Cornell University Library HF 1007.L2 The theory of business 3 1924 013 803 386 Cornell University Library The original of tliis book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924013803386 THE THEORY OF BUSINESS. LONDON PttlNTBD BY 6POTTISWOODE AND CO, NEW-STaEBT SQUARE THE THEORY OF BUSINESS. BY JOHN LAING. LONDON : LONGMANS, GEEEN, AND CO. 1867. (by pehmissiok) TO HENEY LANCELOT HOLLAND, ESQ. G-OVEENOR OF THE BANK OF ENGLAND, PREFACE. On most of the topics connected with business, special treatises, many of them elaborate and of great merit, already exist. The writer of the following pages, how- ever, is not acquainted with any work which aims at exhibiting such topics in thevr relation to one another, and as constituents of an industrial orga/nisation. It has been his endeavour, in some measure, and as concisely as the subject would allow, to supply this deficiency. Paiafully conscious of shortcomings in the execution of his work, he yet hopes that it may prove useful to young men entering business, and also to busy men who desire to obtain a general knowledge of the pro- ductive system as a whole, but who have no leisure for a methodical study of the treatises referred to. City: March 1st, 1867. CONTENTS. CHAP. FAQE I. MODEEN PEODUCTION .1 n. AGRICULTURE, MANUFACTURE, AND COMMERCE 10 m. COMMERCIAL CREDIT . . .... 29 IV. MONEY . . 39 V. IMPORTS AND EXPORTS 61 VI. FOREIGN EXCHANGES. . \ . ? . .74 VII. WAGES AND SALARIES ... . . 92 VIII. PROFIT .... 100 IX. WEALTH, CAPITAL, MONEY .... 110 X. BANK-NOTES 120 Viii CONTENTS. CHAP. I'^O^ XI. BANKING . .- 132 XII. DISCOUNTS : THE BANK RATE . . .140 XIII. BANKING FUNDS AND CAPITAL . . . .153 XIV. CHEQUES ... ... . . 160 XV. THE BANK OF ENGLAND . . . . 165 XVI. DEPOSITS AT INTEREST 186 XVII. INCOME 193 XVIII. INVESTING : THE STOCK EXCHANGE . . .200 XIX. PEESSUEE, CRISIS, PANIC 216 THE THEORY OF BUSINESS. CHAPTBE I. MODEKN PEODUCTION'. MoTHANGEE, a New Zealander, who was brought to Chap. i. England, was struck ' with especial wonder on his visit J to London at the mystery, as it appeared to him, how such an immense population could be fed, as he saw neither occupa- cattle nor crops.' Accustomed, no doubt, in his own now^gppa_ country to see everj family growing its own food and ^^cif jj^™ providing clothing for its members, he was unable to comprehend what in reality is a feature eminently characteristic of an advanced state of production. In England, the days when each family catered directly for the supply of its own wants have been left far behind. The husband has ceased to be the husbandman, growing bread for the household ; his daughters no longer spin, and it is matter only of history that once upon a time ' the goodwife's shuttle merrily went glancing through the loom.' Industrial operations have received a de- velopment at one period undreamt of. Occupations have gradually become separated from one anoiiher, and THE THEOKY OF' BUSINESS. Chap. I. eaoli engages fully the time and energies of an entire section of the commnnity. Husbandry is carried on not in the vicinity of every house or village, but in districts remote from the persons who are to enjoy its products. Spinners have banished the household spin- ster, and the weavers of Manchester and other places have relieved the wife^ of a duty shown by the name to have been recognised at one period as peculiarly her own. Furnishing each article of food and clothing affords occupation to a branch of industry composed possibly of many thousands of workers. Capital. Not Only are all industries carried on separately, every one is broken up into small parts. A product, such as a loaf of bread or a piece of calico, is now the result of a process embracing several stages, each occupying exclusively a group of individuals, which groups are called trades. Materials are moved onward by one trade to another untU they are turned out as goods fit for use. Certain of every series, or, let us say, 'row,' of trades, of which each branch of in- dustry is composed, are of course, by this arrangement,, . engaged vdth operations detaining them permanently at a distance from the stage on arriving at which the articles are ready for consumption. The seed of the sower cannot be bread for months to come, nor will the cotton in the factory be ready to wear for as long a time. All trades, however, for their maintenance must have food and clothing, in other words, articles in a condition to be used, not several months hence, but at once, and these must be furnished by some one. Capitalists, in fact, ' From Wifian, Anglo-Saxon, to "Weave. MODERN PEODUCTION". 3 provide them when they pay money as wages, salaries, Chap. i. and for fresh stocks in trade. A clerk, in the employ- ment of a merchant who imports cotton, obtains in return for a portion of his salary, say, his dinner. In this instance one member of a trade, who exerts himself in producing goods which cannot be finished probably for several months, receives other goods ready for im- mediate use. He has had to do with raw cotton, and as an equivalent for part of his services, aided by money, he has the present use and enjoyment of the things he eats. This case, also, by the way, illustrates the position that a worker usually obtains what he has not personally even helx^ed to produce. The clerk obtains various articles of food, while he assists in the process of converting cotton wool into cotton cloth. In this familiar example are involved the separation of employ- ments ; their subdivision into trades ; also the co-opera- tion of capitalist with labourer. A highly organised system of production materially affects the status of individual producers. As a rule an individual worker has come to be confined to a minute portion of a process. Some men's efforts are restricted to making a small part of the heads of pins. Each becomes, so to speak, a wheel in , a stupendous machine, powerful in com- biaation, useless alone. In a primitive state every one resembles rather his own spear or bow, rude and in- efficient, yet complete in itself. By being enabled to bestow undivided attention upon Division of some possibly minute part of a process the worker increases acquires a degree of skiU and dexterity otherwise un- ^ ' ' attainable. The separation of industries at the same B 2 THE, THEORY OF BUSINESS. Chap. 1. And aug- ments pro- ducts. Divided labour is national co- operation, time affords him an opportunity for selecting a kind of occupation for which by natural aptitude or acquired ability he is best qualified. Skill from concentration of mind is often exhibited in articles of every-day use, which might well excite surprise. Look, for instance, at, the veneering of the joiner ; how exquisite is its finish ! It is hard to believe that the block of wood before us is not a single piece, but consists of a thin coating of costly material spread over a common deal. This is a familiar but striking example of skill springing from the division of occupations. Besides thus increasing sMZ, division of labour augments vastly the amount of pro- ducts. All classes of society experience the benefit of the prodigious expansion of industry which has occurred especially during the last fifty years, in the greater pro- fusion as well as superior quality of the commodities placed at their disposal. ' It is not necessary to~ go back much beyond half a century to arrive at the time when prosperous shopkeepers in the leading thoroughfares of London were without that now necessary article of furni- ture, a carpet, in their ordinary sitting-rooms. Luxury, in this particular, seldom went further with them than a well-sboured floor strewn with sand, and the furniture of the apartment was by no means inconsistent with this primitive and, as we should now say, comfortless state of things." The productive system, from the view-point of the individual worker, is thus one of subdivided industries ; from the view-point of society at large, however, it con- stitutes a vast combination or co-operative organisation. ' Porter's Froffress of the Nation. MODERN PRODUCTION. 5 Every article we consume shows marts of co-operation. Cha p, i. No kind of food or clothiag but is found, on reflection, to bear the imprint of many hands. It requires labour of different descriptions to make each piece what it is, and what with bringing materials from remote places, probably not less to put it where it is. True, the indus- trial organisation does not strike the eye of the observer. The scale on which operations are carried on is much too extensive for it to do so. Those co-operating do not necessarily work in one building, or for the same employer ; possibly they toil on in regions remote' from one another. In truth many have been acting in con- cert during a lifetime without realising the fact of doing so at all. Every worker devoting himself to a specific operation, gives himself no trouble about what his coadjutors elsewhere are doing. He goes on without entering into any agreement that others shall do their part, or that they shall persevere in a work entered upon until it is completed. Harmonious and effective co-operation on the part of millions takes place with- out explicit understanding or arrangement. The extent to which this happens is one of the peculiarities of modem production. The achievements of combined industry, viewed as a And it whole and on a grand scale, are marvellous. Consider a wondrous little of what is implied in furnishing the teeming populations of towns with stated supplies. What difficulties have to be surmounted by the volunteer commissariat ! The number of persons to be provided for continually alters, and a large proportion of the articles required are such as will not keep ; very many 6 THE THEOEY OF BUSINESS. Chap. I. of them spoil if not used at once. Cessation of supply, even for a day, is out of tlie question ; but, on the other hand, stocks must never be in excess of actual require- ments. How dijG6.oult it is to provide accurately for the wants of even a small number has been vividly displayed by recent Crimean experiences ; yet in the case, for ex- ample, of London with its three millions, varying often to the extent of paany thousands through arrivals and departures, notwithstanding apparently insuperable obstacles, with what precision are supplies furnished, and, withal, daUy draughts adjusted to existent stocks, abundant or scanty as these happen to be, and having due regard to the interval which must elapse before new supplies can be obtained. Consumers .are not put unnecessarily on short commons, but stocks are pre- served from premature exhaustion.' The motive power or mainspring that keeps the in- dustrial machinery in motion is ' ctesire for wealth,' ^ a ' See Whatel/s Lectures on Folit. Econ. Lect. iv. ^ No other motive prompting to continued productive effort has been discovered povrerfiU enough to take the place of this ; and to bring it into intense action experience proves that every one must be preserved in the enjoyment of the result of his efforts, or in what others voluntarily bestow upon him. The recognition of the right of individual or private property has been assailed by moralists who — from Plato in his Eepublie, to Owen in his ' all things in common ' system — in framing ideal commonwealths have frequently substituted a ' higher ' motive as the mainspring of social action. Much more excellent, could it be carried out, that every one should work according to his ability, and receive according to his necessities. The only workable plan, however, seems to be the one all but universally adopted by civilised communities. The institution of personal property does not prevent any one who has a loftier ideal from striving after it. He may, as far as he is concerned, suspend the property law, and bestow all he possesses upon others. Nor does the law absolve from the obligations every one is under as a member of a Christian commonwealth to do good to others to the extent of his power. With respect to the importance of MODERN PRODUCTION. 7 desire wMch operates universally. Food and clothing Chap. i. are wealth, and these at all events must be obtained by Desire or everyone; the desire, consequently, though with different the main- intensity and in no objectionable sense, must influence inSiy. all without exception. Powerful and constant in its action, it leads every worker to display his skill and exert his energy to the utmost ; and gives rise, in the aggregate, to vast supplies of products, placing them with exquisite adaptation to requirements in respect of time, place, and quantity, at the disposal of the com- mimity. In characterising business as a co-operative organisa- tion or system, its aim is shown to be quite other than what it appears at one period to have been deemed, when an essential part of commercial operations was considered to be either to overreach, or to prevent others, nations or individuals, overreaching. It is implied in the view here taken of business, that pro- ducers advance the interest of the society which they with others constitute, when they perform their part fairly and well. The merchant has only to act wisely, to benefit the community of which he is a portion ; the shopkeeper need merely serve his locality properly, to render good service. Each in fulfilling his function reaps the harvest of well-doing in. 'profit,' which is at once the reward of past exertions and the stimulus to future. Animated by the hope of profit, tea, cotton, with hundreds of other articles are provided, and those who cater judiciously for the wants of society are put in securing for every one the result of his efforts, the co-operative system at present attracting attention proceeds on the principle of making every worker participate in that result more directly than now. 8 THE THEOET OF BUSINESS. ' Cbap. I. possession of the mftans of purchasing what they them- selyes require. By furnishing articles which happen to be eagerly sought after, they ' make ' more than usual, or, if they fail to supply what is required, they make less. So far producers and society reap commensu- rately with sowing. But persons without any intention whatever on their part to do so, often confer benefits over and above those directly flowing from their exer- tions.' The shipowner, for instance, need have no thought beyond securing good freight, and the exporter beyond consigning what will sell, yet their opera- tions extend commerce, and strengthen the bonds of amity between nations. The printer lad, working with an eye exclusively to his wages, increases the enlighten- ment of the species. In these and similar cases t^e agents give rise to. results not contemplated by them, and for which, therefore, they are not entitled to credit, jnore than the bee, seeking only to lay up a store of nectar, is, for creating the wondrous honeycomb. Not, of course, that producers necessarily limit their efforts to such acts as are productive of gain; far otherwise. The noblest gifts, and services of indescribable import- ance to humanity, have come from this class. No hos- pital for incurables, or almshouses for the aged, or asylum for the orphan, but has benefactors in the counting-house or the manufactory. But acts of phi- lanthropy, voluntarily performed for their own sake, are to be distinguished from benefits to others which, by the providential arrangement of affairs, follow actions springing from motives exclusively self-regarding. ' See Whately's Lectures on Folit. Econ., Lect. iv. MODEKN PRODUCTION. 9 The preceding makes it appear that the question of/ Chap, i. production is of universal concern. Personally, or by deputy, every one must pay frequent visits to ' shops ' to purchase food and clothing, delicacies and luxu- ries, and each thus becomes linked to the industrial organisation. The shop is only the front of a com- plex mechanism, upon the proper working of which depends the continuous flow of goods thither, and which ultimately reach the homes of the community. We proceed to consider, somewhat in detail, the struc- ture of the industrial machine, with a view to under- stand its operations, and the manner in which they are conducted. 10 CHAPTEE II. AGRICULTURE,' MANUFACTURE, AND COMMERCE. Chap. II. The result of industrial combination is not like some product of cliemical union, possessed of qualities quite different- from those of its elements, no one of wliich can be removed without causing a complete change of character, but simply a mechanical blending and the exact sum of its means. In the completed articles displayed on every side, we see what may be called the flowers and fruits of industry; and just as every plant in a tangled mass of vegetation admits of growth apart, without ceasing in any way to exemplify its peculiar principles and properties, or to thrive and fulfil every function of vegetable life, so each product appearing, blossomlike, in Regent or Oxford Streets, belongs, so to speak, to its proper stem, and may be conceived, with its adjuncts, separable from the others with which in reality it is closely interwoven. Hun- dreds of products of a sort, traced back, will be found to converge in some warehouse possibly in the City, whence the branch bearing them reaches to, it may be, a northern factory, while, according to kind, the root is in Alabama, in China, or Bengal. Impossible it obviously is ' Agriculture is here used to mean the operation of the earliest trade in each series ; the one which draws materials from the soil, whether cotton for fahrics or corn for bread. AGRICULTURE, MANUFACTURE, AND COMMERCE. 11 to comprehend, as a wliole, the business, arrangements Chap. ii. of this country. Their complexity, as well as mag- nitude, renders it necessary to have recourse to some indirect method of forming an adequate conception of them. With a view, therefore, to conveying an idea of the structure of the productive system,. and of the manner in which its operations are conducted, advan- tage is taken of the possibility of carrying on a branch of' industry by itself, without altering its character, to select a single article and assume that the series of trades required to produce it, represent in miniature the whole productive organisation in its several de- partments of agriculture, manufacture, commerce, and banking:. Any .commodity may serve our purpose, but the one A single C3,llC0 S6TI6S we choose is calico. Let us then suppose that a month's isseiectedin supply of this commodity is to be purchased of retailers for a sum represented by, say, ^13.' Ascertaining it^ antecedents, it is found that the shopmen from whom it is purchased bought it of warehousemen for 11, and they from manufacturers for 10, who gave 9 to spinners for the yam of which it is made, and they, in turn, 6 to merchants for the cotton in a raw state, while 5 finally finds its way to the cotton-growers in other countries.' The history of every article dealt in by retailers wiU, on examination, be discovered to be similar to this ; and from such observations the generalisation is, that com- ' Tooke, in the History of Prices^ vol. vi., gives 6(Z., 9ii., and Xdd. per pound as the averages of certain kinds of cotton yarns and calico, during 1853, 1854 and 1855. Ourdealers' and retailers' prices axe necessarily sup- posed only. The figures introduced may stand for thousands of pounds or for pence: price is important only as showing proporficn . To exhibit the actual 12 THE THEOEY OF BUSINESS. Chap. II. modities pursue courses, frdm the grower of materials to one stage after another, until they finally make their appearance in shops, their price becoming enhanced as they advance, as in the series of our illustration : the 5 rising to 6, 9, 10, 11, and finally 13. ^*°w'? As the several groups or trades taking part in a pro- of forward- cess work in succession on goods before they can reach ness CO- " ^ exist completion, each operation requiring timd, it foUows that, as a condition of maintaining a continuous stream of completed products, stocks in every stage of forward- ness must always be in existence. In the particular series selected there will be at any moment, besides a reserve of materials, a stock of cotton with spinners, another of yarn with manufacturers; one stock of calico with dealers, and another with retailers ; in all, five at least. Should the entire process of converting cotton wool into calico with retailers occupy six months, it magnitude of the cotton industry, the following facts are extracted from Mr. Arnold's Cotton Crisis, p. 38. In 1860, America sent to this country 1,115,890,608 lbs. of cotton The East Indies . . . 204,141,168 „ The "West indies . . . 1,050,784 „ The Brazils .... 17,286,864 „ Other countries . . . 52,569,328 „ Making-a total import of 1,390,938,752 Ibg. Of this 1,083,600,000 lbs. were consumed within the year. As to the re- ' spective quahtie's of cotton, the most valuable is Sea Island (American) ; next comes ' Egj'ptian,' then ' Brazilian,' while the least valued is Indian, generally termed ' Surat,' of which the principal" sorts are known as ' Dharwar,' ' Brooch,' and ' DhoUerah.' There were in Great Britain ii 1860 some 2,650 cotton factories, worked by a population of about 440,00C persons whose wages amounted to 11,500,000^. The total production waf valued at 76,012,380?., and the declared value of the quantity exported 52,012,380/., the difference showing the home consumption 24,000,000? Capital permanently invested in the manufacture amounted to 65 millions AGRICULTURE, MAITOFACTURE, AND COMMERCE. 13 follows that tlie raw cotton of January is the completed Chap. ii. fabric of July in embryo : plainly, if a single stock were wanting, the future supply of consumable articles must for a time fail. The stocks we have named represent what is known as a country's 'floating' capital. The necessity for advances of completed commodities being made, mentioned already, is also evident. Groups of workers devote themselves to specific portions of a process. Importers and spinners, for example, deal with commodities in stages of their progress remote from that stage at which they are consumable. All,, how- ever, as a condition of continuing operations, must have articles ready for immediate use. It is the part of the capitahsts engaging in these trades to make such ad- vances, which they do to other trades higher in the •series, in paying for stocks, and to their own employes as wages. In stating that stocks in the different stages of for- wardness must coexist, nothing is asserted respecting the quantities of these stocks. Materials are usually forthcoming only once a year, so of them the supply on hand at certain seasons will have to be what is sufficient for nearly twelve months. But how much of these materials shall be made up and kept in the respective states of advancement is matter of choice. What is wanted is a supply in the different stages, large enough to sustain an unintermitting stream of goods at com- pletion, and what is adequate for this will differ with circumstances. Should the means of transit and manu- facturing appliances be deficient, a country must keep 14 THE THEORY OF BUSINESS. Chap. II. much keavier stocks in the intermediate states than i need do when machinery of great efficiency, and rail ways ready to convey supplies to any point, are at iti command. Producers, then enabled to do with smalle quantities of yarn, or cotton, or calico — in other words with smaller, for the time, cZeat^ stocks or capitals, whicl they ' turn over ' frequently — incur less cost for interes on resources locked up ; and it will appear afterwardi that when a saving of this kind occurs, resources ma] be augmented ; more materials can be provided, consC' quently increased supplies of commodities may be mad( available for consumption. They are Speaking roughly, one half of business is to maintaii wari """ a- continuous on-fiow of stocks, typified by those. w( have named, towards completion. Importers, spinners dealers, aud others, only in certain cases after altering the structure of the commodities passing through theii hands, furnish them to the trade next below themselve( in the series, and immediately procure fresh stocks from the trade next above. The general result if that commodities steadily make progress towards thf state of fitness for consumption. Cotton finds its waj to spinners, and calico, leaving the manufacturers hands, is conveyed to the warehouse in place of what ha,£ passed from it to shops, while a never-ending supplj of the raw material is drawn from the fruitful earth, the fountain-head of aU riches. Glancing at the greal business world, parts of the process described are seen ' in the operations of cotton growers, in arrivals of bales at Liverpool, in sales of calico in Manchester, dye- stuffs in Mincing Lane, of goods by warehousemei AQEICULTUEE, MANUrACTURE, AND COMMEECE. 15 in London and elsewliere to shops tkrougliont tlie Chap. ir. kingdom. The other half of business consists of the distribu- And those tion of goods arriving incessantly at completion; SSip"efion ,. • n • 1 1 • i X i distributed. operations m which money plays an important part. Traders sell their wares for money which they pay away for fresh stocks in trade, but not all that they receive. Each Iboks to have a balance over and above, which is the profit on transactions, or rather the means of taking that profit.' The retail price of ' 13,' we take to mean that shopkeepers received this amount of money for their stocks ; and the wholesale price of ' 11,' shows that they pay to warehousemen ' 2 ' less than they received, to place themselves in as good a position with respect to stock as they occupied at the commencement of opera- tions. This particular ti'ade — the shopkeeping — as the result of its dealings, therefore, finds itself in posses- sion of a fresh stock in trade, also of ' 2 ' in money over and above. The other trades of the series find themselves similarly situated. The surplus, or ' profit ' of each trade respectively will then , prove to be as follows : — as the importer gets ' 6 ' for what costs ' 5,' he obtains, in addition to the means of purchasing the fresh stock, a surplus or profit of ' 1 ' : the spinner gets ' 9,' and paying ' 6 ' receives sufficient to replace stock and leave ' 3 ' over : the manufacturer sells for ' 10 ' what he bought at ' 9,' he has consequently an excess of ' 1 ' : the dealer is paid ' 11,' and pays ' 10,' he, therefore, has always a surplus of '1.' Turn now ' How the gross profit of business is related to the ' profit ' of Economists will appear hereafter. 16 THE THEORY OF BUSINESS. Chap. II. from the money to tlie goods' half' of these transactiou We have seen that the stock of each producer replaced by a fresh stock from the trade next abov What becomes of stocks is consequently evident in eac case, excepting, however, one. It might be actual ascertained, were it necessary, that the spinner's stoc of yarn passes into the hands of the manufacturers that stocks with manufacturers are famished to dealers whUe those with dealers, being purchased by retaUeri find their way into shop-shelves. But we do not kno with the same exactitude what becomes of the stocJb conveyed to shopkeepers ; in other words, We do nc know, and cannot well ascertain, who form the miscel laneous multitude that gradually carry away froi retailers, articles which have engaged the skill an energies of many. Merely observing and recording th numberless retail transactions that take place, wouli fail to establish a connection between those who ge the completed goods and the productive system, unles the farther information were also obtained why thos who purchased from shops were able to do so. There i one point on which customers agree, which furnishe presumptive evidence as to who customers, as a body are, and serves so far to attach that motley crowd t( the industrial organisation, and that point is in having money to offer for the articles received. The njone] given for the calico of our illustration, retail, is ' 13 ' or expressed differently, persons who can commanc this number of pieces of money may carry off the en^ ' Every commercial transaction may be divided into halves ; the one hal being money given, the other, goods received. AGEICULTUEE, MANUFACTURE, AND COMMERCE. 17 tire supply of tlie commodity from retailers. And now, chap. ii. reverting to the consideration of the money surplus ^ ' ' retained by the different trades of the series engaged in perpetuating the supply of goods for consumption, adding together .the respective surpluses or profits, what do we find ? Counting the ' 5 ' sent to producers who provide the raw material, the ' 1 ' of the importing mer- chant, the ' 3 ' of the spinner, the manufacturer's ' 1,' the ' 1' of the dealer, and the retailer's ' 2,' the result is "13'; in other words, the money -which. j)roducers as a body obtain is sufficient, and exactly sufficient, to purchase the entire supply of calico arrived at a state of fitness for use. Taking only the one se/ries into account, customers are seen to be no other than pro- Among ducers themselves : those who work are those who eat. themselves. ' When non-productive and professional classes are also taken into account, this conclusion requires modifica- tion. Customers, then, are 'producers themselves, or others to whom they transfer their right to shares of the produce.' JProm the standpoint of any one trade in 'the series, a fresh business operations resolve themselves into parting with compiete^d stock, thereby moving it forward a stage nearer com- fytu^rti" pletion, and receiving in return, firstly, another stock, f^-''"^^ in a like stage of advancement to the one sold when it ^°^''- came to hand ; and secondly, a share of the goods which have reached the finished state. Thus the spinner's operations consist of furnishing yam ; and of eventually procuring a new stock of raw cotton, also — looking still at the single calico series — a share of the cotton •cloth ready for use, with retailers. The extent to which c 18 THE THEORY OF BUSINESS. Chap. II. each participates in the result depends npon Ms contri- ' bution to tlie work. If the operations of one spinner require the exertions of ten men for ten days, then his gross profits will, consist of articles which likewise em- body energy, equal in aU to that of ten men for ten days. Yariations in the rate of remuneration, arising from different degrees of skiU being required in a process, are at present disregarded. In the' transactions of spinners, as of others, money is introduced as a middle term, but without making their nature other than that describe)!. Tor though trades do not sell stocks directly for other stocks, they sell for money used to purchase such others and completed goods, in quantities determined on the principle stated. The general results, of maintaining supply, and distributing commodities completed, are brought about by the plan of augmenting the quantity of money which commodities command as they near their destination, the extent of augmentation at each step de- pending, as stated, upon the importance of the particu- lar trade's contribution. Thus, manufacturers receiving • ' 3,' and dealers only ' 1,' shows the proportion of the work of turning cotton into cloth done by these trades respectively. It clearly appears from the preceding, that ' profit ' consists of products, not of money, which serves merely as the vehicle for conveying them from one owner to another; also, that any individual trade, excepting retailers, whose business it is to furnish finished goods, receives its share for contributing stock which, at a future day, hecom.es supply fit for consumption. Retailers purchase, as it were, for personal use a portion of what they themselves sell ; all other trades buy from retailers. AGRICULTURE, MANUFACTURE, AND COMMERCE. 19 To state concisely tte conclusions arrived at as io chap. ii. the result of productive efforts put forth in the repre- RecapituTa- sentative series, stocks, exchanged for money by the '"°" respective trades, pass downwards, while money, sup- posing it to be paid in every instance for stocks, moves in the opposite direction, that is, from retailers upwards. There are, thus, two streams, one of goods flowing in one direction, and another of money flowing in the opposite. Small portions of that upward money-stream are sent back by each trade, to shopkeepers for completed goods, which portions are the 2, 1, 1, 3, 1, and 5. These, coalescing in retailers' hands, are what feed the perennial upflow of money. With the amount which these portions form, retailers pay dealers ; dealers, manufacturers ; and so on : and thus the work proceeds. Up to this point it has been taken for grahted that instead of a there is only a single series of trades, producing one there are article, and goods have been found to pass from trade to ™^^^' trade towards completion, while completed commodities have been distributed. Dealers being more numerous than manufacturers, and retailers than dealers, the stream widens as it advances. As in physiological diagrams the aorta is finally lost in myriads of ca- pillaries, through which is discharged its life-giving contents to every region of the body, so a chart of any industry would exhibit a broad current of materials spreading forth, and eventually becoming dispersed through the minutest of channels to every part of the industrial system. There are, composing that system, many series, with constituents corresponding in the main to the dealers, wholesale and retail, the manufacturers, C2 20 THE THEOKT OF BUSINESS. Chap. II. ' A 11 inter- cliange pro- ducts. mercliants, cotton growers, stocks-in-trade, and money, of the one already described. Taking the food series for example, it has its farmers, cornfactors, miUers, dealers, and, finally, bakers furnishing the completed commodity. Then there are series whose products are shoes, coats, hats, books, butcher-meat, hardware, gro- ceries, wine, and a thousand things besides. In their later stages, intimately intermingled with each other, the terminal arteries of several industries end in every retail store; that is to say, each shopkeeper deals in the products of several series: for example, in silks, flannels, gloves, and many things besides calico. It has been shown that those who create goods obtain the means of purchasing all of them ; that pro- ducers of calico selling for ' 13,' get 13 as the earnings of the body of trades. And this holds good of every in- dustry. But the members of each do not confine them- selves to purchasing products of their own creation; they extend their choice much beyond these ; provided with money which others have confidence in, they can help themselves to whatever they want. No matter whether the sovereign is earned in some trade remote from, or connected with, calico-making, it will be honoured on presentation in that or any other branch. Earned somewhere, it can be spent anywhere. How great is the advantage of this arrangement ! Owing to it, interchanges of commodities are so easily effected as that scarcely one person in a thousand ever realises that they are actually of the nature of interchanges. Entitled to withdraw what he has helped to make, the factory 'hand' of the calico series, instead of appro- AGEICULTURE, MANUFACTURE, AND COMMERCE. 21 priating any single article, takes a little of a great chap. ir. many. He takes some bread, some meat, several pairs ' ' of shoes, some beer or wine, some tobacco ; or he calls in the aid of a doctor or other professional man, and in return for advice, conveys to him part of his power of purchasing, and the producers of those articles take the place pf the factory 'hand' or his deputy, in buying calico. Retail dealings are instances of a kind of conversion of physical forces. The hungry clown eating his penny loaf, and drinking his ale — these the results of muscular energy exerted by bakers and brewers — applied his industrial force, possibly in driv- .ing bullocks to' market, or in wielding the pickaxe or shovel. He did not want a share of what he helped to make, but he wanted some bread and beer, which he obtains, while in a roundabout way the producers of these have a portion of his share of what he worked at. One part of the contrivance by which the producer of Using ji- • ITT T-Ti T !• identical one thing is enabled so readily to purchase something money; else, is the adoption, by all departments, of money identical in composition and construction. You cannot tell a sovereign earned in the calico branch, from one earned in another. It is to this identity that we owe the universal purchasing power, possessed by money, daily felt to be so beneficial. In order to seCure this power, trades must sacrifice their capacity of furnishing coins for themselves. Were each to assert its right in this matter, it might obtain the questionable advantage of perfect freedom in creating currency, but that ex- tended power which money in common use is endowed with is forfeited. The factory ' hand,' provided with his 22 THE THEORY OF BUSINESS. Chap. II. Tbe distri- bution of which inoney de- termines the pur- chasing power of trades. calico tokens, would find it no easy matter to spend them on bread or anything else ; he would find earning the money only half the battle. The difficulty 6i spending a rouble or a piastre in this country can be appreciated ; still i^ is possible to discover the value oi foreign coins ; scarcely so of currency emissible at wiU. Given the quantity of goods provided by a trade, oi by a branch of industry, the price they fetch above cost determines its power as a body to command the comm'on money, important not in itself, but as conveying a title to the products of other trades and departments. Thai purchasing power is variously distributed between trades and branches, and the fluctuations of prices which deter- mine its distribution, by fostering supply and repressing demand, or the converse, exercise a highly beneficial influence in respect to future supplies, as also in making actually existing stocks square with the requirement for them, whatever it may prove. As sovereigns can be spent in any series, while goods in each are neces' sarily provided long before the exact demand for them can be known, it appears indispensable that prices should vary. Not unlikely, the desire for (jertain kinds of commodities may prove much stronger than was counted on, or the supply turns out scanty, owing tc unfavourable seasdns or other causes. The inducement to purchase articles undersupplied needs to be lessened, and to purchase others, strengthened. It does not follow that more money, and with it a larger share of the country's wealth, goes to one trade ■ or branch, and less to others, simply because the article dealt in by a trade or branch rises in price ; the loai AGRICULTURE, MANUFACTURE, ATs'D COMMERCE. 23 may fetch, more money, but there may be fewer loaves Ch.ip. ir. to sell. The transfer of a larger share does, however, frequently happen. Even a scanty crop often sells for more than a fuU one. Corn, with most kinds of food and materials falling short one-fourth, are likely to rise in price very much more than one-fourth. Instead of the loaf rising from, say, 6d. to about 8d., owing to such a deficiency, it woiild probably go to Is. or Is. 6d. During the years following thte outbreak of the Ameri- can civil war, it is estimated that the stock of materials and cotton on hand in Lancashire, Cheshire, and Derby, became so enhanced in value as to realise 35-| millions sterling, in excess of what they would have done, had the cotton industry remained in its normal condition. The rise and fall of prices are not to be deemed the ^ source of profit to producers as a body. It remains to ,be shown that profit exists independently of them: they are evils, perhaps necessary evils, when the opera- tions of industry are conducted on a grand scale. Speculative dealings in commodities tend to lessen Fiuctua- ' tions flrp variations in the distribution of money between trades lesseoed bv and industries ; and, apart from their influence in this aeaiHigs. direction, when stocks of cotton or corn are bought at low prices, held, and sold later in the season at higher, dealers have been keeping demUnd down to what, as a matter of fact, is requisite to make the existing supply last tin a new one is ready ; an^d in purchasing in one locality and selling at a profit in another, they have withdrawn commodities from where they are compara- tively little wanted, and furnished them where compara-. 24 THE THEOKY OF BUSINESS. Chaf. II. tively irnicli wanted. Hence it follows that judicions speculative operations in materials and com are Mghlj beneficial to society. In the former, which are the com- pleted goods of a future day in the germ, they amouni to regulating the future supply of such goods, by dis- posing wisely of those existing. This will appear more clearly after the chief functions of money under a system of credit in wholesale are discussed. Should operators suffer by their transactions, through their' estimate oi the future of a market not coming true, they bear the penalty of having put the community unnecessarily or short commons. Prices per- Thus far for temporary, or market prices,' and theii ^pend on effect On Supply and distribution. Disregarding now the 'atta^n^"'^ oscUlations from day to day, we consider what regu- "'^"'" lates the terms on which commodities permanently ex- change for money, and through it for one another. For underlying temporary prices there are what, by compari- son, are permanent prices. One article is found to sell on an average for ten sovereigns, another for a sovereign, or perhaps for only the tenth of one. It is not unnatural to rest such permanent difference of price on a wrong ground. It may be inferred that commodities which commaftd much money do so because they are bettei than others commanding only a little. They may be better, but dearness or high price and utility are not ' Price is commonly described as dependent on the ratio, or on the equation between supply and demand. Mr. Thornton, in ^e Fortnightly Review, has shown that the determining causes of price are in practice too varied to admit of being expressed by any formula — that instead of demand and supply being an ' inexorable' law in regard to prices uniTersally, thej really apply only to exceptional cases ; those, namely, in which sales and purchases are effected, so to say, without reserve. AGRICULTURE, MANUFACTURE, AND COMMERCE. 25 ' necessarily connected. One thing fetches ten times chai-. ii. as much as another, yet for the purposes of- life it may ^ ' ' not be superior to that other in that ratio, or at all. Champagne is more than ten times the price of India ale, but few will seriously maintain that there is a cor- responding excellence on the part of the champagne. Other cases, showing that price and usefulness are not necessarily related, will suggest themselves; air and water, things the most useful of all, have no price. We have already given' cost of production as a regulator tsf value, meaning the power of goods to purchase others ; or of price, meaning their capacity to command money in the first instance, and through it other articles. Cost really regulates the permanent price of most commodi- ties. Dealers, for example, ' charge' goods in proportion to cost, and, at public sale, cost also determines the average proceeds. It is resolvable into prior outlay, on account of labour, and ' abstinence;' hence, in giving the value, say of calico, as proportional to cost, it is implied that this commodity, or others selling for money able to buy goods requiring the labour of, say, ten days in their production, themselves contain the same amount. Goods bought from foreigners are, however, not so regu- lated in value. Tea does not fetch a price proportioned to the number of Chinalmen who worked in its production, but to the number of Englishmen or others who made the Manchester goods given to procure the silver sent to China in payment for the tea. The price of such commodities is determined not by the quantity of labour contained in the foreign products themselves, but by ^ At page 18. 26 THE THEORY OF BUSIIfESS. Chap. II. what IS Contained in the articles given to obtain them, Cost fails to explain the value of articles like gems, or pictures by old masters, which may permanentlj command money able to purchase other things costiag much more than themselves. ' Difficulty of attain- ment,' ' of which cost presents one kind, will account foi the market, as well as average price, of all articles, Scarcity is a condition of high price, not usefulness solely or even mainly. An old form of the word ' dear- ness ' or high price is ' dear-th.' As to the particular ground on which the dififereni trades taking part in the series obtain their gross profits, some do so for growing cotton and bther materials, others for converting cotton into yarn, and others yam into the fabric. Merchants and those who only sell do not, like manufacturers, alter the form of' what they deal in, but, equally with them and others who do, participate in the result. They receive their quotas for placing articles where they are wanted, and suitably as to time, Purchasers in paying ' 13 ' in shops for what can be bought at ' 10 ' of the manufacturers, state by' implica- tion that th^y prefer a smaller quantity of the commodity, with attributes imparted by retailers, to a larger without. In paying ' 13 ' to the shopkeeper for what is pur- chased of the maker for ' 10,' they forfeit three-tenthj of quantity. Producers, in consenting to pay the highei price, virtually admit trades as partners and allow then to appropriate part of the product, lessening whal is available for themselves, and do so only if thej think the service of the particular trade worth paying ' Used by De Quinoey in Ms Logic of Folit. Econ. AGRICULTURE, MANUFACTURE, AND COMMERCE. 27 for. Eefusing to give an adequate price soon causes Chap. ii. middlemen, or others not wanted, to suspend opera- " ' ^ tions. The term 'producer,' it will be seen, we apply to Sellers are merchants, as well as to manufacturers— to persons who sell as well as to those who in common langiiage make goods. A common principle runs through operations of both descriptions. Manufacturers only move mate- rials into particular relations to other materials. As for rn.aJcing, in the sense of creating, it is not ia the power of either manufacturer or merchant. ' Man has no other means of acting on matter than by moving it." Products are merely matter invested with certain attri- butes, those, namely, of being what is wanted, made available when and where wanted. Persons performing any part of the Service of investing matter with these attributes are producers. The scheme of production in its departments of Conclusion, manufacture and commerce has now been sketched in outline. It appears that in offering money for wares displayed in shops, every purchaser may be considered virtually to say, ' I have rendered to society a certain service, now let society render me a service in return.'" Spenders obtain the means of spending, either for hav- ing themselves assisted in production (though rarely in producing the things they buy), or from having rendered a service to those who did, and, in remuneration, have received a transfer of their claim. The operations of business have been resolved mainly into moving goods towards completion, and distribubing those arriving at ' Mill's Polit. Eoon. vol. i. ' Eastiat. 28 THE THEORY OF BUSINESS. Chap. II. that state. The trades furnishing products receive, as a body, money sufficient to purchase the entire supply, The destination of that money has been traced so fai as to leave it vrith each trade ; the further distribution of it among the persons composing trades is resumed under ' wages,' ' profits,' and ' rent.' . It has been taken for granted that cash is used in all dealings, and nothing has hitherto been said as to the ownership of capital ; these are among the points to which attention is next invited. 29 CHAPTEE III. COMMERCIAL CREDIT. ^ On the supposition, that cash is employed in all trans- Chap. hi. actions, there will be, as has been shown, streams of commodities flowing towards completion, and others of money passing in the opposite direction, that is;' from retailers, the last of our series, towards growers of materials, the earliest. Portions of the money, arrested on its course by each trade, are returned by it to shop- keepers as its means of appropriating a share of the goods completed. All dealings being for ready money, the dealer, for example, will at once pay money called ' 10 ' on purchasing commodities worth ^ 10 ; ' the re- cipient of the amount locking it fast, or in some form retaining it, until he needs to effect another purchase. As every one must have cash sufficient for making pay- ments, there will then be in use somewhere about an equivalent in money for the cotton, the yarn, and the calico, that is, for commodities in all stages of forward- ness. It is so in countries where there is little or no credit. The proportion of money to what is bought and sold is very great in India, China, and in certain backward parts of other continents besides Asia. The length of the interval that elapses before, on an average, the same piece of money is used a second time — or 30 THE THEORY OF BUSINESS. Chap. III. expressed diiferently, -the rapidity of circulation — is an important element in determining the proportion of money to goods ; jnst as using checks or passes fre- quently, may make a few serve to admit thousands of persons to an entertainment, while they may be so handled as to call one into requisition for every entrant. What has now to be shown is how the conclusions arrived at on the assumption of prompt cash settlement are modified by the introduction of credit. With credit Let US suppose that all wholesale dealings take place in whole- _ _ _ ^ Sale, on credit, and that only retail requires cash — very much what is actually the case in this country. ' It is chiefly in the retail transactions between dealers and consumers, and in the payment of wages, that money or bank-notes now pass,' ' while in wholesale, credit dealing is the rule. Call the length of the term, in our illustrative series, one month, and trace the effect of deferring settlement for this period, on the relative amount of cash to com- modities. The dealer-staking his trade as typical of all in the series — purchases goods as before, in the aggre- gate worth ' 10, ' but instead of handing over their money equivalent immediately, he only engages to hand it over o,t the month's end, by which time retailers on their part will in turn have engaged to pay him sums amounting to ' 11.' When the day of settling arrives, he therefore finds himself in the position of having' to receive ' 11,' and to pay ' 10.' Every trade will be similarly situated. Retailers, however, have this pecu- liarity, that their money comes to them gradually' during the month ; so, by its close, they already hold ' J. S. Mill, PoHt. Eton. vol. ii. p. 48. COMMERCIAL CREDIT. 31 their '13,' while they are under engagement to pay ' 11.' chap. hi. Warehousemen, manufacturers, spinners, and merchants have stiU to get their 11, 10, 9, and 6, while having to pay away 10, 9, 6, and 5, they are left respectively with 1, 1, 3, 1, and 5, forming cash i;n hand, sums which, with the retailer's ' 2,' together make ' 13,' just the sum required to purchase aU the articles ready for use during a month. Besides ' credit in wholesale,' the hvpothesis is that ^^^ <^s'i ■' ^ only 111 ' retail is for cash ' ; during the month, in short, the retail ; trades receiving the '13' spend it in shops; possibly the sums of money do not pass directly from the earlier groups of the series to retailers ; they may make a detour from producers to professional classes or others, who spend them, but this does not alter the nature of the transactions. By degrees the ' 13' eventually reach retailers, and at the month's end this class finds itself with ' 13 ' in hand or in the bank, and under engagement to pay '11' to dealers for stocks purchased. At settle- ment they liquidate their debt of ' 11 ' to dealers, by handing the amount due, or rather an order for it on a banker; dealers pass on '10' of the '11' to manufac- turers, who pay '9' of these '10' to spinners, who hand '6' of the '9' they receive, to merchants, and, finally, '5' of that '6' finds its way to foreign growers of the material. It thus appears, on the assumption of cash in retail and credit in wholesale, that the equivalent The monev equivalent in money required m a backward social state is dis- for ail ♦ stocky save pensed with in every case save one : an equivalent is one—the stiU required for goods in the hands of retailers ; in be dis- other words, for articles completed and fit for use. It with! 32 , THE THEOEt OF BUSINESS. Chap. III. furtlier appears that, altliougli cash is used for purchasing only in retail, the amount kept for that purpose is whal also discharges wholesale debts (called 11, 10, 9, 6, and 5), those contracted by all trades of the series to eacl other in the course of business; that it is used foi Cash kept this at Settlement, which-may be described as a time for retail ' •' . " iiays whole- when the write-off of goods for goods is effected, and the assignment made of money to producers, to be speni upon completed commodities. The ' 13 ' with retailers ai the month's end serves to discharge all debts, and in the process of dischargement gets placed out with the groups taking part in the work. One portion after another is retained by the trades through whose hands it passes, imtil, like a file of soldiers relieving guard, the whole is dispersed. Gradually as the month wears on, the sums assigned in the first instance (as gross profits) to trades, are by them distributed as wages, profits, and rent, to persons who spend what they thus receive on products for their own use; the money thereby returns to retailers, and the process of dispersing and falling in is continu- ally repeated. Credit in wholesale makes goods pay for other goods, without money actually passing as the medium ; the dealer gets paid for the stock he sold to shopkeepers, by the stock he obtains from manufacturers. It will, however, be observed that at settlement each trade, under a credit not less than a cash system, is en- titled to the full value in money of what it sold. The peculiarity — and it is of great importance — with credit is that producers do not retaim all the money they receive. So long as cash is used in retail, it is evident that no extension of credit can banish it completely from whole- COMMEKCIAL CKEDIT. 33 sale, for the sufficient reason that producers, or other chap. hi. persons who represent them, are themselves the parties 7 ' to retail dealings. Were the circulation determined as to quantity solely by the requirement for retail, it must bear a certain relation to the retail value of commodities. It would be equal to the value of goods bought in shops during the month, were each piece of money spent, and only once; or one-half of their value, if twice spent, and so on. Silver coins being used much oftener in a given time than gold coins, fewer in proportidn to their value are required to do a given amount of work. The hypothesis of credit in wholesale, and cash in The hypo- retail, though agreeiag in the main with fact, does not credit in exactly accord therewith. Some wholesale transactions Tiiees^S^ are so conducted as to call for cash on their own account ; ^^t "fa" and some retail purchases are effected upon credit suffi- ciently long to make less money necessary than if every operation were for cash. To make the proportion of money actually used correspond with what would be required were the amount regulated exclusively by re- tail, it must be taken for granted that what is needed f for wholesale just balances what credit in retail dis- penses with. But though differing so far from what really occurs, the illustration is sufficiently exact to convey some -notion of how far money is rendered un- necessary by credit, and of the proportion which that retained bears to commodities. The main function of money is seen to be to serve as claims for completed articles; and spending it in shops is performing the remaining half of an exchange of goods for goods ; the D 34 THE THEORY OF BUSINESS. Chap. III. former half taking place when stocks were given hy wholesale dealers to obtain that money. Credit In an industrial state, when settlement is habitually renders ex- _ "^ cessive left for arrangement at a fature time, freqijently remote, purchase ' probable, trades may purchase, hoping to receive money soon enough to keep their engagements, and be disappointed either from having bought injudiciously, or because un- looked-for influences injure business and prevent them getting the money they counted on receiving. Exces- sive indebtedness is of frequent occurrence in wholesale trades — those where credit-purchase is the rule. It is scarcely necessary to say that, though the power to make contracts is unlimited, the abUity to keep them is limited. When over-trading has taken place, some trifling cause which otherwise might have passed imob- served — as a match, fires a train already laid, or like a slight cold on an enfeebled constitution — entails conse- quences out of proportion to its own importance. The, at times, seemingly disproportionate effects of a hitch in business can only be explained satisfactorily by taking ' into account the existence of engagements to pay money at fixed dates, all of which gradually, but certainly, come due. Periodically the sponge has to be applied to excessive commitments. And ex- With so little money in use, and that little having to rapidspread ^° SO much, no wonder need be felt at the rapid spread of disasters. q£ commercial disaster. Money paid by one firm has to discharge the liabilities of many : the ' 13 ' serves to pay dealers, manufacturers, spinners, merchants, and many besides. Business houses lean on each other. Let any one fail to pay, and an effect is produced which, COMMERCIAL CREDIT. 35 according 'to the intensity of its manifestations, is chap.iii. recognised as pressure or crisis. Instead of the supposed uniform credit period, its duration in practice differs widely. As to the grounds on which variation rests, the term in different indus- tries and countries was probably connected in the first instance with the time required to carry through par- ticular operations. On this ground, credit terms in the days of railways and telegraphs should be shorter than in the did coaching days : it is doubtful whether they are. And wholesale houses, vieing with each other in respect to length, not unfrequently double their nominal credit term by dating goods forward, and otherwise. The tirades engaged in production are frequently in places remote from each other; the importer is in Liverpool, the manufacturer in Manchester, the ware- houseman in London, or elsewhere ; in which case they have recourse to bankers when settling. The nature and effect of remitting are discussed somewhat fully under 'banking." The proportion of money to commodities now given as retained is meant to represent the sum required before banks were established, or cheques brought into use. Banks further lessen the proportion of money, but how, and to what extent, remains for consideration hereafter. Capitalists in contributing funds for production are ' Cash left with bankers as balances is included in the '13'; why, is shown under ' banking.' D 2 36 THE THEOKY OF BUSINESS. Credit affects capi- tal as to ownership. Chap. III. Sometimes said to fiimisli ' money ' or to put so much money into a business. In a certain sense,^ however, they contribute not money, but calico, yarn, or whatever happens to be dealt in. The process is then regarded in its physical aspect : certain commodities are required to produce a given result (calico). There is also a certain fitness in describing the capitalist as furnishing ' money,' meaning the articles ready for consum/ption which that money gives command of. The operation is then looked at in its economic aspect, and from the capitalist's view-point. Thus far credit has been considered as affecting only money ; it also exercises an important influence on the general productive funds of the country, in this respect, that it causes the proprietors of those funds to become distinct classes or persons, from the employers of them. Producers commonly carry on business, at least in part, with the means of other people. They purchase stock, and postpone settling for it beyond the -period requisite for completing a part of the process ; say for terms of three, six, twelve months, or more. Capital, in the form, say, of calico or yarn, then passes from sellers to purchasers. Trade usage prescribes a peculiar mode of charging for the capital thus borrowed. Wholesale houses profess to allow discowtit for cash, which is merely an indirect way of stating that they impose a charge on all who take credit. Ordinary terms are ' 2^ per cent, discount at a month, or a biU at three months ;' in other words, purchasers are offered the choice between paying for a given quantity of goods 97Z. 10s. at the month's end, and lOOZ. at the expiry of three months. The difference COMMEECIAL CKEDIT. 37 between these sums is really a charge for an advance Chap. hi. of capital. Credit, it will be observed, is spoken of as leading merely to goods passing from tbe bands of one person or class into tbose of anotber. It does not create funds. If tbe resources of one are augmented by sucb opera- tions, tbose of others are proportionately diminished. Parting with their means, producers do not, of course, suspend operations until they are returned, but com- monly procure others, by buying also on credit, or, perhaps, by obtaining advances from lenders outside the trade.' But though in themselves simply transfers, credit dealings confer benefit by enabling the agents of production, of which capital is one, to pass from non- producers to producers, and, generally, to reach those who use them to the best purpose. It is shown subse- quently that increasing the produce in any way, may affect the amount of capital available. Still, influential as credit is in this respect, claims for admiration of its effects are often uttered by interested persons, in lan- guage exceedingly high-flown. In wholesale, credit places capital at the disposal of producers, while in retail, at that of consumers, as such. There is obviously an important distinction to be drawn between deferring settlement for a term sufficient to admit of a process being completed, and deferring it beyond what serves for that. The former is requisite as a condition of money being to a large extent dispensed with; the latter over and above grants a loan. The ' From bankers and discount houses : see chaps, xi. & xii. ; also Deposit- hanking, chap. xyi. 38 THE THEORY OF BUSINESS. Chap. III. former is, without doubt, an aid to production; the latter may or may not be so, according to the use made of the funds lent. In his treatise on credit, Mr. Thornton describes its • effects as being to dispose producers ' to lend money to each other, to bring themselves under various engage- ments by the acceptance and endorsement of bills, and also io sell and deliver goods in consideration of an equivalent promised to be given at a subsequent period.' We have endeavoured to set forth how, by its several phases, money is affected as to omiount, and the general resources of the community as to ownership, with which our analysis of the operations of commercial credit must conclude. 39 CHAPTEE IV. THE TISES OF MONET ; ITS VALUE ; MINT PRICE ; THE TALUE OP GOLD. In coimection with commercial credit, tlie principle lias chap. iv. been traced on whicli the quwrttity of money, compared The uses of witL. commodities, is regulated. It rernains, however, ""'"''^" to state explicitly the services which money renders. And one of these is mechanically to facilitate exchanges. Producers dispose of goods for money, which they re- tain until it suits their convenience to pay it away for fresh stocks and articles for consumption. For ex- ample, by means of money, manufacturers eventually replace their present stocks of calico, with others of yam from spinners, and an equivalent of articles suited to their peculiar requirements; the latter the recom- pense for their services of selling and holding. They and all others are enabled to break exchanges, of com- Medium of modities for commodities, into different operations ; to *^<''^*"p- halt between the parts, and to resume whenever it is deemed desirable. The money they may keep weeks or months before spending it; in other words, they may delay completing transactions for lengthened periods. Such a medium is indispensable in a highly developed industrial state. Taking only a single series into con- sideration, several exchanges are necessary to complete ' 40 THE THEORY OF BUSINESS. ^ Chap. TV. an Operation. exported. In France, silver, not gold, was the metal overvalued. The overvaluation of silver there was even greater than the overvaluation of gold here. Gold coins were never seen. Pive-franc pieces were chiefly used. The double-standard system, in fact, causes one of the two metals to be treated as bullion, sending it to the crucible or out of the country, but fails to impart steadiness to money. By this country it has been abandoned' for now fifty years, but France still keeps THE USES OF MONET. 47 tlie old law in force. Since its enactment important Chap. iv. clianges in the relatiye value of the precious metals have occurred. France has become alternately a country with a gold and with a silver currency. Over and above the practical disadvantage attending a double standard, there is an objection in principle. ' It gives rise to a constant depreciation of the standard, since practically that one of the two metals wiU always be the standard of which the real has fallen below its rated value.' Should worn or clipped sovereigns be permitted to go as far in making a payment as those of full weight, those of full weight disappear from circulation, and for the same reason that gold left France, or, formerly, silver this country. It is in effect undervaluing good money. Coins of full weight go no further in paying taxes or debts than the others. But melt them, or carry them across the sea, and the heavy pieces become more valuable than the light. In 1685 the currency of England had fallen into an alarming state. New coin was thrown into circulation with the intention of re- storing the quality of the money. The labours of the Danaides were not more fruitless. Waggon-loads of choice money were famished, and they vanished as fast as they appeared. Great quantities were melted down, great masses hoarded ; but ' scarcely one new piece was to be found in the till of a shop, or in the leathern bag which the farmers carried home from the cattle fair." In the receipts and payments of the Exchequer the milled money did not exceed ten shillings in a hundred ' J. S. Mill. ' Macaulaj's England in 1685. 48 THE THEORY OF BUSINESS. Chap. IV. pounds. The attention, among others, of Sir Isaac Newton and John Locke was directed to the subject. At the recommendation of Locke, hammered money was made to pass only hy weight. This simple provision did more to, cure the evil from which society was suffer- ing than all the previous harsh measures. No longer degraded by being placed on a level with what was clipped and sweated, good coin ceased to vanish. Profit- ing by experience, the Bank of England and all govern- ment offices now receive gold-money only by weight. They deface all light pieces offered them, and charge what will replace the loss incurred by tear and wear. Coins may After adopting gold or silver as the material of money, or may not j -n j t i carry value a country has still to determine whether the cojns factures. shall circulate at, or above, the value of the metal they contain. Neither shillings nor francs contain their fall value of bullion. The silver in half-a-crown is worth only 2s. ^d. It is not at all unreasonable to let coins carry value as manufactures. A sovereign is ' more useful than a piece of uncoined bullion of the 'same weight and purity; the coinage fitting it for being used as money, while it does not unfit it for being used for any other purpose." Yet if coin is more valuable than the bullion in it, an encouragement is so far offered for the illicit creation of good coins. As to the course actuaUv followed, while francs and napoleons are more valuable Sovereigns than the metal they contain^ sovereigns theoretically are not. The British mint receives ^ gold bullion and returns it as coin without any charge. The material ' McCulloch's Did. Art. ' Coins.' " But not less than 10,000Z. at once. THE USES OF MONEY. 49 must, however, be conveyed to Tower Hill, and the opera- Chap. iv. tion of coining takes some time ; hence sovereigns are worth a little more than gold. Gold bullion is made into sovereigns and half-sove- reigns. The sovereign contains 123 grains stq,ndard,' and as there are 480 grains in an ounce, every ounce yields three sovereigns and a fourth nearly. The por- tion of the fourth is commonly stated in shillings and pence (17s. lO^d.), meaning, of course, that the frac- tional part is to a complete sovereign what 17s. lO^d. is The Mint pric6 of to 20s. This is called the ' Mint price ' of gold. The gold is ;;/. term price here introduced misleads many, by conveying meaning ' the notion that the transaction with the Mint is of the Mint re- nature of purchase and sale. The recommendation has samln "in even been made, in consequence of such misconception, of g^oidbui- to allow the price of gold to rise and fall ' like the price ^*"'' of other things.' Owing to the identity of value of ' bullion and sovereigns established by the Mint regu- lations, whenever the value of gold rises in other countries, coins, and not bullion merely, can be exported. As a means of detaining coins the recommendation (we offer no opinion here as to its wisdom) is quite to the purpose. In so far, however, as this result is contem- plated, the consideration passes beyond the range of that at present occupying us. But many persons think that allowing the price of gold to fluctuate would check a draiu of bullion and not of coin simply. No contradic- tion is involved in the idea of variation in the Mint price. It might easily be made to rise above or fall ' More exactly 1 231|1 grains standard, which is 22 carats fine, or 1 1 parte fine gold, I part alloy. A sovereign contains llSgjj grains of fine gold. E 50 THE THEORY OF BUSINESS. Chap, iy. below its present amount. The error lies in fancying that, were the price to alter, any desirable result would follow. Let the Mint discontinue gratuitous coinage ; or make an ounce of material into more pieces than at present, and the price will change. Following the latter course each coin is smaller ; the ' Mint price,' or the sins.ioid. equivalent given by the Mint for an ounce of bullion, weighs au . -,• t i n ounce. rises to 51., 101., or more, according to the number of coins struck from the ounce. 'No benefit to the commu- nity accrues from this alteration. ISText, if the system of free coinage were given up, the net proceeds of an ounce of bullion would not weigh an ounce. Though no longer containing an ounce, the old designation might be retained. Whatever name is given to the coins received, is the Mint price. The dl. 17s. lO^d. then circulating at a value above that of their contents, . were money required for export, rather than melt or export such coin, gold bullion would be bought in the open market at any premium less than the Mint charge. Suppose that to be 5s. an ounce, then the market price of gold might rise to {31. 17s. 10^^. + 6s.) 4L 2s. lO^d.; in other words, a charge on coinage makes possible a depreciation of coins relatively to bullion, equal to the charge. From this, loss may, in the first instance, be borne by merchants whose business compels them tp purchase gold for export, but it wiU not rest with them. In higher prices of what they sell, it will be passed for- ward to consumers with a further sum on account of their risk of loss from possible depreciation of the currency. The conclusion we arrive at is that allowing the price of gold to fluctuate would not be advantageous ; it would THE USES OF MONEY. 5] cause great inconvenience, and also encourage the' Cuav. iv. illegal manufacture of coins. Though coinage is gratuitous, as already stated, coins The market carry a small premium, owing to the trouble and loss of lionmay time required to have them made. Kather than send i^rf. per bullion to the Mint, merchants sell the ounce, which „ot more! might be made into 31. 17s. 10-^d., to the Bank of England, which purchases it at once (and which in practice alone employs the Mint) for 31. 17s. 9d. In dealing with the Bank, ' gold, wherever it may come from, and under whatever form, must be first melted as a pre- cautionary measure by the Bank gold-melters This delicate operation, which requires furnaces and chemical apparatus, cannot be performed in the interior of the Bank ; hence it constitutes a branch of private trade. ... In London (1863) there are only three large establishments for gold-meltiag (to the Bank) ; they belong to Rothschild, Brown and Wingrove, and John- son and Mathie. . . . The ingots (or bank-bars, and worth about 800Z. each), stamped with a mark and cer- tain figures, which henceforth prove their identity, are received at the ' Bullion Office,' assayed by the Bank assayers, and then purchased by the Bank." The Bank is under obligation to buy* all standard gold offered to it, and at ^e fixed price of 31. 17s. 9d. ; also to sell, in other words to return, gold at 31. 17s. lO^*^. That the Bank should have no choice in the matter of ' M. A. Esquiros, in the Berne des deux Mondes. > * The Bank ■will warehouse gold and silver bullion without buying it : loads of treasure are often seen in waggons in Lothbury, which reach the vaults, but do not appear in the Gazette accounts. K 2 52 THE THEORY OF BUSINESS. Chap. IV. purchasing and at a fixed price, may appear a hardship towards it, as well as a violation of sound principle. But it is reaUy neither. The Mint doors are always open, and the Bank can have bullion coined to any amount free of charge. The effect of the law is merely to devolve upon one body the duty of maintaining a supply of coin sufficient for the country, and the re- sponsibility of keeping safely, in the meantime, the nation's treasure. In the case of the Bank dealing with bullion, the term ' price ' is not so inappropriate as in that of the Mint. The Bank really buys, after a fashion, whereas the Mint is supposed to return, in the form of coin, the identical bullion left solely with the view of being coined. So long as the Bank pays 3L 17s. 9d. in coins (or notes convertible into coin) for bullion, the price of standard bullion cannot fall below 3L 17s. Qd. in the open market ; that is to say, no one will part with an ounce for less than the Bank will at once sive. Nor can it rise above 3L 17s. IQ^d. ; no one will give for bullion, coin which would itself yield more than an otmce by sending it to the melting-pot. "Were the Bank to run short of coin, bullion might com- mand less than 3Z. 17s. Qd. of coin. Parallel instances have in fact occurred elsewhere. In Sydney, for ex- ample, after the great gold discoveries, coin rose to a premium. Gold could not be converted with suffi- cient rapidity into sovereigns. Proprietors of bullion accepted less than 3?. 17s. 9d., or an equal weight, in the more convenient form of money. And, more re- cently, in Bombay rupees rose in relation to silver- in THE USES OF MONEY. 53 bars. Tons of bullion were in the vaults, but though Chap. iv. the Mint worked night and day, it could not overtake the demand for rupees to send up country for cotton, in addition to the ordinary payments for opium. Had India possessed a gold currency, probably the intense pressure of the period alluded to would have been escaped. Gold being fifteen times as valuable as silver, the Mint, in the time and with the labour expended in coining rupees, could have turned out gold pieces able to pay fifteen times as much. Besides, the gold coins, being less bulky, could have been more easily conveyed to their destination. The introduction of a gold currency into India has been found beset with difficulties. One plan suggested for getting gold adopted was that of, for a time, declaring both gold and silver coins legal tender at the rate of a sovereign for ten rupees. On the threshold there is a difficulty. Ten rupees, at the present price of silver, are not worth a sovereign. At the rate proposed, rupees are overvalued, and, as until recently with the silver coins of France, will continue to be exclusively employed as money. To bring gold coins into use along with rupees, so long as the relative value of gold and silver continues as at present, it would be necessary either to bring down the sovereign, or whatever the gold coin might be called, to ten rupees, by coining lighter gold pieces than the British sovereign, or to raise ten rupees to the sovereign, either by seignorage or by making each rupee somewhat larger. If the rupee were altered, all con- tracts entered into before the introduction of the new rupee would in justice require to be recognised as having been made at the previous standard. 54 THE THEORY OF BUSINESS. Chap. IT. Another instance of enhanced value of coins, through under-supply, happened in Shanghae ia 1857, when the Carolus dollar, used as money for want, of a suitable nal^ve currency, rose to nearly double its value. Excepting from accident, our mintage laws, as shown, prevent bullion falling in the marketbelow 3?. 17s. 9d., or rising above SI. 17s. lO^d. No mintage Closely linked to gold bullion, sovereigns are made to prevent depend upon the value of a substance in universal gbM itself ^ -^ from request, and of which the supply is enormous. Still in value. the measure of value is not absolutely fixed, like the pound weight or the yard. In quoting the price of any article as ' one sovereign,' we merely state that it will exchange for a commodity like wheat or cotton ; to wit, for rather less than a -quarter of an ounce of gold. Were gold and silver to shift their moorings, they must drag along all the currencies fastened to them, and Mint regulations would be helpless in preventing a result of this kind. The Mint price would not even indicate the cha,nge if it did occur. In the opinion of many, indeed, ah alteration of the nature indicated is impending ; some think, and this opinion gains ground, that it has already begun, and is making fui-ther and rapid progress. It, however, continues matter for discussion whether such a change has even begun. Certainly, notwithstanding the Australian and Califomian supplies, there has been nothing of what was felt after the mines of America in the fifteenth century gave forth their treasure, quaintly described at the time as a ' dear-th of all things, with scarcity of none.' It is well worth while enquiring why it is that tens of millions have been added to the THE USES OF MONET. 55 money supply of tlie world without lessening much, if Chap. it. at all, the purchasing power of each coin ; or, expressed otherwise, without seriously raising prices. The con- clusion that the Talue of the soTereign is as great as ever, involves, the belief that, enormous as the supplies of gold have been, they have not increased the stock relatively to other goods. A very large part of the new gold, it is to be remembered, has not gone into circula- tion in commercial countries, but has found its way to the Bast (or what is the same thing, has taken the place of silver which has gone), to pay for goods sent westward. During ten years no less than 124 mil- lions sterling of gold and silver have been imported into India. India and China' hoard the treasure they receive, and, when it is treated thus, it has no more influence on the value of gold than metal in the mine. Then the absorption of coin in this and other countries must recently have been great. Since the gold disco- veries the railway and telegraphic systems have become developed ; mere transit occupies less time. More com- modities consequently arrive at completion in a given period, and completed commodities are those which chiefly call for the distributing agency of coins. Itself perhaps the most powerful agent which, in modern days, has increased the productiveness of industry, the railway has been made still more influential by the con- current adoption by communities of free-trade measures. Artificial barriers to international intercourse have dis- appeared, and many, it is to be anticipated, are tottering. ' Between 1854 and 1863 inclusive, 34,612,047 of gold and 89,173,759 of silver havebeen sent to these countries. not always more wealth, 56 THE THEORY OF BUSINESS. Chap. IV. Besides these agencies counteracting the tendency of gold to fall in value, there has been the steady increase of population in this and other countries, of itself re- quiring no inconsiderable yearly addition to the quantity of money in use. JEoregoidis Whether or not the supplies of new gold have lowered the value of the entire supply, it is certain that they have prevented what must otherwise have occurred under the influence of railways and free-trade — a great rise in the value of the sovereign ; in other words, a severe fall in general prices. Had that occurred, the advantages of improved processes must have been for a time confined very much to that section of the com- munity possessed of money, instead of being at once widely difFased. It has been asked whether the new gold supply is really an addition to the wealth of the world. Evidently it is, so long as the value of the entire stock is not lowered by the fresh supply. But whenever that takes place it ceases to be so. There is a peculiarity in this respect about money, and the few articles which, like it, are prized for their rarity. The more abundant that products like wheat or cloth be- come, the richer a country is. Money, however, differs from these in not being desired on its own account, but for the sake of what can be procured with it ; the medium, as already stated, should possess great value in small bulk. A state of things, therefore, is possible, under which the foundering of a vessel with a golden freight may to the nation be a calamity, only because it would lead to goods being exported to purchase another. Bui for railways and other causes increasing the supply oi THE USES OF MONEY. 57 products, tlie new gold miglit have proved not beneficial, Chap. iv. but, on the contrary, injurious. A loss of a national kind must attend a fall in the Currencies may require value of gold. Currencies require supplementing. The supple- material of wbicli sovereigns are made can be purchased cheaper abroad ; it is consequently imported and made into coins. Instead of requiring any further import, there is the alternative of severing the connection at present existing between coin and bulhon (by the mint- age regulations), and allowing coins to circulate, as shillings do, at a value independent of the material in them. The objections to this are apparent from what has already been stated. Should it be resolved to allow the coins to continue to circulate at the natural value of their contents, there is no help for it but to submit to an increase of their number. Goods of various kinds must be exported to mining countries, and bullion, in place of articles of food or clothing, imported in return. Producers, possibly without feeling it, part with com- modities which might have been available for the com- munity. The outlay has, however, to be incurred once for all. The pence and shillings of this country pass current at values above those of the bronze and silver they re- spectively contain, but it is too difficult to pass a large enough quantity, especially of ' coppers,' to make it worth while running the risk of illegal coinage. The evil consequences attending an artificial value in coins do not follow in this instance. The phrase 'value of money' has been used in the Tiie 'value ofmonev'is sense in which it is employed by the best writers ; not ambiguous. 58 THE THEOKT OF BUSINESS. CiTAP. rv. with tlie meaning attached to it in the City. There it means not {price, but the rate of interest or discount ; quite another thing. Under Bank rate this ambiguous phrase, which is productive of great confusion, is dis- cussed somewhat fully. Sovereigns ^^t a time when money was deemed the only real are counters • of full wealth. Bishop Berkeley propounded the pertinent 'query,' whether 'the true idea of money, as such, be not altogether that of a ticket or counter ? ' That coins are made of a valuable material does not militate against the correctness of this opinion as to their character. The term counter or ticket, as it happens, is usually applied to articles of little or no inherent worth; but this is accidental. An essential feature in counters, as in coins, is limitation of quantity, but what they are made of is not. Passes or tickets would not have their nature altered by being formed of materials intrinsically valuable, in place of cardboard or zinc. A railway com- pany, or, better still, the managers of an entertainment, might find it desirable to provide ' passes ' for admission worth the fall amount charged as entry money. Once procured, these counters could be employed again and again. The entrant would receive for his guinea, if that were the price of admission, not a worthless bit of paper, but a pass worth a guinea. In practice such pieces are unnecessary, as the visitor parts immediately with what he receives to the checktaker. But in society matters are different ; persons then part with goods, or render services, to strangers, and may have to get the equivalents from others about whom they know nothing. It has, consequently, been found expedient to 'provide THE USES OF MONEY. > 59 pieces possessed of attributes not necessary in tlie other Chap. iv. supposed cases. This country's coins are counters of full value. The view now taken of the character of money is sustained by the occurrences of, say, a year in the world of industry. The commodities in storehouses in December are not those which were there twelve months before. Those there then, and many others created in the interval, have disappeared; but amidst all the flux and reflux of wealth, coins at the year's end continue unaltered, ready for another round of the industrial machinery. Already has price been viewed from its ' goods ' side, and the main fanction of money, under a system of credit in wholesale, engaged our attention ; while here, price has been regarded chiefly from its currency side ; the means employed to secure a good description of money have also been discussed. So far the monetary laws of this country have been shown to provide a standard of value on a secure basis, and to effectually ' guard the medium as to quantity. No arbitrary enact- ment, however, prescribes the limit to money in Great Britain. The Bant or the Mint will ' make,' or at aU events furnish, money to any one to any amount. The clear and. simple provision that each applicant for coin shall provide 113 grains of fine gold, or the half of this, is the only condition imposed by statute, but it suffices to prevent excessive isstie, and proves a better regulator of amoimt than the will of governments. Better to have nature's law restricting the supply of the precious metals as the limit to money than any arbitrary decree. The key of the country's storehouse is thereby left, so to 60 THE THEORY OF BUSINESS. Chap. IV. speak, to tlie safe custody of Dame Nature herself, who gives what the store contains. The mechanism by which uniformity in the value of metallic money is preserved between different countries is considered under ' foreign exchanges.' . 61 CHAPTEE V. IMPORTS AND EXPORTS. Often (as in producing the calico of our series, for chai-. v. example) the groups taking part in a process are in places remote from each other. In preceding sections we hare had under consideration, those who work, and what are the results of working. Here we are con- cerned with where the work is carried on; in other words, the circumstance is taken into account that the workers composing the series are commonly in different localities. It has already appeared how advantageous the plan is which enables every worker to devote him- interna- self to some portion of an operation for which, by reason merce, of efficiency natural or acquired, he possesses the great- est aptitude. Trade between parts distant from each other not only extends the area over which this arrange- ment as to persons can take place, but introduces a new principle on which the quantity and the variety of pro- ducts available for consumption are further increased. A territorial separation of industry allows nations to Or the bestow their productive energies in the way in which, on division of account of soil, climate, or abundance of capital, they '" "^'^' enjoy superiority over others. In the instance in point, India,' Brazil, Egypt, or the Southern States of America, ' 'Britain is fast becoming the clothier of Hindostan. In 1860 she exported to India 241,978,364 lbs. of yarn and cotton goods ' — Arnold's Cotton Famine. 62 THE THEOEY OF BUSINESS. Chap.v. furnisi. the material, but Britain with its elaborate machinery, cheap coal, and industrial skUl, manufac- tures it into cloth. Consumers all the world over experience the benefit of using to the best purpose , nature's forces ; they thereby obtain a larger amount and greater variety of articles for their own use, in re- muneration of industrial efforts put forth by them. Gives rise As One Country usually grows materials, and another to imports J J a and ex- manufactures them for others as well as for itself, the ports, passing and repassing of stocks between coimtries are necessarily of frequent occurrence. The more exten- sively co-operation takes place on the part of nations, the more numerous and important do such transmissions of goods become ; in other words, the grander is the scale on which importation and exportation are con- ducted. The external commerce of the "United Kingdom — of enormous dimensions — consists mainly of import- ing materials and exporting manufactures. Materials are, in fact, purchased from foreigners, and paid for with a portion of what they are made into. During 1865 our dealings with other countries comprised im- ports of wheat, 10,000,000L ; corn and meal, 11,000,000?. ; cotton, 66,000,000?.; flax, 6,300,000Z. ; metals, 5,000,000?. ; sugar, mostly unrefined, 12,000,000?. ; tallow, 3,000,000?. ; timber, 11,500,000?.; hemp and jute, 3,500,000?.; wool, 17,000,000?.; hides, 3,000,000?.; indigo, 2,000,000?. ; raw silk, 10,500,000?. ; oil, 4,500,000?. ; coffee, 4,600,000?. ; tea, 10,000,000?.; wine, 8,000,000?.; tobacco and cigars, 3,200,000?.; and other articles, in all worth 220 millions sterling : and exports of cotton-yam and piece goods,' 57,000,000?.; wooUens, 26,500,000?.; linen, 12,000,000?.; IMPORTS AND EXPORTS. C3 iron, 13,500,000?.; haberdashery, 5,000,000Z. ; machinery, Chap. v. 5,000,000?.; coals, 4,500,000?.; apparel, 3,000,000?.; hard- ' ' ' ware, 5,000,000?.; silks, 2,000,000?.; copper, 3,000,000?.; leather goods, 2,500,000?. ; beer and ale, 2,000,000?. ; earthenware, 1,500,000?., and other articles, making in all 166 millions ; showing, as stated, imports principally of materials, and exports of manufactures. Furnishing foreigners with manufactures, we however take the equivalent partly in articles other than materials ; in tea, sugar, wines, &c. Rearranging the figures of our series, to illustrate foreign trade they become — K (raw cotton « q / ^ (caHco exported), 5J, 6J 5 in^ported), 6, 9, |^(eah«,Jo^^ home ^^^ 10 11, 13 The imports, here represented by ' 5,' consist, by sup- position, solely of raw cotton, which passes to spinners, who seU it at '9 ' as yam ; which goes to manufacturers, who, as calico, sell it at ' 10,' but instead of the whole then passing to dealers in this country, it becomes split into two parts, and one part goes to foreigners, who, possessed by their money receipts for cotton of the means of purchasing, are enabled to appropriate it ; only the remaining part passes to dealers at home, and becomes available for producers in this country. Foreigners in this instance happen to have half of the produce, because for materials ' 5 ' are paid them, while ' 10 ' commands the entire supply wholesale, that is, in the stage at which foreigners purchase. The remaining figures of the formula are connected with the final distribution of the supply obtained, among the respective 64 THE THEORT OF BUSINESS. CHAr. V. trades in eacL. country. This matter having abeady occupied us need not be again dwelt on. We are now dealing with transactions between one country and others, not of those between trades in the same country. Which are In Operations between one country and, others, equi- iii money, vaUnts ' estimated in money are interchanged ; we give goods worth lOOZ. to foreigners for foreign goods worth 1001., though from the published returns of the Board of Trade, which for 1865 gives the imports as 220 millions, and the exports as 166 millions, it would appear that the imports exceed the money value of exports. That they do, arises very much from the manner of making up the returns. The excess of im- ports must not be taken to indicate a balance of trade against this country. The trade accounts of all coun- tries, if framed on the same plan as our own, must at one and the same time exhibit a preponderance of imports. Evideiitly, however, every country cannot reaUy have a balance* to pay to every other. The matter would then clearly be merely one of account. Imports are entered including certain charges for freight, &c. ; exports at the price at which they leave this country. Imports are entered, so to speak, at ' 5,' plus the charges of conveying them hither, but exports only at '5.' Ex- ports really bring more than '5.' In their wages, for ex- ample, our sailors receive a farther share of the product, and for a service essentially the same as that for which the spinner or the manufacturer obtains a share of the ' This is not saying that imports and exports are necessarily of equal amount. In fact they are not. The imports into the United Kingdom consist largely of commodities sent as dividends on foreign investments. No corresponding export has now to be sent for these ; it went long ago. IMPORTS AND EXPORTS. 65 result : lie, like them,- takes part in the process of Chap. v. making goods available for consumers. Thus a con- siderable portion of the amount apparently paid for imports is wages and profit to British subjects. With the requisite addition to the value of exports, and diminution from, that of imports, equivalents would be arrived at, were it not that this country receives tribute from its foreign debtors, for which, of course, there is ' no corresponding export. It is incorrect to consider the excess in the price of imports as in any way indicating and measuring the profit made by selling home goods to foreigners. The source and nature of profit are considered subsequently. Imports may really exceed exports, or, to direct atten- if imports tion to the actual cause of difficulty, a country may rate monej^ engage to pay more for commodities to other countries than they engage to pay in return. Should this happen, money leaves the over-indebted country ; or, technically, the exchanges become adverse, a phrase explained in next chapter. Money continues to go abroad until prices fall ' sufficiently to check further importation, or to induce purchases of what the over-indebted country has to sell. The statement that, in foreign as in home trade, equivalents in money are interchanged, does not mean that the fruits of the better application of the world's productive energies, owing to trade between nations, are divided equally between the countries But the taking part in it. As matter of fact the advantage is trade is very variously divided. That country whose products divided.^ ' Credit prevents a close connection between the export of gold and a fall of prices. P 66 THE THEORY OF BUSINESS. Chap. y. are most eagerly sougM after in tlie markets of the world, obtains the larger share of the benefits pf foreign commerce, a larger share which, however, does not necessarily show itself, according to the old theory, ia the favoured country receiving a balance from others in cash, but by its getting in greater abimdance the commodities of foreigners in exchange for its own. Native products are what in the long run pay for im- ports. When the Chinaman, for example, offers a higher price for British fabrics, he really offers his tea or silk on better terms. Bargains for produce and manufac- tures, it is true, take place for dollars and rupees, or pounds sterling ; but with the money offered for what they sell, merchants purchase Chinese or other com- modities. Great eagerness on the part of the Chinaman to acquire English products, takes the form of offer- ing more Chinese money, which is in effect increasiug the power of this country's representative to purchase Chinese goods. Tea, coffee, and aU imported articles are cheaper here the more intense the demand abroad for British wares ; because the importing merchant, whom the eagerness of foreign purchasers enables to obtain foreign products cheap, is by competition forced also to seU them cheap here : thus the benefit of a successful foreign commerce is transmitted to "the country's own consumers. In a A connection subsists between the preceding con- country siderations as to what determines the value of imports, of home and prices. Gold, of tfhich our money is made, is ]^iube^ imported, and, like other articles imported, its value ^'^^' depends upon the terms on which international ex- changes happen to be effected. Purchase tea and cotton IMPORTS AND EXPORTS. 67 cheaper and tlieir price falls ; they exchange for less Chap. v. money. But when it is money itself which is bought cheap, it cannot, like other goods, fall in price, which, stated differently, is describing it as becoming able to purchase less of itself. It falls in value compared with other commodities ; stated differently, prices of these others rise. When, owing to a favourable division of the benefit of foreign trade, money is obtained cheap, the prices of home products are high compared with all foreign commodities, money included.' The value or purchasing power of money, meaning the scale of prices in commercial countries, is no arbitrary matter ; the distribution of the precious metals is determined by the trade carried on by each country. ' These metals,' says Mr. E.icardo, are ' by the competition of commerce, distributed in such proportions amongst the different countries of the world as to accommodate themselves to the natural traffic which would take place if no such metals existed, and the trade between countries were purely a trade of barter.' More than, a specific proportion, say of sovereigns ^ to commodities, will not remain in this country. Exceed that, and, their value falling, they flow to places where that value continues great; in other words, where they purchase more. High prices in relation to advantageous commerce are important as effects and indications, not as causes. In themselves ' Mr. Senior first pointed out the connection between eificiency of industry and the high money wages of Britain compared with India. Mr. J. S. Mill completed the theory of the determining causes of the value of money (and of all imports) by showing that the strength of the demand for imports and exports determines that value. ' Bank-notes in their own country serve in all respects as coin. F 2 68 THE THEOEY OF BUSINESS. Chap. V. they are of no benefit ; they only render more counters necessary to do a given amount of business. Imports are A country exports as a condition of procuring foreign aim of com- Commodities, and the more it gets by doing so, com- "^'°^' pared with what it would otherwise have done, the more advantageous the operation. A country exporting manu- factures wants the corn, the wine, the tea of others ; and if it could get these without exporting any home products in return, so much thfe better for itself. ' The vulgar theory .... deems the advantage of commerce to reside in the exports, as if not what a country obtains but what it parts with by its foreign trade was supposed to constitute the gain to it.' ' This doctrine is implied in such familiar phrases as ' an extended market for a country's produce ; ' ' an abundant con- sumption for its goods ; ' 'a vent for its supplies ; ' employed to describe the uses and recommendations of commerce with foreign countries and the colonies. The real benefit of foreign trade is measured by the greater abundance of the corn, the wine, the clothing, obtained through impoi:tation over what would have been ob- tained had they bpen produced at home. The excess or difference of quantity obtained by importing is of the nature of a gift conferred by the foreign trade. ' This gift is more or less considerable in proportion as the difference is more or less great. It wUl be the quarter, the half, or three-quarters of the value of the pro- 1 duction, according as the foreigner makes us pay three- quarters, a half, or quarter as much as it would cost if i home manufactured.' ^ ' J. S. MiU. ' Bastiat. IMPOSTS AND EXPORTS. 69 Abundance and consequent cteapness are now recog- Chap. v. nised as the goal of productive efforts. The air we And the breathe and the water we drink are in a condition as better. to supply, to arrive at which is the ideal of commercial legislation. There are, as has been already mentioned, some articles prized only because they are rare : an un- limited supply of these would not enrich a country ; on the contrary, it would impoverish it. Among the articles alluded to are pearls, precious stones, and, mirabile dictu ! money, of which it appears impossible ever to have too much. Production, it is true, can never reach the state when goods, like air or water, shall have no price. In order to that, everything would require to be forthcoming on consumers simply expressing their wish. But though unattainable, provided this condition is deemed desirable, every advance towards it wiU be welcomed, and no attempt wiU be made to shun it' as an evil. At no distant period the object of legislative effort was held to be quite other than cheapness. Until recently the aim of legislators was to set people to work to produce commodities at home, and to pre- vent foreigners underselling in the home market ; by no means to encourage importation, because articles could be had cheaper in foreign markets. The theory of protection to native industry, ' that to I'rotectiou buy things produced at home was a national benefit, other ain? and the introduction of foreign commodities generally a national loss,' is now exploded. This doctrine would make the interest of individuals and classes not to har- monise with the interest of the community, but be opposed to it, ' it being evident that the interest of the than cheap- 70 THE THEORY OF BUSINESS. Chap. V. consumer is to buy foreign commodities in preference to domestic whenever they are either cheaper or better.' There is, however, really no, such conflict of interests. ' The importation of foreign commodities never takes place, except where it is, economically speaking, a national good, by causing the same amount of com- modities to be obtained at a smaller cost to the country.' ' The excess of price that would be paid to produce at home the imported articles, over what they could be bought for elsewhere, is sheer loss to the country as well as to the individuals there who pay it. Those who, to benefit certain home trades, hold the doctrine of the propriety of excluding goods simply because of eheapness would be consistent in excluding other things which cost nothing at all. They could consistently recommend every lover of his country to sign the 'petition of the tallow and wax-chandlers, the manufacturers of lamps, chandeliers, reflectors, snuffers, extinguishers; of the dealers in tallow, oil, resin, spirits, and generally in all articles used for' illu- minating,' to the Members of the Chamber of Deputies, praying to be relieved from the intolerable competition of a foreign rival — th§ sun — with a view to encourage these important branches of industry. M. Bastiat's famous petition to the Chamber, from which this is an extract, concludes with a challenge to the Deputies to ' choose but to be consistent ;' ' for,' says the author quoted, ' while you continue to reject coal, iron, wheat, and foreign stuffs, in proportion as their price approxi- mates to zero, is it not most inconsequential to admit ' J. S. Mill, Folit. Econ. vol. ii. IMPORTS AND EXPORTS. 71 the light of the sun, of which the price is at zero during Chap. v. the whole day?' It is an incomplete description of protection to re- present it as encouraging native industry. So far as it ' encourages one branch of that industry it discourages another. Imports being paid for with exports, when- ever imports are checked, exports are also lessened. Duties on French goods, raising their price, cause fewer to be purchased : having less to pay to other countries, fewer manufactures are required, to send in payment. The country which checks the importation of foreign products in order to produce others at home, even if successful in furnishing at greater expense, articles as good as those which might have been imported cheaper, is volunteering to do a great deal laboriously which nature is perfectly ready to do gratuitously. A protect- ing country, in effect, prevents its own producers from preparing commodities which might procure from other countries an additional one-third, one-half, or more, of what they themselves desire for consumption. The community, in the persons of its consumers, suffers from adopting the erroneous policy. In specifying the advantages accruing to a country Capital iu from its foreign trade, it is no oversight not to adduce trade is nnt the gains of merchants conducting that trade, as a por- mentation tion of these. ' The gains of merchants, when they ° °'''^' enjoy no exclusive privilege, are no greater than the pro- fits obtained by the employment of capital in the country itself.' Nor does ' foreign trade necessarily increase the field for the employment of capital.' ' Foreign terri- ' J. S. Mill. 72 THE THEOEY OF BtSINESS. Chap. V. tory and industry are by it brought into requisition, but a corresponding area of this country and of its industry is, so to speak, set apart to meet tbe wants of consumers in other countries. Discontinue some branches of export trade, and the capital disengaged can find employment elsewhere in the country. ' There would be employment created equal to that which would be taken away. Exportation ceasing, importation to an equal value woidd cease also, and all that part of the income of the country which had been expended on imported commo- dities would be ready to expend itself on the same things produced at home, or on others instead of them.' Although the capital used in foreign trade is not pro tanto an addition to what would otherwise be employed, it is not meant that such trade does not enlarge a na- tion's capital. It does so, indirectly and to an important' extent, by fm-nishing stronger motives for putting forth industrial energy ; consequently when a trade, say in food or materials, is interrupted, a country's capital- employing capacity (a term explained subsequently) is lessened and its capital curtailed. A portion of what was employed productively, is either sent abroad for invest- ment or consumed at home as income. The direct advantage of international commence lies in its placing material comforts in greater abundance and variety at the disposal of workers throughout the industrial system ; an advantage showing itself, in practice, to individuals in cheapness of home and foreign productions. Britain is beholden in an especial man- ner to foreign commerce. Possessed of a soil yielding little beyond the necessaries of existence; a country IMPORTS AND EXPORTS. 73 deserving in some measure the character accorded to Chat'. v. her in ancient belief, when her mineral resources were unkaown, of being a region so desolate as to be given up for an abode of disembodied spirits ; she is now trans- formed into one of the most richly-endowed spots on the face of the earth. Climes which nature has favoured more highly bring their tribute to her shores. We who inhabit this once sterile land enjoy ' the remotest products of the north and south free from those extre- mities of weather which gave them birth ; our eyes are refreshed with the green fields of Britain at the same time that our palates are feasted with fruits that rise between the tropics.' ' And it would be difficult to over- estimate the indirect benefits conferred by international dealings. Speaking of these, Mr. Mill remarks that ' it may be said without exaggeration, that the great extent and rapid increase of international trade, in being the principal guarantee for the peace of the world, is the great permanent security for the uninterrupted progress of the ideas, the institutions, and the character of the human race.'^ Labelled upon all the parcels of goods which pass between countries, Mr. Gladstone sees ' a message of kindly feeling from one to the other ; and the ship voyaging between the lands is like the shuttle upon a loom, weaving the web of concord between the nations of the earth.' ^ The mode of settling debts, prosaically spriagiug from such operations next demands attention. ' The Spectator. = Polit. Econ. ' Speech at Glasgow, Nov. 1, 1865. 74 CHAPTEE VI. ' FOREIGN EXCHANGES. Chap, yi. The materials and mamafactures with wMcli tlie external Imports commerce of this country is mainly concerned event- and exports "^ "^ eventual!}' ually pay for one another, but settlement is brought pay for one •''■•' ^ o another, about gradually and mediately. The merchant who buys materials from other countries engages to pay money for them, not manufactures; and foreign pur- chasers of British manufactures in like manner engage to send hither money, not materials. Foolish, however, ' it would obviously be, and a great waste of energy, to convey money backward and forward between the countries. A merchant in London sends goods to a warehouseman in Paris ; and in Paris a merchant sends Parisian commodities to a warehouseman in London. There is no necessity for the London warehouseman, who gets the Parisian goods, to send to Paris money as payment for them, and for the merchant also in London, who has sent away English goods, to have money sent him from Paris. It will only be necessary for the Lon- , don warehouseman to pay to the merchant in London the money in question, receiving in return a letter ac- Ey means knowledgiug receipt of it, and which also directs the money lying ready in the hands of his (the London merchant's) debtor in Paris to be paid to the Paris mer- chant, so as to cancel the debt in Paris in the same FOREIGN EXCHANGES. 75 manner as that in London. Bills of exchange serve this Chap. vi. twofold purpose. The importer who obtains, as receipt, the bill which the exporter in London holds, sends it in- stead of the money to his correspondent, the Paris merchant, who presents it at the acceptor's, the Paris warehouseman's, oifice, receives the cash, and the trans- action is closed. In place of one exporting merchant and one importing warehouseman in each town, there must be taken into account two great classes, exporters and importers. And these do not usually deal directly with each other, but through bankers and brokers, who accept money from the class of importers (under the form of selling bills to them) and hand it to exporters (by buying bills from them). To the country the result is that all who have to pay money ^are enabled to pay it to brother merchants in the places where they them- selves reside, instead of having to send it to correspon- dents abroad. Merchants in the. respective countries, saved the risk and expense of sending money, will be, Oin the whole, enabled to sell at prices somewhat lower than they would otherwise require.' The supply of bills, springing from exports, and the demand for them, from imports — employing these terms in a very extensive sense — will exactly suit each other so long as exports and imports continue equal in value. Owing to credit the supply of bills as well as the de- mand for them, of any moment, may be connected with dealings of months before ; hence the current prices of ' goods, though affecting importation and exportation (the ' See Thornton on Paper Credit for a fuller explanation of the uses of bills of exchange. 76' ' THE THEORY OF BUSINESS. Chap. Yi. -souTce of bill Supply and demand), may liaye compara- tively a remote influence on the bill supply of any moment. Debt of every kind to other countries, re- quiring to be discharged, creates demand, and so far regulates the price of the day. Whose The varying price of foreign bills forms the subject- prices are matter of the foreign exchanqes ; their current price is the subject . J a . of ' foreign described as ' the state of the foreign exchanges.' Bills on foreign countries are claims for the money of those countries. A bill on France is a claim for francs, on Russia for roubles, and so on. Purchasers of such claims here, offer British money for them. The ques- tion presents itself, how much requires to be. offered? The reply to this question involves a knowledge of what quantity of the foreign country's money, whose bill is dealt with, is equal to a given sum of British money. And after the equivalent is ascertained, it may be found that purchasers offer to give more than that equivalent for the bill, or, on the contrary, they may not offer to pay so much. The former part of the question, that of the ]pa/r of exchange, is connected with the currency, while the actual rate, or price of bills at any moment, is affected also by the state of trade, or rather of general indebtedness existing between countries. We shall say very little about the currency portion of the matter. Themoneys The var of exchange is commonly to be learnt by com- of the countries paring the mintage regulations of countries, but the moneys may not be in accordance with those regulations, and then allowance must be made for any divergence from them. When one country uses a coinage of silver and another a coinage of gold, jpar between such coun- FOEEIGN EXCHANGES. 77 tries is affected by alterations in the relative value of Chap. vi. gold and silver ; hence the preniitim or discount on one or other of these metals in the respective markets has to be taken into account. Between this country and France, when there is no premium either on gold or silver, par is one sovereign on the one hand, and 25 francs and nearly 17 centimes' on the other. With India the rupee is equal, at the present price of silver, to rather more than Is. lid. With Austria, Russia, America, and other countries using paper currencies — capable there- fore of being issued in excess — the par is exceedingly uncertain. In order to find what it is at any time, re- course must be had to the ultimate reference, the money of the world, that is, gold and silver bullion. As the pjrices of foreign bills of exchange depend very much upon the value of the moneys for which they are drawn, fluctuations in exchange quotations are especially likely to happen with countries using paper currencies. The American exchange is affected in one direction by every fresh issue of greenbacks, and in the opposite by every ' A kilogramme (or 15)434 troy grains) of gold j^ths fine is coined into 3,100 francs. In England one ounce (or 5,760 troy grains) of gold j|ths fine is coined into SI. 17s. lO^d. A lengthy but not intricate calculation will show from these rates that a sovereign and 25'22 francs contain the same amount of gold; otherwise expressed, that 25-22 is the par of ex- change. But by the decree of March 22, 1854, the retemie, or charge for coining gold is made 6 francs 70 cents per kilogramme. The kilogramme of gold, therefore, yields only 3'093'3 nei of coin, and the sovereign's equi- valent in French gold coin ys diminished by its proportion of this charge, or by 5 cents, reducing the 25-22 to nearly 25'17. The rupee weighs 180 grains, and is of the qualify jfths fine : it contains, therefore, 165 grains of pure silver; its weight of standard silver is 178-37 grains, and its value, at 60d. per ounce standard, Is. 10'29d. sterling. — Tate. The price of silver is usually more than 60d., and the value of the rupee consequently more than Is. 10-29(f. 7S THE THEORY OF BUSINESS. Chap. yi. withdrawal of the excessive issues. Alterations arising from the currency are known as alterations in the nominal exchange ; those froin changes in the desire to obtain bills in order to remit, as alterations in the real exchange. The latter, originating with trade, afford some indication of its condition. In the figures em- employed in last chapter, both imports and exports were '6.' They would then, of course, exactly pay for one another. The supply of bills would precisely meet the demand for them, with their price at pa/r. Iii actual business it need not be said that no such eiact balanc- ing occurs as is supposed in the illustration. In place of the single series there are thousands, all the trades composing which act independently and at varying terms of. credit. Very easily, therefore, may it happen that the merchants of a country, as a body, purchase from other nations more than they sell in return, and con- sequently leave themselves with a balance to pay. The Also the obligations to other countries being excessive, importers bm"owfnff discover that- more bills are required than are on offer.; ofinterna-'^ unless they succeed in obtaining a biU they may be debtedness ^^^der the necessity of sendingwhat they owe, as money. Sending money,' however, entails considerable expense ; at all events freight and charges, possibly a good deal besides. Before having recourse to such a measure, re- mitters (importers) will bid higher for any biUs that are to be had; bills being claims for money of the kind required and already delivered: Should premium on ' Foreign coins frequently command a premium in this market. Bussian gold coiijs, for example, are often bought above their bullion value to send to Eussia. FOREIGN EXCHANGES. 79 coin, freight and charges, come to two per cent., then Chap. vi. so long as bills can be bought below two premium, it is the interest of remitters to purchase. Instead of im- ports being supposed excessive, it may happen that they are deficient, and then bills, in "place of meeting with eager enquiry, fall to a discount. Holders (exporters), rather than incur the expense of bringing money owing them from the foreign country, consent to take less than the full amount. From these considerations the limit to the range of the prices of foreign bills is evi- dent. Speaking only of bills payable at sight and in the same currency, the variation is restricted to the par, adding or subtracting cost of transmitting bullion, as the case may be. All currencies, however, are not even of the same metal, (jrold is employed in this country ; in Hamburg silver is used. The difference hereby introduced considerably extends the possible range of price. 'When a bill on Hamburg is to be sold in London, if silver is at a premium in England, those who have claims on Hamburg are able to exact this premium from the purchaser of these claims by raising the price of their bills ; that is to say, the buyer .... will receive less marks for his pound sterling. If, when silver is not at a premium, he receives thirteen marks and a quarter for his pound, as the price of silver rises, he wiE receive less ; for instance, bnly thirteen marks and an eighth." The exchange, when the prices of bills on foreign countries rise above par, is said to be unfavourable to a country, and favourable when they ' Gopchen's Theory of the Foreign Exchanges, now the standard work on this subject. 80 THE THEORY OF BUSINESS. Chap. VI. What is called an unfavour- able ex- change is soinetimes reaUy un- fayourable. fall below. The terms faTOTirable and unfavourable are relics of tbe exploded theory wliicli ascribed benefit to preserving a ' balanxje of trade,' and to selling more to other countries than was bought from them, in order that a balance might be left due, which it was assumed would be remitted in cash. Merchants who receive the premium when the exchanges are adverse, as well as those who pay it, belong to the same country. When bills on France are scarce, the premium they command goes to exporters in England. What is called an un- favourable exchange is therefore so far not unfavourable to the country, only to one class of its merchants. The terms in question, however, as it happens, are not alto- gether inappropriate. , An exchange called unfavourable on a theory now found to be erroneous, is in some measure really unfavourable, in the sense of transfer- ring to consumers in other countries a share of the result of British industry. The high prices of bills may indicate excessive importation, evincing great eagerness on our part to obtain foreign products, and on a prin- ciple already advanced, a larger share of the advantage of a trade will in consequence be transferred to foreign countries, that is, to consumers there. Those ,who pay the premium on bills, still pay it to merchants in this country, but when bills continue high-priced long enough to admit of the premium being taken into account as profit, these merchants are forced to part with it to foreign consumers. Exporters (who get the premium on selling their bill) will then be compelled by competition to sell their exports so much the cheaper to foreigners; and importers (who pay the premium) FOREIGN EXCHANGES. 81 will charge more for the commodities they import, to Chap. vr. make up for the loss, and thus levy the premium from consumers at home. The tendency, then, of a continuous unfavourable exchange is to transfer a portion of the benefit of a trade from consumers in one country with the adverse exchange to consumers in the other. A favourable exchange has of course the opposite tendency. With that, exporters of British goods, having to dis- pose of their bills at a discount, make up the loss by charging foreigners higher prices for the commodities they sell them. The bills in question are sold in this country to importers of foreign commodities, who, buy- ■ ing them cheap, can afford to sell their foreign products cheaper to consumers here. An unfavourable exchange in one country indicates a favourable exchange and cheap bills in some other ; excessive indebtedness in one necessarily involves the opposite condition in others. To proceed to details : the prices of foreign bills are Details of quoted in the daily press and elsewhere, as follows: — ters. CoTTESE OF Exchange, March 17. Amsterdam, short, 11 15^ to 16 Calcutta, 2s. Id. Ditto, three months, 11 17|- to J Canton, 4s. 7d. Antwerp and Brussels, ditto, 25 47 J Trieste, three months, 11 80 to 85 to 50 St. Petersbui'g, ditto, 35d. to i Hamburg, ditto, 13 7i to J Copeuhagep, ditto, 9 10 to 12 Paris, short, 25 20 to 25 Madrid, ditto, 49 to| Ditto, three months, 25 50 to 55 Messina, ditto, 25 60 to 65 Frankfort-on-the-Main, ditto, 119^ Lisbon, 90 days' date, 52| to | to f Hong Kong, 4s. 7d. Vienna, ditto, 11 80 to 85 Shanghae, 6s. 5d. Some of these quotations, it will be seen, are in foreign money, others in sterling. A coin of one of the G 82 THE THEORY OF BUSINESS. Chap. VI. The same quotation serves as the expo- nent of an exchange against one country and in favour of another. two countries concerned has in eacli case been selected, and is employed as a measure for expressing Tariations in the prices of bills — ^tbe articles bought and sold. That coin is not named, but is implied in every one of these quotations. The country whose coin has been adopted is said to ' give the certain.' Between Britain and India the rupee is chosen. Thus ' 2s. Id.' appear- ing in this country means that this amount of sterling win purchase a bill here, giving claim to a rupee'in India; and when the quotation appears in India it means that the ujinamed coin (the rupee) will there purchase a bill on this country for 2s. Id. "With France the sovereign is the measure, and therefore does not appear; the quotation consists of a varying number of francs and centimes. Britain, in this instance, gives the certain, as also do some other European countries ; this country, on the other hand, receives it from several. In deter- mining whose money shall be quoted and whose used as the measure, there is no obvious principle involved. Usage has probably arisen from convenience at some early period. Although the selection of the coin of one country instead of the other is somewhat arbitrary, a particular currency, once selected, continues to be used as the standard for both countries. A debt owing by a merchant in one country to a merchant in another, may be discharged either by the indebted merchant buying a bill in his own market and sending it to his correspondent, or by instructing his creditor to 'draw' upon him, the 'drawer' selling the biU thus created, in his own country. So long as the premium on billa in the one place and the discount on them ia the FOREIGN EXCHANGES. 83 other, or conversely, are the same, it is immaterial which Chap. vi. plan is adopted ; otherwise, one being more advan- tageous, as both are equally available, it will be selected. Suppose, however, that biUs in the one are at a premium and at a corresponding discount in the other, then to express this state of the exchanges, the same quotation will appear in the markets of both countries. Here, ■ sterling, and bills for foreign money, seek each other. When claims for foreign money are scarce, that is, when this country has comparatively little to receive, probably from having exported little to others, much sterling must be given to obtain such claims or bills ; and to indicate this, the quotation, when of the kind in which pounds, shillings, or pence are quoted, and form the varying element, will be high ; with India, for ex- ample, 2s. \d., 2s. 2d., or more. In the foreign country its money and bills for sterling seek each other ; then, when this country has less to receive than to pay, ^merchants in the other wiU have more to receive ; biUs in their hands on England will be abundant and cheap. Abundance and consequent cheapness will manifest it- self by claims for more sterling being offered for the native coin, say bills for 2s. Id. or 2s. 2d. for a rupee in coin; likewise requiring a high quotation. Thus the same figures serve as the exponent of an exchange against one country (England) and in favour of another (India). A simple rule of interpretation suggested by the pre- xhe lower ceding is that, speaking exclusively of exchanges made ?n stSg in sterling, the lower they are the more favourable for ^J^^ England, whether quotations appear here or at the other ^IJ°™^°}^ side ; every advance indicates an unfavourable turn, and ^*"'^' G 2 84 THE THEORY OF BUSINESS. Chap. VI. a fall the opposite. Thus an Indian quotation of 2s. Id., or of one on Shanghae of 6s. 6d., is more favourable than of 2s. 2d. and 6s. 6d. respectively. Then of exchanges quoted ynth foreign money, the higher they are the more favourable for Britain, and also whether they appear here or abroad. Simple inspection of quotations will not enable one to pronounce the exchange favourable or the contrary. It is necessary to know further, what is par ; for instance, to be able to pronounce the Indian exchange of 2s. Id. favourable or the reverse, it must be known that (at the present price of silver) Is. lie?, is about par. Then applying the rule for interpreting, it appears that bills on India bear a high premium ; in other words, that the exchange is against this country. Frequently the knowledge whether the exchanges are rising or falling is aU that is required, and this can be obtained by simply comparing the quotations of one day with those of another. The premium, on foreign biUs may be so high as to render means other than purchasing them preferable for discharging debt. The debtor might send goods to the foreign market for sale there. He wishes to obtain command over foreign money ; purchasing a bill is one method of obtaining it; selling goods, another. But the very cause which makes bills scarce and dear is likely to be one which prevents the profitable export of commodities. The scale of prices in the country is probably too high for this. Did the prices of goods oi any kind whatever admit of their being sold to advan- tage in a foreign market, there would not long be any The pre- mium on biUs may- cause a drain of money. FOREIGN EXCHANGES. 85 lack of bills. Persons exporting sucli commodities Chap. vi. would speedily appear as sellers of biUs drawn against them. Although it happens that no goods can be profitably exported, engagements entered into with other countries must still be met ; and, to meet these, bullion is frequently found the most advantageous, possibly only the least disadvantageous, remittance. Of great value, it is very effective in cancelling debt, and from its un- bulty nature the cost of transmission is trifling. In describing the export of bullion as disadvantageous, it is not meant that it is so to the immediate exporter, who may be a banker or bullion dealer employed by merchants, who find they incur less loss by paying him a commis- sion than they would by sending bullion for themselves. But his charge, perchance levied as a premium on the bill drawn against the exported metal, may fall on the importing merchant as a penalty for having misjudged the requirements of the market he professes to supply, staying his hand, and, at the same time, stimulating exportation on the part of those who pocket the premium. Whenever prices in a country are very high, in other words, whenever the value of its money is low, it may ' prove profitable to export bullion ; it wiU necessarily do so in Britain, whose money or ' sovereigns' and gold are of the same value. Saying that prices here are high, is only another way of saying that the value of bullion is low in England. We are, at this point, within sight of the link between prices and the bank rate of discount ^ This qualification is needed, because the ' value of money' is not always the same as the ' value of gold.' of bullion. 86 THE THEORY OF BUSINESS. Chap, yi. or interest. As money, the export of which is caused by the condition of prices, is frequently procured by borrowing, the resources of lenders are trenched upon. This subject is more fully discussed afterwards. Arbitration Calculations as to the advantage of sending away gold and silver involve the prices of bills of exchange, and of the metals in the respective markets. Every Wednesday there is furnished in the City article of the 'Times' a statement of the terms on which operations in bullion can be conducted. Sometimes it is mentioned that in Paris 'the quotation of gold is about 2 per mille premium, and the short exchange on London is 25*5 ; it therefore appears that gold is nearly 7-lOths per cent, dearer (i.e. more valuable) in Paris than in London.' As to the premium on gold in Paris, it of course favours the export of gold from this country. Those who send gold equal, say, to a sovereign, get its full equivalent in French coin, and 2 per mdlle, or 2-lOths p&r cent., over and above. The equivalent for the sovereign being 25'1 7, the premium gives about 5 centimes more, making the exchange for a sovereign 25'22. The quotations next mention that the ' short exchange ' on London is 25'5, intimating that bills, payable in London immediately, are at a discount in the French market. When their . price is at -par, it takes 25"17 to buy a bill there on London for a sovereign, whereas in the state of the bill market 12 centimes less than this will purchase such a bUl. Any one in Paris remitting to England, caU, with his French money, which he ' remits,' purchase a bill for a full equivalent in English money, and have a large per- centage over and above. Twelve centimes on one pound FOREIGN EXCHANGES, 87 gives twelve francs, or nearly 10s. (that is, onp-lialf per Chap. vr. cent.), on a hundred pounds. The quoted rates therefore show a double inducement to engage in exchange operations with France. In the first place, bullion fetches a large amount of French money; and in the second place, that money goes a long way iu buying bills in France. Adding together the 2-lOths premium obtained on selling gold, and the 5-lOths (10s.) discount on bills, we have 7-lOths, the gain on the operation.' The difference of currencies in the two countries com- plicates the matter considerably, and renders arhitration necessary. If both countries used sovereigns, and bills were 2 premium in the market of either, gold could, without any elaborate calculation, be described as being 2 per cent, dearer (i.e. more valuable) in the one country than in the other. Vast amounts of silver have been imported into this Silver is ^ -n T • 1 1 p f> exported to country from France during the last few years, for India, transmission to India and the East, to pay for goods sent by these countries westward. Gold is frequently sent to Paris as the best means of purchasing that silver, and not to purchase, in the French market, bills on this country. There need then be no bills in the transactions. As to the profit yielded by such dealings, when gold is bought in London at-3L 17s. lOd. per ounce standard, and sold in Paris at 2 per miUe premium, it would produce (omitting charges) an exchange of about 25*22 ^ per pound sterling ; that is, ' ' '65 per cent, either way causes a, flow of bullion.' — Too/ce's Prices. Gold and silver being at par, 25-10 to 121 will take away gold; it needs 25'37^ to 40 to brinff it; French gold coins being melted at a loss. ' Par is 25' 17: the premium of 2 per mille adds two one-thousandth THE THEOET OF BUSINESS. Chap, yi. jt would yield this amount of Frencli money in France, as tlie means of purehasing silver there. The considera- tions that affect the remainder of such transactions are, the price of silver in Paris, that is, the terms on which the 25*22 can there be exchanged for silver; and the price at which the silver, when obtained, can be sold in London; cost of transmission both ways has to be deducted. A credit is also sometimes created in France, for the purpose of purchasing silver, not by sending gold or other goods, but by purchasing, in this country, bills on Paris. What is called a favourable exchange of course facilitates transactions of this description, for when bills on France can be bought cheap in England, more French money is thereby obtained with a given amount of British money, wherewith to buy silver in the French market. Other elements in this calculation are, as before, the price of silver in France and in London, also the cost of transmission one way. To state this result precisely in figures: English money is remitted to France to purchase silver there at a greater advantage when the French exchange is 25"2p than when it is 25"10 or 25"5, and the operation is facilitated when silver is at a discount, i.e. when gold is at a premium, in France, and at a high price, say 62c?. per ounce, instead of &ld. or 60c?., in the London market.' Grold is generally more valuable in France than in England, and silver in England than in France. The parts or 5 ceptimes ('02517 x 2) for each pound, making the exchange (25'17 + 5)25-22. • Silver bought at the French mint price, and sold here at 61(Z. per ounce, yields a gross profit of 1§ per cent.. Par is about 60(Z., and consequently 61(f. giving ^th more, yields this percentage. rOEEIGlf EXCHANGES. 89 exchange with France and the continent, as a rule, is Chap. vt. agaiast England, that is to say, in the British market bills on these countries usually command a premium; for example, the French exchange is commonly less than 25"17. The explanation of these facts is that this country distributes the new gold arriving from the mines to the continent ; France pays for some of her portion with silver. For some years past, as already stated, she has been substituting new gold coins for much of her silver currency. In 1849 that currency consisted almost entirely of silver. It was estimated at that time that the total amount of French currency was from 100 to 120' millions sterling, only 3 millions being gold. Since 1849, however, and between 1864 and 1863 only, no less than 89 millions sterling of silver have been sent to India, a large proportion of which was procured from France, in exchange for gold. In the series of causes and effects just mentioned, the prime mover is the East. The exchanges with India and China ^ have been frequently at a point favouring the import of silver into these countries ; that is to say, the Calcutta exchange comes quoted 2s. Id., 2s. 2d., or higher, and the Chinese exchanges, being also made in British money, come quoted high. The demand for sUver for shipment to these markets sends up its price ' M. Chevalier. Mr. Tooke accepts 100 millions as the amount. ' Sir John Bowring, in the Fortnighthj Review, states that in a report presented by Keshen, ' once Viceroy of the Two Kwang,' to the Emperor of China, it is said that ' the foreign money brought from outer nations is all boiled and reduced by quicksilver. If you wrap it up and lay it aside for several years without touching it, it will be turned into moths and corroding insects, and the silver cups made from it by these strangers will change into feathers ! ' ' Some one suggests,' remarks Sir John Bowring, ' that 90 THE THEORY OF BUSINESS. Chap. VI. In mming countries bills carry a premium. The exchanges equalise the value of gold and silver. in London, attracting supplies from tlie continent. High quotations of the eastern exchanges indicate, in eastern countries abundance of bills, on this, implying that exports hither leave a balance for us to pay ; and silver is sent as the article whose value is at the same time lowest here and highest there. In gold and silver producing countries the exchanges are, as a rule, at specie point'; that is to say, bills on other countries carry premiums equal to the expense of conveying bullion to these other countries. Were it not so, it would be more advantageous for persons, for instance in Australia, who had remittances to make to other countries, to buy bills, say on England, than to send bullion. In AustraHa a bill on Britain for 1,000Z. gives the owner of that biU command over 1,000 sove- reigns already in this country, whereas the merchant in Australia who packs up and exports an equal number is no better off after they arrive here than the purchaser of the bill, and he has had freight and charges to pay, instead of postage merely. In relation to the continent, England is a quasi gold-mining country, which accounts for the fact, as far as it is one, that the exchanges with continental countries are, as a rule, unfavourable to Britain. The exchanges equalise the value of gold and silver everywhere, and secure that uniformity which is of such consequence to' money in its twofold capacity of measure and medium. Cost of transmission limits the Keshan had read in our sacred boots of out treasures " that moth and rust do corrupt," and of the "riches -which make to themselves wings" and flee away.' FOREIGN EXCHANGES. 91 difference in tlie value of the precious metals tliat can Chap. vr. permanently exist between countries. Rising and fall- ing in value like wheat, cotton, and other commodities, these metals flow to the market where they are in greatest request. Any difference in the value of money between commercial countries makes itself felt in the respective biU markets : hence the significance and im- portance of exchange quotations ; they indicate what tendency there is at any moment to an outflow of money to o1;her countries. It is necessary to say that in countries which produce Bullion is Ml 1 T Tj- not always gold or silver these metals are exported as commodities, ' money.' and are not necessarily drawn from the monies of such countries. The exchanges of mining coxintries, though unfavourable, may not be unfavourable in the sense of transferring a larger proportion of the advantage ac- cruing from their foreign trade to others. As a quasi mining country, Britain herself has bullion in the hands of dealers, which is regularly bought and sold for money, without itself being money. 92 CHAPTEE VII. WAGES AND SALARIES. Chap. VII. WiTH regard to tlie stocks or capitals used in business, tlie destination of the one wMcli lias arrived at retailers' lias alone to be considered bare. This stock bas indeed already been brought under review, as one of the series required to carry on production. If we compare the entire series to a tree, then we have now to enquire more particularly what becomes of the fruit. The des- tination of the retailer's stock has been unfolded so far as to have placed it, or rather the money which could buy it conveniently, at the disposal of the groups or trades whose united efforts serve to maintain supply. Each of these trades obtained, as gross profits, money ; and the amount received by them, as a body, suf&ced to purchase from shops the whole of the stock in questioii, Gross, or in the form of completed goods. What has at this point is resolved to be done is to ascertain how the money which each trade earns is shared among its members; to search more minutely into the apportionment of the 2, 1, 1, 3, 1, and 6, obtained by the groups respectively; and to find the reason why the persons or classes composing each, receive their portions of these sums. As to the constit- uents of trades, they are found, as a rule, to comprise at least two classes, the members of one of which usually provide the whole of the stock or capital, and members WAGES AND SALARIES. 93 of the other enter into engagements with the ' capitalists,' Chap. tii. to work and to receive stated payments for so doing. Settling the amount of such payments or ' wages,' is in effect apportioning the trade's share of the result be- tween two of the classes composing it. Take the trade of the dealer or warehouseman to represent the other trades of the series, and let us add three ciphers to the figures hitherto used, in order to form numbers better suited to our present purpose. Eeceiving, then, 11,000?. (in place of '11') from retailers for stocks furnished to them during the past month, and having to pay manufacturers only 10,000Z. for the stocks bought to replace those thus disposed of, the dealer is enabled, as before mentioned, to arrest 1,000L on its upward course ; a sum which constitutes his gross profits, his means, indeed, as already shown, of securing com- pleted goods. The 10,000L, which he pays for stock, is not aU his expenditure. That stock, when bought, has to be furnished to town and country customers, to order ; or, stating this differently, it has to be moved a stage on its journey towards completion, and this renders suitable premises, and also the services of many persons, necessary. The farther outlay incurred for rent, wages, and salaries, takes, say, 750Z. of the 1,000L of gross profit, which, with the 10,000L, makes the dealer's entire outlay 10,750L This 750L, which we take as typical, forms the subject of this chapter ; the re- maining 250L, of the next. The 7501. is devoted, mainly, to paying wages, but into rent. other expenses of various kinds attend business, and this sum represents the source whence 'all charges are 94 THE THEORY OF BUSINESS. Chap yii . defrayed. The principal of these other expenses is iuilding-rent, which, speaking correctly, is profit ; and rent proper, that is, all payments for monopolised agents ; for example, patents, copyrights, and grownd- rent. Premises, which cost 2,000Z. in building, may let in Cheapside or Eaton Square for more than 1,000?. a year. The same premises in the suburbs, or in the country, would probably not let for more than 2001. An arable farm in Essex fetches a greatly higher rent than another among the hills of Sutherland. Earming-rent is the type of the outlay now spoken of; but the term. rent, as we use it, also includes every other expense in- curred to secure the assistance of agents conferring a differential advantage on their proprietors for the time being. Wages, Quitting minor charges, we come to the considera- tion of wages' — payments usually absorbing by far the largest portion of the 7501. under consideration. The warehouseman and all other employers have to pay very different amounts of this 760Z., or of sums correspond- ing to it, to secure the services of the persons they Employ. Eor example, they give messengers and porters fr6m 15s. to 50s. a week, and lads from 6s. to 15s. It is not found that services command wages rising in proportion to their disagreeableness. A chimney can be swept for Is. or Is. 6d., and dust removed for less ; whereas a word or two of advice from a lawyer or a physician requires, in all probability, the disbursement of gold. The wages of certain classes of operatives — mill hands, and many others — are known to fluctuate considerably, often between one week, or even one day WAGES AND SALARIES. 95 and anotter, wliile those of other classes continue on a Chap , vii. scale in some measure fixed. Underlying and account- ing for differences of wages and salaries, are general principles more or less obvious. In many cases wages depend directly on the competi- which are tion for employment on the part of worlrpeople and the lated directly bv demand of employers for labour. The simpler a work the state of to be done, the larger will, of course, be the number of maricet, persons qualified to do it. Throughout the community there are many different industries and professions, each requiring certain qualifications on the part of those who would engage in them. Workers possessing the requisite qualifications, form, as it were, classes by themselves, and enjoy monopolies against one another, and against the masses, who, having no aptitude for any avocation in particular, are excluded from all depart- ments in which specific knowledge is needed. Skilled occupations are, so to speak, more or less strictly pre- served. The persons composing the large class outside all are left to compete among themselves for employ- ments rejected by skilled workers. Those outside must take what others leave. The result is that the rate of payment for performing the most disagreeable duties, often requiring no skill to render them, is not only not higher, but actually often lower than for performing others much less unpleasant. Frequently, or rather ordinarily, there are gradations of skill required within a single industry, and consequently there ' are in it different rates of earnings. In the needle-manufacture, wages for a day's labour range, it is said, from Qd. to up- wards of 20s. The distribution of workmen, according S6 TH-E THEORY OF BUSINESS. Chap. VII. to their capabilities, which gives rise to such differences of rennmeration, is one of the benefits conferred by co- operation Tinder its phase of divided industries. By each worker being enabled to devote himself to operations for which he is best qualified, the productive energy of the community is exerted to the best purpose. What waste would be incurred if the skilled artisan, capable of doing some work worth SI. or 41. a week, had to do what an inferior workman would gladly do for one-half the sum, or a boy for less still. Such misdirection of energy would be like setting an eminent mathematician or bar- rister to teach children the alphabet, or the winner of the Derby to draw a waggon. Or salaries, The term salary, like wages, is applied to the re- which are , . « , . i _l j_ ■ • wages set- muneration oi personal services; but to remuneration ciitom. settled by competition less free than is frequently the case with wages. Salaries are often considerably, and sometimes very much, above the amount that would be assigned by the perfectly free competition of all quali- fied competitors. Salaries paid by Government,- by merchants, bankers, and others, to persons whom they employ, are determined in large measure by the custom of particular occupations. Usage prescribes some rate of payment for a certain service. Additional applicants for employment are rejected, and not — like competitors for wages in some departments — accepted at a con- tinually diminishing rate. The custom influences a majority of employers in different branches, and the high scale of payment is preserved in each mainly by opinion. A minority may disregard opinion, and obtain services at a rate somewhat below the average ; WAGES AND SALARIES. 97' only, however, so long as they continue a minority. Chap. vii. When nearly all depart from the customary rate, a new standard comes into use, and the dissentients cease to reap any differential advantage. The line of demarca- tion, separating salaries from wages, is by no means distinct, and it seems to be gradually growing fainter. The terms fees, stipends, &c. are applied to the re- muneration of professional services of different de- scriptions. The ranks of some professional men are guarded Or fees, still more strictly than those of skilled artisans and recipients of salaries. . Limitation of the number of competitors for employment is as necessary a condition of professional as of other remuneration being high. Medical men, barristers, and others belong to classes limited, naturally, by the difficulty of acquiring the knowledge requisite in practitioners ; and artificially, by indentures, diplomas, and various hindrances to en- trants ; then, speaking of those who have entered, the supply of service is limited by professional etiquette under various forms. Professional men, in common with all who enjoy monopoly, are able to command a much higher rate of payment than members of more numerous bodies ; the proceeds of, say an hour's, or a day's, work, for five minutes' advice. Otherwise stated, producers have to pay such men money which will pur- chase a large share of the result of industrial effort. Frequent attempts are made to introduce monopoly of some sort into branches of industry. The strike in the building trade, of a few years ago, is an. instance of an endeavour to do so. The demand made by those who H 98 THE THEORY OF BUSINESS. Chap. VII. took part in the particular strike alluded to was ' fewer hours' work with no reduction of wages.' The attempt was unsuccessful. Many trades are too extensive for their members to combine eifectually, and the specific knowledge needed to engage in them is too easily ac- quired to admit of the limitation of numbers. The utility The foregoing considerations suggest several infer- of a service , . p • i -j • j ^i does not enccs respecting wages ; tor mstance, it is not the w^es. ^ ' ^ utility of a service which determines altogether, or even mainly, the scale on which it shall be paid. If there are many qualified competitors willing to perform some service, the wages will be low although it happens that ' the service is absolutely indispensable. Nor does re- muneration depend upon the general ability of the "candidates for employment, but upon the number of competitors qualified to do the particular work required. In this densely peopled country, where every avenue to preferment is thronged, many skilled workers, possessed of specific Iniowledge which might be turned to good account in other spheres, may have no alternative ex- cept to labour as members of crowded, and consequently low-paid, industries. It is unreasonable to expect pay- ments for services to be made on any other principle than has been indicated. An employer, requiring some work done, naturally refuses to give more than will secure the services of competent persons. He is not to blame because a University graduate, or a skilful artist, ofiers himself as a candidate to fill what may be a subor- dinate position. The need for his doing so arises from the overstocked condition of the labour market. Further, and finally, as additional candidates for sala- WAGES AND SALAEIES. 99 ries are not accepted, it may happen tliat persons who Chap, yii . are little, if at all, inferior to those selected to fill im- portant posts, find themselves under the necessity of resting content with positions where the emoluments are very much smaller. 100 CHAPTBE VIII. PROFIT. Chap.viii. Passing from wages we proceed to net profit,' tlie re- maining element of gross profit. Receiving 11,000L at Net profit settlement, for goods sold, the wholesale dealer gave lOjOOOZ. of this sum to manufacturers for fresh stock ; he also paid 750Z., chiefly as wages, thus leaving 250?., which forms the capitalist employer's own share of the result. A net profit of 250/!. a month, on a ' capital' of 10,760L, gives a yearly return of 3,000L ; being 'at the rate of nearly 28 per cent. As to the particular services for which the capitalist dealer receives this 250L, it has already appeared that advances are requisites of productive operations. Paying 10,000?. and 750Z. in the manner explained are, on his part, acts of the nature of advances. He virtually agrees to defer fruition, thereby exercising self-denial,_ when he mates over money, or claims for completed goods, for stocks which cannot be fit for consumption until a future time, and likewise when he makes it over as wages to those whom he employs. As already shown, the 10,000Z. given for stock eventually becomes income Interest, to manufacturers, spinners, and others. Interest is the name of the portion of net profit which remunerates ' Our net profit is the 'profit' of economists; gross profit is a term of business, but not of science. PROFIT. 101 for abstaining from consuming. Such abstention is Chaf.yitt frequently tlie ground on wMcli interest is received, and net profit its source, when the recipient gets it, for in- stance, upon a deposit from a banker. This element enters largely into the profits of trades in which much fixed capital is used; also of those, like wine mer- chants, whose goods require long keeping to bring them to perfection. The 25,0L further consists of remuneration for superin- Skilled tending and directing industrial operations. A large amount of it is the recompense for headwork. Aug- mentation of the quantity ' of the produce and im- - provement of its quality are results consequent on the more assiduous, possibly more judicious, application of effort secured by superintendence. Recently we saw six men and three horses endeavouring to remove the ponderous gnarled trunk , of a felled tree. Ignorant of 'piechanics, these men spent the greater part of a morn- ing to little purpose, and, after all, contemplated giving up in despair. Had some engineer so directed them as to enable three, with two horses, to remove the huge mass, his service would be like that of every dis- coverer of a more effective mode of applying energy, whether it assumes the form of extending the know- ledge of a handicraft, or of applying science to the arts. Society, after allowing, as remuneration for the skill imparted, anything short of what it secures by the economy effected, is a gainer ; the engineer might have had two of the men to work for him in return for his superintendence, and the community would stiU have benefited by the transaction. 102 THE THEORY OF BUSINESS. ChafVIII . The third, and final, constituent of net profit is re- Audinsur- 'muneration for risJc. Inseparable from business, it is of ance, ^ kinds too numerous and varied for mention. In com- merce ' many are tbe slips that occur between the cup and the lip.' The more obvious dangers are, failure of correspondents ; a fall of prices ; dishonesty of servants holding situations of trust ; fire ; shipwreck ; but there are a thousand and one accidents incapable of being foreseen or guarded against. When risk is great, in fancy trades for instance, it is the insurance element of profit which rises. The three, ' deferring enjoyment,' or ' abstinence,' ' superintending,' and ' incurring risk,' enter into the complex service, of which net profit is the remuneration. Assigning each of these three its portion of that profit, the portions are respectively, interest, wages of direc- tion, and insurance. It frequently happens that the Which pos- parts of the complex service are rendered by dififerent siblyare ^ ^ . , . "' received by persons. Consequently different persons receive the shares different . ' persons. constituting net profit. For example, the practice has become general for outsiders, bankers and others, to furnish a portion, or the whole, of the capital required ; these obtain some, or the whole, of the interest portion of net profit. Lenders really become members of bor- rowing series, and in ' discount ' are assigned shares of industrial results. The amount of the 250Z. which goes as interest, depends of course on the amount borrowed, and on the terms on which loans are effected. Should one-half of a capital of 10,000?. consist of advances obtained at six per cent., 25L of the monthly net profit, wiU pass to lenders as interest. The remark has already PEOFIT. 103 been made, that purchases are often effected on long Chap.viii. credit. In such cases, advances are not the less procured, though they are obtained from other trades in the same series -with the borrower, and not from outsiders. In- terest is paid under the form of forfeiting the discount given for prompt cash settlement. In such instances, interest is, in part at least, received by one person, and the remainder of net profit by another. Again, fre- quently one obtains only the wages of superintendence ; for example, the manager of a public company, or an acting partner who contributes his skill and energy but no capital. The insurance of risks of various de- scriptions forms a line of business by itself. Other things being equal, the rate of profit in all Profit ,mny businesses, through' competition, tends to equality. Permanent differences in respect to profitableness exist however, owing, for instance, to monopoly in some form or other. Certain businesses reqiiire large capitals — floating capital, like produce, home or colonial; or fixed, like machinery — to carry them on. These enjoy a species of natural monopoly. Competition is restricted to large capitalists, hence the rate of profit earned in them may remain above the average. High profit, on account of monopoly conferred by the largeness of the capital required, is probably of unfrequent occurrence since the formation of companies on the joint-stock principle. Small sums can now be easily united, and a large capital formed. Fluctuations in prices, and consequently in the profits of individuals, neither increase nor lessen national pro- fits, except when dealings are with other Countries. As 104 THE THEOET OF BUSINESS. Chap.VIII. On fixed capital the law of profit may be for a time sus- pended. Keview and summary. gross profit is a portion of tlie produce of industry, evidently one person, or class, can obtain more, only by others getting less. The amount of produce is of course supposed itself to remain unchanged. The signifi- cance of prices, as indications of alterations in national wealth, is spoken of hereafter. Here it may be men- tioned parenthetically, that competition equalises ; but cannot cause gross profits to vanish, by driving them to zero. The law determining the rate of profit on fixed capi- tals is less speedy in its operation than the law de- termining the rate on floating capital. Some kinds of fixed capital are very durable — houses, railways, docks, roads, bridges, machinery ; and, once created, they do not admit of being unmade. However poorly they answer the expectations of the capitalists, they will be turned to use until they wear out, provided they yield any return beyond the cost of working. Every undertaking which renders labour more effective, caus- ing nature to do more, and requiring, possibly, man to do less, is beneficial to the community, whether it pays the investor or not. Many public works — railways for instance — in this country have ' proved unprofitable to individuals though social gains. From what has been advanced, in last chapter with regard to wages, and to net profit in this, certain conclu- sions may be drawn. It appears, among other things, that it is a wrong view of the matter which represents profit as ' money ' made by one trade at the expense of another. Trade profits are shares of products created by the co-operation of many persons, and they, in PROFIT. 105 profit, reap a benefit resulting from their own and others ' CHAr.viir . productive efforts. Selling goods for more money than was paid to obtain them, thereby apparently withdraw- ing money from others, is only a plan by which what is produced is conveniently distributed. The act of selling at au advance of price is commonly called making profit. As gross profits, in large measure, consist of existfcig commodities — in the case in hand, of shares of 1,300,000 yards of calico — what is called making profit / is rather taking it. And it fm-ther appears that commerce, or the inter- inter- change of equivalents, is not the cause^^ of profit, in the jg not the sense that, if there were no buying and selling, there profit. ° would be no profit. Giving 20s. for a sovereign is an exchange of equivalents, but dealings of this kind can never create a disposable residue or surplus. Inter- changes, though powerless to create profit, are of un- speakable benefit, in enabling each producer to obtain for what he produces the kind of articles he desires. The French Economistes drew an erroneous conclusion from their observation that, in purchasing from foreign countries^ equivalents have to be given for everything received. Foreign trade, they said, is quite a secondary matter, for it can never increase the country's wealth ; overlooking the peculiar advantages which interchange confers. Under existing arrangements, producers obtain the Profit is not commodities they require for personal use, not by di- mous with rectly producing them, but by producing others which ' Profit in agriculture is earned ' because human beings can grow more food than is necessary to feed them while it is being grown.' — J. 8. Mill. i06 THE THEORY OF BUSH!fESS. Chap.tiii . serve to procure yrhat they want, A trade is said to be profitable when its produce enables those who deal in it to command mucb money, and, through it, much of other articles. Now, in this sense,, a branch of business may easily be unprofitable to those engaged in it, and yet be beneficial to the country. A harvest from very abundance may depress the prices of grain, that is, may lessen the power of those who deal in §rain to command other things, injuring the grain trade all the while its operations are highly advantageous for the community. On the other hand, high profit to one trade may not indicate profitableness except to itself. Profit, as defined, is not synonymous with advantage or benefit to the whole community. Wages and net profit have been shown to come from one source, that is, from the same supply of completed goods ; but they are the remuneration of acts differing as to time of performance, and quality. The net profit (of 250Z.), it will be seen, is received by dealers, for what they did during the past month, though it is spent during the current month, along with the 750L which will be paid, as wages and salaries, to persons producing a, future result. It has already been explained that the services for which wages and profits are paid differ as to quality, profit being the recompense for self-denial, trouble, and risk; wages, mostly for the exertion of muscular energy. Wages and net profit can obviously increase in two ways : the 1,300,000 yards may become 1,500,000 or more, in which case the recipients, both of the 760L and the 2501., are enabled to purchase more commodities ; 1 PROFIT. 107 or the distribution, merely, of the 1,000Z. constituting Chap.yiii . gross profit to our dealer alters, more than 250L going as net profit, and less. than 7oOl. as wages. The figures introduced in connection with wages and The figures ° ° used make net profit are meant to convey a notion only of the me* profit to '• '' _ wages, as source, nature, and mutual relation of the different con- anetathree; stituents of gross profit; not to represent that the proportion varies. proportion actually borne by net profit to wages is as 260Z. to 750L In reality the proportion borne by these paypients to each other varies' widely in different trades, and net profit would probably be found, on strik- ing a general average, to carry off more than we have supposed. Had the gross profits of the spinner been taken, instead of the gross profits of the dealer, net profit would have entered more largely than in the pro- portion of one to three, owing to the great fixed capital which the sphiner must provide. A considerable amount of his entire ' 3,000L' consists of reimbursement for machinery worn out, money which must, however, be passed on, as wages, to niachinists and engineers. If machinery wears out in ten years, then for every ten machines a loss equal to the price of one is incurred annually, which the 8,000Z. has to cover. With a view to throw yet another ray of light on the Profit can exist with- net profit, consider for the moment the pro- out moncv; portion of one of net profit to three of wages to obtain ' Dr. Leone Levi (Sept. 1866) estimates the wages earned yearly in the United Kingdom at 418,300,000^. sterling, and the whole . income of the country at 745 millions exclusive of incomes under 1001. ayear of others than members of th^vorking classes. This estimate would make wages about equal to net profit and rent united : the 1,000^. of gross profit would become one-half wages, and one-half net profits. 108 THE THEORY OF BUSINESS. CiiAF.Yiii . througliout tlie series ; then net profit will absorb in all rather less than 3,000 L of the monthly earnings amount- ing to 13,000L, and wages, rather more than 10,000L ; sums of money giving command, respectively, of 300,000 and 1,000,000 yards of calico. The recipients of the million yards, or of other goods bought instead, while consuming them as clothing and food, exert energy equal to what is required to produce another million, ivith three hundred thousand over and above. The pro- cess of consuming products and creating more than are consumed is continued month after month. Taking the calico series by itself, a million yards are advanced as wages, and a remainder, orsurplus, or wei profit, amount- ing to three hundred thousand yards, or their equivalent, is left for those who make the advances. Money issues forth, not to create profit but merely to enable the dif- ferent classes concerned, to secure conveniently their shares of the produce, respectively as wages and net profit. How the stream of money is fed ha^ already appeared. Instead of looking at the distribution o£ pro- ducts, consider profit as affecting the distribution of producers. The 1,000,000 yards, or their value, 10,000Z., advanced as wages, secure the labour of workers, for a period sufficient for them to produce 1,300,000 yards, worth 13,000?. Call the number of workers 130 ; then the assertion that capital yields 30 per cent, implies that 30 of the 130 men are placed at the disposal of employers. One hundred workers are, by implica- tion, able to replace the 1,000,000 consumed as wages, and 30 are left free to produce comniodities required by capitalists. This subject has now been dwelt on at PEOFIT. 109 sufficient length to render it undesirable farther to at- Chap.viii tempt to show that profit really consists of products, and might exist though there were no money. In the order of events, capitalists take the initiative. Capitalists Hoping to obtain, as net profit like the 250L taken as lead in (.■ji « I'pj T productive representative, the means oi purchasing luture supplies operations. of products, they set the whole machinery in motion. The dealer pays money to the capitalists of another trade higher in the series, for stock, and thereby trans- fers to them the option of continuing operations — an option which they transfer, in part, to the capitalists of a trade still higher, until eventually resources, called 6,0OOZ., reach growers of materials. Animated like others by the desire of profit, the capitalists who receive that 5,000L pay a large proportion of it to tillers of the soil, who furnish materials for another season's con- sumption, and in this manner operations are conducted without cessation. no CHAPTEE IX. WEALTH, CAPITAL, ' MONET. Chap. IX. Before proceeding furthei', it is desirable to form a clear conception of the meaning of Wealth, capital, and money, worda repeatedly used in tlie preceding, and continually occurring in business. Wealth. Of these terms, wealth, the most comprehensive, is defined as ' all useful or agreeable things except those' which can be obtained in the quantity desired without labour or sacrifice.' ' This definition embraces clothes, furniture, houses, and many things besides; scarcely, however, raw cotton and yam, commodities only ap- proaching the state of being useful and agreeable. But to individuals these and other materials constitute wealth, because they can be sold to procure articles strictly in- cluded in the definition. In practice the term is used in a sense sufficiently Comprehensive to include stocks in progress, as weU as completed goods. To be wealth, an object must be ' useful or agreeable,' whence it fol- lows that wealth may vary, owing to changes in peoples' feelings, vdthout the articles of property altering. Al- though goods themselves continue the same as ever, the ■ country's riches must be held to have lessened when the tide of fashion ebbs and leaves commodities, once capable of affording satisfaction, stranded on the beach. > J. S. Mill, Polit. Econ. toI. i. WEALTH, CAPITAL, MONEY. Ill Debts of every description are wealtli to tlie persons Chap. ix. to whom they are owing, but not to society. Being as much minus to some as they are plus to others, they cannot be included in an inventory of the nation's riches. Wipe consols, mortgages, et hoc genus omne, ' out of the national ledger, and you do not diminish the social wealth;- for though fundholders, receiving no more dividends at the Bank, may be ruined, taxpayers, who eventually provide these dividends, have as much more in their pockets as the fundholders have less. Foreign stock, held by Englishmen, counts as a portion of the riches of England, but not as a portion of the riches of the world. It appears from what has been said, that national and individual wealth are not precisely identical. Fluctuations in prices are not alterations in the amount of a country's wealth, but they may, and usually do, accompany and mark such alterations. Change of taste, rendering goods unsaleable, causes their price to vanish. Here the alteration of desire, to coin a word, wwwealths certain articles ; falling prices merely serve as the exponents of what has occurred. Misconception exists as to how a nation's wealth in- its mode of creases. Great Britain is often said to have grown very is not acat- • 1 T XT _j.- • _L • ■ J? J? tnlilatioii. rich, and the assertion, m a certain sense, is free from objection. Not, however, as conveying the notion that our ancestors, in remote ages, commenced to accumu- late a mass to which succeeding generations have gone on adding, year by year. At one time it was firmly believed that a hoard of savings did exist somewhere, but not now. Public works and buildings, the clothes being worn by thirty millions of Britons and Irishmen ; 112 THE THEORY OF BUSIXESS. Chap. IX. the food and apparel, mostly lield as stocks in trade by ■waretoTisemen, shopkeepers, and others, ready to be consumed during the next few months ; together with materials and machinery for furnishing more as these wear out — this is a list of what constitutes the bulk of England's vaunted wealth. As far as riches actually existing at this moment are concerned, this country will soon be poor enough. Twelve months wiU scarcely pass, before nearly all will have 'disappeared. A com- munity is rich, rather potentially than in the sense of really having ; a nation is wealthy chiefly as possessing, in its skill and energy, a latent power which enables it, with the help of costly machinery and other kinds of fixed capital, aided by natural resources, to furnish ample and steady supplies, whether for peace or war. An over-production of wealth can never occur : the fear of universal glut, at one period entertained, is groundless. But too much of some kinds of wealth may be created ; clock-faces are over-produced if not in proper propor- tion to the other parts; and, as the industrial machine is fully worked and at high pressure, too much of some things implies too little of others. Capital, The next topic proposed for consideration is capital, meaning ' the various commodities which constitute the stock in trade of the coimtry.' ' The aim of every capi- talist is to keep his capital at least undiminished ; the dealer refrains from consuming any portion of his 10,750L, but it will be observed that others to whom it is paid spend and consume the whole of what he so care- fully refrains from spending. Although thus treated, the ' Wilson's Capital, Currency, and Banking WEALTH, CAPITAL, MONEY. 113 dealer is represented as preserving his capital unim- Chap , ix. paired. It will be understood that ' keeping capital unimpaired' does not mean scrupulously storing tlie Though * prcscrv6(i articles composing it — as matter of fact the shopkeeper's unim- hosiery stock or capital wiU presently appear as articles co^uied of apparel being worn by consumers — but merely that capitalists set workers who use the commodities which make it up, to provide others in place of those they con- sume. That capital is kept up not by careful accu- mulation but by continual replacement, explains why countries sometimes recover so rapidly from the havoc caused by invasions, floods, earthquakes, or other cala- mities. Most of what is destroyed would have perished in the ordinary course of events, by being consumed as food, or worn as clothes. Not only do capitalists en- deavour to preserve their means intact, they try to augment them, and in such attempt they are encou- raged by public opinion, which, with reason, holds it desirable to enlarge the social resources. Every increase of capital means more calico, or other articles, for con- sumers. JSTo matter how remote the stock enlarged As income, happens to be from the state of completion, the crude contribution eventually arrives at retailers'. During the past century the capital of England has vastly in- creased, but what now exists is new, not the accumula- tion of ages ; just as the population of this country is very much greater in 1867 than it was in 1767, and yet scarcely one person of the present larger population was living a hundred years ago. There are physical limits to capital, consequently to the amount which can be paid as wages, profits, and rent. These extreme limits I lU THE THEORY OF BUSINESS. Chap. IX. are prescribed by tbe qtiantit j of products that, in the par- ticular condition of industrial knowledge, workers can create, with every available appliance brought into re- quisition — a quantity which, although it cannot be ascer- tained, must be specific. Let us, as heretofore, employ 1,300,000 yards of calico to represent that utmost pro- duce, whatever it reaUy is. The amount devoted as capital always stop^ short, sometimes far short, of its physical boundary. The margin, between the sum ad- vanced for productive purposes and the gross produce, which remains with capitalists, constituting their net profit, supplies them with the motive for continuing operations. How small a margin will induce persons as capitalists to furnish funds depends, in large measure, on the estimation in which a future good is held, com- pared with a present. In China, Turkey, and all coun- tries where life and property are insecure, the current rate of interest is very high ; evidence, however, not of prosperity, but that few consent to act as capitalists, and that they need a large proportion of the result to induce them to do so. All employment of capital involves the sacrifice of a present, for the sake of a future, good; and voluntarily to submit to a sacrifice requires an incentive. National differences in respect to being in- fluenced by the future are investigated by Mr. John Eae, ' a Scotchman resident in the United^ States,' whose book Mr. J. S. Mill has rescued from oblivion by quoting from it in his great work. In every country some rate of net profit must be the lowest which will call forth capital. This rate we have placed at 3,000^., out of gross proceeds amounting to 18,000?.; or of 300,000 yards of calico, out WEALTH, CAPITAL, MONKY. 115 of a total of 1,300,000. The 3,000L, and the 300,000 Chap.ix. yaids, cause the owners of 10,000L, and of 1,000,000 yards, to make them over, chiefly as wages, for the use of 'others; that is, to employ these quantities 'as capital.' Unless either the gross produce is augmented, or capi- talists become willing to accept a smaller margin, no more than the 10,000L, or the 1,000,000 yards, can be used productively. Granting the assumption that gross proceeds cannot be increased beyond 1,300,000 yards, it follows that if more than 1,000,000 were paid as wages, the margin or profit is diminished: the rate falling, funds are withdrawn, probably by others than those who made the augmentation, and eventually the effect of adding to capital is not to increase the amount, but merely to change the persons who 'employ what is used. Fresh savings, by augmenting the wages fund, always benefit persons employed : such savings are tantamount to gifts — say of 100,000, yards, more or less, according to their amount — to the recipients of wages, who, however, gain at the expense of employers. The doctrine, that there is a limit to capital, does not imply that a time ever arrives when individuals become unable to add to their resources. Even in Holland, where the stationary state has, it is thought, long been reached, some are always growing richer, and employing larger capitals. But the doctrine teaches that, in the absence of im- provements in the arts, others remove about as much as these add. Different departments in this country recognise, in their own way, the limit pointed out. The farmer knows to what height it will pay to cultivate land ; also that 116 THE THEORY OF BUSINESS. Chap. IX. some tracts are too poor to be used at all. Shopkeepers and waretousemen are aware tliat, in their respective lines of business, they can dispose of more than a given quantity of goods, only by submitting to a sacrifice of profit. As a rule, old countries, not excepting England, have at command as much capital as, in the existing state of their knowledge, they cai-e to employ. In this country, where the soil is all appropriated, and, speaking gene- rally, fully worked, the minvmwm is prevented from being reached, principally by the escape-channel for surplus resources that is afforded through the ravenous appetite of foreigners for capital. Individuals may always in- crease their capitals by acquisition from others; but, supposing knowledge to be fully taken advantage of, national capital can expand only 'in conj\mction with Improve- some successful effort of the inventive faculty, some im- back't^"™ provement of some of the employments formerly prac- tised in the community, or some discovery of new arts.' ' The gross produce then becomes, so to speak, more than 1,300,000 yards, and more than 1,000,000 (or their value) can be advanced. Railways and telegraphs, acting in conjunction with free trade, vastly extended the capital-employing capacity of this country, but its wealth is again overflowing. In connection with dis- count-banking, certain deductions are arrived at, from the doctrine which has just been propounded. The minimum rate of one period may differ from that ' Eae'siV™ Principles of Polit. Econ., Boston, 1834. The 'Seven Days' War,' just concluded, affords a fresh iUustration of knowledge ' conferring power, not over nature's forces, but politically. limit. WEALTH, CAPITAL, MONEY. 117 of anotlier ; should it have fallen, it shows that capital- Chap , ix. ists have become willing to devote funds to productive employment, for a smaller surplus over advances than formerly. The minimum may fall, owing to a change in any, or all, of the three elements of profit; the risk compensating element lessens as security of property increases. The conditions adduced as determining a country's Capital capital-employing power are such as are somewhat temporarily I.6SS6D6d permanent in their nature. The mind and feelings appointing a minimum are not absolutely fixed, but they do not change rapidly. Industrial skill is also usually of gradual growth. As regards these elements a country's capacity at any period is in some measure determinate. There are, however, sundry causes which temporarily affect capital, consequently wages and sala- ries. Fear of loss from anticipated fall of prices, from the insolvency of correspondents, and many other in- fluences paralyse effort. Fewer commoditiesare created, and the community sustains an injury which is not re- solvable into postponement of dealings merely; fewer now, more hereafter; implied in a statement often made when business is flat, to wit, that the 'money' not spent freely, being in the country, sooner or later must be forthcoming. The type of the capital just considered is food or Machinery clothing, and is called floating capital. There is another capital kind whose type is machinery, railways, or land im- **^'^* ' provements. The term including the class of which these are instances is fixed capital. It is the result of a prior expenditure of revenue, or floating capital. 118 THE THEORY OF BUSINESS. Chap. IX. Money is the last of tlie three topics which it was Money proposed to discuss. So far as money consists of coin, it is wealth to the commiinity, and, usually, also capital. ' Greenbacks ' may be capital to individuals in the sense of enabling them to procure articles suitable for pro- duction, but to the nation they are not. Sovereigns are not capital in virtue of being money. Whenever a means of halting between the parts of an exchange is brought into use, money is provided ; but only when some com.modity is employed to impart increased stability and other attributes to what is chosen as the temporary halting-place in transactions midway, is money a por- tion of capital. In the Wealth of Nations money is included in circulating, or floating, capital. There are,, however, economists who place it in the class fixed. In a national sense it may, perhaps, best be considered fixed, and to individuals, floating or circidating. Is some- To the term money a meaning is often attached much founded more comprehensive than coins (or coins and bank-notes) capital. merely. Very frequently it is used When the much wider capital, or even wealth, is intended. It is a ' com- mon fallacy that money and capital are the same thing.' ' How such a mistake originates is evident enough. Capi- tal, as has been shown, is conveniently expressed in terms of moneyJ Stocks of cotton, ©f yarn, and of calico, are called so many pounds — respectively 5,000Z., 6,000^., and 10,000L — although in reality only one set of , pounds sterling is in use. These and similar quotations of property in terms of money, besides expressing the relation of the quoted property to .the measure, imply ' Lord Oyerstone. WKALTH, CAPITAL, MONEY. 119 that the quantity of money named might, under cer- Chaf . ix. tain conditions, ])e procured in exchange for the stocks. The power of obtaining money, should it be desired, is conferred by the law of ' averages' — a law whose opera- tion is very extensively involved in the workings of society, and which is spoken of subsequently. Here we take leave of manufactures and commerce. Here we and enter the remaining department of the productive another system, that, namely, of Issue and Banking. ' of^the"™ system. 120 CHAPTEE X. BANK-NOTES. far been assumed that coins are em- ployed in making payments. Chap. X. At ttis stage we quit that part of our scheme which has occupied us hitherto, and proceed to another department of the industrial system; one comparatively of recent growth, but which, especially of late, has attained to It has thus colossal proportions. It has thus far been assumed that the ' 13,000Z.' which at settlement is passed from re- tailers to dealers, and by them to manufacturers and other capitalists in discharge of debts, is all paid in the form of sovereigns, shillings, and pence. English money, however, is not used in all the places where the groups composing our series carry on operations, and to send sovereigns abroad to be melted for coinage into eagles or napoleons would be a useless expenditure of energy. To avoid this, a portion of the '13,000Z.' is kept for international payments in the shape of bullion, which portion, though lying inert in vaults, is utilised by the contrivance of paper substitutes for it in the form of bank-notes, which every one will accept at least as readily as the gold itself. It is found expedient also to employ to some extent these paper substitutes for coin in home transactions. In tracing the effect of bank-notes on a country's stock of metallic money, the more adequately to re- present its amount, we shall employ in illustration the BANK-NOTES. 121 sum of '130 millions' instead of the '13' (or the Chap.x. ' 13,000Z.'). It is not necessary to expand the prices of the cotton (called 5,0001.), the yam, and the calico, in the same ratio, as we do not now deal with these com- modities.^ The enquiry concerning bank-notes, banking, cheques, the Bank, discounting, on which we have now entered, has to do exclusively with money ; that is to say, with the fund which the ' 13 ' has been assumed to re- present, not with that which the stocks of goods typify. The ' 130 millions ' we take as an apjproxvmation to the quantity of money which this country would require were there no bank-notes and no hanMng-Jiouses in existence. The actual amount under the supposed circumstances might possibly differ from this, without, however, affect- ing the suitableness for our purpose of the sum fixed on. Viewed as matt&rs of fact, conclusions arrived at from the hypothetical premises will, of course, call for alteration according to the opinion held as to what would be the amount of the money employed. Figures 9,pproaching reality will, it is believed, prove more serviceable than others arbitrarily selected. The ' 130 millions ' here in- troduced is a multiple of the sum whose relation to capital, and commerce generally, has already been in- vestigated ; the relation, therefore, of banking matters, growing as they do out of that amount, to subjects dis- cussed previously, should be sufficiently apparent. ' Besides, it does not necessarily follow that the proportion of capital to currency in one industry will fairly represent the proportion borne by capital to currency generally; '130 millions' may be the quantity of money required under the supposed circumstances, while using the same multiple of the. prices of the yarn, &c. that 130 millions is of ' 13 ' might fail to state the value of the country's capital. 122 THE THEORY OF BUSINESS. Chap. X Starting, then, with, metallic . money, amountiag, throughout all the series composing the productive sys- tem, to 130 millions sterling,'we enquire how this supply will be affected by the introduction of bank-notes. Bank-notes In the great entrance ' Hall ' of the Bank of England flAn lip obtained the words notes paid for gold, prominently displayed, convey the information that there any one may obtaia bank-notes in return for sovereigns.'^ And not a few avail themselves of the opportxmity thus afforded, for, irrespective of considerations connected with interna- tional dealings, the precious metals possess some attri- butes which, as materials of the media of exchange, are obviously not advantageous. In the first place they are weighty. To effect settlements of large amounts by means of coins, owing to this quality, woxild be an ex- ceedingly arduous undertaking. This would be so even when coin required to be conveyed, only to another part of London, not to speak of the still greater difficulty when it ha4 to be sent to distant places throughout the country. A thousand sovereigns weigh over twenty- one pounds ; fifty make a good pocketful, and are over a pound in weight. But not only does metallic money ' As some evidence, thougli far from eoncluGive, that tliis amount would be needed under tlie supposed circumstances, take the instance of France with her scanty hanking facilities. She requires, it is estimated, from 100 to 120 millions sterling of coin ; and had she no banks she would require still more, say 130 millions in all. The population of France is larger than the^ population of this country, but the commerce is smaller. Shall we greatly err in estimating the requirements for coin on the part of the two coimtries, without banks, as equal ? It has been explained that the exact amount is not indispensable for our purpose. The principle on which the supply of money is determined has been given in the Kicardian theory of the distribution of the precious metals, already quoted. ' Also in exchange for bullion, the material of sovereigns. BANK-NOTES. 123 entail inconvenience from weight ; gold and silver coins Chap, x. suffer loss from tear and wear. Tke direct vfaste on coin in circnlation amounts, it is said, to as much, as one-fourth per cent, per annum. If the money of the country vrere entirely metallic, the loss on this account would be very considerable. To replace worn coins the process by which they were procured in the first instance would need to be continued on a reduced scale. To prevent or lessen tear and wear is to secure a clear gain to society. Again, besides the difficulty of moving gold and silver coins from one place to another and the cost attending their use, there is the risk attending the custody of commodities so valuable. After all, money must be retained to no small extent. Even after com- mercial credit has operated as far as its influence reaches, in lessening the quantity required by a country, there are trades, for instance, bankers, exchange dealers, and others, under the necessity of keeping large re- serves of coin. Had such trades to retain in the form of gold and silver all the money they require, they would need their respective stores of treasure to be guarded, and this would entail on the community addi- tional outlay. Bank-notes are free from these disad- vantages. Light and of small bulk, they are easily conveyed from place to place ; the cost of producing them is comparatively trifling, and, by a simple expedient frequently resorted to, they admit of being preserved safely without trouble or expense. Cut a bank-note into halves, and each half, apart from the other, is worthless ; while at any time the portions can be reunited and the value of the note restored. 124 THE THEORT OP BUSINESS. Cha p. X. There are in all, througlioiit the United Kingdom, There are about 44 millions of bank-notes,' occupying the place of them in which must otherwise have been filled chiefly by coins, use, Bank-notes, though of paper, constitute a portion of a country's share of the world's currencyj and exert pre- cisely the influence of metallic pieces in determining the scale of prices. AU bank-notes outside the issuers' walls, even those confined in purses, or lying motionless in the safes of merchants and bankers, including the banking department of the Bank of England itself, are said to be ' in circulation.' This expression is not used thus, that is in a sense not implying activity or motion, exclusively in connection with bank-notes. Similarly all books which have gone from ' Mudie's ' are described as ' in circulation,' though possibly lying in libraries or upon drawing-room tables, untouched. The term is one of those word-pictures that call up most vividly an image other than the one intended. Deduce the func-: tions of the Speaker of the House of Commons from the idea ordinarily conveyed by the word speaker, and you will not arrive at the duties of one who does not speak in debate at all. Erroneous inferences respecting the fonctiqns of currency have been deduced from the term ' circulation,' and contests keen as any between nominalist and realist have resulted. But confusion need not arise if the somewhat technical signification of the word is borne in mind. What we mean, then, by notes being ' in circulation ' is that they occupy places which, were there no bank- er ' in cir- culation,' Of these the Bank of England furnishes about 30 millions, and other issuers throughout England, Scotland, and Ireland, the remaining 15 millions. BANK-NOTES. 125 notes, would be filled almost exclusively by gold or silver Chap. x. pieces. Yiewed nationally, hank-notes tahe the place of a portion of a country's metallic money supply ; the country, as its sliare of the world's currency, obtains less than it would otherwise do, by all bank-notes ' in circulation ' against which, issuers do not hold gold. Danger attends the very convenience afforded by bank- Au of notes. An important point of difference between them convertible and metallic money is that the former can be procured at wUi. in unlimited quantity, while the latter, being intrinsi- cally valuable, cannot. Dearly purchased would be the convenience which bank-notes afford, were the country, by using them, to lose the steadiness in value which money possesses when allied to gold and silver. Better dispense with the use of bank-notes altogether than lose the immense advantage of gold as the measure or standard. Fortunately it is possible to obtain the lesser good without sacrificing the greater, to secure the more convenient medium, without forfeiting the privilege of a stable standard. In order to this it is necessary that issuers should return, on demand, all coin entrusted to them by persons who carried away their notes. For the reason stated, the counterpart of the announcement, already quoted, that notes are paid for gold, is likewise displayed by the Bank of England and other issuers, in the words gold paid for notes. As long as every person can reclaim, at will, all sovereigns left for notes, no difference of value is possible between sovereigns and their paper substitutes. If such a thing were to occur ■ as that bank-notes became able to purchase less than sovereigns, the notes would immediately be returned to 126 THE THEOEY OF BUSINESS. Chap. X. the Bank for coins. Tlie law of instant convertibility causes tlie mixed currency to conform to the value of the coin portion, and hence equally well to serve as a standard, while at the service of the community is placed a medium of exchange exempt from some drawbacks inherent in metallic pieces. Convertible In resolving that issuers shall redeem their notes not increase with gold whenever called upon to do so, a community of money: effectually restricts the amount of its paper currency. It thereby declares its determination to employ gold and silver as the basis of its circulation, notes being substi- tuted for a portion of the coins made of these metals, merely as matter of convenience. This country ac- cepted gold and silver as sufficient in quantity, as well as suitable from the qualities these metals possess, when it passed the Bank Act of 1819, repealing the measure then in force, restraining the Bank of England from giving ' coin for notes.' -All nations have not in like manner agreed to take the precious metals as the material of their money. The United States, Turkey, Russia, and other countries, use currencies not regu- lated in quantity by gold or silver, the bank-notes of these countries not being convertible into coins of these They affect metals On demand. When anyone can, at any moment, quaiiti/. carry the note he holds to issuers and obtain coin, note- issue is conducted under conditions prev.enting it from permanently increasing the quantity of money, which accordingly continues at '130 millions;' its quality only is then affepted by a portion consisting of paper, instead of being all gold and silver. The consequence of any farther emission of notes is evident. The value of BANK-NOTES. ]27 money (coin as well as notes) falls in the country Chap. x. where the fresh issue occirrs ; in other words, prices rise compared with the markets of other countries; notes cannot be sent abroad, but coins can, and accordingly they are exported in payment. The flight of sovereigns acquires fresh impetus from every new emission of notes. The coin portion of the country's money diminishes as the note portion increases, until the entire currency consists of paper. It is an error to suppose that issu- ing more-bank notes with the law of convertibility in force, would make the money circulating in a country more abundant. There certainly would be more notes, but then there would be proportionally fewer sovereigns. The quality of the circulation of the United Kingdom The 44 might be further operated upon than it has been, and might, be without sacrificing convertibility : otherwise stated, a good many notes might be added to the 44 millions now in use without making the aggregate stock of money more than 130 millions, consequently without depre- ciating the currency. In England the lowest denomi- nation of bank-note is for 6?. ; the country retains sovereigns to effect all payments requiring less than 6L Were notes for \l. or 21. issued, they would release a portion of the 86 millions' at this stage supposed to be retained as coin (or ^bullion) by producers themselves. In Scotland \l. notes have taken the place of coins so completely that, until recently, people in that country scarcely knew what a sovereign was. In England however, it has been judged inexpedient to continue the • As 44 of 130" are notes, it leaves 86 of coin in use; which' banking further reduces. The 86 does not include issuers' reserves, of 19. 128 THE THEOKY OF BUSINESS. Chap. X. issue of Small notes. ' It lias been found by experience at the Bank that small notes are much more liable to be forged ; the smaller the notes, the easier it is for the forger to pass them off through a multiplicity of channels." The non-issue of small notes preserves in England a reserve of coins ready to meet any sudden foreign expenditure. During the terrible famine of 1846, Mr. James Wilson, in the ' Economist,' advocated the issue of notes for small sums, to take advantage of the latent power of obtaining sovereigns which he proposed should be used to buy food for our starving countrymen. Happily the evil days passed without rendering it necessary to have recourse to what must always be considered the last resort. Should society, under pressure, consent to substitute notes for the coins which on good grounds it deemed expedient to use rather than pieces of paper, the transaction is to be re- garded as temporarily 'pledging' articles of national property which would have been retained had hard times not come, and which, at the earliest opportunity, must be brought back again. Issuers use The banks, whose united issues of bank-notes amount coins left to 44 millions, retain in hand only 19 millions of the for notes, gold and silver left by the persons who obtained these notes. Issuers throughout the country have lent or invested the remaining 25 millions at interest. Al- though liable to be called upon at any moment to restore the coins left in their custody, experience has proved that they may with perfect safety employ a very large proportion of them. There are, as a rule, about as many » J. G. Hubbard, Esq. BANK NOTES. 129 persons requiring notes for coins as there are persons Chap. x. ijdesiring tteir coins back. The law of averages, already alluded to, gives rise, in this department as in others, to results which can in the aggregate be anticipated, pand whose occurrence can be confidently relied upon. A characteristic of bank notes is that they are not all sent in for cash as speedily after receipt as possible. Were they returned for coins on the day on which they were issued, the tills of issuers would be emptied nightly. They can and no use whatever could be made of coins which were because" ^ left for a few hours only. Persons procuring bank notes are kept^*^" in the morning would benefit to .the extent of being "^^"^ "'S^'t- enabled to do business more conveniently, and the com- munity would also gain by avoiding the tear and wear of coins ; but as far as the quantity of metallic money is concerned, if issuers had to deliver up, as supposed, all the coins left with them, (and they must do so unless bank notes are kept over night), there would have to be retained in the country nearly as many sovereigns and haK sovereigns as if there were no notes. It is well known that bank notes do remain out, sometimes for a long period, while as a rule, other credit substitutes for money, cheques for example, are cashed at the earliest opportunity. All bank notes are not kept over ,night ; e»many, like cheques, are returned at once,' and these do ' The penny stamp recently imposed on cheques tends to increase the niimber of bank notes so returned. The published bank accounts will not show the entire augmentation on the ground indicated, because they give only the notes outstanding at the close of business. Such augmentation will tell on the number of notes issued say during twelve months. That number will also increase, as far as Bank of England notes are concerned, by arrangements frequently made on the part of issuers, to substitute them for their own notes. K 130 THE THEOEY OP BUSINESS. Cii.vp. X. not extend the paper portion of the country's money, nor do they dispense, with coins. Others, howe^^er, are retained for months together. Holders of bank notes feel perfectly confident that every person will accept them in payment as readily as they will coins. When a currency consists of convertible notes, this confidence rests mainly on the wide-spread belief that those who promise to pay coin on demand wiU do so. As inspiring the requisite confidence, there are such subsidiary con- siderations as the paper of bank notes, and their gene- ral style of execution ; these together presenting easily appreciable evidence of genuineness. Why it is that cheques are not held as bank notes are, will appear- > hereafter. The ' 25 millions,' being the portion of the ' 44 mil- lions ' of coins left in exchange for notes, which issuers use, have been ' invested ' mostly in government securi- ties, but some in bills of exchange. In both cases the coins will have found their way abroad 'through the exchanges,' and the country will have received in return materials and other commodities, as imports. The reserve While all bank notes which have left issuers must be kl!?ereis considered 'money' or 'circulation'; in other words, utio'nf """ as a part of the ' 13,' or ' 13,000L,' or ' 130 millions ' ; the metallic reserves held by issuers should not be counted as such. Bank notes are money in duplicate. In counting all notes in use, the whole of the coins (or bullion) left with issuers in exchange for these notes, of which the reserve is only a small part, are reckoned. The reserve confers the attribute of ' instant converti- bility' on the paper portion of the '180 millions'; BANK NOTES. 131 through it, sovereigns left for notes can be at once re- Chap. x. covered. How much must be kept to ensure this re- sult, concerns issuers alone and not the community. Their reserves we may henceforth leave out of account ; the fact on which our attention should here be fixed is that substituting bank notes, or paper money, for gold, is a great advance upon using coins exclusively. Cheques, the subject of a future chapter, will be found to be a farther improvement. K 2 132 CHAPTEE XI. BANKING. Chap. XI. OxjR hypothetical circulation has now been brought to a state resembling the actual circulation in England Bysupposi- during the reign of Charles the Second. At that period tion banks . „ i • t have not the quantity of money retained must have fallen mate- established. riaUy below an equivalent for commodities in all stages of forwardness. The existence of bills of exchange implied mutual confidence on the part of producers suffi- cient to enable them to defer settlements, the tendency of postponing payments being, as already explained, greatly to lessen the proportion of money to goods. And the diminished amount in use consisted partly of paper substitutes for coin, under the name of ' gold- smiths' ' notes. But the habit of employing bankers had not come into fashion in the time of the merry monarch. In the reign of William the Third, ' old men were still living who could remember the days when there was not a single banking-house in the City of London. So late as the time of the Restoration every trader had his own strong box in his own house, and, when an acceptance was presented to him, told down the crowns and caro- luses on his own counter.' ' It is interesting to trace how and to what length the introduction of banking-houses ' Lord Maeaulay's 'England in 1685. BANKING. 133 affects a circulation, called 130 millions,' all of gold, or Chap. xi. virtually so, as tlie note portion is exchangeable at will for sovereigns, or if for exportation, for tlie more suit- able 'bar.' All of tbe circulation is not affected by banking ; a large portion of it ia retained by the public for current use, forming cash, in tills, small change in the pocket, or otherwise in hand ; but in this country the immense sum not actually required at the moment is, as a rule, left with bankers, as balances of drawing accounts. How much of this 130 millions is retained, and how much is handed to bankers, cannot be ascertained pre- cisely. It is necessary, however, to estimate on the best data that offer, the amounts employed in these modes re- spectively. A not very recent calculation, by M. Cheva- lier, gives the value of sovereigns and half-sovereigns in this country (let us assume not left with bankers), as 40 millions,* and of silver coin, 10 millions ; to which add 14 millions of English country, Scotch, and Irish, bank notes, all of which the public retain ; also as much of the 30 millions issued by the Bank of England as are held by others than bankers, which let us call 15 mil- lions ; and we have as the amount kept by the public, 79 millions ; deducting which from the 180 millions, 51 millions sterling are left as the quantity held as balances, by bankers private and joint stock in England, Scotland,, and Ireland. According to their published returns, bankers have the custody of a much larger ' Autioritiee differ widely as to what this amount is. Professor Fawcett gives the gold coin as 45 millions sterling ; Mr. Newmarch, in 1856, as 70 millions. 134 THE THEORY OF BUSINESS. Chap. XI. amount tlian tliis. The joint-stock banks of London alone hold more than is here assigned to the banking class of the kingdom. It must, however, be understood, ■ that at present we deal exclusively with the funds which, but for bankers, each producer would retain for himself, as coin and notes ; the larger part of joint-stock liabili- ties — deposits at interest — does not come within this category, and will be afterwards considered. Different sections of society have come to occupy themselves solely with rendering some specific service to the community ; we have those who furnish commodi- ties, such as tea, or cotton ; those who act as soldiers, sailors, policemen, postmen, lawyers, doctors, or clergy- men. In accordance with this social arrangement, at- tended with such manifold advantages, a banking class has gradually formed itself, the members of which devote themselves to facilitating operations with money. They consent to receive sums for safe custody, agreeing to repay them whenever called upon by their owners to do so. Cash is payable to producers under circumstances , which render bankers absolutely indispensable. In each of the series constituting the industrial system, retailers, whose shops line the thoroughfares of every town and village, are paid in daily driblets, while, having mostly purchased on credit, they do not require to pay dealers for some time. Dealers, in like manner, have often to pay manufacturers and merchants at periods other than those at which they themselves receive payment from retailers. During the intervals elapsing between receipt and expenditure, money needs to be taken charge of.' BAlfKING. 135 Possibly not required at once, it must beinstantly fortli- CrrAP. xi. coining whenever it is required. The banker meets a want, by providing, in the meantime, a place of safe custody. His doors are open every day for receiving money and paying it back ; almost every one, now-a- days, ' keeps a banker.' Besides acting as custodiers of cash conveyed to them. They also bankers collect monies due to customers, and undertake money, to present bills as they arrive at maturity. 'Perhaps the greatest advantage derived by the merchant or trades- man from the employment of a banker, is its relieving him of all trouble with respect to the presentation for payment of due bills and drafts.' ' ' Suppose that a mer- chant has only two bills due each day. These bills may be payable in distant parts of the town, so that it may take a clerk half-a-day to present them ; and in large mercantile establishments it would take up the whole time of one or two clerks to present the due' bills and the drafts. The salary of these clerks is therefore saved by keeping an account at a banker's.' Not that clerks, as a body, necessarily suffer by this or other improve- ments which increase the productive force of society. Through such, the community is served, while some of its members are left disposable to render additional service. Greater effectiveness of industry is not the sole bene- fit resulting from the collection by bankers of bills for producers. ' It is reasonable to suppose that losses from bills would sometimes occur from mistakes or over- sights ; from miscalculations as to the time the biU would become due ; from errors in working it up ; from ' McCuUoch's Commercial Dictionary. 136 THE THEORY OF BUSINESS. Chap. XI. forgetfulness to present it, or from presenting it at the wrong place. In these cases the indorsers and drawers are exonerated, and if the acceptor do not pay the bill, the amount is lost. In a banking-house such mistakes do occur, though most rarely ; but when they do occur, the loss falls upon the banker, and not upon his cus- /tomer.' ^ And 'remit' Bankers further enable payments to be made in dis- to distant .1.1 places. taut places without dispatching money for the purpose. All who take part in a productive process have their shares of the result apportioned to them as money. When producers are in places remote from each other, unless obviated, there would arise the necessity for con- veying not only the various articles constituting these shares but also the money to buy them with. In every town there are traders who have supplied commodities to other towns, and also those who have purchased com- modities — imported them, so to speak. Those who have sold wiU be in the position of having to receive money; those who have bought will have to pay it. Such money- engagements are adjusted, as in the case of dealing be- tween nations, vrithout transmitting coin either way, and this, chiefly by the instrumentality of bankers. They accept payment from the debtor class, under the form of enabling them to remit, and, instructed by bankers in other towns who have likewise undertaken to remit, pay the money in the very town where they receive it, to the creditor class composed of producers, who, having furnished commodities to other localities, are in the position of having money to receive. Bemit- > Gilbart. BANKING. 137 ting causes the local supply of money to change hands, Chap. xr. but not necessarily, or even usually, to leave the town which it is said to be remitted from. Settlement is eventally effected by passing not money but the commodities which the money buys. Bankers help to adjust the entanglement of mutual indebtedness arising from transactions ; but they cannot dispense with the necessity for sending a substantial equivalent for goods bought : that is to say they cannot make a few scratches on paper serve instead of materials, clothes, and food. Debts due by one place are still discharged by articles supplied by it to others, although the complexity of transactions renders it impossible to trace the steps of the process. A town, like an individual, has to give an equivalent of some kind for all it receives. 'Many of the banking companies established in differ- The bank- - . . ing system ent districts, have a direct intercourse with each other, is highly and they have all correspondents in London ; hence a person residing in any part of the country, who wishes to make a payment in any other part, however distant, may attain his object by applying to the bank nearest to him.' One place may have to pay more than it has to receive, in which case, as with settlement of interna- tional transactions, drafts will bear a premium sufficient to pay for the transmission of money. ' It will generally be found that the trade between seaport and inland towns is in favour of the former. Manufacturing towns and large cities have usually the balance in their favour.' ' London is the focus to which a large portion of the pe- cuniary transactions of the empire, and of the world, ' Gilbart's Principles, v. ii. p. 104. 138 THE THEORY OF BUSINESS. CiiAF. XI. are ultimately brought for adjustment. By far tlie largest proportion, both of the inland bills in circulation in this country, and also of the foreign' bills drawn upon Great Britain, are made payable in the metropolis. There is, as a rule, a greater demand to remit to London than there is to remit from it. Bills on it usually carry, a premium, forming one element of the commission charged by country bankers for remitting. The balance of indebtedness, giving rise to the favourable exchange, may be due, not to London, but to other places ; London being simply the medium of transmission. It is, how- ever, in some measure, attributable to its being the seat of government, to which accordingly remittances as taxes or as income to persons residing there, are con- tinually being made. The commission charged "hj bankers for remitting varies. From Edinburgh or Glas- gow to London, for example, the charge is Is. per Cent. ; until recently it was 2s. 6d. In remitting from London to the country, the premium is frequently escaped. The Bank of England issues post bills payable without charge at its branches throughout England after the lapse of a week from acceptance. Of late it has become usual to remit to the provinces by sending down cheques on London bankers. The clear- A plan. Called clearing, is adopted by the banking- ing house. ... houses of London for more speedily arranging their enormous amount of pecuniary obligations, consisting of foreign biUs, inland bills, cheques, drafts, coupons, &c. It is carried into effect in the following manner : 'At certain times each day a clerk from each banker attends at the clearing-house, in Lombard Street, where BANKING. 139 he brings all the drafts on other bankers, which have Chap. xi. been paid into his house that day, and deposits them in their proper drawers (a drawer being allotted to each banker) he then credits their accounts separatelj with the articles they have against him, as found in the drawer; balances 'are then struck for all the accounts,'' and settlement of the balance due to or by each banker, is effected by a cheque on the Bank of England, where the clearing account is kept. We have now enumerated the principal services ren- Banitcra dered by the banking class to the community. From count. what has preceded it appears that what bankers deal with as balances of current accounts, is a portion of the country's 'circulation,' meaning the share of the world's money assigned to a country on a principle already stated. That circulation we have represented as 130 millions sterling, and have followed a large part of it to the vaults of bankers, where for the moment we leave it, premising that the manner in which bankers are remune- rated for their services is peculiar. Permitted to do so by the law of averages, they contribute from that store to the resources of different series, and obtain a portion of the ' interest ' element of net profit. The nature of ■ such operations is our next subject. : J. E. McCulloch. 140 CHAPTEE XII. DISCOUNTS : THE BANK KATE. Chap. XII. Bankers lend 34 millions of their 51, Although every pound of it is repay- able on demand. Peominence has been accorded to the circiimstance that, of the 130 millions of coin and bank notes, an amount, estimated at 61 millions, is placed with bankers as working balances ; and incidental reference has been made to their using a portion of this sum. They lend two-thirds of it to merchants, manufacturers, retailers and others, chiefly on the security of bills of exchange. The course followed is for producers to offer bills for discount, and should the banker take them he hands over immediately the sums which, on a day more or less distant, the bills give claim to, deducting interest for the time that has to elapse before the day of pay- ment arrives ; hence the term ' discounting.' Interest is deducted on making the advance ; as already shown, it is drawn out of the borrower's net profit, and is not all earned until the term of the loan has expired. Every pound of the 51 millions of coin and noies entrusted to ba.nkers is repayable on demand, under penalty of bankruptcy ; and it is quite uncertain when any customer may put in his claim. Still, as has been conclusively demonstrated by experience, in ordinary times as much as two-thirds of the entire amount left can be made use of. It is indeed marvellous, when a large number of persons are concerned, and each acting DISCOUNTS : THE BANK EATE. 141 spontaneously, How results are produced wMcli, in the CifAP. xir. aggregate, may be predicted witli perfect accuracy. But ~^ it is only of the aggregate that this holds good. As to the manner in which any particular individual wUl act or be affected, the law of averages affords not the slightest indication. The power of foretelling events is possessed with respect to other classes of social phe- nomena besides those connected with banking; but it is subject to the same kind of limitation. No onq^ for instance, can say whether a particular person will die at a given time ; yet the practice of life insurance rests on the assumption that the number who will die during a year can be accurately ascertained beforehand. Every immarried man enjoys the option of remaining single ; yet in the aggregate, it is certain how many will quit the state of single blessedness. The number of murders, suicides, felonies, and other crimes, also admits of being foretold. It is possible even to tell how many letters wiU be posted throughout the kingdom unaddressed.' In these and similar instances, reliance may be reposed in the occurrence of ascertainable general results. And so it is with banking : though every customer is free to withdraw all his money at a moment's notice, discount- ing is carried on upon the assumption that not more than a certain proportion will do so at any given time. It is perfectly true that bankers coidd not repay what they owe, were aU creditors to assert their claims simul- taneously ; still, in pratice, anyone who may elect to have his money, be he merchant, manufacturer, ware- houseman, or shopkeeper can, without fail, instantly ' Buckle's Civilisation, toI. i. 142 THE THEORY OF BUSINESS. Chap. XII. obtain every sMlling Tvliicli the banker holds for him. In small constituencies the law governing averages may not have free scope, and there is a probability then of accidental combinations causing results not admitting of certain prediction. Some of Suppose the operation of lending two-thirds of the are sent 61 millions of Sovereigns which lie dormant in bank goods are vaults to take place in a country for the first time. It is return.^ ™ tantamount to increasing the circulation-— to making the 130 mUlions virtually 164 millions. No addition, of course, is really made to the money previously in the country. Merchants and others receive 34 millions as loan?, but the quantity remaining with bankers is so much the less ; it is reduced to 17 millions. Notwith- standing this reduction, all producers buy and sell as they would do if their bankers continued to hold the en- tire 51 millions. Each assumes, and with reason, that at a moment's notice he can obtain every sovereign be- longing to him. The reserve of 17 millions thus exerts all the influence of the full 61 millions. Hence when the 34 millions set free pass into the hands of persons who expend them on commodities, they constitute a new demand, and prices rise. Importation is stimulated in consequence. Bills on foreign countries command a premium; and sovereigns, or their material, are sent abroad. The outflow will continue until prices return to their normal elevation compared with other markets. Eventually the result is that stocks of materials and of other commodities are obtained, while several millions of coins, which would otherwise have lain idle in bank , vaults, are parted with in payment. The means of DISCOUNTS: THK BANK EATE. . 143 augmentiiig capital are thereby provided, and in so far chaf. xii. as its volume is enlarged the community obtains an in- creased revenue of completed goods. The popular notion is that, in discounting, bankers deal with ' money ; ' the opinion expressed by the late Mr. James Wilson, in his ' Capital, Currency, and Bank- ing,' is that ' when a banker discounts bills he furnishes in dis- his customers with a command over commodities.' Dif- banker"^' ferent but by no means conflicting views are thus taken > mon^y,' of the matter. The 34 millions under consideration, thev'funiish virtually a new fond added to the country's resources, ^"Xcom- will be composed, like resources previously in use, of f^"'^ °^^^^ money and commodities in certain proxDortions. Money t'^^-' does not, in all probability, enter into the comfposition of capital so largely as it appears to do from our illus- trative series, in which it was not necessary that all stocks should be mentioned. Suppose money to be to goods, as 1 to 9 or 10 — figures we have seen used in coimection with enquiries similar to the present — then some 3 or 4 millions of the 34 will consist of cur- rency, and the remainder, of goods, chiefly stocks in trade. Some of that money-portion will be in use for current dealings, and the rest wiU be in reserve with bankers : if in the same proportion as other funds, then as 79 in the former position to 17 in the latter. The money-portion serves to purchase the commodity- portion and to transfer it to producers as stocks. Dis- count bankers are, in effect, capitalist partners of the various traders forming the series of a country, and advance all or a part of the stocks required in processes. The banker furnishes all or some, foi> example, of the 144 THE THEORY OF BUSINESS. Chap. XII. dealer's 10,750L, and at the montli's end the dealer will be in a position (when he receives payment of the lljOOOL) to repay the advance with interest — the latter being a portion of the remaining ' 250Z.' or net profit, deducted but not earned when the loan was effected. The banker, as a partner in industrial undertakings, has this peculiarity, that he is called on (as loans run. off) to express his pleasure as to continuing to engage in operations. In the sums borrowed by discounters there is, as shown, no inconsiderable quantity of money in the narrow sense ; and, as borrowers pay interest on the whole amount borrowed, they consent to pay in- terest for loans of some money proper, that is to say, of sovereigns or bank notes ; the bulk, however, of what they pay for, is commodities. It appears from what has been stated how bankers may be represented as dealing with ' money,' and yet with ' commodities.' The term ' assistance ' is not applicable to all ad- vances. Bankers are as deeply interested in having their 34 millions employed, as borrowers are in obtain- ing them. Merchants and other borrowers look for two elements of net profit, which are remuneration chiefly for head work and for risk ; bankers, and other lenders, for the third, or interest element. Production being in a sound condition, bankers' reserves are fully employed with the rate of discount equalising demand and sup- ply at a point only slightly above the rate of interest yielded by securities involving no risk. An excessive accumulation of bullion in the vaults of the Bank of England, so far from being an increase of the nation's riches, is a symptom of languid production. When it Advances are not always ' assistance to com- merce. DISCOUNTS: TliE BANK BATE. 145 hxppens, there will probably be at the same moment Chap. xii. a similar accumulation in the vaults of the Bank of "^ France, and in other monetary centres, showing that fewer coins are required to carry on the business of the world. As soon as prosperity returns, which means a greater abundance of products suited to the desires of consumers, a demand for money springs up, and trea- sure forsakes the banks. Not that the withdrawal of money is necessarily a healthy sign. Apparent pros- perity, equally with real, gives rise to a demand for currency. Every person, when speculation is rampant, seems to make large profits. Sales at nominally re- munerative prices are readily effected, and settlement takes place by hills. More lavish expenditure, owing to what appears fairly earned gain, is indulged in : for a time money may be virtually augmented not by with- drawing funds from bankers, but simply by spending more frequently what is already in use. Some slight shock to confidence dissipates this factitious augmenta- tion, and, to fill the void created, resei-ves are trenched upon. Could we count the coins used when the rate is high, the portion of the circulation with the public would often be found, both during periods of real prosperity and inflation, to have been increased by the addition of sums ordinarily left with bankers. There is no inseparable connection between the bank Banking rate of discount and drains or arrivals of bullion. Gold ^"f^ "* would come and go although discounting were to cease by"com- "^ and no rate to be quoted, as merchants in this or in "'^"''^^• other countries happened to owe most. If bankers were to discontinue the practice of lending, then when 146 THE THEORY OF BUSINESS. Chap. xn. the state of international indebtedness requii^d money to be sent to otber comitries, quondam, borrowers would sell their goods at current prices, and these would fall until some commodity became a better remittance than gold or silver. As things are at present con- ducted, the holders of goods borrow and do not sell; thus it is that a drain of money though of commercial, not banking, origin, tells on the bank rate. A million or two of gold do not bear a large proportion to the require- ments of commerce, but they bear a very large proportion to themoney left with bankers : henoe we are led to expect extreme fluctuations in bankers' terms of lending. The bank- Discount Operations are matters of borrowing and called the lending, not of buying and selling. A bank-rate of money. 5 per Cent, implies that ninety-five sovereigns com- mand not a given quantity of other goods now but 100 sovereigns, a year hence, each pf the 100 as valuable as each of the ninety-five. The ninety-five sovereigns paid down are in fact lent. In the City the bank-rate of discount is called the value of money for the time being, a phrase which, on a previous occasion, we have used as 'another name for prices, or the power of money to purchase goods. The best economists employ the term exclusively in this sense. It is very important to. bear in mind these entirely different meanings attached to the words 'value of money.' The bank-rate is liable to be affected by whatever influences the desire to borrow or the ability to lend banking funds ; and, as prices are often powerful agents in indirectly doing this, they (that is the value of money in the scientific sense), are often the determining causes of the rate (or the value of DISCOUNTS: THE BANK BATE. 147 money in the City sense). The rate, in turn, frequently Chap. xi[. exercises (mediately) an influence upon prices. The Bank and the produce markets mutually act on each other : a change in Threadneedle Street is usually ac- companied by a movement in Mincing Lane. Varia- tions in the value, that is the purchasing power, of ■ money, arising ft-om alterations connected with money itself, may teU upon the rate. Issue more notes, ' make issuing more notes money more abundant,' and the bank rate is likely to may send be affected, though not necessarily depressed, in con- instead of sequence. Whether it shall be depressed or not de- pends on the parties by whom the fresh issue is made. If by government in payment of its expenses, then whatever the immediate effect of a further issue may be in lowering the rate by preventing contractors and others from discounting, eventually such issue tight- ens the ' money market ' rather than renders it ' easy.' Bankers, in holding the same amount of money, com- mand a smaller proportion of the country's resources : their loan fund is really curtailed. But when the ad- ditional currency is furnished by bankers, their loan- able fund is augmented, and the further issue tends to lower the rate. There is an instance, of recent occur- rence, iu which the phraae 'value of money' occurs in dif- ferent senses. A theory was propounded to account for the high rate during 1863-4. This country had then to pay large quantities of gold and silver for Indian and other cottons. An increased demand for these metals sprang up, and the rate was then very high; it was argued that this high value of money was the consequence; of the increased demand for the material of which money l2 148 THE THEORY OF BUSINESS. Ch\.p XII. is made. Demand for the material of money may account for a high, value of money, using the expression in the economic sense, but not for a permanently high yalue in the City sense of the rate of discount. The rate, being purely an affair of borrowing and lending, is affected only by changes in the relative strength of the desire to borrow and the desire or power to lend. A sudden alteration in the direction of trade is almost certain to stimulate borrowing, and so to raise the rate ; but it will not continue high on this account after trade has adapted itself to its new conditions. Only in as far as gold and silver are borrowed does a demand for them tell on the rate : otherwise merely prices (the value of money in the scientific sense), are affected by a demand however intense it may prove. The theory just stated is tenable on the supposition that, during 1863-4, trade was in a transition state. M. Pereire M. Pcrcire, the eminent financier, has propounded a of banks novel theory, in accordance with which he holds that (Umand. the Bank of France should conduct its discount oper-- ations. In the exposition of his opinions given in the ' Economist,' he contends that the Bank should not, as ' heretofore, proceed on the principle of checking demand when loans are wanted, but that it should, instead of raising the rate, thereby injuring commerce, meet the demand for accommodation : and, in order to procure resources for the purpose of doing so, it should realize securities, and, if necessary, increase its own share capital. As far as we understand the plan recom- mended, it seems to us that were the Bank of France, or any other bank, to act on it, difiiculty would be ex- DISCOUNTS : THE BANK RATE. 149 perienced in obtaining more capital. Investors would Chap, xii, be loth to purchase shares in banks forced to sell securities at a loss (as at a loss it must be in times of pressure), in order to lend the proceeds at an unduly low rate. Demand for advances is, from the nature of the case, insatiable. With an adverse exchange the Bank's resources could be cleared out in a week : soon the question would press itself on the attention of the executive — How can the supply be maintained ? Even power to issue note's without limit would be inadequate. Bankers make use of a portion of the money that is temporarily left in their custody; and in many other Money is departments of industry there are persons to whose care ous." articles of various kinds are committed. In the public warehouses there are usually large stocks of sugars, tea, coffee, cotton, tobacco. Great quantities are continually arriving and others being withdrawn; but there is always a stationary residuum of considerable amount. That balance is never made use of as bankers' balances are. Why is it that gold and silver can be used, while other commodities cannot ? There is no essential difference between metallic money arid commodities, for metallic money itself belongs to this category. Gold and silver, however, possess one attribute which other goods do not. As mehtioned in the chapter treating of money, these metals are homogeneous. One sovereign, or one ounce of gold, is in every respect, as good as another, whereas the various qualities, of most commodities shade off so gradually as to demand no small amount of skill properly to appreciate different stocks. Persons who leave sovereigns with bankers are quite satisfied with 150 THE THEOKY OF BUSINESS. Chap. XII. having coins different from those left returned to them: otherwise it wonld be impossible for bankers ,to nse part of their banking funds, any more than for others to use a residuum of indigo or corn left in the public ware- house. Other points besides homogeneity favour the employment of gold and sUver, for instance, their un- bulky nature, but the quality spoken of seems the most important. No qualm No qualm of consciencfi is felt by bankers on accept- at taking ing usury or interest. It would be difficult to find, a in erest. jjiore striking instance of the universal belief of ages becoming entirely exploded, than is furnished in con- nection with this subject. For fifteen centuries at least, the doctrine was inculcated by the Church that the gain of the usurer was to be shunned. It is now scarcely credible that in the House of Commons, at a former period, a member maintained that 'it was not the amount of the interest taken that constituted the crime ; but all lending for any gain, be it ever so little, was wickedness before God and man, and a damnable deed in itself, and there was no mean in this vice any more than in murder or theft." Permission was, how- ever, at length granted to Christians — it had not been withheld from Jews — and apparently with the sanc- tion of the Pope himself, actually to offer a material consideration for loans, in connection with some charit- able institutions of Italy. The first step taken admit- ting that, under certain circumstances, accepting interest was permissible, others rapidly followed, until, with the repeal of the Usury Laws, restriction on borrovring and ' Dr. John Wilson (16th century), Enc. Brit. Art. ' Usury.' DISCOUNTS : THE BANK RATE. 151 lending in tliis country practically disappeared. Adam Chap. xir. Smith, held that on grounds of expediency no one should be permitted to give or take more than five per cent. As to how the establishment of banks affects the Disoonnt- quantity of a country's money it has been shown that the amount, a large proportion of it is then left by producers and influence of others in the hands of the banking class ; of which money. ^ money, discounting releases two-thirds, -thereby really lessening the stock of cash in use. With money actually diminished by many millions, the scale of prices con- tinues the* same as if the whole 130 miUions^-the sum by supposition required if no banks existed — were re- tained. Although not kept by them in hand, every sovereign entrusted to bankers as balances must be held to be ' circulation,' meaning that it forms in effect a portion of the country's money-supply ; no further share of the world's stock is obtained by a community to make up for what is displaced by lending. The term circulation has already been commented on, with re-^ ference to applying it to bank-notes held in reserve by bankers and the public generally ; but a further explana- tion may be thought necessary in applying it to money even not retained in reserve. Adam Smith's comparison All ba- of money to ' a wheel circulating compiodities ' wUl aid bankers are us in this matter. A wheel rotates as if it were solid, whereas in fact a large portion of its area is hollowed out, answering, let us suppose, to the effect on the ' money-wheel,' of discount-bankers advancing their 34 millions. Further, as it is but little of the circumference of a driving wheel that actually bites the rail at any instant ; so but little of the money in use is actually circulation. 152 THE THEORY OF BUSINESS. Chap. XII. being exchanged for commodities at any moment. All of the driving wheel off the ground, though indispens- able, is in one aspect not really employed. Such part resembles the portion of the ' money-wheel,' which is with bankers and others in reserve. Balances being ' circulation,' it follows that producers contract the cir- culation when they withdraw balances for export ; but by discotmting, they do not. The money represented by 34 millions, lent by bankers, is in effect a fresh fund, and trenching on it is raising money by means other than lessening the volume of the currency. 153 CHAPTER XIII. BANKING FUNDS AND CAPITAL. The money in tlie hands of the banking class which, Chap. as we have seen, can be lent, serves as a fund which ■ — -,-1— , „ , , , . J. 1 Bybankers every producer leels he may draw upon m case ol need, lending, Were it not for a fund of this description, each must, for himself, retain a reserve against contingencies which An insur- affcer all might never occur. The money in bankers' is provided, hands serves its purpose as insurance, although it may never be drawn upon. This, then, is one benefit arising from bankers lending a portion of the cash left in their keeping. Another is the better distribution of capital. Bankers are in a position to place capital in the hands of persons likely to use it advantageously for themselves ^^hj capital and for society at large. The advantage accruing to the '^trSuted community from this source does not admit of numerical expression, but beyond question it is considerable. As far as systematic lending increases the productiveness of industry, it tends to enlarge a country's capital-em- ploying capacity. The opinion is commonly entertained that the volume But not of the capital used in a country is augmented by the augmented, amount brought by note-issue and discounting into profitable employment. This idea is apparently coun- tenanced by the father of economic science. In the ' Wealth of Nations' Adam Smith says that ' the gold 154 THE THEOEY OF BUSINESS. Chap. XIII Though soAietimes it is. and silver money wMcli circulate in a conntiy^ may very properly be compared to a highway which while it cir- culates and carries to market all the grass and com of th^ country, produces itself not a pile of either. The judicious operations of banking (issue) by providing^ if,' continues the author quoted ' I may be allowed so violent a metaphor, — a sort of waggon way through the air, enable the country to convert as it were a great part of its highways into good pasture and cornfields.'. The operations of issue and banking increase the na- tion's available wealth, but previous discussion has led to the conclusion that capital is not always enlarged when wealth is. The law of the increase of capital had not been traced when Adam Smith wrote. G-enerally in new sometimes in old countries, capital is deficient. When it is, bankers' advances will meet a real want, and resources which would otherwise have lain useless in bank vaults, being exchanged for m aterials, become productive. Waste lands are then brought under cultivation, and, as it were, highways converted into pastures and cornfields. But advances by bankers have a different effect when, instead of being under- supplied, capital is so plentiful as every year to leave a vast residue disposable for foreign investment. Coun- tries like Britain whose resources are in a state of over- flow reaUy pay for their coins not with wealth which would otherwise have formed wages and salaries at home but with funds which would, had they not been arrested in their courses, have gone abroad and yielded interest, or at most net profit. Advances of coins, or their material, by banks have the effect simply of reversing the process BANKING FUNDS AND CAPITAL. 155 gone througli in getting them, by causing a part of tlie Chap. wealth, then given to become again available. Now r-^- unless some action has taken place on the country's capital-using ability concurrently with its recovery, there . is no reason to believe that it can be added to the capi- tal already under employment in the country, any more than it coilld had it not been exchanged for money in Advances the first instance. Hence it follows that the funds in ^he/sums. question if employed productively will, under certain circumstances, displace capital of equal amount which would have been used had bankers kept all their money iu their vatdts, When a country is in a state of reple- tion as to capital, the ' 34 millions ' released by dis- counting either go abroad or expel others previously in use. In either case a large sum is made available for investment in other countries, and the interest ' yielded by it is a clear gain to the nation. As matter of fact the money, or the proceeds of it, made available by banking, are largely employed as capital and in this country itself, but this is no proof that more capital is employed here. ' In the department of economy a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects the first only is immediate ; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen.' ' Now it is seen that bankers add, by discounting, to the capital of certain merchants or others, but what is seen fails to establish the conclusion that the volume of capital em- ployed by the community is thereby enlarged. Economy ' Bastiat. 156 THE THEORY OF BUSINESS. Chap, is not the only department of knowledge in whicli the - — r— ^ seeming evidence of the senses requires to be corrected by reflection. The sun was long supposed to rise and set. People appeared to see it move. Yet it is now admitted on all hands that could any one at a glance have scanned the entire solar system, the opinion formed, apparently on conclusive evidence, must have been altered. And not less in the world of production would inferences drawn from personal experience, with a wider range of vision, often be found to require great modification. Discounting in this country leads rather to one person instead of another employing capital, than to an augmentation of the amount used. Bankers If the funds, released and invested abroad in con- theirowii Sequence of banking operations, are sufficient to yield profit or interest equal to what is paid as wages and profit to the banking class, bankers in efPect defray their Own charges. To what extent different banks engage in operations yielding revenue in a national sense can- not be ascertained. Private banks give no interest, and, consequently, it is mainly money proper, or the kind of fund the employment of which effects saving, that is entrusted to them. They, however, do not pub- lish their balance-sheets, while joint stock banks, who do, fail to separate interest-bearing liabilities from ba- lances. The Bank of England gives no interest, hence, like private banks, it receives chiefly sums which would have been kept by their owners as money, that is sove- reigns and bank notes. The bank has usually set free about 20 millions sterling, the interest on which, accord- ing to principles already stated, is a clear gain to the BANKING FUNDS AND CAPITAL. 157 comiminity ; in other words, the incomes of the pro- Chai*. ■V'TTT prietors of Bank stock and of the clerks are "so far - " , " - really paid by foreigners who use the sovereigns released. Banking, as snch, does not necessarily defray its own cost in a national sense. Suppose banks to be estab- But do not lished in a country using an inconvertible paper cur- do so. rency, one therefore not admitting of export. The currency lent in discount would augment, by the full amount, the home circulation. Lending ' 34 millions ' of balances consisting of paper money would make the ' 180 millions ' into 164 millions. Prices would rise proportionally; in other words, it would take 161 mil- lions to purchase goods which 130 would have purchased before banks were introduced ; and a part of the money being with bankers implies that some of the country's ca.pital is placed in their power. In this instance no investment takes place abroad, and the banking class is a charge on the country. Not that bankers would under such circumstances, any more than they do now, impose a direct charge for keeping balances ; their charge would be levied in the form of discount upon bills, for money lent. When investment takes place abroad the interest earned repays the deduction whether it is made by bankers in the form of a commission, or as discount. When no interest is obtained, then the in- come of the banking class lessens pro tanto the income of other classes. In rendering available for productive use what must have been locked up, it may seem that, as a smaller capital is enabled to create a result, it must, on econo- mic grounds, be held that the productiveness of industry 158 THE THEOET OF BUSIN"ESS. Chap, is increased. Bankers, it is true, are relieved from re- XIII ■ , . ' - ■ tainin'g large amounts left with them as balances ; but customers still require to keep as much money as ever in their bankers' hands. Producers, consequently, are not relieved in any degree from exercising ' abstinence.' Banking, in general, haS not now been discussed; merely the single function of advancing ; and we have shown why comparatively little importance should in this country be attached to utilizing funds otherwise unfruitful,' It need hardly be said that the view here taken in no way detracts from the importance of bank- ing. A banking class enables producers to devote themselves without interruption to fulfilling their re- spective duties. Had every one to do for himself what bankers now do, the productiveness of industry must be seriously lessened. We rest the claims of bankers to consideration on economic grounds, chiefly on their col- lecting bills, remitting, taking charge of money and returning it whenever called for ; not mainly on render- ing funds productive, which would have remained un- employed: nor even — important as it is to transfer resources to trades and branches whose products are in request— on their ' receiving money from persons who do not require it, and handing it to others who do,' which is sometimes given as an epitome of banking. In 1810 Napoleon gave even a more concise definition , of the fanctions of the Bank of France. These were, he said, to provide money at all times at four per cent. ! ' A few extracts are here given which appear to convey the idea that dis- counts enlarge the capital employed in the country ; — Mr. Gilbart says that ' banking increases the productive capital of the BANKING FUNDS AND CAPITAL. 159 country.' And again, that 'he (the banker) draws into active operation Chap. those smaller sums of money ■whicli were previously unproductive in the XIII. hands of private individuals.' Mr. James Wilson {Capital., Currency, ^c, p. 11) says, ' It must be quite dear to those who are at all familiar with such subjects, that \>j this means (banking) a large portion of the money, or coin, was transferred to capital — was abstracted from the unproductive coin in the hands of the public as circulation, and tlirough the medium of the banker, restored as capital to such an extent as circumstances render prudent, to productive purposes. The effect, in point of fact, was the same as if so much new capital were added to the wealth of the country.' Mr. McCulloch {Enc. Brit. 7th ed.) says, ' If, for example, the currency of the United Kingdom consisted wholly of gold, it would amount to at least 80 millionsi of sovereigns, and if the customary rate of profit were six per cent., it would cost 4'8 millions a year; for were this 80 millions not eni- ployed as money it would be employed in branches of industry, in which, besides affording wages to thousands of individuals, it would yield six per cent., or 4'8 millions a year of net profit, to its possessors.' In the 8th edition of the same work the word thousands is substituted for numerous. Mr. H. D. Macleod {Banking, vol. i.) says, 'The various methods of economizing the use of money are strictly to be considered as an increase of the resources of the nation.' ' The resources of a country are all those objects which, taken by themselves, are not wealth, but which are capable of being applied to the production of wealth.' In the Edinburgh Semew, for Jan., 1865, in 'Seven Per Cent.' aninference is given, in connection with substituting bank notes for coin, which involves what we hold to be the correct doctrine. The inference is that, in this country, the advantage directly accruing from the substitution of bank notes for metallic money is interest, merely. In Eraser's Magazine, for June, 1865, Mr. Bonamy Price asserts that the gain is much more than interest. :6o CHAPTEE Xlf . CHEQUES. Chap. Whilb the issue of bank notes alters ihe^uality of a --,--1-^ country's money, banking enables its quantity to be less- ened. All bank notes in circillation fill places wbich., but for them, would be filled by coins ; and banking allows mucb money to be dispensed With, which, with- out it, must be retained. There are thus two modes of utilizing a large proportion of the metallic money intro- duced into a country, and of diminishing the cost of adopting a currency of this description — one is replacing some of the metallic money with inexpensive paper; the other, establishing banks, and discounting. "What has still to be considered is how cheques influ- ence money as to quality or quantity, a subject which has elicited the expression of Tarious opinions. The cheque is a natural adjunct or outcome of banking. A person, say a retailer, who has money with a banker, when the day arrives for paying the dealer, instead of going to the banker, withdrawing some of that money, and handing it to the dealer, writes upon a slip of paper, which the dealer takes to the banker, ' please pay bearer lOOZ., 200Z., (as happens) of my money.' Such slips of paper are in constant requisition, so mach so that bankers get them printed uniform, very much to their own convenience and to that of their customers. Payments CHEQUES. 161 are, in England, mainly effected by their instrumentality.' Chap. XIV Thougli the most important part of the influence ex- ,—1- monev, erted by cheques in economizing moneyj is, perhaps, indirect, they do give rise to some direct economy. Not only do they save the tear and wear of coin, they also increase its efficiency, by investing the money they repre- Cheques sent with the property, so to speak, of being able to be efficiency of in more than one place at the same time. Payments of money can be effected by written orders much more readily than by passing cash ; these orders can easily be transferred from one person to another, without loss of time, and being at once paid in to a banking account, the money they stand for can be used, by being drawn against, more frequently than if coin itself were employed in payments. Were cash made use of, intervals must elapse between its withdrawal from the bank and repay- ment, during which the funds would not be available. Without cheques, money must bear a larger proportion to commodities than it need do when they are used. 'If no payments were made by cheques on bankers by means of which money is merely written off one account and added to another, and that to the extent of milhons daily, with few or no bank notes or coin passing, it is obvious that considerably more currency would be re- quired.' ^ A stronger word than ' considerably ' may appear to some better suited to express the increase of requirement for money, that would follow the discontinu- ' In the Joufnal of the 'Statistical Society' for October 1865, Sir John Lubbock gives an analysis of the operations of his firm, showing the propor- tion of payments made by cheques and by bank notes, ^ Kicardo. M 162 THE THEORY OF BUSINESS. Chap. XIV. And place more of it with ■ bankers : But they act as bank notes only to a trifling ex- tent, ance of cheques. If all bank notes in circulation wei cancelled, coin, to an equal value, must take their place not so, however, with cheques. No doubt those who a present need not do so, would be forced to witt dralw money daily from their bankers to effect payment But, on the other hand, money, and not cheques, woul also be paid in. Bankers would not require to retain larger proportion of their liabilities in reserve than the require to do now. A portion of the reserve whicl under a cheque system, lies dormant in bankers' tilli would become active, and form the fund drawn out an paid in daily, in the course of business. The princip] of averages, on which discounting proceeds, would I unaffected. The indirect influence of cheques in lessening tl money of a country is very great; greater, probabl; than the direct. The convenience they offer in effectin payments has induced many to employ bankers, wi otherwise would not have done so, and money is thereb added to that fund, two-thirds of which are, as we ha\ shown, dispensed with. Thus far cheques, by having enabled the quantity ( money to be diminished, have exercised an influem similar to that of banking. They do not possess all tl attributes necessary to enable them to serve as complel substitutes for coin : and therefore alter the quality ( money, after the manner of bank-notes, to only a trifliu extent. They fail to induce holders to keep them f( any length of time. Few cheques compared with tl number used are retained long enough to enab bankers to employ the funds against which they ai CHEQUES. . 163 drawn. Cheques are instances in fact, of the ima- chap XIV gmary case of bank-notes being sent in for payment • r-^ the same day on which they are issued, for as a rule cheques are cashed without delay. Translate the word- ing of cheques into its promissory equivalent and the reason why they are not used like bank-notes becomes apparent. Such equivalent would be ' I promise to pay to bearer, on demand, the sum of £1000 from my account at the Banh.' It thus appears that the cheque is a claim not, like the bank-note, upon the entire re- sources of a bank but upon the problematical re- sources of a single customer. The recipient of a cheque trusts in the first place the drawer, and then, after him, the banker on whom it is drawn. Those who accept bank-notes in payment trust the banker only. The fur- ther question of genuineness of signature arises when a cheque is taken from another than its drawer. It is not the cheque or order, versus the promissory, form that is the chief point of difference between cheques and bank-notes. Instruments in the order form would pass , as readily as bank-notes if their tenor and appearance caused equal confidence to be reposed in their worth. Owing t To create such confidence cheques would require to be tenw. drawn on behalf of some corporation or firm of well- known responsibility ; and, for the satisfaction of third parties, on material possessed of features characteristic enough to enable all to assure themselves readily that the documents were really executed by those whose names appeared on them. It has been said on high authority' that bills of ' Mill's Polit. Econ., vol. ii. p. 60. m2 164 THE THEOKY OF BUSINESS. Chap, exchange and cheques circulate as money and perforin — r-^— ' all the functions of it equally with bank-notes. But experience demonstrates that practically there exists a Tery marked difference between bank-notes and cheques. As far as confidence is concerned no hesitation is felt in retaining bank-^notes for any length of time, while there is a feeling in favour of cashing cheques immediately. Why these should be so speedily returned for payment has just been shown. They are in consequence dis- qualified for performing one of the functions of money ; they lack the quality which induces holders to retain them over night or for a longer time. A dock warrant serves some of the purposes of the tea or cotton it re- presents^ better than the tea itself. It serves to transfer ownership from one merchant to another ; here however its capacity as substitute necessarily stops short. But the uses to which money is put makes it possible for paper to answer all of them. Cheques are equally capable with notes of transferring the ownership of coin from one person to another, but bank-notes alone are endowed with qualities enabling pa^er to fulfil all of the functions of money as the medium of exchange. In the preceding sections it has been taken for granted that issue is effected prior to banking, but this is not necessary for the support of the theory advanced as to the nature and respective functions of bank-notes,! banking and cheques. Suppose banking to be established ' first, and then issue ; bank-notes would release a portion of the reserve (one third of coin) with bankers, and would also take the place of some of the coins kept by society for its current dealings. 165 CHAPTBE XV. THE BANK OP ENGLAND. The Bank op England consists of two great depart- Chap, xv . ments, one devoted exclusiYely, or nearly so, to issuing The Bank ' •/ ' •/ ' o consists of and cashing notes ; the other, to conducting general t^o depart- banking business. The balance-sheets of. the two departments appear weekly in ' The Gazette,' in the following form : Bank of ENaiAND. An Account pursuant to the Act 7 and 8 Victoria, cap. 32, for the week ending on Wednesday, Dec. 13- Issue Department. Notes issued £ , 30,000,000 & £ Government debt 11,015,100 Other securities .... 8,984,900 15,000,000 Gold coip and buUion 16,000,000 Silver bullion — 80,000,000 30,000,000 Banking Department, Proprietors* capital.. 14,553,000 Eest 3,447,000 Public deposits 6,000,000 Other deposits 18,000,000 Seven days and 1 other bills / 18,000,000 24,000,000 500,000 Govmnt. securities (including ) , „ ^.^^ nnn dead weight annuity) ]■ "."""."W Other securities 19,000,000 Notes 10,000,000 Gold and silver coin 500,000 Dated the 13th day of December. Geoege Poeees, Chief Cashier. ]66 THE THEORY OF BUSINESS. Chap. XV. Passing througL. the main entrance, in Tlireadneedle Street, into the open court-yard, the entrance to the Issue Department is directly opposite. Ascending one or two steps we reach the Hall, the principal office of this department. Here it is where any person may obtain notes in exchange for coin, or coin for notes ; or 3L 17s. 9d. for each ounce of standard gold; or silver for a sovereign, provided it is of full weight.' If not of full weight it will be slit in a machine furnished for the purpose and returned to the owner, or bought at its bullion value. Eetuming to the court-yard, the Banking Depart- ment is both right and left. To the right is the spacious apartment containing several of the chief banking offices : — The Drawing Office, where money is received and repaid by cheques or otherwise, as in any ordinary bank ; the Public Drawing Office, in which the government accounts are kept; the Bill Office, ' The Bank -weighing machines are the invention of the late William Cotton, Esq., at one period Governor ; each weighs at about the rate of 2000 coins an hour. In 1860, £21,978,910 in sovereigns and half-sovereigns vrere tendered to the Bank by the public, including banters ; of these, ;£593,651 proved to be too light to go into circulation. In 1850, the numbers were !£15,423,019 and £398,653, respectively. '"Where good money and bad (or light) money are thrown into circulation together, the bad money drives out the good money.' The first writer who noticed this fact was Aristophanes, ' He seems to have thought that the preference which his fellow-countrymen gave to light coin was to be attributed to a depraved taste, such as led them to entrust men like Cleon and Hyperbolus with the conduct of great affairs.' — (Macaulay's England, vol. iv., footnote.) Aristophanes fails to explain why good money refuses to mingle on equal terms with light coins. In the Edinburgh Review, for Jan., 1866, there is noticed a rare tract, ;written by Nicole Oresme, Bishop of Lisieux, in the 16th century. He is probably the first who showed why money leaves one place for another. In his tract he says, ' homines enim conantur suam monetam portare ad loea ubi earn credtmi magis vdlere.' THE BANK OF ENGLAND. 167 where undue bills are registered and retained iintil they Chap. xv. arrive at maturity ; the Post Bill Office, where money can be remitted to the country and foreign parts ; the Out-Tellers Office, whence cheques and due bills are dis- patched for collection. To the left, on the opposite side of the court-yard, is the suite of banking offices in which business connected with the management of the national debt is transacted ; where the dividends on consols and other stocks are paid as they fall due, and where trans^ fers are effected when purchases and sales of stock on the part of the public take place. The Issue and the Banking Departments represent the two kinds of opera- tions which affect the money of the country respectively as to quality and quantity. The issue department is the source of a large proportion of the ' paper pieces ' used instead of metallic by the community, while to the banking department merchantSj, manufacturers, the State, and others have entrusted as balances a large amount of the country's money consisting of sovereigns, other coins, and bank-notes ; of these separately, and first of the Issue Department. The Bank, as shown by the accounts given above, The Issue happens to have issued bank-notes to the value of 30 ment has millions sterling. As the entire note -circulation of the so^miuioas country amounts to 44 millions, the Bank of England exchange" contributes two-thirds of the whole. °^ ^°^^' Like other issuers it has made use of a large propor- it, has tion of the metallic money received from persons who 15 millions carried away the notes in question. It has invested 16 gou.'^' millions of that money in government securities, and retains the remaining 15 millions on hand as reserve. 168 THE THEORY OE! BUSINESS. Chap. XV. The Bank is restrained by statute from employing more than 15 millions. Should any one now leave sovereigns for notes in the hall of the issue department, the Bank must keep all of them in its coffers. The sum invested yields interest at about 3 per cent., which interest is the source whence the cost of issue is defrayed. The whole of it however does not go as charges. For the year ending August 31, 1860, the gross profits of the issue department, being mainly the interest yielded by the securities bought, were .... ^456,928 Of which the public received from the Bank : 1st as compensation in lieu of stamps .... 60,Q00 2nd as share of profits of cir^ culation . , , . . 128,078 188,078 Leaving 267,850 From which, taking the expenses of manage- ment, including walges, rent, bank note paper, &c 179,405 There remains to the Bank a net profit of . £88,445 As already explained, it is only because notes are not cashed on the day they are emitted, that issuers are able to use some of the gold left for them. A recent return to Parliament gives the periods during which bank-notes of different denominations remained in circu- lation. It states that in 1856, Bl. notes were kept out, on an average, seventy days; 101. notes, fifty days ; 201., BOl.; and lOOZ. notes, twenty days; 2001., 300Z., and bOOl. notes, nine days ; and those for 1,000Z., seven days. In THE BANK OF ENGLAND. 169 1831, 61. notes remained out one hundred and fifteen Chap. xv? days ; 101. notes, eighty days ; and l,000i. notes, thir- teen days; while in 1792, 101, notes were held on an average two hundred and thirty-six days, and in 1818, one hundred and thirty-seven days. The retention of bank notes for one whole day is sufficient to qualify them for dispensing with coins. The whole of the 30 millions of notes represents a The whole of the 30 portion of the country's share of the world's currency, millions a share apportioned to it on a principle previously ad- sense ' cir- vanced. The sense in which these notes and those of country bankers, together making 44 millions, are ' cir- culation ' has already been explained ; reason has also been given why the bullion reserve should not be con- sidered as such. It cannot be learned with precision what becomes of all the Bank's 30 millions of notes ; we shall probably be near the truth in assuming that 15 millions of them are held by bankers, including the banking department of the Bank of England, in reserve ; and that the re- maining 16 millions are in use by the public other than bankers. Passing now to the Banking Department, the accounts The Bank- already quoted, show that 24 millions sterling have been mfnt^^"'" lefb in the hands of the Bank in its capacity of banker. Eecent events have led many persons to carry their balances to the Bank, the liabilities of which have in consequence been so much increased during the past twelve months as to render re-arrangement of certain banking offices necessary. The 24 millions form a por- tion of the 51 millions, the sum, it wUl be remembered. 170 THE THEORY OF BUSINESS. Chap. XV. wMcL. we Supposed to be placed witli tlie whole bank- Hoids 24 ing class. Those who have entrusted the vast amount millions of , . the '130.' under consideration to the Bank, comprise merchants, warehousemen, manufacturers, and other producers, in- cluding agents of various kinds ; also the private and joint stock banks of London, all of whom have accounts in the 'Drawing Office,' and through them, bankers generally throughout the kingdom ; the G-overnment of India, for whom the Bank pays dividends on different stocks ; the High Court of Chancery ; and finally, the British Government, the entire revenue of which passes through the Bank, a large portion thereof being col- lected by the Bank's country branches. In receiving taxation and disbursing it to the 268,000 creditors of / the State and as salaries to public functionaries of every grade, the Bank stands between producers, — from whom, by the strong arm of law, money conferring claims to a part of their products has been diverted as taxes, direct or indirect, on wages, profits, or rent, — and the others to whom, for various reasons, products are to be transferred. The banking department, like any ordi- nary bank, keeps the current balances of its customers"; collects bills and drafts for them; and remits to places at a distance. The 24 mUhons of deposits, with the Bank's own capital of 18 millions, a large proportion of which it has invested in government securities,' consti- tute the bulk of its resources. And, by After the manner of other discount-bankers the Bank ing™iends londs. On the security chiefly of bills of exchange, a por- 19 millions. . ' The 1 3 millions of government securities in the hanking department are not to be confounded with the 15 millions held by the issue department. ment, for notes. THE BANE OF ENGLAND. 171 tion of the money left in its keeping. It lias lent 19 Chap. xv. millions, consisting partly of deposits and partly of its own capital, and retains 10^ millions sterling in reserve. As shown previously,^ the funds advanced as discounts are composed of cash and commodities in a certain proportion. The Bank has chosen to transfer 10 of the unused it has left millions to the department of issue, obtaining Bank of gold notes in exchange. These notes it holds in reserve in the^othw place of the metal which it can recover at any moment, men*^ This note-reserve measures the power of the banking department, which contains the 'discount office,' to withdraw, or to enable others to withdraw, gold from the issue department. All bankers throughout London and the provinces also retain some of their reserves as bank notes, and those wTio do stand in the very same relation to the issue department, in respect of their power of withdrawing bullion, as the banking depart- ment itself does. The Bank as banker is only one among many holding valid claims upon .the treasure in the department of issue. The item ' notes ' appearing in the accounts to the credit of the banking depart- ment, and not the entire stock of bullion in the other department, constitutes the available resources of the Bank of England, and determines the extent to which it can make further advances to producers. The pro- portion which this item bears to the deposits regulates the Bank rate of discount. Whenever that proportion declines, the resources of the Bank of England diminish, and they augment whenever it becomes greater, what- ^ At page 143. 172" THE THEORY OF BUSINESS. Chap. XV. ever the movement of the entire stock of bullion may- chance to be. bankers "^^ *^^ ^^^ ^°^^® ^^^^ ^^ °^ *^® ^^ millions, as- aisoiendon sumed to be the aggregate of balances left with the banking class, there are other 27 millions of money- proper at the disposal of bankers throughout the United Kingdom, of which two-thirds, or 18 millions, can be lent. No return states weekly how it fares with this portion of the loanable fund of the banking class, but we may conclude that not until it runs low will there arise any intense demand for discount at the Bank of England. Hence the significance of a diminution of the Bank's resources. ' An advance in the Bank rate usually means that a previous pressure has been put on aU other sources where discount is attainable, and that the demand has reached the last reserve.' ' Whenever an alteration in the rate is expected, the approaches to the ' Discount Office ' are thronged with representatives of the leading houses to obtain the earliest intelligence of the result of the deliberations in the Bank ' Parlour,' and news of any change in the rate is immediately flashed over the kingdom, the con- tinent of Europe, and now of America. ' Richard Cob- den relates how when travelling in Turkey and Greece, about the year 1837, he saw in the little island of Syra, Greek merchants, telescope in hand, waiting with the greatest anxiety for the arrival of the vessel which would bring them news from the Bank of England.' ^ Demand for Demand for money anywhere in the United Kingdom anywhere may tell upon the resources of Threadneedle Street. may affect the Bank. i G-oschen's Foreign Exchanges. ' M. Esquiros. THE BANK OF ENGLAND. 173 Some of the special causes that, tliro;igh money, aifect Chap. xv. the rate are given in the sequel ; here suffice it to say that whether it be languid trade making money redun- dant in a locality, or brisk trade making it scarce, the central reserve is likely to be affected. Customers of bankers in Liverpool or in Leicester will keep larger balances, or being pressed, they run them low, and, by discounting, place themselves in funds, possibly for export. Thus provincial bankers, through their town agents, may affect the Bank of England. Not that every cause which reduces the resources of the banking class generally, reduces the great central reserve. When the operative influence is distrust, it often augments the resources of the establishment which, besides being an ordinary banking house, serves as the citadel of com- merce whither in danger every one flies for safety. It has already been explained why all of the ' 24 mil- lions ' we have been considering, and of the 51 millions in which these are comprised, continue to constitute circulation in a national sense, in other words, to form a portion of the ' 130 millions.' The Bank Charter Act of 1844 has been prolific of The Bank Act 1844 controversy, and although it has passed its majority, difference of opinion continues to be expressed regarding it. There are persons who attribute every commercial disaster in some way or other to its malign influence, and others a^ain who hold with equal tenacity that the country's prosperity furnishes evidence that the measure operates beneficially. The Act discriminates between the bank note and all Discrimi- other credit-substitutes for coin. It treats bank-notes tween bank notes and 174 THE THEORY OP BUSINESS. Chap. XV. as instruments endowed with the faculty of serving in- every other stead of coins, hence of constituting a portion of the ™' amount of money assigned to this country as its share of the world's currency. The Act declares issuing notes to be as rightful a function of the State as issuing ' sovereigns. In both cases money is created. ' Banking is one thing, issue is another thing. Half of the mis- understandings that prevail on the subject arise from that inexplicable confusion in the minds of men which leads them to suppose that the issue of promissory notes is essentially and properly part of the business of a banker.' ' It separates As the Bank of England performs the functions both banking, of issue and of banking, it is, as might be anticipated, practically affected by an Act discriminating between these operations. It was this Act which gave rise to the complete separation that now exists between the issue and banking depa.rtments. Previopsly, the Bank held a common reserve against all its liabilities without distinction. It guards The Act prescribes 16 millions, as we have said, as the the issue of ■ notes, length that the issue department may go in employing the gold and silver left with it for notes : securities ^ must also be deposited for the millions made use of. The notes of the Bank of England have been declared legal tender throughout England, to the great conveni- ence of bankers ajid others who would otherwise have to retain coin in reserve. In Scotland and Ireland. a ' Mr. Gladstone's Speech, Feb. 23rd, 1865. ' No other issuer except the Bank of England is required by the Act to give security ! THE BANK OF ENGLAND. 175 bank note is not legal tender; consequently Scotch, and Chap. xy. Irish bankers require to keep specie reserves. It has been proposed to make the Bank of England note legal tender in Scotland. Scotch bankers could then hold some of their reserves as Bank of England notes, and the Bank would have to keep the metallic reserve of Britain instead of that of England. The declaration that the Bank note is legal tender amounts to declaring that debtors, bankers and others, throughout England may discharge debts contracted to be paid in pounds sterling, by tendering, not pounds sterling, but the promises of a large banking corporation to pay pounds sterling. Taking this view of the matter, it appears im- peratively necessary that Government, who confer such power upon the note, should, as it has done, take the farther step of securing that there shall always be a supply of pounds sterling in the Bank coffers sufficient to meet every claim by persons who had no option in respect of accepting notes in payment. Such is, in- deed, only an act of justice to creditors throughout the country. The Act, 1844, is sometimes charged with having But does limited the circulation ; but its limitation was the re- their suit of previous legislation. The remark has already been made that this country passed a real currency re- striction Act when it resolved that every bank note should be exchangeable for coin on demand. Britain did that nearly half a century since. The relation of the existing law to the preceding is thus concisely stated by Lord Overstone : ' The Act, 1819, ordered specie payments, but took no measures towards secur- 176 THE THEORY OF BUSINESS. Chap. XV. ing or Carrying out that ordinance ; then the Act, 1844, rendered compulsory the measures which were necessary for securing the convertibility of the note.' The Act, 1844, therefore only carried out effectually resolutions previously adopted. To raise the objection that notes cannot be issued unless gold is left in exchange, cuts deeper than the Act now in force. The recommenda- tion to issue notes irrespective of gold or silver, implies the advocacy of inconvertible paper. The employment of more money -^ for that is the aim of those who advocate inconvertibility — is, in itself, obviously of no advantage : sellers obtain higher prices for their wares only to pay higher in the same proportion for fresh stocks. During the transition to paper prices some may gain, but others must lose to the same extent. As to the practical working of the statute in question, it is exceedingly simple. 'Much of the discussion to which the Act has given rise is owing rather to the reasoning on which the measure was founded, and by which it has been defended, than by the provisions of the Act itself.' Only on the emission of bank notes un- represented by gold is restriction placed. Neither the banking department nor any other hank is by it in any way trammelled in its operations. Perfect freedom of , trade exists in banking. Requires The issue department is under obligation to buy, buy gow at ^t the fixed price of £S 1 7s, 9d. per ounce, aU gold of .17s. 9d. gta^jj^a,rd fineness offered to it for sale by merchants and others, which, as already shown, merely devolves on the Bank the duty of preserving an adequate supply of coins for the community ; the notes it pays for bullion THE BANK OF ENGLAND. 177 being exchangeable for coins. In accordance with the Act, the issue department, by the account given above, must hold 16 millions of gold unemployed. This is not to be considered a hardship towards the Bank, for when it purchased that gold it ' gave merely its own notes in exchange, and these notes cost only the paper and print- ing. The country incurs some loss by retaining trea- sure unused; a loss which previous investigation has shown to resolve itself into forfeiting interest merely. The Act enforces weekly publication of the balance And to , . publish sheets of both departments. A witness and member of accounts the Bank executive, examined by the Parliamentary Committee on Bank Acts which met in 1858, stated that ' as an exhibition of the Bank's accounts these re- turns are perfectly true and most judiciously arranged.' ' The late Mr. James Wilson considered that the appear- ance of the item 'notes' in the banking department perplexed the uninitiated, and he recommended that ' coin ' should be made to appear iustead. If the bank- ing department were to retain its reserve in gold, it would be necessary for it either to coin a great deal more buUion than at present, or to retain uncoiued metal, in which case banking would no longer be dealing with -* money,' and the alteration would confuse some if it removed misunderstanding from the minds of others. As far as the Act is concerned, the banking department seems free to do in the matter in question as it pleases : the Act requires only ' so much of the gold coin and gold and sUver bullion .... as shall not be required by the banking department thereof to be transferred > J. G. Hubbard, Esq., M.P. N 178 THE THEOKT OF BUSINESS. Chap. XV. to the department of issue. The Bank has chosen to ' ' transfer its entire stock, except 500,000Z. kept for current use. But it does The Act does not diminish the Bank's proper power its powCT to assist merchants and other producers. In poiat of to lend, ^^^^^ larger amounts have been advanced since the Act came into operation than before, so that there is no ground in what has actually happened on which to rest the assertion that the Bank is crippled by the Act. Against issue, excessive compared with the gold held, the Act places its veto ; but, as already stated, this is no fresh restriction. Under the preceding regime the Bank did not, any more than now, enjoy the privilege of un- fettered power of issue. Liable to be called upon for ■coin in return for notes, it had then, as now, to regulate its issues by the gold in reserve. Nor does it A favourite argument against the Act is that it fixed quantity the extent of issue twenty years ago, and that the amount country's i^^T^ provided is inadequate for the business carried on money. now. This objection probably rests on misconception, i The Act at no time fixed the quantity of money which the country should use. That is determined on a principle already explained. The volume of a virtually metalliie| currency is indeed beyond control; there is, however, some discretionary power left as to what the constituents of that volume shall be — how much paper, and how much coin. If it alleged that the combined amount of coin and notes is insufficient, the reply is that this is not the result of any Act of Parliament. In no or- dinary case could excessive striagency ia an Act dealing with bank notes create scantiness of the eountry^s money THE BANK OF ENGLAND. 179 as a whole. Were money undersupplied, its value must Chap. "xv. rise, and the importation of gold would become profit- able. The statutory enactment migbt, indeed, be too stringent, and the over strictness could take the form of preventing the issue of notes of certain denominations, say all under a certain value. In England there is no restriction whatever on the issue of notes for more than 51. ; only those for less than this are proscribed. Unless on the ground that the refusal to issue notes for smaller amounts is inexpedient, no charge of undue stringency can so far be sustained. The only remaining way in which undue strictness can show itself (credit being sound), is by issuers being forced to keep in reserve too much of the gold received for notes. But the published statements exhibit no unnecessary accumulation of trea- sure in the issue department, and emitting more notes without receiving bullion in return would merely di- minish a reserve by admission at present not too large. The loss caused by shaken confidence, certain to be the consequence of keeping an inadequate reserve, would far more than counterbalance any gain that might be obtained in the shape of interest on the million or two released, — a gain in a national sense quite insignificant. Some of the opposition that the Bank Charter Act Some opposition has encountered found a basis in the arguments of its to the Act ,. iij_j. IT rests on dif- supporters ; but during the last few years, public ferences of opinion has become almost uniformly in its favour. Still, to the some eminent men retain a partially unfavourable opi- notes, nion respecting it, and among these is Mr. J. S. MiU. One ground of his disapprobation is the assumption, in- volved in the measure, that bank notes differ from N 2 180 THE THEO-KY OF BUSINESS. Chap. XV. cteques and bills of exchange, Mr. Mill maintaining that all of these 'circulate as money, and perform all the functions of it.' ' Mr. Fullarton, on this point, holds an opinion similar to that of Mr. Mill. 'There is not,' he says, 'a single object at present attained through the- agency of Bank of England notes which might not be as effectually accomplished by each individual keeping an account with the bank, and transacting all his payments of five potmds and upwards by cheques.' Granting that cheques and bills are merely bank notes slightly modified in form, the conclusion would be irresistible, that the statute, dealing as it does exclusively with bank notes, is very defective, elaborately closing, so to speak, one Httle water-gate, and leaving' larger passages entirely un- guarded. Why we cannot accept as correct the opinion of Mr. MlU as to the functions of bank notes and cheques, though appearing in a work to which we thankfully acknowledge ourselves deeply indebted, has already been stated. As to the cogency of the reason given, it is open to every one to judge for himself. As to bills of exchange, when they have some time to run, in our judgment whoever accepts one in payment consents so far to perform the act of the capitalist: he postpones fruition. In the instance quoted by Mr. Mill from Mr. Thornton, of a farmer paying his grocer by a biU on his comfactor, the grocer in reality advamces ready gdods. Money will come into play when the bill arrives at maturity. Much discussion has arisen from describiag the Some, on , , . , ambiguities operation of the Act as that of making the mixed of words. currency fluctuate like a purely metallic one, so far by its ' Polit. Emm., vol. ii. p. 30. THE bank: of ENGLAND. 181 causing all drains to diminisli the circulation. On this, Chap. xv. Mr. Fullarton remarks that ' one might imagine they (the supporters of the Act on such ground) supposed that gold, which is drained off for exportation from a country using a currency exclusively metallic, is collected by driblets at the fairs and markets, or from the tills of the grocers and mercers.' Not so, however, if the mean- ing attached to 'in circulation' by those favourable to the Act is borne in mind. All bank notes outside issuers' walls, also all balances with bankers, (not merely the i portions of them held ' in reserve '), form part of the ' cir- culation ' — portion, that is, of the ' 130 millions ' without bankers — money which, becoming distributed periodi- cally among producers, forms, as already explained, the vehicles for conveying commodities as wages and other kinds of income. So that procuring money, say by selling goods, and withdrawing it for export, would be ' contracting the currency ' — not, however, by picking up pieces here, there, and elsewhere ; but rather by intercepting on its course a part of the stream of sove- reigns and notes. Taking money from bankers by borrowing it, as already shown, would not be contracting the circulation ; that would be keeping its volume, so to speak, at 130 millions, and meeting a drain by trench- ing on reserves, which are not circulation. The Act has been blamed for not preventing crises. It has failed to do so, and for a similar reason it has failed to prevent earthquakes. Some of its more zeal- ous supporters, who expected it to prevent crises, have allowed their zeal to overstep discretion. The nature and causes of commercial revulsions are considered 182 THE THEOET OF BUSINESS. Chap. XV. later, wlien it will appear that these disasters originate in regions other than currency with which alone the Act deals. But the desirableness, on the whole, of keeping bank notes apart from all other kinds of credit substi-- tutes for money becomes more and more felt. 'In a scientific view . . . the effect of the separation (of the issue of notes from banking) was to give a legal affirm- ation to the true character of currency by removing it from being confounded with bills of exchange, with promissory notes, with deposits, and with book debts, and, in fact, from the whole category of mere banking expedients and representatives of credit.' ' In the opinion of Mr. Mill himself, the Act in restricting note issue is beneficial in so far as this interposes obstacles to advances on the part of bankers, and arrests specula- tive extensions of credit at an earlier period, with a less drain of gold, and consequently by a milder and more gradual process ; ^ and if the restriction on note issue, instead of being absolute, were made contingent on the rate of discount being less than, say, ten per cent, the opposition of many would be entirely removed. Details. Thus far as to the famous Currency Act of Sir Robert ' J. G. Hubbard, Esq., M.P. ' Mr. Mill states {Folit. Econ. toI. ii. p. 226, and an explanatory note in the 6th edition does not alter his position), that the Bank Act 1844 makes a drain of 3 millions virtually a drain of 6 millions : first, 3 millions of notes are withdrawn from the Banking Department, and then used to withdraw 3 millions of coin from the Issue Department. The Bank's resources are of course not reallt/ reduced by 6 millions, owing to this twofold action. The Bank could not use the coins *hile they lay in the Issue Department ; it however held notes, the shadow, so to speak, of these coins, notes which, before the Act, it would not have had} Were the Bank, for any reason, to retain its reserve as coin, withdrawing 3 millions, or any other sura, would not have even the appearance of a double effect. THE BANK OF ENGLAND. 183 Peel ; and now to pass somewhat abruptly to details ; — Chap. xv. as of some interest it may be mentioned tliat, as visitors to the Accountant's ' Library ' are informed, the Bank does not re-issue its notes, and preserves those done with, for seven years, in case required as evidence, or for other purposes. About 10 millions of used notes are returned every year ; the old stock on hand, will there- fore be about 70 millions, any note of which can be pro- duced in a few minutes. ' The dies from which the water- mark is made, as well as the plates used in printing the notes, are all manufactured at the bank.' ' The notes are also printed on the premises, but the paper is made at Portal's Mills, Laverstock. In the two departments of the Bank, head office and branches, upwards of 1000. persons are employed, to whom nearly a quarter of a million sterling is paid as wages and salaries. The estimated rental of the premises in Threadneedle Street is 60,000Z. a year, and of the branches, 10,000Z. ' The Bank,' remarks M. Esquiros, in the Eevue des deux Mondes, 'represents at present the greatest accumulation of riches existing in the world. Its influence is felt in all the markets of Europe, and there are no enterprises in the most remote countries where it is not, to some extent, present through its intervention and capital.' To epitomise, in terms of the series used in illustration. Summary. the conclusions arrived at as to the position, and influence on a country's money, of bank notes, banking, discount- ing, cheques, and the Bank of England, in the six chap- ters immediately preceding ; it will be remembered that, ' Thomson Hankey, Esq. M.P., on Banking. 184 THE THEORY OF BUSINESS. Chap. XV. as representing the nation's productive resources, stocks or capitals of yam, cotton, and calico, respectively with spinners, merchants, manufacturers, dealers, and retail- ers, also coin amounting to '13,000i.', were taken; which coin becomes periodically distributed among producers/ as the means of taking gross profits. All the topics discussed in these six chapters, are connected with the coin or money portion of dealings. Issue causes a large proportion (4,400Z.) of the repre- sentative 13,00OZ. of coin to be replaced with bank notes, thereby making money partly of paper, altering its quality but leaving its quantity 13,000^. as before : all bank notes, outside issuers' walls, are 'circulation.' Such is the substance of chapter X. Then (chapter XI.) a part (6,1001.) of this mixed cur- rency of 13,000Z. is committed to a hanking class ; the remainder (7,9001.) represents what is retained by the public as ' change,' and for current purposes : all balances, (that is the 5,100Z. entrusted to bankers), con- tinue to form portion of the country's ' circulation.' Next, (chapter XII.) bankers, of the 5,100Z. left ia their hands, on the banking principle, lend two-thirds (3,400Z.) to producers. Loans, as discounts, are shown (chapter XIII.) not always to augment the capital used in a country. Cheques (chapter XIV.) are not money — they do not form portions of the ' 13,000Z. ' — but facilitate transfers of money, by dispensing with actually handling it, there- by greatly increasing the convenience afforded by banks: directly, at all events, they do not materially alter either • the quality of money, as bank notes do, or its quantity. THE BANK OF ENGLAND. 185 The Bank of England, (chapter XV.), of the whole chap. xv. bank note circulation (4,400i!.) is the furnisher of nearly ^"~' two-thirds (3,000i.) ; and of the entire amount (5,100Z.) committed to bankers, it, as banker, according to the accounts given above, holds 2,400?. 186 CHAPTEE XVI. DEPOSITS AT INTEREST. Chap. XVI. Deposits are not reserves of ■what would haVe been kept as money. The six chapters immediately preceding have been oc- cupied with subjects related to money, that is to coin and bank-notes ; or, more accurately, with what would be coin or notes were there no bankers. In aU the series throughout the country, comprising capitals in the shape of stocks of commodities in various stages of advance- ment, there would be (without banking) money amount- ing to 130 millions- sterling. In the six chapters it has been shown how this money is affected, in the first in- stance as to quality by issue, then how it is diminishedi or otherwise acted on by banking, discounting, and lastly by cheques. We now, however, quit the consid- eration of banking operations as concerned with money and proceed to treat of them as dealing with deposits at interest, the final topic connected with our sketch of the structure and working of the productive system. Bankers, besides dealing with balances of current ac- counts, deal with funds of another character. A few years ago the resources of bankers were adequately described by the late Mr. James Wilson as 'reserves before required to be kept by private individuals and traders, accumulated in the hands of the bankers,' but since this was written the assets of bankers have been DEPOSITS AT INTEREST. . 187 swelled by vast sums, not lioweTer of what private in- Chap. XVI dividuals would themselves have retained as money had ^ — r— ^ there been no banks. In 1840 the liabilities of the joint stock banks of London, including acceptances, amounted to about 3 millions sterling ; in 1845, to 10 millions ; in 1853, 21^ mOlions ; in 1856, 36^ millions ; in 1863 to about 70 millions ; and in 1866 the liabilities of only seven banks exceeded the enormous aggregate of 85 millions. The larger part of these sums, it is pre- sumed, comprises funds left at interest. While balances, as shown, consist principally of what, but for bankers, would have been retained as money, 'deposits' con- sist of what would not have been kept as money. Not that the difference here stated marks the two classes of bankers' liabilities by a clear line of demarcation, for in fact they shade imperceptibly into each other. Still this blending need not prevent the recognition of two kinds of funds, ' any more than the scattered trees of the intervening plain prevent our speaking intel- ligibly of the distinct forests of two separate hUls.' ^ Surprise is frequently expressed at the vast quantities of mon&y which the deposit system has called forth ; but it will not be felt when it is understood that deposits are not money properly so called. A deposit might originate in this manner: a producer, say our ware- houseman, receiving at settlement 11,000L, instead of paying it away for fresh stocks and as wages to per- sons in his employment, pays it into his banker's to bear interest. Some other producer, influenced by the condition of the markets so far affected by the altered ■ Whewell. 18S THE THEORY OF BUSINESS. Chap. XVI. In one sense they are com- modities, demand, borrows the 11,000Z. and purchases from manu- facturers the stocks which the ol^her left unbought. De- posit discounting is in large measure the employment under somewhat different auspices, of capital which had already been devoted to productive use, and not the addition of resources to those previously employed. The deposit banker of the illustration has merely stepped in to occupy a place between the owner and former employer of wealth (the ex-dealer), and the new employer thereof. Depositors contribute towards the capital required in some series or other, but possibly not such large amounts as we have supposed. Sums of 101. and upwards are accepted on deposit from persons who receive them as profit, salaries, wages, or rent. Both deposits and balances, viewed nationally, consist principally of commodities, but there is this marked distinction between the stocks of goods derived from these two sources, that whereas those obtained from balances owe their existence entirely to the operations of bankers, and without such operations would remain as coia idle in bankers' vaults, in respect of most of those stocks arising from deposits they would exist whether there were bankers or not. Without the agency of banks, as regards deposit funds the chief difference would be that they would be employed directly by their owners instead of indirectly as at present. One of the priucipal effects of the deposit system is what amounts to a revolution, silently brought about, in the manner of employing capital. The owners of capital have become in an increased degree a distinct class from the employers of it. DEPOSITS AT INTEEEST. 189 Deposits, as well as balances, are described as money. It is evident from what bas been stated that tbey are not money m every sense in wbicb balances are. In tbe sense that any depositor can in ordinary times ™™^''' obtain in tbe form of bank-notes or sovereigns, tbe en- tire sum left at interest, deposits n6t less tban balances are money. Still in deposits, money is mainly just re- . ferred to as tbe standard or measure to express nu- merically engagements entered into by bankers with depositors on the one hand and borrowers, or dis- counters, on the other. Such then being the nature and influence of the de- Deposit posit system, let us next consider some of the results of enlarge the lending balances as compared with those of lending 'S™"*^^ deposits. It was found that advancing money received as balances conferred a threefold benefit ; first, by creat- ing an insurance fund ; next, by advantageously placing the country's productive resources ; and finally, by gain- ing interest through causing investment elsewhere. With regard to the fand affording insurance, deposit- banking does not materially enlarge it. In fact, the balance portion of bankers' liabiliti^s contains the re- serve held against the deposit portion. Suppose the ex-dealer depositor to employ his 11,000?. himself, and not to ' deposit' it ; it is then evident that the 11,000?. wUl consist of calico, also of a portion of the ' 13,000?.' of the cash employed by our single series. The ' 5,100?.' of that '13,000?.' which becomes balances represents the cash kept against the yam, the calico, and aU other stodks including the dealer's. And matters are not altered when, by a certain arrangement, another takes 190 THE THEORY OF BUSINESS. Chap, the place of tlie dealer in employing stocks. Bankers — r-^ never keep one-third, or nearly that, of their deposit- liabilities as cash.' As to dispensing capital, the system proceeds on the plan of calling in the aid of a class between the owners It increases of Capital and those who employ it. In Scotland, in- borrowed terest-giving has been productive of almost unmixed "'^^^ " ' good. There is, however, an important difference be- tween the allowance of interest in Scotland and in London. The rates offered by the joint stock banks in the metropolis before the crisis of 1867 were unheard of in the north. When more then three per cent, is allowed on deposits, consols and many of the best securities become ineligible as banking investments ; only securities yielding larger returns can be used, but as a rule, these cannot be readily disposed of, and in periods of pressure or crisis are not saleable except at a ruinous sacrifice. Bearing in mind that all deposits are repayable in cash which, during panic, is not un- likely to be called for, the danger of holding securities which cannot be easily realised is evident. The result is that bUls of exchange are almost the only kind of security suitable for deposit-bankers. It has been sug- gested, in order to prevent the necessity for forced sales to meet an unexpected demand for money, that deposits should be made repayable only after a lengthened notice of intended withdrawal. But when depositors feel their ' ' Against upwards of 20 millions the London and Westminster Bank, in 1865, held only 1,617,000^. in cash; hut in 1866 itheld 3,464,000?. against 22 millions. Other banks usually hold even a less proportion of cash- than this ; and frequently some of what they do hold is at call, that is, not strictly cash in hand. DEPOSITS AT INTEREST. 191 money tied up in any way they are apt to become alarmed, Chap. and alarm soon spreads widely. The limitation of lia- r-I— bUity having been extended to private partnerships,' the tendency wiU be to withdraw deposits for employment directly by their owners. Eetiring partners, or assist- ants admitted to share profits, are likely to leave or to place more money in business, and less with bankers, as the provisions of «fche Act are more fully taken ad- vantage of. Such a change in the mode of employing capital would likely prove beneficial. The knowledge of persons connected with a firm, of its capabilities and requirements, will naturally be fuUer than a banker's can be. Finally, as to how far deposit secures interest or net profit to the community by rendering fresh resom-ces available. Though consisting principally of funds which And at- . . tracts some would in any case have been employed productively, fresh funds; deposits are in part new. Saving is encouraged by the practice of allowing interest on sums so small as \0l. Deposit it will be observed exercises its influence in enlargement by causing saving, whereas ordinary bank- ing utilizes money existing but lying unemployed. So far as banks encourage habits of prudence they are productive of good effects, which cannot however be ex- pressed numerically. The system, inaugurated by Mr. Gladstone, of the post office savings-banks, whereby sums of one shilling and upwards are received, must afford a healthy stimulus to the exercise of self-denial bearing upon a class lower in the social scale than was previously brought under such influence. But though deposit en- ' By the 28 & 29 Victoria, cap. 86. 192 THE THEORY OF BUSINESS. Chap. XYI. But does not much augment the capital employed at home. larges considerably available resources, it does not follow that tbe country's capital employed at home, is aug- mented thereby. The new resources are, as matter of fact, used in the country, as they are mainly lent on bills of exchange, but only by displacing others which how- ever are available for investment elsewhere. It is questionable whether the deposit system enlarges the home capital to any considerable extent. The magnitude attained by deposits has imparted immense importance to the bank-rate. When borrow- ing is carried to such a length, no wonder that business men anxiously watch every change in bankers' terms. A difference in the rate may make all the odds between an operation turning out profitable or the reverse. 193 CHAPTEE XVII. INCOME. Income, or revenue, is only another name for what chap. has already been frequently spoken of, to wit, goods finished and furnished fit for consumption. Commonly expr^sed in terms of money as so many hundreds or thousands of pounds annually — it is to be borne in mind that ' the revenue of the society consists altogether in ffOods, and not in the wheel which circulates them." iThe products furnished by the country's industry, or those procured with them from foreign countries, together with others received as dividend^ from debtors abroad, constitute the income or revenue of the year. Income has previously been arrived at by following income has the course of production, and it has been viewed as as- teen ar- ^ signed to different groups of producers, composed of fo^owtng''' capitahsts, labourers, and proprietors of land and other * produc- monopolized agents. Goods completed become income *"'°' to these classes imder the designations of profit, wages, and rent. These groups of producers as such have however no distinct class existence. The community, it is true, consists of individuals deriving income which is either wages, salaries, rent or profit ; but one person may receive from aU these sources. A merchant who ' Adam Smith. 194 THE THEOET OF BUSINESS. Chap. XVH. Reversing that order ■we now proceed up- wards. Income may really increase though its money amount does not, possesses an estate and is besides a director in a public company, for example, is in this position. Eeversing the course already followed of proceeding downwards to income, we now ascertain its amount by adding together the money-incomes of individuals, and seek to connect the result thus arrived at, with the dif- ferent constituents of the productive organisation. The money-income of the United Kingdom has been esti- mated at 600 millions sterling, that is to say, if all the money received as salaries, wages, profits, and rent, by Englishm^en, Scotchmen, and Irishmen during a year, were added together this would be the sum.' Does the 600 millions thus arrived at express the money value of products completed and consumed during the year ? Plainly not. An estimate grounded on the income-tax returns would in many cases count commodities more than once, ^he ' 1,000Z.' made by dealers would appear first in the return of their incomes, and then portions of it again in the returns furnished by professional men and others whom they fee. To make ' money-income ' correspond with ' goods finished and used,' a consider- able deduction must consequently be made, but what, can only be conjectural. Call it one-third or 200 mU- lions ; then 400 millions wiU be the money value of the articles in question. A country's income may increase although its money amount does not. Improvements augmenting the supply of commodities available for consumption effect a real ' Dr. Levi gives this as the amount in the Stat. Soc. Journal for 1858 ; more recently (Sept., 1866) this writer gives 745 millions as the sum, exclusive of incomes, not of the working classes, under 100^ a year. INCOME. 195 augmentation of income; but its money value expe- Chap. riences a corresponding expansion only if improvements ■ , — '-^ extend to the mining countries/ and lower the, cost of gold. Again, abundant harvests and similfir causes may temporarily swell the income of a year without affecting its money value. The converse of the pro- position no less holds good. Money-income may in- crease (say from 600 millions to 700 or 800) without the country becoming richer : in other words more coimters may be required to buy and sell with, owing to gold falling in value, while no more products are made available for the benefit of the comniunity. The income of a country and its wealth, are in a great Income is cIosgIv r&~ measure one. The yearly income of the United King- lated to dom, as stated already, consists principally of the clothes worn by the people, and the food they consume. To these add fixed capital, and the bulk of what constitutes its 'wealth is arrived at. Income is related even more closely to floating capital. And to That the ready goods which are forming, or will form, capitaif income were in their earlier stages capital, has already been explained. After what has been advanced re- specting capital, it is undesirable further to elucidate this part of our subject. Floating capital includes stocks remaining on hand at the close of a year, and these wUl not thep have become income ; but against these may be placed what were income, but had ceased to be capital, to wit commodities with consumers at its begin- ' The result of a more advantageous foreign trade is not taken into account. o 2 196 THE THEOKY OF BUSINESS. Chap, ning ; SO the year's income though not identical with its — . — '-^ floating capital is co-extensive with it. Money-income far exceeds money possessed. A sove- reign is used many times in the course of a year. Silver coins change hands still more frequently than gold coins. The money-income of any individual, though stated in pounds sterling, of course does not express the number of sovereigns he receives in twelve months, but merely measures and states the extent to which he is enabled to draw upon the annual produce of the coun- try's land and labour. No doubt any person may if he choose take his entire income in coins, but the law of averages determines the requirements of society as a whole with respect to coin as to other things. It has The revenue of this country has vastly expanded of increased _ *^ of late. late years; population has not increased, with propor- tionate rapidity, consequently individual Englishmen are on an average better off. It seems as if we were now deriving a fall measure of advantage from the in- troduction of the railway, the telegraph, and free trade. An augmented mass of products is placed within reach of consumers, as wages, profits, and rent. The public revenue exhibits extraordinary elasticity, and vast for- tunes are amassed by producers. True there is now, as ever, a large class on the verge of starvation, but this is not incompatible with a state of great prosperity. The abundance and general prosperity which at intervals visit communities are not in their nature permanent, and there is no reason to expect the present plenty to continue always. A country as a rule gradually uses up the fresh space, in effect afforded by improvements, INCOME. , 197 by swelling the census returns. To some extent, how- Chap. CTer, Great Britain is seizing tlie opportunity granted ^-, — '-' by its augmented productive force to work less. The weekly holiday or half holiday ; early closing ; the an- nual fortnight or month's recess — are all steps in that direction. There is still room for further progress in the way of lessening toil. The most zealous Confucian could not bestow more time and self-exhausting thought in securing material comforts immediate and prospec- tive than thousands in this country do on every side. While the income of the community as a whole Salaries exhibits a decided increase compared with its income risen so twenty years ago, the augmentation has not extended wages, r^nt, equally to all classes. The profits of business have *° ^'^° ' expanded ; rents have also risen ; and wages in most industries are greatly enhanced. But fees, stipends, and salaries of many kinds have not participated to the fuU in the general prosperity. These results are per- fectly in harmony with preceding investigations. Ke- venue of every description has been shown to come to hand in the first instance as gross profits, and enlarge- ment of revenue takes chiefly the form of augmented gross profits. Our dealer, by his month's operations, makes more than ' 1,000L' A large proportion of his expenditure, in some measure fixed, continues as before ; such are payments to professional men, and to those whom he employs as clerks; in short all emoluments regulated by custom, and settled at a rate somewhat above what would be the result df competition on the part of all qualified competitors. So far therefore he pays away 750^, the same amount as formerly, hence 198 THE THEORY OF BUSIiVESS. Chap, the portion remaining as his net profit is greater. The ■ , — '-- immediate effect, then, of augmented production is to raise the net profit of producers. This imparts a stimulus to accumulation, which is accompanied by an enlarged demand for labour and business accommodation. All payments are not fixed though some are ; wages of , unskilled, and the lower kinds of skiUed;, labour depend closely on demand and supply ; such wages rise, and rents likewise mount up. We are thus prepared for an improvement in the status of mechanics, artisans, and factory employes, and for a less degree of improvement in that of the classes receiving salaries under various appellations. Symptoms are now not wanting of public companies recognising the altered state of matters by elevating the scale of their fixed payments, and event- ually the community generally will no doubt also take action. Unless this happens, the relative position in society of the recipients of fixed sums and of wages wiU in future differ considerably from what it was formerly. It is still exceedingly hard to tell, whether or not a sovereign will buy less now than it would some twenty years since ; if less, then not only has the status of the salaried classes not risen proportionally: it wiU have fallen. Getting the same number of sovereigns, each of which has lost in purchasing power, amounts to losing position. Income is TiaaUy ; — income, closely related to wealth and float- samed.'and i^g Capital, is all consumed within the year in which it r^eTpiace. is produced. This proposition does not conflict with the other that large sums are yearly saved. Some may save ; or otherwise expressed, may lay by for old age, INCOME, 199 but the meaninff of this is that such persons provide Chap. . . . XVII. for receiving shares of the income to be created in future , — ■years, not that they preserve existing income. All per- sons, whether they save or not, depend for future revenue upon the continued fruitfulness of the earth, and the uninterrupted operation of the forces of nature. 200 CHAPTEE XVIII. INVESTING : THE STOCK EXCHANGE. Chap. We proceed to consider how the nation's yearly revenue • ,_:- is disposed of— revenu6 called money, but really con- Money may sisting of commodities provided by the industry of the e inres people. Though ' money ' is said to be dealt with in investing, it will be understood that it is mainly the products commanded by that money which are actually involved in such operations. Persons put, as we say, money into business ; or into the bank, as balances or deposits at interest; into securities, home or foreign; or into some fixed investment : of these we treat in order. In business, The effects of putting money into business have already appeared. It has been shown that capital em- ployed in that manner eventually becomes wages or salaries, profits or rent, to those engaged in maintaining the continuous supplies of finished goods — products which in turn may arrive at similar destinations. Or put into The disposal of money left with bankers, either as balances or as deposits, has also been traced; it has been found that it chiefly forms stocks of commodities in the various departments of production. The limit to investment in these modes respectively should like- wise be apparent from preceding considerations. tUe bank, INVESTING : THE STOCK EXCHANGE. 201 By investing in new gorernment securities, income Chap. is made over to the State. Loans are now known to be derived froTn the same source as taxes, that is from the Govem- revenue or income of the year. Our Government now talces and does not borrow what it requires. It imposes taxes which do not necessarily inflict greater immediate injury on production than would be caused by raising the amount by loan, while the need of providing divi- dends or interest in perpetuity or for a long term, is avoided. Some modification of the assertion as to the identity of the source of taxes and loans is requisite to suit the' case of countries like Britain which exports capital every year. Loans raised here might come partly from funds on their way abroad, instead of being drawn entirely from what would have been consumed in the country as income. Still, borrowing is attended with the great drawback that it necessitates the imposi- tion permanently of taxes to provide dividends. At one time loans were supposed to come from accumulations, and only taxes from current revenue ; this may account for the free use made of borrowing as a means of raising resources in days gone by. A debt of nearly 800 millions sterling is proof of The the high favour in which borrowing was once held by Debt™ the Government of this country. This vast amount, ' known as the ' National Debt,' has of course no exist- ence except as entries in the ledgers of the Bank of England. The greater part of the commodities which the enormous debt .represents disappeared long ago as material of war, and as wages of soldiers and sailors. The practical result of the debt is that nearly 26 202 THE THEOEY OP BUSINESS. Chap. XTIII. Probably lessens capital. millions sterling are every year diverted from producers as such, and made over to fundholders. As to the in- fluence of the debt on the country's capital, difference of opinion obtains ; probably the debt lessens the amount of capital by bringing saving sooner to a stand-still. Many taxpayers are capitalist-producers. Withdrawing a portion of their profits as taxation weakens the motives prompting them to employ funds productively. The dividends are, it is true, spent chiefly in the country, but this does not make much difference as they are not spent by such producers. Fundholders take the place of producers and appropriate portions of the results of industry. Although the national debt may lessen capi- tal, it does not follow that, had there been no debt, and consequently a larger capital, individuals would have been better off than they are now. There would in all. likelihood have been proportionally more persons to share the larger capital. Were the debt to vanish sud- denly, capital would rapidly expand, and if more rapidly than population, then, for a time at least, all would be benefited. As to the gradual liquidation of national obligations, it is not advisable in all cases to maintain a surplus revenue for their extinction. ' The advantage of paying off the national debt of Great Britain, for instance, is that it would enable us to get rid of the worse half of our present taxation. But of this worse half some portions must be worse than others, and to get rid of these would be a greater benefit proportionally than to get rid of the rest. If renouncing a surplus revenue would enable us to dispense with a tax, we ought to consider the very worst of all our taxes as precisely INVESTING: THE STOCK EXCHANGE. 203 the one which we are keeping' up for the sake of ulti- Chap. . XVIII. mately abolishing taxes not so bad as itself.' ' The time ■ , has at length arrived, however, when, in the opinion of Mr. MiU, Mr. Gladstone, and other anthorities on the 'subject, strenuous efforts at reduction of the national debt should be made. When people invest in foreign loans'' they virtually Money may . mi ■ J? J. be lent to make over commodities to other nations. They m tact foreign transfer to them the means of purchasing some of the 400 millions' worth of goods, by supposition the yearly production of this country. If the opportunity for investing abroad was removed, the commodities in question would most likely not be created at all. Many persons wiU produce in order to invest, who would not do so in order to consume ; in other words, the hope of securing future income proves a stimulus where the desire for immediate income does not. In one sense therefore the revenue yielded by funds invested abroad constitutes a clear gain to the country, and fresh facil- ities for sound foreign investment are to be viewed as nationally beneficial. In effecting a new foreign invest- ment investors pay money to the agents of the foreign borrower. These agents not unfrequently purchase goods in the lending country ; ships, materials of war, materials for railways or other public works ; and pay for them with the money received from subscribers to the loan, which then obviously simply changes hands in the lending country, passing from lenders to merchants 1 J. S. Mill, Polit. Econ. vol. II. p. 459. ' Such operations tend to equalise the rate of interest in different conntries : they raise the rate here. 204 THE THEORY OF BUSINESS. Chap, and others wlio furnish the particular commodities de- XVIII. ^ - — ■ • sired by the foreign borrowers. Should the contractors or agents remit the proceeds, they buy bills which, as a rule, are claims drawn against commodities sent by our merchants, to the foreign market. Eemittiug a loan creates a demand for biUs and tends to make the ex- changes adverse to the lending country. Loans are practically though not ostensibly granted to a foreign country when its securities are imported in payment for English products exported. The foreign investments of this country are enormous. By investing in the zenith of her afiQuence, Britain is providing a revenue which will flow in as commodities without effort on her part, even should she from the exhaustion of her coal fields or other causes lose her foremost place as producer. She can, so to speak, retire from business, or carry it on upon a diminished scale, and stiU have a large foreign commerce in the shape of fleets conveying tribute to her shores. Or put into In entering into fixed investments a portion of the fixed ill- -\ r • 1 5 • • -I vestments, products forming the year s income is made over to those who produce a railway, or roads, or machinery, or ships, or houses. As matter of account workmen receive monej' which they spend on food, clothing, and other commodities, while the country obtains in their place a railway, or houses according to circumstances. The work-people and others employed in consequence of the investment having been resolved upon are evidently those alone who derive immediate benefit from the operation. The investor hopes to reap advantage in the form of a good return on his capital at some futme INVESTING: THE STOCK EXCHANGE. 205 time. Excessive investment in undertakings of this Chap. , ' XVIII description may disturb industry by withdrawing funds — 1-, — '^ from manufactures and commerce. Too many people are then in effect set to produce houses or railways, and too few to produce articles required as revenue by the community. Over-investment may at first rather benefit than injure business. The workiag classes are enabled to purchase more than usual, at the expense of investors. But with a deficiency of floating capital industry must eventually suffer. ' Every investor, whether in business or otherwise, investing refrains from consuming ; he is said to save. Notions reframing far from correct are held with respect to the nature suming. and effect of saving. Without going the length of imagining that what is saved is money, and that it finds its way into strong boxes, it is felt by many, who forget that hoarding is now given over, that those who save, though acting wisely for themselves, somehow withdraw what others might have enjoyed ; and that trade would be benefited rather than injured did no saving take place. Need it be said that to others than the persons who abstain, saving is actually more advan- tageous than spending in the sense of buying for con- sumption? Spend money in a locality; certain shop- keepers thereby obtain, say ' 13 ' for what cost them only ' 11,' and thus make a profit of ' 2,' pwrchasers con- suming the '11'; whereas by saving and investing, these purchasers would place the entire ' 13 ' at the disposal of other people. Such then are the nature and consequences of saving The force and investing, with the main channels into which savings commodi- 206 THE THEOET OF BUSINESS. Chap. xviir. ties to be invested abroad, and luxuries, is available for other purposes. Various opinions are beld as to the amount of Britain's yearlj- savings. There are periods of great in- * vestment. Dividends consist of products. flow. The wliole of the productive force of society which is habitually expended in proTiding luxuries, and commodities for investment abroad, can if necessary be devoted to support a drain on any emergency requir- ing the country to put forth its energies, say for defence or conquest. As to the actual extent of the yearly savings of this country, very different estimates have been given. Mr. Gladstone when unfolding his budget for 1861, said 'may we take them at fifty millions? Enormous as that sum is, I believe it may be taken as the amount which the skill, and the capital, and the industry, and the thrift, of England may be computed to lay by every year.' Investments at certain periods are much more ex- tensive than at others. During a course of investmeHt • business is likely to be brisk owing in part to the ex- portation of commodities, caused by the exercise of purchasing power placed by investors in the hands of foreign borrowers and others. The condition of inter- national indebtedness eventually requires money to be sent abroad. Investors experience difficulty in meeting calls, and producers who, reckoning on the continuance of buoyant markets, have entered into excessive ea^ gagements, find their stocks moye off more slowly than they counted on. Then follow a struggle on the part of investors and producers to fulfil their engagements, consequent demand for assistance, and an extreme bank- rate. The class of investments first mentioned yield profit, or interest, the nature of which has already appeared; fixed investments give as returns shares of the results INVESTING: THE STOCK EXCHANGE. 207 which the amounts invested assist in creating. Divi- chap. dends on loans to the home goyernment, as already s , L. stated, are a portion of the taxes consisting in reality of products diverted from producers; and, on foreign loans, of products diverted from foreign producers. The dividends on loans to India, though nominally re- mitted as money, are actually discharged with Indian products ; on those to Turkey, with goats' hair or tobacco, and to Portugal, with wine or lambs' wool. Foreign debtors remit dividends by purchasing from merchants in the foreign country bills on Britain drawn against commodities sent hither. In remitting, the foreign country reverses the original operation of bor- rowing ; it then parts with a portion of its own wealth, whereas in borrowing it received a still larger amount of the lender's. Fluctuations in the exchanges have some influence on the periodical remittances of interest. When dividends are payable in the lending country, and in its own money, those fluctuations affect the borrow- ing country alone ; but when payable ia the foreign country and in its money, it is the creditor who feels them. The dividend warrant is then simply a bill on the foreign country, rising or falling in price with the prices of other foreign bills. The proprietors of. this description of stocks are beneflted by an exchange called adverse to the country in which they live. They are then able to obtain a larger amount of sterling for their biUs for foreign money. In this country with its income tax all dividends as Dividends well as revenue from other sources are held liable to the uabWor tax. The bulk of the public debt of Britain bears three i°<=o"etar 208 THE THEOET OF BUSINESS, S^T; T^ cent. : in other words the state has engaged to pay — ■ — ■ SI. a year for everj lOOZ. of stock held. It has, how- ever, for many years paid not so much as SI.; some- times, indeed, as little as 21. 16s. This has been , stigmatized as breach of contract, partial repudiation, and by other hard names through misconceiving the nature of the transaction, which simply amounts to this : instead of first paying SI. in fall and sending afterwards to the residence of the recipient for 4s., or other sum, as tax, reducing his receipts to 21. 16s., Government simplifies matters by blending the two operations, and 'paying its subject creditor only 21. 16s. in the first instance. A discussion arose some years ago from in- come tax being levied from dividends on stock held hy foreigners. When foreigners buy consols they are aware, or may be, that they purchase not a three per cent, stocfe,, but one that yields a return varying with circumstances. It is optional with them to purchase or not, and if they do they cannot complain from having to pay income tax. So far no difficulty now presents itself. Suppose, however, that a country imposes an income tax aft&r it has contracted loans with foreigners, or after stock has been purchased by persons belonging to other nations ; can the tax fairly be taken from such property ? The Government of India some time since levied a tax from dividends on native paper held largely in this country, bought when there was no income tax in India. As these dividends were also subject to English iucome tax, the tax was twice charged. By those who objected to the Indian impost it was urged that securities in the hands of foreigners should not be held liable for a tax created INVESTING: THE STOCK EXCHANGE. 209 after the debt was contracted, tmless, at the time of con- Chai'.- '' ' ' XVIII. tracting, it had been distinctly stated that in the event ■ < — of sudh a tax being levied they would be held liable. On the other side, among pleas advanced in favour of deducting the Indian tax, it was alleged that foreign * creditors of India derived benefit from its expenditure ; that, in fact, the portion of the dividend deducted should be considered a kind of insurance for the' re- mainder being punctually paid, as it went towards maintaining the Indian government. The principle involved in this apology would not be recognised as correct in business. Banks, for example, would demur to pay insurance on the stock in trade or on the life of their debtor, unless this were ' written in the bond.' The plea would also sustain foreign countries in de- ducting tax from dividends payable in sterling and in this country. The impost in question seems defensible, but on a different ground. When a government has borrowed from its own subjects they cannot complain, should an income tax be levied subsequently, because their dividends, like their neighbours' income, are held liable. And surely loans contracted in a country's own currency, with dividends payable also in the country, may be considered as raised from its own people. Shx)uld other nations voluntarily take part in such operations they identify themselves with the in- terests of the people of the foreign country, sufficiently to lead them to expect to have to contribute with them towards its taxes. Thus the Indian tax is defended, not on the ground that payers obtain benefit from the expenditure of the tax, but because the Government of 210 THE THEORY OF BUSINESS. Chap. XVIII. But it would be unjust to lev}- the tax on certain in- vestments. Coupons. India cannot, or will not, discriminate between lenders who belong to the country and those who do not.' But when a Government ostensibly appeals to another country for assistance, and promises to pay a specified rate of interest in the lending country, it is not at liberty, under 'pretext of income-tax newly imposed, to make any de- duction not stated when the loan was obtained. The tax would then be taken from persons who ohviously do not belong to the country, or derive the benefit of the expenditure of the tax, at least in a manner warranting the exaction.- In our view the Government of India, — sustained in its action when levying a new tax from dividends yielded by native loans though held by foreigners only on the ground of the impossibihty of recognising foreign holders — would not be justified in deducting tax from its loans raised in this market. Turkey, for the same reason with India, may (unless it has given pledge to the contrary) take tax from GaimeSf, not from sterling six per cents. ; America, from dollar bonds, not from sterling. Dividend warrants are sometimes termed coupons. The investor frequently receives a printed sheet, con- taining an acknowledgment of debt, probably also a promise of repayment at a given time, surrounded with a fringe of small dividend warrants to^ be cut off (hence the term cowpon) as they fall due, and presented for payment at some office stated on them. The centre of the sheet is technically styled the talon. Hitherto the discussion has been confined to opera- ' Drafts are issued at the Bank of England for these dividends, but they" &te payable in India. investing: the stock exchange. 211 I tions which are inTestments in a national as well as in Chap. an individual sense. Transactions in existing securities • , — '^ (as the documents furnishing evidence of indebtedness stock Ex- as well as claims to dividends are called) differ however whaifMein- from those that have been occupying us, in this, that Jo^*^";"''^ they are investments to individuals but not to the com- "^""'^ "" munity. Members of the Stock Exchange take part in bringing out new investments, but they make it their principal business to assist in transferring the owner- ship of those already created. They find buyers for principals who desire to sell, and sellers for others who wish to buy. In such operations floating capital is ex- changed, (by the intervention of money) for titles to dividends, or vice versa. Banks, Insurance Companies, the Court of Chancery, knd private individuals, are the parties to such transactions. It is frequently necessary to return foreign securities to foreigners, to pay, for example, for imported grain. "We then ' buy corn by cancelling obligations that foreigners have now either commercially or politically with this country.' ^ The process by which these obligations were obtained is thereby reversed. Instead of this country furnishing capital to other countries, such others furnish it to this in the shape of corn and various kinds of food. The national wealth is not affected in amount by f^i^^_ alterations in the prices of securities, except when a fluctuation ^ ' -"^ IS not an purchase or sale is made with other countries. If consols alteration ■^ _ in the (pronounce con-sols') fall from 96 to 90 the country is no nation's ^^ ' ■ , •' wealth. poorer on that accoimt, nor is it richer by their rising from 90 to 95. In regard to consols all that exists, ■ J. G. Hubbard, Esq. M.P. p 2 212 THE THEORY OF BUSINESS. Chap. XVIII. A fall in the value of gold would not affect consols. as already mentioned, is an engagement on the part of the British government to pay 31. a year for every 1001. of stock held. The price of the day shows how mnch other persons are willing to pay to the present holder to be allowed to take his place as recipient ♦' of the annuity of 31. During the great civil war in America the engagements of the federal government were in small request. United States 6 per cents, fell to less than 40 ; in other words, people would not give more for the promise of the American government to pay 6 yearly. American securities were largely held in this country, but the national wealth did not suffer by the depreciation which took place in that class of property when the dividends were regularly paid in currency of its original value. Persons who sold of course lost, but if others in this cowni/ry bought, the nation's wealth remained as it was. The loss sus- tained by some was compensated by the gain made by others. Fluctuations in the prices of securities like consols, into the value of which the element risk scarcely enters, ordinarily indicate an alteration in the strength of the desir^ for capital compared with that for periodic payments or dividends. They show changes in the value of money, using this phrase in the City sense of the rate of interest, but not in the economic sense. The price of consols would not be affected by a change in the value of money in the latter sense. Such a fall would lessen the power of the sovereign to purchase ' cotton, or coffee, and all commodities except gold, but not its power to purchase consols. The reason is evi- dent. The 31. per cents, being at 90 means that INVESTING : THE STOCK EXCHANGE. 213 a yeaxly payment of SI. in perpetuity can be bought Chap. for an immediate payment of thirty times the amount, ■ . — ^ that is, of 901. The 3 will bear the same relation to the .90 whether each piece of money represented by these numbers is able to purchase a large or only a small quantity of different articles ; in other words, ' • whatever may be the economic value of money. Let the value of the sovereign fall to half what it is at present, and the purchasing power of the 3 will dwindle to half, but people will continue to give 90Z. as before for the engagement on the part of the British government to pay SI., because each of the 90 will have been af- fected as to purchasing power in precisely tie same proportion as each of the 3. Thus an actual decline in the value of money does not manifest itself in an alteration in the price of the funds or other invest- ments similar in character. But an expected fall in its An ex- value will depress consols. In other words, investors may. will not give so much money for a series of annual repayments expected steadily to decline in value as they would give to obtain equal payments about whose value they had no such expectation. They will offer ' fewer years' purchase,' say only 29 years, or fewer, ac- cording to circumstances, and consols will fall to 87 or- under. It is impossible to say how far an expected fall in the purchasing power of money has been instru- mental in causing the low range of consols and other securities which has recently obtained ; but it is not too much to suppose that trustees and others in antici- pation of such an event have in soine cases avoided securities yielding fixed money returns. Probably, how- 214 THE THEORY OF BUSINESS. Chap. XVIII. Securities are sold to relieve pressure. fever, the main depressing influence at work in lowering consols has been tHe competition of other securities affording a better return than three per cent. An influence other than an anticipated fall in money's value has also been operating, depressing all securities, and that is the increased profits obtainable from busi- ness, owing in large measure to the united operation of railways,- telegraphs, and free trade ; more money, as it is said, is put into business, and less offered for fixed money payments. ■ In periods of pressure sales of securities are often effected to obtain capital. As every sale supposes a purchaser disposing of it, the supply on the whole is not augmented by the operation. Pressure is removed from some point by spreading it over a wider area. When dealings in securities are between countries, the capital of either may of course be increased, that of the other being correspondingly lessened: the capital of the world remaining unaltered in amount. 215 CHAPTEE XIX. PEESSUEB, CRISIS, PAliTIC. OuE tHeory of the productive system, embracing tlie chap. mTitual relation of agriculture, manufacture, commerce, ' - and banking, with the mode of disposing of products, has now been stated. At this point we should be able to appreciate the derangement to which an organisation so constituted is liable, a^d to form an estimate of the worth of various preventive and remedial measures frequently recommended. Industrial derangement is here considered mainly in industrial its tendency to make commerce and manufacture press mentis' upon banking, and thereby to affect the terms on which ^ahiiv'as bankers lend. We have chiefly in view the funds which t^e'^'^^oney lie within the province of what is known as the ' money ™"i^«t,' market,' and these constitute that portion only of the nation's capital over which bankers and other lenders have command. The capital of the country cannot be curtailed without lessening income in some or all of its forms of wages, profits, and rent. "When it is diminished in amount, workmen lose employment, or businesses have to be wound up ; farms remain unlet, or factories work on half time, or they close altogether. But possibly the rate of interest or discount gives no indication of what is occurring. It will not do so, 216 THE THEOKT OF BUSINESS. Chap, indeed, unless that portion of capital in the hands of XIX — ^-l- bankers is trenched upon. Of which As bearing on the state of the money market an stitueTts important change in its Constituents requires special cenrt.vbeen notice. So long as. bankers allowed no interest, and, changed. consequently, dealt almost exclusively with balances of current accounts, their loanable fund was not liable to much variation from the side of supply. Now, however, that they offer interest on deposits and thus deal vnM capital left for the sake of what it yields, they may at . any time have their resources withdrawn, owing to depositors resorting to other modes of employing their capital. Hence, building houses, lending to foreigners, shipments to foreign markets, languid trade, and many causes besides, by diminishing the, loanable fund in the hands of bankers, frequently tell powerfully on the state of the money market. Due allowance should be made for the influence of the deposit system, in contrasting the frequent and extensive oscillations of the Bank rate of late years with the comparatively few changes during the period preceding the Act, 1844, or with the fluctua- tions in the rate of the Bank of France. The money Prcvious investigations into the nature and working of may be the productive system prepare us to expect pressure from from com- Commerce as weU as from issue and banking ; and, first, merce, j^^ ^^ trace to their sources some forms of disturbance resulting from commerce, the operations of which may involve, as already shown, currency, credit, and com- modities. Through The Currency is subject to periodic undulations which, rency, unlcss taken into account, create trouble. It expands PRESSURE, CRISIS, PANIC. 217 towards tlie fourtli of every montL., owing to the number Chap. of bills arriving at maturity at tbat period ; it is also ■ ■ — affected by the payment of the quarterly dividends, har- vesting, the Scotch ' term ' time, and by other causes. But besides such influences of stated recurrence, others at irregular intervals give rise to pressure. It may be that industrial activity sends forward more products, and additional money is required on their account. Speculative dealings, too, by forcing up prices, render more currency requisite. In the case of a healthy expansion of industry, goods wUl be abundant, and augmented exportation speedily brings bidlion which restores the loan market — perhaps temporarily dis- turbed by the absorption of money in the home trade — to its normal condition. But when the absorption of currency is , caused by inflated prices, no such means for procuring additional gold from other countries are available. The pressure thence originating is usually of long continuance. When demand is for currency as such it is likely to be sudden and sharp, possibly sending the rat^ to an extreme point. Of most commercial and monetary derangement, credit is a condition. Engagements are entered into to pay money after the lapse of months, possibly of years, hence there are always extensive money obligations on the part of members of the community to each other and to foreigners, existing, temporarily, in a latent form. Purchases effected in spring, at credits of three and six months, involve payments, but not tiU summer and autumn. Though no fresh engagements were made from this moment for several months, a series of money 218 THE THEORY OF BUSINESS. Chap, payments -wotild have to be made daily during that period. After the crisis in May of last year, busiaess ■ was contracted as much as possible, but gradually-ma- turing engagements kept the rate at an extreme point for several months thereafter. The influence of credit in postpcndTig payments leads us to look for a low rate of interest for some time after business has recovered from a state of prostration. Destruction of commercial credit is capable of creat- shaken jjjg an enormous demand for curreilcy ; one, indeed, practically boundless. 'Whenever merchants have a want of confidence in each other, which disinclines them to deal on credit, or to accept in payment each other's cheques, notes, or bills, more money, whether it be paper or metallic money, is in demand.' ' Suspicion being entertained of the stability of commercial houses, the tendency is, in short, to revert to the social state in which money-equivalents are required for stocks of com- modities in all stages of advancement, and the magni- tude of the potential demand from this source will be understood from previous remarks upon the effect of commercial credit in dispensing with cash.^ Or through Pressure frequently originates' with commodities — Gommodi- , ^ , ' ties, that is, with what wc caU the goods' half of operations; that is to say, in capital, as contradistinguished from ciu'rency. A key to vagaries in the money market is not seldom to be found in the state of the produce markets. Owing to It may be that goods prove unsuited to actual re- goods , ^^ M , proving quirements. Commodities are necessarily prepared long ununited ^/^T"^" ' Eicardo. ^ Sefi Chap. ni. PRESSURE, CRISIS, PANIC. 219 before the exact kind or extent of demand for them is Chap. XIX known. Spring dresses, even the light garments worn ~ r-^— in summer are made months in anticipation, and liabilities are then contracted in connection with these wares. Producers are not unlikely to be disappointed in their expectation of selling, owing to unseasonable weather, or some caprice of fashion. The credit-term on which these goods were bought gradually but cer- tainly expires, and, though unsold, the purchases must be paid for. Again, the supply of commodities is often unex- Or in short supply) pectedly reduced. No cause of pressure operates more frequently or more powerfully than a bad harvest. The injury inflicted by it is sometimes accounted for by stating that 'people spend more On food, so they have less left to spend on other things, and trades in these "other things " become dull,' an explanation which overlooks the consideration that the farmers in Essex or York- shire, or in foreign countries, who obtain the 'more money ' instead of others may spend it. Should they do so, less in all need not be spent ; but business would still suffer in certain quarters. The demand from agri- cultural districts, or from abroad, might cause purchases of English products ; but these products would not pass through the anticipated channels, nor reach the usual consumers. The streams of commodities would be partly diverted from their courses. The demand will lead to purchases from merchants and wholesale houses ; but retail dealers in many districts are either left with their stocks unsold, or they sell fewer than usual; and, making less money, they experience difficulty in 220 THE THEOET OF BUSIlfESS. Chap, meeting their engagements. Those who furnis]i food — r-^ may not purchase equivalents of other goods, and then purchases by them may hare to be encouraged by lower- ing prices. The alternative of those who furnish food consenting to defer the enforcement of their claims to equivalents is considered subsequently. Or over- Over-investment, whether it takes the form of bricks invested. and mortar or railways, at home, or of sending com- modities as investments to other countries, lessens the supplies of goods available for home consumption. Stocks are sometimes diminished m effect, when they are not in reality. Although commodities exist, pro- vided they are not available, it is quite sufficient to cause pressure. Bonded and other warehouses may be choked with stocks from floor to roof, yet, if withheld from sale, they are practically non-existent. An anticipated alteration of supply may ca'iise dis- turbance. Fear that pent-up stocks may be let loose, or that certain articles will prove more abundant than had been expected, makes buyers hold aloof, checking the free passage of money. In these and similar instances of pressure originating with capital, the currency, or the mean^ of conveying goods, is still the channel through' which pressure manifests itself. The condition is commonly ascribed to a ' scarcity of money.' Money is scarce, but just as when viands are in short supply the appliances for serv- ing them are consequently also diminished. The money Passing from commei^ce as the possible seat of dis- may also be order, pressure may have its origin in a different irom iaaue, department of the productive system — that cpnnected PEESSUEE, CEISIS, PANIC. 221 with bank-notes. The result of the failure of a bank , Chap. XXX of issue is the yirtual disappearance of a portion of the ^-« — r— ^ country's money. Some of the '13,000Z. ' of our series suddenly vanishes. As the same sum of money effects numerous payments, the mere amount of notes extin- / guished is far from commensurate with the injury done. When the void is large, unless it is instantly fiUed with coins or notes in good repute, wide-spread disaster may ensue. The effects of the failure of the Western Bank of Scotland some years ago, whose notes were for a time refused by other bankers, exemplified a state of pres- sure attending the discredit of notes. The evil consequences of the stoppage of a bank And ^ ir b balance- holding balances msij b6 not less but even greater. Pro- banking, ducers must always have cash in hand or practically so, with which to carry on their businesses. Unable, through the failure of their banker, to touch a shilling of their working balances, although the need for them is as ur- gent as ever, merchants and producers generally, have to provide second balances. They, in the first instance, endeavour to place themselves in funds by borrowing from bankers ; and a high rate of discount may be the immediate result of a bank failure. The events of May 1866 created a rush for money by which the reserve of the Bank of England in the coui^se of a few days was nearly exhausted. Of the sums received in trust by a bank, and which in the aggregate frequently form a perfect mountain of money, it can, without lessening the dimensions of the pile, mine and remove its contents to the extent, as we have already shown, of two-thirds. The vacuity thereby created is not perceived so long as 222 THE THEORY OP BUSINESS. Chap, the bank continues in good credit. But it has in hand XIX — A^ only one sovereign out of three ; obviously therefore each soveTeign it holds is required to do duty for itself and other two. Let a bank stop, ahd this threefold power of every pound in reserve vanishes ; each instantly dwindles to its proper proportions, and a void conse- quently appears in the circulation. The absorption of coin and notes of May would not have been prevented by making the reserve of each failed bank at once avail- able, say by transferring it to another bank to lend, because the capacity of triple service does not admit of transfer. The resuscitation of a fallen bank is necessary to make the securities in its keeping tantamoimt to cash. Nor would pressure have been obviated by customers of failed banks immediately opening accounts with other banking-houses. In a national sense some of the treasure released by the ' mining ' operations spoken of has, in short, to be brought back to the country. The sums thus re-absorbed will be set free again, but when, depends not merely upon the banJnnipt estates being wound up, but also on the time that elapses before the community consents to entrust as much money as before, to the banking class. Bank-notes are stiU (Feb. 1867) held above their average; very little is known about the coin portion of the circulation. Or deposit. The failure of a bank dealing with-deposits at interest does not lock up what to merchants and others is moneij required for current dealings. It, however, embp,rrasses discounters aaid those to whom the deposits belong, and also indicates in all probability a, diminution of the nation's capital, through unwise investment of deposits. PEESSUBE, CRISIS, PANIC. 223 Several of tlie -more conspicuoTis causes of tightness Chap. XIX. of the money market have now been recapitulated, and ,— 1— it appears that they may be connected with goods or tions of the ' capital' as well as ' money.' In practice, some of the causes of causes enumerated may operate as follows : when credit p^^^^"*" is shaken, our dealer, for example, will in effect say, ' I have 10,000Z. t6 pay next week ; can I depend on receiv- ing from retailers the sums they owe me in time to meet my obligation,s ? ' and an honotirable anxiety — not necessarily ' unreasoning panic,' as is often alleged — to fulfil engagements prompts him to provide against pos- sible disappointment. In healthy times the amounts he receives in payment serve his purpose, and one sum of money then discharges numerous liabilities ; but when in anticipation of receipts he provides money he extends the requirement for it. If the additional amount is paid in to a banker it can be advanced, and a deadlock thereby prevented. Possibly, however, the dealer doubts whether his banker would repay the sum of 10,000?. when required. The conviction that he cannot Tcnow that he would, easily gathers strength sufficient to in- duce the dealer to take charge of the money for him- self. 'The ' 17 niiUions ' when banking fails, tend again to become " 51 millions,' their full amoimt. The demand on this ground, together with the effort to revert to some extent to equivalents in money for all goods, causes a frantic rush for bank-notes and coins. The important difference between bank-notes and all other credit-substitutes for money is keenly felt under such circumstances. To satisfy increased requirements, money borrowers Scanty means of 224 THE THEORY OF BUSINESS. Chap. XIX. meetiag increased demand foi money exist. As to remedial measures , for 'scarcity of mdney,' A further issue of notes is seldom ap- propriate. are thrown upon tlie banking class, but tbeir means on hand are very limited. Bankers have,' as a rule, leilt as much (' 34 millions ') of their resources as they dare lend, and hold a reserve not more than sufficient for their regular business. Deposits at interest, though of vast amount, do not add materially to the stock in hand of money, and hence are of little account in extending the ability of bankers to meet demand for currency. As far as bankers are concerned, taking into calculation ' the potential demand for money from the collapse of credit alone, their policy must evidently be to check demand, not to attempt to satisfy it. With respect to remedial measures for what is called ' scarcity of money,' the panacea commonly prescribed is a further issue of bank-notes, a course expedient in cer- tain cases ; in others, highly inexpedient. Such a course would not be appropriate during a period of pressure caused by the absorption of currency in the home cir- culation either from augmented dealings, or from the failure of banking-houses; nor when the pressure k owing to unduly elevated prices. The remedy applicable to the first two cases is a further importation of gold; and in the last, a return to lower prices. The de- parture of money from countries is a natural result of excessive indebtedness on their part, springing, it may be, from too heavy importations of goods, prompted by the state of prices in the home market; or from over- investment, otherwise expressed, from the excessive importation of securities. The effectual remedy under such circumstances is the diminution of imports — a step quite within the reach of merchants — and if possible PEESSUKE, CRISIS, PANIC. 225 the augmentation of exports. When commodities, Chap. XIX. owing to the seasons or to ' over-investment, are really -- — ,— 1- scanty, or when, owing to speculative holding, they are so in effect, the cure for pressure must come from di- minished consumption, or from throwing stocks on the market. The arrival of the requisite money from other places. An advance the curtailment of engagements to other countries, and of interest the diminution of consumption, all take time to produce cases™"^' their effects. The demand which sends foreign bills to i'«°^fi<'"''- a premium and causes money to leave the country, arises from engagements possibly contracted months before, and others will have been contracted in the meantime, aU of which »will gradually mature and require to be met. The diminution of purchases cannot therefore make its effect felt instantaneously. For the present an advance in the rate of interest or discount exercises a highly beneficial influence. It hastens the arrival of bullion through its action on the prices of foreign bills ; it induces holders of goods to sell them rather than to hold by borrowing, and leads foreigners who have funds in the country to leave them here. When food has been purchased in other markets owing to a failure of the crops at home, those who have famished grain are tempted by the high rate to defer withdrawing the equivalents of domestic commodities to which they are entitled. The foreigner, so to speak, then lends the food he sends, or rather the commodities which we would have to pay him for it. Such is the nature of the operation, though all the steps in it are expressed ia terms of money. The foreigner is said to leave his Q 226 THE THEOET OF BUSINESS. Chap. XIX. It affects the ex- changes. A demand for loana does not always in- dicate an under- supply of money. money here instead of taking it away. Advanced by bankers or others to certain borrowers, say manufac- turers, it is paid to persons in their employment as wages, or to spinners for stocks, who pay some or all to factory hands, and thus it is spent virtually on the articles which the foreigner refrained from removing. Pressure frequently originates iu accidental over-purchases at fair prices; it is unnecessary to prove that deferring payment under such circumstances is advantageous, or that, though a high rate only effects postponement of claims, not the cancelment of them, provided the respite is utilised and liabilities lessened, great good may ensue therefrom. The manner in which advancing the rate J)roduces its effect is by ' correcting the exchanges.' Short bills' on this country when the rate is raised are in request, and their prices in the foreign markets rise : in Paris, say from 25 to 25-10, or 25-20, while in the home market the same kind of bills on other countries fall. On the assumption that pressure is really, what it seems to be, the result of a ' scarcity of money,' the re- commendation to issue more notes is quite reasonable. ,It has appeared, however, that a demand for loans does not always indicate scanty currency. It may originate in an under-supply of products, and in this case the ' ' Short bills,' that is, those into •whose value interest does not enter. 'In exchange operations the price of bills at sight is most important, as that determines the course of bullion shipments.' The prices of long dated bills are also affected by the rate of interest in the places on which they are drawn. Thus 60 days' bills on London fall in price in Paris when the rate of interest in London is raised : bills are in less demand to withdraw funds from the country whose rate is high ; they yield less if discounted. PEESSUEE, CEISIS, PANIC. 227 cmrency, so far from being deficient, is redundant, and Chap. some of it will probably be sent abroad. There is a ■ r—- sense in which the medium of exchange is under- supplied, and one in which it is likely to continue so, and that is, in relation to the requirement for it. But it is highly improbable that for any length of time it will continue scarce compa/red with other a/rticles. Were gold relatively scanty, orders would be at once dispatched abroad to send gold and it alone. If money persistently leave a country, the probability is that its merchants have made excessive investnjents elsewhere or have pur- chased too heavily of goods, or that they have engaged to pay too high a price for them ; in other words, that they have contracted to deliver money too cheaply, scarcity of which is at once the result of these opera- tions, and the cure of the evil. When the resources of bankers are trenched upon to supplement stocks in short supply, their rate of discount may be forced to an ex- treme point. Bankers dare lend only so far as is con- sistent with keeping their engagements to their clients. At all hazards they must retain reserves suf&cient to meet the demand of those whose money they hold. Their high rate is frequently deplored as being injurious to business ; but the purser is not to be looked on as the cccuse of suffering when he is unable to serve out fall rations ; the high rate is itself a result of scanty products. 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Adbott on Sight and Touch 10 Acton's Modem Cookery 27 Alcock's Kesidence in Japnn 32 Allies on Formation of Cliriatendoin 20 Alpine Guide (The) 22 Apjohn'8 Manual of the Metalloids 12 Abaoo'b Biographies of Scientific Men .... 5 Popular Astronomy 10 ABNotn's Manual of Enclish Literature. . . . 7 Aknott's Elements of Physics H Ariindinea Cami '^^ Atherstone Priory 23 Autumn holidays of a Country Parson . . 8 Ayhg's Treasury of Bible Knowledge 19 Bacon's Essays, hy Whatblv 5 .-.. Life andLettera, by Speddino S Works '> Bain on the Emotiona and Will 10 on the Senses and Intellect 10 on the Study of Character 10 Baines's Explorations in S.W. Africa .... 22 Ball's Alpine Guide V3 BABi>rARD''s Drawing from Nature 16 Bayldon's Rents and Tillages 18 Beaten Tracks 22 Beckek's Chariclea and Gallua 24 Beethoven's Letters 4 Benfey's Sanskrit Dictionary 8 Lekrt's Journals and Correspondence .... 4 Black's Treatise on Brewing 28 Blackley and Fiiiedlandeb's German and English Diction ary S Blaine's Rural Sporta 2ti Veterinary Art 26 Blight's Week at the Land's End 23 Boase's Essay on Human Nature 9 Philosophy of Nature 9 Booth's Epigrams 9 Boneh's Transylvania 22 Bodrne on Screw Propeller 17 Bouknb'b Catechism of the Steam Engine. . 17 Handbook of Steam Enzine 17 Treatise on the Steam Engine ... 17 Bowdlrb's Family Shabspeabr 25 Boyd's Manual for Naval Cadets 27 Bbamley- Moore's Six Sistera of the Valleys 24 Baandr's Dictionary of Science, Literature, and Art 13 Bray's (C.) Education of the Feelings 10 1 Philosophy of Necessity 10 on Force 10 Brinton on Food and Digestion 2? BaibTow's Glossary of Mineralogy II Brodie's (Sir C. B.) Works. . . , 15 . Autobioeraphy 15 Constitution b1 History 2 Browne's Ice Caves of France and Switzer- land '-2 Exposition 39 Articlee '» Pentateuch 1^ Bocklk'o History of Civilization 2 Boll's Hints to Mothers 2S Maternal Management of Children. i'K Bunsbn's Ancient Egypt -^ Bt/NsEN on Apocrypha '. 2(i BoRKB'sVicissitucies of Families '•> Borton'^ Christian Church ^ Cabinet Law^'er 2'^ Calvert's Wife's Manual "' Campaigner at Home ** Cats and Fablje's Moral Emblems I'i Chorale Book for England 21 Clouoh's Lives from Plutarch - CdLBNso (.Bishop) on Pentateuch and Book of Joshua I!' CoLtiNs's Horse- Trainer's Guide 2ti Columbus's Voyages -■'• Commonplace Philosopher- in Town and Country R Comnoton's Translation of Virgil's ^nf/'/ 2'j CoNTANSBAu's Pockct Frcnch and Englibh Dictionary k Practical ditto w CoNYBBARsand Howson's Life and Epistles of St. Paul IS CooR on the Acts in Cook's Voyages £:: Copland's Dictionai'y of Practical Medicine 1 '' Abridgment of ditto I'l Cox'a Tales of the Great Persian War 'J Tales from Greek My thology 2-1 . Tales of the Gods and Heroes 2 1 Tales of Thebes and Arwos 2l Cresy's Encyclopedia of CivilEngineering 17 Critical Essays of a Country Parson s Crowe's History of France i Cki'mp on Banking, Currency,* Exchanges 27 CossANs's Grammar of Heraldry lU Dart's Iliad of Homer 2.'> Dayman's Dante's Divina Commedia 'iu D' Aubione's History of the Reformation in the time of Calvin 2 Dead Shot (The), by Marksman 2ti De la Rive's Treatise on Electricity It Drlmard's VillageLifeinSwitzerland .... 2'J Dr LA Pbyme'9 Life of Christ m Dk Mohoan on Matter and Spirit 9 De Tocqoevjlle's Democracy in America. . "J DoBsoN on the Ox 27 Duncan and Mjllabd on Classification, &c. of the Idiotic- Ij 30 ' NEW WORKS PUBXisHED BY LONGMANS and CO. DiTER'sCityofBkjme, 2 Edwards' Sbmnittster's iGuide 27 Emce,aTftI,pr^g?:^*^ 23 ELUcoTT'jBJro^^pid Narrow Way '?' 19 [Commentary on Ephesiana ; 19 .^Destiny of the Creature 19 ^i^^ecturesonLifeof Chri4 ■.. IS ^^jli_ Commentary on Galatiana ..;.;. IS) Pastoral Epist.^. 19 . — Philippians, &e.. 19 ' Theesajoniana.*.-; 18 Easays and Reviews : 20 on Religion and Literature, e^ted ■ byMAwNiNo ,,,',:.'.i 20 FA,iHBAiai;ionTi;on>Shipbiinding 17 ITAiaBAiiCLN's Al?pliCii1.ion of Cost and Wrougrht, Iron to Buildin? . . , ; 17 -——. — ^~ Infoi'ipation for Engineers. . . 17 — — ; Treatise nn Mills &.Millwqrk 17 FABBAR'sCriiJiptfersonLansruage 7 Flack's ■Huijta^'a Experiencee ■. . . . 12 Ffodlkfs's CHristendom 's Divisions '20 FftB^HFifatD's Alpine Byways ,. l.SH -T7 — rr — -^ Tour in the GrisonB 22 Friends in Couiicil 9 Fboude's History of England 1 Gee's Sunday to Sunday gl Our Sermons ' 31 Gilbert and Chdhchill's Dolomite Moun,- taine ' 22 GillIs'b Shipwi-eeks of the Navy 23 GoETH^»'S6cood Faust, by Anster 24 Qoodevb's Elements of Mechanism ........ 17 Goule's Questionaon Browne's Exposition of the 39 Articles 18 Grant's Ethics of' Aristotle 6 Graver Thoughte of a Country Parson .... 8 Grat's Anatomy 14 Greene's Corals and Rea Jellies 12 — Sponges and Animalculce 12 Grove on Correlation of Physical Forces.. 11 Gwilt's Encyclojiaidia of Architecture .... 16 Handbootof Angling, by Ephembra 26 Hare on Elecf ion of Representatives 6 Harlev and Bhow>i's Histologicai Demon- strations'.... '. 15 Hartwih's Sea and its Living Wonders. ... 12 r- Harmonies of Nature i . . , . 12 — : Tropical World 12 HatJohtOv's Manual of Gpology 11 HAwsBtt*^ Ijnstt'iir.tions to Young Sportsmen 26 Hbalby'* Ghees Problems 28 HiA ton's' Notes on Rifle. Shooting 36 Hblps's Spanish Conquest in'^Lmerica Z Herbchbl a EseayB fVom the Edinburgh .and' Quarterly |leview8 ...' 13 ~ Outlines of Astronomy 10 Hewitt.oh the Diseases of Women ..,.:.., U Hodgson's Time and Space j 10 HoLLAifrn'n Essays on Sc entific Subjects.... 13 HoLMKs'h System of Surgery ...".'. ; , 14 HJOOKRR and Walkeii-Arnott's British Flora 13 Hopkins's; Hawaii ,....' 11 Horne's Introduction to *he Scriptures .... 19 ■ ■ ..I— ^ Compendium of ditto jg HoRSLBv's Manual of Poisons 15 HoaSYNs**, Talt»a,.- 18 : ' Occasional Essays 9 How we Spent the Summer 22 Howitt'h Australian Discovery 22 Ho-wiTT's.Bpral Liffe of England. . ., .'..,..., 25 Visitsto Remarkable Places 23 Hudson's Executor's Guide 28 Directions for Making Wills S8 HuoHEs's (A-) ('orden Architecture is (W.)- Manual of Geoirraphy u Hullah's History of Modern Music 4 Traiisition Musical Lectures .... 4 Humboldt's Travels in South America .... 23 HtiMPHKFvs' Sentiments of Shakspeare .... Ifi Hdtton's Studies in Parliament d Hymns ijrom Xi/^a Germanica 21 Icelandic Legends. Second Series 24 Idle 's Hints on Shooting 2& Inob^ow's Poems 2^ jAjfsaoN's Legends of the Saints and Mar- tyrs iG legends of the Madonna I6 rLegeilds of the Monastic Orders 16 Jameson and Easti,ahe*s History of Our Lord 16 Johnhon's Patentee's Manual 17 — : Practical Dranghtstnan 17 Johnston's Gazetteer, or Geographical Dic- tionary ■ 11 Jones's Christianity and' Common Sense .... iff E^[.isch'» Commentary on the Bible 7 Hebrew Grammar 7 Keller's Lake Dwellings of Switzerland.. 12 Kesteven's Domestic Medfcine 15 KiRBv and Spence's Entomology 13 Koenen on Pentateuch and Joshna 19 Lady's Tour Round Monte Rosa 2S Landon's(L.E L.^J Poetical Works 2& Latham's English Dictionffiry 7 Lawbenc on Rock's ...'..v. 11 Lrck v's History of Rationalism 3 Le'fiure Hours in Town 8 Lewes' History of Philosophy S Lrwin's Fasti Sacri , 19 TiEwison Early Roman History , 6 Eanayson Administratioas 6 Fablesof Babhics.... & on Foreign Ju'risdiction ., 6 on Irish Disturbances &■ on Observation and' Reasoning in Politics. . . .'. ; r. . . . G on Political Terms .'...'.*.' 6- LiDDELL and Scott's Greek -English Lexicon & T-. ^", — ^ — r Abridged ditto 8 Life of Man SymbolisPd ,. ifi LiNDLET and Moore's Treasury of Botany 1&' Longman's Lectures on the History of Eng- land ,„. 2 Loudon's Agriculture .".''* jn Cottage.Farm,Villa Architecture ](^ pmn^v, !.■■''''.'.!!""!!!!!! in Trees and Shmba 13 Lowndes's Engineer's Handbook i& Lyra DomeBiica ..,.'. £i EucTiaristica '. 21 Oermanica * 16, 21 Messianica , .,, 21 Mystica 2? Sacra ;..;.,.. zi Macaulay's (T/Oi-d^Esflaya 3 History of l^Dg^nd 1 Lays of Ancient Rome St..