 
 
 61 1-16 „ 
 
 1843-43 .. 
 
 3,:|82,996 
 
 1,197,438 
 
 1 11 
 
 988,199 
 
 69 7-16 „ 
 
 1843-^ .. 
 
 4,023,327 
 
 2,801,731 
 
 1 11 
 
 1,407,791 
 
 59 3-16 „ 
 
 1844-45 .. 
 
 3,571,345 
 
 2,616,951 
 
 1 9S 
 
 1,290,787 
 
 59} 
 59i 
 
 1846-46 .. 
 
 4.210,910 
 
 3,065,709 
 
 1 9 
 
 1,348,494 
 
 1846-47 . . 
 
 3,984,261 
 
 3,097,042 
 
 1 lOf 
 
 1,069,499 
 
 69 6-16 „ 
 
 ■ 1847-48 .. 
 
 4,016,537 
 
 1,541,804 
 
 1 10 
 
 727,756 
 
 69 11-16,, 
 
 1848-49 .. 
 
 4,231,635 
 
 1,889,195 
 
 1 9 
 
 1,844,431 
 
 n 
 
 1849-60 .. 
 
 4,167,705 
 
 2,935,118 
 
 1 10 
 
 2,106,977 
 
 1860-61 .. 
 
 3,862,568 
 
 3,236,458 
 
 2 0^ 
 
 2,766,460 
 
 60 1-16 „ 
 
 1851-52 .. 
 
 3,610,829 
 
 2,777,523 
 
 2 
 
 2,365,848 
 
 61 
 
 1852-S3 .. 
 
 3,796,802 
 
 3,317,122 
 
 1 11 
 
 2,210,367 
 
 60A 
 
 1853-64 . . 
 
 4,369,009 
 
 3,860,565 
 
 2 
 
 
 2,410,280 
 
 6U 
 
 1854-65 .. 
 
 4,272,589 
 
 3,669,678 
 
 1 11 
 
 
 4,767,582 
 
 61} 
 
 1865-56 .. 
 
 6,036.793 
 
 1,484,040 
 
 2 
 
 
 3,431,653 
 
 61 5-16 „ 
 
 1856-57 .. 
 
 4,983,849 
 
 2,819,711 
 
 2 
 
 
 3,041,944 
 
 61 6-16 „ 
 
 1857-68 .. 
 
 9,354,728 
 
 628,499 
 
 2 
 
 3,351,600 
 
 61i 
 
 1858-69 .. 
 
 13,470,617 
 
 25,901 
 
 * 
 
 2,819,398 
 
 61 6-16 „ 
 
 1859-60 .. 
 
 16,253,678 
 
 4,694 
 
 ft 
 
 4,196,093 
 
 62 1-16 ,, 
 
 1860-61 .. 
 
 10,646,185 
 
 797 
 
 « 
 
 2,663,063 
 
 61 11-16 „ 
 
 1861-62 .. 
 
 11,242,685 
 
 1,193,729 
 
 1 11| 
 
 6,733,711 
 
 60 18-16 „ 
 
 1862-63 .. 
 
 10,863,137 
 
 6,641,576 
 
 1 111 
 
 6,248,910 
 
 61 7-16 „ 
 
 1863-64 .. 
 
 16,818,982 
 
 8,979,521 
 
 1 111 
 
 4,696,274 
 
 611 
 
 1864-65 .. 
 
 9,480,062 
 
 6,789,473 
 
 1 ll| 
 
 3,914,891 
 
 6l| 
 
 1865-66 .. 
 
 10,419,741 
 
 6,998,899 
 
 1 11} 
 
 2,818,780 
 
 61 1-16 ,r 
 
 1866-67 .. 
 
 10,924,952 
 
 5,613,746 
 
 1 11 
 
 4,098,779 
 
 6H 
 
 1867-68 .. 
 
 12,681,606 
 
 4,137,285 
 
 1 Hi 
 
 2,833,009 
 
 60 9-16 „ 
 
 1868-69 .. 
 
 13,661,553 
 
 3,705,741 
 
 1 11 
 
 3,025,981 
 
 60i 
 
 1869-70 .. 
 
 14,609,939 
 
 6,980,122 
 
 1 11 
 
 2,892,483 
 
 60 7-16 „ 
 
 1870-71 .. 
 
 13,523,477 
 
 3,443,509 
 
 1 10 
 
 3,306,972 
 
 60 9-16 ,, 
 
 1871-72 .. 
 
 13,486,813 
 
 10,310.339 
 
 1 11 
 
 2,821,091 
 
 60i 
 
 1872-73 .. 
 
 13,831,718 
 
 13,939.095 
 
 1 10 
 
 2,998,444 
 
 60 6-16 H 
 
 1873-74 .. 
 
 16,532,844 
 
 13,286,678 
 
 1 10 
 
 2,013,637 
 
 69i 
 
 1874-75 .. 
 
 14,480,643 
 
 10,841,615 
 
 1 10 
 
 2,796,370 
 
 68 6-16 „ 
 
 1875-76 .. 
 
 14,356,598 
 
 12,389,613 
 
 1 9 
 
 919,899 
 
 62I 
 
 1876-77 .. 
 
 15,696,372 
 
 12,696,800 
 
 1 8 
 
 2,713,967 
 
 1877-78 ,. 
 
 16,904,686 
 
 10,184,465 
 
 1 8 
 
 1,076,657 
 
 64 13-16 „ 
 
 1878-79 .. 
 
 18,739,711 
 
 13,948,566 
 
 1 7 
 
 1,117,935 
 
 52 9-16 „ 
 
 1879-80 .. 
 
 18,200,357 
 
 16,261,810 
 
 1 8 
 
 2,270,107 
 
 51* 
 52I 
 
 1880-81 .. 
 
 18,118,800 
 
 15,239,677 
 
 1 8 
 
 4,128,187 
 
 Total .. 
 
 429,463,736 
 
 242,466,548 
 
 - 
 
 - 
 
 - 
 
 • In consequence of the Mutiny it was necessary to refnrin from drawing on India in 
 
 these years. 
 
430 THEORY AND PRACTICE OP BANKING 
 
 On Monetary and Political Convulsions as influencing 
 the Exchanges 
 
 36. 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 func- 
 tions of money, but as soon as it is destroyed there is an intense 
 demand for money to fill the void. Money rises enormously in 
 value. Multitudes of persons are obliged to sell their goods at a 
 sacrifice. The consequence is that money, having risen greatly in 
 value, both with respect to goods and debts, an immense quantity 
 will flow in from neighbouring countries. Thus in 1800-2, there 
 was a great commercial crisis at Hamburg. The rate of discount 
 rose to 15 per cent. That immediately drained the bullion from 
 the Bank of England. In 1825 there was a great commercial 
 crisis in England. For a considerable period the Bank, by malcing 
 extravagant issues at a low rate of discount, had turned the 
 foreign exchanges against the country. But no sooner did the 
 crisis occur in December than the foreign exchanges immediately 
 turned in favour of it. Exactly the same thing happened in 1847. 
 No sooner had the crisis in that year fairly set in than the 
 exchanges turned in favour of the country. In the French 
 revolution in 1793, and subsequent years, immense quantities, of 
 inconvertible paper were issued, which kept all the French 
 exchanges in a v^ry depressed state. In 1796 this, Paper 
 Currency was annihilated, and the exchanges immediately turned 
 in favour 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 
 
 37. The preceding paragraphs show upon what complicated 
 causes these great movements of bullion depend which produce 
 
MEANS OF CORRECTING THE EXCHANGE 431 
 
 such important consequences. There are three great Economio 
 Quantities — Products, Bullion,, and Debts — all seeking to 
 be exchanged, all flawing 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. 
 Different methods of doing business require diiFerent quantities of 
 Bulhon ; but, however perfect and refined the system may be, we 
 must come at last to the basis of Bullion as its moderator and 
 regulator. If, therefore, the Bullion be suffered to ebb away too 
 rapidly, the whole superstructure is endangered, and then ensues 
 one of those dreadful calamities — a monetary crisis 
 
 We have endeavoured to explain the different causes which 
 produce an adverse exchange, so that if one takes place the proper 
 corrective may be applied. If it be caused by a Depreciated 
 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 Hise in th.e Rate of 
 BiscouxLt 
 
 It used to be a favourite doctrine that an adverse exchange 
 was in itself an inducement to export on account of the premium 
 at which the 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 price 
 
 This was one of the fundamental objects of the framers of the 
 Bank Act of 1844. They truly observed that the prices of goods 
 had often been unduly inflated by the excessive creation of credit, 
 while gold was rapidly flawing out of the country. Thus, when 
 prices were kept too high here, nothing but gold would go. One 
 object of the Act was, therefore, by causing a gradual and com- 
 pulsory contraction of Credit as Bullion ebbed away, to lower the 
 prices of goods and encourage an export of them 
 
 The reasoning of the framers of the Act was undoubtedly 
 correct in that respect. But the only thing is, whether the same 
 object may not be attained another way. This is not the place 
 to discuss fully the policy of that Act, because there are several 
 
432 THEORY AND PRACTICE OF BANKING 
 
 other conflicting theories involved in it, which we cannot fully 
 discuss until we come to the consideration of a commercial crisis 
 
 It is suflB.cient to say here that all the objects of that Act are 
 obtained by paying proper attention to raise the Rate of Discount 
 as 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 out- 
 flow ; and for many years there was a great prejudice against 
 doing so 
 
 We have observed that a difference 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 difference will 
 be more considerable than might appear at first sight. And, if 
 they are three months' bills, of course the profit reaped will be 
 only one-fourth of the apparent difference. Thus, Mr. Goschen 
 says, there must be a difference of 2 per cent, between London 
 and Paris before the operation of sending gold over from Prance 
 for the sake only of the higher interest will pay. And between 
 other continental cities, of course, the difference may be much 
 greater 
 
 But whatever the difference may be, the method is absolutely 
 certain. Directly the rate 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 be the attraction, until at last the necessary 
 equilibrium is restored between Bullion and Credit 
 
RISK OF Nanking in England 433 
 
 CHAPTER IX 
 
 ON THE RISE AND PROGRESS OP BANKING IN 
 ENGLAND UNTIL THE RENEWAL OF THE 
 BANK CHARTER IN 1800 
 
 1. Banking, in the modern sense of the word, had no 
 existence in England before the year 1640. Up to that period 
 merchants had been, for a considerable time, in the habit of 
 depositing their bullion and cash in the Mint in the Tower, for 
 convenience and security, under the guardianship of the Crown. 
 Eleven years had elapsed since Charles I. had dissolved his third 
 Parliament — eleven years crowded with incidents of the deepest 
 interest in the history of the human race. The King and the 
 Parliament parted with feelings of mutual exasperation, and the 
 Monarch gave very plain intimation that henceforth he meant to 
 have no more of them. From that time he and Strafford were 
 engaged in a deliberate and systematic attempt to establish an 
 absolute despotism on the overthrow of the ancient constitution of 
 England. For a little while the King was triumphant— wicked 
 judges gave judgment against Hampden. Laud established an 
 Anghcan popedom on the banks of the Thames. Everything 
 seemed to favour the design, and, humanly speaking, there is 
 every probability that the eminent ability of Strafford would have 
 been ultimately successful, when an incident occurred which 
 destroyed the labours of so many years, and was the moving cause 
 of a train of consequences which ended in the destruction of the 
 monarchy and the church. The republican constitution of the 
 Scottish church was an object of hereditary antipathy to the 
 King ; and his advisers, with that suicidal intemperance which is 
 the invariable characteristic of ecclesiastic despots, thought that 
 the time had now come to force a prelatic liturgy upon the nation. 
 The Scotch, with fierce determination, rushed to arms in defence 
 
 n' 
 
'434 THJLORY AND PBACTICE OF BANKING 
 
 of their ecclesiastical liberty, and the King did not hesitate to 
 accept the alternative of civil war 
 
 3. After some indecisive skirmishing, a treaty was at length 
 agreed upon, probably with little sincerity on either side. But 
 an accommodation of some sort was then an absolute necessity to 
 the King. His first army had exhausted his scanty and ill- 
 managed exchequer. It had cost him £300,000 ; , not only all the 
 money that had been laid up was wasted, but the revenue had 
 been anticipated. The enemy were proud and insolent, the army 
 corrupt and disheartened, the country mutinous, and inclined to 
 the rebels, and the Court, according to Clarendon, were all three. 
 The peculation that went on would be something incredible if it 
 was not said on such excellent authority. The King thought he 
 •might rob every one else, so the officers of the revenue thought 
 they had an unlimited license of robbing him ; of the sum of 
 £200,000, raised from the people, only £1,600 reached the Ex-, 
 chequer. The King was in despair, when he happened to intercept 
 & treasonable correspondence between the Scotch and the King of 
 France. At length, he thought, he might venture to call a Par- 
 liament. The English nation would surely be roused to indignaticm 
 at such flagrant treachery 
 
 3. The writs were issued in December, 1639, for the Par- 
 liament to meet on the 13th April, 1640. Notwithstanding the 
 national exasperation at the proceedings of the King during the 
 preceding twelve years — notwithstanding that, by way of bravado, 
 and to induce people to believe that the Parliament was called 
 entirely through the King's grace and good will, and not through 
 jiecessity, ship money was -levied with the same severity, and the 
 ecclesiastical courts maintained their usual cruelty— the nation 
 were sincerely anxious for peace and moderation. TJnder the 
 influence of these feelings they returned a House of Commons 
 wishful to reform abuses, but composed of persons free from party 
 engagements, afraid of all violence, secret combinations, or doing 
 anything to hazard the peace of the country. Clarendon bears 
 testimony that there was not the least approach to any. irreverence 
 to the Crown, that it managed all its debates and behaviour with 
 wonderful order and sobriety, and that it was exceedingly well- 
 
RISE OF BANKING IN ENGLA.!ND 435 
 
 disposed to please the King, and to do him service. In a debate 
 on a case where the Lords had undoubtedly committed a gross 
 breach of the privileges of the House, there was not an angry 
 or offensive word spoken ; and when an obscure member made 
 a sneering remark upon the bishops, he met with no en- 
 couragement 
 
 4. But the evil genius of the King prevailed. The unhappy 
 Monarchj utterly unconscious of the momentous nature of the 
 problem which was in course of solution, quarreled with the 
 Parliament, which was his last hope of salvation. In a fit of 
 indignation that it did not instantly submit to his haughty de- 
 mands, and vote an enormous supply with the readiness of eastern 
 slaves, he dissolved it within three weeks of its meeting, \vithout 
 having passed a single Act ; to the profound grief and despondency 
 oi all who were anxious for peace — to the gloomy delight of 
 those sterner spirits whose souls thirsted for vengeance for. the 
 tjrranny of years. No sooner was the deed done than he was 
 seized with alarm and regret, and endeavoured to recall it, but it 
 was too late. No suppHes 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 heavy loss for ready money. It was 
 debated for several days at his Council to coin £800,000 of base 
 money, with 3d. of silver in the shilling, but the plan was 
 finally rejected owing to the speech of Sir Thomas Rowe, a 
 noble argument, which might have been studied with advantage 
 nearly two centuries later. Besides this, the King seized 
 the merchants' Ballion and cash in the Tower, to the amount of 
 £120,000. 
 
 6. 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 impolicy of 
 
 FF 2 
 
436 THEORY AND PRACTICE OE BANKING 
 
 sach 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 
 principal and interest was ultimately repaid to them. But, 
 although they had succeeded in this instance in saving their 
 property, the prestige of the Eoyal honour was gone : they were 
 too wise to trust their money again to such precarious custody, 
 and they were 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 off with them their 
 masters' cash. Others lent out their master's money clandestinely 
 to the goldsmiths at interest at id. 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. difference in the ounce, and most of it 
 heavier than it ought to have been according to the relative value 
 of the metals abroad. The goldsmiths did, what always will be 
 done under such circumstances, they bought up all the heaviest 
 coins, and melted them for exportation. Moreover, they 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 high interest, and began to 
 discount their bills. Finding this to be very profitable, they 
 began to attract deposits to themselves, by offering interest for 
 them, and allowing the depositors to have repayment whenever they 
 pleased. People found 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 were transmitted to town. Five 
 or six stood pre-eminent among their brethren, and Clarendon 
 
RISE OF BANKING IN ENGLAND 437 
 
 says that they were men known to be so rich and of so good 
 reputation, that all the money of the kingdom would be trusted 
 or deposited in their hands. And they then first came to be 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 
 unquestionable sincerity in wishing to govern with free parlia- 
 ments, he and they were unable to agree any better than his 
 Eoyal predecessor had done with them. They were jealous of his 
 power, and kept him in a constant state of financial embarrass- 
 ment. 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 was not lost under that of his dissolute 
 successor. The first care of the restored monarch was to disband 
 the terrible Eepublican armies. But they required to be paid off, 
 and some hundreds of thousands of pounds were required to be 
 got together in a few days. The slow receipts of the taxes were 
 quite inadequate to effect this, and the Ministers were compelled 
 to have recourse to the bankers, and they were so well satisfied at 
 their proceedings that they declared the King's affairs could not 
 be carried on without their assistance 
 
 9. Their method of doing business with the Crown was as 
 follows. As soon as the supplies were granted, they were sent for 
 to attend the King. He, having consulted his Ministers 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 provided by such a day. They were then asked how much 
 they could lend, and what security they would require. Each 
 answered according to his several ability, for there was no joint 
 stock among them, one perhaps, £100,000, another more, another 
 less. They were desirous of having 8 per cent, for their money, 
 which the King and his ministers were quite ready to give, as a 
 reasonable remuneration i but, upon further consideration, they 
 
438 THBOEY AND PEACTICE OF BANKING 
 
 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 was 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 revenue as were least charged. 
 But even this was no security, as the King and the treasurer 
 might divert these payments to other purposes. " Therefore,"' 
 says Clarendon, " there is nothing surer but that it was nothing 
 but the unquestionable confidence in the King's justice and the 
 treasurer's honour and integrity, which was the true foundation of 
 that credit which supplied the necessities of the Government. 
 The King always treated them very graciously, as his very good 
 servants, and all his ministers looked upon them as very honest 
 men." We shall soon see how their confidence in the King's 
 honour was repaid 
 
 In 1663, Charles II. issued a splendid gold coinage of £6, £2; 
 and 20s. pieces ; the latter were called Guineas, as they were made 
 of gold brought from the Guinea coast by the African Company. 
 They were struck to be equivalent to twenty shillings in silver, 
 and thus to represent the £, or Pouitd, in gold. The pound, 
 ■weight of Crown gold was ordered to be cut into 44^ guineas, and: 
 continued to be so as long as they were coined 
 
 11. It belongs to the general historian to relate the terrible 
 downfall of England's greatness in eight years from- the death of 
 Cromwell. The year 1667 may be considered as the nadir of the 
 national humiliation. For the first, and we may devoutly, trust 
 with Macaulay, for the last time, the citizens of London heard/ 
 the sound of hostile cannon. With extraordinary infatuation, the; 
 Government rushed into a war with Holland, whose capital hadi 
 illuminated when the news arrived of the death of their tprriblej 
 antagonist, Cromwell, and little boys ran about the strgets, cryiug. 
 that the devil was dead. Notwithstanding the unexampled, 
 magnitude of the supplies voted by Parliament, they, were allf 
 embezzled by the courtiers, who made fortunes while the sailors, 
 mutinied for want of pay, and the ships were unsea worthy. The 
 
RISE OF BANKING IN ENGLAND 439 
 
 Duteh destroyed Sheerness and Chatham, butned the ships lying 
 there, and insulted Tilbury 
 
 IS. Nothing could be more disgraceful and humiliating than 
 the misconduct which led to this disaster but the wild despair 
 and ridiculous consternation that toot possession of the people 
 of London when they heard of it. The King alone, who never 
 wanted personal courage, and the Duke of York, kept their 
 composure, and put to shame the cowardice of a general officer,; 
 who thought himself one of the greatest soldiers in Europe, 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 that 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 
 crfeditors aU the securities and assignments made for repayment 
 of their advances ; that he would not on any occasion whatever 
 permit any alteration or interruption of these securities. He 
 moreover said that he held this resolution firm and sacred in all 
 fiiture assignments and securities to be granted by him upon any 
 other advances of money for his service, by any person 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, his 
 country, her honour and greatness to the King of France, and 
 for 20 years England suffered an eclipse in European politics. 
 The public indignation at the ravages of the Dutch demanded a 
 scapegoat, and it was appeased by the sacrifice 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 popularity at home and 
 
440 THEORY AND PRACTICE OF BANKING 
 
 respect abroad for this unwonted display of firmness and 
 magnanimity, which revived the memory of Cromwell, the 
 infamous traitor signed a secret treaty with Louis, binding 
 himself to re-establish the Eoman Catholic religion in England, 
 to unite with him, and destroy the very people with whom he was 
 so ostentatiously in alliance'. Bad as the Cabal Ministry were, 
 the indelible infamy of this transaction was peculiarly personal, 
 to the King. He 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 sufSciently 
 wicked to be entrusted with their knowledge. The Treaty was 
 signed in May, 1670 
 
 14. It was impossible to prevent some hints of what was 
 going on reaching Holland. De Witt and the States took alarm 
 at the recall of Temple, whose character for honour and integrity 
 stood so high that his presence was considered a sufficient 
 guarantee of the fidelity of England. The King ordered him to 
 leave his family at the Hague, and promised his speedy return. 
 Parliament met in October. The King left the Lord Keeper to 
 explain his vfews to them. The Keeper expatiated upon the King's 
 pleasure in meeting his Parliament, the immense 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 supply asked for, and added to it a long 
 homily on the growth of Popery, and earnestly petitioned the 
 King to take measures to suppress 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 temptations whatever 
 
 15. No sooner were the credulous Commons duped out of 
 their money and dismissed, than the King set to work to pick a 
 quarrel with the Dutch, They were wantonly provoked by a 
 jnost outrageous insult. A small yacht, not even a man of war, 
 
EISE OF BANKING IN ENGLAND 441 
 
 was ordered to sail through their whole fleet on their own coast, 
 and iire upon them if they did not strike their flag to it. The 
 Dutch, who tendered any explanation that the English Govern- 
 ment 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. Prance 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 wholesome a respect 
 for the English nation to venture again upon ship money. 
 In this dilemma the King declared that the staff of the 
 treasurer should reward the ingenuity of the man who should 
 discover an expedient for "raising the wind." Shaftesbury is 
 said to have the merit of originating the idea, but Clifford reaped 
 the profit and honour. The expedient hit upon was to shut up 
 the Exchequer 
 
 16. Charles seemed to be most at home in the lowest depths 
 of iniquity. With the treaty of Dover in one pocket, he 
 professed a warm zeal for the Protestant religion ; with his 
 Proclamation of 1667 in the other, he seized upon the bankers' 
 money in the Exchequer. "When he had performed the splendid 
 feat of duping his Parliament out of £800,000, for the purpose 
 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 
 treasurer's staff, he superadded an ignominious peerage. On the 
 2ad January, 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 
 Vyner alone 
 
 17. The bankers, it is true, were not many, but the money 
 they had belonged in great part to their customers, and these were 
 10,000. The cowp de finance was so cleverly done that no one, 
 except one or two of the most intimate friends of the conspirators, 
 
442 THEOEY. AND PEACTICE OF BANKING 
 
 had the slightest warning. The 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 went 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 public- 
 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 by 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,,, 
 for the benefit of their creditors, in lieu and satisfaction of their 
 debts, a yearly rent, part of the hereditary excise, equal' to 6 per 
 cent, upon 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 times of fiery trial. The recoil of 
 the crimes and cruelty of the Popish plot had struck down the ; 
 fomentors of that horrible delusion. The blood of the hostile 
 parties alternately flowed like water from the scaffold. The^ 
 RoyaUsts had. obtained the undisputed ascendency, and payment, 
 of the interest due to the bankers immediately ceased... None was 
 paid during the reign of James II. At length, in 1689, when' 
 the creditors were worn out with despair, some , of them 
 determined to petition the. Court of Exchequer to make an 
 order for payment of their claims. The Crown determined to) 
 resist payment, and the case was argued at great length?; two 
 ypars were occupied in the arguments .and deliberations', of the^ 
 
RISE OP BANKING IN ENGLAND 443 
 
 judges. At length, in 1691, the Court gave judgment in favour 
 of the petitioners, and made an order on the Exchequer for 
 payment. The Court appealed to the Exchequer Chamber. At 
 that time the Lord Chancellor, 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 Homers 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 patent were good and valid to bind the 
 Crown. 2. Whether the remedy taken by the petitioners was 
 thC' proper one, and if it was in the power of the Court of 
 Exchequer to order payment from the Treasury of the- sums due 
 to the claimants. On the first point the Common Law Judges 
 unanimously held that the letters patent were good and vahd to 
 bind the Crown. On the second point they all, with one excep- 
 tion, held that the petitioners had adopted the proper course in 
 petitioning the Exchequer, and that the 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 power 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 Somers. It 
 is one. of the most famous cases in Westminster Hall. The Lord 
 Keeper is said to have expended several hundred pounds in 
 collecting books and pamphlets for his judgment. He carefully 
 abstained from, pronouncing any opinion as to whether the grant 
 was goodj and bound the Crown ; but, after going over all the 
 precedents with extraordinary care and minuteness^ and reviewing 
 the history and powers of the Court of Exchequer, he held that 
 the petitioners had adopted a wrong remedy, and that the Court 
 had no power to order payment as it had done. It was ' doubtful 
 whether the Keeper of the Great Seal had power to give the 
 judgment of the Court against the 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 Exchequer 
 
 19. Under such circumstances, it was scandalous and dis- 
 
444 THEORY AND PKACTICE OF BANKING 
 
 graceful in the Crown to contest the matter any longer. Every 
 
 one affirmed the case ; the objection was purely technical. The 
 
 claimants appealed to the House of Lords ; the Crown persisted 
 
 in a strenuous and disgraceful opposition, but, on the 23rd 
 
 January, 1700, the Lords finally gave judgment in favour of the 
 
 bankers, and reversed the judgment of Lord Somers. One would 
 
 have thought that after such aggravated wrong and injustice, the 
 
 Parliament 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 
 
 farthing of it. An Act was passed in 1700, that after the 26th 
 
 December, 1701, the hereditary 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 expense of such protracted litigation 
 
 20. Notwithstanding the political agitation of the period, 
 and the vice and extravagance of the Court, 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 Grovernment to 
 erect similar institutions. A great number of projects were 
 started in print, some of particularly magnificent dimensions, but, 
 as none of them came to anything, we need not be delayed by 
 them any further 
 
 21. The troubled, but glorious era of 1688, not only 
 destroyed public credit, but as was natural, diminished the 
 productiveness of the taxes, and the new Government were 
 obliged to purchase popularity by abolishing the -hearth tax. 
 
RISE OF BANKING IN ENGLAND 445 
 
 The tonnage and poundage, which in the reign of James II. 
 produced £600,000, fell in 1693 to £286,687, and, notwith- 
 standing some additional taxes ,were laid on, the whole revenue 
 in 1693, was £1,510,318. Such an income was wholly 
 inadequate to sustain the feeble and unsettled Government, and 
 the most extensive frauds and robberies prevailed among the 
 public officers. Some of these frauds were brought to light and 
 the offenders punished ; but, though commissioners were appointed 
 for the purpose of discovering the defaulters, the Commons 
 resolved in 1701 — "That it was notorious that many millions 
 of money had been given to his Majesty for the service of the 
 public, which remain yet unaccounted for." It was alleged, that 
 in five years, the almost incredible sum of nearly eleven millions 
 was thus embezzled 
 
 22. The chief object which tempted 'William's ambition to 
 obtain the Crown of England, was to head the great European 
 alliance against the overwhelming power of France. No sooner 
 was the King pretty firm on his throne than he persuaded the 
 Parliament to agree to a war with their ancient enemies. The 
 Parliament was eager for the war and readily voted supplies, but 
 they were scarce, and difficult to be got. The Governinent, at 
 first, attempted to persevere in the old plan of mortgaging the 
 grants to be voted by Parliament. Their attempts, however, 
 were not very successful; and, in 1690, Parliament began the 
 system of allowing money to be raised on short annuities, which 
 was attended with good success. The increasing expense 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 £1,000,000 upon 
 a tontine scheme. The subscribers were to receive 10 per cent, 
 till 1700, and after that £7,000 per annum was to be divided 
 among the survivors till their number was reduced to seven, when, 
 upon the death of each, his annuity was to lapse to the Crown. 
 So low was the credit of the Government that only £108,100 was 
 obtained on these tempting terms, and a clause was introduced by 
 which the subscribers might obtain 14 per cent, upon any lite 
 they chose to nominate. But even these two schemes produced 
 only £881,493 
 
•4.46 THEORY AND PRACTrCE OE BANKING 
 
 S3. All these devices, however, failed in producing an 
 •adequate supply of money to support the war, which 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 were obhged to revert to the humihating plan 
 of borrowing from every one in the city they could. They were 
 obliged to solicit the Common Council of London for so small a 
 sum as £100,000, and if they granted it, the Councilmen had to 
 make humble suit to the inhabitants of their respective wards, 
 •going from house to house for contributions, and for these 
 advances they had to pay, in premiums, discount, and commission, 
 from 30 to 40 per cent. 
 
 24. The unhappy bankers, and their assigns, had, in despair 
 'of having their rights acknowledged by the Crown voluntarily, 
 been driven into a court of law. Some of them, however, 
 endeavoured to come to an agreement with the Crown. "When it 
 tried to raise money by way of perpetual annuities in 1691, they 
 thought that they might make terms for themselves. On the 18th 
 January, 1692, their proposal was submitted to the House. They 
 said that whereas the debt due to the bankers and their assigns, 
 was above £1,340,000 principal, with 8| years' arrears of interest, 
 at 6 per cent, at Christmas, 1691, they proposed 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 £29,378 ; 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 arrangement. 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 Com- 
 mittee who brought up this report to the House first met, a 
 proposal was made to them, that certain parties- were ready to 
 
RISE OF BANKING IN ENGLAND 447 
 
 'subscribe a million, on condition of receiving £65,000 a year, of 
 which £5,000 was to be for management, and the rest for 
 interest, and that their bills of property or stock should have a 
 'forced cun-ency, 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 per cent on that sum. This scheme was devised 
 by Mr. William Paterson, and supported by several wealthy 
 merchants in the city. The Committee declined to receive the 
 proposal for giving a forced currency to this stock, but they were 
 quite willing to receive such a plan, and make the .stock transfer- 
 able at pleasure. The proposal broke off upon this difference. 
 Paterson and some of his friends were 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 beginning of 1694, 
 when the increasing public necessities made the Ministry 
 attempt to start another such project. They sent for Paterson, 
 and requested him to organise another plan. His second project 
 was to raise a capital 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 per cent. The Lords of the 
 Treasury, however, who were accustomed to allow 40 per cent, 
 discount on tallies at 8 per cent, interest, which had but four or 
 five years to run, could not be persuaded that persons would 
 subscribe at par to a fund which had no positive determination. 
 This plan underwent several modifications, but they all failed, 
 and a lottery was started to supply the deficiency, which was 
 equally abortive. Not discouraged by the failure of all these 
 attempts, he persevered, and formed another project, which was to 
 raise and circulate £1,200,000 upon a fund of £100,000 a-year. 
 Some party jealousy came at the opportune moment to assist 
 Paterson. Mr. Michael Godfrey, brother of Sir Edmundbury 
 Godfrey, and some persons who were nettled with some 
 transactions with the East India Company, now took Paterson 
 tp, and in effect, supplanted him ; for, though he continued to 
 iadvise and assist in the direction of the measure, Godfrey stood 
 foremost in it, and was considered both by the Ministers and the 
 
448 THEORY AND PRACTICE OF BANKING 
 
 Parliament as the efficient man, on whom all depended, and to 
 whom all acknowledgments were to be paid 
 
 S5. 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 
 existence 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 was there to be 
 found such a degree of monetary honour, as to induce people to lend 
 their funds upon perpetual annuities upon the security of the 
 Eoyal word. The debt created by the establishment of the Bank 
 of England was the first attempt in England to raise money by 
 way of jjerpetual annuities, and it did not take place until the 
 chief power in the State had finally passed away from the Crown 
 to the Parliament. Only thirteen years after the Eevolution, the 
 King, in his speech to Parliament, 30th December, 1701, 
 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 monarchs ! 
 
 27. The Act, Statute 1694, c. 20, incorporating the Bank of 
 England, received the Eoyal assent on the 25th April, 1694, and 
 its chief provisions are as follows — ■ 
 
 1. After providing ibr raising certain taxes mentioned in the 
 Act, it directed that the sum of £100,000 a-year should be 
 appropriated to the encouragement of persons making a voluntary 
 loan of £1,200,000 for the purpose of carrying on the war with 
 Prance, in the following manner — 
 
CHARTER OF BANK OF ENGLAND 441) 
 
 2. The Crown might appoint commissioners to receive sub- 
 scriptions for the sum of £1,200,000, before the 1st August, 
 1694, from any 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 was empowered to authorise, by letters patent, 
 the subscribers to the loan to assign and transfer their stock and 
 interest, and to prescribe the manner of .doing so, and to erect' 
 them into a corporation, to be called the Governor and Company 
 of the Bank of England, with all the usual privileges of a corpora- 
 tion, together with the power to acquire and hold lands, rents, 
 tenements, and hereditaments of all descriptions, in as full 
 a manner as any private individual, subject to a proviso of 
 redemption 
 
 4. That in case the whole sum of £1,200,000 should not be 
 paid into the Exchequer by the Ist January, 1695, then the pay- 
 ment to the subscribers shall only be at the rate of 5 per cent, on 
 the sum advanced ; and that at any time after the 1st August, 
 1705, upon Parliament giving twelve months' notice, and 
 repaying the whole of the debt due, the Corporation should cease 
 and determine 
 
 5. No single person was to subscribe more than £20,000, 
 and one-fourth was to be paid down at the time of subscription, 
 and the remainder before the 1st January, 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 was subscribed before 
 the 1st of August, the subscribers were not to be made a cor- 
 poration, 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 
 aUowed to do so by Act of Parliament. In case they exceeded 
 this limit, the proprietors were to be liable in their private 
 capacities 
 
 8. The corporation were aUowed to deal in bills of exchange, 
 to buy or sell bullion, gold, and silver, to lend money on the 
 
450 THEORY AND PRACTICE OF BANKING 
 
 security of goods aad wares, and merchandise, and if the loan 
 was not repaid within three months of the time agreed upon, to 
 sell such goods ; and to sell goods, the produce of their own 
 lands 
 
 9. But they were strictly forbidden, either directly or 
 indirectly, to deal or trade, or to permit any one on their behalf 
 to deal or trade, with any of the money, stock, or effects of the 
 corporation, in buying or selling any goods, wares, or merchan- 
 dise, under 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 
 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, by 
 indorsement thereon, and all such assignees might sue thereon in 
 their own names 
 
 11. That if the Corporation should purchase any Crown lands, 
 or advance any money to the Crown whatever, except by the spe- 
 cial permission of Parliament, they should forfeit treble the value 
 of all such advances ; one-fifth to any common informer, and the 
 remainder to the public 
 
 12. All fines, amerciaments, and Judgments recovered against 
 the corporation might be paid by the officers of the revenue, out 
 of the annuity of £100,000 
 
 In pursuance of this Act, a commission to receive subscriptions 
 was nominated on the 15th of June, the whole stock was subscribed 
 for in ten days, and the Charter of Incorporation was issued on 
 the 27th July 
 
 S8. 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 eight per cent. 
 But several very numerous classes of people regarded it with the 
 utmost detestation. The usurers, whose inordinate gains were 
 checked, were filled with rage. Some said that it would become 
 a gigantic monopoly, engross all the money in the Kingdom to 
 itself, and 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 
 
THE BANK OF ENGLAND 451 
 
 their passion, that if the Bank allowed 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 in the expected 
 supplies. The domestic enemies of the Government were furious 
 against it, because they saw how enormously it would strengthen 
 the new dynasty 
 
 S9. The immense benefit which accrued to the State by the 
 establishment of the Bank, -was shown by the increased vigour 
 with which the war was carried on. The army assumed the 
 offensive; and, in July, 1695, the King undertook the siege of 
 Namur. At this time Mr. Michael Godfrey, the Deputy-Governor 
 of the Bank, went 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 a pamphlet on 
 the subject of the Bank, which is of great historical 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 forwarding. He states 
 that, whereas in the beginning of 1694, the Government talhes 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 per 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 contemporary 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 scandalously 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 surprising and quite 
 
 GG 2 
 
452 THEORY AND PRACTICE OF BANKING 
 
 unexampled, 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, which 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, within 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 well as bank bills, hut 
 they do not consider that it is nothing mahes bank litis current, 
 .hut only hecause all those who desire it can go when they will and 
 fetch their money for them ; and to force anything to pass in pay- 
 ment but money would soon end in confusion. He then enters 
 into numerous arguments to show that any attempt at a forced 
 currency would only end in damaging the public credit. He says 
 that the chief reason of the indignation of the goldsmiths at the 
 Bank was that they allowed id. per cent, per diem on their bank 
 bills, which drew away customers from them. He says that the 
 interest allowed to the holders of their bills amounted to £36,000 
 per annum 
 
 30. The year 1694 is remarkable as the one in which the 
 first of those speculative manias occurred, which have, on different 
 subsequent occasions, seized upon the nation. All the tricks, all 
 the rogueries, which have been so familiar in the joint stock 
 bubbles of later years, were rife at the time, but it is 
 remarkable that while, in later times, these things have always 
 sprung up when there was a greater abundance of capital than 
 usual, in time of peace, this was at a time when a costly war 
 had been raging for several years, and there was a great dearth 
 of specie 
 
 31.. We must now retrace our steps a little, and examine 
 t^e -condition of the Coinage, which is necessary to understand the 
 subsequent history of Banking ; for controversies on the subject 
 
BAD STATE OF THE COINAGE 453 
 
 now began which have lasted almost till our own times ; if indeed 
 they may be even yet considered to be extinct 
 
 In April, 1690, the great scarcity of silver coins occasioned 
 great public inconvenience. The goldsmiths complained to the 
 House of Commons that they had ascertained that immense 
 quantities of silver bullion and dollars had been exported. That 
 many Jews and merchants had recently bought up large 
 quantities of silver to carry out of the kingdom, and had given 
 three half-pence per ounce above its regulated value. That this 
 had encouraged the melting down of much plate and milled 
 money, whereby for six months past no Bullion had been 
 brought to the Mint to be coined. The House appointed a 
 Committee, who verified these allegations. It was shown that 
 the profit of melting down the milled money for exportation was 
 about £25 per £1,000, and that the Mint price of silver was 
 £5 2(^. per ounce, but it was generally sold for 5s. S^d. The 
 House, in consequence, passed one of their useless laws against 
 exporting Bullion 
 
 The state of the Coinage now became every day more dis- 
 graceful. Quantities of base and counterfeit coin were thrown 
 into circulation. The House of Commons addressed the King to 
 abolish the private right of coinage of half-pence and farthings. 
 The current coins had been for mauy years chpped and 
 adulterated, which in 1694 reached such a height, that the 
 silver coins current had lost nearly half their value, while a 
 great part of the currenfe money was only iron, brass, or copper 
 plated 
 
 As this state of matters gave rise to the first great Currency 
 debate of modern times, and brought 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, guineas, which had originally been coined 
 to represent 20s., gradually rose, till they reached 30s. The 
 exchange with Holland fell 25 per cent., and it would have fallen 
 still lower, only it was shewn that the real exchange was in favour 
 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 Chaplain-in-Ordiaary to the 
 
454 THEORY AND PRACTICE OE BANKING 
 
 King and Queen, being selected to preach before the Lord Mayor 
 and Aldermen on the 16th December, 1694, made it the subject 
 of his sermon on the text, Gen. xxiii., 16. In an admirable 
 sermon, or rather politico-economical discourse, he denounced the 
 fraud and wickedness of clipping and debasing the coinage. He 
 said (p. 19), that the money was clipped down nearly one half. 
 He showed that he understood the subject a great deal better 
 than many men a century later. He showed that, if the money 
 generally were clipped, all the good and weighty money that 
 remained 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 Gasar's face and titles, but weight 
 and goodness that procure credit. And, if a foreigner importmore 
 of his country's goods than he carries away of ours, the over- 
 balance must be paid in weighty money, for the clipped will not go 
 abroad. Now, if the exportatiou of our weighty money (which is 
 only now the milled) be a mischief to a nation, we see it is 
 occasioned chiefly by the clipping " 
 
 33. The disgraceful state of the Coinage could no longer 
 be overlooked by Parliament. On the 8th of January, 1695, a 
 Committee was appointed to consider the subject. At this time, 
 says the Parliamentary History, vol. v., p. 955 :— " The difiBculty 
 lay so heavy upon 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 
 diminished and debased, as that five pounds in silver specie 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 expense 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. 6^. 
 That various penalties should be imposed for offences against the 
 coins. An Act was passed, statute 1695, c. 17, to prevent 
 
BAD STATE OF THE COINAGE 455 
 
 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 
 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, borrowing, 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 ought by law to 
 pass for, under a penalty of 10s. for every 20s. so trafficked with. 
 It also enacted that whoever should buy or sell, or knowingly 
 have in his possession, any clippings or filings 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 
 goldsmith, or refiner of silver, to buy or sell Bullion, under pain 
 of imprisonment, and enacted numerous other vexatious penalties 
 and regulations respecting the export of Bullion. All these 
 absurd cruelties were wholly ineffectual, 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 
 
 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 standard, 
 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 ozs. 11 dwts. 8 grs., showing a deficiency in the 
 weight of the carrent coins in the ratio of 10 to 22. One 
 writer says (An Essay for regulating of the coin. By 
 A. v., Sept. 2, 1695)— "Upon trial I have found that 5s. 
 of miUed 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. 
 
456 THEORY AND PRACTICE OF BANKING 
 
 Again, 20s. of milled money to weigh 43s. of our now current 
 money 
 
 " I hare 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 place £100 Weighed 222 15 
 
 Another place 198 17 
 
 Another place 190 
 
 Another place "... 182 8 
 
 Another place 174 11 20 
 
 1,198 5 17 
 "The £600 weighing in all 1,198 oz, 5 dwts. 17 grs., and is 
 no more than what £310 in milled money will weigh 
 
 " I am informed the money paid into the Exchequer doth 
 weigh from 15 (and seldom the £100 reacheth) to 20 lbs. 
 weight, so that the very best brought in there doth not weigh 
 two-thirds of what it ought to do, and the money paid into 
 the Exchequer is supposed, a great part of it, to come from the 
 country 
 
 "But, as it's believed that the 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 am informed that £100 doth weigh on 
 
 ■ trial of two bags in each place, to be, viz. — 
 
 In the City of Bristol, one bag of £100 weighed 
 
 Another weighed 
 
 In the City of Cambridge, a bag of £100 
 weighed 
 
 Another weighed 
 
 In the City of Exon, one bag of £100 weighed 
 
 Another weighed 
 
 In the City of Oxford, £100 in half-crowns 
 weighed 
 
 £100 in shillings ... 
 
 Oz. 
 
 240 
 227 
 
 Dwt. Gr. 
 
 
 15 
 
 203 
 211 
 180 
 192 
 
 5 10 
 19 
 7 
 3 
 
 216 
 
 198 
 
 10 
 15 
 
 1,669 
 
 1 20 
 
BAD STATE OE THE COINAGE 457 
 
 "The £800 weighing no 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 warm controversy arose 
 whether the new money which should be coined should be of the 
 old standard in weight, fineness, and denomination, or whether it 
 should be depreciated, or raised in value, as it was absurdly 
 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 were depreciated, and a strong party maintained that 
 the standard of the coin should be depreciated to the level of the 
 depreciated notes 
 
 33. 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 passed at 30s. We shall, therefore, make some extracts 
 fcom contemporary pamphlets. It says, in one published in 1695 
 {Some Remarlcs on a Report containing an Essay for the Amend- 
 ment of the Silver Coins, iy Mr. W. Lowndes. London, 1695), 
 page 6, after speaking of the gradual deterioriation 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 G-OLD 30s. a Guinea in good money, 
 that is, in weighty standard money, but in clipped and counter- 
 feit money, whereof 6s. 5d. was 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 accoedinglt, so that 
 it cannot properly be said that Bullion is advanced much, but 
 that the money that is exchanged for them is of much less value 
 than it was, and the new coining of our money will not, as I 
 apprehend, alter the value of bullion, gold, &c., but it will bring 
 silver in coin to its due value " 
 
 After enforcing and illustrating these views at considerable 
 
458 THEORY AND PRACTICE OF BANKING 
 
 length, he observes that Mr. Lowndes hoped that the exchange 
 with Holland, which was then 25 per cent, against England, 
 might be prevented falling lower, and. says, page 16 — 
 
 " If guineas continitb current at 30s. a piece, the 
 exchange will continue about the rate it does, except the common, 
 and ordinary variation, which many sudden drafts and remit- 
 tances occasion ; and if guineas fall, the exchange will rise in 
 proportion; AND if the silver coin is redressed guineas 
 WILL FALL, and there are no other designs whatsoever can efPect 
 any considerable alteration, for English standard silver and 
 standard gold will always be of the same value in Holland, as the 
 same standard silver and gold in England, with 2, 3, 4, and 6 
 per cent., or thereabouts : and that difference 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 19 — 
 
 " 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 the badness of our silver coin 
 
 Again, page 20 — 
 
 "The Balance of Trade is not the Cause of the 
 Great Fall of the Exchange with Holland, but the 
 Debasing of 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 quantity, but to let it be entirely free 
 
 84. We have already seen from the pamphlet of Mr. G-odfrey 
 that, in the spring of 1695, the Bank was in high credit. His 
 pamphlet is nothing but a strain of congratulation on the great 
 success that had attended the experiment. Burnet also tells us 
 that a party in the country, who were moved with great jealousy,, 
 formed a design to ruin it on account of its flourishing credit. 
 They tried what could be done to shake its credit, but this 
 attempt was rejected with indignation by both Houses. He also 
 tells us at the same period, that there were two sets of coin, one 
 
BAD STATE OF THE COINAGE 459 
 
 milled, which could not; be practised upon, the other not so, 
 which was clipped, and so much so that at last it was diminished 
 to less than half its proper weight. When this had gone on for 
 some time, the King was advised to issue a proclamation to 
 make it current by weight and not by tale, but it was strongly 
 opposed in the Council. The badness of the money then was 
 ■very visible. Guineas, which were valued at 21,'?. 6d. in silver, 
 rose to 30s., that is to say that 30s. sank to 21s. Gd. The 
 deterioration became still worse, and later in the summer Lord 
 Somers again proposed in the Council that a proclamation 
 should be issued to make coin current by weight and not by tale. 
 The King was also of that opinion, but the rest of the Council 
 were unanimously against it. " And so," says Burnet, " this 
 proposition was unanimously laid aside, which would have saved 
 the nation about a million of money. For now all people believed 
 that the Parhament would receive the clipped money in its tale, 
 clipping went on, and became more visibly scandalous than ever 
 it had been " 
 
 35. Mr. "Wilham Lowndes, the Secretary of the Treasury, 
 was Ordered by them to make a Eeport 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 the time, valuable investigation of the history 
 of the coinage, and its successive depreciations in weight and 
 fineness. After giving the date of every Mint indenture for four 
 hundred years, he says, p. 56 — " By the careful observing of 
 which deductions here made, from the indenture of the Mint for 
 about 400 years past (many of which are yet extant, and have 
 been seen and examined by me), it doth evidently appear that it 
 hath been a policy constantly practised in the Mints in England 
 (the like having indeed been done in all Foreign Mints belonging 
 to other Governments), to raise the value of the coin in its 
 . extrinsic denomination from time to time, as any exigence or 
 occasion required ; and more especially to encourage the bringing 
 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 
 
460 THEORY AND PRACTICE OF BANKING 
 
 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 extrinsic value of the coin can by no possibility mean any- 
 thing else but the quantity of things it will exchange for. And to 
 call the quantity of things it will exchange for its denomination is 
 a most pitiable confusion of ideas. Mr. Lowndes then says : — 
 " The which being premises, and every project for debasing the 
 money (by the reason before given) being rejected as dangerous, 
 dishonourable, and needless, it remains that our nation in its 
 present exigence, may avail itself, by raising the value of its coinsj 
 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 joieces less, 
 or ordaining the respective pieces (of the present weight) to be 
 current 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-live pence — a wild goose chase in 
 which we decline to follow him 
 
 His proposal was, then, that all the existing undipped silver 
 money should be raised in denomination to 6s. M. the crown, 
 and other coins in proportion, so that the shilling would pass for 
 fifteen pence instead of twelve. That new coins should be struck 
 at the increased denominations. These coins he proposed to 
 christen by new names. . The reasons he alleged for this pro- 
 ceeding are — "1. The value of the silver in coin ought to be 
 raised to the foot of 6s. 3rf. in every crown, because the price of 
 standard silver in Bullion is risen (from divers necessary and 
 unnecessary causes, producing at length a great scarcity thereof 
 in England) to 6s. bd. an ounce. This reason (which 1 humbly 
 conceive will be irrefragable) is grounded chiefly upon a truth 
 so apparent, that it may well be compared to an axiom, even in 
 
LOWNDES ON THE COINAGE 461 
 
 mathematical reasoning, to wit — that whensoever the extrinsic 
 value of silver in the coin hath been, or shall he, less than the 
 price of the silver in Bullion, the coin hath been, and will be, 
 melted down " 
 
 He then enters into some objections against this proposal, and 
 says, p. 76 — " That everything having any value or worth what- 
 soever, when it becomes scarce, grows dear, or (what is the same 
 thing) it riseth in price, and consequently, it may 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 aforesaid, is conse- 
 quently grown dearer. That it is risen in price from 5s. 3d. to 
 6s. 5d. an ounce ; and, by 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. by 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 acquire. That this advanced price of the 
 silver has been growing for some time, 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 understood to be a cause 
 of making silver scarce. That there can never be proposed any 
 just or reasonable foot npon which the coin should be current, 
 or an extrinsic denomination very near that price. It being 
 most evident that if the value of the silver in our coins 
 should (by any intrinsic denomination) be raised above the 
 value or market price of the same silver reduced to Bullion, the 
 subject would be proportionately injured and defrauded, as they 
 were formerly in the case of the base moneys coined by public 
 authority " 
 
 He then says the value of the silver in the coin ought to be 
 raised, to encourage the bringing of Bullion to the Mint 
 to be coined. That this had been repeatedly done in the 
 
462 THEORY AND PRACTICE OF BANKING 
 
 English and Foreign Mints. That raising 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 occasions, requiring a large supply of money for that 
 purpose 
 
 He says that at that time guineas passed current for 30s. 
 
 He then gives some details of the state of the coinage, by 
 which he showed 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 extraordinary delusion, however, began to 
 prevail in early times, of which we have the first notice in 
 Plutarch. It was this, that when the coins were once called and 
 recognised by a certain name, that their value depended upon 
 the name, and did not depend upon the quantity of metal in them. 
 About the end of the 17th century this incredible 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 
 
 36. The extraordinary doctrines of Lowndes called forth 
 a worthy antagonist, and were the origin of some of his 
 most admirable writings, and they are of so much importance 
 that we shall make some extracts from them, as there is no 
 doubt that the fallacies he combated are even not yet entirely 
 eradicated 
 
 Locke had in 1691 published a treatise, in which he showed 
 the utter fallacy of interfering with the rate of interest by law, 
 and combated the idea that was then becoming prevalent, that 
 the value, as it was called, of the coin should be raised in order to 
 keep it in the country. He showed that the persons who sup- 
 ported such a plan were confounding the denomination with the 
 value, its name with the purchasing power, and that all such 
 
LOCKE ON THE COINAGE 463 
 
 ideas proceeded from a confusion of terms, and would have no 
 real effect. The arguments of Locke, though by no means 
 absolutely novel, had never been put before so luminously and 
 fully. The proposal of Lowndes, coming from a man holding his 
 ofBcial position, demanded a prompt notice and exposure. This 
 Locke did, in FAxrther Consider ations concerning Raising the 
 Value of Money, in which he exposed the fallacy of Lowndes's 
 arguments — " Raising of coin is but a specious word to deceive 
 the unwary. It only gives the usual denomination of a greater 
 quantity of silver to a less {e.g., calling four grains of silver a 
 penny to-day, when five grains of silver made a penny yesterday), 
 but adds no real worth, or real value to the silver coin, to make 
 amends for its want of silver. That is impossible to be done, for 
 it is only the quantity of silver in it, that is, and eternally will 
 be, the measure of its value, and to convince any one of this, I 
 ask whether he that is forced to receive but 320 ounces of silver 
 under the denomination of £100 (for 400 ounces of silver which 
 he lent under.the like denomination of £100) will think these 
 320 ounces of silver, however denominated, worth those 400 
 ounces he lent ? If any one can be. supposed so silly, he need but 
 go to the next market, or shop, to be convinced that men value 
 not money 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 instead of 12, and calling them 
 inches, as to increase the value 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 
 
 " Clipping 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, ^y 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 
 
 " Altering the standard by raising the money, will nob get to- 
 tbe public, or bring to the Mint to be coined, one ounce of 
 
4'64- THEORY AND PRACTICE OF BANKING 
 
 silver ; but will defraud the king, tlie church, the universities and 
 hospital, and of so much of their settled revenue as the money 
 is raised, e.g., twenty per cent, of the money (as is proposed), 
 be raised one-fifth. It will weaken, if not totally destroy, the 
 pubhc 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, shall be defrauded of twenty 
 per cent, of what those Acts of Parliament were security for. 
 A less quantity of silver has a less value ; and an equal quantity 
 an equal value 
 
 " 4. That money differs from uncoined silver only in this, that 
 the quantity of silver in each piece of money is ascertained 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 traffic in it ; but 
 not to be joined with silver as a measure of commerce " 
 
 Locke then examines Lowndes's doctrine, that the value (or 
 denomination) of the silver coin should be raised to 6s. M. the 
 ounce, because the price of standard silver has risen to 6s. bd. 
 the ounce — 
 
 " This reason seems to me to labour under several mistakes ; as 
 
 " 1. That standard silver can rise in respect of itself 
 . " 2. That standard bullion is now, or ever was, worth, or sold 
 to the traders in it for 6s. bd. the ounce, of lawful money of 
 England. For, if that matter of fact holds not to be so, that an 
 ounce of sterling bullion is worth 6s. bd. of our milled weighty 
 money, this reason ceases ; and our weighty crown pieces ought 
 not to be raised to 6s. Zd., because our light clipped money will 
 not purchase an ounce of standard bullion, under the rate of 
 6s. bd. 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. hd. of our clipped money, I grant 
 it him, and higher too. But, then, that was 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. 5<?. the ounce of our weighty milled money. 
 
LOCKE ON THE COINAGE 465 
 
 This I not only deny, but further add, that it is impossible to be 
 80. For 6s. bd. of milled money weighs one ounce and a quarter 
 near. Can it, therefore, be possible that an ounce of any com- 
 modity 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 toark 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 
 riseu, 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 
 will seU. 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 will 
 exchange for a greater quantity of silver than it would before. 
 Eising and falling of commodities are 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 
 quarter of the same goodness. And so it is in silver : an ounce 
 of silver will always be of equal value to an ounce of silver ; nor 
 can it ever rise or fall, in respect of itself : an ounce of standard 
 silver can never be worth an ounce and a quarter of standard 
 silver ; nor one ounce of uncoined silver exchange for an ounce 
 and a quarter of coined silver ; the stamp cannot so much debase 
 its value. Indeed, the stamp, hindering its free exportation, 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. Sd., or 5s. 4^. the ounce of coined silver for 
 uncoined, when there is need of sending silver beyond seas ; as 
 there always is, when the balance of trade will not supply our 
 wants, and pay our debts there. But much beyond this the 
 goldsmith will never give for bullion, since he can make it out 
 of coined money at a cheaper rate 
 
466 TITKOKY AND PRACTICE OF BANKING 
 
 " It ia said bullion has risen to 6s. 6d. the ounce, i.e., that an 
 ounce of uncoined silver will exchange for an ounce and a quarter 
 of coined silver. If anyone can believe this, I will put this short 
 case to htm. He has of bullion, or standard uncoined silver, two 
 round plates, each of an exact size and weight of a crown piece : 
 he has besides, of the same bullion, a round plate of the weight 
 and size of a shilling, and another yet less, of an exact weight 
 and size of a three-pence. The two great plates being of equal 
 weight and fineness, I suppose he will allow to be of equal Value, 
 and that the two less, joined to either of them, make it one-fifth 
 more worth than the other is by itself, they having all three 
 together one-fifth more silver in them. Let us suppose, then, 
 one of the greater and two less plates to have received the 
 next moment (by miracle, or by the mill, it matters not how), the 
 mark, or stamp, of our crown, our shilling, and our three-pence, 
 can anyone say, that now they have got the stamp of our Mint 
 upon them, they are so fallen in value, or the other unstamped 
 piece so risen, that that unstamped piece, which a moment befoi"6 
 was worth only one of the other pieces, is now worth them all 
 three ? Which is to say, that an ounce of uncoined silver is 
 worth an ounce and a quarter of coined. This is what men 
 would persuade us, when they say that bullion is raised to 6s. bd. 
 (of lawful money) the ounce, which I say is utterly impossible. 
 Let us consider this a little further in another instance. The 
 present milled crown pieces, say they, will not exchange 
 for an ounce of bullion, without the addition of a shilling, and a 
 three-pence of weighty coin added to it. Coin but that crown 
 piece into 6s. Sd., and then say it will buy an ounce of bullion, 
 or else they will give up their reason and measure of raising the 
 money. Do that which is allowed to be equivalent to coining of 
 a present milled crowu piece into 6s. 3d., viz., call it 75 pence, 
 and then also it must, by this rule of raising, buy an ounce of 
 bullion. If this be so, this self-same milled crown-piece will, and 
 will not, exchange for an ounce of bullion. Call it sixty pence 
 and it will not : the very next moment call it seventy-five pence, 
 and it will. I am afraid nobody can think change of denomina- 
 tion has such power " 
 
 Locke then goes through each of Lowndes's arguments and 
 proposals one by one, and gives them such a refutation as would 
 
LOCKE ON THE COINAGE 467 
 
 have delighted the heart of Chillingworth. Among other things, 
 he says — " It is true, what Mr. Lowndes observes here, the 
 importation of gold, and the going of guineas at 30s. has been a 
 great prejudice and loss to the Kingdom. But that has 
 been wholly owing to our clipped money, aud not at all 
 to our money being coined at 5s. 2d. the ounce : nor is the 
 coining of our money hghter the cure of it. The only remedy 
 for that mischief, as well as a great many others, is the putting an 
 end to the passing of clipped money by tale, as if it were lawful 
 coin " 
 
 To Lowndes's doctrine, that raising the coin by making it 
 more in tale, would make it more abundant for general use, Locke 
 says — " Just as the boy cut his leather into five quarters (as he 
 called them) to cover his ball, when cut into four quarters it fell 
 short ; but, after all his pains, as much of the ball lay bare as 
 before. If the quantity of coined silver employed in England 
 fall short, the arbitrary denomination of a greater number of 
 pence given to it, or, which is all one, to the several coined pieces 
 of it, will not make it commensurate to the size of our trade, or 
 the greatness of our occasions. This is as certain, as that if the 
 quantity of a board, which is to stop a leak of a ship fifteen inches 
 square, be but twelve inches square, it will not be made to do it, 
 by being measured by a foot which is divided into fifteen inches, 
 instead of twelve, and so having a larger tale, or number of inches 
 in denomination given to it 
 
 " This indeed, Would be a convincing reason if sounds would 
 give weight to silver, and the weight of a greater number of pence 
 (less in quantity proportionably as they are more in number; were 
 a large supply of money 
 
 " The necessity of trust and bartering is one of the many 
 inconveniences springing from the want of money. This 
 inconvenience the multiplying arbitrary denominations will 
 no more supply, nor any ways make our scarcity of coin 
 commensurate to that need there is of it, than if the cloth 
 which was provided for clothing the army, falling short, one 
 should hope to make it commensurate to that need there is of it 
 by measuring it by a yard one-fifth shorter than the standard, 
 or changing the standard of the yard, and so getting the 
 full denomination of yards necessary according to present 
 
 HH a 
 
468 THEORY AND PRACTICE 01? BANKING 
 
 measure. For this is all that will be done by raising our coin, 
 as is proposed. All it amounts to is no more but this, viz., That 
 • each piece, and, consequently, our whole stock of money, should 
 be measured and denominated by a penny one fifth less than the 
 standard ... 
 
 " The Increase of denomination does, or can do, nothing in the 
 case, for it is silver by its quantity and not denomination, that 
 is the price of things and measure of commerce ; and it is the 
 weight of silver in it, and not the name of the pieces that men 
 estimate commodities by, and exchange them for 
 
 " If this be not so, when the necessity of our affairs abroad, 
 or ill-husbandry at home, has carried away half our treasure,' 
 and a moiety of our money has gone out of England, it is but to' 
 issue a proclamation that a penny shall go for two-pence, sixpence 
 for a shilling, half-a-crown for a crown, &c., and immediately, 
 without any more ado, we are as rich as before. And, when half 
 the remainder is gone, it is but doing the same thing again, and 
 raising the denomination anew, and we are where we were, and 
 so on ; whereby, supposing the denomination raised 15-16, every 
 man will be as rich with an ounce of silver in his purse as he 
 was before when he had 16 ounces there, and in as great plenty of 
 money, able to carry on his trade without bartering his silver, 
 by this short way of raising, being changed into the value of 
 gold ; for, when silver will buy 16 times as much wine, oil, 
 and bread, &c., to-day as it would yesterday (all other things 
 remaining the same as the denomination), it hath the real worth 
 of gold 
 
 "This, I guess, everybody sees cannot be so, and yet this 
 must be so, if it be true that raising the denomination one-fifth 
 can supply the want or one jot raise the value of silver in respect 
 of other- commodities, i.e., make a less quantity of it to-day, buy a 
 greater quantity of corn, oil, and cloth, and all other commodi- 
 ties than it would yesterday, and thereby remove the necessity of 
 bartering. For, if raising the denomination can thus raise the 
 value of coin in exchange for other commodities" one-fifth, by 
 the same reason it can raise it two-fifths, and, afterwards, three- 
 fifths, and again, if need be, four-fifths, and as much further as 
 ■you please. So that, by this admirable continuance of raising 
 our roiri, wc shall bo rich, and as well able to support the charge 
 
LOCKK ON XIIE COINAGE 469 
 
 of tlie G-oyernment, and cany on our trade without bartering, or 
 any other inconvenience for want of money, with 60,000 ounces 
 of coined silver in England, as if we had six, or 60 millions. If 
 this be not so, I desire anyone to show me why the same way of 
 raising the denomination, which can raise the value of money in 
 respect of other commodities one-fifth, cannot, when you please, 
 raise it another fifth, and so on. I beg to be told where it must 
 stop, and why at such a degree, without being able to go 
 further 
 
 " It must be here taken notice of, that the raising I speak of 
 here, is the raising of the value of our coin in respect of other 
 commodities (as I call it all along) in contradistinction to raising 
 the denomination. The confounding of these in discourses 
 concerning money, is one great cause, I suspect, that this matter 
 is so little understood, and so often talked of with so little 
 information of the hearers 
 
 " A penny is a denomination no more belonging to eight than 
 to eighty, or to one single grain of silver : and so it is not 
 necessary that there should be 60 such pence, no more nor less, 
 in an ounce of silver, i.e., twelve in a piece called a shilling, and 
 sixty in a piece called a crown : such like divisions, being only 
 extrinsical denominations, are everywhere perfectly arbitrary. 
 Tor here, in England, there might as well have been twelve 
 shiUings in a penny, as twelve pence in a shilling, i.e., the 
 denomination of a less pence might have been a shilling, and of 
 the bigger a penny. Again, the shilling might have been coined 
 ten times as big as a penny, and the crown ten times as big 
 as the shilling ; whereby the shilling would have but tenpence in 
 it, and the crown a hundred. But this, however ordered, alters 
 not one jot the value of the ounce of silver, in respect of other 
 things, any more than it does its weight. This raising being but 
 giving of names at pleasure to aliquot parts of any piece, viz., 
 that now the 60th part of an ounce of silver shall be called a 
 penny, and to-morrow that the 75th part of an ounce shall be 
 called a penny, may be done with what Increase you please. And 
 thus it may be ordered by a proclamation, that a shiUing shall 
 go for twenty-four pence, and half-crown for sixty instead of thirty 
 pence, and so of the rest. But that an half-crown should be 
 worth or contain sixty such pence,, as tlie pence were l)ef.or& the 
 
470 THEORY AND PRACTICE OF BANKING 
 
 change of denomiaation was made, that no power on earth could 
 do. Nor can any power but that .which can make the plenty or 
 scarcity of commodities, raise the value of our money their double 
 in respect of other commodities, and make that same piece or 
 quantity of silver under a double denomination, shall purchase 
 double the quantity of pepper, wine, or lead, an instant after such 
 proclamation, to what it would do an instant before. If this could 
 be, we might, as everyone sees, raise silver to the value of gold, 
 and make ourselves as rich as we pleased. But it is but going 
 to market with an ounce of silver, of one hundred and twenty 
 pence, to be convinced that it will purchase no more than an 
 ounce of silver of sixty pence : and the ringing of the piece will 
 as soon purchase more commodities, as its change of denomination, 
 and the multiplied name of pence, when it is called six score 
 instead of thirty" 
 
 It may, perhaps, appear to some that the arguments put for- 
 ward by Locke, are so simple and convincing, that it is almost a 
 waste of ingenuity and labour to dwell on them at such length. 
 But, unfortunately, this is not so. The confusion of ideas 
 between the name and the value of a coin, is one which is but 
 too prevalent even at the present day. It seems almost incredible 
 that an able man like Mr. Lowndes could perceive that debasing 
 the standard of the coin, by putting less silver and more alloy, 
 was a public fraud, and an injury to all creditors, and yet that 
 he should be totally incapable of perceiving that raising the 
 denomination of the coin was exactly the same thing in principle 
 as debasing the standard. In each case the quantity of pure 
 silver in a crown or a shilling was diminished. Nevertheless, 
 this fallacy is deeply seated even at the present day. It was, 
 moreover, exactly the same fallacy, under another form, which 
 blinded and deluded the Bank of England, the Government, and 
 the House of Commons, in 1811, into their insane vote on the 
 doctrine on the Bullion Eeport, that the Bank Note was 
 depreciated. But alas ! instead of a Montague willing to learn 
 wisdom from the counsels of a Locke, there was only a Vansittart, 
 who refused to listen to Horner and Canning, and we are still 
 smarting for his infatuation 
 
 37. And so it went on till Parliament met in November, 
 
BAD STATE 01? TUE COINAGE 471 
 
 1695. The urgency of the evil caused the subject to be taken up 
 the very first thing by Parliament, and the Commons addressed 
 the Crown to issue a proclamation to name a day when the 
 currency of the clipped money should absolutely cease. A 
 proclamation to that effect was accordingly issued on the 19th 
 December, but the time named in it was so short, that it threw 
 all trade into the utmost confusion. People refused to receive 
 the old money, for fear it should be left on their hands. Evelyu 
 has the following entry in his diary — " 12th Jan., 1695-6.— 
 Great confusion and distraction by reason of the clipped money, 
 and the difficulty found in reforming it. 23rd Jan. — They now 
 began to coin new money " 
 
 38. The subject, then, of reducing guineas to their original 
 value, was then taken into consideration. A Committee was 
 appointed to take into consideration the price of guineas, on 
 the 1,3th February, 1696. Several petitions were presented on 
 the subject. The graziers, butchers, and others connected with 
 Smithfield Market, said that £40,000 a week passed through 
 their hands for cattle, which for twelve months past had been 
 paid in guineas at 30s. a piece, for want of current silver, a great 
 part of which they had still, and were obliged to keep by them 
 to trade with, and they said that a sudden fall would ruin them. 
 The merchants, woollen drapers, and other traders, stated in 
 their petition, that commerce was brought to a stand by reason 
 of the uncertain value of gold. They thought that a gradual 
 lowering of guineas from time to time would be the only effectual 
 means to remedy the evil, and prevent the loss from being more 
 severe if they were lowered at once. A third petition, from divers 
 merchants and others, said — 
 
 " That by reason of the badness of our silver coin, some men 
 have taken occasion to raise guineas to 30s. a-piece, which being 
 about 40 per cent, value here above the proportion of gold to 
 silver in any other part of Europe hath caused the bringing 
 over to us vast quantities of gold, causing the exchange to fall, 
 and, consequently, the carrying out of our silver in that disad- 
 vantageous proportion, to the impoverishing of the kingdom. 
 That, notwithstanding the care taken to reform the silver coin, 
 yet certain persons continue buying and selling guineas, being 
 
4.72 THEORY AND PKACTICE OF BANKING 
 
 employed therein, as they believe, by persons promoting their 
 private gain, whereby they are still' kept up to 29s. and 30s. ; at 
 which rate the petitioners are forced to receive them for debts, 
 but cannot pay them so to the King's receipts, or upon bills of 
 exchange, so that they are necessitated to buy silver money 
 with their guineas, at 3, 4, and 5 per cent, loss, and thereby 
 contribute to the gain of those persons who kept up that trade. 
 That at this time great quantities of gold are bought up and 
 imported hither from Holland, where four of our milled crowns 
 and two weighty shillings will purchase a guinea, the profit 
 whereby is so great, that if some speedy stop be not put to this 
 pernicious trade, our milled money will be melted down and 
 carried away as fast as it can be coined " 
 
 Other petitions to the same effect, and corroborating these 
 facts, were also presented 
 
 39. It was then carried by a majority of 164 to 129, on the 
 15th February, 1696, that guineas should be lowered to 28s. ; on 
 the 28th it was resolved, by a majority of 194 to 140, that after 
 the 25th March, they should be reduced to 26s., and on the 10th 
 April to 22s., and heavy penalties were enacted against all who 
 should deal in them at any other rate, after that date. It was 
 ■further ordered that the clipped money should be received in pay- 
 ment of taxes till the 4th May, in advances to Government till 
 the 1st July, and after the 1st February, 1697, should absolutely 
 cease to be current. At this time though both gold and silver 
 were legal tender, yet the silver coin was considered as the 
 standard currency, and gold only subsidiary. Debts were 
 considered to be contracted in silver, and when this great 
 disarrangement of the relative value of gold and silver took 
 place, it was considered as a great public grievance. All the 
 heavier pieces were culled out, and sent to Holland, where 
 guineas and bullion might be bought for 22s. which passed for 
 30.S. in England, the consequence was a steady drain of silver 
 from England, and a continued influx of gold. The Act of 
 Charles II. gave every one the right to have his bullion coined 
 'at the Mint free of exiDense, and many persons had availed 
 themselves of this privilege. By a return presented to the 
 Commons, it appeared that since Lady-day, 1695, up to February, 
 
EUN UPON THE BANK 473 
 
 1696, guineas to the amount of £721,280 had been coined for 
 149 persons. An Act, statute 1696, c. 13, was passed to take 
 off this privilege, and to prohibit the importation of guineas and 
 half guineas 
 
 40. All this time the Bank of England had received the 
 degraded coin at its nominal value. Its notes were payable to 
 bearer on demand. As soon as the new coin came out they 
 were bound to pay them in full weighted coin, that is, for every 
 7 ounces they received they were bound to give 12. Such a 
 state of things could have but one result — an immediate run 
 upon them took place. Its success had enraged the private 
 bankers and money dealers, whose profits it diminished. All its 
 enemies now made a combined effort to destroy it. They col- 
 lected its notes in all directions, and, on the 5th May, 1696, they 
 suddenly presented for payment £30,000 in notes. The directors, 
 after a solemn deliberation, knowing the purpose for which 
 these notes were presented, refused payment of them, but 
 continued their payments to their ordinary customers. Their 
 enemies ran about crying that the Bank was destroyed. But 
 ■the public, who understood the transaction, received their notes 
 at first at their full value! But the extreme scarcity of silver 
 continuing, they were obliged to make a general suspension. 
 They gave notice that they could only pay 10 per cent, on their 
 notes once a fortnight, and, as the demand continued, they were 
 unable to preserve even that payment, and a short time later 
 they were obliged to make a still further suspension, by paying 
 3 per cent, every three months 
 
 41. The following extracts from Evelyn's diary are interest- 
 ing and important — 
 
 " 13th May, 1696. — Money still continuing exceedingly scarce, 
 go that none was paid or received, but was all on trust, the Mint 
 not supplying for common necessities 
 
 " 11th June. — Want of current money to carry on the smallest 
 concerns, even for daily provisions in the markets. Guineas 
 lowered to 22s. and great sums daily transmitted to Holland, 
 where it yields more, and other treasure sent to pay the armies, 
 and nothing considerable coined of the new, and now only current 
 
474 TIJEOKY AND PKACTICE OiT BANKING 
 
 stamp, cause such a scarcity that tumults are every day feared, 
 nobody paying or receiving money. Banks and lotteries every 
 day set up 
 
 " 26th July. — So little money in the nation that Excheq^uer 
 tallies on the best fund in England, the Post Office, nobody 
 would take at 30 per cent, discount 
 
 " 3rd August.— The Bank sending the £200,000 to pay 
 the army in Flanders, that done, nothing against the enemy 
 had so exhausted the treasure of the nation, that one could 
 not have borrowed money under 14 or 15 per cent. OQ Bills 
 {i.e., Bank of England Bills), or on Exchequer tallies under 30 
 per cent." 
 
 42. We have in our possession a rare pamphlet which has 
 the unusual and fortunate circumstance of bearing on it the day 
 of its publication. It is entitled " An Essay on the Coin and 
 Credit of England, as they stand with respect to its Trade ; by 
 John Gary, Merchant, in Bristol. Bristol, printed by WiU, Benny, 
 and sold by the booksellers of London and Bristol. October the 
 22nd, 1696." It would have been fortunate if other pamphleteers 
 had displayed equal forethought for the benefit of posterity, 
 when exact dates are of such importance. This pamphlet contains 
 statements of fact of the first importance in the Theory of the 
 Currency. It says, p. 1 3 — 
 
 " When our coin was corrupt and base, all Exchange rose upon 
 us, but now it is returned to its ancient standard, Exchange 
 Ebturns to its old cotirsb ; not that the standard of our money 
 is always the exact rule of our exchange, the balance of our trade 
 often causes it to alter, either to our advantage, or to our loss, 
 ■besides the charge of management, but this is little in comparison 
 with the other. A familar instance we have in the case 
 of Ireland, where, whilst our coin was iase, seventy pounds was 
 worth one hundred pounds here, which was in some measure 
 proportionable with the value of pieces of eight, which they 
 took in Ireland by weight, to our clipped money, and also to our 
 guineas at 30s. a-piece, and how far this carried the trade of 
 England into that Kingdom, the traders to the West Indies 
 have been too sensible, but, since the error of our coin hath been 
 corrected, that very Exchange is so much varied that one 
 
THE LAND BANK 475 
 
 hundred pounds here is worth one hundred and fifteen pounds 
 there 
 
 " And since I have mentioned guineas, I cannot let 
 them pass without some observations. How eager was the 
 coatest for keeping them up to that exorbitant value ! and how 
 UQwiUingly did the money changers, and those whom they 
 had deceived, yield to the alteration ! Whereas it was well 
 known that the reason why guineas were so high was the badness 
 of our coin" 
 
 This is a conspicuous and decisive instance of the truth 
 of the principles in the chapter on Exchanges, that a restora- 
 tion of the coinage alone is 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 restora- 
 tion of its quality had brought the exchanges to par in 
 October, 1696. "We must now enquire what the state of Credit 
 was at that time, or the price of bank notes and Exchequer 
 tallies 
 
 43. The Bank of England was a Whig project, and had been 
 eminently successful in supporting the Government in the prose- 
 cution of the war. It had excited the warmest feelings of joy and 
 congratulation among its friends, and the bitterest feelings of 
 rage and indignation amongst its enemies, and the enemies of 
 the Government. It was not endowed with any monopoly. in its 
 favour at that time. The Government 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, &c., 
 were to be advanced solely to landowners for the cultivation of 
 the land at three per cent. It was therefore called a Land Bank. 
 It was warmly patronised by the Tory party. The origin of it 
 is variously ascribed to a Mr. Briscoe and to Dr. Hugh 
 Chamberlen. The Bank of England and all its friends, of course, 
 opposed it with all the power they could, but the temptation was 
 too great, and it was sanctioned by Act of Parliament in April, 
 1696. The time for taking subscriptions was limited, in the like 
 manner as had been done in the case of the Bank of England. 
 
476 THEORY AND PKACTICE OF BANKING 
 
 When the subscriptions opened, the Lords of the Treasury 
 subscribed £5,000 on behalf of the King, but the other sub- 
 scriptions amounted only to £2,100 when the time came for 
 its closing. It was, therefore, a total and complete failure. 
 The finances of the State were in the utmost disorder, 
 great arrears were due to every branch of the public service, 
 some funds were wholly deficient, others produced much less 
 than was calculated. In the next session of Parliament^ 
 the amount of arrears was ordered to be laid before them, 
 and it amounted to the frightful sum of £6,000,459^more 
 than ail the current coin in the kingdom was supposed to 
 be. Under these circumstances, when Parliament met in 
 October, 1696, Bank notes were at a discount of 20 per cent, 
 and Exchequer tallies of 40, 60, and 60 per cent., at the 
 same time that the exchanges were restored to par. Every one 
 forboded the total ruin of public credit. The enemies of England 
 fejoiced, and believed, that it was utterly irretrievable, and 
 that the great European alliance against France would soon be 
 dissolved 
 
 44. Under these depressing circumstances. Parliament met 
 on the 20th of October, 1696. The King congratulated the 
 House on the year having passed away without any disorder, 
 considering the great disappointment in the funds voted at their 
 last meeting, and the difficulties which had arisen from the 
 recoining 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 
 denomination, and that they would make good all the deficiencies 
 on the funds. They also repealed the Bill for preventing the 
 -coining and importation of guineas, as it had only aggravated the 
 public disorders 
 
 45. When the Bank of England was subjected to the 
 mortification of declaring a partial suspension of payments, it 
 
 .endeavoured, to retrieve its credit by .making two calls of .20. per 
 
NEW BANK ACT 477. 
 
 cent, each upon its proprietors, the second of which was payable 
 on the 20th November. These measures, however, did not effect 
 their purpose, and the Parliament had to take iu hand the great 
 business of restoring the credit of the Bank notes, and the 
 Exchequer tallies. On the 3i'd February, 1697, Parliament agreed 
 to increase the capital stock of the Bank, by receiving new sub- 
 scriptions, which were to be made good in tallies and Bank notes. 
 It passed an Act for this purpose, statute 1697, c. 20. The chief 
 provisions were as follows — 
 
 1. All persons, natives or foreigners, bodies politic or 
 corporate, might subscribe to the new stock, and the subscriptions 
 might be paid, four-fifths in Exchequer tallies and one fifth in 
 Bank notes, upon which the Crown would allow 8 per cent. 
 
 2. Before the 24th July, 1697, the capital stock of the Bank 
 was to be estimated, 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 
 
 3. All such subscribers were to be incorporated with the 
 proprietors of the old stock 
 
 4. The time when the Crown might put an end to the corpo- 
 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 Corpo- 
 j'ation of the Governor and Company of the Bank of England, no 
 other Bank, or any other corporation, society, fellowship, company, 
 or constitution, in the nature of a bank, shall be erected, or 
 established, permitted, suffered, countenanced, or allowed by Act 
 of Parliament, within this kingdom 
 
 6. The Bank were allowed to extend their issues of notes 
 beyond the original capital of £1,200,000, to the amount of new 
 capital which should be subscribed, provided that they were 
 made payable to bearer on demand : and in case they made 
 default in such payment, they might be paid on presentment 
 at the Exchequer, out of the annuity due to the Bank. All notes 
 above the sum of £1,200,000, were to bear a distinguishing 
 mark 
 
 7. All the property of the Bank was exempted from taxes 
 
 8. Bank Stock was to be personal property, and not real 
 
 9. It was made felony to forge or counterfeit any Bank note 
 
478 THEORY AND TRACTrCE OF BANKTNTx 
 
 or obligation under the Common Seal, or altering or erasing any 
 indorsement on such a note or bill 
 
 10. Bank Stock exempted from any foreign attachment 
 
 1 1 . The debts of the Corporation forbidden to exceed their 
 capital stock ; if they did so, the Members were liable in their 
 private capacity 
 
 ] 2. All persons were forbidden to buy or sell tallies at more 
 than the legal rate of interest, under the penalty of forfeiting 
 treble the value of the money 
 
 46. Such were the measures taken to restore the credit of 
 the Bank, and we observe that their own depreciated notes were 
 taken in payment as specie at their full amount. The public, 
 however, was still grievously suffering for want of a circulating 
 medium during the slow process of the recoinage. The Bank of 
 Englaad did not issue notes below £20, which were of little use 
 for the general purposes of business. The Chancellor of the 
 Exchequer, Montague, hit upon the plan of issuing bills upon the 
 Exchequer for £5 and £10. These bills at first passed 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 authorised 
 to contract with any persons to cash these Exchequer bills on 
 presentment, allowing them a moderate premium. They were 
 allowed 10 per cent, at first, but the Exchequer bills soon rose 
 above par, and then the interest was reduced to 4 per cent. 
 Under this Act, upwards of £2,000,000 of Exchequer bills were 
 issued 
 
 47. The new subscriptions to the Bank, under this Act, 
 amounted to £1,001,171 10s. ; two hundred thousand pounds 
 worth of Bank notes and eight hundred thousand of Ex- 
 chequer tallies being taken out of circulation, and received at 
 par 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 which bore interest were 
 at a premium 
 
 48. When we consider the unquestionable services the Bank 
 had rendered the G-overnment, which contributed so greatly to the 
 success of the war, and the pacification of Ryswick, and when we 
 
DISCOUNT ON BANK NOTES 
 
 479 
 
 consider the terrific state of public credit, owing very much to the 
 total failure of the Land Bank, we need not be surprised that the 
 Bank of England employed those circumstances for the purpose 
 of securing a monopoly for themselves. Nor, considering the ideas 
 of that age, can be we 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 eminent services, but the consequences 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 qnartei-s of a century are chiefly due to this gi-eat wrong, 
 and violation of the true principles of trade. English banking 
 has never recovered its fatal 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 
 
 49. We have felt it necessary to be thus minute and cir- 
 cumstantial 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 prominently noticed in 
 the Bullion Eeport, and we must now examine the account of it 
 given there 
 
 But we must first of all give a statement of the Discount 
 on Bank Notes and the Rates of Exchanges during 1696 and 
 1697 
 
 STATBHrENT OF THE DISCOUNT FEB CENT. ON BANK NOTES 
 
 1696. 
 
 £ 
 
 s. 
 
 1697. 
 
 £ s. 
 
 1697. 
 
 £ s. 
 
 July 9 . 
 
 .. 16 
 
 
 
 Jan. 30 . 
 
 .. 19 
 
 Aug. 3 .. 
 
 ..7 
 
 ,. 16 . 
 
 .. 8 
 
 
 
 Feb. 18 . 
 
 .. 21 
 
 „ 26 .. 
 
 .. 3 10 
 
 „ 28 . 
 
 .. 10 
 
 
 
 „ 20 . 
 
 .. 24 
 
 „ 28 .. 
 
 ..2 
 
 Aug. 25 . 
 
 .. 15 
 
 
 
 Mar. 23 . 
 
 .. 23 10 
 
 Sept. 18 . . 
 
 ..10 
 
 Sept.l2 . 
 
 .. 17 
 
 
 
 April 3 . 
 
 .. 18 
 
 Oct. 
 
 .. par 
 
 Oct. 10 . 
 
 .. 12 
 
 
 
 May 20 . 
 
 ...IS 
 
 
 
 >, 22 . 
 
 .. 18 
 
 
 
 June 5 , 
 
 ...13 
 
 
 
 „ 27 . 
 
 .. U 
 
 
 
 „ 17 . 
 
 ...13 
 
 
 
 Dee. 26 . 
 
 .. 17 
 
 
 
 „ 24 . 
 
 ...10 
 
 
 
480 
 
 THEORY AND PRACTICE OF BANKING 
 
 STATEMENT OP THE BATES ON THE LONDON EXCHANGE 
 DURING 1695 — 1696 
 
 
 Amstei'- 
 dnm 
 
 Uottei'- 
 diim 
 
 G-enoa 
 
 Ant- 
 werp 
 
 Hara- 
 bui-ff 
 
 Cadiz 
 
 Madrid 
 
 Yenice . 
 
 April 23, 1695 . 
 
 31-2 
 
 31-4 
 
 56-29 
 
 3011 
 
 29-11 
 
 56-2 
 
 56-1 
 
 59- 
 
 Jan. 24, 1696 . 
 
 810 
 
 31-2 
 
 60- 
 
 31- 
 
 29-9 
 
 600 
 
 60- 
 
 63- 
 
 May 2, „ . 
 
 30-1 
 
 30-2 
 
 64- 
 
 30- 
 
 28-8 
 
 60- 
 
 61- 
 
 61-2 
 
 July 19, „ . 
 
 29-8 
 
 30-6 
 
 65- 
 
 29- 
 
 — 
 
 60- 
 
 — 
 
 — 
 
 July 28, „ . 
 
 38-7 
 
 33-9 
 
 58- 
 
 33- 
 
 82-4 
 
 53- 
 
 58- 
 
 54- 
 
 Sept. 29, ,, . 
 
 36-5 
 
 36-7 
 
 54- 
 
 36- 
 
 35- 
 
 48- 
 
 49- 
 
 51- 
 
 Ootr. 6, „ . 
 
 36-8 
 
 36-10 
 
 53-2 
 
 35-7 
 
 35-8 
 
 48- 
 
 49- 
 
 — 
 
 Noyr. 6, „ . 
 
 37-4 
 
 37-6 
 
 52-2 
 
 37-2 
 
 36-4 
 
 47- 
 
 48- 
 
 49- 
 
 Deor. 16, „ . 
 
 87-8 
 
 3710 
 
 51- 
 
 37-8 
 
 36-8 
 
 46-2 
 
 47- 
 
 49- 
 
 In interpreting this table, we perceive that a great change in 
 the figures took place at the end of July, 1696. Some rise very 
 much, others /a?Z. The fact was, that it was 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 which London gave the 
 variable price would of course fall ; 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 difference 
 between the Eates of Exchange as they were paid in coin, or 
 Bank Notes, during the winter of 1696-97, given in A Collection 
 for the Improvement of Husbandry and IVade, thus : — 
 
 Amsterdam 
 
 Rotterdam 
 
 Antwerp 
 
 Hamburg 
 
 Cadiz 
 
 Madrid 
 
 Leghorn i ........ . 
 
 Venice 
 
 Discount on Bank Notes 
 
 Deo. 16, 1696 
 
 Money Bank Note 
 
 87-8 
 
 37-10 
 
 87-8 
 
 36-8 
 
 46-2 
 
 47-2 
 
 51-2 
 
 49- , 
 
 16- 
 
 81.19 
 
 31-10 
 
 31-9 
 
 30-9 
 
 55- 
 
 67- 
 
 61-1 
 
 58- 
 
 Feb. 23, 1697 
 
 Money Bonk Note 
 
 86-3 
 
 86-5 
 
 36-4 
 
 35-5 
 
 47-1 
 
 48- 
 
 52- 
 
 49- 
 
 21- 
 
 -29- 
 29-2 
 29-2 
 28-2 
 58- 
 58- 
 64- 
 60- 
 
 Mar. 2, 1697 
 
 Money Bonk Note 
 
 36-5 
 
 36-7 
 
 36-6 
 
 35-9 
 
 46-3 
 
 47-3 
 
 52- 
 
 49- 
 
 '22- 
 
 29-2 
 
 29-4 
 
 29-4 
 
 28-2 
 
 58-2 
 
 59-2 
 
 63- 
 
 61- 
 
 Having given these tables, which are of the utmost 
 importance in the Theory of the Currency, and to which we 
 shall hereafter refer, we may how see what the Bullion Eeport 
 
 states 
 
THE BULLION REPORT 481 
 
 It says, p. 17 — 
 
 "The experience of the Bank of England itself, within a 
 Tsry 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 clipping were coupled with the effect of 
 an excessive isstie of paper. The Directors of the Bant 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 Uberality of those loans to private individuals, as well as 
 by the large advances to Grovernment, the quantity of the notes 
 became excessive, 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 at £110 per cent., though only 60 per cent, 
 upon the subscriptions had been paid in. By the conjoint effect 
 of this depreciation of the paper of the Bank from excess, and of 
 the depreciation of the silver coin from wear and clipping, the 
 price of gold bullion was so much raised that guineas were as 
 high as 30s.: all that remained of good silver gradually 
 disappeared from circulation, and the exchange with 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 without effect. At length the true remedies were resorted 
 to ; first, by a new coinage of silver, which restored that part of 
 the currency to its standard value, though the scarcity or money 
 occasioned by calling in the old coin, brought the Bank into 
 straits, and even for a time affected its credit. [Surely, if Bank 
 notes were at a discount of 17 per cent, lefore this, its credit 
 was affected.] Secondly, by taking out of the circulation the 
 excess of Bank notes. In proportion to the amount of notes sunk 
 in this manner, the value of those that remained in circulation 
 
 II 
 
482 THEORY AND PRACTICE Oi' BANKING 
 
 began presently to rise ; in a short time notes were at par, and 
 the foreign exchanges nearly so. These details are aU very fully 
 mentioned in authentic tracts, published at the time, and the 
 case appears to your Committee to afford much instruction upon 
 the subject of their present inquiry " 
 
 The Eeport refers, in a marginal note, to A Short Account of 
 the Bank, by Mr. G-odfrey ; A Short History of the last Parlia- 
 ment, 1699, by Dr. Drake 
 
 60. On examining this paragraph, it may be said to contain 
 the following allegations — 
 
 1. That, very soon after the foundation of the Bank, it made 
 excessive issues of paper 
 
 2. That, in consequence of these excessive issues, and while 
 they continued to pay their notes in specie on demand, their 
 notes fell to 17 per cent, discount 
 
 3. That in consequence of these excessive issues of paper by 
 the Bank, and the depreciation of the silver coin from wear and 
 clipping, guineas rose to 30s. from 21s. Gd., and that the remaining 
 good silver disappeared from circulation 
 
 4. That in consequence of the two preceding causes, Exchange 
 with Holland rose to 25 per cent, against England 
 
 5. That many attempts were made by the Bank and Parlia- 
 ment to reduce the price of guineas, and force a better silver 
 coinage into circulation, which all failed 
 
 6. That measures were at length resorted to of calling in the 
 old silver coinage, and re-issuing it at full weight, and taking 
 the excessive issues of the Bank out of circulation, which were 
 finally successful, restored the Bank notes to par, and restored 
 the Exchanges 
 
 The Committee ground their allegations upon Mr. Godfrey's 
 pamphlet on the Bank, and Dr. Drake's History of the last 
 Parliament, 1699, as weU as a number of anonymous pamphlets' 
 to which they give us no clue to discover their names 
 
 51. We must now examine each of these propositiona 
 separately 
 
 With respect to the first, what is, or what is not an excessive 
 
THE BULLION KEPOET 483 
 
 issue, is a matter of so much speculation that it is quite impossible 
 to affirm or deny it 
 
 With respect to the second allegation, there is not only no 
 evidence in its favour in the pamphlets quoted, but the most 
 ovei-whelming evidence against it. Mr. Godfrey's pamphlet was 
 Written in 1695, when the credit of the Bank was in the most 
 flourishing condition, when 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 May, 1696 
 
 With respect to the third allegation, we have the most positive 
 and overwhelming evidence the guineas were at 30s. in the spring 
 of 1695, when the credit of the Bank was unimpeached and its 
 notes were all paid instantly on demand 
 
 With respect to the fourth allegation, we have already seen 
 that the exchange on Holland was at 25 per cent, against 
 England in 1695, nearly one year before Bank notes were at a 
 discount 
 
 The fifth allegation is entirely erroneous. Parliament made 
 no attempt to reduce guineas till February, 1696, when the silver 
 coin had already been called in 
 
 The commencement of the sixth allegation is quite wrong in 
 point of time. It is an unquestionable fact, testified by the most 
 conclusive evidence, that it was the scarcity of money while the 
 old was called in, and before the new was f uUy 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 
 new. 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 only. 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 subscription in 
 Bank notes and tallies raised their credit, by reducing their 
 quantity, but they have been misled by Dr. 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, 
 
 II 2 
 
484 THEORY AND PRACTICE OF BANKING 
 
 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 
 a 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, whereas Bank notes were still at a heavy 
 discount in June, 1697 
 
 52. We have been thus minute in examining the circum- 
 stances 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, shown by the most conclusive 
 evidence, that this paragraph iu the Bullion Eeport is full of the 
 gravest chronological errors, in a matter in which minute accu- 
 racy of dates is all important 
 
 53. There was one circumstance which we have not seen 
 noticed by any writer, which we may probably suppose contri- 
 buted greatly to increase the discount at which the notes were. 
 There were none at that time under £20, and notes of that 
 amount must have been obviously unfit for the ordinary purposes 
 of trade. The great want was small change, but that had 
 almost entirely disappeared, consequently, when the holder of 
 one of these notes wanted change, he must have made a much 
 greater sacrifice than was warranted by any want of confidence 
 in the Bank. Under these circumstances we may be somewhat 
 surprised that no one hit upon a plan which would certainly have 
 been successful, namely, an issue of £1 notes, to have supplied 
 the deficiency until a sufficient quantity of guineas had been 
 coined for circulation 
 
 54. The issue of small Exchequer bills was entirely success- 
 ful, although they had not a forced currency. The great cause 
 of the mischief to the Bank was, that the old and the new coin 
 were allowed to circulate together, which all experience showed 
 would inevitably drive all the new coin out of circulation. And 
 this is exactly what did happen 
 
 " While the hammered money, and pieces not clipped within 
 the ring, were permitted to pass, for the present necessity of 
 
DIFFICULTIES OF THE BANK 485 
 
 trade, nobody was willing to make payments in new money, 
 which so much exceeded the old in intrinsic worth. And, 
 therefore, the new silver money as fast as it issued from the 
 Mint and Exchequer, was in a great measure stopped in the 
 hands of its first receivers, for none were disposed to make 
 payments in the new silver coin at the old standard, when they 
 could do it in clipped pieces so much below it. And those who 
 had no payments to make, kept their new money as medals and 
 curiosities in their chests, and there is reason to believe that at 
 first a great quantity of new money, by the help of the melting 
 pot, went abroad in ingots to purchase gold, which at this juncture 
 was a very profitable commodity in England" 
 
 55. In this great discussion, all the fallacies which are so 
 specious and plausible, and which were maintained with so much 
 earnestness 116 years later, were put forward — except one. The 
 invariable language of all writers at that period was that the 
 Bank notes were depreciated. They always speak of the notes 
 heing at a discount, it was reserved to modern ingenuity to 
 discover the crowning absurdity — that it was not notes that had 
 fallen, but gold that had risen ! 
 
 56. The Bank was instituted for the purpose of assisting 
 the Grovernment in the war with France, and did very materially 
 do so in 1695, when its credit was high. In the next year, 
 however, it continued to do the same, when its credit was 
 greatly shaken. This no doubt was of great assistance to the 
 army, and its conduct is highly lauded by Dr. Drake, but 
 some of its own proprietors thought very differently of its 
 management. In a pamphlet entitled A Second Fart of a 
 Discourse concerning Banks, which was published by one of them, 
 which bears no date, but which was most probably written in 
 1697, which contains a series of excellent rules for the conduct 
 of a' bank, the direction is severely censured for dealing in 
 exchanges, for running into remittances, and launching too 
 deeply into loans, to which causes the author attributes the loss of 
 their credit. This would seem to allude to the loan mentioned by 
 Evelyji 
 
486 THEOJiY AND PRACTICE OF BANKING 
 
 57. The political troubles at the commencement of the 
 next century placed the Bank in difficulties again in 1704 and 
 1707. In the latter year the revived hopes of the Jacobite 
 faction, roused by the preparations of Louis XIV., threw the 
 country into a panic. The public stocks sunk 14 to 15 per cent. 
 The enemies of the dynasty, and the enemies of the Bank, 
 combined to make a run upon it, The private bankers tried to 
 swamp their great rival, and Sir Francis Child pretended to 
 refuse its notes. These malicious proceedings, however, called 
 forth an equal amount of ardour from the Grovernment and its 
 friends. Several of the highest nobility came forward to lend 
 money to the Corporation, and the Queen lent it her warmest 
 support. The directors made a call of 20 per cent, on their 
 proprietors, and, by these means, surmounted their diflSculties 
 and restored their credit 
 
 68. In 1709 the Government were again in a state of 
 great pecuniary embarrassment. The produce of the taxes 
 scarcely covered one half of the expenses. In this extremity, 
 the Ministry turned to the Bank of England, and, by mutual 
 arrangement, the following terms were proposed and accepted by 
 Parliament — 
 
 1. That the interest upon their original stock of £1,200,000 
 be reduced to 6 per cent., with an allowance of £4,000 for 
 managing the debt 
 
 2. That they were to advance a further sum of £400,000 
 at 6 per cent, interest 
 
 3. That they should be allowed to double their present 
 capital of £2,201,171 10s. at the price of 115 per cent, for the 
 new stock. Upon which they agreed to circulate £2,500,00,0 of 
 Exchequer bills, and receive an allowance of 6 per cent., one 
 half for interest, and the other for repayment of the principal, 
 and that no more Exchequer bills should be issued without the 
 consent of the Bank 
 
 4. That their privileges as a Corporation should be continued 
 for 21 years from 1st August, 1711 
 
 The subscription' lists for the new stock were opened on the 
 22nd February, 1709, at nine in the morning, and by one o'clock 
 the whole sum was subscribed at a premium. And a million 
 
MONOPOLY OF THE BANK 487 
 
 more might have been subscribed before evening if there had 
 been room 
 
 59. The Act of 1697 had only provided that no other bank 
 should be sanctioaed by Act of Parliament ; it did not prohibit 
 any private Joint Stock Bank from, being formed, nor any 
 other corporation, or company setting up banking business. 
 A company, called the Mine Adventurers of England, at 
 the head of whom was Sir Humphry Mackworth, who turned 
 out to be a great rogue, commenced doing all kinds of 
 banking business, issuing notes, &c. To put a stop to this it 
 was enacted — 
 
 " That during the continuance of the said Corporation of the 
 Governor and Company of the Bank of England, it shall not be 
 lawful for any body politic or corporate whatsoever, erected or to 
 be erected (other than the said Governor and Company of the 
 Bank of England), or from any other persons whatsoever united, 
 or to be united, in covenants, or partnership, exceeding the num- 
 ber of six persons, in that part of Great Britain called England, 
 to borrow, owe] or take up any sum or sums of money on their 
 Mils or notes payable at demand, or at any less time than six 
 months from the borroiviug thereof" 
 
 And the Bank was strictly forbidden to issue notes to a larger 
 amount than their capital stock. That is, each loan to Govern- 
 ment was attended with an augmentation of Currency to an equal 
 amount. Now to a certain extent this plan might be attended 
 with no evil consequences, but it is perfectly clear that its 
 principle is utterly vicious. There is nothing so wild or absurd 
 in John Law's Theory of Money as this. His scheme of basing 
 a paper currency upon land is sober sense compared to it. If for 
 every debt the Government incurs, an equal amount of money is 
 to be created, why here we have the philosopher's stone at once. 
 What is the long sought El Dorado compared to this ? Even 
 there the gold required to be picked up, and fashioned into coin. 
 Besides, people in this country would have to go round the globe 
 in search of it. But let us coolly consider the principle involved 
 in this plan of issuing notes upon the security of the pubhc debts. 
 Stated in simple language, it is Ms— That the way to Oebate 
 momy is for the Oovernmenl to borrow Money. That is to Say, 
 
488 THEORY AND PRACTICE OF BANKING 
 
 A lends B money on mortgage, and on the security of the mort- 
 gage, A is alhwed to create an equal amount of money to what he 
 has already lent! ! Granting that to a small extent this may 
 be done without any practical mischief, yet, as a general principle, 
 what can be more palpably absurd ? The ravings of Chamberlen 
 himself are not more wild 
 
 60. At that time the practice of issuing notes was 
 considered so essentially the main feature of banking, that a 
 prohibition of that was considered an effectual bar against 
 banking. The clause quoted above was intended to prevent any 
 bank being formed with more than six partners, so as to prevent 
 any private Company being formed of sufficient power and 
 influence to rival the Bank. It was so uideis'iood at the time, 
 and it did have the effect of preventing any other Joint Stock 
 Bank being formed 
 
 61. The financial difficulties of the Grovernment in the year 
 1713, at the Peace of Utrecht, made it necessary to have 
 recourse to ,the Bank again. They agreed to lend to the 
 Crovernment £100,000, secured upon Exchequer bills, at 3 per 
 cent., upon receiving an extension of their charter, which had 
 still twenty years to run. By the Statute I., 1713, c. 11, its 
 existence as a corporation was. prolonged to twelve months' notice, 
 to be given after 1st August, 1742, and the payment of 
 £1,600,000. By a second statute that year, they were authorised 
 to lend money upon South Sea Stock 
 
 62. In 1716, an Act, Statute 1716, c. 8, was passed to 
 redeem and modify several of the pbblic debts due to the Bank, 
 but not altering their privileges in any way, and to make farther 
 advances at 5 per cent. They were also authorised to make such 
 calls as they pleased upon their proprietors. The excessive 
 absurdity and inconvenience of the usury laws in commerce were 
 even then felt, and the Bank was exempted from their operation. 
 They were authorised, in the quaint phraseology of the Act, 
 " at their own good liking," to borrow or take up money at any 
 rate of interest they pleased, above the legal rate, upon their 
 bills, bonds, or any obligation under their Common Seal, or upon 
 
Newton's report on tub coinage 489 
 
 credit of their capital stock for any time, or to be paid ou 
 demand. What portentous folly it was that any one else might 
 not observe his "own good Uking" in the rate he paid for 
 borrowed money. In this Act, the clause prohibiting any 
 banking partnership to consist of more than sis members was 
 repeated. There were at that time three annuities of £88,751, 
 £100,000, and £76,830, besides other debts, upon which an 
 annual interest of 5 per cent, was paid ; the Bank's existence was 
 prolonged indefinitely, until all these annuities and debts were 
 discharged 
 
 63. We must now again take up the history of the Coinage, 
 and give an account of its last change, and its settlement on its 
 present basis. The Government, adopting the advice of Locke 
 and Newton, restored the coin according to its ancient weight, 
 fineness, and denomination 
 
 The political benefits which followed this great restoration of 
 the coinage are beyond the purpose of this work. In 1707, the 
 union of the kingdoms necessitated a new coinage. At the same 
 time the relative value of the gold and silver coins began to 
 differ from the market value of the two metals, and, as silver 
 was underrated, it became very scarce. It is much to be 
 lamented that the Government, having adopted Locke's 
 arguments in favour of the maintenance of the standard, did 
 not also adopt his argument with respect to the necessity of there 
 being only one standard of value. . It was perfectly conclusive, 
 and the evils, which he had shown must necessarily foUow fi-om 
 this economic error of having two measures of value, manifestly 
 displayed themselves. In 1708, the Government offered a 
 premium of 2^d. per ounce to every one who brought foreign 
 silver coin, or plate of any sort, of standard fineness, to the Mint 
 to be coined. This, however, was quite ineffectual, and as 
 matters grew worse every day, the Government referred the 
 matter to Sir Isaac Newton, who had for many years been at the 
 head of the Mint, to report upon 
 
 Sir Isaac Newton said in his Report — " That a pound weight 
 Troy of gold, 11 ozs. fine, and 1 oz. alloy, is cut into 44| 
 guineas ; and a pound weight of silver, 11 ozs. 2 dwts. fine, and 
 18 dwts. alloy, is cut into 62 shillings ; and, according to this 
 
490 THEORY AND PRACTICE OF BANKING 
 
 rate, a pound weight of fine gold is worth 15 pounds weight 
 6 0Z8. 17 dwts. and 5 grs. of fine silver, reckoning a guinea at 
 £1 l.s. 6^. in silver money. But silver in bullion, exportable, 
 is usually worth 2d. or Sd. per ounce more than in coin ; 
 and if, as a medium, such bullion of standard alloy be valued 
 at 5s. 4:^d. per ounce, a pound weight of fine gold will be 
 worth but 14 lbs. 11 ozs. 12 dwts. 9 grs. of fine silver in bullion ; 
 and, at this rate, a guinea is worth but so much silver as would 
 make 20s. 8d. When ships are laden for the East Indies, the 
 demand of silver for exportation raises the price to 5s. 6d. or 5s. 8d. 
 per ounce, or above ; but I consider not these extraordinary cases 
 
 "A Spanish pistole wds coined for thirty-two rials, or four 
 pieces of eight rials, usually called pieces of eight, and is of 
 equal alloy, and the sixteenth part of the weight thereof ; and 
 a Doppio Moeda of Portugal was coined for ten crusados of 
 silver, and is of equal alloy, and the sixteenth part of the 
 weight thereof. Gold is, therefore, in Spain and Portugal, of 
 sixteen times more value than silver of equal weight and alloy; ■ 
 according to the standard of those kingdoms ; at which rate a 
 guinea is worth 22s. Id. But this high price keeps their gold 
 at home in good plenty, and carries away the Spanish silver 
 into all Europe : so that at home they make their payments iu 
 gold, and will not pay in silver without a premium ; upon the 
 coming in of a Plate fleet the premium ceases, or is but small ; 
 but, as their silver goes away and becomes scarce, the premium 
 increases, and is most commonly about six per cent., which, being 
 abated, a guinea becomes worth about 20s. 9d. in Spain or 
 Portugal 
 
 " In France a pound weight of fine gold is reckoned worth 
 fifteen pounds weight of fine silver ; in raising or falling their 
 money, their King's edicts have sometimes varied a little 
 from this proportion, a little in excess or defect ; but the 
 variations have been so little, that I do not here consider 
 them. By the edict of May, 1709, a new pistole was 
 coined for four new Louises, and is of equal alloy, and the 
 fifteenth part of the weight thereof, except the errors of their 
 Mints ; and by the same edict, fine gold is valued at 'fifteen 
 times its weight of fine silver ; and at this rate a guinea is worth 
 20s. 8^d. . , . 
 
NEWTON S REPORT ON THE COINAGE 491 
 
 " The ducats of Holland and Hungary, and the Empire, were 
 lately current in Holland among the common people, in their 
 markets and ordinary affairs, at five gilders in specie, and five 
 stivers ; and commonly changed for so much silver moneys in 
 three-guilder pieces and guilder pieces, as guineas are with ua 
 for 21s. 6a!. sterling ; at which rate a guinea is worth 20s. l^d. 
 
 "According to the rates of gold to silver in Italy, Germany, 
 Poland, Denmark, and Sweden, a guinea is worth about 20s. 
 and Id., 6d., bd., or 4^., for the proportion varies a little 
 within the several Governments in these countries. In 
 Sweden, gold is lowest in proportion to silver, and this hath 
 made that kingdom, which formerly was content with copper 
 money, abound of late with silver, sent thither (I suspect) for 
 naval stores 
 
 "In the end of King William's reign, and the first year 
 of the late Queen, when foreign coins abounded in Eagland, 
 I caused a great many of them to be assayed in the Mint, and 
 found by the assays, that fine gold was to fine silver in Spain, 
 Portugal, France, Holland, Italy, Germany, and the northern 
 kingdoms, in the proportions above mentioned, errors of the Mint 
 fexcepted 
 
 "In China and Japan, one pound weight of fine gold is 
 worth but 9 or 10 pounds weight of fine silver ; and in East India 
 it may be worth 12 ; and this low price of gold in proportion to 
 silver canies away the silver from all Europe 
 
 " So, then, by the course of trade and exchange between 
 nation and nation in all Europe, fine gold is to fine silver as 14 4-5, 
 or 15 to one ; and a guinea at the same rate is worth between 
 20s. 5d. and 20s. 85^. ; except in extraordinary cases, as when a 
 Plate fleet is just arrived in Spain, or ships are laden here for the 
 East Indies, which cases I do not here consider. And it appears 
 by experience as well as by reason, that silver flows from those 
 places where its value is lowest in proportion to gold, as from 
 Spain to all Europe, and from all Europe to the East Indies, 
 China, and Japan ; and that gold is most plentiful in those places 
 in which its value is highest in proportion to silver, as in Spain 
 and England 
 
 " It is the demand for exportation which hath raised the price 
 of exportable silver about M. or ^d. in the ounce above that of 
 
492 THEORY AND PRACTICE OF BANKING 
 
 silver in coin, and hath thereby created a temptatioa to export 
 or melt down the silver coin rather than give 2d. or 3d. more 
 for foreign silver ; and the demand for exportation arises from the 
 higher price of silver in other places than in England, in pro- 
 portion to gold, that is, from the higher price of gold in England 
 than in other places in proportion to silver, and, therefore, may 
 be diminished by lowering the value of gold in proportion to 
 silver. If gold in England, or silver in East India, could be 
 brought down so low" as to bear the same proportion to one 
 another in both places, there would be here no greater demand for 
 silver than for gold to be exported to India. And if gold were 
 lowered only so as to have the same proportion to the silver 
 money in England, which it hath to silver in the rest of Europe, 
 there would be no temptation to export silver rather than gold to 
 any other part of Europe. And to compass this last, there seems 
 nothing more requisite than to take off about 10^. or 12d. from 
 the guinea ; so that gold may bear the same proportion to the 
 silver money in England which it ought to do by the course of 
 trade and exchange in Europe. But if only 6d. were taken off at 
 present, it would diminish the temptation to export or melt down 
 the silver coin. And, by the effects, would show hereafter better 
 than can appear at present, what further reduction would be most 
 convenient for the public 
 
 " In the last year of King William, the dollars of Scotland, 
 worth about 4s. 6^d., were put away in the North of England for 
 5s., and at this price began to flow in upon us. I gave notice 
 thereof to the Lords Commissioners of the Treasury ; and they 
 ordered the collectors of taxes to forbear taking them, and thereby 
 put a stop to the mischief 
 
 "At the same time, the louis d'or of Prance, which were worth 
 but 17s. fat. a piece, passed in England at 17s. 6d. I gave notice 
 thereof to the Lords Commissioners of the Treasury; and his 
 late Majesty put out a proclamation that they should go but at 
 17s. ; and, thereupon, they came to the Mint, and £1,400,000 
 were coined out of them ; and if the advantage of 6^d. in a louis- 
 d'or sufficed at that time to bring into England so great a quantity 
 of French Money, and the advantage of three farthings in a louis- 
 d'or to bring it to the Mint, the advantage of 9^d. in a guinea, 
 or .above, may have been sufficient to bring the. great quantity of 
 
Newton's report on the coinage 493 
 
 gold which hath been coined in these last fifteen years, without 
 any foreign silver 
 
 " Some years ago, the Portugal moedors were received in the 
 West of England at 28s. a-piece. Upon notice from the Mint, 
 that they were worth only about 27s. Id., the Lords Commis- 
 sioners of the Treasury ordered their receivers of taxes to take 
 them at no more than 27s. Qd. Afterwards, many gentlemen in 
 the West sent up to the Treasury a petition, that the receivers 
 might take them again at 28s., and promised to get returns for 
 money at that rate ; alleging, that when they went for 28s., their 
 country was full of gold, which they wanted very much. But the 
 Commissioners of the Treasury, considering that at 28s. the 
 nation would lose 5^. a piece, rejected the petition. And if an 
 advantage of bd. in the 28s. did pour that money in upon us, 
 much more hath an advantage to the merchant of 9\d. in a 
 guinea, or above, been able to bring into the Mint great quantities 
 of gold, without any foreign silver, and may be able to do so still, 
 till the cause be removed 
 
 " If things be let alone till silver money be a little scarcer, the 
 gold will fall of itself ; for people are already backward to give 
 silver for gold, and will in a little time refuse to make payments 
 in silver without a premium, as they do in Spain; and this 
 premium will be an abatement of the value of the gold ; and 
 so the question is, whether gold shall be lowered by the Govern- 
 ment, or let alone till it falls of itself, by the want of silver 
 money 
 
 " It may be said, that there are great quantities of silver in 
 plate, and if the plate were coined, there would be no want of 
 silver money. But I reckon that silver is safer from exportation 
 in the form of plate than in the form of money, because of the 
 greater value of the silver and fashion together ; and, therefore, 
 I am not for coining the plate, till the temptation to export the 
 silver money, which is a profit of 2d. or M. an ounce, be 
 diminished ; for, as often as men are necessitated to send away 
 money for answering debts abroad, there will be a tempta- 
 tion to send away silver rather than gold, because of the 
 profit, which is almost 4 per cent, i and for the same reason 
 foreigners will choose to send hither their gold rather than their 
 silver " 
 
494 Theory and practice of banking 
 
 Mr. Aislabie, the Chancellor of the Exchequer, brought the 
 subject of the great scarcity of silver coin before the House on 
 the 21st December, 1717, and was seconded by Mr. Caswall, 
 who gave details of the different relative values gold and silver 
 coin had borne with respect to each other, according to the plenty 
 or scarcity of each, and said that the over-valuation of gold in 
 the current coins of Great Britain had caused the exportation of 
 great quantities of silver specie. To prove this, he laid open 
 a clandestine trade which had been carried on for many years 
 by the Dutch, Hamburghers, and other foreigners, in concert 
 with the Jews and other traders here, which consisted in 
 exporting silver coins, and importing gold in lieu thereof, which 
 being coined into guineas at the Tower, near 15d. was got by 
 every guinea, which amounted to about 5 per cent.: and, as 
 these returns might be got five or six times in the year, con- 
 siderable profits were made by it. In his opinion, the only way 
 of checking this was to lower the price of guineas and other 
 gold specie 
 
 Sir Isaac Newton has shown that the true value of the guinea, 
 according to the market values of gold and silver at that time, 
 was 20s. 8d. The House, however, did not adopt his recom- 
 mendation to its full extent, but they addressed the Crown to 
 issue a proclamation to make guineas current at 21s. In ac- 
 cordance with this, the King issued a proclamation on the 22nd 
 December, 1717, making guineas current at 21s., and reducing 
 the other gold coins from 23s. 6d. and 25s. 6d. to 23s. and 25s. 
 each 
 
 This was the last alteration made in the relative values of gold 
 and silver coin, and now, in the language of the Mint, the price 
 of gold was fixed at £3 17s. lO^d. an ounce, which is so sore a 
 puzzle to many persons. This alteration in the value of guineas' 
 created some alarm that it might be further reduced, and caused 
 considerable confusion in trade, but, in January, 1718, both 
 Houses of Parliament passed resolutions that they would not 
 alter the standard of the gold and silver coins of the kingdom ia 
 fineness, weight, or denomination 
 
 By the reduction of the price of the guinea, the value of gold- 
 to silver was fixed at 15M|§^ to one ; butj as in Holland and 
 France the rate was 14J to 1, a profit still remained on exporting. 
 
THE SOUTH SEA COMPANY 495 
 
 silver and importing gold. Thus gold became the cheapest 
 medium in which to make payments ; and, by this means, during 
 the course of the last century, it became gradually an understood 
 thing in commerce that gold was the standard of value. This 
 custom was finally adopted as law in 1816 
 
 64. Up to the year 1711 all the permanent debt contracted 
 by the Government consisted of Bank of England Stock. In 
 order to replace the capital thus withdrawn from circulation, the 
 Bank had always been allowed to issue notes to an equal extent : 
 but it was quite evident that this could not go on indefinitely. 
 At this period the party antagonistic to that which founded the 
 Bank of England were in power. The dismissal of the Whigs 
 had shaken public credit. The unfunded debt of the State was 
 enormous— it amounted to nine millions and a half. Mr. Harley 
 (afterwards Earl of Oxford), the Chancellor of the Exchequer, 
 revived the idea which we have before noticed, as first suggested 
 by Dr. Chamberlen. He persuaded a number of merchants to 
 undertake this debt, upon receiving interest at 6 per cent., and 
 being incorporated as a company for 32 years, with the exclusive 
 privilege of trading to the South Seas. This was hailed by his 
 party at the time with great approbation, as a masterpiece of 
 financial wisdom. Such was the origin of the South Sea Com- 
 pany. We cannot, of course, enter into any of the details of 
 this famous scheme, beyond what strictly concerns our present 
 subject. Ample details will be found elsewhere. Though espe- 
 cially forbidden by Act of Parliament to carry on banking 
 business, this great monetary corporation overshadowed the 
 Bank of England. In 1717, the Government determined to 
 make a strong effort to reduce the national debts. Proposals 
 were invited from each of these great companies. The South 
 Sea Company proposed that their then capital of £10,000,000 
 should be augmented to £12,000,000 ; that the additional 
 £2,000,000 should be employed in redeeming several public 
 debts, and g,mong these the banker's debt : that the interest on 
 their original capital should remain at 6 per cent., and interest 
 at five per cent, should be given on the new capital till the 24th 
 June, 1718. After that date interest at 6 per cent, should be 
 allowed on the whole capital. That the duties upon which such 
 
496 THEORY AND PRACTICE OF BANKING 
 
 interest was chargeable should be continued, and any surplus, 
 after paying them, should be applied to redeem other public 
 debts. That all sums of principal and interest might be 
 redeemed after a year's notice, after 24th of June, 1725. That 
 their capital and stock in trade should be exempted from all taxes 
 whatever 
 
 65. The Bank of England proposed that their privileges 
 should remain untouched till 1742, as by the last Act. That an 
 annuity of £106,500 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 
 should 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, per annum. They demanded that all their privileges should 
 continue 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 them of their eminent public services, and 
 requested that all the public stocks might be made transferable 
 and payable at the Bank, which duty they undertook to perform 
 without any profit to themselves, on condition that no farther 
 taxes be laid on their capital, or upon their bills and notes. 
 Upon further debate, the proposals of the Bank of England were 
 accepted, as well as those of the South Sea Company, and three 
 Acts were passed to carry them into effect. At this time the 
 South Sea Company appeared to have got so completely the better 
 of the Bank, that they invited the King to become their Governor, 
 and, on the 1st of February, 1715, an Act was brought in to 
 remove any diflBculties in the way. It was read and passed 
 through both Houses on the same day, and on the next received 
 the Eoyal assent 
 
 66. The skirmish between thesfe 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 SOUTH SEA COMPANY 497 
 
 the state of the public debts to the attention of Parliament. 
 This was preliminary to the introducing a plan to Parliament 
 which the Ministry and the South Sea Directors had secretly 
 projected, and determined to bring before Parliament, before any 
 opposition could be organised 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 public 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 offered a lonus of £3,500,000 to the 
 State, payable in four instalments, to commence at Lady-day, 
 1721. This astounding proposal 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 rally. They 
 reminded the House of the great and eminent services it had 
 done the public, and obtained five days' delay 
 
 67. The Bant determined not to be outdone in audacity. 
 They also undertook to consolidate these debts, and add them to 
 their capital. Upon the whole, it was calculated that their pro- 
 posal was more advantageous to the 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 points. The 
 Bank, in a fit of wild desperation, amended their offer. The 
 chief points were, that for every £100 annuity for 96 and 99 
 years, they offered £1,700 Bank Stock, and that, after the 24:th 
 June, 1727, the interest on the whole consolidated funds should 
 be reduced to 4 per cent, absolutely, and thenceforth be redeemable 
 by Parliament 
 
 68. The contest between these gigantic rivals was simply 
 which was to devour the other. The debate was long and fierce ; 
 Mr. Robert Walpole was the champion of the Bank, Mr. Aislabie, 
 Chancellor of the Exchequer, was patron of the South Sea Com- 
 pany. At length, on the 2nd April, the South Sea Bill was read 
 a third time, and passed by a majority of 172 to 55. Then it 
 
 KK 
 
498 THEORY AND PKACTICE OF BANKING 
 
 was carried up to the Lords. The debate was equally animated, 
 but, as usual, less garrulous ; it was ended in a single day, and 
 the South Sea carried the day by a majority of 83 to 17. The 
 King closed the session on the 11th June, and congratulated 
 Parliament on the good foundation they had prepared for the 
 payment of the national debts without violation of the public 
 faith 
 
 69. The price of the South Sea Stock, on the 7th April, 
 when the Bill passed, was 310, next day it fell to 290. On the 
 12th, the Directors opened their first subscription of £1,000,000 
 at £'300 for every £100, having first propagated the most enor- 
 mous 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 double the price of the first 
 payment. Then began the wild delirium — by successive stages the 
 stock stood at £500 on the 23rd May ; on the 2nd June at £890; 
 next day it fell to £640. After some fluctuations, the Company 
 opened their books for a third subscription at £1,000; £4,000,000 
 were taken at that price, and, before the end of June, the stock 
 was at £2,000. The price of Bank Stock, at the same time, was 
 £260. The great outbreak of the bubble mania had begun 
 before the prorogation of Parliament, and on that day the King 
 had published a proclamation to put 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 what 
 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, and, of course, immediately 
 decamped. Permissions to subscribe to a future scheme were 
 Belling at sixty guineas 
 
 70. Then came the fearful collapse ; on the 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 Walpole, the Bank of 
 England agreed to a draft of a contract for providing means to 
 
THE REST 499 
 
 sustain the credit of a number of their bonds. After protracted 
 negotiations, the terms were agreed upon between the two 
 Companies, and brought before the proprietors of the Bank of 
 England, and approved of by them. Before, however, it could 
 be embodied in a legal form, affairs took a very different turn. 
 A great many of the goldsmiths and private bankers had ad- 
 vanced great sums upon the South Sea Stock ; when this fell, it 
 brought a run upon them. Many of them stopped payment, and 
 absconded. The Sword Blade Company, who were the cashiers 
 to the South Sea Company, stopped payment. This portended 
 universal bankruptcy. The Bank had been assailed with every 
 species of public resentment because it had hesitated to lend its 
 aid in supporting the South Sea Bonds. Every one looked upon 
 it as the sole pillar of credit, but even the credit of the Bank 
 was now shaken. The general failure of the bankers imme- 
 diately caused a great run upon it. The Bank, in these straits, 
 devised a trick to prolong the payments. It employed a number 
 of clerks to tell out the money which was demanded, as well as 
 what was brought in. Payments were made in light sixpences 
 and shillings, and large sums were paid to particular friends, 
 who went out with 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 
 
 But something was required to be done to restore public credit. 
 The South Sea Company were permitted to sell annuities 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 capital : 
 it then stood at £8,959,995 14s. Sd. 
 
 71. IJp to the year 1722, the Bank had divided the whole of 
 its profits among the Shareholders, and had made no reserve for 
 any contingencies. The dividend, therefore, had been extremely 
 variable. It had fluctuated from 18^ per cent, in 1706, to 6 per 
 
 KK 2 
 
500 THEORY AND PRACTICE OF BANKING 
 
 cent, in 1722. The inconvenience of this was strongly felt, as 
 well as having no fund to fall back upon in cases of emergency. 
 These had hitherto been met by making calls upon the proprietors. 
 In this year the Directors established a reserve fund, which is 
 called the Eest 
 
 72. Several financial transactions took place between the 
 Government and the Bank, which need not be detailed here. 
 Upon most of the previous occasions of the renewal of the 
 charter, there had been much public discussion as to the expe- 
 diency of continuing this monopoly. The Bank, however, had 
 always been able to relieve the continually embarrassed state of 
 the finances, and had thus purchased its privileges. As the time 
 was drawing near for the expiry of the monopoly in 1742, these 
 discussions became more frequent and animated, and several 
 attempts were made to set up banks in such a manner that they 
 should not violate the clause in the Act of 1709. When the 
 time for the renewal came, the Government were, as usual, in 
 difficulties, and the Bank agreed to lend them £1,600,000, 
 without interest. To raise this sum, they made a call upon their 
 proprietors, which raised their capital stock to£9,800,000. In 
 consideration • of this, their exclusive privileges M?ere continued 
 till twelve months' notice after 1st August, 17641 Moreover, it 
 was determined to stop up all the loopholes in the( Act of 1709, 
 and the following clause was inserted in the Act, Statute 1742, 
 c. 13, s. 5— 
 
 " And to prevent any doubts that may arise concerning the 
 privilege or power given by former Acts of Parliament, to the said 
 Governor and Company of exclusive Banking, and also in regard 
 to the erecting of any other Bank or Banks by Parliament, or 
 restraining other persons 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 hereby further 
 enacted and declared, by the authority aforesaid, . that it is the 
 true intent 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, 
 united, or to be united, in covenants or partnership, exceeding 
 the number of six persons, in that part of Great Britain called 
 
THE REBELLION IN SCOTLAND 501 
 
 England, to borrow, owe, or take up any sum or sums of money, 
 on their hills or notes payahle at demand, or at any less time 
 than six months from the borroiviny thereof, during the con- 
 tinuance of such said privilege of the said Governor and Company, 
 who are hereby declared to be and remain a corporation with the 
 privilege of exclusive Banking, as before recited " 
 
 This clause demands the most earnest attention, because it is 
 the one which contains the sole monopoly of the Bank of England, 
 which is, at the present time, being again brought before the 
 attention of Parliament. It is a penal clause, and therefore, of 
 course, to be construed strictly ; and we must now examine its 
 real force and effect 
 
 We have already shown that all banking consists in " Issuing" 
 Rights of action, or Credit, in exchange for Money or Securities. 
 When a banker has once issued this Right of action to his cus- 
 tomer, the customer might either transfer this Right of action, 
 or Credit, to any one else he pleased, by giving him a Cash Note, 
 or Cheque on his banker, or the banker, if the customer preferred 
 it, would give him a Promissory Note, payable to bearer on 
 demand ; and it is perfectly legal at Common Law for any per- 
 son whatever to issue Promissory Notes, payable to bearer on 
 demand 
 
 Now, the sole monopoly granted to the Bank of England by 
 this clause is, that during the continuance of its Charter no part- 
 nership exceeding six persons in England, should issue Notes 
 payable on demand, or at any less time than six months after 
 issue. All other kinds of banks and methods of banking are left 
 absolutely free and untouched 
 
 There is not a syllable in this clause to prevent Joint Stock 
 Banks being formed, which should not issue Notes, or Notes 
 payable at six months after issue 
 
 And there is absolutely nothing whatever to prevent any bank 
 in any other part of the world, in Scotland, Ireland, France, 
 Russia, or America, from opening a branch in London, and doiug 
 all sorts of banking business, except only issuing Notes payable 
 at less than six months after issue 
 
 73. In September, 1745, the rebellion in Scotland seemed 
 to be assuming formidable proportions. The Chevalier captured 
 
502 THEORY AND PRACTICE OF BANKING 
 
 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 per cent. A meeting of merchants 
 immediately took place, and 1,600 of the most eminent came to 
 a resolution, on the 26th, pledging themselves to support the credit 
 of the Bank Notes. It also said that the Directors adopted the 
 same expedient on this occasion, which had been so successful in 
 1720, of paying in sixpences 
 
 74. In 1746 the Ministry were again in diflBculties, from 
 the political disturbances in the preceding year, and they were 
 obliged to apply for assistance to the Bank. The proprietors 
 authorised the Directors to cancel £986,000 of Exchequer Bills, 
 upon receiving an annuity of 4 per cent., and to create new 
 stock for that purpose. This increased the paid-up Capital to 
 £10,780,000, which was not further augmented till 1782. In 
 1750 the interest upon £8,486,000 of the debt due to them from 
 Government was reduced to 3 per cent. 
 
 75. In 1759, the Bank began to issue Notes for £15 
 and £10 
 
 76. It is a favourite doctrine with 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 great 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 17G3 is remarkable as among the first of those great 
 eras of commercial distress and prostration, caused by too great 
 an expansion of credit. And these disasters took place where 
 there was no currency at all but what represented bullion — 
 Hamburg and Amsterdam. The progress of the Seven Years' 
 War had probably encouraged great speculation among the 
 continental merchants, which involved those connected with 
 them in ruin when peace came. Two brothers at Amsterdam, 
 named Neufville, were among the principal merchants and 
 speculators who had connections all over the continent. At 
 
THE CRISIS OF 1764 503 
 
 length their embarrassments became so great that the bankers 
 at Amsterdam could no longer support them, and they failed for 
 upwards of 330,000 guineas, on the 29th July, 1763. Before the 
 news of their actual stoppage reached Hamburg, the bankers of 
 that town were thrown into the greatest consternation by hearing 
 that it was intended at Amsterdam to allow the Neufvilles to fail. 
 On the 4th August, 1763, the bankers at Hamburg met to con- 
 sider 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 Anasterdam, 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 infallibly 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 support the Neufvilles, by furnishing what money 
 they want, and giving them two or three persons of unquestion- 
 able probity and skill for curators, that their affairs and their 
 engagements may be concluded and terminated, without causing 
 a general ruin, which 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, we have unanimously 
 resolved to suspend our own payments, as long as we shall judge 
 it proper and necessary, and that we shall not acquit them, or the 
 counter-protests that shall come from you, or any whatever 
 
 " This is the resolution we have unanimously taken, and from 
 which we will not depart, happen what will. The fate of the 
 general commerce of all Europe is at present absolutely in your 
 hands ; determine, gentlemen, whether you should crush it totally, 
 or support it " 
 
 The letter, however, came too late to exercise any influence, 
 as the Neufvilles had been allowed to fail six days before. A 
 general failure took place, eighteen houses immediately stopped 
 payment. A much greater number in Hamburg immediately 
 followed, and no business was for some time transacted but for 
 ready money. The failures were equally general in many others 
 
504 THEORY AND PRACTICE OF BANKING 
 
 of the chief cities of Germany. A conspicuous example that 
 credit may be just as easily abused under a metallic currency, 
 as under a paper one. This crisis extended to England, and 
 Smith says that the Bank made advances to merchants to the 
 amount of a million 
 
 77. In 1764 the Bank's Charter expired. The terms of 
 renewal were an absolute gift of £110,000 to the nation, and a 
 loan of £1,000,000 on Exchequer bills for two years at 3 per 
 cent, interest. The charter was then renewed on these terms till 
 twelve months' notice after 1st August, 1786, and the repayment 
 of the Government debt 
 
 78. In 1772 the first of those great commercial panics took 
 place, in which the Bank was called upon to take a prominent 
 part in supporting commercial credit. The preceding two years 
 had been distinguished by the most extravagant overtrading. 
 On the 10th June, 1772, Heale and Co., Bankers, in Thread- 
 needle Street, stopped payment, involving several 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 
 ■whole city was in consternation : there had not been such a pro- 
 spect of 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 speculations 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 niortal blow to all public and private credit through- 
 out Europe. They were caused by great speculative dealings in 
 trade, as well as in the public funds of different countries, and the 
 losses were estimated at £10,000,000 
 
 79. During the course of this century, the coinage was pro- 
 gressively deteriorating, and a Committee of the House of 
 Commons reported, that on a considerable amount of the gold 
 coinage, the deficiency was about 9 per cent.,; in the year 1774, 
 
INDUSTRIAL PROGBESS IN ENGLAND 505 
 
 the great re-coinage was ordered. The market price of gold well 
 illustrates this deterioration — 
 
 BEFOKE THE KE-COINAGE 
 
 Market Price of Gold 
 
 July, 1718 £3 19 10 
 
 January, 1721 3 18 6 
 
 1730 3 18 11 
 
 1754 3 18 5 
 
 1761 3 18 10 
 
 1772 410 
 
 AFTEE THE EB-COINAGE 
 
 January, 1782 £3 17 6 
 
 1790 3 17 6 
 
 And it continued at this rate till September, 1797 
 
 80. The next renewal of the charter was in 1781, when, 
 upon the Bank's advancing £2,000,000 at 3 per cent, interest 
 for three years, the charter was renewed tiU twelve months' 
 notice after the 1st August, 1812, and the payment of the 
 public debt. In the next year a call of £8 per cent, on the 
 capital produced £862,000, and the paid-up capital of the Bank 
 was £11,642,400. The renewal of the charter five years before 
 its expiry excited very keen discussion. The Ministry, however, 
 eulogised the eminent public services the Bank had rendered for 
 ninety years, and warmly deprecated any- attempt to interfere 
 with its privileges. They carried their plan by a majority 
 of 109 to 30. Considering that the Three per Cents, were then 
 at 58, the offer of the Bank was a very great accommodation to 
 the State 
 
 81. The termination of the Seven Years' War took place in 
 1763, when it is usually said that this nation finally took that 
 rank in the scale of nations which she at present 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 unparalleled splendour. Previously to this time, 
 Great Britain was probably more backward in great public 
 
506 THEORY AND PRACTICE OF BANKING 
 
 works than any State in Europe. She could show nothing that 
 could be compared with the gTeat French and Spanish 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 begun 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. In Italy, Gerbert, the morning star of 
 modern literature and science, was famous for his hydrauhc 
 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 ccmmercial 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 Europe, 
 but Holland, can boast. Taking into consideration the compara- 
 tive wealth of the country at the two periods, the period from 
 1770 to 1795 was fully as wonderful an effort 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 equal 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 place. It would almost seem that these 
 three men, Brindley, Arkwright, and Watt, were specially raised 
 up by Providence to elaborate those miraculous resources, which 
 it is impossible fiO doubt, carried this country triumphantly 
 through that terrific contest which was then just about to burst 
 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 coiintry. Now were the seeds of future ruin, misery, 
 
THE CRISIS OF 1782 507 
 
 and desolation sown broadcast throughout the land. The pro- 
 digious development of all these industrial works demanded a 
 great extension of the Currency to carry them on. What 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 prevented 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, 
 and it was just at this period that they began successfully to 
 extend their branches into the country. England required to 
 have a Currency, and, as it could not have a good one, it had a 
 bad. Multitudes of miserable shopkeepers in the country, 
 grocers, tailors, drapers, started up like mushrooms and turned 
 bankers, and issued their notes, inundating the country with 
 their miserable rags. Burke said that when he came to 
 England in 1750 there were not twelve bankers out of London ; 
 in 1793 there were 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 present day 
 also took their rise at this time, but they were, comparatively 
 speaking, few. The great majority were such as we have 
 described above 
 
 83. The state of the foreign exchanges, and the condition 
 of the coinage about this period, offer many instructive examples of 
 the truth of the principles laid down in the chapter on Exchanges : 
 but we shall reserve them till we come to the consideration of 
 the Bullion Eeport, when they will be fully discussed 
 
 84. In 1782 the unhappy war with America was fortunately 
 terminated, and immediately a prodigious extension of the foreign 
 commerce, which had been previously unusually restricted, took 
 place. The enormous markets thrown open to the merchants 
 led to the most extravagant overtrading, which was greatly 
 fostered by the most incautious issues from the Bank, and a 
 very alarming drain of specie from the Bank, which produced 
 a crisis, threatening to compel them to stop payment. The 
 
508 THEORY A1?D PRACTICE OF BANKING 
 
 directors, however, considered that if they could only restrain 
 their issues for a short period, the returns in specie in payment 
 of the exports would soon set in in a more rapid manner than 
 they went out. They determined, therefore, to make no com- 
 munication to the Government, lut for the present to contract 
 their issues until the exchanges turned in their favour. 
 The alarm felt by the Bank was greatest in the month of May, 
 1783. They then refused to make any advances to Government 
 on the loan of that year, but they did not make any demand for 
 payment of the other advances to Government, which were then 
 between nine and ten millions. They continued this policy up 
 to October, when at length the drain had ceased from the 
 country, and money had begun to flow in from abroad. At 
 length, in the autumn, when the favourable signs began to appear, 
 they advanced freely to Government on the loan, although at 
 that time the cash in the Bank was actually lower than at the 
 time when they felt the greatest apprehensions. It was then 
 reduced to £473,000 
 
 85. The doctrine then stated by Mr. Bosanquet that guided 
 the Directors was this — That while a drain of specie is going on, 
 their issues should be contracted as much as possible, but that as 
 soon as the tide had given signs of ceasing, and turning the 
 other way, it was then safe to extend their issues freely. This 
 was the policy they acted upon, and it was entirely successful, 
 iind the credit of the Bank was saved 
 
 86. The period succeeding the American war was one of 
 great apparent prosperity throughout Europe. People firmly 
 believed that all wars were come to an end, and the reign of 
 perpetual peace had begun. The fierce enthusiasm which had 
 distracted Germany for so many years with religious wars, had 
 abated, and the despotic sovereigns of that country, with no 
 apparent object of terror, had become sensibly milder in their 
 administration. The press had attained unwonted freedom. To 
 the unobserving eye, nothing betokened any symptoms of dis- 
 turbance ; and the writings of philosophers propagated the belief 
 that the indefinite progress of human perfectibility was at hand. 
 
THE CRISIS OF 1794 509 
 
 Europe was at last roused from its dream of security by the terrific 
 progress of the French Revolution 
 
 87. Mr. Tooke states, from his own personal recollection, 
 that there had been an enormous and undue extension of 
 commercial speculation, not only in the internal trade and 
 banking of this country, but also throughout Europe and the 
 United States, for some years previous to 1792. The amount of 
 bank notes in circulation, which was under, six millions in 1784, 
 had increased to nearly eleven millions and a half in 1792. At 
 length, in the autumn of 1792, commercial failures began both 
 here and abroad, as well as in America. The average 
 of bankruptcies during the first ten months had been 50, 
 in November, they suddenly rose to 105. This unusual 
 number created much uneasiness, but they diminished greatly 
 in December. In January, 1793, they rose again. The 
 French Eevolution was now advancing with rapid strides ; the 
 King had been a prisoner ever since the 10th August. In 
 November the Convention published what was tantamount to 
 a declaration of war against every established Government in 
 Europe. Great Britain thought it time to arm. The militia 
 were called out, and on the 13 th December Parliament met, and 
 the King called the attention of the Houses to the increasing 
 political ferment in the country, which had shown itself in acts 
 of riot and insurrection. He said that the agitators were 
 eyidently acting in concert with persons abroad, and that it waS 
 impossible to see, without the most serious uneasiness, the 
 evident intention of the French to excite disturbances in foreign 
 countries wholly contrary to the law of nations. Under these 
 circumstances it became necessary to augment the military and 
 naval forces of the country. An angry correspondence between 
 the Governments inflamed the passions of both nations, and, on 
 the execution of the King, the British Government expelled the 
 French Ambassador, and the Convention instantly declared war. 
 The declaration of war, though it must evidently have been 
 foreseen, gave a shock to credit, which was already staggering. 
 On the 15th February, a house of considerable magnitude, deep 
 in corn speculations, failed, and on the 19th, the Bank refused 
 the paper of Lane, Son, and Fraser, who stopped next morning to 
 
510 THEORY AND PRACTICE OF BANKING 
 
 the amount of nearly one million, involving a great number of 
 other respectable houses. In the meantime, the panic spread to 
 the bankers. It began at Newcastle. The partners in the 
 banks at Newcastle were opulent, but their private fortunes were 
 locked up. They issued notes which allowed interest to 
 commence at some months after date, and then they were pay- 
 able on demand ; when the run came they were unable to realise, 
 and stopped payment. The panic immediately spread through- 
 out the country. It was computed that there were nearly 400 
 country Banks at that time, of these 300 were much shaken, 
 and upwards of 1 00 stopped payment. The Banks of Exeter and 
 the West of England almost alone stood their ground. They 
 issued notes payable at 20 days' sight, with interest commencing 
 from the date of the note, and ceasing on the day of 
 acceptance. The best contemporary authorities are unanimous 
 in attributing this terrible disaster to the inordinate multiplication 
 and reckless operations of these country " bankers," which had 
 been established in almost every town and even village in the 
 country 
 
 88. This great pressure extended to the London bankers 
 as well as the country ones. One of them says that the extra- 
 ordinary state of credit had obliged every person connected with 
 trade and money transactions, to gather in and husband every 
 resource to meet all demands. That for six weeks back every 
 man of money and resources had been straining every nerve to 
 support himself and immediate friends, and could not give that 
 support to others which they would have been disposed to do. 
 All these circumstances naturally produced a demand on the 
 Bank of England for support and discounts. But the Bank, 
 being thoroughly alarmed, resolved to contract its issues: 
 bankruptcies multiphed with frightful rapidity. The Govern- 
 ment urged the Bank to come forward and support credit, but 
 they resolutely declined 
 
 89. Sir Francis Baring greatly blames the directors for 
 their conduct on this occasion. He says that they at first 
 accommodated themselves to the crisis, but their nerves could not 
 support the daily demand for guineas, and, for the purpose of 
 
THE CRISIS OF 1794 511 
 
 checking the demand, 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 Grorernment, and in the circulating paper 
 
 3. To enable country banks to discharge their demands 
 whilst confi.dence in the Government and in the bank remained 
 entire 
 
 That every measure ought to be taken to prevent and 
 mitigate the first cause, except prohibition and 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 shows, from 
 the state of the exchanges, that it was quite impossible the 
 guineas could have left the country, as the loss on exporting 
 them to Amsterdam was £3 6s. M., and to Hamburg £4 2s. 6d. 
 per cent., and it was notorious that large quantities of gold and 
 silver were coming in from France. The cause of this 
 was the continued depreciation 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 
 precedent of 1697, when Montague had sustained public credit 
 by an issue of Exchequer bills, and thought that a similar plan 
 might be followed in this crisis. The Minister desired him to 
 propose a scheme for the purpose, which he presented on the 
 16th April. A Committee of the House of Commons was imme- 
 diately appointed. In the meantime, a director of the Eoyal 
 
512 THEORY AND PRACTICE OF BANKING 
 
 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, 
 unless they received immediate assistance from Government, 
 general failure would ensue. Numerous houses, who were per- 
 fectly solvent, must fall, unless they could obtain temporary 
 relief. Mr. Macdowall, M.P. for Glasgow, stated that the com- 
 mercial houses and manufactories there were in the greatest 
 distress from the total destruction of credit. That this distress 
 arose from the refusal of the Glasgow, Paisley, and Greenock 
 banks to discount, as their notes were poured in upon them 
 for gold 
 
 93. The Committee reported that the general embarrass- 
 ment of commercial credit was so notorious as to call for an 
 immediate remedy, without much examination. That the 
 failures which had taken place had began with a run on those 
 houses that issued circulating paper without sufiQcient capital, 
 but had extended so as to afifeot many houses of great solidity, 
 and possessed of funds ultimately much more than sufficient 
 to answer all demands upon them, but which could not 
 convert those funds into money in time to meet the pressure. 
 That the sudden discredit of so large an amount of bankers' notes 
 had produced a most inconvenient deficiency of the circulating 
 medium. These circumstances had caused bankers to hoard 
 to a great extent. That unless a circulating medium was 
 provided, a general stoppage must take place. That they had 
 requested a number of the most eminent merchants to meet 
 and consider a plan of issuing Exchequer bills to a certain 
 amount, under proper regulations, who 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 direc- 
 tions of a board of commissioners appointed for that purpose, in 
 sums of £100, £50, and £20, and under proper rg'gulations. 
 After considerable doubts were expressed by Mr. Fox and Mr. 
 
ISSUE OF EXCHEQUBB BILLS 513 
 
 Grey, as to the policy of this extraordinary measure, which was 
 laknown 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, was sent down to 
 Manchester and Glasgow on the strength of the Exchequer 
 bills, which were not yet issued. This unexpected supply, 
 coming so much earlier than was expected, operated like magic, 
 and had a greater effect in restoring credit than ten times the 
 sum could hare had at a later period 
 
 95. When the whole business was concluded, a report was 
 presented to the Treasury. It stated that the knowledge that 
 the loans might be had operated, in many instances, to prevent 
 them being required. The whole number of applications was 
 332, and the sum applied for £3,855,624, of which 238 were 
 granted, amounting to £2,202,000 ; 45 for sums to the amount 
 of £1,215,100 were withdrawn, and 49 rejected. The whole 
 sum advanced was repaid; two only of the parties assisted 
 became bankrupt, all the others were ultimately solvent, and 
 in many instances possessed of great property. A considerable 
 part of the sum was repaid before it was due, and all the rest 
 with the utmost punctuality. So much scrupulous care was 
 taken to preserve secrecy as to the names of the applicants, 
 that they were not known to that hour except to the Com- 
 missioners and their own sureties. After all expenses were 
 paid, the transaction 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 very intimation of 
 the intention of the Legislature to support the merchants, 
 operated hke a charm aU over the country, and in^ 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 
 
514 THEOPiT ANJ) PRACTICE OF BANSINO 
 
 argument to show the mistaken policy of the Bank. The pani© 
 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 during the two following years, money became as plentiful as 
 in time of peace, and 4 per cent, interest could scarcely be got 
 
 97. AH 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 weight of testimony in favour 
 of the happy effects of this measure, some rigid doctrinaires.; 
 afterwards condemned the proceedings as a violation of the true, 
 principles of Political Economy. Even, some who. helped tq devisci. 
 it changed their opinion afterwards upon the subject. Thus, Lord, 
 Sidmouth, in 181.1, observed that he was, upon consideration, 
 inclined to doubt of its wisdom and policy. Lord G-renville also 
 ^aid, that from experience and reflection he. was convinced the 
 measure was founded on wrong policy ; as one of those who were , 
 concernedi in the measure, he was perfectly ready tp avow his,, 
 error, for he was perfectly satisfied in his own mind that it wasj 
 unwise and impolitic 
 
 99. 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 principles of Economics, it immediately resolves itself into a. 
 question of loss of. capital. It is quite easy to show that all greati. 
 errors in Economics are destructive of capital. They may be, 
 estimated in money. Was this measure a pecuniary loss to thq . 
 country ? But what would have been the loss to the country if 
 
 *it had not been adopted ? Who, can estimate the destruction, 
 of capital that would have ensued in the general wreck of public,-, 
 cjedit ? It might haye endangered the safgty qf : the St^fe But , 
 
LONDON BANKERS CEASE TO ISSUE NOTES 515 
 
 there are other arguments which appear to us to be conclusive as 
 to its propriety. The general loss of credit was chiefly caused by 
 a thorough want of confidence in the Currency of the country. 
 The miserable notes of the majority of bankers were utterly 
 blown upon. The great desideratum was a sound Currency. 
 Now, what 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 principles of Economics, 
 which caused the bad character of the Currency. Consequently, 
 the measure of the Government in providing a Currency in which 
 people would haye confidence, was merely a correction of the 
 error which had produced these deplorable results. An unde- 
 sirable one, it may be, but yet no better one was possible under 
 the circumstances 
 
 100. It was about this period, though we have not been 
 able to ascertain the exact date, nor is it at all material, that 
 London bankers discontinued the issue of their own Promissory 
 Notes, and confined themselves exclusively to paying the Cash 
 Notes, or Cheques, of their customers drawn upon themselves. 
 iVom this period London bankers entirely ceased to issue Notes, 
 though they were never forbidden to do so until the Bank Charter 
 Act of 1844. The public notions about " banking," as we have 
 seen, were so exclusively directed to issuing Notes that, when 
 Parliament intended to confer a monopoly on the Bank of Eng- 
 land, it considered it sufiicient to forbid any Bank of more than 
 six partners from issuing Notes ; and for a very considerable time 
 it did have that effect. But when London bankers discovered 
 that they could perfectly weU carry on their business without 
 issuing Notes, there was, of course, nothing to prevent a Joint 
 Stock Bank from carrying on business by the same method. By 
 a fortunate accident, the opportunity which this method afforded 
 of circumventing the monopoly of the Bank, was not discovered 
 till many years afterwards. If it had been, there cannot be a 
 doubt but that Parliament would have put it down very quickly. 
 When it was discovered, the age of such monopolies had passed 
 away, and the demand of the Bank to have it provided against 
 was refusefd 
 
 LL 2 
 
516 THEORY AND PRACTICE OF BANKING 
 
 101. Sir Francis Baring and Mr. Tooke both agree in saying 
 that nothing could be more satisfactory than the iinancial condition 
 of the 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 1794-95 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 throughout Europe and America. France 
 was in a still worse position than England, and the Government, 
 still further to embarrass her and afford relief to this country, 
 seized all neutral vessels laden with corn, bound for France ; it 
 also employed agents to buy corn in the Baltic ports, where its 
 price had already been raised greatly, in consequence of large 
 purchases on account of the French Government 
 
 102. 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 had 
 been usual for the Government to contract with none but the 
 most respectable monied men, who had the undoubted power to 
 faM their engagements. On this occasion, the Minister con- 
 tracted with men who did not possess those powers, and in order 
 to make good their payments, they were obliged to have recourse 
 to operations on foreign places, which deranged the exchanges, 
 and had a still greater effect in raising the rate of interest in 
 this country 
 
 These causes alone were 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 
 
ILLEGAL ADVANCES BY THE BANK 517 
 
 an UEScrupulous 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 were taken 
 ia the first Act of 1695 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 
 inade payable at the Bank, to the amount of £20,000 or £30,000, 
 when it was usual for the Treasury to send down orders to set 
 off such advances against the accounts to which they properly 
 belonged. If ever these advances reached £50,000, it was a 
 subject of complaint. In the American war these limits had 
 been much exceeded, and sometimes reached £150,000. Mr. 
 Bosanquet was Governor of the Bank in 1793, and the legality 
 of such proceedings excited grave doubts in his mind, and, after 
 consulting with his brother Directors, they agreed that it was 
 a serious question whether the penalties provided in the Act 
 did not extend to such transactions. They, therefore, thought 
 it would be expedient to apply to the Government, to obtain 
 an Act of Indemnity, to relieve them from any penalties they 
 might have incured, and to permit such transactions to a limited 
 amount. Mr. Bosanquet, who conducted the negotiation with 
 Mr. Pitt, expressly says that Mr. Pitt proposed to bring in a 
 clause which should indemnify the Directors to advance to a 
 limited amount. He says, that it was originally intended that 
 the penalty should be taken off only in case the advance on 
 Treasury bills should be restrained within a limited sum. This 
 limited amount was intended to be fixed at £50,000 or £100,000. 
 Mr. Bosanquet, however, then went out of ofiBce, and was unable 
 further to attend to the negotiation. Mr. Pitt was much too 
 keen not to see at once the enormous facilities Government would 
 obtain if this Act were passed. Accordingly, he pressed it quickly 
 through Parliament, but he took care to omit any clause of limita- 
 tion (Statute 1793, c. 32). Never had such a formidable engine 
 been placed in the hands of a Minister. He was now armed with 
 an unbounded power of drawing upon the Bank, with nothing 
 to restrain him, unless the Directors should take the audacious 
 
518 THEORY AND PEACTICE OF BANKING 
 
 ^tep of dishonouring his bills. The Bank, henceforth, was 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 1794 the foreign subsidies 
 were £2,641,053 ; in 1795 they amounted to £6,253,140. 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 specie 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 effect of making the foreign 
 exchanges adverse, and excited the greatest alarm in the Bank 
 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 com- 
 mercial world were equally pressing. Nothing could be more 
 unpleasant 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, 1795, it became 
 necessary to adopt 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 requested to make his financial arrangements 
 for the year without requiring further assistance from them ; and, 
 more particularly, that they could not allow the advances on 
 Treasury bills at any one time to exceed £500,000. Mr. Pitt 
 promised to reduce them to that amount by payments out of the 
 first loan 
 
 105. He, however, paid little regard to these remonstrances ; 
 and, on the 16th April, they were compelled to remind him that 
 he had not kept his promise that the sum should be reduced. 
 
PITT DECEITES THE BANK 519 
 
 They told him that they had come to a resolution that they 
 would Eot, in future, permit the advances to exceed the stipulated 
 sum. Mr. Pitt pretended he had forgotten the circumstance 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 ineffectual, and, 
 on the 30th July, the Directors informed him that they intended' 
 after a certain day, to give orders to their cashiers to refuse pay- 
 ment of all bills, when the amount exceeded £500,000. Mr. Pitt 
 was not prepared to comply with 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 Avith them for the 
 repayment of the other advances. After some further communi- 
 cations, they agreed to the loan for £2,000,000 
 
 106. The Act of Mr. Pitt had, in fact, deprived the Di- 
 rectors 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 were in progress, 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 had ever dotie 
 before, though we must, in common fairness, acquit the Directors 
 of the whole 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 was chiefly caused by the 
 bills which were drawn on the Treasury on behalf of foreign 
 Governments, which were made payable at the Bank. The 
 Directors had then to choose between endangering their own 
 safety, or declaring the Government bankrupt 
 
 107. All these concurrent causes which we have detailed, 
 began to produce their full effects in the autumn of 1795. The 
 drain commenced in September, and proceeded with alarming 
 rapidity. On the 8th October, the Bank made a formal com- 
 
520 THEORY AND PRACTICE OF BANKING 
 
 munication to Government, that it excited such seriuos apprehen- 
 sions in their minds, that they felt it an absolute necessity that 
 the advances to the Government must be diminished. They 
 reminded him of the warning they had given in the beginning 
 of the year as to the danger of the foreign loans, which had 
 been fully verified, and that numerous other payments must 
 shortly be provided for. That the market price of gold was 
 then £4 is. per ounce. Under these circumstances, the Bank 
 could lend no further assistance to the Government. On the 
 23rd of the same month, the Directors having heard rumours of 
 a new loan, waited on Mr. Pitt, who professed that he had not, 
 at present, the most distant idea of one. On the 18th November, 
 the Governor informed Mr. Pitt that the drain continued with 
 unabated severity, and that the market price of gold was £4 2s. 
 per ounce, and said that rumours were in circulation 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 the French, that he 
 was of opinion that it would highly conduce to the 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 timg 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 after- 
 wards appointed 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 
 engagement to diminish the quantity by at least one-third, and to 
 use influence to persuade others to do the same ; and an Act was 
 passed offering heavy bounties for the importation of corn 
 
Pitt's bad conduct to the bank 521 
 
 109, This project of a loan going on, and being now 
 proposed to be £3,000,000, the Court of Directors, after a 
 very solemn deliberation, on the 3rd December, came to the 
 unanimous resolution that, if the loan proceeded, they had 
 the most cogent reasons to apprehend very momentous and 
 alarming consequences from the actual effects of the last loan, 
 and the continued drain of specie and bullion. In answer to 
 this representation, Mr. Pitt solemnly promised them that he 
 should lay aside all thought of it, imless 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 
 necessary to choose between making the Government a bankrupt, 
 and taking stringent measures to restrict their accommodation to 
 the merchants. They resolved to fix 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 
 advanced, a pro rata proportion of each apphcant's bill should be 
 returned without regard to the respectability of the party or the 
 soHdity of the bills. 
 
 HI. 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 great 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 the Court, founded upon its 
 experience 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 aU probability prove fatal to the Bank of England 
 
 " The Court of Directors do therefore most earnestly deprecate 
 the adoption of any such measure, and they solemnly protest 
 against any responsibility for the calamitous consequences that 
 may follow thereupon " 
 
 Mr. Pitt replied, that after the repeated promises he 
 had made that no further loan should be made without 
 
522 THEORT AND PRACTICE OF BANKING 
 
 communicafcioii 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 need- 
 less alarm 
 
 113. We have already seen, ftom Mr. Pitt's conduct in the 
 affair of the clause relating to the advance on Treasury bills, that 
 he was not bound by any very scrupulous notions of honour. 
 On this occasion he departed still further from the right pathj 
 for, notwithstanding all his solemn promises, so frequently and 
 emphatically made, the Directors discovered that remittances 
 were still continuing to be clandestinely made. In several inter- 
 views 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 Hamburg were in a state of extreme 
 depression during the first three months of 1796. Sir F. Baring 
 shows that during January the profit was £7 10s. per cent. ; 
 during February, £6 10s. ; and during March, £8 7s. 6d. in 
 transmitting gold to that place. At length the several drains 
 began to diminish. An abundant supply of corn was obtained. 
 The continued 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 
 
 114. The stringent measures adopted by the Bank to 
 contract its issues, caused much complaint amongst mercantile 
 men, and a meeting of bankers and merchants was held at the 
 London Tavern, on the 2ad April, who 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 diminution of mercantile discounts 
 by the Bank. They resolved that if means could be found to 
 augment the circulating medium, without infringing the privi- 
 leges of the Bank of England, so as to restore the amount to 
 
INeEEASING DIFFICULTIES OF THE BANK 523 
 
 what it was before the contraction of discounts, it was the duty 
 of every friend to trade to give such a plan the most earnest 
 support. The meeting appointed a committee to prepare a plan 
 for such a purpose. Mr. Boyd drew up a long report on behalf 
 of the Committee, which proposed that a Board of twenty-five 
 members should be appointed by Parhament, who should be 
 authorised to issue promissory notes, payable at six months after 
 date, hearing interest at 1^^^. per £100 per day, upon receiving 
 the value in gold and silver, Bank of England notes, or in Bills 
 of Exchange having not more than three months to run. The 
 Committee had an interview with the Chancellor of the Exchequer 
 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 plan he determined to try before 
 adopting 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 without 
 the second would be of no use to him, and begged them to 
 reconsider their decision. The directors, thus pressed, were 
 driven to assent to it, but they accompanied it with a most 
 serious and solemn remonstrance, which they desired should be 
 laid before the Cabinet. They said that nothing under present 
 circumstances could induce them to comply with the demand, 
 except the dread of a worse evil following the refusal, and they 
 said that this advance would incapacitate them from granting 
 any further assistance during the year. They closed their 
 remonstrance by saying — 
 
 "They likewise consent to this measure in a firm reliance 
 that the repeated promises so frequently made to them, that the 
 advances on the Treasury bills should be completely done away, 
 may be actually fulfilled at the next meeting of Parliament, and 
 the necessary arrangements taken to prevent the same from ever 
 
524 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 Malt 
 Taxes of 1797, which was granted on condition that the 
 advances on Treasury bills, amounting to £1,613,345, 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 to 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 Grovernor assured him that the drain of cash had been 
 continuous and severe of late, and that such a demand would be 
 very dangerous 
 
 117. The enormous failures of the country bankers in 
 1793, had been followed by a permanent diminution of the issues 
 of country banks to a prodigious extent. Mr. Henry Thornton, 
 after instituting extensive inquiries in different 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 country to supply their place. Meantime, as we have 
 already observed, although the foreign exchanges had become 
 favourable, the Bank still continued to adhere, with the utmost 
 severity, to its policy of restriction throughout the autumn of 
 1796, and during the last three months they were no higher 
 than they had been in 1782, with an amount of commerce many 
 
POLITICAL GLOOM IN 1797 525 
 
 times larger than in that year. Commercial payments required 
 to be made in some medium in which the public had confidence. 
 As the pubHc could not get notes, they made a steady and 
 continuous demand for guineas. The bullion in the Bank in 
 March, 1T26, was £2,972,000 ; in September, £2,532,004 ; and 
 in December, £2,508,000, when a drain set in more severely 
 than ever 
 
 118. At this period the political situation of the country 
 was in the most gloomy condition. The war-like combinations 
 of Mr. Pitt had totally failed, and all Europe was now smarting 
 under the consequences of their suicidal policy in meddling with 
 the French Republic. Mr. Burke had pronounced, in 1790, 
 that France was, in a political light, expunged from the system 
 of Europe ; that it was doubtful whether she would ever appear 
 in it again. That Gallos quogue in hellis floruisse audivimus 
 would 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 quelled internal dissentions 
 in oceans of blood, and poured forth her armies in a resistless 
 torrent to avenge herself upon the haughty States which had 
 presumed 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 negotiation, and concluded a treaty 
 with her, offensive and defensive, at St. Ildefonso, on the 19th 
 August. The campaign of Napoleon, in 1796, 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, Rome was only saved from conquest, by absolute 
 submission of Tolentino ; and, within a month, Venice was 
 annihilated, and Austria sued for peace at Leoben. This great 
 reverse of circumstances had strengthened the party 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 he stayed 
 
526 THEORT AST© PRACTICE OF BANKING 
 
 in Paris for two months ; but, as neither party was sinepre, the 
 treaty came to nothing. The fact was, that peace was the 
 furthest 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 Napoleon in military talent, and who 
 was burning to emulate his exploits in Italy. While the 
 pretended negotiations for peace were going on, the Directory 
 were organising an immense expedition for the invasion of 
 Ireland. The orders to sail were transmitted to it several weeks 
 before the British envoy was expelled from Paris, audit actually 
 sailed two days before he left. Fortunately, this great armada 
 was dispersed by a tempest, a few straggling vessels reached 
 Ireland in the last week of December, but the rest were obliged' 
 to put back to Prance 
 
 119. This terrible menace which had been so long 
 hanging over the country, and whose destination it was vain 
 to conceal, inspired the utmost alarm, and there was a continual 
 demand for guineas in Ireland. The year 1797 commenced 
 with the most gloomy apprehensions and depression ; the 
 country bankers discerned that the first burst of the storm 
 would' fall upon them, and determined to provide for it, by 
 obtaining as much specie as they could from London, and, 
 accordingly, the drain continued with increased rapidity after the 
 beginning of the year 
 
 ISO. Mr. Pitt had hinted in his interview with the 
 Governor of the Bank on the 1st February, that a loan for 
 Ireland would probably be required, which would probably not 
 exceed £200,000, but soon afterwards the directors were 
 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 that time the Banks at Newcastle had. a more than 
 
INCREASING DIFFICULTIES OF THE BANK 527 
 
 ordinary demand upon them for cash. In addition to the 
 manufactories and collieries, the number of troops stationed in 
 that part of the country had been considerably augmented. The 
 banks had imported an extra supply of cash to meet their pur- 
 poses, and were negotiating for more when an event happened 
 which brought on the crisis. A French frigate went into one 
 of the Welsh harbours and landed 1,200 men. At the same 
 time an order came down from Grovernment to take an inventory 
 of the stock of the farmers aU along the coast, and to drive it 
 into the interior if necessary. These 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 part of their rents in their hands, 
 actuated by the terror of an immediate invasion, hurried into 
 Newcastle the produce of their farms, which they sold at very 
 low prices, and immediately rushed to the different banks tO' 
 demand specie. Seeing this universal panic, the banks came to 
 an agreement to stop payment on the Monday, if the panic did 
 not subside, which they accordingly did 
 
 132. On the 21st February the state of the Bank became so 
 alarming, that the directors resolved that the time had come 
 when they must make a communication to the Government. The 
 quantity of bullion had been rapidly diminishing, and the 
 constant calls of the bankers from all parts of the town for cash,, 
 showed them that there must be some extraordinary reason for 
 it. Mr. Pitt was aware that this proceeded from the general 
 alarm of invasion, which he thought was magnified much beyond, 
 anything to warrant it. It was agreed that a frigate should be 
 sent over to Hamburg to purchase specie. On the 24;th of, 
 February, the drain became worse than ever, and inspired them 
 with such alarm for the safety of the House that they sent a 
 deputation to Mr. Pitt to ask him how long he considered the 
 Bank should continue to pay cash, and when he should think it 
 necessary to interfere. Mr. Pitt said it would be necessary to 
 prepare a proclamation to put a stop to cash payments, and to 
 give parliamentary 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 Bank. The deputation assured 
 
528 THEOEY AND PRACTICE OF BANKING 
 
 him that the Bank would readily agree to this ; and it was 
 resolved to call a meeting of the chief bankers and merchants of 
 London to come to some resolution for the support of public 
 credit in this alarming crisis 
 
 153. 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 now became a 
 run ; the first serious apprehensions that danger was imminent, 
 were felt on the 21st of February ; but the drain then became 
 unexampled, till on Saturday, the 25th, the cash was reduced to 
 £1,272,000. Before this, the directors, in a state of utter 
 bewilderment at the state of the country, had used the most 
 violent efforts to contract their issues. In five weeks they had 
 reduced them by nearly £2,000,000. On the 21st January they 
 were £10,550,830 ; on the 25th February they were £8,640,250. 
 But even this gave no true idea of the curtailment of mercantile 
 accommodation, for the private bankers were obliged, for their 
 own security, to follow the example of the Bank. In order to 
 meet their payments, persons were obliged to sell their stock of all 
 descriptions, at an enormous sacrifice. The Three Per Cents, fell 
 to 51, and other stock in proportion 
 
 154. On Saturday, the 25th, the Court felt that the fatal 
 hour was at last come, when they must for the first time since its 
 institution, come to a total suspension of payments. A meeting 
 of the Cabinet was held on Sunday, at Whitehall, and an Order 
 in Council was issued, requiring the directors of the Bank of 
 England, to suspend all payments in cash until the sense of Parlia- 
 ment could 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 recommended 
 the subject to their most serious and immediate attention. Mr. 
 Pitt moved that the message should be taken into consideration 
 the next day, and he should propose that a Select Committee 
 be appointed to investigate the state of the Bank's affairs, which 
 he believed were in the most solid condition 
 
STOPPAGE OF THE BANK 529 
 
 126. The directors of the Bank had the order in Council 
 printed arfd widely circulated, and issued a notice of their own, 
 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 the notes. At this time the cash in 
 the Bank was reduced to £1,086,170 
 
 137. The relief produced at the instant, by the definite 
 determination to suspend cash payments and extend their issues 
 of paper, was 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 
 
 1S8. 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 debts of the Government, amount- 
 ing to £11,686,800, which paid them 3 per cent. 
 
 129. Both Houses reported that it was advisable for the 
 public 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) was 
 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 was 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 payments for the Army, 
 Navy, or Ordnance, in pursuance of an order from the Privy 
 Council 
 
 4. The Bank was to make no advance above £600,000 for 
 the public service, in cash or notes, during the restriction 
 
 5. If any person deposited any sum, not less than £500,<-in 
 
 MM 
 
530 THEORY AND PRAOTICE OF BANKING 
 
 gold, ia exchange for notes in the Bank, it might repay three- 
 fourths of the amount 
 
 6. It might advance £100,000 in cash to the bankers of 
 London, Westminster, and Southwark, and to the Bank of 
 Scotland, and the Eoyal Bank of Scotland, £25,000 each 
 
 7. Payment of debts in Bank notes to be deemed as payments 
 in cash, if offered and accepted as such 
 
 8. No debtor was to be held to special bail, unless 
 the affidavit stated that payment in bank notes had not been 
 offered 
 
 9. Bank notes would be received at par, in payment of taxes 
 10. Bank might issue any cash it received since 26th 
 
 February, upon giving notice to the Speaker of the House of 
 Commons, and advertising in the " London Gazette," and on the 
 Eoyal Exchange 
 
 11. The Act to continue till the 24th June 
 
 130. An Act was also passed to enable the Bank to issue 
 notes under £5 (Statute 1797, c. 28), and by c. 32 this power 
 was extended to the country banks, but they were to continue 
 liable to pay money on demand for them, and, on 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. 
 
 13S. We cannot refrain from noticing that, in the debate 
 on this measure, Mr. Pitt expressed the identical views on the 
 subject of the circulating medium that are the leading principles 
 of this work. He says : " 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 has been generally described; 
 It appeared to him to consist in anything that 
 answered the great purposes of trade and commerce, 
 whether in specie, paper, or any other terms that 
 might be used " 
 
EEROE OF THE MEECTOES 531 
 
 133. An event of stich portentous magnitude as the 
 suspension of cash payments by the Bank of England, 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 policy which ought to have been 
 adopted under the drain which occurred in the last week of 
 February, 1797. Many men of great eminence and ability 
 changed their opinions in after times, when they came to 
 look back upon 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 were 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 commerce. They considered that 
 if they advanced to the G-overnment they must contract their 
 issues to merchants, and, as the Minister was the more powerful 
 and imperious party of the two, they were obliged to yield to his 
 power 
 
 134. Several of the directors, being examined before the 
 committees, unanimously attributed the necessity of stopping pay- 
 ment to the enormous amount of their advances to Government, 
 and gave it as their decided opinion, that if the G-overnment had 
 repaid these advances, as they ought to have done, that this 
 great catastrophe would have been avoided. We 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 Government, would it 
 have been prudent to have been more liberal in their accommo- 
 dation 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 
 
 MM 2 
 
532 THEORY AND PRACTICE OE BANKING 
 
 England ought to have extended their issues to supply the place 
 of the country notes 
 
 136. Mr, Walter Boyd, an eminent merchant, was very 
 clearly of opinion that the restriction 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, 1795, 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 associa- 
 tion of a great part of the country banks, considered that the 
 quantity of coin in the country was greater than it was 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. The Committee of the Lords called the attention of 
 the House very strongly to these opinions, but they did not 
 venture themselves to pronounce an opinion on their justness. 
 The Committee of the Commons went considerably nearer 
 towards approving of them. In the year 1810, the Governor 
 of the Bank being examined before the Bullion Committee, 
 stated, that after the experience of their policy of restriction, 
 many of the directors repented of the measure, and the BulHon 
 Committee explicitly condemned the policy of the Bank both in 
 1793 and 1797 
 
 139. The Directors of the Bank, acting in the midst of such 
 unprecedented circumstances, and so tremendous an emergency, 
 are entitled to have their conduct examined with all forbearance. 
 But, taking all these circumstances into consideration, we cannot 
 fail to acquiesce in the opinion expressed by so many eminent 
 
EVILS OF THE BANK MONOPOLY 533 
 
 bankers and merchants at the time, by the subsequent avowal 
 that experience had led many of the directors to repent of the 
 policy they then pursued, and by the decided opinion of the 
 Bullion Committee, that the policy pursued by the Bank in this 
 momentous crisis was erroneous, and that the severe restrictions 
 they attempted to place upon commerce, very greatly contributed 
 to bring on the calamity by which they were subsequently over- 
 whelmed. Nothing, in short, could be more unhappy than their 
 regulations of the amount of their issues. When the exchanges 
 were violently adverse, so that it was enormously profitable to 
 export gold, they enlarged them to an extravagant extent, and 
 when the exchanges were extremely favourable, so that gold was 
 sure to flow in, they restricted them with merciless severity. 
 The issues, which were £14,000,000, when the exchanges were 
 against the country, were reduced to £8,640,250, when they had 
 been for several months eminently favourable. It appears, from 
 the entire evidence in the reports, Miat 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. This disaster was the second notable penalty which the 
 country paid within four years for the unjustifiable monopoly of 
 the Bank. Never was there a more unfortunate example of 
 monopolising selfishness ; it would neither establish branches of 
 its own in the country, nor would it permit any other private 
 company, of power and solidity, to do so, whose credit might 
 have interposed, and aided in sustaining its own. Moreover, 
 when a failure of confidence was felt in the country notes, 
 it refused to issue notes of its own to supply their place. 
 The power of issuing what plays so important a part in 
 commerce, was absolutely forbidden to wealthy companies, 
 and left in unbounded freedom to private persons, many 
 of whom had no capital or property to support their 
 issues, and whose credit vanished like a puff of smoke, in 
 any public danger. The Bank, consequently, was left to bear 
 the whole brunt of the crisis, solitary and unsupported, and 
 finally succumbed 
 
534 THEORY AND PRACTICE OF BANKING 
 
 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. We must, in candour, 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, expressed their regret at having done so. Sir 
 Eobert Peel, in 1844, said it waiS a " fatal " measure. Notwith- 
 standing, however, the concurrence of so many weighty 
 authorities — and this is peculiarly a case where great 
 authorities carry much weight — we cannot help thinking that 
 it was fortunate that it occurred at this early period. The 
 alarm and dangers which preceded its stoppage were com- 
 paratively 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 fortunate, 
 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 doubtedj 
 and the carrying through the re-coinage of the silver, in the 
 midst of so much public 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 
 independence 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 circumstances 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 than the alliance against France. . The 
 
BANK ISSUES SMALL NOTES 535 
 
 fortunes of the 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 appear to be any 
 instance of its having successfully withstood the danger of an 
 invasion by a foreign enemy. Even in Scotland, where 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 withstood the dread of invasion, if it had 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 that it could do so in England, where not only it 
 was of much inferior stability, but was the very part of the 
 empire aimed at, and first exposed to danger. The constant 
 power of producing public embarrassment by demands for gold 
 would have been a powerful weapon in the hands of the enemy, 
 in which they would have found many to support them in this 
 country from political sympathy. This measure, therefore, 
 removed one perpetual source of terror and alarm from the 
 Ministry. We shall show, 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 suspension, then, 
 must, we think, have taken place sooner or later, it was probably 
 advantageous for the country that it did occur so early in the 
 struggle 
 
 142. The presumed scarcity of guineas, which led to the 
 supposed necessity of issuing the order in Council, also rendered 
 a more abundant supply of the circulating medium necessary, and 
 an Act was immediately passed suspending, till the 1st May, the 
 Act (Statute 1775, c. 51) restraining the negotiation of small 
 promissory notes. In a few days the Bank caused to be prepared 
 and issued £1 and £2 notes, and, to supply still further the 
 •demand for a small currency, they issued a notice that they had 
 
536 THEORY AND PRACTICE OF BANKING 
 
 imported a large number of Spaaish dollars, which were to be 
 current at 4s. 6d. However, it was discovered that the dollars 
 were undervalued by 2d. each, so their current value was enhanced 
 by 3^. These dollars were stamped with a small king'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 immense 
 quantity of similar dollars, which they had stamped in a 
 similar manner. They were all called in on the 31st October, 
 1797, by which 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 they were obliged to 
 pay them aU 
 
 143. When the actual suspension took place, the foreign 
 exchanges were highly favourable, so much so as to make it 
 profitable to import gold, which began to flow in in great 
 abundance. On the 30th May, Mr. Manning stated in the 
 House, that vast quantities of gold had flowed into the 
 Bank, both from the country and from abroad. The Govern- 
 ment, however, and the directors of the Bank, concurred 
 in thinking that it would be imprudent to resume payments in 
 cash at the period when the 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 15th the House of Commons appointed a Secret Committee to 
 inquire whether it was expedient to continue the restriction. On 
 the 17th they reported that on the 11th of that month, the total 
 liabilities of the Bank were £17,578,910, and their assets 
 £21,418,460, leaving a balance in their favour of £3,839,550 
 exclusive of the Government debt of £11,686',800. That the 
 advances 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 favourable, and had every appeaarnce of con- 
 
STATE OF THE EXCHANGES 537 
 
 tinning so, unless political circumstances should affect it. 
 That no inconvenience seemed to be felt by the bankers 
 and traders of London, for, whereas by law they were entitled 
 to demand three-fourths of any deposits in cash they might 
 make, they had only actually demanded one-sixteenth. They 
 presented a resolution of the directors, stating that the 
 condition of the Bank's affairs was such that it could with 
 safety resume its usual functions. The Committee, however, 
 recommended that in consequence of the state of public affairs, it 
 was 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 in the country to 
 the policy of the Ministry was very powerful, and the transactions 
 between 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 with very great 
 ability against the national evils and inconveniences of the 
 monopoly of banking by one company, 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 
 speeches on this and a subsequent occasion were full of admirable 
 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 
 
 146. The exchange with Hamburg at the time of the 
 suspension of cash payments was 35'10 ; it continued to improve 
 throughout the whole of the year, and in December stood at 38*5, 
 which was about £13 per cent, above par ; the issues of the 
 Bank were about 11^ millions during the year. This extra- 
 ordinary state of the exchanges continued during the whole of 
 1798 when they began gradually to fall, and in March, 1799, 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 upwards of £7,000,000 in its vaults, and the 
 
538 THEOEY AND PRACTICE OF BANKING 
 
 directors expressed their readiness to the Government to resume 
 payments in cash. The Ministry, howeyer, thought it inex- 
 pedient in the state of the country 
 
 147. The harvests of the two preceding years had heen 
 unusually abundant, and in January, 1799, the prices of all sorts 
 of corn were extremely low, wheat being 49s. per quarter, and 
 other kinds in proportion ; but the winter of 1798-99 was ex- 
 tremely rigorous and unfavourable for farming operations. The 
 spring was equally unfavourable, and in May, , wheat was at 
 61s. M. This was followed by an extremely wet summer and 
 autumn, so that at the end of the year wheat was at 94:S. 2d. 
 In February, 1800, the subject of the scarcity was taken up in 
 both Houses, Lord Auckland said it was estimated that the 
 produce of last year's crop was little more than half an average. 
 Under the influence of this unparalleled deficiency, the price of 
 wheat rose in June, to 134s. bd., and remained to 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 temptation 
 of heavy bounties 
 
 148. Under the influence of the enormous importation of ■ 
 wheat, the exchange with Hamburg continued to decline all 
 through the summer of 1799, till in the last week of August, it 
 had fallen to par. . It continued steadily to decline after that 
 until, in December, 1800, it reached 30. In the meantime, the 
 price of foreign gold in coin, which had been at £3 17s. 6i. 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 WilUam Pulteney in 
 advocating the foundation of another bank, produced great effect, 
 and during 1799 it excited great public interest. Meetings were 
 held for the purpose of promoting it, and numerous pamphlets 
 were published on the subject. The Bank Directors took alarm, 
 and as the Minister was in want of a supply, they took advantage 
 of his necessities to obtain a prolongation of their monopoly. 
 -The charter had still twelve years to run, but upon advancing 
 
CONPLICTING THEORIES 539 
 
 £3,000,000, without interest for six years, Mr. Pitt agreed to 
 renew it for twenty-one years from 1812. Very soon after the 
 opening of the Session in 1800, a bill for this purpose was 
 brought forward and passed 
 
 150. "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 unmoyed amid the universal ^ 
 Tuin 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 support houses which 
 are really solvent,, but which may be brought down in the 
 general discredit. Each of these theories has been tried, but 
 the supporters of the first, or Restrictive theory, 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 1793, says — " These 
 proceedings, which obviously foreboded a risk of hostilities, were 
 the signal for a check on mercantile credit all over the kingdom ; 
 and that check led ly consequence to a demand on bankers for the 
 money deposited with them, in order to supply the wants 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 show ; and they 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 comniercial crisis, the Bank 
 restricted its issues until the exchange became favourable, and 
 then it freely expanded them, and passed safely through the 
 crisis 
 
 In 1797, the Directors having for some years previously 
 prodigiously extended their issues, while the exchanges were 
 adverse, and, being at last sensible, of their imprudence, and 
 
540 THEORY AND PRACTICE OE BANKING 
 
 having contracted them so that for a considerable period the 
 exchanges had become favourable, continued their policy of 
 merciless restriction long after gold was flowing into the 
 country, AND THE RESULT WAS THE STOPPAGE OP THE 
 BANK 
 
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