i mmmmmv- iUiimUiUitiiMiUitWi T li E WAYS AND MEANS PAYMENT: FULL ANALYSIS THE CREDIT SYSTEM ■VS' 1 T 11 ITS VARIOUS MODES OF ADJUSTMENT. EY STEPHEN COLWELL SECOND EDITION. PHILADELPHIA: J. B. LIPPINCOT T & CO. I860. J 7 ^ ^ ^ s Entered, according to tlic Act of Congress, in the year 1S59, by J. B. LIPPINCOTT & CO., in the Clerk's Office of tlic District Court of the United States for the Eastern District of Pennsylvania. :nA CONTENTS. f^ PAOE \*i Introduction 1 5 CHAPTER I. 2a Exchange of commodities an incident of civilized life — Agencies of this exchange not to be confounded with the exchange itself — The fitness of these agencies best determined by treating them as agencies more or less necessary to the main purpose, but not indispensable — Money, and money of account 25 if CHAPTER II. o ^ MONEYOFACCOUNT. ^ 1. The employment of gold and silver involves terms in which to express their value — Mint price and market price — Money of account a necessity 31 J g 2. Idea of value carried in the mind as the idea of weights, measures T of length and capacity — The use of money of account is much ,M greater than of money — Often confused in language — Kelly's Cani- A bist — Varieties of moneys of account — Decimal system 35 X ^ 3. British money of account — The pound sterling — Guinea — Sir Isaac Newton — Lord Liverpool and the system of 181G — Why frac- tions in weight of coins — Coins adjusted to money of account — "What is a pound?" — Fixed price of precious metals — Influx of gold — Depreciation only postponed — Remedy — Suspension of payments in Groat Britain in 1797 46 u. § 4. Colonial currency of Canada, and of the thirteen colonies now part of the United States 55 § 5, Moneys of account in Italy, Germany, &c. — Evils of varied coin- age — Coinage implies a previous price — Coins not a measure — Prices in money of account understood instantaneously — Ricardo — I Sir James Stewart — Bishop Berkeley — Montesquieu — Money of account, its limits of usefulness — Edinburgh Review 59 O-ti^D^iLoJ*' iy CONTENTS. Koies to Chapter II. I. Marquis Gamier and his critic, Letronne --^ II. Kxtract from a paper by the author, in the Bankers' Magazine — Prices — Uritish money of account — Locke and Lowndes, and the reeoina-e cntroversy of 1095 — Continental currency— Introduction of dollar unit — Hubert Morris — Alexander Hamilton - 7 III. Kxtnict I'roni a paper by the author, in Hunt's Merchants' Maga- zine — Nature and functions of money of account — Disturbance of prices of precious metals — Legal tender — Depreciation of paper currency — Coinage system of Great Britain 90 CHAPTER III. GOLD AND SILVER AS M O X E Y . I 1. Gold and silver a common equivalent or medium in the inter- change of commodities — Circulation by weight — Not constituted money by coinage, wliich only facilitates circulation — Diversity of mints, and confusion of coins — Wear and waste — Clipping, filing, sweating and counterfeiting 101 g 2. Circulation of the precious metals as money — Commerce de- pends on coins for so much use as is made of them, and no more — They perform no functions beyond the use we see made of them .... 110 § 3. Quantity of money required for the business of a country 118 CHAPTER IV. GOLD A X D SILVER STANDARD OF PAYMENT. I L The precious metals neither a measure nor a standard of value — The legal standard of payment — Standard of coinage — Legal tender — Objections to legal price of gold and silver — Earl of Liverpool — Price of gold fixed by authority in Great Britain — Seignorage on coins for retail business — Waste and folly of incessant recoinage — Legal tender at market price safe in large transactions 123 ? 2. Coinage — French coinage — Debasement, frauds, disturbed money of account — System of the United States — Act of Congress, 1792, adopting the dollar unit — Price of gold fixed — Results — Act of June, 1834, reducing weight of gold coins — Result — Act of February, 1853 — Silver coinage — Ingots of gold — Export of silver. 137 CONTENTS. V Notes to Chapter IV. I. Earl of Liverpool — British system of coinage adopted in 181G .... 14G II. System of coinage in the United States — Double standard — Pro- posed adoption of single standard of gold, as a remedy for scarcity of silver — Reduction in the value of our silver coins 149 C II A P T E R V. COINS NOT A MODEL CURRENCY. The actual use of coins measures their importance and power — Modes of payment more efficient — Each to be judged upon its merits — Usages of trade assign to coins their office — Not a model cur- rency — Bear no higher interest than a credit in bank — The British act of 1844, requiring the issues of banks to fluctuate as gold — Sir Robert Peel — Lord Overstone — Col. Torrens — Question one of commerce and payment — Return to hard currency impossible 155 CHAPTER VI. BANKS OF DEPOSIT. I 1. Bank of Amsterdam 174 1 2. Bank of Hamburg 181 Note to Cliapter VI. Bank of Amsterdam 184 C 11 A P T E R V 1 1 . THE CREDIT SYSTEM. § 1. Distinction between credit and the credit system — The latter defined — Business of payments separated from the business of dis- tributing commodities — Trade made virtually a barter — Division of labor leads to this — Relations of debtor and creditor mutual, and mainly among the same classes — The fund which pays debts derived from credits the counterpart of debts — Credits as a currency — Convertibility — Blending credits and money — Diversion of credits from their proper functions 188 2 2. Books of account 200 C II A P T E R V I II . COMMERCIAL SECURITIES. ^ 1. Promissory notes and bills of exchange, their efficiency as means of payment — As evidences of debt, they aid in separating the busi- ness of trade from that of payments — Dealers in exchange — Bankers — Concentration of debts and credits — Balances — Use of notes and bills in Lancashire, England, and in the United States — Limits of use in payments — Mutual debts and set-oli' 205 VI CONTENTS. g 2. Foreign exchange a means of payment — Complicated with coin- age and its evils, and with increased transactions of domestic trade — Processes of foreign payments readily perceived — Imports — Ex- ports — Dealers in exchange and bankers — Payments, where to be made — Rate of exchange — Circuitous exchange — Fluctuations in exchange — Economy of payment increases trade 212 I 3. -Fallacy of making foreign exchange a criterion of domestic cur- rency — Foreign exchange simply the process of paying and receiving debts of foreign trade — The medium employed has its prope^ agency — So with payments of domestic trade — Neither should guide nor control the other — Payments as distinct as the trade to which they belong — Long-continued adverse foreign exchange of American colonies, and its results 221 Note io Chapter VIII. Foreign exchange, its relations with banks — Export of specie — Con- traction of our currency — Resident agents of foreign merchants and manufacturers, their influence on foi'eign exchange and domestic currency 228 CHAPTER IX. BANK-NOTES. Facility and power of bank-notes — Disadvantages — Issued in exchange for paper of individuals — Convertibility not the basis of bank-notes, but a security against abuses — Inadequacy — Banks, and the re- straints imposed upon them — Bank-notes a medium by which com- modities pay for commodities — Demand for bank-notes by the debtors of banks, the cause and result — Bank-notes and progress of con- sumption — Circulation and efficiency — Exchange between banks — Proportion of bank-notes decreasing 231 CHAPTER X. DEPOSITS IN BANKS. A greater facility than bank-notes needful — Banks the reservoir of funds not in actual use — The fund employed in large payments — Credits the fund which pays debts — Depositors employ their credits to pay their debts — The credits will pay the debts — Deposits vir- tually a system of accounts kept by the banks for their customers — Indebtedness cliiofly mutual, and settled by set-off — Demand for deposits — Circulation — Absorbed by the banks in payments of dis- counted paper — The banks pay for paper with credits, and receive them in payment 241 CONTENTS. VU CHAPTER Xr. CLEARING-nOUSES. g 1. The Clearing-house of London — Private bankers — Concentra- tion of payments — Mutual adjustment — Mutuality of debts — Pro- cesses at the Clearing-house — Amounts cleared — Bullion Report of 1810 — Sir Henry Thornton — Relations of clearing to commerce — Banks and their customers — Payments of foreign trade — Do- mestic payments of special districts — The credit system — New channels for the precious metals 252 §2. Bank adjustment in the United States — Clearing between the banks — Mutual accounts and correspondence — Domestic exchange — Balances of home trade — Mutual debts the basis of this adjust- ment — The system of clearing in New England, at the Suffolk Bank of Boston 265 § 3. Clearing between the banks of Scotland — Balances payable in Exchequer bills, notes of the Bank of England, or gold — Their sys- tem of deposit, and its influence upon business — Stimulus to punc- tuality and industry — Circulation of bank-notes in Scotland — One pound notes 271 CHAPTER XII. FAIRS. Commercial Fairs of the 13th, 14th and 15th centuries — Continued on the confines of Asia and Europe — Kiachta — Nijni Novgorod — Kief — Concentration of payments — Fairs of Lyons — Payments of Lyons — The opening — Mode of conducting — Viramen de partie — Set- ting-off debts — Payment of balances — Results — Rationale — Illus- trations — Fairs of Novi and others in Italy chiefly for payments. . . 275 CHAPTER XIII. ' THE BANK OF VENICE. Bank of Venice — Originated 1171, in a loan to the Republic — Office of transfer — Interest paid — Transfers in payment of commodities and debts — Sums deposited taken by the Republic — In 1423, bills of exchange and payments in gross made only in bank — Premium on bank funds — Circulation — Banco del Giro — Evils of coinage, and severity of laws — Department for deposits repayable on de- mand and transferable — Its success — Deposits taken by the Govern- ment, but repaid — Capital of the Bank — London Encyclopaidia corrected — Causes of agio — Precautions againut fraud — Concen- tration of payments at Venice 288 Viii CONTENTS. CHAPTER XIV. THE B A X K OF G E X A . 'House of St. George, or Bank of Genoa — Contrast in financial systems of Venice and Genoa — Complications of Genoese finance — Security exacted by public creditors — The system of 1302, its officers — Pri- vate bankers — Bank in 1407 — Large array of officers — Deferred dividends, or Moneta di Pagiie — Famine of 1539 — Deposit system — Bank bills — Price of shares — Money and moneys of account — Advantages of Bank to trade — Processes of the Bank — M. Gautier and M. Coquelin on the moneys of account of the Bank — Carlo Cuneo on tlie moneys of Genoa 311 Nolc to CJiapter XIV. Italian writers — Dictionnaire du Commerce, Paris, 1839, corrected. .. 337 CHAPTER XV. THE BANK OF ENGLAND. I 1. Opinions and projects on credit and currency previous to the Bank of England — Samuel Lambe's plan, 1665 — Evils of the coin- age — Dr. Hugh Chamberlain's plan, 1G65 — Large model of a Bank, 1678 — Bank of Credit, 1682 — Bank of Credit, 1683 — R. Murray's plan, 1695 — J. Asgill's plan, 1696 — Office of credit, 1698 339 ^ 2. Bank of England chartered in 169-4 — William Patterson the pro- jector — Founded on a loan of £1,200,000 at eight per cent. — Oppo- sition and objections — Commenced 1695 — Bank-notes — Advances to government — Recoiuago — Rate of discount — Business of the Bank — Deposits — Bank bills — Ci-edit — Goldsmiths robbed by Charles II. — Safety of deposits — Use of deposits — Bank bills payable on demand — Bills of exchange and promissory notes on time — Convertibility — Bank-notes not substitutes for specie, but for commercial paper: should fluctuate with this paper, and not with coin — Concentration of payments in London 352 I 3. Bank of England's credits in account — Deposit of bank-notes — Conversion of individual paper into bank-notes — Bank issues credits, and receives credits in payment — Credits wrongly blended with deposits — Open credits payable on demand hazardous — Ob- jections — Credits payable on demand abolishes time on bills of exchange and promissory notes — Mingling credit and money — Consequences — Real nature of credits in account — Expand with trade, diminish with it — Not money — Payment by bank credits not dependent on money — Not a question of convertibility 379 CONTENTS. IX 2 4. Bank of England suspension from 1797 to 1822 — Order of Privy Council — Opposition — Terms of suspension — Extensions — Pro- gress of the country during suspension — Dissatisfaction — Lord King — Convertibility — Processes of payment the same during sus- pension as before — Bank issues and the commodities of trade — The credit system — Controversy as to depreciation during suspension — Bullion lleport, 1810 — BuUionists and anti-Bullionists — Tooke's History of Prices — Prices of gold and silver, and amount of circula- tion, from 1797 to 1821 394 CHAPTER XYI. THE DANKS OF SCOTLAND. The Bank of Scotland chartered, 1G95 — John Holland's account — Contrast -with Bank of England — Founders of the Scottish Bank avoid relations with Government — Object, economy of money — Bank-notes — Trouble with Roj'al Bank — Suspension — Modes of relief — Identified with masses, by receiving small deposits on in- terest — Forty banks, 340 branches — Harmony — English preju- dices, Scotch scorn — Cash credits a principal feature — Contrasts with English system — Scotch system equally effective, and safer — Bank failures few, and not disastrous — Suspension of 1797 in Eng- land without effect in Scotland — Reports to the House of Lords and to the Commons, 182G — System not cordially approved in England — One-pound notes — Discussions — Sir Walter Scott's level of gold — Modes of regai'ding the subject in England and Scotland — Scotch Banks the pride of the people — W. Chambers' distrust, with expla- nations 407 Note to Chapter XVI. Regulations for exchange of Scotch Bankers' notes 442 CHAPTER XVII. BANKS OF THE UNITED STATES. g 1, Banks are agencies of payment — Discussions and different views — Banks are dealers in credits — General waiver of legal currency — Paying fund from the proceeds of discounted notes — Banks absorb their own issues — Process exemplified — Demand for bank currency makes it good — Commodities of trade hold by debtors to banks — ■ Sold to pay the banks — Bank currency the medium — Commodities the basis ; individual and bank paper mere securities and means of adjustment — Circulation and deposits of New York banks in 1857 — Daily payments — Banks of the United States pay and are paid in their own currency, and thus furnish a safe medium for cii'cula- tion — Mutual debts 444 X CONTENTS. § 2. Bank-notes not money, but promissory notes of banks — Perform the functions of money — Deposits are so employed, but are not money — Both substituted by banks for notes of individuals — Banks make securities of paper, not money — Convertibility of bank-notes does not make them money; it is a mere check on the banks — Gold and silver not the basis of bank issues ; these are based on paper dis- counted by the banks, and this paper is based on the commodities for which it is s'^'cn — Convertibility an inadequate check — Em- ployed with fatal effect against those who rely upon it — It abolishes time on commercial paper , 459 § 3. Bank issues and agency the chief actual medium of payment — New York banks in 1857 — Contraction of currency — Fund used to pay debts — Process of paying continuous — City banks and country banks — The former chief agents in payments — Demand for specie — Panics — Results — Banks increase, despite abuses of banking — Effects of rapid contractions of currency — What is called specie pay- ments — Banks at the mercy of the mob — Men of business at the mercy of banks 475 § 4. Public right to the facilities afforded by banks — Contractions of the currency, and results — Remedies — Discounts, proceeds payable at a future day in money, but receivable at all times for debt-s to banks — Deposits payable at a future day, but receivable in bank for debts — Bank-notes payable at a day future, but receivable for debts — Long credits an element of disturbance in the credit system — Diversion of funds of the credit system from their proper channels — Country banks — Their business of a different nature — Present banking system not adapted to it 489 CHAPTER XVIII. INTEREST. Distinction between prices of precious metals and interest, or the price payable for the use of them — The price of each fixed by the State — Evasion — Fluctuations in price of gold and silver not coincident with rates of interest — High interest makes no demand for coins — Demand for facilities of credit system determines the rate of interest — Higii interest does not arise from scarcity of that for which in- terest is paid, but from fears of banks and capitalists — Usury laws should not apply to paper of the credit system — Amount paid yearly in the United States for interest — Objections — Interest a part of the expense of commercial adjustment — Not a question of money, but of dispensing with money — Economy of interest practicable in England and the United States 509 CONTENTS. XI CHAPTER XIX. /^ PRICES. 1 1. Complexity of the subject — Market value expressed in money of account — Money is for payment — Prices, sales and payments distinct tilings — Elements of prices — Influence of interests and passions — Necessity of purchasing — Necessity of selling — Fashion and fancy — Plenty and scarcity — Demand and supply — Monopo- lies — Commercial legislation — Duties — Speculation — Cost of pro- duction — Prices in great marts of trade 521 § 2, Eflfect upon prices of quantity of money — Theory of Montesquieu acceded to by Hume, Locke, and Harris ; denied by Sir James Stewart, Adam Smith, Lauderdale, Malthas, Ricardo, Torrens, M'Culloch — James Mill — Prices not expressed in coins, but in money of account — Wholesale mainly control retail prices — Lauder- dale — Malthus — Torrens — M'Culloch — Conflict of opinions — Marquis Gamier — Adam Smith — Ganihl — Humboldt's propor- tion of gold to silver — Jacob on precious metals — Rise of prices not in proportion to the increase of money — Arthur Young's inquiry into the progressive value of money — Tables of prices in Spain — Beawes — Prices of wheat in France 538 § 3. Effects of bank currency upon prices — Increase of wealth in Great Britain in 18th century — Advance in prices increases cur- rency — Power of purchasing depends not upon money, but upon personal confidence — High confidence leads to speculation — Lord Overstone — Tooke's History of Prices — His examination before the Secret Committee of 1832 — Evidence on prices before Parliamentary committees of 1832 and 1840 — Influx of gold from California and Australia — Comparison of currencies in United States in 1848 and 1856 — Prices the scale by which products of labor are exchanged — • Justice to labor determined by what men can purchase, not by the price they pay 564 CHAPTER XX. PUBLIC P A Y JI E N T S , 2 1. Processes of receiving and paying — British Exchequer, its prac- tice — Exchequer bills introduced by Earl of Ilalifiix — British reve- nue always anticipated — Floating debt a saving of interest — Ex- chequer bills suited to a certain class of lenders — Quantity carefully gauged to the demand — Wisely managed by the Bank of England — Advantage of disbursing revenue before its receipt, thus furnishing the currency in which the revenue is paid — Amount of Exchequer bills issued — Reduction of circulation by sale of Exchequer bills — Rate of interest — The Exchequer and the Bank — British system in contrast with that of the United States 577 Xii CONTENTS. ^ 2. Financial system of Franco — Count Mollien and Marquis D'Au- jiffret — Harmony and subordination of the system — Outline — Re- lations with domestic exchange — Special distribution of public funds — Money in treasury shortest time possible — Economy of new system — Commission on transfers — D'Audiffret — Money ad- vanced on public account — Firmness of the system — France first appreciates relations of public finance with trade and industry — Perils of credit lessened by this system — Want of details — Contrast with system of United States 594 g 3. Treasury of the United States — Act of Congress, 184G — Paper currency the usage of the country — Departure from usage — Efi"ect upon banks — Advance of interest — Increase of private banks — Economy of the system — The remedy a step towards banking — Domestic exchange and the treasury — Centre of operations of trea- sury and domestic exchanges in New York — Transmission of funds to and from New York — Paper operations of treasury — Present system and the public creditors — Indirect taxation and California gold favored the Independent Treasury 605 ]^ote. — Extracts from Reports of Secretaries of Treasury, Mr. Meredith and Mr. Guthrie, on the subject of Independent Treasury, and also from Report of Mr. Casey, Treasurer 613 g 4. Independent Treasury a result of financial difficulties — State banks — Currency of government paper and specie — Opposition to banks and paper currency — Bank of France — Banks not to be crushed, but replaced — Financial system of the act of 1846 — Treasury notes payable on demand without interest, and at six and twelve months with interest — French loans of 1854-5 — Whole loan offered by people in France out of Paris — Board of Treasurers — Principles restricting the issue of treasury notes — Lenders of money, their relations with the treasury — Offices in Washington and Now York — Connection of treasury with domestic exchange — Friction — A remedy required, and co-operation of the treasury — A national institution to form point of contact between the treasury and the domestic exchange 621 Note. — Mr. Guthrie's remarks on banking system of United States, . . . 626 I INTRODUCTION. "We propose to offer here, in as condensed form as practicable, what may be considered as the leading positions of this volume. A statement of this kind will enable every reader to glance more readily over those portions of the work of most interest to himself. It is taken for granted, that whilst there are so many conflicting opinions on the subject of money, currency, banking and credit — that whilst both theory and practice remain in doubt and dispute, and no authority high enough to settle these differences has yet appeared — there is room for the labors of those who may wish to furnish materials for the final adjustment of many vexed questions. It is further assumed that writers treating of these subjects have paid too little attention to the fact, that whatever concerns money, cur- rency, banking and credit, must be considered as strictly subordinate to commerce^ of which they are merely agents ; this cannot be over- looked, in any aspect in which these topics may be considered, with- out hazard of error. The chief inquiry is not. What is the power of money ? or. What is the use of money ? or, What can be substituted for money ? The inquiry which we prosecute, to ascertain the nature and doctrine of money, is. What is commerce, and what is the nature of the agency of money in its affairs ? Money, with all its substitutes, is only one of many agents of trade, and, like many others, it is a pure matter of discretion and convenience how far it may be employed. Warehouses and ships are very needful and much used agencies of commerce ; but a great business may, upon occasion, be done with- out them. It is with money, as with every other expensive agency of commerce, a question not how much it can be used, but how far it can be dispensed with. It has always been, and must always be, a chieflconsicrei'atlUH' iJf the practical merchant, to ascertain to what 1 (1) 2 INTRODUCTION. extent his business can be conducted without so expensive ari agent as money. ]>y the progress of civilization, commercial integrity and Christian virtue, it is now possible to carry on immense operations ia trade and manufactures without any aid from money; excepting the merest retail business, not one per cent, of the payments of Great Britain and the United States are made in real money. The main subject of this volume is not, therefore, money, but pay- ments. The inquiry before us has been, not the nature and use of money, but how are the payments or adjustments of commerce effected, whether by money or otherwise. The object has not been to bring forward new doctrines, or to propose reforms, but to attempt a very ample and thorough analysis of the present modes of employing money and credit in the current business of industry and trade. We have supposed that the best preparation for reforms and improve- ments would be a perfect understanding of the present system, in its various forms. Any suggestion in these pages which may seem to go beyond this, is made with the greatest diffidence, and more by way of contrast or illustration than as advice or doctrine. It has long appeared to us a grave mistake in those who have treated of money, that they leave out of vjcvv money of account, with- out a due understanding of which, as an agency of commerce, much confusion must reign in the minds of all who approach the study of money or currency. Gojd. ajiid silver are commodities of great value in small compass, selected for coinage, and made the legal standard of payment ; money of account is the language in which prices are expressed, and books of account are kept. A merchant may, in a few minutes, cast his eye over a hundred entries in his journal, in which the sums debited for goods sold may run, in various fraction- ary sums, from ten to a thousand dollars. He sees at a glance, and understands at what rates the goods were sold. But if the exact sum in coins corresponding to each entry was placed opposite to the entry, instead of the appropriate figures, it might require hours or days to ascertain, by counting and examining the coins, what is other- wise understood in a few minutes. So, likewise, naming prices in money of account is quickly done, and instantly understood ; but making payments in coins is necessarily a slow operation. We dis- tinguish, then, between the term money, as applied to giving prices, to keeping books of account, to expressing suras on the face of pro- missory notes, bills of exchange, and other securities, and the term money, as applied to coins used in making a payment; and this dis- INTRODUCTION. 6 tincti.011 we hold to be so important, that the subject cannot be well understood without it. To some it may appear as if we had labored this point at needless length, and with unnecessary minuteness ; but regarding it as the key to many difficulties of finance, and consider- ing the neglect of the subject hitherto, we have thought it better to be profuse of illustration, than to fail of our object in securing for money of account its true position in the consideration of the subject. People may change their coins once a month ; but they scarce change a money of account in half a century. In many of the more retired portions of the older States of the Union, the people still reckon by the colonial currencies of pounds, shillings and pence, as they existed in each of the respective colonies before the era of our independence. The use of a money of account is a mental operation, and is a characteristic of every civilized people. The same mental habit is applied to the use of weights and measures, which makes it extremely difficult to change even what is obviously absurd ; people prefer denominations to which they are accustomed, even when incon- venient, to those which are more simple, but which need the fami- liarity of habit to make them appreciated. We have, therefore, treated money of account as a leading element of the subject. It is the language of prices, of books of account, of price-currents ; it is the mode of expression employed in all money securities, to denote the amount for which they are given ; and, in fine, it is the very language of finance. To leave money of account out, when the whole subject of currency, banking and credit is in- volved, is like leaving arithmetic out of mathematics. It is for want of attention to the real agency of money of account, that such expres- sions as the "power of money" are often used, when only the power of credit is intended. When a merchant inquires the price of a hun- dred bags of coffee, learns the rate, and makes the purchase, giving his note for the amount, money has exercised neither power nor influ- ence in the transaction. It was the power of credit which made the purchase, and the power of money of account which enabled the par- ties to understand each other, make the transaction, and take the note for the amount of the purchase. The greatest power in the com- mercial world is commercial integrity, and the confidence or credit which it inspires. This is the power which moves nine-tenths of the commodities found in the channels of trade and industry. Money, by which we intend coins of gold or silver, is neither a standard of value, a measure of value, nor a representative of value. 4 INTRODUCTION". The precious metals are commodities of value, and do not, of course, lose that quality, though they gain another, by being coined. They become, by coinage and the law of legal tender, a standard of pay- ment. Every man may, by law, claim payment in coins ; that is, for any commodity previously sold, for any debt due, every person may exact the expressed equivalent in the commodity of gold and silver assayed and coined at the mint in denominations agreeing with the money of account. All debts are thus payable ; and it is only be- cause the parties agree to other modes of payment, that all debts are not thus paid. There are many obstacles to the use of coins in large transactions, besides their great cost; among these, the risks of theft and robbery, and the care and anxiety which these hazards impose, the danger of counterfeits, the rapid wear and deterioration of coins, the frauds of clipping, punching, sweating, and many others, which are regarded as severe grievances and trials in all countries where an exclusively metallic currency has long prevailed. All these combined have pro- duced a constant eftbrt to escape the employment of coins in large transactions. Gold and silver coins have not lost their interest in the eyes of men ; they are still the standard of payment, and universally an acceptable medium of exchange ; but they are far from being the universally employed medium of exchange. The men of trade and industry, who but receive money in large amounts to pass it off in the same way, are more concerned to escape trouble, risk and expense in the matter of payment, than anxious to employ only gold and silver which have passed through the mint. At the present time, then, the precious metals are employed only as the standard of payment, or legal tender, to be appealed to in case of di.sagreement, a very rare occurrence; as the medium of the merest retail trade ; as a reserve or security for tlicir issues, by banks of cir- culation ; and as the medium of i)aying balances of trade, both foreign and domestic. All these together make not five per cent, of the operations of industry and trade in this country, or in Great Britain. We cannot adojjt any safer criterion of the actual power of the precious metals as money, than what we see ; their import- ance and use is precisely what we know to be done with them ; no- thing more. All the rest is accomplished by means of credit, and the many processes of the credit system. It must be a great and mischievous fallacy, then, to regard gold and silver coins as a sort of model medium of exchange, to the cha- INTRODUCTION. 6 racteristics and incidents of which all other modes of interchange must be made to correspond. This is nothing less than an attempt to fasten upon industry and commerce the very shackles and inconvf. niences wliich they have long been struggling to cast away. There are many ways of making payments without using coins, each of which may stand for what it is worth, and be employed according as it may be available, without being tortured to work as coins would have worked, if they had been employed. When two men of business deal largely together, keeping the record in their books of account, which once in three months are balanced, and the mutual debts thus paid without any use of coins, there is no possible sense in which the mutual payment thus effected could be made more effectual by any reference to coins, than by this simple and economical method of balancing the sums of the various entries, debts and credits, expressed in money of account, the one against the other. This mode of payment needs no aid in theory, in practice, or by analogy, from any employment of coins ; but this mode of payment is one of the main devices of the credit system. As the debts of men of business find their way into the banks, so do their credits ; and the functions of the banks, stripped of their many complications, consist chiefly in balancing and thus extinguishing the debts and credits of their customers. There is no ground, we think, for the doctrine that the incidents and characteristics which attend a currency of gold and silver should be imitated, or even referred to, in the processes of the credit system, much less be regarded as laws. ATT are equally agents or processes of commerce, ancl^TiiTist be considered and judged upon their respec- tive merits, and be employed according to the opinions and sound discretion of the parties concerned. Coins become indispensable only when claimed as a legal right. The real origin of the deposit banks, such as Amsterdam and Hamburg, was the worn and deteriorated state of the coinage, which, at that time, was a grievance of a magnitude which only those fami- liar with the commercial history of that period can realize. This evil is only less now, because the circulation of coins is nearly dis[)ensed with. These deposit banks proved to be more useful than their pro- jectors anticipated. The circulation of the ownership of the coins was found to Ijc much more rapid and easy than the circulation of the coins. The wear and tear was saved, and they w^ere more effi- cient in bank than out of it. And it was ultimately revealed at Am- sterdam, that the transfers and payments at the bank could proceed 6 INTRODUCTION. for scores of years after the specie had been removed. This, how- ever, should have been well understood from the first establishment of the l)ank ; for, while the ownership of the deposits was changing every day, no one had an opportunity of verifying the fact of the amount being actually in the bank. Every man who accepted a credit in the bank took it upon his confidence in its administration. The money system, to this extent, thus resolved itself, by a sort of necessity, into a credit system. The credit system was, in fact, a growth (ex necessitate rei) of ne- cessity. It was indispensable to the advance of civilization and industry ; it grew with the progress of commercial punctuality and integrity ; it now flourishes only in this soil, and cannot be destroyed where it finds this aliment of its growth. It sent forth many vigorous shoots, in various countries, long before it attained its present mag- nitude and wide extension. The payments at the fairs so prevalent in Europe during the middle ages, some of which continue even down to our time, were, to a large extent, made by setting-off debts against debts. Men learned to pay their debts with their credits ; and this mode of payment only disappeared as the jirogress of the credit system, and the growth of cities, absorbed both the business and the payments of the fairs. These payments at the fairs revealed that the best fund with which to pay debts is debts. Every debt implying a credit, no one could better employ his credits than in paying his debts. This required no money, and was, therefore, not only economical, but free from innumerable risks and troubles inse- parably connected with payments in money. The Banks of Yenice and Genoa were both remarkable forerunners of the credit system, and beautiful examples of its economy and power. The political and commercial importance of these two great republics were, in a great measure, owing to their respective banks, the oldest and most important of which we have any account. The lessons taught by these institutions have no doubt entered largely into the progress of the credit system, as now developed ; but we strongly insist that the study of the system of these two banks is yet necessary to any thorough comprehension of the power of credit, and of what is necessary to an enlarged and efificient financial system. The capital of the Bank of Venice consisted of a debt due by the republic to its citizens. The government took the money, and gave in its place an inscription on the books of the bank for the amount, bearing interest. The government returned the money immediately 1 INTRODUCTION. 7 into the channels of circulation among its citizens, whilst the lenders of the money circulated the debt as a deposit in the bank. All the large payments of this great commercial city were, for nmny centu- ries, paid in this fund, and the gold and silver coins were released for the purposes of the retail trade, the payment of foreign debts, and the foreign expenditures of the republic. Tlie government of Yenice dealt faithfully with these holders of stock in the bank, not only paying the interest punctually, but redeeming any amount which seemed superfluous, or beyond the demand of the public. This policy not only kept the bank fund at par with specie, but more than twenty per cent, above it. The bank was always open to further loans to the government, when such investment was in de- mand. The capital of the bank fluctuated in amount according to the wants of the people, and not according to the wants of the public treasury. - The Bank of Yenice performed its functions for over five hundred years, with an uniformity of success, and immunity from censure or complaint, which no other currency has enjoyed for a tithe of that period. During that time of vast commerce and immense public expenditure, the repuljlic had incessant trouble with their own and foreign coinage, and very many stringent regulations were made and enforced, to cure evils and prevent abuses ; but we have no record of abuses on the part of the bank, or of injuries inflicted by it upon the people. Believing that the commercial fairs of Europe, and the Banks of Yenice and Genoa, were capable of imparting historical lessons not yet properly appreciated, we have brought them more prominently before the reader than has been done in any work upon money or currency. We have, in later times, acliieved a method of clearin"* debts between banks ; but a lesson may be learned from the pay- ments at the fairs, of successful clearing between individuals. There is no reason, in theory or in practice, why clearing may not, to a considerable extent, be practised between individuals mutually in- debted; The history of these fairs furnishes abundant exemplilica- tion of this most economical and effective of all the modes of pay- ment. The history of these celebrated banks furnishes other lessons which will richly repay the most careful attention. They demon- strated the •ellicacy of circulating deposits as a means of payment, ard. that the deposits were just as ell'ective when they consisted 8 INTRODUCTION. of a debt due from the government, as if they were gold or silver ; and tlicy showed that it was possible to keep the amount of this public debt, as hold by the depositors in the banks, within a range of amount which not oidy prevented depreciation, but kept the deposits always from fifteen to thirty per cent, above gold and silver. The distinction between credit — the confidence which men place in each other, and which induces them to defer the day of payment for goods purchased — and the credit system has not, in our view, been sufficiently observed. The credit system springs from credit; there could be no credit system without the exercise of that confi- dence which accepts a future instead of a present payment. The two processes are, however, wholly different; credit refers to confidence, and to the jjostponement of payment ; the credit system refers chiefly to the mode of payment. It is that system by which the payments for commodities are separated from the transactions to which they belong, and made a separate business. More than nine-tenths of all the payments of industry and trade are effected through the processes of the credit system. The payments thus made are in no degree connected with, nor dependent upon any reference to, or any employ- ment of the precious metals. The credit _,sy;st?™_ii_y^^-^ \yhich men set-off the debts wliich others owe them against those which they owe to others. This, of all modes of payment, involves the least risk, and is the most effective, satisfactory and economical. No currency can be more suited to pay a man with than that which he has issued himself. It is that which the credit system employs ; and it may be added, that this system keeps books of account for those who avail themselves of it, in which they take credit for what others owe them, and are debited with what they owe others. The magnitude and complication of the credit system conceal its details, and render it, as a whole, difficult of comprehension. It is only by severe and continued analysis that the processes of this vast system of payments can be even partially displayed to the view of the reader. Books of account may be regarded as one of its most effective agencies. The merchant who debits a manufacturer five thousand dollars for raw materials in the course of six months, and gives him credit for finished goods to the amount of seven thousand dollars in the same period, is very willing to unite with his customer in dis- charging ten thousand dollars of this debt by balancing the account INTRODUCTION. 9 between them, leaving only two thousand to be paid otherwise than by the balance. The merchant and his customer each receive pay- ment of five thousand dollars without money or currency. Each is paid with the debt lie owes ; the book is the evidence of the debts, and the balancing is the act of payment. The issue of promissory notes by each of these parties for the five thousand dollars does noL^alterthe nature of the transaction, but only the mode of payment. \The notes, instead of the books, become evidences of debt ; and if the notes are exchanged directly, no other payment is necessary. If the merchant finds it for his interest to negotiate the note held by him, the complication commences. But the debts to be paid are not increased ; the real nature of tlie busi- ness remains the same ; the parties have only changed. The mer- chant receives the amount payable to him from the person to whom he negotiated the note ; and with the amount so received he can pay the^note given by him to his customer ; and this customer can, with the amount so received, pay the amount of his note negotiated by the merchant. It is the same when both parties negotiate the notes they take ; both remain debtors for the notes they gave, and both receive the amount needful to ])ay, from the parties to whom they transfer the notes. It is thus with all who give and take notes in the course of their business ; they use the notes they receive to effect the payment of the notes they give ; and it is the same with bills of exchange. To effect this, further complications and devices become necessary. A class of men is formed, who make it their business to deal in these securities, or evidences of debt. If a banker or broker pur- chases the two notes given by the merchant and his customer, it is obvious that both receive the means from him to pay the notes, of which he has become holder and owner. The process of payment between them will be very simjjle, if the banker merely give each of the two parties credit on his books for the proceeds of the notes pur- chased of them. Their respective checks on tliese credits pay oiT the whole indebtedness, except the interest deducted for the time the notes had to run, which interest they must pay in other funds. Banks become, in this way, substantially book-keejiers for their customers. They discount promissory notes and bills of exchange at their instance, giving them credit in account for the proceeds ; the banks can well afford to take checks upon these proceeds in pay- ment, because they give nothing else for the paper ; and every check 10 INTRODUCTION. given in payment reduces the liability of the bank to that amount. The custoniei-s of the banks are indebted in large amounts for notes given, and are creditors in large amounts for notes received ; the notes are all either discounted by the banks, or placed in them for collec- tion ; and the banks thus represent both creditors and debtors. So far as the banks have issued bank-notes, or given credit for i)romis- sory notes and bills of exchange, they can receive them in payment, for it is their own currency. Their liabilities to the public are for bank-notes, and credits on deposit ; and the return of these in pay- ment is a redemption, to that extent, of their liability. The books of the banks furnish, thus, a mode of adjustment by which the customers are enabled to apply their credits to the pay- ment of their debts. The profit or commission of the banks is the interest for the time the discounted notes have to run. Promissory notes placed in the banks for collection are usually paid in the same way : the banks can afford to take their own currency for tljese also, because it is, to that extent, a further redemption of their debt to the public. So far as the indebtedness of the customers of the banks is mutual, it is readily extinguished, for to that amount the debtors hold credits sufficient to make their payments. Every one who has a balance to pay, must do it, of course, to the satisfaction of the bank. It is by the operation of this process that the dis- charge of much the largest portion of the debts annually paid in the United States is effected. This process continues with a regular step, because the notes held by the banks mature day by day, and must be met ; the proper fund to pay them is that which the banks gave for them, and this is not only the most abundant, but the most accessible. The demand for this fund is, therefore, as strong and constant as the necessity of paying commercial paper at maturity. In becoming chief creditors of the men of business, the banks issue a currency which would not otherwise e.xist, and which becomes a medium specially adapted, in quantity and kind, to pay every debt due to them. The debts pay- able at the banks are the proper absorbents of the currency issued by the banks. This currency is good, and attains circulation be- cause it is in demand, not only by all the debtors of the banks, but by all who are their debtors. Such a large and constant demand, in fact, makes this currency available to a very wide extent. The debtors of the banks become such by giving promissory notes for commodities of trade in general use ; and they stand ready to INTRODUCTION. 11 receive for these commodities that bank currency which will pay their debts. The tendency of this currency is, therefore, and should be, to flow back to the banks in extinguishment of debts there payable. In this, as in many other things, where the largest advantage is found, there is found also the greatest danger of abuse. The great demand for this currency, arising from the urgent necessity under which debtors to the banks are placed, of paying their notes as they mature, invests the bank currency witli the full power of money ; for that which will pay such a vast amount of debt is needed by so many, that it will purchase whatever can be obtained for money. The banks seem thus to have it in their power to manufacture money, and they are importuned to lend this currency as if it were money. Their power of safely issuing it is limited strictly to the demands of those who require it to pay debts maturing in the banks. It can only be good when the debtors of the banks are able to pur- chase it from the hands of the public, and when they do so purchase it to pay their debts in bank. It is not money ; it has only this function of paying debts in bank, and circulating as a substitute for money, un^IeFTEFslfhiulus of the demand for it by the debtors of the banks. The banks have, however, at various times and places, fallen largely into the error of lending their currency as money ; and there have been many occasions and periods when their debtors became unable to return it to the banks ; and then it was often found that the promises of the bank were worth not so much as the paper on which they were printed. No more of this currency can be issued safely than the banks can find not merely safe men to borrow, but men who have something with which they can actually redeem it from the hands of the public, and restore it to the issuers. If the circulation is not kept active Ijy the demand of the debtors, and if they do not return it at as rapid a rate as that at which it is issued, payment will be demanded of the banks at a rate with which they cannot possibly comply. This al)use of issuing currency without due precaution, and in amounts wholly unjustifiable, is the most com- mon, and one of the worst abuses of baidiing; and it occurs from ignorance far more frequently than from iVaud. The remedy for these evils which has been most relied on, is that of placing the banks under stringent obligations to pay their cur- rency on demand in specie. This would be a complete remedy, if 12 I X TR D r C T I X . compliance were possible ; but that is not the case — far fi'om it. It involves a stock of the precious metals in the country equal to the deposits and circulation of tlic banks, and applicable to this purpose of remaining in the ban.ks as a security for their issues. Security, absolute security, sliould be required of the banks; but it is surety au error to assume that the security must be gold or silver. There arc many ways of securing debts, but gold and silver are rarely thought of as security ; yet it is recpiii-cd of the banks to three times the quantity in the country. The banks are required to hold this security for public benefit, which involves two great absurdities ; one, that the banks should bind themselves to perform an impossi- bility ; the other, that they should Ije the holders of the security on which the public is to rely. The fact that baidc currency can, to a certain extent, perform the functions of money is only incidental ; it is not its office, nor special purpose. Because its special use, however, gives it this power, and therefore opens a wide door of temptation to abuses and over-issue, security becomes necessary not only as a restraint, but to make good losses and damage. This security should, therefore, not only be such as can be given, but such as would be always safe and avail- able ; and the banks should not be the holders of it. The exaction of payment on demand by the banks in coins for all their issues, is not only a demand with which they cannot comply, but it has served further to obliterate the distinction between bank issues and money. So long as no demand is made upon the banks, it is assumed that their issues are convertible at the will of the holder. They obtain, by this means, a higher credit and wider circulation ; and that is looked upon as money which is, by theory, convertible, and which is assumed to be so in practice. The temptation to both banks and borrowers is thus increased, and the volume of l)ank issues swelled, until a collapse becomes inevitable. As the special function of bank currency is to pay debts to the banks, the rule of issue should be not what they can put into circulation, whether depo- sits or notes, but what they can recall by the payments of their debtors ; for if they do not return the notes, the baidvs can never redeem them. In all the processes of industry and commerce, there is probably no absurdity tolerated equal to that practised by the banks, of dis- counting the paper of their customers running from two to six months, and giving their bank-notes or credits payable on demand INTRODUCTIOX. 13 ill coins. The persons who give these notes take from two to six months to arrange for their payment ; the banks intervene, abolish the credit which the course of trade dictated to the parties, and be- come responsible for the whole instanter. The banks of the United States incur this liability every year, to the extent of not less than $3,000,000,000, and are at no time free from a demand for less than $500,000,000 in specie, a quantity more than double that in the country, and tenfold that held by the banks. There is no conceivable plan by which the banks could fulfil this en- gagement. It would be impossible for the drawers of the paper thus takeu by the banks to anticipate tlie maturity of their obligations, and pay them in coins ; any law framed to enforce such anticipation would be regarded as the height of absurdity and injustice. It is this fearful blunder which has made banks of circulation the terror of many minds, and the object of such prejudice and reproach as scarcely has a parallel. AVhilst they fnlhl their legitimate functions of purchasing individual paper with their own currency, and receiv- ing that currency again in payment, their usefulness is admitted and extolled ; but whenever the sole test of their soundness is applied, and payment in coins for their issues is demanded, they have no choice but to be ruined, or to ruin their customers. They cannot pay their notes and deposits in gold or silver, and must suspend, or commence a contraction of the currency which works a public injury many times greater than the capital of the banks concerned ; it not only ruins individuals, but causes the sacrifice of a vast amount of property, and works a still greater loss by depreciation. If this test of paying all liabilities on demand were applied to the richest firms in the nation, they would all fail. That the banks undertake thus to pay docs not alleviate the absurdity ; for, on the one hand, they should not be permitted to undertake an impossi- bility ; and on the other, no reliance should be placed upon a secu- rity aljsolutely unavailable. We impose upon the banks, as a test of their solidity, a condition which, when the time of trial arrives, becomes a scourge to the whole community in which they are situate. It is a test which enables the banks to resist the fulfilment of their engagements by inflicting a grievous calamity upon the public. When called upon to pay on demand, they resist it with all the powers of attack and defence they can wield ; and they claim to be sound, not unfrequently, because they have hurt the public more than the public has damaged them. 14 INTRODUCTION. Ill place of this dangerous condition, the banks should be required to give ample security for both their notes and deposits, and that security should be lodged with the State ; they should be required, under severe penalties, to keep their issues at par with specie. Their notes and deposits should, at all times, be receivable for any debts due to them, or piiyablc at their counters ; but they should not be bound to pay specie in any other way than it is payable by their customers ; that is, at the maturity of the paper discounted or pur- chased by them. If the individual paper taken by the banks averages two months to maturity, then their customers have these two months in which to employ the bank-notes and deposits issued to them in payment of their debts in and out of bank ; and during that period of adjustment, the banks should be exempt from any demand for specie upon their issues so employed, both because they are perform- ing a legitimate office for which they are specially adapted, and from which they could not be withdrawn without serious evil ; and because the credit on the paper for which they were exchanged is not ex- pired. The claims of the banks on the public ought to proceed pari passu with the claims of the public on the banks. On this principle, the issues of the banks would be absorbed in payment of debts due to them. If not so absorbed, the banks should only receive in payment that which will redeem them when presented. Whatever liabilities of the bank are not thus redeemed, should be amply covered by available security. The practice of paying or extinguishing debts by the process of clearing, now becoming so common among the banks, is not new. Three centuries ago, a very large proportion of the payments of cen- tral Europe were made in that way. Then it was effected, on a large scale, between individuals ; now it is wholly confined to ths banks. Then it was the chief mode of accomplishing the vast pay- ments arising from the trade of the multitudinous fairs of that period ; and it so continued, until other modes of commerce supplanted that of the fairs. The clearing at the fairs was simply a process of set- ting-off debts against debts — the same, in effect, as balancing booi' accounts. A. said to B., you owe me a thousand florins; pay that amount for me to C, to whom I am in debt. This being done, A. is acquitted, and thus the process goes on. It is obvious that the final balances, among hundreds assembled for that purpose, may be reached by setting-off mutual debts, and drawing verbally on each other at sight, where the process involves more than two persons, and INTRODUCTION. 15 thus continuing to pay, until tlie result is reached of those who have more coming to them than they had to pay, and of those who had more to pay than they had due to them. The conclusion of the whole was, that the balances to pay were the exact amount of those to receive. The mode of payment which had most prominence in large trans- actions, after clearing began to lose its importance with the decay of the fairs, was that of circulation. This was practised not only at the great Banks of Venice and Genoa, but also at the deposit banks which succeeded them. The same money in a bank, or the same credits upon the books of a bank, was by this method kept circulating or passing from person to person, accomplishing a continued circle of payments. Its effectiveness did not come to an end, for it moved in a circle embracing nearly the same parties, gradually passing from the men of one generation to those of another. This circulation is still in full vigor in the Bank of Hamburg, and other survivors of the deposit banks of the seventeenth century ; but it has no counterpart in our more modern institutions. The deposits in our banks are the proceeds of discounted commercial paper. The credits issued by the banks, of which these deposits are composed, are absorbed and wholly extinguished whenever they are paid to the banks. Their place is supplied continually by new discounts and new credits. This mode of payment by circulation of the same money, or the same fund, as, for instance, national debt, differs from clearing. In the former, it passes from hand to hand, performing all the payments its successive owners can effect with it. If these owners were seated at one table, they could circulate a sum in coins from hand to hand to the same effect, and see the money before them at the same time. But if seated at the same table, they could extinguish a large portion of their debts by simply exhibiting their claims, and balancing or clearing them, so far as mutual, and by verbal transfers, as in the fairs, until the final balances were reached, seldom over five per cent. on the amount paid. Clearing is, beyond all question, the simplest, the most economi- cal, and when applicable, the most efficient of all modes of ])aying del;ts. It is precisely analogous to balancing accounts. Parties w^ho are in Ijusincss relations arrange to ascertain daily, or at con- venient times, the state of their mutual claims ; and having verified, extinguish them by set-off. The banks of New York extinguished among themselves in that way, in 1857, upwards of $7,000,000,000, 16 I N T n D U C T I N . or upwards of $20,000,000 each day, upon which the daily balances did not exceed five per cent. This enormous sura is cleared in New York alone, without the use of any currency or medium of payment wliatever. It is done by evidences of debt bearing- the items of mutual claim, by a statement of the amounts, and by the processes of a balance. Tlie banks in other cities avail themselves also of the economy and facility of this process. These clearing establishments have been gradually improving their methods, and we believe there is yet room for progress in that respect, not only as between banks, but that the same principles and processes are susceptible of many applications between individuals. This would not only be an advantage to those who may adopt them, but would exert considerable influence in reducing friction in the operation of the money and credit systems. A com- prehensive treatise on this subject, in which the subject should be thoroughly treated in reference to its possible applications to clear- ing between individuals, would be an important addition to commer- cial literature. The fact that those who give credit to the greatest extent take it from others most liberally, and that the object of such persons is to apply their credits to pay their debts, furnishes sufficient ground upon which to build such an inquiry. The subject of interest has engaged our attention upon only two or three points. Interest is almost exclusively considered in the light of a charge for the use of money. No adequate explanation of the term interest, as now very generally employed, can be given from that point of view. Strictly speaking, very little monej' is lent upon interest; there is probably, in the United States, ten times as much interest paid as there is money lent upon interest. We do not regard the proceeds of discounted notes, whether they take the shape of bank-notes or bank deposits, as money. They are merely the credits or securities of the bank substituted for those of indi- viduals. Yet these bank-notes, but more especially the deposits, are really the chief medium of payment. The fund upon which interest is chiefly paid, is that which stands in the banks under the name of deposits. The two great items of interest paid in this country are the deduction made from notes and bills of exchange sold or dis- counted, and loans of amounts deposited in the banks, the proceeds of discounted paper. Gold and silver are seldom lent upon interest; they are never sought for as a medium of payment, because a check upon a bank is INTllODUCTION. 17 preferred. Gold will command no higher rate of interest than a credit in bank. When interest has advanced even one or two hundred per cent., there is no corresponding advance in the precious metals. The current rate of interest depends upon the facility of obtaining the needful supply of that fund which is usually employed in paying debts. It is not the plenty or scarcity of this fund which determines the rate of interest, so much as the disposition of the holders. The fluctuations in its amount do not correspond with the fluctuations of interest. It often happens that the deposits in the banks are largest when the rate of interest is highest. There are many speculations about the level of the precious metals, about money flowing to one country and from another : this flux and reflux, when applied to problems of interest, furnish no light. Within the range of trade, foreign or domestic, the precious metals receive little impulse in any direction from the rate of in- terest ; nor do they exert upon it any appreciable influence, except so far as the loss of specie by the banks may lead to a contraction of the currency. We have discussed the topic of prices more elaborately, perhaps, than was necessary for our purpose, which was chiefly to show that the relation between the quantity of money, or currency, and prices was not, by any means, so close as many have supposed. The notion long prevalent, that prices were exactly adjusted to the cpian- tity of currency, is shown to have been long since exploded. Among the innumerable influences which go to determine the general range and fluctuation of prices, the quantity of money or currency is found to be one of the least efl"ective. This subject is specially important as bearing upon the results of fluctuations in the issues of banks. Besides the fact, that quantity of currency has less effect upon prices than is generally supposed, it is to be taken into account that, for all the currency issued by the banks, there is a special and constant demand from the debtors of the banks, which prevents it from having as much influence as it might otherwise have. The debtors of the banks having in their possession the whole range of commodities to which prices apply, are offering them for this currency, to secure it for their con- stantly recurring payments. Their constantly maturing obligations do not permit them to hold out for extra prices. We have dwelt at some length upon the subject of public pay- ments, with the view of turning the minds of financial inquirers to a 2 18 INTRODUCTION. topic which has received too little attention. Public taxation has been largely discussed in many countries ; but the mere question of the best mode of effecting public payments has not received the consideration it deserves. The history of productive industry and trade shows that, for the last six hundred years, where civilization has been highest, efforts to improve the modes of payment have been incessant and most successful. From the origin of the Bank of Venice to the present day, in Europe, there has been no rest from attempts to facilitate payments, and economize the means and methods of payment. The motives which have so long and so continuously operated on the ranks of industry and of trade must have been not only strong, but well founded. That which has so constantly occupied the minds of men of busi- ness cannot be beneath notice of governments, under the same cir- cumstances. If the annual receipts into the treasury of France are $300,000,000 ; if the annual receipts into that of Great Britain are $260,000,000; and if, in the United States, the treasury annually receives $75,000,000, the mere method of receiving and disbursing these vast revenues must become an important consideration — very important, if we take the conduct of the most intelligent men of busi- ness, for ages past, as a criterion. This importance refers to the people from whom the revenues are collected, as well as to those to whom they are paid, and to the government itself, in regard to the facility and economy of its financial operations. A financial system should be specially adapted to the habits and customs of the people for whom it is designed. No government can long depart from the usages of its people, or disregard their modes of business, without paying some penalty, soon or late, for the mis- take. We regard the present mode of administering the treasury of the United States as involving this error. The habit of the people to employ paper currency and credit wherever they are appli- cable, is almost universal. This use would be still more general and uniform, but for restrictive laws, which the abuses of banking have provoked. In the face of this custom of the country, the public treasury has rejected the use of paper currency altogether, and reserves for itself an exclusive currency of gold and silver. This policy has had, during nearly its whole existence, the extraordinary support of the California gold-mines, and has not, therefore, deve- loped fully the harsh and evil tendencies with which it is fraught The day is approaching when this system, if continued in its pre INTRODUCTION. 19 sent shape, will create a financial disturbance great enough to shake the industry of the country to its centre, and endanger any adminis- tration which may attempt to uphold it. We have compared our exclusive system, as administered under the act of 1846, with the financial systems of France and Great Britain, and find nothing in either to justify or encourage us in continuing a scheme of finance so fraught with peril to the inte- rests of labor and trade. We refer to the manner in which that act has been carried out, not to its provisions as they stand in the statute book. Our system assumes at once the attitude of being independent of the people and the commercial institutions of the country. It has been very aptly called the Independent Treasury, for it admits no sympathy and no relations with the business or the interests of the people. In Great Britain, the Exchequer leans upon the Bank of England, the greatest commercial institution of the country ; and in this way a sympathy between the movements of the Exchequer, or public treasury, is established, which runs through and tempers, if it does not control its wdiole operations.' Besides 1 The following account, given by the "Economist," No. 799, of December, 1858, page 1400, a commercial journal of the highest character, published in London, shows how carefully the authorities of the Exchequer look to the in- terests and convenience of those from whom the revenue is collected. Com- plaints had been made of the trouble and risk of attending to pay duties, even in notes of the Bank of England. '•At length, iu 1854, the treasury, of its own accord, devised a scheme of ■which, as it has been in practice now nearly four years, the success and effi- ciency have been fully tested. "In the year 1857, the net amount of customs duty received in the port of London was £11,495,322, being, in round figures, about half of the whole amount collected within the United Kingdom. This sum was made up of 158,843 payments, at the rate of 514 in number, and amounting to £37,210 daily. That was the case that had to be dealt with. The ti-easury adopted two plans, either of which Avas within the reach of all traders alike. 1. The one plan provided for the receipt of the checks of private traders, drawn upon such bankers as would comply with certain regulations made with a view to the secu- rity and convenience of the customs department. According to those arrange- ments, a check being presented at the custom-house in payment of duties, was received by the proper officer, and the necessary entries for the ultimate de- livery of the goods were proceeded with ; every hour a clerk was despatched with the checks which had been received within the hour to the various bankei's upon whom they were drawn, who placed their mark upon thorn, which made them payable by the Bank of England, where they were charged to tlie different bankers' accounts. The clerk then returned to the custom-house with the 20 INTRODUCTION. this, the Exchequer is a constant l)orro\vei" from the people, to the extent of nearly the whole annual revenue upon Exchequer bills. It borrows, in anticipation of the public revenue, from those who lend voluntarily upon short loans, and is thus enabled to disburse the revenue previous to its receipt. This is a great accommodation to a large class of lenders, who are pleased to have an opportunity of realizing interest upon short loans, and upon such undoubted secu- rity ; this class are thus kept in constant relations with the govern- ment, and are prompt to supply the treasury with any required checks so marked ; the goods were cleared and delivered ; and the whole checks of the day paid to the public account at the Bank of England at the close of the day, •where they were adjusted to the various accounts to which they applied. By this means a merchant had the check system, and all the security attaching to it, extended to the payment of duties, while the Crown ran no risk. 2. The other plan consisted of an arrangement with the Bank of England, by which a special description of bank-note should be made to be used exclusively for cus- toms duties, and to be received at the bank only from the customs department. They are denominated customs checks. The different bankers receive them from the Bank of England as they do their own notes ; and supply their cus- tomers with them as they are required for the specific purpose of paying duties. By this means all risk of theft and fraud is avoided. To all intents, they are bank-notes, but to be used only for a specific object, and useless for any other. " The utility of these arrangements is now seen by the great extent to which merchants Iiave used them. In the last year, the payments of customs duties were made in the following way : — 100,781 payments in cash £3,320,492 35,317 •' by traders' checks 3,563,966 22,745 '• by customs special notes 4.610,864 Total payments... 158,843 Total amount £11,495,322 Therefore, of £11, 495, 322, the total amount of payments, only £3,320,492 was made in cash under the old plan; while £8,174,799 was made in the two new modes of checks and special bank-notes. And even those payments which con- tinue to be made in cash, consist of the smallest sums, as the number of pay- ments made in this way, and representing the smaller sum named, is no less than 100,781 ; while the number representing the larger sum is only 58,062. The average amount of the payments in cash is £32 19s. ; while the average in traders' checks is £101 3.s. 4(/., and in special bank-notes, £204 8s. 2d. " But the convenience and security which are gained by the merchant by this system, great as they are, do not constitute all the advantages which it affords. It effects a great reduction in the currency. But for it, the sum of £8,174,799 of bank-notes, issued under the limit of the act of 1844, would have been re- quired in 1857 more than were actually used." INTRODUCTION. 21 assistance in financial emergencies. The creditors of the public derive even more advantage from this mode of disbursement in anticipation ; for the Exchequer being always ready to pay, the whole payments of the annual expenditure are made not only with more regularity, but probably weeks, if not months, in advance of what would otherwise be the time. The present financial system of France, the result of a reform which has been in progress under the auspices of men of great ability and experience for more than thirty years, is perhaps, in many aspects, the most perfect of any now extant. It has rescued the finances of France not only from the greatest confusion and embar- rassment, but has placed them in a more enviable position than those of any country in Europe. To the astonishment of the capi- talists of Europe, the government of France was able to borrow, in 1865, for the expenditure of the war in the Crimea, upwards of $250,000,000, without resorting to the city of Paris, or capitalists out of France. Not only so, but the sum actually offered in the de- partments out of Paris was $332,000,000. This offer to the govern- ment was from 300,000 persons in the interior of France, very few of whom would have been lenders to the public but for the very ex- cellent financial system which now prevails in that empire. In Great Britain and France, large use is made of treasury notes, called, in the one. Exchequer bills, and in the other. Pons du Tresor. In both countries, the ministers of finance are permanently author- ized to issue them upon certain principles, and under specific regula- tions. In England, the Exchequer bills are issued and managed with a skill and success which nothing of the kind can surpass. In neither country has there been an over-issue of these treasury securi- ties, for more than a generation past. In Prussia, a treasury cur- rency in denominations as low as five dollars has been issued, for that length of time, and no abase has occurred.' It is very true, that the over-issues of the assignats during the French Revolution, of the con- tinental paper currency during the American llevolution, and the later over-issues in Russia and Austria, are well calculated to create distrust in the minds of all whose attention is turned to the use of a ' Tlie Prussian government is so careful of the credit and stability of this emission of currency from the public treasury, that it redeems pi'omptly every counterfeit brought to the public offices. By this wise policy, it obtains the earliest information of the existence of counterfeits, and is thus able promptly to follow offenders. Of course, this greatly increases confidence in the currency. 22 INTRODUCTION. paper currency for public purposes. But as this whole matter re- solves itself into (questions of knowledge, official integrity, and finan-. cial skill, it should not he summarily dismissed, unless it is conceded that these requisites are beyond the reach of our government. When we remember the fact, that a bank can, with its own notes, or credits on its books, purchase commercial paper to the amount of millions of dollars, and that it can take its own notes aud issues in payment of this commercial paper as it matures, thus providing a special cur- rency for this purpose, and saving the use of millions of money — when we know that many nations could pay the entire national ex- penditure in treasury notes, and that they could, of course, afford to take such notes in payment of all dues at their public treasuries, we should hesitate to give up the problem of a government currency as impossible to solve. The truth is, not only can it be solved, but it is of much easier solution than many others which constantly engage the attention of men in authority. The order, subordination and numerous checks which now characterize our treasury department, are a far greater triumph of financial skill and good administration than would be the successful employment of treasury notes as a currency. Of course, such an issue by the treasury could only be upon a well-devised plan, and well-settled principles, to be as faithfully observed as are the present processes of the many functionaries of the Treasury Depart- ment. The leading principle of every such emission of paper, as well as that of the banks, is to issue only so much as will return in the regu- lar course of the business in which the issue is made. It is not, and should not be, the issue of so. much as will not probably be returned for payment, but the issue of so much as will inevitably return in payment to the issuer. Whatever amount the return payments to the issuer will absorb, is a safe emission ; beyond that, all is unsafe. The Treasury of the United States could, in any year, issue one- fourth the amount of the estimated income in treasury notes ; the next year, one-half; the following year, three-fourths; and by the experience gained in three years, the officers entrusted with this duty could manage such emission without danger of over-issue. If the public would not readily receive them, they should not be issued at all ; if they should fall below par, immediate measures should be taken, at any cost, to recall them in such quantities as would restore them to perfect equality with gold. INTRODUCTION. 23 The suggestions made in the chapter on public payments are chiefly intended to stimulate inquiry, and secure the attention or men whose experience in financial affairs, and general knowledge of busi- ness, may enable them to tlirovv some light on the interesting ques- tions involved in the whole subject. Although it has not been our design to propose reforms, or even to give intimations of that kind, we cannot forbear introducing here a further remark on the subject of bank deposits. In our large cities these are of great amount, and upon their management depends very largely the state of the currency throughout the whole country. If city banks are constrained at any time, by a demand for the precious metals, to contract their issues, and to withhold the customary facili- ties of banking by refusing to discount commercial securities, the con- traction of currency which ensues becomes an occasion of loss and damage often tenfold greater than the amount of specie involved in the demand. A contraction of currency by the banks in New York soon extends its baleful influences throughout the whole land. The mis- chief becomes vastly disproportioned to its cause. It is in view of the magnitude of this evil, and of its frequent and inevitable occurrence, that we make a suggestion, dictated more by a desire to save the community from harm, than to save the banks from any liability for specie to which they are justly exposed. The banks should be even more desirous to prevent these evils than to protect their reserve of coins and bullion. The danger of the city banks, which drives them to the measure of contracting the currency as a defence, arises mainly from liability to pay their deposits on demand in specie. Now, however great may be the difficulty of changing our present banking system, so far as bank-notes are concerned, it does not extend to deposits. These be- long to the customers of the banks, residing for the most part in their vicinity, whose chief business with the banks is, through them, to apply their credits to the payment of their debts. This is mainly done by the proceeds of discounted notes, with an average of more than two months to run. The banks may propose to this large class, that the proceeds of discounts shall oidy be entered to their credit, pay- able in legal currency when the discounted paper matures, but receiv- able as now at all the banks for every debt payable there. This would ensure the deposits, for every legitimate purpose to which they are applicable, ample circulation; indeed, they would i)e no less cur- rent and acceptable than they are at present. They could, with equal 24 INTRODUCTION. effectiveness, fill every proper function to which they are adapted. ' They would cease to be an object of overwhelming alarm whenever a demand for the precious metals occurred ; the banks could, therefore, in the face of such a demand, continue their discounts, and supply the usual facilities of payment, knowing that the constant progress of payments to them would absorb all these issues of credit before specie could be demanded for them. Some modification of this ))lan might certainly be arranged by men with clear views of the subject, and sufGcient experience in banking ; the efi'ect of which would be to place the city banks upon a safer basis than they have ever yet rested on, and to take away from them all pre- text for those sudden contractions of currency, which, whilst they are a scourge to industry and trade, make the banks themselves constant objects of reproach and detestation to a large class of the community. There is nothing in the law of legal tender to prevent this. The banks now agree to pay the proceeds of discounted notes on de- mand, and of course that law places them under the obligation of paying in gold or silver. But on the plan proposed, the banks would only agree to pay the proceeds at maturity of the discounted paper, with the additional stipulation that these credits Avould be receivable in all payments to the banks. Under such an arrangement the banks would, at all ordinary times, treat these deposits precisely as they do now ; but in case of a demand for specie for exportation, they could choose between contracting the currency and refusing to pay specie, except under the terms of their contract with their depositors.' The order in which we have presented the subjects of this volume seems to us the logical one ; but we have no doubt there are many who will be more inclined to look first at what is advanced on the subject of the credit system. This will naturally be the case with those who are already familiar with the subject. All such may com- mence their examination at the seventh chapter, turning to the pre- vious chapters only as they may find occasion, from the tenor of the matters discussed. 1 A memorandum somewhat in tins form might be prefixed to each bank book: "The proceeds of all notes discounted for C. D. shall be placed to his credit, paj'able in gold or silver to the said C. D. at the maturity of the notes discounted; but subject, in whole or in part, to the check of C. D. in payment of any debt due to the bank, or for the purpose of transferring the same to any other bank or person." THE WAYS AND MEANS OF PAYMENT. CHAPTER I. Exchange of commodities an incident of civilized life — The agencies hy which this exchange is effected must not he confounded with the exchange itseJf — Tlie fitness and nse of these agencies can be best determined by treating them as agencies more or less necessary to the main puiyose — Money, and money of account. In civilized life tlie industry of men is so largely developed and subdivided, as to involve an incessant exchange of commodi- ties and services. Civilized men require food and clothing of great variety in form, substance and preparation. Their dwell- ings and furniture are equally varied, and demand for their pro- duction an equally varied and subdivided industry. Intellectual, moral and religious wants and exigencies engage also a large force of subdivided labor. In this division of labor, there is one large class employed in producing and preparing food ; another in producing and preparing raiment ; another in building ; another in furnishing buildings ; and another in the labor of minister- ing to intellectual, civil, moral and religious wants : each ol these large divisions is arrain subdivided into lesser classes ; an(. these again by innumerable ramifications and divisions, unti' each person is reached in his separate individuality. The whole labor of society is thus apportioned among all its members in that way which the force of circumstances, and their intelligence, has dictated. In every community, much the larger number of persons are mere laborers, and have only their labor to give in (25j 26 EXCHANGE OF COMMODITIES. exchange for such of the comforts of life as they may require. In every case, however, Avhether we regard classes or individuals, a continual series of exchanges is involved. The manufacturers of clothing must have food, shelter and furniture; the producers of food must have clothing, shelter and furniture ; the builders and furnishers of houses must have food and clothing ; those who minister to intellectual, civil, moral and religious wants, need all those things ; and the others, in like manner, require their services. Descending to every individual of each class, each person must give his labor, the product of his labor, or the products of the labor of others, in order, with that, to purchase what he requires. Every individual who earns a living, whether by his own labor or that of others, must exchange what he has for that which he wants. Even merchants, whose chief business it is to assist in this great interchange of commodities, exchange, by a continued process, their old stock of goods for a new one. The progress of industry and society is thus mainly character- ized by a constant scries of exchanges, in which every individual takes, directly or indirectly, an interested part. The manufac- turer who produces, by the labor of others, goods to the value of half a million yearly, exchanges these goods for the raw mate- rials and labor which enable him, in a succeeding year, to pro- duce a like amount. The professional man, the artist, or the laborer, exchange the exercise of their learning, skill or labor for what they want, consume or enjoy. The reader may develop more fully, and dwell upon these great features of industry and civilization, viewing them thus apart from the mere agencies by which this vast interchange is effected. It is not difficult to distinguish between the thing to be done, between the exchange thus accomplished, and the means by Avhich it is done. One large and important class of society is composed of the various agents engaged in the process of this interchange as their business or profession: merchants, with their attendants, bankers, brokers, clerks, transporters, and the laborers connected with them, constitute that class in every country. But other agencies are also prominent, such as ships, boats, canals, railways, warehouses, shops, books of account, and EXCHANGE OF COMMODITIES, 27 money. None of these are essential to the idea of an exchange. They are facilities, agencies, aids more or less desirable or indis- pensable, according to circumstances. Men who .ire near to each other may effect their exchanges without the aid of merchant, broker, ship or carriage. They may, by means of books of account and mutual charges and credits, wholly dispense with money. The intervention of money has, in no small degree, blinded men to the distinction between the exchanges of indus- trial life and the means or agencies by which they are accom- plished. This agency of money, although one of the most important, and doubtless one of the oldest and most expensive, is, however, very far from being an indispensable concomitant of an exchange of other commodities. The advantage of a common medium of real value, for which men could safely sell any com- modity they ha-d, and with it as readily purchase any they required, cannot easily be over-stated. Money, however, is not of the essence of an exchange, but only an agent to be employed when some advantage is to be gained by resorting to it, of faci- lity, security or otherwise. When a man sells an hundred bushels of wheat for $150, and with that money purchases three tons of iron, the transaction is an exchange of the wheat for the iron. The money employed is as much an agent, as the wagon used to transport the wheat and the iron. The exchange could have been made without it, but it was used because the parties found it more convenient or advantageous to do so. Even when money is employed, its real value as an equivalent is not an essential ingredient of the exchange. If, unknown to one or both parties, the money employed is counterfeit and worthless, the exchange of the wheat for the iron is none the less perfect and satisfactory to all parties ; and the counterfeit money may con- tinue to circulate, and be the medium or agent in many such exchanges, before it is discovered.^ All these exchanges will be as 23erfect as if effected with good money. This docs not prove that when money is used as equivalent, it should not be really 'A counterfeit dollar may be the agent of a hundred exchanges, and only the value of the dollar Le lost by one person, in whose hands it is detected. A large quantity of false money is always in circulation. 28 EXCHANGE OF COMMODITIES. what it purports to be ; it only shows that exchanges of commo- dities may be effected without a real equivalent as a medium. Wheat, in the case above, pays for the iron ; the commodities exchanged arc the compensation, or payment, for each other. Thus, in the course of the year, a man exchanges the commodi- ties he makes, or has for sale, for those which he requires ; that is the main feature and object of his business. The professional man, and he who ministers to intellectual, civil, moral and reli- gious wants, exchanges his services for that which he consumes or requires. These multifarious exchanges are effected with or without money, or other ordinary agency of exchanges ; their beneficial results do not depend upon the manner in which they are effected. The exchange of the commodities being the object, every advantage, facility, security and economy would be resorted to in accomplishing that object. We thus insist upon keeping the object, and the means or agencies of effecting it, separate and distinct, as necessary to attaining clear views of the whole subject. As economy, facility and security are to be consulted in the thing to be done, it is necessary to keep the agencies, in all cases, in a subservient position, to be employed or not, to bo changed and modified or not, exactly as the main object dictates. Although our design, at present, is to treat of only one class of the agencies in effecting this great interchange of commodities and services, that which relates to commercial payments, in- cluding money and all its substitutes and modifications, we hold it to be specially important to a true comprehension of the sub- ject that the agent, whatever it maybe, should always be treated as subordinate to the object which is accomplished by it. Money, in all its forms and modifications, is to be employed or not, and to a greater or lesser amount, as circumstances, commercial skill and convenience require ; always considering, first, the ex- changes to be effected, and next, the means of effecting them. This is the channel which men pursue in the actual progress of business, and it is that which will conduct us, with proper dis- crimination, to the clearest views of the subject. But another distinction is equally to be marked and kept up EXCHANGE OF COMMODITIES. 29 in the mind by those who would attain to clear conceptions on the subject of money. We refer to the distinction between the precious metals, as a common equivalent, and coins from a public mint. It should be understood that it is not coinage which con- verts the precious metals into money. They would be used as such were there no coins, as is the case in China. Coinage does not give the precious met.ils a value which they had not before. It is not in the power of any nation to regulate the price of gold or silver ; this price must depend on circumstances which no nation can control. But though coinage is not that which gives their value or price to gold or silver, it is that Avhich prepares it properly for the purposes of a medium of exchange. In all the large payments in which gold is now employed, it would be used in the shape of bars, if not in that of coins. In the case of such payments, the mint needs only to prepare bars of fine gold or silver, of some uniform standard or quality, in order that, in paying, only the weight would have to be verified or ascertained. Gold and silver may then answer all the purposes of money, without being coined; for retail purposes, and small payments, the coinage affords a facility or convenience which is fully appre- ciated and admitted on all hands. But the coins, as such, do not constitute the money. The coins have a uniform shape, weight and quality, or standard, and in this consists their charac- ter. Prices are not expressed in coins ; that is, coins are not exhibited to express, signify or mark the price of any commo- dity. There is ;i mode of expressing prices or amounts, which is perfectly intelligible, in which coins arc not employed. The sums written in books of account, and upon the face of promissory notes and bills of exchange, are not indebted for their definite meaning to coins or coinage. Previous to our adoption of the dollar as the unit of our money of account, all prices were expressed, and books were kept, in pounds, shillings and pence, which had no corresponding coin ; so, also, were promissory notes and money securities expressed. These denominations were the money of account of that day, as the dollar is at pre- sent. It is well known, as we shall remark more fully hereafter, that these terms had a difierent significance in Massachusetts, 30 EXCHANGE OF COMMODITIES. New York and Pennsylvania. In each of these the unit had a different value or power, "vvhich was perfectly understood by the people in those different States ; although in neither was there, or bad there ever been, any coin corresponding with these various units. Men can carry in their minds a unit of value, as they can carry the idea of a foot, a yard, a mile, or an acre ; or of a pound, an ounce, or pennyweight. The physician writes his prescription in ounces, drachms and scruples, in matters requir- ing the utmost accuracy, and involving life or death. He has, of course, in liis mind the most definite and accurate idea of the quantities of the various ingredients to be compounded. But when the prescription comes to bo made up, the apothecary must apply the measure or the scales, or he cannot accurately realize the idea of the physician. It is the same with the money of account. It is so universally in use, that everybody is as familiar witli its meaning as the physician is with the apothe- caries' weight. All prices, and all amounts, are expressed in it; but when a payment is to be made in gold or silver, the scales must be applied, or coin produced, of which the value as ex- pressed in the money of account is known. Money of account will be the subject of special treatment in the following chapter. CHAPTER II. I 1. People emploijing gold and silver have terms in wJiicJi to express their value — Mint price and market price — Moneij of account a necessity. Before treating specially of the use of gold and silver as money, it will be of advantage to notice and understand the mode of expressing prices, keeping accounts, and stating amounts, ■which has prevailed among all civilized people, and still prevails. People who have attained to the use of weights and" mea- sures, and arithmetic, employ a money of account, in which they state prices, sums and accounts. It is not a mechanical process by which other articles are compared by weight or bulk with gold or silver. It is an arithmetical process, by which, with the aid of some unit of value, taking its origin from a coin or special weight of gold or silver, the value of such coin or weight being fixed in the mind by constant use for a time, becomes a unit, readily borne in the mind, susceptible of being readily added, multiplied or divided by a combination with numerals. There is no nation far enough advanced to employ arithmetic which does not attach a specific value to both gold and silver, and which has not some terms in which to express that value. In the first stage of using the precious metals as a medium of exchange, they are given in exchange for commodities according to the estimate the parties to the exchange make at the time. With the progress of intelligence and arithmetic, people begin to place a general price on the precious metals, as well as upon other things. Every article which is the subject of exchange, becomes the subject of price, and by help of these prices the parties make their sales and payments. The price or value of gold or silver ceases to be what the party possessing them, at his caprice, puts upon them; their price becomes even better known, (31) 32 M N E Y F A C C XI N T . genci'ally, than that of any other articles ; and it is by this price that they are paid or delivered. This fact is obscured and hid- den from popular view by the custom of governments fixing a price upon the precious metals for the purposes of coinage. It is thus overlooked too often, that tl;e price at the mint is founded on the market price ; the people at large having no occasion to discuss the prices of gold and silver as they do of other articles, the impression prevails that the price of gold and silver is merely an affair of the mint and public authority. It is important, how- ever, and shouhl not be forgotten, that gold and silver are just as much the subject of price as other things, though obscured by coinage and legal enactments. This is familiarly known to dealers in coins and bullion, and to intelligent merchants and bankers ; though all such arc not equally aware how much they arc indebted to the money of account for the facility with which they make their varied computations, and varied transac- tions, without any aid from coins. The formation of a money of account among people capable of employing one, is not only an universal mental proclivity, it is a mercantile necessity. It would be literally impossible, in the present state of coinage, to continue for any considerable time to express prices and large sums by the number of coins which would be equivalent to the price or amount. The same effort of mind necessary to remember the value of a coin thus named to express a price or an amount, is sufficient to enable persons to carry the memory of that value in the mind, and use it with the same effect, abstractly, as if referring to the coin. Every coin or weight, of gold or silver, used for any long period as the means of expressing prices or amounts, becomes the unit of a money of account, and is used abstractly and arithmetically. It becomes quite as capable of expressing changes in the value of the precious metals, as of any other articles ; for it remains fixed at the value at which it passed into the money of account. It is then employed in expressing the prices of thousands of articles, and for stating all possible sums in the way of compu- tations, accounts and financial adjustments. Being so variously and constantly employed by such multitudes, it attains perma- M N E Y F A C C U N T . 66 nency ; being, like the mast of a ship, heW by stays and checks innumerable on every side. The value of the unit, or beginning point, being once firmly fixed in men's minds by constant use, remains there wholly inde- pendent of subsequent changes of price which may afiect the specific article from which it took its rise. Thus, if it sprung from a coin, or a certain quantity of gold or silver, it becomes afterwards so independent of these as to be quite capable of ex- pressing the changing prices of that or any other coin. It is, then, a matter of fact that all commercial people keep their accounts, compute money, and express prices, by the use of a money of account. The naming a price with them is not naming a coin, or any specific quantity of gold or silver ; but it is the employment of the denominations of the money of account, which all understand to express a price. There is scarcely any mental operation more generally and constantly in exercise, than that which is used to fix and express prices. All classes of men have more or less occasion to be familiar with it. ■v^ The distinction between money and money of account is not apprehended and kept before the mind with equal facility, by all persons, on the first attempt. If the subject is new to the party making the effort, it will require some earnest attention and patient discrimination. Moliere, in one of his comedies, intro- duces a character who, entering upon the education suitable for a gentleman late in life, finds, to his great surprise and pleasure, that he had been speaking prose all his life without a master. So many have to learn that they have been long employing a money of account, without being aware of the acquisition they had made. Even in those times and countries where money cir- culated by weight, or in uncoined pieces, there must have been some mode of expressing the value of silver by weight, or of the "pieces" which were cut to a particular weight, and passed as " pieces of silver." AVhether bar, piece or shekel, the parties dealing had some way of expressing the value of the precious metals. A people who have arrived at such a degree of civiliza- tion as to receive and deliver gold and silver by weight, and to employ arithmetic in the computations connected with such trans- 34 JI X K Y F A C C U N T . actions, must be supposed, as "\ve have said, to have some idea of the value of the various quantities of gold or silver -which the scales and weif^hts might specify. If a piece of gold were cut from a bar, and found to be of a particular weight, they attached a particular value to so much gold. They did not merely say a shekel gold is worth a shekel of gold, but they attached a price to so much gold as weighed a shekel ; and they had some terms in which to express it. If one said to another, I will give 3'ou a shekel of silver for an article, the party addressed had two men- tal processes to go through before he could understand the oifer ; he had to recall to mind how much gold was the weight of a shekel, and next, what was the value of that much gold. One of these processes involved an abstract quantity, and the other an abstract value. So easily does the mind master these abstrac- tions, that men retain the ideas of weights and values in their minds as readily as they do the power or significance of numbers. Values and quantities have, from the very dawn of civilization, been as readily retained as any of the processes of arithmetic, and they are now as familiar as the multiplication table. If M'e suppose the pieces of silver mentioned in the New Tes- tament were of unequal and undetei'mined weight, we may imagine them to have been offered for what they might happen to be worth ; as if the party offering should say, here are thirty pieces of silver : you see them : will you take them for the service we ask ? In such an offer, no money of account would be employed. It would be an offer of a quantity of silver to be judged of by sight. But if the thirty pieces of silver were coins, or quantities known and familiar by constant use, their value or price would occur to the mind the moment they were recognized ; and in every civilized country there is, and always has been, a mode of expressing and writing down the value, which is thus readily per- ceived and understood ; and this is the money of account. If one person say to another, I will give you these 100 Spanish dollars now before me for your horse, money of account is not necessarily involved; it is the specific offer of the 100 silver coins for the horse. Yet, if the party to whom the offer is made makes acy valuation of the 100 Spanish dollars, he can only do MONEYOFACCOUNT. 35 it by means of a money of account. If the offer is merely of 100 dollars for the horse, the ijalue or price is expressed in money of account ; the payment is to be arranged afterwards, either by a promissory note, or bank-notes, or five $20 gold pieces, or twenty $5 gold pieces, or 200 half dollars. So if, in the United States, one person says to another, '• I will give you these 50 British sovereigns, or these 50 French Napoleons, or these 100 five franc pieces, for any commodity," it would be understood to be the offer of a specific article : it' would be regarded, not as an offer of money, but of the particular coins mentioned, whether •worth more or less. The party accepting such an offer would accept the thing offered. But an offer of 100 dollars, only im- plies that the payment is to be satisfactory, and if not, the person to whom payment is to be made has the power of exacting it in such coins us the laws have made a legal tender. § 2. Idea of value carried in the mind as the idea of weights, measures of length and capaciijf — The use of a money is much greater than of money — Often confused in language — Kelly's Cambist quoted — Varieties of moneys of account — British decimal system. The idea of a certain value, which of course had its orinfin in an actual comparison, or perfect familiarity, with some material article, is as easy to fix and carry in the mind as the idea of weight or quantity. As physicians carry in their minds, with perfect certainty and facility, the idea of the weights and quantities involved in ounces, scruples and drachms, and pre- scribe compounds of medicines requiring the utmost nicety ;ind caution, by their knowledge of these quantities, Avithout scales or weights : so it is with pounds, tons, bushels, yards, feet and inches ; these terms carry to the minds of those most familiar with them, perfectly definite ideas, independent of any actual use of weights and measures. They use them constantly, well understanding each other in reference to quantities, not only without the weights and measures, but without any access to them. So men speak of values and prices, perfectly comprehend- ing (ach other, although they may have no means, nor any occa- sion for payment. 36 M N E Y F A C C U N T . It is as easy to carry tlio idea of the value expressed by a pound sterling, a franc, or a dollar, «! the mind, as the quantity expressed by a ton, a pound, a bushel, or a foot. The truth is, that there is so much occasion to name prices, or express values, that almost every individual of a community, however insignifi- cant he may be, becomes perfectly familiar with the money of account. It is more used than any reference to Aveights and measures. After all, none of these ideas cost the mind more effort than that of carrying the value or power of the Arabic numerals. It is no greater effort of mind to understand what is meant by ninety-nine bushels, than to understand what is intended by ninety-nine men. Quantities and values can be made the subject of conversation, of estimate, of contracts, of statistical tables, and of innumerable modes of expression, Avlthout any production of the article spoken of, or of the weights, scales, measures or coins by which quantities are actually defined, or payments actually made. It is well it is so, for it would be very inconvenient to produce a pound weight, or a dollar in coin, to explain our meaning when a pound or dollar is mentioned, not to speak of tons and miles. The value of the unit of a money of account is, in fact, so fas- tened on men's minds, that it may be said there is nothing they know better, and nothing, so far as their mental habits are con- cerned, which is so little likely to change. If no attack were made upon this mental habit in Great Britain, the people of that country would continue to keep accounts, compute and express prices, in pounds, shillings and pence for ages to come, even if no sovereigns, or pounds or shillings, were knovvn among their coins. Though Hooded with all the coins of the world, they would promptly and readily express the value of every coin in pounds, shillings and pence. It is the money of account of England which at this moment performs the great function of expressing all prices there, whether of stocks, or coins, or bullion, or bank-notes, or merchandize. It is not the gold sovereign, nor the silver shilling, nor the copper penny, whicli is used to measure the values of these innumerable things ; it is the scale of the money of account existing in all men's minds, and appli- M X E Y F A C C U N T . 37 cable to every article alike, which is employed to express every possible price and variation of price. So, in the United States, our money of account, the dollar and its cents, or hundred equal parts, is used to express every possi- ble price, and change of price, of every article. If bullion rises in price, silver dollars may be quoted at $1.05, or $1.10 ; or, if it falls in value, they may be quoted at .97, .98 or .99 ; and depreciated bank-notes are readily valued at any part of a dol- lar, from one cent to ninety-nine. When English sovereigns or shillings are paid aAvay here, they are not paid as pounds or shillings, but are valued in our money of account at whatever their price for the time being may be. In every country, when all the transactions by book accounts, all the purchases upon credit and for paper-money, all the com- putations by money, and all the conversation about prices are taken into account, it will be found that all these taken together immeasurably exceed all the transactions in actual money of gold or silver. It is by no means surprising, then, that the mental operations by which all the vast transactions by books of account, all sales on credit or for bank-notes, all this continual fixing and naming of prices, is carried on, should become the law of reckon- ing, to Avhich every description of money itself should in the end become subject. Such is indeed the fact, as the actual state of things in every country proves, and this has always been known to intelligent accountants and cambists. It has been prominent in the guide-books of merchants and bankers, but has not been so familiar to statesmen, political economists, and theoretical writers on money.^ But even where the special functions of • The want of clear views of the nature and functions of money of account is strikingly exhibited in the following passage from a work of the late Leon Faucher: — "The effective money in the middle ages varying con- stantly, and being at the mercy of every prince, to be altered at his will, they devised a money of account, a sort of abstract or fictitious unit, which might remain relatively invariable in the midst of monetary fluctuations caused by the unskilfulness or the bad faith of governments, and the cus- tom is preserved in some States to this day." — Sin- L' Or et Sur L' Argent, page 5. This is written by one who was recently, and at the time of his de- 386434 38 MONEYOFACCOUNT. money of account have been understood, there has not been suffi- cient attention given to exhibit the actual relations between money of account and money of gold and silver; and yet neither can be fully understood until both are understood. We fre- quently find them utterly confounded, and the attributes of each referred to the other. There is, however, no difficulty in keep- ing their offices and functions separate, Avhen the distinction is kept in view. The value of an article, or of a fixed quantity of goods, is ex- pressed instantaneously in money of account. The merchant who says his cloth is worth a dollar a yard, is understood without producing either a dollar or a yard-stick. When a sale actually takes place, and payment is to be made, then gold or silver, and weights or measures, become necessary. If the money laid down is in coins corresponding in denominations with the money of account, it appears to favor the idea that the article sold was measured by the coins. But if payment is made in the precious metals by weight, or in coins not corresponding Avith the money of account, then the agency of the money of account is called in to express the price of the bullion by weight, or of each coin : so that the transaction is completed by the employment of money of account in fixing the price of the merchandize, in adding the sum of various articles and their prices together, to ascertain the whole amount of the sale, and in fixing or expressing the value of every coin offijrcd in payment. In many large establishments for the sale of merchandize, salesmen are employed in making sales of vast quantities of goods, with the prices of which, in all quantities and varieties, they are perfectly familiar, actually spending the most of their time in naming and discussing them ; but few of these salesmen, however adroit, can tell the cease, a minister of finance, and certainly a man of ability. He was employinf; the.money of account of France every day, he was familiar with it, he would have been utterly at a loss without it, yet he accounted it as a barbarous relic of the dark ages. It is like an atmosphere to finance; it is the very language of financiers; they can neither think nor communicate their ideas without it; yet its agency and use is alleged to have belonged to the middle ages ! M N E Y F A C C U N T , , 39 price of gold or silver by the pound, ounce or pennyweight, or the value of any coin of those metals, except a few domestic coins. When large payments, therefore, arc made in bullion or mixed coins, the receiving these is referred to another clerk, who knows both their quality and price. Any one who will take the trouble to recall to his mind the course of such transactions will perceive that money of gold or silver is not employed as a measure, even when it is used in pay- ment, which is very rare in large transactions. The precious metals as frequently require measurement or estimation as the articles for which they are given in payment. It is no more difficult to express the true value of coins or bullion than of any other article of value. Their chief advantage lies in their safety and convenience as a medium of exchange — an imperish- able equivalent in retail dealing, so important to every condition and chiss of men — and not in the fact that they can be or are used as actual measures or standards. They are standards of coinage, not of price or value. The term standard of value can- not be too strongly condemned. As a matter of fact, gold and silver are employed only as standards of payment in the current transactions of commerce. The invariable formation of a money of account, which, while the precious metals, or some substitute, remain the medium of exchange, or the instrument of payment, becomes the medium of comparison, the expression of equiva- lents, the language of prices, obviates equally all need of a mea- sure or standard of value for any article which has any price. By aid of this mode of expressing prices, the largest transactions can be instantly accomplished, and notes or checks given in payment, without the aid or presence of coins or bullion, or any thought of or reference to them, and without the knowledge necessary to make the payment in coins or bullion.' ' We refer the reader, for some illustrations of this subject, to " Kelly's Cambist," ' a work of admitted authority, founded upon information ob- tained with great labor and expense, in which the author was aided by the ' The Universal Cambist and Commercial Instructor, bcin<^ a AiU and accurate Trea- tise on the Exchanges, Coins, Weights and Measures of all dealing Nations. By P, Kelly, LL.D. 2 vols. 4to. 40 .AI N E Y F A C C U N T . The moneys of account of Prance, England, and the United States are as completely established, and their functions as corn- British government. Although, on the subject for which we refer to this useful book, we find much confusion of terms, and great need of more dis- crimination, yet there are facts enough to guide the reader to very certain conclusions, and clear views. He distinguishes money into real and imagi- nary ; the real are coins, bank-notes, &c. ; the imaginary, "also called ideal moneys, are not represented by any coin, but are used in keeping accounts. They are understood to have had their foundation in real coins or weights, which were the original units adopted as the measures of value, and which have been continued under the same denominations, notwith- standing the changes that may have taken place in their intrinsic value." — "Although moneys of account be not represented by real coins, yet their intrinsic value may be determined by their known relation or proportion to certain coins." — "Moneys of account may be considered with respect to coins as weights and measures, with respect to goods ; or as a mathematical scale, with respect to maps, lines, or other geometrical figures. Thus they serve as standards of the value both of merchandize and the precious metals themselves. It should, however, be remarked, that moneys of account, though they are uniform as a scale of divisions and proportions, yet they fluctuate in their intrinsic value with the fluctuation of the coins which they measure or represent." The terms standard of value, measures of value, intrinsic value, and representation, as applied to moneys of account, is open to strong objection ; but the meaning of the author, on the whole, is suffi- ciently obvious. Moneys of account have "their foundation in real coins or weights;" and they often remain unchanged, although the coin or weight on which they are founded may have undergone many changes. When once well esta- blished, they become capable of expressing the prices of both goods and the precious metals. By their intrinsic value he means the value of the unit represented in the precious metals. Moneys of account do change with the gradual changes in the value of coins, if the denominations of the coins are the same with those of the money of account ; because the mass of the people in whose minds the money of account is fixed, foil to distinguish between them when both are called by the same names. But when the money of account does not correspond with any coin, it does not fluctuate, nor even tend to fluctuate, with the precious metals or coins ; but remains steady, and quite capable of marking and expressing the variations in the value of coins and bullion. The "Cambist"' furnishes "a Table of moneys of account," of which it is remarked, " that some of these are real coins, the value of which may be computed from the mint regulations, or from assays; but when they are imaginary moneys, which is generally the case, their ' Vol. II., page 148. Edition of 1835. MONEYOFACCOUNT. ' 41 pletely performed, as elsewhere ; although the franc, the sove- reign or pound, and the dollar coins, agree with the unit of the money of account. To understand the system of money in any country, the first requisite is to know in what terms or denomi- nations accounts are kept, prices fixed and expressed, and all the dealings of the people carried on ; this, whatever it may be, and whether any coins correspond or not, is the money of account of that country. The chief difficulty in understanding the subject of moneys of account and coinage, is the blending them or not keeping them wholly apart as distinct things. It will be found, as a matter of fact, that in every country. the money of account is used to express the value of coins, and that coins do not serve essentially to give effect to the money of account. Where there is a coin corresponding with the unit of the money of account, it is true it presents the value which the other expresses. It is proper, in England, to say that the coin called a sovereign is worth a pound sterling; but it is not proper to say that a pound sterling is worth a sovereign.^ The pound is the unit of the British money of account, and it is employed not only to express the value of the sovereign, but the value or price of every other coin or quantity of gold over that amount. There is a money of account in Great Britain, based on the shilling, which is seldom employed beyond the value of three or four pounds ; prices are frequently expressed in shillings, from one to sixty or eighty, but seldom beyond that amount, though there value must be found by their established proportion to real coins." This table sets forth over one hundred and twenty different moneys of account, and exhibits the fact that several countries have more than one, and some as many as five; a fact vidiich is a proof that past monetary revdiutions are not only productive of misfortune and damage at the time, but of enduring evil and inconvenience afterwards. A v^-ant of precision in the language of the author, on the subject of moneys of account, is apparent tlirough the whole work; and yet a little attention only is requisite to comprehend his statements. It is only needful, for this purpose, to remember that the money of account is not only as oiierative, but as necessary, to commercial dealing, where the coins correspond with it, as where they do not. ' The sovereign is a recent coin, and when first issued was made to con- form to the minutest fraction in the pound of the money of account. See infra, Chapter 4. 42 MOXEYOFACCOUNT. is no difficulty in understanding those Avho express prices in shillings to any amount not too large to be converted, mentally and instantly, into pounds. This double money of account is an argument, in England, for the adoption of the decimal system, which furnishes a relation between the unit of the money of account and its parts, much more easily carried in the mind than that used in the British system of money. It would be much easier to apprehend the value of any part of a pound expressed in hundredths, than in shillings and pence; and this perfect faci- lity of perceiving the relation of all the parts of the unit to the unit itself, saves the formation and use of a subsidiary money of account, like that of the shilling. In the United States we express many prices in cents, but we always perceive the rela- tion of the number of cents to the dollar ; and, in fact, the com- mon mode of writing cents is fractionally as ~{^^J%, instead of 20 cents. ^ ' The confusion which reigns in the minds of many men, as to the exist- ence and functions of a money of account, is strikingly illustrated in the discussions now pending in England on the adoption of a decimal system. While many understand its true idea and use, and intelligently explain the difficulties and nature of the proposed change ; others, for want of this cor- rect conception, carry confusion into the whole discussion by speaking only of coinage. Some of the reformers absurdly proposed changing the unit of their money of account, the pound sterling. A greater mischief can scarcely be conceived ; certainly a more needless evil could not be inflicted on the country. Pounds are already counted decimally ; it is only the parts or frac- tions of a pound to which the reform applies. It is, in fact, the shilling money of account which is to be changed. The coinage part of the question is com- paratively of little importance. To change the money of account of a nation like Great Britain is indeed a serious affair, and demands the utmost cau- tion and investigation. The best mode of effecting this change, as it strikes us, is that which has in part received the approval of Parliament, the British public, and the greater number of those who have written on the subject.' This preserves the pound unit of account, without displacing the shilling as a coin. It involves the lowering the copper coinage four per cent., which, in practice, would not be found to work injuriously. The mint would take the old copper coins at a premium of four per cent., payable in the new issue. The dealers would give as much for the old coins as ever they did, * The pound and mII sj-stem, in which 1000 mils make a pound. The copper coin- age is lowered four per cent., which makes mils and farthings equivalents. MOXEYOFACCOUNT. 43 When it was recently proposed, in England, to adopt a deci- mal system, dispensing with the pound as the unit of the money because they could be reimbursed by the change into new coinage. The British system virtually includes four moneys of account ; one with the pound unit already counted decimally; one with tlie shilling unit; one with the penny unit ; and another with the farthing. The change proposed is to dispense with the three latter, and have them absorbed in the first. In fact, it will be found not to be a question of coinage, except the copper money, but a question of the mental habits of the people. In spite of all that can be done, the people of Great Britain will reckon by shillings for at least a half century to come. This, however, will not disturb the adoption, nor prevent the success, of the proposed money of account. It is now seventy years since the decimal system of this country was legally adopted ; and, during all that time, the Spanish coins, halves, quarters, eighths and sixteenths of a dollar, have circulated con- currently with our decimal coinage. They have, doubtless, obstructed in some degree the complete adoption of the decimal money of account in the expression of prices and sums under one dollar. But for the last forty years prices under one dollar have been expressed, if not exclusively in cents, at least Avith equal facility, and to a much greater extent, in cents than in the terms of the Spanish coin. Both are yet employed, and both generally understood. The term shilling, in the State of New York, maintains its place fully, as it corresponds with the Spanish eighth ; but the eleven- penny-bit of Pennsylvania, and the nine-pence of Massachusetts and Vir- ginia, representing the same amount, or 12J cents of our decimal system, have nearly disappeared. These Spanish coins, which for fifty years greatly outnumbered our decimal coinage, were readily valued in our money of account, and the gain over the old system has been immense. The diflSculty, in England, is really less than we have had to encounter. The money of account founded upon the pound unit can be introduced in far less time than it required to introduce the system of the United States, because the pound unit is retained. Here it is given up for the dollar. There the shil- ling may, and should be, retained as a coin ; and will not only prevent con- fusion in the minds of those who cannot at first understand the nature or the reason of the change, but greatly aid and facilitate the progress of the measure. The shilling bears the same relation to the pound that a half dime does to a dollar in the United States: or, one-twentieth of a pound. While the people are learning the now system, the old coins which form a part of it will enable them to avail themselves of the old system, until they become equally familiar with the new. The merchants, bankers, brokers, and dealers in bullion, can exercise the most eficctive influence in introducing the new money of account. Let prices be named both ways ; let bills bo made out with the sums expressed 44 lyi >: E Y F A C C U N T . of account, Professor Aircy, avIio -was examined by the Parlia- mentary committee on the subject, said : — "I can scarcely con- both ways, for which the stationery should be prepared, and paper properly ruled. This part of the business expert tradesmen, bankers and clerks will master in a fortnight. Their customers, or most of them, must, however, bo dealt with in pounds, shillings and pence for many years. For in this money of account will the greater number continue to think, long after the account-books of the government, of the banks, and the principal merchants, are kept by the new system. The books of the Bank of England might be all safely opened upon the new system within a year, or less, from the time the measure was resolved upon ; and so of all other large establishments. But cashiers, tellers, and others in like positions, would be obliged to be equally familiar with both systems, and to be able to translate sums instan- taneously from one to the other. Great advantage would be gained very soon ; but the entire and universal adoption of the new money of account could not have place for from twenty to fifty years. The inconveniences of this gradual progress would not be equal, as a whole, to those of the pre- sent system. It would, in fact, be a measure completely successful for those persons and institutions who most require and need the change. It is a happy circumstance for the success of this measure, that so little change in the coinage is required. None would, indeed, be far better than too much. It would be highly useful, it seems to us, to have the new pieces of the same value as the shilling and sixpence, having the same impression coined, with the addition in figures of their value in the new money of account. Every shilling and sixpence would be a lesson, and an aid to the memory. With this addition there would be less objection to the old crowns and half crowns, than to any possible new coins. Of the other plans of introducing the decimal system of money into Great Britain which have been pi-oposed, none appear to us so safe and desirable as the one already approved by the House of Commons. Many of them betray a total misconception of the whole subject, and deserve not a mo- ment's consideration. The attempt at a universal system of coinage enter- tained by some is only a little loss visionary than an universal language. Changing coins does not change moneys of account. Governments may order new coins, but the people will not always reckon by them. The best devised system of universal coinage could not, with all the power of modern Euro- pean governments, be forced upon the people in a century, if at all. As with coins, so with weights and measures. They cannot be changed upon the ground of general conformity, because the inconvenience of the change will endure for a whole generation of those who are asked to make it. The weights and measures in general use are so fixed, as to their meaning, in the minds of the people, that any proposal of change alarms them, or, if it causes no alarm, it will not be received. The French system of weights and M N E Y F A C C r N T . 45 ceive it possible, except by the most violent and offensive mea- sures, to change the principal money of account from its present value of the pound sterling. Every estimation of large, and even of very moderate sums, is formed by the pound. I do not attach great importance to such things as the national debt, or the rental of the country ; but the price and rental of private estates, the salaries of officers, the annual wages of servants — in larger matters, the expense of constructing a railway, or sail- ing a ship — all are estimated by pounds. An alteration of the value of the pound would unhinge every estimate and contract in England. I' say, advisedly, every contract for the shilling is inseparably connected with the pound ; and every contract which is not ostensibly made by the pound, is made by the shilling."^ It is remarked by Dr. Bowring, in his instructive little work on the decimal system, that, " To the pound sterling the most distinct and definite ideas attach, whether on large or small amounts. Mention a pound, five pounds, ten pounds, fifty pounds, a hundred pounds, a thousand pounds, ten thousand pounds, and your meaning is comprehended by everybody."^ Every one is acquainted with a large class of prices, and knows a great number of articles which can be purchased for a pound, for five or for ten pounds ; the Avages of a man for a year, the price of a horse, the rent of a farm, the cost of a cottage or first-class dwelling, the value of a ship, the cost of a steam engine : all such valuations are carried in the mind, and are measures, so much boasted, has made its way on]y very gradually in France. It is even yet but partially adopted, and is now admitted to have defects which should be corrected before it extends further. It could not have passed so extensively into use, if it had not been originated at a time when change was the order of the day ; when all old things, and old insti- tutions, were under the process of being exploded, reformed or modified. The French system could not be forced upon Germany, nor Great Britain, nor upon the United States. Those who are laboring for the desirable object of an universal system of coins, and weights and measures, must fail of suc- cess, because the complications and difficulties to be overcome arc equally beyond the reach of science, authority and individual enterprise. ' Minutes of P^vidence on Deciznal System, page 30. Bowring's Deci- mal System. * The Decimal System, by Sir -John Bowring, page 104. 46 M N E Y F A C C U N T . expressed in money of account. In naming such prices, or expressing such estimates, those ^vho use them have no reference to any quantity of gokl or silver ; for, among those who thus freely speak of prices, few could tell, or without help ascertain, the value of a quantity of the precious metals corresponding to any large sum named by them. If the owner of a cottage, valued by him at a thousand pounds, were to have gold to that amount laid before him in payment, he would be utterly at a loss as to its real value. If the amount were in sovereigns, he could count them ; and as each sovereign bears the mint certificate that it contains gold to the value of a pound, he would take the 1000 sovereigns for ,£1000, not on his own knowledge, but on the faith of the public coinage. The estimate of the article is made in pounds, and the price is perfectly understood by both buyer and seller, whether payment is made at the time or not. If made in gold bullion, it would be carried to a dealer in bullion to be weighed and valued ; if in sovereigns, they would bo received, not because the receiver knew either the genuineness of the gold, or that the coins contained the requisite quantity of gold to be equal to a pound, but they would be received solely on the faith of the impression on the coin indicating both quantity and quality. § 3. British money of account — Tlie pound sierJing — Guinea — Sir Isaac Kewton — Earl Liverpool — System o/" 1816 — Wlnj fractions in u^eight of coins — Coins are adjusted to money of account — ''What is a pcnmdf" — Fixed price of j^recious metals — Influx of gold — Depreciation post- poned, but yet to come — Remedy — Suspension of payments in Great Britain, in 1797. In further illustration of the subject, we shall notice specially some of the more noted moneys of account, and such as may appear best fitted to explain their nature and functions. The British money of account derives its terms from the fact that English coinage was founded upon the pound of silver, out of which was coined twenty shillings. Since that time, the money of account for expressing large sums has been the pound unit, for small sums, the shilling ; but owing to various abuses of the coinage, and other facts which we cannot recount here, the pound M N E Y F A C C U N T . 47 of silvei' which at first was coined into twenty, is now coined into sixty -six shillings. The money of account of England has passed through just so many changes as have concurred to bring down the pound of the former money of account, expressing the equiva- lent of a pound of silver, to the pound of the present money of account, which is not equivalent to the third of a pound of silver. At this point it has remained unchanged for more than a cen- tury. From the reign of Charles II. until the year 181 G, when the sovereigns were coined, the pound sterling had no corre- sponding piece in the coinage. The guinea was intended as a coin to be of the value of a pound, but not having been correctly adjusted, its greater value was at once shown by its price ex- pressed in the money of account ; and the price of gold fluc- tuating, it varied correspondingly in price until the year 1717, when it was fixed by Sir Isaac Newton at twenty-one shillings, at which rate it has remained under regulation of the mint. In 1816, under the advice of the Earl of Liverpool, and in pursuance of his elaborate report,^ gold was adopted as the legal tender of Great Britain, and a coinage of sovereigns ordered. In making this important change, if it had been regarded merely as a matter of coinage, it can hardly be conceived that the weight for this new coin would have been fixed at five pennyweights, three grains and ^H of a grain. We ask, for the sake of those to whom the idea of a money of account is not familiar, why this special quantity of gold, involving so minute a fraction, was to constitute the sovereign, which was to be thereafter the most important coin of Great Britain ? Coins are easily made of any ' Letter to the Kinj; on the coinage of tl)e llealm. 4to, London, 18U5. This very elaborate report, in which there is much to admire and to learn, exhibits, however, that confusion of ideas and expression which characterize all writings on money by authors who know nothing of, or who disregard the money of account. The eighth, ninth and tenth pages of this celebrated document furnish abundant proof of the difficulties encountered by those who endeavor so to define money in coins as to include all the functions of a money of account. The introduction of the money of account removes all the difficulties so strongly felt by the Earl of Liverpool. Notes of the Bank of England were then, and have been ever since, a legal tender in England. 48 M N E Y F A C C U X T . weight, and they tire readily changed. Why did the British government determine to coin 46'il sovereigns from a pound of gold ? Why admit such fractions into their coinage ? Why not make tlie coins even parts of a pound, so that every one might knoAv the quantity of gold in his coins, as well as the value ? The reason was, that the British government having resolved that the pound sterling should be represented in the coinage, there could be no discretion as to the quantity of gold in the sovereign, for the value of a pound sterling was well known to all the people, and had remained unchanged for more than a century, and, but for unwise legislation, or want of legislative care, would remain far more steady, and freer from fluctuations, than gold or silver. The sovereign Avas then necessarily made to weigh 5 dwts. S^?,] grains, that it might represent the British unit of money of account ; that is, it was made the equivalent of a value known and fixed before.^ The British government did not create or enact the money of account ; it grew up with the progress of the nation, and although it had undergone muta- tions under abusive regulations, yet it remained unchanged from ' The Franc of France Aveiglis (silver) 76.5 grains. Napoleon, " " (gold) 99.2 Sovereign, England, " " 122.5 Shilling, " " (silver) 80. 5 " Dollar, U. States, " " 412.5 Eagle, " " (gold) 258. The coins here mentioned, and all others, are accurately adjusted in weight to the unit of the respective moneys of account they represent. The money of account is not changed to suit the coins, but the latter to represent the former. Where this adjustment is not correct, as was the case with our gold coins before 1834, the coins will not circulate. If coins are undervalued in the money of account, they will be melted or exported ; if overvalued, they will bo refused. The adjustment of the coin to the unit of the money, or the part it purports to represent, must be correct to the minutest frac- tion. This is because coins are made a legal tender. Bars of gold or silver of any size may circulate by weight at the market price. Coinage, with a law making the coins a legal tender, is fixing the price by law of the precious metals, and is open to serious objections when applied to larger sums. All that a government can do, in the way of fixing this price, is tc force creditors to take them at the price fixed. M N E Y F A C C U N T . 49 the time it ceased to be improperly tampered with and abused. This the government, in the measure of 1816, wisely chose to respect. It was a prominent feature of this measure, that it fixed the price of gold. The Britisli pound would have remained steady, and capable of expressing, by its fractions, every variation in the price of gold ; but the emission of a coin as the equivalent of a pound made it difficult for any but dealers in bullion to tell when gold changed in value. Two things, essentially distinct, were thus blended in the minds of the mass of the people ; dealers in bullion alone could detect changes in the value of gold, but the people could not distinguish between the pound of the money of account and the sovereign.^ This difficulty was increased, ' " If Ave have attained a clear conception of the functions of the money of account, we are able to answer the question, wuat is a pound? by sim- ply replying, that it is the unit of the money of account of Great Britain. The value of that unit, or its power, everybody in that country knows. The statute which fixes the mint price of gold in England is an application of the money of account by Parliament to the article of gold ; and it really no more changes the nature of the money of account, when applied by law to express the value of an ounce of gold, than if a merchant had so used it. The price of an ounce of gold is declared, by statute, to be permanently at X3 175. lOjf?., and the Bank of England is required to purchase it from all who oifer, at X3 17.s'. 9cZ. Although the effect of thus declaring permanently the value of gold may confuse the minds of many, and lead them to infer that the ounce of gold is the £3 17s. lOjcZ., it does not remain the less true that it is a simple expression of value, and that the ounce of gold and the £3 175. lOld. are not convertible terms, because the latter expresses the value of the former. It may be asked, what did £3 175. lOld. mean before it was used by the statute to denote the value of an ounce of gold? Did not people understand, by £3 175. 10^ J., the same thing after its use in the statute as before? And how many thousands reckon familiarly in pounds, shillings, and pence, who know nothing about the mint price of gold. " If a British statute, or proclamation, declares the gold Napoleon of Fi-ance to be worth 155. lO^cZ., that is not merely declaring the Napoleon to be worth its weight iu gold, it is the expression of the value in English money of account; it is not the same as if it had declared that tlio Napo- leon, weighing ninety-nine grains and tAvo-tenths, is equal in value to ninety-nine grains and two-tenths of gold. Such a declaration as this would only be intelligible to those familiar with the process of weighing gold. To say that a Napoleon is worth 155. 101(7. is perfectly intelligible to every 4 50 M N E Y F A C C U X T . and the confusion confirmed, by the enactment making sove- reigns a legal tender for debts, at the rate of a pound sterling ; this "was fixing the price of gold by law, and fastening the money of account to gold, whatever might be its fluctuations. When this was done, the mint price of gold was <£3 17s, lOicZ. ; and this became, under that enactment, thenceforward the fixed price of gold in Great Britain, at which all persons were compelled to receive it in payment. Whatever may be said of the policy of fixing the price of any article, even that designated for money by law, it cannot be questioned that it was a false step to endan- ger the steadiness of the money of account by fastening it to any coin or quantity of gold. The function of money of account being to express and register values or prices, whatever tended to confuse its operation, change its power, or render its expres- sions less intelligible or less reliable, was surely to be avoided. Such a measure, if gold remained unchanged in value, could have no other ill effect than preventing people from apprehend- ing clearly the distinction between the unit of the money of English ear; but if you were to ask the exact weight in gold which would be equivalent to 155. lOjfZ., not one person in a thousand could reply with- out a calculation, or consulting some authority. " In England, gold is the only legal tender for sums over forty shillings. If you enter a warehouse in London, and ask the price of any number of articles over that sum, the salesman will inform you instantly ; but if you ask him how much gold you shall weigh him for any article, he cannot answer. "When the English farmer asks fifty shillings a quarter for his wheat, does he measure the value by a mental reference to fifty shillings, or to two-and-a-half sovereigns in gold ? Or does he, on the instant, think of either silver or gold? Does he think of anything beyond expressing a price ? And did he not, with equal readiness, give the rate before the mint price of gold was fixed as at present? If, as some say, the naming a price is strictly a comparison of the article priced with its equivalent in the gold standard, why is wheat continually quoted in shillings, of which there is no equivalent in gold, instead of in pounds and fractions? Why say fifty shillings, instead of £2 10a-. ? If the process of naming a price was strictly a comparison with gold, the mind would naturally cling to the pound or sovereign, and its fractions, especially where there are equivalents in gold, and say two-and-a-half sovereigns." — Merchant's Magazine, April, 1852, by the author of this volume. MONEYOFACCOUNT. 51 account and the sovereign, or gold bullion. But if the recent influx of gold had been accompanied by the fall in the price of that metal, which the extraordinary quantity seemed to warrant, then the confusion which must have befallen the money system of Great Britain would have been disastrous beyond estimate or conjecture. The evil, though alleviated, is greater than is now suspected. It is strange that it docs not create more apprehen- sion. Great Britain has bound all her subjects to receive 5 dwts. and Sjg] grains in payment of a pound sterling. The immense pecuniary transactions of that country with all the Avorld tends to uphold the price of gold when it exhibits a tendency to sink. The flow of gold from all the world to England has been seen, and the current of silver from England has not been less visible. The depreciation must proceed to a serious extent before its efiects become clearly revealed or appreciated. The evil must, by its own nature, enhance itself; for the depreciation being more clearly perceived elsewhere, the gold would increase in its flow to the point of over-valuation. Each step of this deprecia- tion would aflect every pecuniary transaction of the countiy, and constitute an attack on the national money of account, in which all prices, rents, wages, salaries, taxes, and securities for money, are expressed. The magnitude of such an evil is wholly beyond estimate. That Great Britain has not already suffered more from this source is one of the most extraordinary things in the history of commerce ; for no sane man would have sup- posed that such an influx of gold could take place, as has occurred within five years, without a heavy depreciation. The causes which have delayed this depreciation are, many of them, now well understood. Among them are usually mentioned as prominent, an immense displacement of silver by the export to the East, caused in part by revolutionary movements in China; contemplated rebellion in British India ; short crops ; the in- crease of enterprise and manufacturing industry on the conti- nent of Europe ; together with an immense absorption of capital in the construction of railroads ; these, added to the war with Russia, produced a demand for gold which no previous combina- tion of circumstances ever equalled. 52 M N E Y F A C C U N T . We can scarcely doubt that the depreciation of gold has only been postponed, and that it cannot be avoided, -whether it is to take i)laco by a process so slow as to be perceptible only to those who will be shrewd enough to take full advantage, or "whether it occur so rapidly that none may escape its consequences. But whether slow or quick, it cannot occur Avithout much evil to Great Bi'itain and the United States. There is no excuse for encoun- tering such a mischief without preventive measures. The diffi- culty in providing a remedy is only that which arises from the coinage, and that presents an obstacle only in reference to the merest retail business. Great Britain has only to adopt the same principle and practice in regard to gold that has long prevailed in reference to silver. Let gold above five sovereigns, or some other suitable amount, be a tender only at the market price. The regulation of the United States, on the occasion of the great influx of gold, was precisely that Avhich it ought not to have been. Gold should not have been made a legal tender in sums above twenty, or thirty, or fifty dollars, except at the market price, which will be familiar to all when it is permitted to find its own range like other commodities. If this were so, every fall of gold would be at once marked on the money of account. An ounce of gold would be quoted in London at X3 lis. lO^cl, or at ^3 17s. 5d., X3 17s. Od, <£3 10s. OtZ., <£3 Os. OcZ., according to its market price. Every con- tract for money in the nation would remain intact, and every debt paid in gold would be paid only at the market price. The sovereigns, and other gold coins and bars, would be public cer- tificates of the quantity and quality of the gold in them, but would be received only at their current value. No confusion or mischief could follow this repeal, to be compared with that which may be feared if a heavy depreciation in gold should occur. The government, by the adoption of the gold standard iu 181G, the coinage of sovereigns, and making gold a legal tender at a fixed rate, endangered the money of account, and placed its very existence on the hazard of the value of gold remaining un- changed. No possible improvement in the coinage of a country MONEYOFACCOI'NT. 53 could compensate for the mischiefs of a ruined or confused money of account. It is true that such mischiefs have, in past times, been often inflicted upon nations ; but the real history of these evils is yet to be ■written, and their magnitude to be appre- ciated. New coins are frequently introduced with impunity ; and, great as the evil of an over multiplication of coins has been in many parts of the world, it does not compare with the evils involved in an unsettled or broken-down money of account. The period of the suspension of specie payments by the Bank of England, from 1797 to 1822, furnishes a fit illustration of the functions of a money of account. This period included the Mars of the French Revolution and of Napoleon, and the three years of war between Great Britain and the United States. The commercial payments of Great Britain were, during that pe- riod, effected almost entirely by means of credit: gold was so much in request for military purposes, that it became an article of merchandize in constant demand, at a high price, iu England for shipment to the continent. The daily transactions of men involving the whole business of the country, the payment of taxes and wages, the sale of goods, the whole move- ment of income and expenditure, and the internal exchanges of the country, were carried on by substitutes for money, or by the various devices of credit. During this long period of paper currency, the money of account fulfilled its functions with a steadiness surprising to those who understood not its nature. All the contracts of Great Britain involving price and payment were made in the language of the money of account. For more than a score of years it was the medium of expressing the prices of all commodities, and all services. It was equally so before 1797 and since 1822 ; but when there is a currency of gold or silver, or a paper currency, that is convertible, it is difficult for many to separate the office of a money of account from that of coins. It is so fixed in their minds, that gold and silver are the practical measures of value, that there is no place in their conception for the exist- ence or movement of a money of account. It seems strange, however, that any one, during this period of suspension of specie payments in Great Britain, could have failed to see-the working of the money of account. Gold and silver, during all that period, ceased to be employed as m.oney in large transactions: no man sold his goods, or rendered his services, with the expectation of payment in coins or bullion. Few people in Great Britain, in that day, knew the exact price of gold, and no one hesitated an instant in affixing his price to other articles in pounds, shillings and pence. Nor did the dealer in coins and bullion hesi- tate in naming their price in these denominations. During all that period it was the sole medium of valuation, the sole medium of expressing or fixing prices. Business men, in those days, did not refer to the precious metals 54 MONEYOFACCOUNT,. in their ordinary transactions. The charges in their books of account, and the sums expressed in their bills of exchange and promissory notes, were stated in the money of account; but they -were, neither by law nor by cus- tom, payable in coins or JauUion. As a matter of fact, the demand for gold for exportation so increased its value, that it was sold at times as high as 100 shillings the ounce, instead of 77 shillings and 10^ pence, the mint pi-ice. The proof that this was no depreciation of the paper currency, as some contended, is, that the fluctuations of silver did not correspond, either in time or rate, with those of gold.' There is no adequate proof that general prices in England indicated any depreciation of the paper of the bank. It was never quoted as below par. The high price of gold was the only real ground for alleging a depreciation of the paper. Yet this fluctuation in the price of gold had occurred fre- quently before the suspension by the bank in 1797.^ It is impossible, then, to refuse to the money of account of Great Britain the credit of having, during the important period of British history between 1797 and 1822, fulfilled the great office of serving as the medium by which the people measured or expressed the prices or values of all commodities and services in all private and all public transactions. It is equally true that it had done so before, and h.as done so ever since. During that time they were always conversant with money of account, but very little with coins. It was no more evident, however, during that time than since, that the fixing a price and expressing it in money of account is one thing, and payment is another and quite a different thing. In many of the recent discussions in regard to tlie adoption of a decimal system, the importance of the British money of account is not only fully acknowledged, both by writers and by the eminent men who were examined before the Parliamentary committee, but the necessity of. preserving it intact is strongly urged. Now, if thus important, where is the treatise or work in which the nature and functions of a money of account are deve- loped ? Where, in what book, or from what authority, are we to learn the doctrines of this very important agent in commer- cial transactions ? ^ See within, the closing paragraphs in the Chapter on the Bank of England. " Gold was quoted, at the dctes afiBxed, as follows : — 1783, March Sis. 9rf. per ounce. The mint price being 77». lOJcZ. 1783, May 828.3d. " " " " " 1792, May to Sept 81s. " " « " " 1795-C 858. 86s. S8s. per ounce. " " " " MONEYOFACCOUNT. 55 If changes of temperature can bo measured and expressed by the degrees of a thermometer ; if the pressure of the atmo- sphere can be, in like manner, expressed by the scale of a baro- meter ; if places on the surface of the earth can be indicated by lines of latitude and longitude ; if men understand each other Avhen they speak of a foot, a yard, a pound, an ounce, or an acre ; and if these modes of expressing temperature, pressure, locality, length, weight, &c., can be carried in men's minds, and employed constantly and intelligently to express definite ideas, how is it that we have been so slow to apprehend that prices or values may be expressed in a similar way ? How is it that men can carry in their minds distinct and definite ideas of pounds, yards, feet and acres ; that they can make estimates, sales and contracts, involving immense weight in pounds, and vast lengths in yards, and large surfaces in acres or feet, without any appli> cation of scales or yard-sticks, if they cannot carry in their minds definite ideas of pounds, yards and feet ? It would be a vain attempt for government to replace these ideal methods for others substituted by authority. The old thermometers, baro- meters, degrees of latitude, pounds, yards and feet would main- tain their empire over the minds of men once fully accustomed to them, for whole generations. § 4. Colonial currency of Canada, ami of the ikirieen colonies noiv of the United States. The continued existence of the money of .account in the British colonies of North America furnishes an apt illustration of the nature and workino- of the ideal scale by whicli men make computations, and express prices. The money of account is the same, in terms or denominations, as that of England, though not the same in meaning. The pound unit of Canada does not express the same value as the pound sterling. It is not now, and never was, represented by any coin of gold or silver. The people of these British colonies receive and pay out the coins of England and France, the United States, and other countries, always estimating their value or price in their own money of account. They have their own banking system, and their own bank-notes issued in sums expressed in their own money of account. So, also, are expressed the prices of all articles of merchandize ; and all their domestic money transactions are effected in like manner. If the toniv- 56 JIONEYOFACCOUNT. city of those people for their money of account had not been great, it could not have been maintained tlms unchanged for over half a century under the circumstances of their intimate relations with, and dependence on, the government of Great Britain. All the officers and soldiers of the army who go out from the parent country, and all the emigrants, carry with them their habit of using the British money of account : there must be incessant occa- sion, throughout these colonies, of comparing these two moneys of account; so much so, that very many of the people must be as flxmiliar with the British money of account as their own. The inconvenience of this differ- ence must be very great for the British government and its officials, as well as for the colonial governments and people. The temptation of^the Impe- rial government to make the colonial money of account conform to that of Great Britain must be very great; yet, in the Aico of all these circum- stances, this colonial money of account maintains its sway in the habits and minds of the people. We are not minutely acquainted with its history. The latest authority in our hands gives its value as one-tenth less than ster- ling; that is, £100 colonial is equal to £90 sterling. It would be interest- ing to learn whether this colonial money of account has undergone any change within the last fifty years. It is quite probable that fluctuations have taken place in the price of the precious metals in these colonies, owing specially to an unfavorable exchange creating a demand for specie for expor- tation. Such occasions, by showing an increased price of the coins in cir- culation, might to some appear like u change in the value of the money unit; •whilst, in fact, they would only prove a local demand for the coins or bul- lion, and an enhanced price. But what it is desirable to know is, whether the Canadian pound, or unit of account, has undergone change in its power or value during the last fifty years, as the same is employed by the mass of the people. British North America furnishes another remarkable instance of perse- vering adhesion to a money of account. The French inhabitants of Lower Canada cling to the old mode of computation which prevailed in France a century ago, when their ancestors emigrated thither. Despite their long subjection to British authority, to their being long surrounded by a larger population using another money of account, they cling to the denomina- tions of livres, sous and deniers. This is a continuation of the old French money of account, in which the French Canadians yet express all their ■prices, and by which they express the value of all the coins in circu- lation. The habits of these Canadians afford, then, plain proof that men do not measure the value of goods by moans of gold or silver, or their substitutes, bank-notes ; and that they do it by means of a money of account, which is employed not only there, but in all civilized countries, to express the price as well of goods as of money itself. Wc think it will be M N E Y F A C C U N T . 57 found tliat the French Canadian money of account has undergone no change in its power or value for a whole century.' At the time of the separation of the United States from Great Britain, the money of account of all the colonies was expressed in pounds, shillings and pence; but these terms had very different significations in the various colonies. The term or unit pound, in the following named colonies, is ex- pressed as below in our present money of account. No one of these units corresponded to the pound sterling — that of South Carolina being nearest. £1, New England and Virginia is equal to $3.33, or Cn. ty the dollar. " New York and North Carolina •' $2.50, or 8s. " " " Pennsylvania and Middle States.... " $2.66, or 7s. 6(?. " « « South Carolina " $4.28, or 4.s. 8rf. " " Whoever will take the trouble to trace the history of these various and differing moneys of account, will find that coinage, or the regulations of mints, had little to do with it. The variations originated in part from the same, and in part from diff'erent causes. Whilst, in England and France, and other European countries, the fall in the value of the unit of the money of account was caused, generally and mainly, by abusive and fraudu- lent regulations of the coinage, in these colonics this departure in various degrees from the pound sterling proceeded from the monetary struggles arising from over-importation, a consequent ' As a specimen of the manner in which the prices of various coins were expressed iu the moneys of account of the British Provinces of North America : • — Coins. Nova Scotia, Halifax. Lower Canada. Upper Canada. Vr. Edward's I. A B. d. £ R. d. £ a. a. £ s. d. British Guinea 13 4 13 5 15 6 — " Sovereign... 15 14 4 1 10 — American Eagle 2 10 — — — — ;; 2 6 British Crown — 5 6 _ g _ 7 6 " Shilling — 1 1 — 1 3 — 1 6 American Dollar... — 5 — 5 — — 3 French Crown — -55 — 5 . — _ — " Five Franc. — 4 7 — 4 8 3fartiii'g Jirilish Colunies, pofje 229, anil Ajipeiidi.v, page 53. The units of the moneys of account of some of the British Islands arc as follows : — Jamaica £1 sterling equals £1 8s. or Gs. Sd. to the dollar. Barbadoes " " £1 7s. or Gs. 3(/. " " Windward Islands " " £1 15s. or 8«. Zd. " " Leeward Islands " " £2 Os. or Ss. Qd. '<■ " 58 M N E Y F A C C U N T . long-continued unfavorable exchange, and from a depreciated paper currency. The different circumstances of different colo- nies led to varying results; but, when the advance of indus- try and domestic trade had secured greater prosperity, and a more settled policy, these various moneys of account became fixed. There never had been any coinage to correspond with, or sustain any of them. The coins in circulation ^Yere almost exclusively Spanish ; there could be no pretence that these moneys of account corresponded with or represented any coins or system of coinage, or that they were in the slightest degree supported by coins or coinage. Every coin in circulation was as much the subject of price estimated in these moneys of account, as a bushel of wheat, or a barrel of flour. All prices in each colony, and subsequently in each State, were expressed in the pounds, shillings and pence of that locality. The people measured not values by coins, but they expressed the known value of coins like other ascertained quantities, by their own money of account. These varied moneys of account were adhered to, from mental habit, for thirty to fifty years after our present simple decimal system was adopted. It is no uncommon thing now, in the interior of Virginia and Massachusetts, to hear people express prices in the old money of account. In New York the term shilling prevails yet, as it agrees with the Spanish subdivision of the dollar adopted as the unit of our national mono}'' of account. It was a common practice for merchants, for tAventy years after the adoption of the dollar unit, to keep their books in the pounds, shillings and pence, with blank columns, in which, at their leisure, they converted their first entries into dollars and cents. For though merchants and pro- fessed accountants became familiar with dollars and cents, they were obliged to deal with the people in pounds, shillings and pence. It is true the value of the dollar was well known to the men of that day, but it Avas known only as the value of other things ; it had no place in the minds of the people as the unit of a money of account. For them, prices expressed in dollars would have to be converted into pounds, shillings and pence. In the latter terms they instantly understood prices in all their M N E Y F A C C L' N T . 59 relations ; but prices expressed in dollars, or in sterling money, involved a calculation. Notwithstanding the simplicity of the dollar unit, and the extreme inconvenience of the differing moneys of account in the different States, seventy years, or two generations, have passed since the change was made, and yet traces of the old habits of reckoning are to be met with in all the old States. If any man finds himself unable to compre- hend the working of a money of account, and its firm hold on the minds of people, let him study these moneys of account of the Atlantic States of North America. § 5. Moneijs of account in Ilaly, Germany, &c. — Evils of varied coinage — Coinage implies a previous price — Coi^is not a measure — Prices in rnoneij of accoxint understood instantaneously — Eicardo — Sir James Stewart — Bishop Berkeley — Montesquieu — Money of account to he taken as it is, aiul its limits of itsefulness studied — Edinburgh Review. We have abstained from entering at large into any notice of the moneys of account of various European countries, whicli, though full of instruction, are so complicated with questions of banking and coinage as to be less easily understood. The small extent of the separate countries of Germany and Italy, and the consequent multiplication of contiguous mints and varied coinage, and the blending in the circulation of so many different coins, early begot an amount of vexation and loss in money transactions, which people only bore because a remedy seemed hopeless. The evil, instead of diminishing, only increased with the lapse of time ; for every effort of reform, and every application of remedy, only enhanced the mischief. It is easy to see, however, through the endless mazes of this varied coinage, that the evil would have been insufferable but for the facility afforded by moneys of account in valuing and computing the numberless coins which went to make up the circulation in many parts of Europe. It is true that this facility was somewhat diminished by the formation, in many countries, of several different monej's of account. Some coins were computed in one money of account, and some in another. In some countries one money of account was appropriated to bills of exchange, and another was used in the bank accounts. People who were flooded with such a varied coinage as that w^hich prevails in Germany and Italy, were often reduced to the patriarchal mode of making payments by aid of the scales. The method subsequently adopted to escape these evils was to pub- 60 JI N K Y F A C C IT X T . lisli tables of the various coins in circulation, -with their value in the most used money of account of the country where the table was constructed. Such a table is that made by Sir Isaac New- ton in 1710, a copy of which is found in the second volume of Kelly's Cambist (page 154) ; several such tables, of recent date, are found in the same volume, in the pages succeeding. These statements show that there were thirty gold coins called ducats, some twenty-five of which were from different mints, with wholly dififcrent impressions, and scarcely any two of which were of the same value. There were twenty-three gold coins called pistoles, from nineteen different mints, of differing values and impressions. No less than fifty-one silver coins, called rix dollars, were in circulation from about twenty different mints, and of varying value. We might adduce many such cases, to show how very complicated and vexatious is the general coin- age of Europe. But the real extent of the evil cannot be conjec- tured from such instances, even if we had space to continue them. To know these coins, and deal in them, becomes a special branch of the business of private bankers, who of course must have a compensation for their skill and trouble. Many of the continental public bunks had their origin mainly in this difficulty. To scrutinize, count and pay over these coins became such a bur- den, that it was assigned as among the chief reasons for the establishment of the banks of Amsterdam and Hamburg. Those who carefully examine the mode of proceeding by merchants and bankers through all this labyrinth of moneys, will find that it was only mastered by the mental habit of subjecting all these coins to the valuation of one or more moneys of account. It is no great difficulty for men much accustomed to deal in money to master several difierent moneys of account, and employ them mentally with equal facility. There are many men who, from their peculiar position in business, can apply with equal readi- ness the moneys of account of England, France and the United States. Time and opportunity may give this facility to any per- son ; but, unaccustomed to other moneys of account than their own, the most expert arithmeticians of either of these countries will always be found converting the money of both the others MONEY OFACCOU NT. 61 into their own, as a means of ascertaining its meaning or value. An Englishman, simple as the French system is, always men- tally converts every sum and price named to him in France into his complicated denominations of pounds, shillings and pence, before it presents to his mind a full idea of the value expressed. So, indeed, must the traveller from France do in the United States, although familiar with a decimal system similar to our own. The price of a horse, or a coat, in dollars docs not instantly convey to his mind the value named ; it must be turned into francs. All modern coinage implies some previous mode of expressing value or prices. It will be seen that the coins are always made to correspond with the denominations of this mode of expression. When the English sovereign was first coined in 181G, it was made to contain so much gold as was equivalent to a pound ster- ling. And so it will be found that coins are always made to correspond not specially with a previous Aveight or coin, but always with the money of account. This w^ill be shown more fully hereafter. Coinage, as now conducted at modern mints, is not only in accordance with the prevailing money of account, but subservient to it. A certain weight of gold or silver has its price expressed in some particular denomination of the money of account. Three things are expressed in a coin, weight, quality, and price or value. Its weight is ascertained by actual applica- tion of the balance in the mint ; its quality, or standard of fine- ness, is also fixed by law and the workmanship of the mint ; its price is also fixed by law before it is coined. It is made to corre- spond to some previous rule in all these respects. It is not, therefore, a measure or criterion of value ; but an article pre- pared by the mint, and vouched by the public authorities as of a proper Aveight and quality to be employed in payment at a par- ticular price. It is a commodity commonly used in payment, and approved for that purpose, which is brought to one common standard of quality, and divided into pieces accurately weighed, and of such size and weight as will be convenient for use, reckon- ing and circulation. If these coins Avere in occasional use among savages for the purposes of exchange, they Avould probably com- pare every article Avith the coin, and among them coins Avould bo 62 M N E Y r A C C U N T . a kind of measure of value. In civilized life, coins arc not mea- sures of value, but special quantities of gold or silver weighed, certified by the impression received at the mint, and adjusted by the weight given to them to a particular price expressed in the money of account. The gold and silver thus prepared has given to it every possible advantage as a medium of payment. As a general equivalent, no commodity has ever been preferred, and none is likely to be preferred. We therefore count coins, "we pay in coins, but we do not express prices nor keep books in coins.' All our computations of money, all our conversation about the market value of merchandize, all the sums named in reference to real estate or public revenue, all the sums expressed in bills of exchange — all these, as we have said, are stated in money of account. If one person say to another, I will give you $10,000 for your house, he to whom the offer is made knows instantly the import of the offer ; but if, instead of this, he places before him a large cask of dollars, and says, I will give you these, it may require two or three days' time to ascer- tain how much is offered. So any one understands, in an instant, what value is intended by $100 ; but it may require many minutes to count and scrutinize $100 in coins. In analogy Avith the mental process which is applied to all measures and weights when they are merely spoken of and not actually used, men employ a money of account to express prices. It is only arith- metic, with a value affixed to the unit or number one, which is to ' "A coin is merely a piece of metal, of known weight and fineness." — "It has been said to be both a sign and measure of value; in truth, it is neither." — " It is equally incorrect to call money a measure of value. Gold and silver do not measure the value of commodities more than the latter measure the value of gold and silver. When one commodity is exchanged for another, each measures the value of the other." — Encycl. Britt., article ''Money," by J. R. M-Cullock. Mr. M'CuUoch and others have thus clearly taken away the old mea- sure, without bringing forward the real agent in fixing prices. It is money of account which makes of the exchanges of civilized people a real barter; it registers prices and amounts, and the credit system efi"ects the pay- ments. Commodity, in fact, pays for commodity. This is explained as we advance. JI X E Y F A C C U N T . 63 accompany all subsequent numbers and combinations in propor- tion to the number of units expressed. Fractions and decimal parts are expressed as in all other cases. " During the discussion of the bullion question," says Mr. Ricardo, " it was most justly contended, that a currency, to be perfect, should be absolutely invariable in value." " But it was said, too, that ours had become such a currency by the bank restriction bill ; for by that we had wisely discarded gold and silver as the standard of our money ; and, in fact, that a one pound note did not and ought not to vary with a given quantity of gold more than with a given quantity of any other commodity. This idea of a currency without a specific standard was, I believe, first advanced by Sir James Stewart ; but no one has been able to offer any test by which we could ascertain the uniformity in the value of a money so constituted."' This shows that even Mr. Ricardo, who must have known what was meant by a money bf account, could not embrace its func- tions in his view of money in general. Sir James Stewart, in whose Avorks we first find distinctly set forth the existence and uses of a money of account, did not speak of it nor propose it as a currency ; he did not regard it as money. We give his own words : — " Money wliich I call of account is no more than a scale of equal parts, invented for measuring the respective value of things vendible. " Money of account is, therefore, quite a different thing from money coin, and might exist although there was no such thing in the world as any sub- stance which could become an adequate and proportional equivalent for every commodity. "Money of account performs the same oiBce, with regard to the value of things, that degrees, minutes, seconds, &c., do with regard to angles, or as scales do to geographical maps, or to plans of any kind. "In all these inventions there is some denominative taken for the unit. " In angles it is the degree ; in geography it is the mile ; in plans, foot, yard ; in money it is the pound, livre, florin, «S;c. " The degree has no determinate length, so neither has that part of the scale upon plans or maps which marks the unit; the usefulness of all those being solely confined to the marking of proportions. ' Proposals for an Economical and Secure Currency, Section II. 34 M N E Y F A C C U N T . "Just so, the unit in money can have no invariable determinate propor- tion to any part of value ; that is to say, it cannot he fixed in perpetuity to any particular quantity of gold or silver, or any other commodity. "The value of commodities depending upon circumstances relative to themselves, their value ought to be considered as changing with respect to one another only ; consequently, anything which troubles or perplexes the ascertaining these changes of proportion by the means of a general deter- minate and invariable scale, must be hurtful to trade; and this is the infal- lible consequence of every vice in the policy of money or coin. " Money, as has been said, is an ideal scale of equal parts. If it be de- manded, what ought to be the standard value of one part? I answer by putting another question : what is the standard length of a degree, a minute, or a second ? None ; and there is no necessity of any other than what, by convention, mankind think fit to give. "The first step being perfectly arbitrary, people may adjust one or more of those parts to a precise quantity of the precious metals ; and so soon as this is done, and that money becomes realized, as it were, in gold and silver, then it acquires a new definition ; it then becomes the price, as well as the measure of value. " It does not follow, from this adjusting of th» metals to the scale of value, that they themselves should therefore become the scale." Sir James Stewart then refers to the bank money of Amsterdam, and the African custom, mentioned by Montesquieu, as perfect exemplifica- tions of a money of account. "A florin banco has a more determinate value than a pound of fine gold or silver; this bank money stands invariable like a rock in the sea." — Sir James Sieivarfs Political Economy, B. 3, cli. 1, vol. •/., Ath ecL, jh 526. Now, whatever may be the imperfections of this statement, by Sir James Stewart, of the nature of a money of account, Mr. Ricardo should have seen that he did not propose " a currency without a specific standard." He did not propose a currency of any kind ; for a currency is something which passes as a medium of exchange, and a money of account is something which every one must carry in his mind as he does his knowledge of words and arithmetic. "It has long been obvious to observing men that there was something more in the nature and functions of money than was exhibited in the mere coinage of the precious metals, and that many false measures and notions were prevalent in consequence. To some it appeared clear that any sub- stance whatever might serve for money, if men were only agreed to receive it as such. Hence, probably, the Carthaginian attempt at money of leather, and the Chinese paper-money. Those who saw clearly that money per- formed a certain circle of operations, returning to perform them again and again, were struck with the constantly repeated routine in which money M N E Y F A C C U N T . 65 appeared to circulate. This subject was occasionally adverted to long before it was ever seriously taken up. Bishop Berkeley, in his 'Querist,' was one of those vrho first intimated the distinction between money and money of account. In his 23d query lie asks: ' Whether money is to be considered as having an intrinsic value, or as being a commodity, a standard-, a measure, or a pledge, as is variously suggested by writers? And whether tlie true idea of money, as such, be not altogether of a ticket or counter?' Query 25 : ' Whether the terms crown, livre, pound sterling, &c., are not to be considered as exponents or denominations' (see, also, the 24th query); 'and whether gold, silver and paper are not tickets or counters for reckon- ing,' &c. Query 26 : ' Whether the denominations being retained, although the bullion were gone, things might not, nevertheless, be rated, bought and sold, industry promoted, and a circulation of commerce maintained ?' Query 35 : ' Whether power to command the industry of others be not real wealth ? and whether money be not, in truth, tickets or tokens for conveying and recording such power, and whether it be of great consequence what mate- rials the tickets are made of?' " It is evident the Bishop saw dimly the value and functions of a money of account, but that he did not perceive the nature and use of a coinage, or the importance of the precious metals as a universal equivalent. Thus it is, that while some have looked at the money of account, they lose sight of the importance of coins, or the regular mode of authenticating the pieces of gold and silver, which are used sometimes for payment; whilst those who regard the latter too narrowly, are not able to comprehend that money of account in which all men name their prices, and keep their accounts. " Montesquieu, in the 3d chapter of the 22d book of the ' Spirit of Laws,' treats expressly of ideal money: 'There are real and ideal moneys: civil- ized people, who all use ideal money, do so because they have converted their real into ideal money. Those who at first had a real money find that by fraud, or by act of the government, a part of the metal which should be contained in a coin is withheld, abstracted, and the piece thus reduced is still called by its former name.' lie saw clearly that men reckoned by a money of account, but imagined it was only because the coin had been altered. The truth is, however, that the temptation to alter the coin arose, as we shall explain, from the fact that a gain could be made by using the terms of the money of account to keep up the deception of the debased coin. That which was called a shilling, was still called a shilling, although re- duced in quantity and value ; but the idea of the value of a shilling being firmly fixed in the minds of the many would be applied, by reason of the name, to the debased coin. And the evil of these changes induces the author of the ' Spirit of Laws' to discourage the use of ideal money. In the 8th chapter of the same book he tells us, that ' the blacks on the coast of Africa have a sign of value without money, purely ideal. A certain article is worth three macutes, another six, another ten niacutes. That is the same GQ M C X E Y F A C C U N T . as if they said simply 3, G, 10. The price is fixed and expressed by com- parison of commodity with commodity, for there is no money in particular, but every portion of goods is money, or means of payment, compared with others.'" — From an article, hy the author of this volume, in the " Bankers^ Magazine," of July, 1857. The power and functions of a money of account are of great importance ; but we must take the money of account for what it is, and for nothing else. We may trace its history, study its applications, and consider its range of power and usefulness ; but we cannot deny its existence, nor shut our eyes to the fact that its use is as universal, as it is unavoidable, among all civilized people. It is a very proper and natural inquiry how far a money of account may be relied upon for uniformity and perma- nence. Since men will estimate and count by an ideal scale, it becomes important to learn all that can be known of this im- portant mental process. What are its advantages and disadvan- tages ? Does the unit of the money of account vary under slight, or only under extraordinary influences ? What kind of influences seem most to aflect it ? These, and other like questions, may well demand consideration ; but no one can any more be held responsible for the defects of a money of account, than can any one claim merit for it as an invention of his own. Sir James Stewart was not the inventor of that Avhich had been in use in all ages ; and it was not incumbent on him " to offer any test by which could be ascertained the uniformity in the value of a money so constituted." Few men were better fitted to judge of the uniformity of a money of account than Mr. Ricardo, if he had applied himself to that particular point. ^ ' " It is clearly necessary, therefore, to have a mode of expressing values, which is as applicable to every change in the value of the precious metals as to any other commodity. This is what they have in China, and what they had in Venice, and what tliey have in Hamburg, and in every commercial community, where their coins do not correspond with the money of account. It is what they have even where this correspondence exists, but with such confusion of ideas as greatly impairs the advantage. Mer- chants, bankers and capitalists can readily apply the usual money of account to bullion ; and the price-currents give constantly the price of gold and sil- ver in bars by the ounce, and of doubloons and dollars. But the mass of MONEYOF ACCOUNT. 67 § 6. Moneys of account, liow formed, pi-eserved, disinrhcd and destroyed. The agency of moneys of account being acknowledged, it be- comes a matter of interest to consider how they are formed, pre- served inviolate, and disturbed or destroyed. Hitherto, whilst the people are prone, in Great Britain, to look upon the precious metals, and pounds and shillings, as the same thing. It is, however, none the less true, that the course of dealing converts any system of coinage into a money of account used in all the price-lists, and in all sales. Men familiar with prices soon learn to carry the prices of hundreds of articles in their memo- ries, with all the fluctuations that are constantly taking place ; and this they do not accomplish by keeping in their minds a distinct idea of the quantity of gold or silver which may be the equivalent of each price, for of these quantities they may have no correct conception at all. However it may be done, whether by mere force of memory or practice, or by the aid of association, it is true that men in business carry a vast amount of details about prices in their rninds, who know very little of anything about gold and silver coins or bullion. It is, hence, always the tendency of commerce to create a strict money of account, especially among those who have most to do with trade, and most familiarity with prices. This would be at once seen and credited, were no coins circulated; but it is no less true where it cannot readily be detected, than where it is evident in the business of every day. The occasions in which prices are named, discussed and fixed, are vastly more numerous than those in which any actual or veritable measure- ment of the value of any article is made in gold or silver ; so much more so, that those whose occupations lead them incessantly to the consideration of prices, find it much easier to carry money of account in their heads than money of coins in their hands. "Mr. Locke has said, men do not contract for denominations, not having noted that they contract by them; and the writer of an article in tlie 'Edin- burgh Review' for October, 1808, says that 'Abstract ideas are of no use in going to market.' Mr. Locke has been frequently refuted and contradicted in reference to some of his positions about money ; and the autl^r of the article in the 'Review' has been handled with masterly severity and power by the writer of the book reviewed.' The author of the 'Review' has used this flippant expression as an argument; and it is clear enough, from a survey of the entire article, that his conceptions and practical knowledge of the whole subject were far too confused to enable him to escape from fallacies even as glaring as that. He quotes with equal readiness to support '"Essay on Money and Exchange," by Thomas Smith, 8vo. page 231: Loudon, 1807. " The Bullion Question Impartially Discussed : an Address to the Editors of Ed. Review," by Thomas Smith: London, 1812. G8 M N E Y F A C C U N T . the subjects of money, coinage, coins, the precious metals, cur- rency, and banking, have been treated at great length, but little attention has been given to moneys of account, and still less to his positions, that which is directly against, as that which sustains them. lie neither comprehends the work reviewed, nor the authors whose works lie quotes. This is not for want of abilit}', but for want of sufficient previous knowledge of commerce and the use of money. He would have found it very difficult to give a philosophical reply to the question, With what kind of money did Englishmen pay their debts from 1797 to 1822, during the period of suspension? His position, that 'nothing can measure value but value itself,' would hardly be a satisfactory response. He could not fairly rid himself of the interrogatory, as ho does of the African custom of reckon- ing, by an imaginary standard of bars (originating from bars of iron) ; ' When tlie Africans estimate the value of a purchase in bars of iron, they have not, in general, the bars to give for it; they have only some other kind of goods, and their purchases and sales are mere barter, though they esti- mate the value of the commodities given and received by comparing them with bars of iron. When the Europeans, however, make their estimates by comparison with ascertained quantities of gold and silver, iJie)/ have the gold and silver ready to give for the commodity which is the object of the pur- chase.' This was a monstrous assumption for an Englishman to make in 1808, even for the sake of argument. That it was done in pure simplicit}' is evident from the following sentence : ' The convenience of this is very great.' Notwithstanding this convenience, it is probable that not one pound hterling in one thousand of this convenience was used in payment for com- modities during the quarter of a century of suspension. And from 1822 to this day, but a very small proportion of such payments have been made In the convenient shape of coins. What, then, did Englishmen use to make their purchases? A more intimate knowledge of the laws of trade would have taught the reviewer, that the transactions of English commerce might be resolved into barter as justly as those of Africa. He would have found it difficult to explain, on his principles, why counterfeit coins and notes are just as efficient and convenient, until discovered, as the genuine; the whole loss fallihg upon those in whose hands tlie^^ are detected, although pur- chases may have been made with them to thousands of times their nominal value. The mind of the reviewer was thrown into a perfect chaos, by assuming that what Mr. Smith called a standard unit of the money of account was meant as a standard of value. lie floundered in this misunder- standing, without reaching a single clear conception of the subject strictly under review. Money of account is not a standard of value, it Is an expres- sion of value or price ; by aid of arithmetic and men's mental faculties, it becomes, so long as undisturbed, the surest and most reliable expression of prices or values. There can be no standard of value in the sense in M X E Y F A C C U X T . 69 the manner of their formation, preservation and destruction. We cannot leave the subject without adverting to these topics. From what we have presented to the reader, it will have been seen that when any special coin, or weight of gold or silver, or any other article of value, has been employed for a time as an equivalent, or in payment for things purchased, people assume the value of the article in question as the unit of a money of account, and employ it, with the aid of arithmetic, to express prices. The more active the dealings of a people, the quicker they fix in their minds the unit from which proceeds a money of account. This is fastened upon the minds of the masses by inces- sant use ; few habits, mental or bodily, are more constantly in use than the fixing and expression of prices. This unit of the money of account becomes familiar to every one; and being which the term is sometimes emplo3'ed; the right use of the term, as applied to the precious metals, is the standard of coinage." — Ariide in ihe "BanK-er^s Magazine," hy the author of this volume, July, IS")!. Tlie examination of this subject was not without profit to the reviewer. He took up his pen to ridicule and crush Mr. Smith, and his idea of a monej' of account. lie did not spare any weapon used by reviewers; and after having, as he complacently supposed, destroyed all Mr Smith's claims, he very coolly puts forth the very opinion the review is written to controvert. lie ridiculed Mr. Smith out of his shoes, and dcliberatnly and gravely steps into them, and thus delivers himself to his readers : — " Next we account, hy means of money. Now, what is the operation of accounting? We first state, in denominations of money, the value of any article, or accumulation of articles ; and this statement we can manage in various ways. We can add to it another similar statement, or we can sub- tract it; we can multiply it; we can divide it, and discover various rela- tions which it bears to other statements. In all these operations the terms pounds, shillings and pence exactly resemble algebraic symbols, and the letters x, y, z, might be employed for them. Operations of account, there- fore, are undoubtedly carried on by abstract terms or symbols, and it is impossible it should he otherwise." — Edinhuryh Review, October, 1808. Th. Smith, Wilson, and others, who, during the period of the British sus- pension, advocated the agency of money of account, committed the serious mistake of applying the terms, standard and currency, to mere money of account. It was an error to speak of a " standard unit," and still worse of " abstract currency." The reviewer expresses the true agency of the money of account. 70 M N E Y F A C C U N T . employed daily and hourly in reference to thousands of articles of value, it cannot change unless some unfavorable influence is brought to bear upon it. That which is committed to the memo- ries of the people of a whole nation — that which they are repeat- ing constantly, and multitudes do little else from morning to night, cannot be forgotten, and cannot easily change. Any ten- dency to change in one locality would be checked by another. If undisturbed, we see no reason to believe that the dollar, the unit of our money of account, would change in a thousand years. Some moneys of account are known to have remained unchanged for hundreds of years, one of which was the money of the Bank of Venice. "Whenever the business of a people continues unin- terrupted, their money of account must continue unchanged, if not purposely or Insidiously, directly or Indirectly, attacked. Its principle and working being understood, public authority may be employed to protect it from attack or unfavorable influ- ences. Legislation cannot suddenly create moneys of account ; it may unsettle and destroy those Avhlch long use has established, or it may defend them, and when It Is expedient to change, pro- vide that it may be done with the least possible injury to the innumerable Interests affected. There are many ways in which moneys of account become un- settled Or destroyed. If the money unit has a coin to correspond with it, the correspondence is of course a fact familiar to every one. This is the case with our dollar coin, and our dollar unit. If we had no dollar coin, the people would have equal facility in the use of their money of account ; but as we have one, the fact of their being of equal value is by all taken for granted. Now, if gold should very gradually fall in value, and if the gold dollar coin continued In circulation for a considerable length of time, a gradual accommodation of the money of account to the coin might take place. But such changes being always sooner per- ceived, and better understood, by dealers in coins and bullion, never take place but at immense loss and disadvantage to the bulk of the people ; because the prevailing systems of coinage conceal the market price of the precious metals from all but those initiated in the mysteries of the bullion market. Of course MONEYOFACCOUNT. 71 tliis cause of change is much more effective where the coin is made a legal tender for the amount of the money unit. If, in such case, the coin falls in value, the law still makes it trood for the discharge of the same amount as hefore the depreciation. This conceals the fact of depreciation, and the unit of the money of account is betrayed into gradual conformity with a coin which has really lost its value, and is reduced in its power of purchase. This occurred in many instances after the discovery of America, and the influx of silver, which was a result. " The want of a clear conception of the existence and functions of a money of account has beclouded nearly all the legislation, and all the spe- culations on the subject of money, during the last century and a half. We shall have occasion to note how much it was needed in the English contro- versies during the period of the bank restriction. It is strange, indeed, that what was so well understood at Venice, and familiar there for centuries to her mercliants who traded throughout the world, should not have been more generally comprehended elsewhere. At Venice there was a money of account which had no coins to correspond, and nearly all the payments of that great city were made in bank credits as expressed in that money of account. This was so, also, in other countries. " It is true that kings and ministers were not without some knowledge on this subject. All the attempts to make advantage by debasing the coins, or raising their value, proceeded from some knowledge of the agency of money of account. These attempts were made in the expectation that the habits of the people, in expressing values by the usual money of account, would lead them to continue to estimate coins of the same name, at the same value, after a part of their proper quantity or quality had been ab- stracted. This kind of swindling was employed to rob the people for cen- turies, with very considerable success, though not always equal to the expectations of the perpetrators. The fraud did not consist in mej'eZy making the coins lighter; that could readily be detected, and its consequences avoided ; but it consisted in calling that a crown, shilling or franc, which no longer contained the same quantity of silver which coins of these names had formerly contained. When the prices of all commodities were expressed in these denominations, they could not all readily be changed, and con- tracts would continue to be made for some time before prices would be adjusted to the change. The money of account would continue to operate unchanged long enough to give rapacious rulers some advantage of their operation. But the efiuct of names, and the new coin being a legal tender, would finally break up the money of account, and compel a new adjust- ment, or scale of prices. So long as the coins were named by the denomi- nations by which prices were expressed, so long every change iu the quan- 72 M N E Y F A C C U N T . tity or quality of metal in these coins, connected with their being made a legal tender, broke up and destroyed, soon or late, the existing money of account. This tampering with, disturbing, and occasionally wholly de- stroying the adjustment of prices, as expressed in the money of account, was an intense evil inflicted for ages upon the various countries of Europe. It could not, however, have been accomplished so successfully if the nature of the mischief had been understood. The mystery which shrouded the subject of money enabled each perpetrator of this fraud to offer plausible arguments which the people could not successfully refute, even if not con- vinced. Largo capitalists generally shared the profits of these financial operations, whatever pains were taken to reserve the whole to the adminis- tration. " In Venice, where the money of account was undisturbed for upwards of five hundred years, and was the medium in which the value stated in bills of exchange and bank credits were expressed, the chief payments during all that time were made in hank credits, bearing a premium of twenty per cent, over the precious metals. Any attempt by the Venetian government to debase the coin would have been futile and ineffectual, unless the bank had been at the same time destroyed, and the money of account broken up. Many changes were made in the coins of Venice, but their true value, in every instance, was at once marked by their value in the bank money. " The various debasements in England consisted in, from time to time, increasing the number of shillings coined from a pound of silver. In 1066, one tower pound of silver was coined into 20 shillings ; by the year 1464, six debasements had increased the number to 375. Gc7. In 1527, the pound Troy of silver was coined into 45 shillings ; two changes carried the num- ber, by the year IGOl, to G2 shillings. It is now at 66 shillings. Now, the mere reducing the weight of a coin ought not to be considered a debase- ment, any more than issuing half crowns instead of crowns. It was the very fact that the public had the comparative value of the shilling clearly in view, that made It profitable to call a less weight of silver by the name of a shilling. If a piece of silver weighing 20 dwts. had been reduced to 19 dwts., it would have been estimated accordingly. But the shilling, as a term of comparison, was applied to a thousand commodities of trade." — Bankers' Magazine, July, 1857. Ariidc hij the author of this volume. The livre of France was reduced from a pound of silver to very little more than the hundredth part of a pound. In many countries the reduction Avas still greater. In all the countries where the unit of the money of account originated from the use of the pound of silver in coinage, it would, but for the debase- ment of the coins, have remained until this day unchanged. Let M N E Y F A C C U N T . 73 any one look into the history of one of these violent changes, and he will see what a struggle it is for a people suddenly to change their money of account, and what confusion takes place at such a time in all transactions of money and commerce. A money of account may also become unsettled or destroyed, and a new one originated, by the depreciation of a paper cur- rency issued in correspondence with the unit of a money of account. Tliis, however, is not so apt to occur, unless the paper currency is a legal tender for debts, or where some special government or bank paper composes the whole, or nearly the whole, circulation. If such paper gradually falls in value to a fixed depreciation, it gives rise to a money of account corre- sponding to it ; and if sales be made by that money of account, and payment be made in coin, the latter is valued in the money of account high enough to cover the depreciation. Many in- stances of this are met with in Europe ; and remarkable cases are found in Austria and Russia. It was urged, as we have already noticed, by many in England, that the notes of the Bank of England were depreciated, during the suspension of specie payments, precisely in proportion to the enhanced price of gold. If this had been so, the English money of account would have been changed in the same proportion ; that is, above ten per cent. That appeai-ed to be so to those who could not conceive that gold could rise in value sufficiently to account for all that difference ; but it was denied by those who could not believe that ten per cent, had been added to the nominal value of everything in Great Britain except gold. It cannot be de- nied, however, that if the Bank of England had not, in that important crisis, been managed with signal wisdom and skill ; and if the government, in that time of great expenditure, had not acted tov/ards the bank with equal prudence and for- bearance, the notes Avould liave depreciated to a much greater extent than ten per cent. It may be questioned whether any ins'tance of like good management on the part of bank directors, and like forbearance on the part of a needy government, can be found. England thus saved her money of account, and avoided immense derangement of the pecuniary concerns of the people. 74 M N E Y F A C C U N T . The history of the suspension of the Bank of England for twenty-five years is probably, taken in all its bearings, one of tlie most instructive portions of the history of money. ^ The imdcniable fact that all the dealings of that period of foreign war, and increased commerce and industry, were carried on in the language of the English money of account ; and that nearly the whole of the payments Avere made in irredeemable bank- notes, and in checks upon banks not paying gold or silver, can- not be explained but by the agency of money of account, and its important subserviency to the credit system. CONCLUDING RE JI ARKS. The reader is specially desired to notice that we are not, in this, bringing forward or recommending any new mode of reck- onino" or computation. We simply assert the matter of fact, that all prices, all books of account, all statements of sums of money, all bills of exchange and promissory notes, and all bank-notes, are expressed in money of account. All that is said or done with reference to money, where neither gold nor silver, nor other medium, is employed, is merely a use of money of account. If this be a fact in the mental habits of all civilized people, as we not only aver it to be, but that it cannot be otherwise, it is im- portant to comprehend all its uses. We must accept the fact, if it be one, together with all its inevitable and all its proper consequences. The conclusions to be drawn from this fact are a separate consideration. There may be difierences of opinion as to the deductions which may be drawn from, or the uses which may be made of it ; but whatever these may be, we must not shut our eyes to a fact so important, the proof of which is so obvious and so indisputable, and the influences of which are in constant and active operation, whether we notice them or not. ' See ante, page 52, and closing pages of Chapter en Bank of England. NOTES TO CHAPTER II. MARQUIS GARNIER AND HIS CRITIC, LETRONNE. No writer, so far as we know, has apprehended more clearly the nature of a money of account, than the Marquis Garnier, who, in 1817, read to the Trench Academy of Inscriptions and Belles-Lettres a memoir upon the values of moneys of account among the nations of antiquity. lie published afterwards, in 1819, a " History of Money from the highest antiquity to the reign of Charlemagne." The latter work contains a chapter on Moneys of account, which embraces the substance of the previous memoir. This learned writer ascertained, in the course of his investigations, that it was impossible to comprehend the ancient writers when they spoke of money, or to arrive at any sound conclusions in transferring the money of ancient times into modern money, without resorting to the distinction between coins and money of account. We know that the money of many modern nations cannot be properly appreciated without a due knowledge of their money of account; and can, therefore, readily admit that such knowledge is equally important in the just appreciation of ancient moneys. Without entering into this question, or vouching for the conclusions reached by Ger- main Garnier, we give his clear deliuition of money of account: — " AVe distinguish then," he says, " two kinds of money — real money, or coins, and money of account, which is the expression of values, or the spe- cification of prices. The valuation of merchandize made by the seller, the offer made by the purchaser, the accounts, the promises to pay, the stipula- tions of hiring, quotations of stocks, and the rents of farms, all that in every transaction precedes the act of payment, must be carried on bv means of money of account. Ileal money only intervenes for actual payments." — "The elements of which a money of account are made up consist, properly speaking, of arithmetical quantities, which can be mentally multiplied and divided." — " Real moneys consist of coins of metal, of which the form, material, impress and appearance may bo readily changed, without occa- sioning the slightest derangement in the daily dealings of society, or in agreements and contracts already made." — " But as to money of account which has no determined form, being in its nature incorporeal, it is one of the institutions to which people are most strongly and constantly attached by the powerful influences upon the mind of a habit incessantly applied to (75) 76 N T E S T C ir A P T E R 1 1 . the bi"-hest interests of cominoii life. Tlie denominations of the money of account, the order and proportion of its divisions, assume at lenp;th an inva- riable character, and remain the same during; the lapse of ages, to such an extent, indeed, that only more powerful influences, or great political events, can effect any change. The value of this money of account would have been not less steady and unchanging than its denominations and subdivisions, if the injustice and rapacity of governments had not frequently employed them to cheat their creditors and defraud the people, by adopting the expe- dient of lessening the value of coins. The people, not aware of the change in the coins, would continue for some time to estimate them in their money of account at the same price for which they passed before the debasement, and at which obligations and contracts were previously made. But every alteration in money of account has been regarded as a public calamity, as a source of disorders, public and private ; and it has always awakened among a people a general discontent. On the contrary, changes in the impression or the forms or denominations of coins is a common event, inflicting no injury upon any interest, and offending against no established habits of the people." ' This is a clear view of the nature of money of account, as well as of the distinction between it and coins, or real money. His success in apply- ing this distinction to ancient moneys has been disputed by Letronne, who, whatever may have been his other qualifications, as a critic of Garnier, fur- nishes no evidence in his work of his knowledge of that distinctiin.*^ The difiicultics which surround that subject are, perhaps, greater than any M'ith which adepts in ancient history have had to grapple. It is very certain that the distinction taken hj Garnier, above quoted, could not but be a great assistance in historical researches touching values ; and that no man can understand the subject of money, ancient or modern, who does not compre- hend the nature of a money of account. We would not undertake to decide upon the point in dispute between Garnier and Letronne. It requires something more than a full appreciation of a money of account to decide upon the real value of ancient moneys: on the other hand, it may be well doubted whether any man is capable of adequately mastering the subject, who does not fully understand what is meant by a money of account. We fear that Letronne labored under this disadvantage. He speaks of ideal moneys, but in no place exhibits any real comprehension of a money of account. He professes to meet Mar- quis Garnier on the ground of f\xcts alone. We enter not into the issue between them here ; the reasoning of both appears to be often inconclu- sive. Garnier adopts the idea that there was a general money of account prevailing extensively among the civilized nations of antiquity. Modern * " Histoire dc la Monnaie," par Marquis Gamier. Tome i, pp. 72 to 70. ' " Considerations sur revaluation dcs Monnaies Grecques et Romaiiio," &c. -Ito, Paris, 1817. NOTESTOCIIAPTERII. 77 experience tends to contradict tliis, as every modern ration has its o-wn money of account, and many liave several. One of the proofs to which he appeals as evidence of this, is the fact that Jacob sent money by his sons to purchase corn in Egypt, which money was received and valued, as he supposed, by a common money of account. Now it does not follow, by any means, that because Jacob's money was received by the officers of Egypt, it was estimated by the money of account used by Jacob himself. British sovereigns may be paid for any article in France, but would alwavs be estimated and reckoned as so many francs. As people think in their ver- nacular language, so they always estimate and deal in their own money of account. Letronne, referring to the instance of Jacob's money being received in Egypt, very correctly says it was received by weight ; and from this he very incorrectly infers that there could have been no common money of account in the case. This plainly evinces that he did not understand the real nature of money of account. It is not probable that any people ever weighed gold or silver in payment, who had not a money of account, in which they expressed the price or value of the different c[uantities. In China, and in many other countries, gold and silver pass only by weight, but its value is always expressed in money of account. Whether the people of Mesopotamia, where Jacob dwelt, and the people of Egypt, used the same money of account, cannot be ascertained from the fact that Jacob's money passed in Egypt. All money of gold or silver will pass in China by weight : so, doubtless, the money of all the world would have purchased corn in Egypt, being paid by weight. The "four hundred shekels of sil- ver" weighed by Abraham, in payment to Ephron for the cave of Machpe- lah, was "current (money) with the merchant." II. EXTRACTS Fvorti an Article in the "Bankers^ Magazine," of Kcio York, in ilie July and August Kos. of 1857, by the Author of this Volume. MONEY OF ACCOUNT. "Inquiring prices, and fixing them, occupy a large portion of the time and attention of all men in trade, and not a little of many others whose only connection with business is to purchase for the supply of their own wants. The conversation and discussion on the subject of prices, where no sale or transaction takes place, greatly exceeds, perhaps ten-fold, that which results in a change of property. The minds of a large proportion of the people in all tliriving business communities become familiar with the prices of a cer- 78 NOTESTOCIIAPTERII. taiu ranp;e of articles which they have most ocoasion to purchase or sell. They keep pace with the fluctuations, and are well advised when they are asked, more or less, for any given commodities. These respective or com- parative prices are readily borne in mind. Housekeepers well know the comparative rates of coffee, tea, sugar, rice, pepper, and other things which go to swell the household expenses. They know that a pound of beef is worth more than a pound of bread, and that a pound of butter is worth more than one of beef; and not only so, but they know it accurately and independently of any actual purchase: they know it without actually naming any price in money for each article. This idea of the comparative price of these articles is carried in their minds with perfect facility. And although, for facility and perfect convenience, these prices are expressed in money, yet any one familiar with prices could readily say a pound of rice is worth two pounds of flour, a pound of beef is worth four of flour, a pound of tea is worth eight of cofiee, a bushel of wheat is worth two of potatoes, and very many could run round a whole range of comparisons, showing a definite and precise idea of the respective prices of the articles named. " In all business transactions, prices are fixed and expressed in money of account. It forms the universal medium of estimate and comparison. Money of account may either correspond with the current coins or not. In England, all valuations are made in the terms pounds, shillings, ^?e«ce and favtiiings, and occasionally in guineas. The coins correspond; that is, in naming a pound, you express a sum or value which has an equivalent in the sovereign ; the shilling of account has its equivalent in the coined shil- ling, and so of the penny. In the United States, the money of account is expressed in dollars and cents, and the coins correspond. In many coun- tries, however, the money of account and coins do not correspond. In China, prices are expressed in tales, mace and candarines ; and accounts are so kept, and evidences of debt are written in tlie same way ; so that these denominations are the money of account. Coins are not used in China. Gold and silver are largely used in payments and morctyitile transactions, tut always by weight, being valued like other commodities in the money of account — the value or price fluctuating according to the plenty or scarcity, the rate of exchange, the degree of fineness, and other causes. There js a very great diversity in Europe in the moneys of account and coins; in many places there are various modes of keeping accounts, and various systems of coins, and no agreement among them ; in some there is a partial agreement. In Gibraltar, accounts are kept in dollars, which ex- press a value equal to about two-thirds of our dollar, and without any cor- responding coin, [See 'Kelly's Cambist,' ' Grund's Merchant's Assistant,' and other similar works; 'Austria, Venice, Genoa.'] In making a price, it is first, by inveterate habit, stated in the old way, and then con- verted, if necessary, into tiie new, as men sometimes think in one language and express themselves in another. So if, in Great Britain, sovereigns and NOTES TOC II APTERII, 79 shillings were ■wholly withdrawn from circulation, and Spanish or French coins substituted, the people would continue to think and value in pounds, {jhillings and pence until some powerful disturbing cause broke down the habit. It is more than half a century since the present admirable metrical system of weights and measures was adopted in France, with all the advan- tage of a decimal sj'stem ; yet the mass of the people continue to think and estimate under the imperfect and complicated systems which had been long in possession of the public mind. The idea of a specific value and quantity once lodged in the mind, and familiarized by daily and constant use, will be as difficult to eradicate as one's native language. We may learn a new language, but we cannot easily forget that in which we have chiefly con- versed from childhood, and in which we must continue to shape our ideas long after we may begin to express them in another. There are great numbers of business men familiar with the prices of a large number of the commodities of trade, engaged in daily discussing them, making sales and purchases, or quite competent to make them, yet, when produced and ex- hibited, wholly unable to recognise the quantities of which they speak, or to specify the quantity of gold or silver which is the equivalent of the prices they so fluently quote. They can tell you the price of a ton of iron, a hun- dred weight of sugar, or a barrel of flour ; but they might be wholly unable to tell whether a lot of iron contained one or five tons, whether a lot of sugar contained one or five cwts., or whether a barrel of flour contained one or five hundred pounds. Nor could they tell the weight or size of the quanti- ties of gold or silver which would be-equivalent to the prices named. The editor of a price-current, who is constantly conversant with prices of almost the whole range of commerce, and quite able, from his familiarity with prices, to buy and sell, may be wholly ignorant of coins, of the mode of weighing the precious metals, or any other commodity. When coins are wholly, and for a long period, banished from circulation, men find no diffi- culty in naming pi-ices and proceeding with the whole business of trade. In the United States, gold and silver are the only legal tender in payment of debts, and*yet not one thousand dollars of debt in a thousand millions is paid in those metals. Men must, therefore, be much more familiar with prices, and with money of account, than they are with the precious metals. "When a price is fixed, in the ordinary course of dealing, tlio eaming such a price is not the same thing as holding up to the party to whom it is named a quantity of gold or silver of equivalent value. When a barrel of flour is said to be worth five dollars, the party fixing that prict; docs not mean the quantity of gold in a half eagle, or of silver in five dollars, for that quantity he does not know, lie uses the same expression he would use if he were asked the value of the half eagle, ' five dollars.' So if, in England, an article is said to be worth fifty-five shillings, neither party forms any idea of the quantity of gold equivalent to that amount, although payment cannot be made in silver beyond forty shillings. So, during our 80 NOTESTOCIIAPTERII. Revolutionary War, -when for many years there was only a paper circula tion, prices were expressed in the various currencies of the different colo- nies, and very few indeed could have been guided by the quantity of gold or silver equivalent to any price expressed in their pounds, shillings and pence. "It is evident, therefore, that money of account is the medium in which prices are quoted and expressed in all countries. It is capable of mea- suring, comparing and stating values to the utmost extent of the require- ments of trade. Much confusion of ideas has arisen from blending the functions of coin with those of money of account, in legislation, in works on the subject of money, and in conversation. It is unfortunate for clear views on this subject, that the money of account has not, in all countries, as in China, been kept wholly distinct from the coins. " The errors prevalent on this subject are very distinctly exemplified by Mr. Locke, in liis tract on money, published in the controversy on the re- coinage in England, at the close of the 17th century. The great philoso- pher had no conception of the real functions of a money of account. lie tells us that ' Men, in their bargains, contract not for denominations or sounds, but for the intrinsic value, which is for the quantity of silver by public authority warranted to be in pieces of such denominations ; and it is by having a greater quantity of silver that men thrive and grow richer, and not by having a greater number of denominations, which, when they come to have need of their money, will prove but empty sounds, if they do not carry Avith them the real quantity of silver expected.' ' Again: 'The yard or quart men measure by, may rest indifferently in the buyers or sell- ers, or a third person's hands, it matters not whose it is. But it is not so in silver. It is the thing bargained for, as well as the measure of the bar- gain ; and, in commerce, passes from the buj'er to the seller, as being in such a quantity equivalent to the thing sold ; and so it not only measures the value of the commodity to which it is applied, but is given in exchange for it. But this it does only by its quantity, and nothing else. For it must be remembered that silver is the instrument as well as measure of commerce. And every one desiring to get as much as he can of it for any commodity he sells, it is by the quantily of silver he gets for it in exchange, and by nothing else, that he measures the value of the commodity he sells.' (Page 4, 5, idem.) " As the arguments and authority of Mr. Locke are greatly relied upon in the controversy which has been waged on this subject, it may be proper to state his views still more fully. After having insisted upon silver as the proper standard of value, and urged his objections to the double standard, he adds: 'One metal, therefore, alone can be the money of account and contract, and the measure of commerce in any country. The fittest for this ' Page 9 of Locke's Tract. " Further Considerations on raising vahie of Money," 2d cd., 1695. NOTESTOCHAPTERII. 81 use is silver. It is cnougli that the world has a^^reed in it, and made it their common money ; and, as the Indians rightly call it, measure, all other metals, gold as well as lead, are but commodities.' ' "If these misconceptions were not still frequently reiterated, it would scarcely seem necessary to refute them, as that was done at the time of their publication, and has been frequently since. In Mr. Locke's day, silver was the common medium of payment in small transactions, and he was not fiimiliar with the modes of payment in the large operations of trade. He could not distinguish between the shilling of account and the t^hilling of silver. Even in the 17th century, before the Bank of England emitted a paper currency, a large portion of the great payments of commerce were effected in various other ways among merchants, than by the transfer of the precious nietals. When Mr. Locke asserted that men did not contract for denominations, he simply overlooked the fact that they contracted hy them. They used denominations continually as a scale, a measure, or an instrument, in all their quotations of price, valuations and bargains, but only used silver and gold when they were actually present, and then as a oommodity and an equivalent. Mr. Locke could not foresee that, for nearly a quarter of a century, gold and silver almost disappeared from the circu- lation of England, and that, during that period, men were so far from always contracting for silver or gold, that no man ever expected to receive any payment in these metals, or either of them, lie could not foresee that his descendant, Lord King, would make himself conspicuous as the only man in the nation who insisted on being paid in gold, giving his tenants special notice that their rents could only be discharged in that way. Yet all the business of the trade and revenue of Great Britain, from 1797 to 1822, a period of immense operations in war and commerce, was carried on by the aid of the denominations pounds, shillings and jjence, and bank-notes. The theory of Mr. Locke must fall to the ground before such an example as this, whatever may have been the efforts of Lord King to uphold it by his individual exertions.^ " The controversy in which Mr. Locke launched his " Further Considera- tions concerning raising the value of Money," would have been of still greater importance if it had resulted in a true solution of the question. It Avas, however, conducted, though with great ability, under an entire mis- apprehension, by both parties, of the true issue. The points started excited inquiry and speculation on the subject of money to such an extent, that England, during the last century and a half, has produced more writings on currency, banking and moncj', than all tlie world beside. To these may ' Page 31, idem. His views stated shortly at page 22. ^ Lord King published a pamphlet on the restriction of specie payments by the bank, in 1803, and gave the notice mentioned to his tenants. This occasioned a special act of Parliament, which showed that the ministry of the day understood the subject as little as his lordship. 6 82 X T E S T C II A P T E n 1 1 . bo added :i liiip;e pile of folios emanatin<^ from Parliamentary Committees, embudyinj^ a mass of valuable facts, evidence and experience. The miscon- ceptions of Mr. Locke and Mr. Lowndes have never yet been cleared up. It •was impossible for them ever to coincide, because they regarded the subject from a different point of view, and, of course, with dififerent objects and impressions. A full comprehension of the nature of money of account was needed to enable them to grapple with the real diiBculties of the recoinage. That step had become necessary by the miserable state of depreciation into which the coins of the realm had sunk during the last half of the 17th cen tury. Owing to the natural wear, and the frauds by clipping, punching, sweating, and other similar means, the silver coins had depreciated from jive to hoenty per cent.^ The point to be settled for the action of the govern- ment was, whether the new coins should be issued of the original weight, or be made to correspond to their value at the average depreciation. Mr. Locke, who for the want of a merchant's familiarity with the subject of money, could not bring his powers of abstraction to bear, did not conceive of a mere money of account, but involved himself in a labyrinth of fallacies, by treating silver coin as the only possible money. Ilis fundamental posi- tions were in connection with those already cited, that ' Silver is the instru- ment and measure of commerce in all the civilized and trading parts of the world.' ' The intrinsic value of silver considered as money, is that esti- mate which common consent has placed on it.' 'That an equal quantity is always of equal value to an equal quantity of silver.'^ The last position is always true, saj's Ruding, except in the case of coinage, to which Locke applied it.'' " These unsound and oft-refuted positions are sufficiently plausible to influence many minds. The least reflection will satisfy practical men that silver is not the instrument and measure of commerce; it is merely one of the agents sometimes employed in trade, but frequently dispensed with, and never indispensable. The intrinsic value of silver is fixed, like the value of other articles, by the cost of obtaining it, by the demand for it, and by other causes, special and general, applicable to other commodities. An equal quantity of silver is not always at the same price with an equal quan- tity of silver, because that implies that no change ever takes place in the value of silver, when, at the present time, all merchants know that it does change frequently ; and our price-currents chronicle these changes in the price of gold and silver, as they do other changes in price. Entertaining these false notions, Mr. Locke looked upon a crown or five-shilling piece, or a shilling, or a Spanish dollar, as a certain defined quantity of silver, unalterable in value, and inseparable in idea from the silver itself. In his view, goods were only sold for the silver named as the price. He could not ' "Lowndes," 60, 61. Taylor on "Money System of England," 81. " Pages 1, 2, " Locke's Tract." " Ruding's "Annals of the Coinage," vol. ii. page 42, NOTESTOCIIAPTERII. 83 understand that dollars could be said to be worth 45. Gd., is. Id., 4s. 8d., &c., or that crowns could be quoted, in case of a demand for silver in France or Holland, or in case of a high exchange, at 5s. Id. or 5s. 2d., &c. lie saw the confusion of terms, but could not understand why 19/^^ dwts. of uncoined silver should be at a higher price than a crown purporting the same weight; nor why an ounce of silver, at the very time he wrote, was selling at 6s. 5c/., when it ought to be worth only 5s. 2d., by his doctrine. For, formerly, when the full weight crown was worth only five shillings for the 19y5 dwts. of silver it contained, the ounce of silver was only worth 5s. 2d. Silver had, therefore, apparently risen about 20 per cent. All this, to Mr. Locke's mind, was the merest confusion of terms, wholly unintelligible, the jugglery of agiotage ; fo,r with him a dollar was a dollar, a crown a crown, a shilling a shilling, an ounce of silver an ounce, and nothing more or less. He supposed that men's minds had become confused, and that no change had taken place except a depreciation in the defaced and dipt coins. His opponents saw very clearly the apparent change in value. They saw clearly that, as matters then stood, a crown of full weight was worth 6s. od., and not merely 5s., as formerly rated. ' That silver in England being grown scarce, is consequently grown dearer. That it is risen in price from 5s. 2d. to 6s. 5fZ. per ounce.' ' This seemed to them an actual enhancement of price. It was only apparent, however, for no such increase of price had taken place on the continent. The real difficulty in this question, in which both parties were partly right, was that neither understood nor appreciated the nature and functions of a money of account. The coins had, according to the usage of Europe, been made to correspond with the money of account, a correspondence which has produced unnumbered mischiefs, and stood darkly in the way of clear views of the subject of money. As the coins, in the course of half a century, gradually lost value by abrasion or clipping, the money of account followed, with a change which was so gradual that the public took no note of it. Shillings, which had lost a fourth of their weight, were still called shillings; crowns, which had lost a tenth, were still called and treated by the mass of the people as worth five shillings. But when, after 1690, the depreciation had reached an average of 15 per cent., the extent of the evil began to be felt. As soon as silver coins began to bo exported, upon an unfavorable exchange, they were treated as bullion, and valued in the money of account of the countries to which they were to be exported according to their actual weight. It was found at once, that while the great mass of the sales and transactions of the country was car- ried on in the old denominations, and with the imperfect coins, and these old denominations had gradually, in the minds of the mass of the people, kept pace witii the coins, the merchants in the foreign trade, familiar with the price of bullion at home and abroad, very clearly saw the change which ' " Essay for Amendment oi' the Silver Coins." Lowndes, page Tk 84 XOTESTOCIIAPTERII. liad taken pliico ; that the coins were worth intrinsically less than formerly, and they gave Gs. 3d. for a crown of full weight. But 3Ir. Locke denied that thoy gave 65. 3c?., and insisted that only 5s. was given in depreciated coins called G.?. od., but having only 55. of silver in them. Confusion had invaded the money of account, and men differed about what was meant by five shillings. Mr. Locke insisted that the new crowns should contain the same quantity of silver, lOj^o dwts., as formerly, because that quantity was 55. ; Mr. Lowndes insisted that that quantity was now worth Os. od., that the new crowns should contain only about 15/^ dwts., and that the shillings should contain proportionably, that is, one-fifth less than the old coinage, because he clearly saw that the whole range of prices had been fixed in a money of account, which had been formed upon the depre- ciated coins. " Mr. Lowndes wished to avoid the mischief of suddenly wresting back the money of account from its present adjustment to its former position: 'By this project, all computations in pounds, shillings and pence used in accounts, and the reckonings by pounds, marks, half marks, practised in the law of England, and in the records, contracts, and other instruments relating thereunto, will be preserved as they ought to be.' ' All the con- tracts fur many years had been made in the money of account, as it corre- sponded with the depreciated coins. To require debts thus contracted to be discharged in coins of full weight, or their equivalent, was an injustice the government could not perpetrate ; and the coins were called in, imper- fect as they were, to be restored in new coins of the old weight. That only met the difficulty to a small extent, because much the largest proportion of the debtors had no coins in their hands to be thus exchanged. They had to sell goods to raise money, and their goods would sell, of course, at a depre- ciation proportioned to the increased value of the coins. This hardship was strongly urged as an objection, but in vain, as it was resolved by the authorities that the weights of the old coinage must be preserved. They believed in Mr. Locke's idea of an equal quantity of silver being always of equal value. The money of account, as understood and used by the people, was violated, and all recent subsisting contracts were in confusion. "The true doctrine of money of account applied to the difficulties of that recoinage, upon which we have dwelt at more length, with the view of showing this doctrine more distinctly, would have settled at once the chief part of the dispute, and enabled them to grapple with the real facts, unob- scured by a cloud of misconceptions. If the coins had been as Mr. Locke contends they should be, merely weighed pieces of metal of a certain standard ([uality, the money of account would have kept its original adjustment; and if the ounce of silver, valued at 5.?. 2d., had lost one-fifth of its weight, it would have been valued at 4*. Ihd. ; and the gradual depreciation would ' " Lowndes' Essay," &c.. page 85. Lowndes was Master of the Mint. N T E S T C II A P T E R I 1 . 85 have been so imperceptible in the course of ;i series of years, as to liave fallen with severity upon none. The money of account would have re- mained intact, measuring; and expressing the value of the pieces of silver and gold according to their weight, with the same precision and readiness as other articles. In case of a rise of the precious metals, consequent upon a high exchange, the rise would be at once noted in the money of account without the least confusion in any mind. The ounce of silver which had, at the ordinary exchange, been rated at 55. 2d., could as easily be stated to be worth 55. 5d., 5s. 4d., or 5s. lOcZ. Under the proper and unobstructed operation of a money of account, the evil could not have taken place : that is, if the weight and quality in the first place had been simply certified by the stamp of the mint, and the price had been left to the course of com- merce, there would have been no inducements to clipping or punching, as the amount thus abstracted would have been deducted by the first person to whom it would have been ofl"ered ; and when the actual wear began to be appreciable, the loss would have been deducted in all large payments. In this way the loss by wear, for twenty, thirty or fifty years, could never be suddenly tlirown at once, with all its severitj', upon any community; but would be borne, in the lapse of years, by several generations of business men, by such slow degrees as to be imperceptible as a burden. The object of a recoinage would, in such a case, only be to revise the standard of quality, detect adulterations, and by the re-issue of pieces newly Aveighed and stamped, to save the people the trouble of weighing. and assaying. To this, neither Mr. Locke nor Mr. Lowndes, and those agreeing with them, could have made objection, if tliey had once perceived the efficiency and utility of an undisturbed money of account. It would have explained nearly every point of difference between them, saved the government 10 per cent, on the recoinage, prevented a great amount of injustice to individuals, and preserved the money of account at its then adjustment. It would have pleased Mr. Locke to have the precious metals issued by weight and quality only ; and it would have pleased JMr. Lowndes to have retained the signifi- cance of pounds, shillings and pence unchanged, as then employed to express the value of all the commodities of trade." " We may aptly introduce here a passage from a work on ' Coin and Coinage,' ' which denotes a clearer conception of this subject than any to which it was the fortune of Mr. Locke to attain. ' For all exchange is either by the actual or intellectual valuation of money; that is to say, cither the thing is exchanged for money, or, if it be exchanged for another thing, the measure of that exchange is, how much money either of the things exchanged is conceived to be worth ; and practice hath found out that in value, which geometricians have found out in quantities, tliat two lines which are equal to a third line, are equal to one another; so tho ' By Rico Vaughan, page 3. London, 1675. 86 NOTESTOCHAPTERII. money is a third line, by which all things are made equal in value.' Money of account is the line or medium of comparison by which values are com- pared, stated, expressed, and by which parties discharge their debts, by delivering as many goods into the channels of commerce as they take, 'by which all things are made equal.' "In the controversy which gi-ew out of the famed Bullion Report of 1810, Mr. Iluskisson published a pamphlet, ' The Question concerning the Depre- ciation of the Currency Stated and Examined,' ably sustaining the doctrines of that report, for which he was, as an acting member of the committee, responsible. That dispute was waged among scores of writers on grounds on which it was impossible they could arrive at any just conclusion. One party contended that, owing to the long continued wars of the French Revolution and of Napoleon, the demand for gold on the continent became extraordinary, as on such occasions it always does, and that, in consequence, it had risen in value. The other maintained, that the bank paper, which was the general currency, had depreciated to the extent of the apparent difference between them. Gold was quoted occasionally as high as £5 4s. — the usual price being £3 lis. lOhd. per ounce. The testimony of mer- chants, taken before the committee, decidedly sustained the views of the first, that gold had risen. But those who, like Locke, were unable to sepa- rate the idea of money from gold or silver, concluded that, as an ounce of gold was always equal to itself, it must always be of the same value ; and that, as a pound sterling is the ' unambiguous name of a certain quantity of coined gold or silver,' the paper must have depreciated, as the gold could not rise in value. No force of argument, no array of facts, could move them from this, as they regarded it impregnable ground. It was shown that other articles had not, like gold, risen in comparison with paper; that silver had not; and that parties were in constant pursuit of the gold for exportation. All in vain ; for, in the view of the bullionists, a pound denoted a certain quantity of gold ; and however much that gold might be in de- mand, it could never be more valuable than itself. Mr. Iluskisson, with far more knowledge of the subject than Mr. Locke, could not escape from the blinding effects of this error. lie was met by numerous adversaries, who labored under other errors of doctrine or fact, which left the question still unsettled. They fought the battle, indeed, on a field where it could never be determined. The very fact that such an array of able men applied their powerful minds, and in numerous instances great practical knowledge, to the solution of this question of depreciation, without full success — for it is still a matter of contest — proves there was some lurking misapprehension in the minds of both parties, which kept them from the true point of the controversy. The merchants, who contended that gold had risen in value, and that the bank-notes had not depreciated to the extent of the apparent difference between paper and gold, sustained themselves by an appeal to facts which would have been irresistible, except to those who could not N T E S T C II A P T E R I 1 . 87 conceive of a difference in value between a pound sterling and a sovereign, between twenty-one shillings and a guinea. It w.is useless to array facts to prove that two and two did not make four, for as clear as that did the bullionists conceive their position to be. " In the years 1811 and 1812, two publications appeared, in which the doctrine of money of account, misnamed Abstract Currencies, was applied •with much discrimination and clearness to this question.' No reader of these works can fail to perceive that the elements introduced by them into the discussion are indispensable to a fair understanding of the subject, and especially to a safe solution. It was shown that gold had risen, and that the money of account, which continued to correspond with the bank paper, measured that rise in value. As soon as the paper ceased to be convertible into gold, it ceased to fluctuate in value with gold, and became a medium of exchange or currency, of which the money of account was the expres- sion. But we can neither quote from the close-woven pages of Mr. Wilson, nor attempt an abstract, as he follows up the thread of fallacy alleged to run through the doctrines and arguments of the bullionists with a steady perseverance, and in such an unbroken chain, that it is difficult to detach a link. No mind open to the truth, and sufficiently disciplined to the labor of close investigation, can read these pages without perceiving that the doc- trine of an abstract money of account has found an advocate few would venture to assail, or could hope to overcome. We are not aware that any reply to Mr. Wilson's publications ever appeared. " We cannot omit, in our mention of those who have supported the true idea of a money of account, a publication which appeared in Philadelphia, in 1832.''^ In this pamphlet the whole subject is ably and fully handled, and, as a single treatise on this subject, is more suited for popular reading than any yet published. In summing up his conclusions at page 62, he lays it down : ' That value in exchange was originally altogether compara- tive ; one article being compared with another. That, to enable this to be done, it was found absolutely necessary to assume an intermediate imagi- nary point of comparison, and that this point of comparison is to be found in use in all countries.' He says this is used to express the value of coin, as well as of other commodities. .He compares it to the assumed point in algebra; to the imaginary points of the north and south poles; to the imaginary line which is drawn for the meridian ; to the degrees of latitude and longitude. By these lines ships are guided thousands of miles over a ' " Defence of Abstract Currencies in reply to the Bullion Keport and Mr. Huskis- Bon:" By Gloucester "Wilson, Esq., F. U.S. London, 1811. "A Further Defence of Abstract Currencies :" By the same. 1812. Mr. Wilson was a barrister. ' From the press of Jespcr Harding : Svo. pp. 76. The copyright is secured by Thomas Smith. The pamphlet is otherwise anonymous, but in the introduction the writer speaks of himself as a foreigner. Can he be the same Thomas Smith whose works on the Theory of Money we have already notieed ? Ante, note, page 67. 88 N T E S T C H A P T E R 1 1 . trackless ocean, and an unerring account of the track is kept; and few ship-owners would be willing to intrust the care of a ship to a master who should declare that he would take no charts to sea, as they were nothing but imaginary lines drawn upon paper.' "We find a clear expression of the doctrine of money of account in a report made to Congress in the session of 1830-1. ' Nations generally esta- blish a measure of value, founded upon an ideal unit or money of account and contract. Coins regulated in conformity to this standard usually com- pose the metallic cuiTcncy, and they are generally the only legal tender in payments. The stamp set upon the metal is the seal of the State, certify- ing as to the fineness and weight of the coin ; and the money unit, or its integral parts or multiples, being exhibited in every coin, facilitates enume- ration, exchanges and payments,' &c. " There is a point in the history of our government from which this sub- ject can be studied with advantage. The subject of the establishment of a mint was brought to the notice of Congress as early as 1782, by Robert Morris, 'financier' to the confederation, in a report submitted by him on the 15th of January of that year. This was not acted upon, and the sub- ject was referred to Alexander Hamilton, Secretary of the Treasury, in April, 1790, who submitted an elaborate report on the 28th of January, 1791. These important papers are accompanied by extended notes of Mr. Jefferson, as they are found at large in American State papers, vol. vii., fol. ed., p. 91. No previous coinage of any importance had existed in the colonies; Spanish coins were almost the only kind in circulation; an ex- cessive derangement in the money of account in the different colonies had occurred ; and the fact was constantly exhibited of merchants counting by pounds, shillings and pence, and paying in Spanish coins. This was felt to be very inconvenient, after the affairs of the Revolution, and the sub- sequent intimate connection of the colonies, had blended their business, and increased their mutual trade. The desire for a uniform system became general. It is evident, from, the whole tenor of the documents last referred to, that these eminent men understood clearly enough the distinction between the money of account and money in coins. Mr. Morris desired to retain the moneys of account strictly as they then were, and sought a unit for the con- templated coinage, which would be a common divisor for all. This divisor was the l-440th part of a dollar, of which 24 would be a penny of Georgia, 15 of New York and North Carolina, 20 would be a penny of Virginia and New England, and 16 a penny of Pennsylvania, &c. His coinage was to be founded on this minute unit, as follows: — ' Thero is, in all this illustration, the want of a clear statement that the unit must have an ascertained power or value, derived in the first instance from articles used as money, and from that fixed by use in the minds of the people. NOTESTOCIIAPTERII. 89 10 units to be equal to one penny. 10 pence " " one bit. 10 hits " " one dollar. 10 dollars " " one crown.' This dollar would have been two-thirds of the Spanish dollar. Under this coinage, it was supposed the people would continue their old habit of count- ing and estimating by pounds, sliillin<:5s and pence, and that tlie new coins would be valued in the same way as the Spanish coins had long been. Mr. Morris understood the difficulty with which people changed their habits of mental reckoning and fixing prices, and therefore deemed it safer to change tlie coins than the nionej'^ of account, even though the systems in the several States were so various. His coins were not only to lie paid as equivalents in value, but convenient, in small transactions, as counters or assistants in reckoning, from their decimal subdivision, and from carrying on their face evidence of weight and quality. "Mr. Hamilton expressly recognises the distinction between the unit of the money of account, which he says, is ' the pound in all the States,' and the 'unit of the coins,' which is 'not so easy to pronounce,' but which he considers to be the dollar. He recommends the adoption of the dollar as the unit of the coins as well as of the money of account, the more especially as the people were prepared for it by the circulation of tlie Spanish coins, and by many of the financial operations of the Ilevolution. Mr. Jefferson coincided with the Secretary of the Treasury, and recommended the adop- tion of the dollar unit, and the coins issued ever since. 'A required condi- tion of the unit is, that its multiples and subdivisions coincide in value with some of the known coins so nearly, that the people may, by a quick refer- ence in the mind, estinialc their value; and, if tiiis be not attended to, they will be very long in adopting the innovation, if ever they adopt it.' — 'Am. State Fap., Finance,' vol. vii., p. 105. ' The unit or dollar is a known coin, and the most familiar of all to the minds of the people. It is already adopted, from North to South, and therefore offers itself as a unit already introduced. Our public debt, our requisitions and their apportionments, have given it actual and long possession of the place of unit.' — 'Ibid. Fi- nance,' vol. iii., p. 105. "These valuable papers clearly recognise the distinction between the functions of a money of account and a coinage, though, in maiiy respects, there is a want of that precision in their views, which nothing but a long familiarity with the subject could give. Hamilton and Jefferson seem to take it for granted that the coins should correspond with the unit of account. Morris did not deem that necessary, because, undoubtedly, ho understood the matter better than either of them. For want of knowing more, how- ever, his plan was certainly inferior, on the whole, to that they proposed. It would have been a happy time to adopt a coinage recommended since and bef ire, by many eminent men. The standard of quality being fixed, 90 N T E S T C 11 A P T E R 1 1 . the precious metals to be coined into Troy pounds and decimal parts of a pound, ounces and parts of an ounce, and the dollar being adopted as the unit of account, with a decimal subdivision, these pieces of the precious metals would be readily valued in this money, following all these fluctua- tions. A coinage intended specially for small transactions of half-dollars and under^ would have been advisable to bo a legal tender, not beyond ten dollars. The fact that the legal tender of gold or silver, in large transac- tions, is a very rare occurrence — few people having ever seen it resorted to — shows that it should not be the rule, but the subject of exceptional regulation. Tlie precious metals finding their value according to the mar- ket, could not disturb the steadfastness of the unit of account, which would perfectly register and express every variiition in them." III. EXTRACTS From cm Article, hy the Author of this Volume, in " Hunfs Merchants' Magazine," of April, 1852. MONEY OF ACCOUNT ITS NATURE AND FUNCTIONS. "When an Englishman visits the continent, he carries in his mind his own money of account, and by its aid values every coin he meets ; he ex- presses that value in the terms which are most familiar to him : thus the foreign price of every article can only be realized when mentally turned into pounds, shillings and pence. The foreign coins he carries in his pocket are all measured in that way, and it will require a long familiarity with foreign prices before he can think in any money of account but his own. The mental operation is similar to what he uses in learning to speak a foreign language ; he thinks first in his own what he may express after- wards in a foreign tongue. If the English traveller is familiar with the home prices of articles submitted to him abroad, he will, without hesitation, annex prices to all the foreign goods he sees in English money of account. He does not, in this instance, use his domestic coins as a measure of value; the operation of fixing such prices is not a comparison of his domestic coins with the foreign goods ; it is the expression of their value in English money of account. " During the time of the suspension of payments by the Bank of Eng- land, between 1797 and 1822, such was the demand for gold on the conti- nent, for army purposes, that it became, for most of that period, merely an article of commerce, in great demand for export." . . . It must be perfectly plain to those who are familiar with the history NOTES TO CHAPTER II. 91 of that period, that if every coin of gold and silver had been swept by the foreign demand from that country, the people ■would not the less have con- tinued to transact their business and make payments in pounds, shillings and pence. So they would have done, also, if platina had been introduced as a medium of payment. A whole generation of men came into business during this suspension, who were not familiar with coins, and seldom even saw a guinea or a sovereign ; vet they never had any difficulty in buying and selling by pounds, shillings and pence. Did they, in every instance, use coin as their measure of value? "Does the active salesman, who is continually naming prices from morn- ing to night, carry the image of the silver dollar in his mental vision all the time ? Suppose, when he pronounces the price of a bale of goods to be two hundred dollars, that amount of silver coins were thrown before his asto- nished vision, he would be very apt to say: 'Carry them to the bank or the broker; I am no judge of coins; they may be too light, or they may be counterfeit, for aught I know.' The purchaser may reply: ' Take them by weight, and return any that may be condemned as false coins.' But the answer would be, in almost every such instance: 'I know not the value of a pound; ounce, pennyweight, or grain of silver.' Did this merchant mea- sure the value of his goods by coins ? Let us suppose this lot of miscella- neous coins to be carried to the counter of a dealer in the precious metals ; it will be immediately inspected, classed and valued in dollars, precisely as the merchant valued his goods. Some dollar coins may be worth one dol- lar, and one, two or three cents; some worth one, two or three cents less than a dollar: the various classes into which they may be assorted will be separately valued, and the whole being added together will make the sum which the broker is willing to give for the lot. It is soon sold and paid for by a check on the bank, which pays the merchant for his goods. Now, was not this parcel of coins valued in the same way as the box of prints, and were not both equally indebted to the efficiency of the money of account? "If it be alleged that the merchant and broker had each a reference, in their minds, for the purpose of expressing their several valuations, to per- fect dollars, we ask how they could thus carry the idea of a dollar so per- fectly as to exceed in accuracy the ordinary coins of circulation. If men can carry the value of the perfect coin in their minds, then that is what is called 'imaginary money,' or money of account, by the Cambist. " Take another case of a bale of goods, priced, sold, and paid for, in what appear to be new and perfect dollars. It would bo said, by those wi:o take that view of the subject, that the value of the goods was measured by the coins which were used, as an equivalent in paying for them. But the coins are all counterfeit, and so perfect that they circulate a long time, perform- ing all the functions of money, without injury or loss to any one except those in whose hands the falso.coins are at last detected. In this instance, every article paid for in these coins would have been valued in false money; 92 N T E S T C II A P T E R 1 1 . and as every dollar mi2;!it liavo been paid a liundred times without injury to any except the last holder, the rather stranj^e conclusion must be drawn, that false coins are equally efficient in nieasuriii;;; value with the genuine. This will hardly be admitted, and we are driven to the conclusion that it is the ideal dollar of our money of account — tlie value of our money unit clearly understood and firmly settled in tho minds uf tlio people — that is applied without hesitation at all times, and by everybody, to measure the value of every article of sale, or susceptible of valuation, whether goods, coins or bullion. "Our ancestors brought with them to America the English money of account, and their posterity continued thus to employ it until the present system was adopted by our government after the Revolution. But a money of account cannot, even by legislative authority, be created nor destroyed in a day. The English money of account maintained its supremacy ia terms, though greatly changed in signitieation, through a long period, although almost the only coins in circulation were Spanish dollars, and halves, quarters, eighths, and sixteenths." — "It is yet partially used in the interior of Virginia, South Carolina, and perhaps Massachusetts. In New York the term shilling holds its ground generally to this day, owing, in part, to the shilling there corresponding in value with the Spanish eighth of a dollar. These colonial denominations varied so much, that in Massa- chusetts a half-dollar coin was valued at three shillings ; in New York, at four shillings ; and in Pennsylvania, at three shillings and ninepence. A merchant of the last-named State was, sixty years since, just as prompt in affixing prices to his goods as one of the present day ; the former could employ the Pennsylvania currency just as readily as he of this day uses dollars and cents. The former had in his mind no coin corresponding with his 2^011 lid, his shilling, or his penny. There was no such coin: nor could he have in his mind, as the measure of value, any corresponding weight of silver or gold, because very few indeed knew the value of either metal by weight. It is impossible to think or say that the merchants of that day measured or Istimated the value of their goods by mental or actual refer- ence to coins, for there was then none such, and never had been. This colonial money of account was a purely ideal scale, the power or value of which was fixed in the minds, and its use in the habits of people. What was so long true of our colonial currency, is to this day true of the Cana- dian money of account, which has no corresponding coin — the British shil- lings, and Spanish and American coins circulating there, not corresponding with their money unit. It is worthy of remark, too, that the French popu- lation of Canada still preserve the money of account which their ancestors brought over with them, and which has long been out of use in France, namely, livres, sous and denlers. There have been no coins corresponding with this unit and its parts to keep up the memory of this money of account, to confirm its use, or to explain its meaning. NOTESTOCHAPTERII. 93 " It -would be endless to bring illustrations of our meaning from the moneys of account of Europe and Asia, as every country ^Yhere industry has flourished, or commerce been active, furnishes proof that the same habit of converting the denominations of coins into a mental scale, for com- paring and expressing values, prevails everywhere — in China and Persia, and the East Indies — equally as in the more civilized nations of Europe. China has no coinage, and gold and silver are there sold constantly at their market value, and -weighed out in payments, the amounts of which are expressed in the money of account. "But we need not continue these details further, at this stage of our in- quiry. It is proper to say that we do not bring forward this use of the money of account as a standard of value, or as what some have called an abstract currency. It is no standard of value, nor is it a standard of any kind; nor can it, without an abuse of terms, be called a currencj'. Its use neither dispenses with a standard of coinage, ntir with devices for payment, institutions of credit, nor a paper currency. It is the popular expression of value. Coinage furnishes the legal equivalent. "A money of account, well established in the Iinbits and minds of the people, is a thing of slow growth, and cannot, therefore, be created by law. Our National Legislature enacted that the dollar shouM l)e the unit of our money of account, and immediately the public accounts were translated into dollars and cents; but manjf years elapsed before dollars and cents be- came, in flict, the money of account — the popular measure, or scale of value, in the sense in which we use the term. If Congress were, by another act, to require that all business should be transacted in francs and centimes, it would require nearly half a century to make the change in the minds of the people. So far as legislation is concerned, such a change could be made in a day ; but long familiarity with the terms, in all the circles of in- dustry and the avenues of trade, can only establish the precise power and force of these terms in the minds of the masses. " If we reflect that the annual product of our industry, agricultural and manufacturing, in the United States, exceeds three thousand millions in value, and that, on the average, these products are sold many times, and that this mighty mass of valuables is, to its whole extent and in all its parts, put at prices fixed in our money of account, and that an incessant valuation is going on in the infinite operations of trade and industry, we must admit that anything which introduces confusion into such an immensity of busi- ness must be an incalculable evil. It falls far short of the reality, if we esti- mate the successive valuations or prices fixod on goods sold and unsold every month, in the United States, at over a thousand millions. A mis- take of one per cent, on this vast sum would be a disturbance on the whole to the extent of ten millions. If our government were to require us hence- forth to keep our accounts in francs and centimes, making no other change in 0U4- money system, tlie di.'^turbancc created would be a matter of incon- 94 N T E S T C II A P T E R 1 1 . venience, the amount of ■which must be measured by the immense transac- tions it would affect, and the necessity of convertins; such an infinity of sums of money from doHars into francs. But the change would not be con- fined to mere inconvenience, for many of the ignorant, the dull, and the unwary would become the prey of the designing and crafty. There can, of course, be no adequate estimation of the mischiefs which such a change of our money unit would inflict; and surely nothing can justify such legis- lation, except greater evils were threatened from the other side. The grounds of our national adoption of the dollar unit were not merely its con- venience and superiority ; for, strong as are these reasons, they might have failed to overcome the opposition to a change ; it was the necessity of har- monizing the differences of the money of the several States, which made the adoption of a new unit, which should be common to all the States, a matter of imperative obligation. And the free communication among the States, with different modes of computation, having among them the same legal money unit, was what efficaciously hastened a complete compliance with the law. The new money of account was a language into which all the varying languages of computation could be translated. When men of Massachusetts and Pennsylvania were accounting together, instead of a mutual transfer of their accounts into their respective currencies, they were both changed into federal money, and thus adjusted. The necessity of doing this constantly, among those residing in different States, greatly assisted and hastened that otherwise slow process of displacing one money of account by another. The inconvenience was less felt and complained of, because it was really not so great as that which they endured under the old diversified systems. Disturhance of the Moncij of Account Jjy open and hj concealed attacks. "But if the change of a money unit, under the most favorable circum- stances, and for the strongest reasons, is productive of so much inconve- nience to all, and risk of imposition upon the unskilful and unwarj', what must be the effect where the change is not merely from one unit to another, but a concealed or unseen attack upon the unit itself? what the effect, if resulting from the enforcement of such regulations, as tend to change the value of the unit, aud produce confusion in regard to it in the minds of those employing it? Instances of this kind of change are bub too familiar to readers of the histories of European countries, in the frauds perpetrated by mistaken or unscrupulous rulers, in the successive debase- ments of the current coins. In England this has been done until the equiva- lent of the money unit five hundred years ago, and that of the present day, is as thirty-two to ninety-nine: they coined originally, including the alloy, £1 Is. 4d. from a pound of silver ; since 1816, they coin £3 (Js. from that quantitj- of silver. In France, the debasement has proceeded so far as the rate of seventy to one. The evils and losses inflicted upon the respective N T E S T C H A P T E R 1 1 . 95 countries in which these abuses were practised can never be adequately estimated. Measured by the mere inconvenience they imposed, great as that was, no just idea of the mischief could be attained. A more correct estimate may be drawn from the cries of distress which came from all quarters on the occasion of these debasements. Volumes might be filled with the complaints caused by the iniquities of this process of debasement. In France a heavy tax was agreed to be paid on condition the coinage was permitted to remain undisturbed. It is true that, in the periods when these debasements were most resorted to as a means of raising money, neither rulers nor subjects fully understood the true nature of the evil, although its results were felt by those whom they aifected, so as to leave no doubt about the injury. The functions of a money of account were not known, as they arc not sufficiently appreciated even to this time. The whole of the mis- chief was, in those cases, imputed to the change of the coinage, because that Avas the occasion. No debasement, however great or well managed, could much injure those who were knowing enough to detect the fraud, or in a position to discover it. They could readily perceive that the new coin which purported to be a shilling, and which the authorities required to be so called, was in fact worth only ten pence ; and they could take their precautions accordingly. Eut the mass of the people, who could not dis- tinguish the shilling of their money of account from a shilling coin, would continue to count, and fix their prices, and make their sales in the usual shilling of account, and receive payment in the debased coin. Their eyes would only be opened after the fraud was complete, and after the perpe- trators had extracted a large sum from the public ; and after merchants and bankers, shrewd enough and unscrupulous enough to avail themselves of the opportunity, had levied a tenfold larger sum. This process of break- ing up or destroying a money of account is one of fraud and misconception, where all parties to a transaction are ignorant of what has been done; they speak in one language — the law, under which they act, speaks in another; they make their prices by one scale — the law exacts payment by another. Where, as would soon bo extensively the case, one party comprehended the change, and the other did not, a direct advantage could be taken to the extent of the depreciation. Such debasements destroyed the money of account, because the base coin was made a legal tender for its nominal amount of valuation in the money of account. The ignorant and unwary were therefore preyed upon until the extent of their losses finally opened their ej'es, and the speculati(m became no longer available. The prices of all articles would become enhanced to the amount of the debasement, and that being the case, anew money of account would gradually bo established, as habit rendered the new unit familiar. It must not be overlooked, that the success of this kind of fraud depended on the fact that the money unit in use, where the fraud was attempted, was so firmly fixed in the minds of the people, that they would continue to compute by it after the alteration 96 NOTESTOCKAPTERII. in the value of the coin. The success of the fraud would come to an end as fast as the new money of account replaced the old one. The law which made the debased coin a tender at its former value would cease to be effec- tive when all prices were fixed by the new scale. It is well known that men of business had such a dread of the confusion, trouble and loss ensuing from a debasement, that they stood aghast at the prospect or mere suspicion of such an event.' Effect of a change in the value of the precious Metals on the Money of Account — Law of legal tender — Depreciation of Paper Currency. " There is another way in which a monetary unit may be changed, which it is important to consider, and that is, by a change in the value of the pre- cious metals of which the coins most in use are composed. It is by no means a necessary consequence ; but unless the danger is seen, and precau- tions taken, there is always hazard of the money of account being disturbed where the ordinary coins of circulation change their value gradually, and from causes not generally appreciated. This danger is always greater where the name of the money unit is the same with that of the chief coin — as in the case of our two coins, gold and silver, each called a dollar. If the silver in a dollar coin should depreciate by degrees imperceptible to the mass of men, the unit would alter by a change following at, a long interval from the de- preciation. During this time a harvest of profit would accrue to those who were shrewd enough to perceive the alteration, and fortunate enough to be in a position to avail themselves of it. Its operation would of course be very unequal ; the advantage and disadvantage to some might be equal; many might suffer severely without understanding the reason; and some might be profited without knowing how. The whole mass of transactions occurring within the range of this depreciation, the prices fixed upon all commodities for sale, the contracts of sale, the actual payments in coin, the whole position of debtors and creditors, their books of account, evidences of debt and securities of credit, would be more or less affected. There could be no certainty that the parties to these transactions perfectly understood each other. It might very frequently be a matter of accident or chance on whose side the advantage would fall; but it would be very certain that those who understood tlie process of depreciation would have power to turn the whole event very greatly to their profit. "We say that the money unit would sufi'er even where it did not corre- spond in name with any coin ; we mean, of course, where there is a fixed price on the precious metals, and a law of legal tender. Wherever neither of these circumstances exists, as in China, where great fluctuations in the value of gold and silver occur, there such changes have no effect whatever ' See the note at page 35, "Snelling on the Coins of Great Britain, France, and Ireland." NOTESTOCHAPTERII. 97 upon the money of account. In China, the value of gold and silver can always, in any variation, be expressed in tales, mace, candarines and cash; and so in England, if the statute making gold a legal tender at £3 175. 10|(?. were repealed, the value of gold could be expressed under any possible de- gree of variation in pounds, shillings and pence. So, if our law making gold a legal tender were repealed, we should have no difficulty in express- ing its value in dollars and cents, at any possible depreciation to which it might descend under the effect of the influx of that metal from California or Australia. But when the law compels men to take gold at a fixed value, and coins are issued in gold which are made a legal tender at one dollar, five, ten, and twenty dollars, the mass of men will be slow to perceive any depreciation of a coin which the law holds at the same value. They can only discover the change by a long process of selling at the old value, and being paid in the new; whilst very few will enjoy the equivalent advan- tage of buying by the old scale, and paying by the new. " The unit of valuation may be disturbed and destroyed by the deprecia- tion of a paper currency which enjoys the whole circulation of a country. If such a currency is once established in the confidence of a community, so as to be received in all business transactions at par with the unit, or as equivalent to coins of known value, it may decrease by such imperceptible degrees, and from such unseen causes, as gradually to cause a general rise of prices corresponding to the stage of depreciation. This of course, de- stroys that money of account, and gradually substitutes another; but the process is fraught with all the mischiefs and confusion attendant upon a change in the value of gold and silver. "This was that which was alleged to have taken place in England in the period of suspension of payments by the bank between 1809 and 1815, when at one time, as we have already mentioned, gold reached the very high price of £5 4s. And it is still urged by some in that country, that no more unjust nor impolitic legislation ever took place than that which restored the unit of account to its original place compared with gold. But the very heated controversy which took place within the period above-men- tioned, is one of tliose in which the calm observer of later days, looking through a less prejudiced medium, can clearly perceive that there was much truth and error on both sides ; and that their differe«ces were of a nature that no element employed in their discussion could enable them properly to reconcile or determine the preponderance. No doubt there was some depreciation of the paper of the Bank of England, but not by any means corresponding to the price of gold, the demand for wliicli was in- creased, owing to many special causes, but chiefly to the wars raging on the continent. After the battle of Waterloo, as the affairs of the continent gradually resumed a state of quiet, gold fell by degrees to its average mar- ket rates. "If the strenuous efforts which wore put forth at the period of this con- 98 NOTES TOCHAPTER II. trovcrsy had been in part directed to preserve the money of account intact, rather than to an angry and excited discussion upon the question wliether gold had risen or bank-notes had fallen in value, more light would have been shed upon the subject, and ninre real good accomplished. The publi- cations of this period, and the Parliamentary reports, form the most valua- ble mine of instruction on the subject of money and credit anywhere extant, but far too voluminous to be more than merely referred to in this connexion. " Tlie money unit of the American colonies was destroyed and diversified by a process the opposite of the depreciation of the coin. The long con- tinuance of an unfavorable exchange with England in most of the colo- nies begot a constant and pressing demand for coin as a remittance. The exports of the colonies were insufficient to furnish bills of exchange for ad- justment of the large indebtedness to the mother country, created by inces- sant over-importation. The only possible mode of discharging a large por- tion of this foreign debt was by the exportation of coin. The demand thus arising continued so long and so urgent, that the value of coins began and continued to enhance, through a long series of years; the scarcity became so great, that the colonists suffered severely for some medium of exchange, and were driven to various strange expedients, and not unfrequently to a state of barter, in which the commodities to be exchanged were valued in the money of account: that is, all payments were made in the commodities exchanged, whilst all prices were fixed in the money of account. During this period, Spanish dollars and fractional coins, under this special demand, rose in value, and increasing prices continued to be expressed in the usual money of account. The dollar, which at first was worth 45. 6d., became worth 55., 5s. GcZ., 65., 65. G(?., Is., and 75. &d., in Pennsylvania; and in New York it went to 85. It is true that, in some colonies, this process was complicated with an excessive issue of paper currency. In such cases, it may not be practicable to estimate the respective influences of the unfavor- able exchange and consequent demand for coin as an article of export, and that of the over-issue of paper currency ; but that both causes had their appropriate result is easily seen, and the more especially as they were not always contemporary. In some of the colonies no paper was issued, and in them the unfeivorable exchange destroyed not less effectually the money unit; and in some of the colonies the original money unit was changed before the issue of the paper currency. It should be noted that neither an unfavorable exchange, nor an over-issue of bank-notes necessarily involve the destruction of the money of account. Where there is a regular place for the transaction of exchange, and regular quotations of the rate of ex- change made public, there the nature of the demand for coin is at once seen and understood, and the price of coins nearly keeps pace with the price of exchange ; both coins and bills of exchange being rated, in the terms of the money of account, at what they were worth. There was riji NOTES TO CHAPTER II. 99 regular price for exchange, .nor were there regular dealers in exchange in the early days of our colonial existence ; and the mass of the people did not comprehend the true nature of the demand for coin. Hence, as coins almost disappeared from circulation, and as a high nominal price was continually bid for them, the prices of other commodities fell into a state of confusion, and all harmony of adjustment was gone ; for few could tell whether prices referred to an equivalent in coins, or an equivalent in other commodities. " So in the case of paper issues ; its depreciation does not necessarily imply injury to the money of account ; for where there is good paper with which to make comparison, it may be quoted, paid and received at any rate of discount agreed upon, from 1 to 99 per cent. — a fact familiar to all men of business in the United States. Glance at the Causes ichicli introduced the j)resent Coinage System of Great Britain. "Before examining our own system of coinage in reference to modifica- tions which may seem to be advisable in any aspect of the subject, it may be profitable to glance at the steps by which Groat Britain was led to adopt the gold standard. Previous to that change, the double standard had pre- vailed, and for more than a century had been a source of perpetual trouble to individuals, and loss to the nation. The mischief began before the com- mencement of the eighteenth century, by the rapid disappearance of silver from the circulation. This process was due to many causes, but chiefly to the over-valuation of silver at the mint of France. This carried off all the heavy silver coins, and left those most worn to perform an increased duty in the circulation, whereby they very rapidly became more and more de- faced and deficient in weight. The evil became, at last, insufferable, and brought on a discussion, in the reign of William and Mary, as to the best remedy. In this discussion the celebrated John Locke took a conspicuous part. The government — very honestly, as its members thought, but very unwisely, as it has since been regarded — undertook, in the face of this foreign demand for silver, to recoin the whole silver currency, and to make it of full weight, but without due precaution. Whilst this light currency, depreciated in weight from 10 to 25 per cent., passed by tale, it could not bo exported, because the over-valuation was not equal to this depreciation. The recoinage increased the evil, for it exactly prepared the coins for ex- portation, by making them full weight, without increasing their home value as a legal tender. So the mischief continued, in more or less force, through- out the whole of the 18tli century. The efi"cct was to introduce gold into circulation in place of the withdrawn silver. The extreme fluctuations of the gold which was thus drawn so largely into the channels of trade, pro- duced great inconvenience, and kept up bitter complaints. So inefficient ■were the means employed to keep the silver in circulation, all Ijut the worn and light coins being constantly withdrawn and exported, that in 1797 the 100 NOTES TO CHAPTER II. further coinage of silver was forbidden. A century of experience, and an immense sum wasted in coinage, bad sufficed to sbow tbat tbey could not by mere coinage, countervail the laws of trade in bullion. The sum of the matter was, that they over-valued gold in England, and silver in France; and that, by consequence, France could not keep gold, and England could not keep silver. In the progress of the 18tli century, the scarcity of silver, with the influx of gold and its variations — the guinea varying in price from thirty to twenty-one shillingH and sixpence — completely unsettled the ancient money of account, and formed a new one upon gold: that is, the plenty of gold made the people by degrees more familiar with its value than with the value of silver; and thus a new money of account began to form upon gold. This was perceived as early as 1774, when silver was declared no longer a tender, except by weight, beyond £25." CHAPTER III. § 1. Gold and silver a common equivalent or medium in the inierchange oj commodities — Circulation by weight — Not constituted money by coinage, tohich only facilitates circrdation — Diversity of mints, and confusion of coins — Wear and waste — Clipping, fling, SKcating and counterfeiting. We have been thus full in the treatment of money of account, its nature and functions, that the distinction between it and coins or bullion might not for a moment be lost sight of in the subsequent discussions of this volume. We have seen that the money of account occupies the whole ground of the expression of prices ; the ■whole ground of books of account, so far as prices, amounts or sums of debt or credit are stated in them ; the whole ground of the statement of sums or amounts in bonds, notes or bills of exchange, checks, and other securities ; the whole ground of financial estimates, statements and computations ; in fine, all that relates to money, where actual equivalents are not employed, belongs to the domain of money of account. The formation of a money of account, w^hich invariably occurs among all trading people above the condition of savages, takes away at once from gold or silver, whether coined or weighed, all application or use as a measure of price, or medium of comparison. Among savages, the precious metals are no doubt directly compared with the articles for which they are bartered : with them it is, lite- rally, so much of one thing for so much of another. It is not so in civilized life, where commodities are very seldom sold with any thought of payment being exacted in gold or silver. The money of account not only serves, to this extent, the use of coins or bullion, but it saves even any actual reference to them; it is, therefore, an immense economy in trade. It narrows the use of the precious metals, perhaps, more than any other agency. (101) 102 GOLD AND SILVER. It makes the credit system possible. This diminished use of the precious metals indicates vast progress in industry and trade. In the forming stages of society, it may be necessary to employ the precious metals in almost every transaction. As commerce is now carried on in Great Britain, and in the United States, the use of coins or bullion does not extend to the thousandth part in value of the business ; but though the proportion in which they are used is so reduced, they are none the less prized, and still remain that common equivalent with ■vfhich every other com- modity can be purchased. Although very little employed in large purchases, because they can be dispensed with, they are the only articles which every one is at all times willing to take. Their chief office is in the payment of balances of trade. When two nations, or two provinces, or districts, or individuals, trade with each other, their mutual debts may be set ofl' against each other, in the ordinary course of business, so far as equal ; but the balance either way is payable only in gold or silver, because, where other articles of export fail, these are always acceptable in discharge of any debt, domestic or foreign. Small as is the proportion of the precious metals to the whole value of commodities exchanged, yet being employed in the retail dealing, and made the only legal tender in payment of debts, their use is not only familiar to the public, but creates a vague impression that all dealings and prices have a strict reference to coins, or specific quantities of gold or silver. We have shown that this is an erroneous impression : they are seldom referred to when the term money is used. Gold and silver are only referred to in dealing, when the actual intention of the par- ties is to deal in or employ them. Coins cannot perforin the functions which are the attributes of a money of account. They are not used for the statement or expression of values. AVhen used in a purchase, or in discharge of a debt, it is an equivalent — as commodities applied to that purpose, the value of which is as necessary to be stated in money of account as that of any other article. The term money has many significations, and of cour.se two that are very diflerent — when applied to money of account, and to coins of gold or silver : in one sense it is used GOLD AND SILVER. 103 to express values, and to state amounts ; and in the other, it is applied to a commodity used in actual purchase, or in actual payments. It is in the latter sense that we are now to speak of the pre- cious metals ; their use as money in no way divests them of their quality of a commodity. A man may invest his fortune, or any portion of it, in land, in cotton, in silk, in gold or silver. Pre- ference fur these metals as a common equivalent dates from the earliest records of history, and probably prevailed long before the idea of money was formed. It would be interesting to assem- ble here all the fragments of history on this subject ; but it would not much subserve our purpose. We have abundant proof, in early history, that gold and silver were employed as "money of the merchant;" that they were weighed and passed as current money. Although called money, when thus weighed and passed, it is obvious that the term means no more than that gold and silver were the commodities used to barter or exchange for all other things, and for all services. This gave them the name and office of money ; and in this sense there is neither mystery nor difficulty in comprehending the nature of money. The beauty, admirable (qualities, and superior conve- nience of these metals, as embracing great values in small com- pass, have in all ages recommended them for this purpose. They were employed three thousand years ago as money ; they are still so employed. Gold and silver, in the days of the Pharaohs, were weighed as money ; they are still weighed as money in China : they are still weighed among us, and in Europe. The fact of their being weighed by public authority, and issued in pieces of convenient size, in no way alters the nature of their function of money, though it doubtless adds vastly to their con- venience, and quickens their circulation. Such pieces of money are not received, in payments and purchases, in virtue of their accurate weight, and their bearing the impress of public autho- rity, but because they are gold or silver, certified as to quality and quantity by the impression of the coinage. Much of the difficulty of understanding the distinction be- tween money of account, and money the medium of exchange, is 104 Tx L I) A N D S I L V E R . removed -where the medium or money is weighed. Every one, then, knows that he expresses the price of gokl or silver by weight, as he expresses the price of other things. There is no complication in the transaction. The articles thus exchanged are examined as to quantity and quality, the respective values computed, and the exchange is made by the arithmetic of the money of account. It is simply the use of gold or silver as arti- cles for Avhich all other things are freely exchanged ; and this use is supported both by the market value of the metals, and by the convenience and confidence afforded by coinage. It is pro- bable that the exchangeable value of gold and silver is enhanced by their being employed as a common medium of exchange, thereby increasing the demand for them in proportion to the amount so used. The use made of them as a medium of ex- change by no means alters their price or value ; it is only one of the many uses to which they are applied. It is obvious that this medium of exchange is an expensive instrument, the gold and silver employed in this way being of no other use. The great value of the instrument imposes a limit upon its use, and pre- vents it from being employed as much as would otherwise occur. This limit of circulation could not be overcome by increasing the quantity employed as a medium of exchange; because increasing the quantity involved an increase of the expense of interchange of the medium employed, or a depreciation of the medium em- ployed. In no country does the quantity of the precious metals used as money probably exceed one-tenth of the value of the gross annual product of its industry ; and in none does it probably exceed one-hundredth part of the whole transferable property of the people. To employ a larger quantity, as a medium of exchange, has not been found advantageous. To avoid increasing this quan- tity, and even to save the necessity of employing it all, an im- mense number of devices have been resorted to, with more or less success, the consideration of which will be reached as we proceed. The first important step, after weighing the precious metals in payment, was coinage, a facility which greatly promoted a rapid circulation of money. In the shape of coins, a given quan- tity of money could be employed to make ten payments in the GOLD AND SILVER. lOo time it would before effect one. Coins are not only accurately weighed, but their quality is also accurately tested ; the impres- sion on the piece, Avhich makes it a coin, is an official and legal certificate of weight and quality. The gold or silver, then, which, previous to coinage, had to be carefully cut or subdivided and weighed, and carried to a skilful person to ascertain its purity, passes as a coin instantly from hand to hand, without delay or hesitation. Rapid as the circulation to which this facility of coinage has given rise, the exigencies of industry, civilization and commerce soon exceeded its powers. The movement of the pro- ducts of industry in every civilized community has long since far surpassed any possible circulation of coins. This, of course, stimulates efforts to effect the exchange of goods Avithout the in- tervention of money. Besides, the system of coinage was found to be susceptible of such abuses, as tended greatly to limit its use- fulness and power. Every country had its own mint, and esta- blished its own regulations. The weights of different countries did not correspond ; and as the coins of each were adjusted by its weights, it became necessary both to weigh and assay coins circulating out of their own territory. The people of each country were familiar only with the values denoted by their own coins, and therefore could not know the standard of weight or purity adopted at other mints than their own ; they could not confide in the certificate impressed upon a foreign coin, because they could not understand it. This difficulty, which has greatly obstructed tlic use of coins in all parts of the world, is also greatly enhanced by changes in weight and standard of quality at all the mints, and by changes in the impressions or appear- ance of coins. When more than a hundred different mints were issuing new coins to mingle with the old, a confusion supervened which reduced the convenience of coinage, in some cases, below the old mode of weighing. This evil became so intolerable as to beget loud and bitter complaints, and many attempts at reformation, some of which proved only aggravations of the mischief. Many were the suggestions and plans for a general system of coinage for Europe. It may well be doubted whether the vexations and losses incurred by the abuses of 106 GOLD AND SILVER. coinaf^e in many countries did not far exceed all the disadvan- tages of being without any. There are now in the vaults of bankers, in Italy and Germany, immense sums in coins which can no longer be circulated, because the people are unwilling to receive them. They belong to a past generation, their weight and ({uality are unknown to them, and of course their price is not known. These pieces are only used in bags, in the heavy payments between bankers ; they have ceased to be applicable to the ordinary circulation, and have lost part of their powers and usefulness.^ • Germany alone had C8 mints, each with its separate coinage and regu- lations. When all the gold and silver coins, with their subdivisions, from 68 mints were circulating over a territory no larger than Germany, it can readily be conceived what a nuisance this variety became in business. But when this nuisance was enhanced by a due proportion of counterfeits, by the abrasion, clipping, and other deterioration of coins, it can scarcely be imagined how intolerable the burden became. The complaint was loud and bitter, and projects for reform abounded ; a system to be uniform not only throughout German}^ but Europe, was earnestly demanded. The same evil induced the establishment of banks of deposit in Holland. In urging upon the public his proposal of a convention of delegates from the various governments of Europe, to devise a uniform mode and system of coinage, ScarufE placed before his readers the whole mischief in bold relief. The director of the mint in Reggio, however, could not move the authorities of that day by his logic, nor by his position ; and he lacked the power which Napoleon applied to the subject more than two centuries after, when he introduced a uniform coinage into Italy. No sooner had the power of the French Emperor ceased to be felt in Italy, however, than the Pope, and other princes, commenced the old system of multifarious coinage, the evils of which are now seriously felt : " Dont la diversite embarrasse tons les jours, non-seulement les etrangers et les voyageurs mais meme les ban- quiers et niarchands Italiens." Italy is said to be fan;ous for the worst coins, and the best writers on money. One of tlie earliest of these was Scaruffi {''Discorso sopra la Mo- neta"), published in 1582, and to be found in the second volume of "Baron Custodies Collection of the Italian Economists." Scaruffi was, for many years. Master of the mint at Reggio. lie was so profoundly impressed with tlie mischiefs of the coinage, that he looked upon it not only as the scourge of Italy, but as " a conSagration which threatened all Europe." Not satisfied with deploring these evils at home, and with suggesting local remedies, he proposed a plan for a uniform and general coinage for all GOLD AND SILVER. 107 The complications and perplexities of coinage have long been a serious grievance to the industry of the civilized ■world — a grievance, in many localities, regarded as intolerable, and only Europe, the coins to be the same in size, weight, and alloy or standard. If this suggestion of Scaruffi's was not adopted, another important one was. He proposed that all manufacturers of plate and jewelry tihould be com- pelled, by law, to place their mark on every article manufactured by them, together with a designation of the quality of the metal. This is now the law in most of the countries of Europe, and should be here. In this age of paper currency, of higher commercial credit, when public opinion is strong enough to restrain men in authority from debasing coin, it is scarcely possible to credit the injury inflicted upon industry and com- merce by the diverse coinage of Italy, its alterations, counterfeits and de- basements. This combined evil is not only called, as above, a conflagration, but a scourge, a pestilence; it was compared with the contemporaneous famine and pestilence of the IGth and 17th centuries. The aid of Heaven and the Church was invoked by processions, indulgences, &c., to miti- gate the morbus numericiis. The ecclesiastical remedy was not suc- cessful. "L'ltalie fut sans contredit la nation qui souffrit le plus dc cet excess si grave. Divisee pour son malheur en tant d'etats divers, ie mal scmblait multiplier par le nombre de ces gouvernmcns." ..." lis persisteraut alors dans la stupide determination de laisser l'ltalie ce qu'elle etait depuis long-temps, une mosaique de gouvernemens, de lois, de douaines, de mon- naies," ifec. In the Papal dominions a custom has prevailed, which adds greatly to the perplexities of those who have to deal in the coins of Italy. Every Pope adopts new devices, and often makes other changes, for the coins to be issued during his Pontificate; and besides this, the interregnum between the demise of one Pope and the election of another, which is often a period of some months, is characterized by a coinage of its own. Between the years 1700 and 1780, there were issued from the mints at Rome 283 dif- ferent coins, of which 67 wore gold. Besides these, other varieties were issued from other mints in the ecclesiastical States, as Boulogne, Ferrara, and Gubbio. [ "Caissier Italien," folio 8.] In the same period, the other mints of Italy were active, and issued, in- cluding those of the ecclesiastical estates, not less than 800 varieties of coin, to circulate in the small territory of Italy. It was felt to be a great relief from this intolerable confusion, when Napo- leon introduced a uniform coinage. This blessing was only enjoyed during the ascendency of the French Emperor. As soon as it ended, in 1814, every government of Italy returned to the old system of coinage, and con- tinues it until the present. A traveller may, at any time, obtain a roleau 108 GOLD AND SILVER. escaped by the establishment of banks of deposit, or other de- vices. We refer now only to the multiplicity of coins of different weights and degrees of purity. Of course this evil was immensely increased by the secret debasement of coins practised in a greater or less degree at all mints, until within a very brief period. But coinage was found to have its diflScultics, independent of mere complication and variety of coins and standards. The coins in actual use were found to lose in weight by wear so rapidly, that the smaller sizes, in the course of a few years, dete- riorated in weight from ten to twenty per cent. This inevitable process was slow, but sure ; the coins of a whole people became so diminished and injured in their own hands, that men of busi- ness were afraid to receive them at their nominal value. This deterioration of course obstructed their circulation, and lessened their power and usefulness. Every European country has suf- fered seriously from this cause. Another difficulty encountered by coinage, scarcely less than any other, is the facility it gives to counterfeiting, and to frauds upon the genuine coin. Coined money circulates with such rapidity, upon the faith of the public certificate on its face, veri- fying weight and quality, that counterfeit coins are put in circu- lation among the people with a success, which makes it a large business wherever coins are extensively employed ; and counter- feit coins often continue long to exercise the functions of money, of coins from an Italian banker, which, though of full weight, can only be disposed of at a discount. We said, may obtain ; we should rather have said, he will be fortunate if he is not sometimes served in that way. Those who wish to know more of the evils of Italian coinage and money, may consult the Cambist writers. Commercial Dictionaries, and numis- matic authors who treat of the coins of that country. See Scaruffi, Davan- zaii, and other writers, whose works are contained in the collection of Baron Cusiodi, of the "Ecoiiomisti Italiani," in 51 vols. 8vo. See, also, " BaccoUa degli Scriitori delle Moncla d' Italia, Fillipo Argellati ;" " Sio7-ia delta Economia Pubblica in Italia, di Conte Pecchio ;" ^'Ilistoire de la Re- publique de Venise," torn. iii. 75; "Caissier Italien," passim: "Marperger on BanJcs," 1717, 4to, pages 170 to 189, in German. GOLD AND SILVER. 109 before tlicy are discovered. In China, the skill of counterfeiters is sucli, as wholly to prevent the use of coins ; and that vast population is — for that reason, it is said — confined to the primitive mode of weighing, in payments, all the gold and silver used in commerce. Genuine coins are, by fraud, subjected to processes which rob them of a considerable proportion of their value. They are punched; sweated; filed; sawed in two, the interior scooped out, and filled with lead, the sides being then reunited ; these, and other modes of making a profit on new coins, have been success- fully practised in every country, to a greater or less extent. By these processes, coins are reduced at once, for the profit of the operator, to the lowest value at which they will circulate. They may thus lose, in a day, as much as they would have lost in years of circulation. If these, and other mischiefs attendant upon a large circulation of coins, are not felt to the extent they once were, it is because the circulation of coins is so largely replaced by bank-notes, that false coiners, finding it unpro- fitable to pursue the business, have turned their attention, with great success, to the production of counterfeit bank-notes. "Whenever governments return to a large circulation of coins, false coiners will be found at their old business.^ We find, then, in practice, various limitations to the power of the precious metals as money. They must, in the first instance, be weighed and assayed before they are received in payment. If that difficulty be removed by public authority, and pieces be issued ready weighed, of a certain quality or standard, then the changes of weights and standard, the multi- plicity of coins consequent upon the great number of mints, the counterfeits and frauds upon the coins, all together make up a ■ When, upon an occasion not very remote, one of the governments of Italy recalled a coin only a few years in circulation, the officers of the mint, not being aware of the danger, found after a short time that they had already redeemed a much larger amount of the specific coin than the mint had issued, and the offerings for redemption were far from growing less. If this test were applied to many coins, it would reveal a quantity of base money of which few have any suspicion. 110 GOLD AND SILVER. great obstruction to the continued and increased use of gold and silver as a sole medium of exchange. We shall recur again to the fact, that the great value of these metals makes their use a very expensive method of eflfecting exchanges. These difficulties in the use of the precious metals as an in- strument of payment, have operated with such eifect in the more civilized portions of the worhl, that only a very small portion of the exchanges of the products of industry are now effected by the actual intervention or presence of either gold or silver. They are now chiefly used in retail dealing, in small transactions, and in paying balances of trade. The great subdivision of which the j^recious metals are susceptible, specially fits them for the actual payments of the retail trade. Where countries, districts, or individuals have large and continued dealings, by which they in effect exchange goods for goods, a balance may fall either way, for which the goods are not wanted ; such balances are with facility discharged by the export of gold or silver. But there is still a natural tendency in the marts of commerce to avoid, in every possible way, the use of so expen- sive an instrument of trade as gold and silver. The various modes of dispensing with them, and the substitutes employed, will come under our notice hereafter. § 2. Ciradation of the precious metals as money — Commerce depends upon coins for so muck tise as is made of (hem, and no more — Tliey jycrform no functions beyond the use we see made of iliem. No term is more common, in treating of mon^y, than circula- tion. It is applied equally to all its substitutes, as bank-notes, checks, bills of exchange, and promissory notes, and other secu- rities. It is a term founded on well-known facts, and descrip- tive of well-known tendencies. With the facts and many of the details of circulation, all men of business are more or less fami- liar ; but not many give themselves the trouble to analyze the process, and its results. They know that money goes and comes ; that it passes round, and appears to return whence it set out ; and that there is a sort of average quantity of money circulating among a certain number of people in a certain district : that if GOLD AND SILVER. Ill the very same coins do not, year after year, perform the same round, a very considerable proportion will be found in the same track. Few examine minutely the details which give this circu- lar impulse to money, as it moves in the channels of business. Money being a medium by which men exchange commodities, its movements are wholly controlled by the course of this ex- change of commodities. Men exchange the products of their industry, or their professional or intellectual services, or their bodily labor or skill, for other products, or for other services, or labor or skill. This is the object, sum or result of their transac- tions ; but the business is effected by exchanging these things, first for money, and then by exchanging the money for the things required. The money intervenes, and then retires ; it is not of the substance of the transaction. If the exchange desired could, with equal convenience, be effected without the aid of money, it would not be employed. No exchange of commodities is, in the result, any the more effective for having been made with money. The farmer who sells a quantity of wheat for ^500, taking a parcel of land in payment, and who afterwards pur- chases agricultural implements, giving the land in payment, has exchanged his wheat for the implements by the medium, not of coins, but of land ; but the exchange is equally as effectual and advantageous for him, as if made with coins. The medium em- ployed leaves none of its marks or characteristics on the exchange. It may be a very grave question, in many localities, whether wheat can be more advantageously converted into flour by steam or water-power ; but it is of no consequence to those who eat the bread, what medium has been employed in the conversion. So, whatever importance belongs to the subject of money, and other modes of exchange, it in no way affects the validity or usefulness of the exchange, however it may have been accom- plished. The first consideration is the desired exchange ; the next is, that it should be effected at the least expense, and with the greatest facility possible. Of course so expensive an article as coined money, whatever its merits as a medium of exchange, will not be used when it can be dispensed Avith; and, as a matter of fact, very lew of the exchanges referred to ;ire now nuide by 112 GOLD AND SILVEK. tlie intervention of coins. But although these are now so gene- rally dispensed with, yet the mode and causes of the circulation of money, were it invariably used, requires not the less to be better understood. Every man exchanges that which he has to spare for that which he wants, and others have to spare ; and there is scarcely a community, of which the members are not more or less de- pendent on each other. All are, to some extent, dependent on the farmer, merchant and mechanic ; but these are dependent on the physician, lawyer, teacher, and other professional men ; and all are, by a complicated but well-understood dependence, linked together. All receive something, directly or indirectly, from the others. Now, if money were used in all this inter- change of commodities and services, it would be found to tra- verse the whole circle of the community ; and though it might pass back and forwards many times in the hands of individuals, yet it would have performed a round in the community. The chief transactions of any community are substantially the same every year, or half year ; and it would happen that very nearly the same sum, if not the same money, would pass through the same hands every season. Great variations must of course occur, but there would be an approximation to the same results. The farmer, the mechanic, tradesman, manufac- turer, and the professional man, would all go through nearly the same round of exchanges, and be ready, with the return of the season, to go through them again. The money would thus have actually been paid for every commodity, and for every service, only as a medium. The substance of the whole would be the transactions or dealings which had taken place between the parties, the money being left wholly out of view. The rapidity of the circulation determines the quantity of money required ; and the rapidity of circulation depends on the state of industry, and upon the roads, rivers, cities, and other natural and artifi- cial facilities. But the circulation is mainly and chiefly facili- tated by that mutual dependence in a community which springs up when people supply their own wants. The narrower the circle in which money moves, other things being equal, the more GOLD AND SILVER. 113 exchanges it can eifect. If farmers, manufacturers, tradesmen, mechanics, and men of all the various occupations which go to make up a civilized community, are close together, their ex- changes, if effected with money, will be rapid in proportion to their vicinity. If we imagine a people wholly isolated, then the circulation among them would be complete ; no part of their money would flow into other channels, and no final balance would remain to bo settled with any other community. The regularity of this movement, and the sameness of the result, has suggested to many minds, in every age of the world, that money does not perform its functions by reason of its intrin- sic value, but by virtue of this circulation. It appeared to them that if parties were agreed, any other substance would perform the same office as well. The Carthaginians, history informs us, resorted to leather as a material for money ; and the Chinese, some eight centuries ago, to paper, not on any principle upon which paper-money is now used, but simply as a material for money, on Avhich could be impressed a certificate of value, for which each piece of leather or paper was to pass. We have no adequate account of the experiment in leather ; but the Chinese trial of paper proved as unfortunate as some of the same kind in later times. It is obvious enough, upon a little consideration, that mucli of the efficacy of money depends on the fact that it circulates in accordance with the mutual dependence of the people, and with a rapidity proportioned to the smallness of the circle, and to the natural or artificial facilities Avhich exist to aid the transporta- tion of the commodities for which it is used as a medium of interchange. But the regularity of the proceeding in no com- munity is ever so great, that mere counters could be safely sub- stituted for money of intrinsic value, an idea which has haunted men in all ages, and no doubt gave rise to the experiment of the Carthaginians and the Chinese. The idea is, that if men agree Avhat substance they will use for money, as they only receive it to pay it away, it is perfectly indifferent what the material is, so it be convenient. There are insuperable objec- tions to a mere conventional medium of exchange ; among these 114 GOLD AND SILVER. is the "wide door it opens to fraud, and the difficulty of restrict- ing its quantity, which is the only means of maintaining its nominal value. If mere counters, -without value, would purchase articles of value, counters would be supplied too rapidly. When the medium employed has an intrinsic value corresponding with its nominal price, then the holders are at all times, and under all circumstances, safe at every stage of commercial progress. Let war, revolution, commercial revulsion, or despotic authority bring forth what evils they may, the people have in their hands either their commodities, or their price in the precious metals. It is true that any material employed as money, which all are willing to receive, may with perfect success fulfil all the func- tions of money for a time ; but no means have yet been found to make money, without intrinsic value, adequate to all circum- stances and emergencies. Men may, for a while, concur in such experiments, and all may go smoothly for a time ; but when large balances, foreign or domestic, are to be paid, when the season of alarm and trouble arrives, the conventional money, which depends on the confidence of an entire community, is stripped in a moment of all its power and usefulness. Counter- feit money may, for a long period undetected, perform all the functions of genuine coins ; but the moment its true character becomes known, all its power is gone. Whilst, therefore, the circulation of money presents some fea- tures of regularity which suggest the idea that counters may be substituted for coins, there are accompanying irregularities, unavoidable obstacles, emergencies, accidents and hazards, Avhich make it impossible permanently to substitute mere counters for coins. The devices now employed so extensively under the credit system are not of this kind ; they are securities, express- ing that a certain amount is to be paid on demand, or at a day fixed. A counter, without intrinsic value, is neither a thing of value, nor a security, nor a claim upon any one. Whenever it is refused, there is an end of it. We have already noticed the obstacles to rapid circulation, arising from the wearing of coins, from frauds upon the coinage by punching, sweating, splitting, and debasing ; but more espe- GOLD AND SILVER. 115 cially from the immense variety of coins proceeding from scores of different mints. Whatever facility of circulation any people may have by the nature of the country, or ^Yhatevor artificial facilities might be provided, these obstacles seem to place a limit to a largely increased circulation of coins, which neither power nor ingenuity can overcome. The first I'emedy resorted to against this evil was only an alleviation. The collection of this multifarious coinage in sacks, duly counted, indorsed, and sealed Avith the name of some well-known merchant or banker, only made the sack circulate as so much bullion. The coins were no longer useful or convenient, and their circulation as such was, in fact, at an end. The next great remedy for these obstacles to circulation was the establishment of such banks as those of Amsterdam and Hamburg. These banks received coins on deposit, after care- fully ascertaining their value, and placed the amount received to credit of the depositor. The holder of such a deposit transferred his title to the money in the bank, instead of count- ing and delivering the coins. This method of transfer would have admitted of a circulation more rapid than any attainable' by coins at large, had not these banks surrounded the transfers with restrictions and limitations, which greatly reduced their efiicacy. In some cases, but one transfer of the same amount was permitted in one day. It is quite obvious that the same sum might be transferred, under very safe regulations, every five or ten minutes during the day. But this process of transferring the title to money is a very different thing from circulating money. It is, in fact, a stoppage of the circulation of coins ; the title circulates in their place. The parties to s.uch transfers do not know, nor do they attempt to ascertain, that the equiva- lent in coin is actually in the bank. These deposit banks were half-way stations between an exclusively hard-money circulation and the credit system. The parties who transferred and received credits in these banks confided in the fact that the money trans- ferred was there. There was an exercise of confidence and mutual faith, without which the bank could not have existed. We shall have occasion to remark that, in the case of the Bank 116 GOLD' AND SILVER. of Amsterdam, that confidence, and the unimpaired usefulness of the bank, continued long after a large portion of tlie money liad been abstracted by the authorities of the city. Banks of deposit, then, rather mark the limits of the circula- tion of coins, than constitute its climax. They belong almost as much to the credit system as to the money system, partaking of the characteristics of both. Whilst civilized people have always shown a strong partiality for the precious metals as a medium of exchange, the history of the last four centuries shows that there have been inducements strong enough to suggest and introduce other modes of eifecting exchanges. No doubt the expense of gold and silver as a medium of exchange, the annoying difficulties growing out of a multifarious coinage at every mint, the multiplication of mints and coins, the debase- ment of coins by governments, and their fraudulent deterio- ration by rogues, contributed at a very early date to drive mer- chants and men of business to other methods of payment, and to seek another medium of exchange. But these inducements to resort to other modes of payment, influential as they must have been, were by no means the chief reasons why, at the present day, so small a portion of business transactions are effected by the actual employment of the precious metals as money. The partiality for this money is scarcely less than it has ever been. The great fact is, that the increase of industry and production for the last three centuries, the division of labor, and the conse- quent vast increase in the interchange of commodities, has far transcended any possible circulation of coins as a medium of pay- ment for the whole of these transactions. It may be safely assumed that when other modes of effecting these exchanges were adopted, it had become, if not a necessity, at least a conve- nience and an economy too considerable to be resisted. It may be asserted, too, very safely, that though the precious metals intervene to such a small extent, in proportion to the whole pay- ments of commerce, yet they are acting now as effectively as ever they did : that the transactions of commerce, which now take place without the intervention of gold or silver, are such as could not take place if dependent for their progress upon actual GOLD AND SILVER. 117 payments in the precious metals. The exchanges of domestic and foreign commerce, which take place without the actual aid of gold or silver, are essentially the measure of the incapa- city of coins to accomplish the commerce of the present day. Gold and silver money have long ceased to be the chief agent in effecting the exchanges of commodities. Their chief employ- ment now is as the small change of retail business, as a means of paying the balances of foreign trade, and as a security for the public in the business of banking. The quantity of coins withdrawn from circulation for this purpose of banking is vastly more than made up by the greater quantity of bank-notes issued, and by the greater rapidity of bank-note circulation over that of coins. Yet if the compai-ison between what is done with and without the use of coins be enlarged by adding to the circula- tion of coins that of bank-notes also, it will be found, especially in Great Britain and the United States, that a very small pro- portion of the whole payments of these countries is effected in coins and bank-notes, even when taken together. We are speaking, it will be kept in mind, of the actual use of coins ; of what is effected by the actual transfer of gold or silver as money. We yield nothing to the mistaken idea that coins are in some way employed whenever prices are expressed. Believing that the whole subject of expressing prices, naming amounts, writing down the results of sales in books of account, and all similar matters, belong to and are fully explained by the opera- tion of money of account, we refer, in speaking of the agency of coins as a medium of exchange, always to the actual employ- ment of the precious metals. In this restricted sense, every man can for himself determine to what a narrow channel their circu- lation is now confined, compared with other more effective agencies. Whatever indefinite ideas some may entertain upon the sub- ject, the real use of coins is merely tliat in which we see them employed. Though every man may exact payment in coins of all that is due to him ; yet this is almost never done. Wlien not so exacted, the payment is made in some other satisfactory way. The Treasury of the United States exacts payments in coins, 118 GOLD AND SILVER. and the payments are so made. Business is done with coina only when they are present in the transaction, actually paid and received. For so much use as is made of coins is business in- debted to them, and no more. ^ 3, Tlie qiiantUy of 'money required for the business of a country. Few mystifications have been more profound than those which have pervaded speculations on the quantity of money required for the business of a country, and on questions as to the results of an increase or diminution of money. Such inquiries appear, at first view, important ; and few of the earlier writers upon money have neglected a subject so inviting as the amount of money needed to make a country prosperous. To men not deeply versed in the details of commerce, there appeared no insurmountable difficulty in the topic. It was long a favorite notion, that the wealth of a nation was measured mainly by its stock of the precious metals ; and legislation exhausted itself in the vain attempt to prevent their exportation. That commerce which brought home gold or silver was considered a national blessing ; that which carried it oiF a misfortune. This opinion, which belonged to the mercantile school in political economy, lingers yet in many countries, and in many minds in all coun- tries. The doctrines on the subject of the quantity of money, to which this opinion when it prevailed gave rise, however, con- tinue to be inculcated as earnestly as before, although they lost their chief support when it was admitted to be contrary to sound policy to prohibit the exportation of coin or bullion. To us it appears that the subject is wholly impracticable, and that no safe conclusions can ever be drawn from such reasonings. The actual quantity of money in a country never has been, and never can be ascertained with sufficient exactness to make it the ground of any safe deduction. The actual sum of money em- ployed by any country in its ti'ade, for any period of time, it is still more impossible to ascertain. And the quantity actually needed in any country for the purposes of its trade, during any certain lapse of time, is still more indeterminate. Of two coun- tries, the annual value of Avhose commerce is the same, one will GOLD AND SILVER. 119 require for that commerce a much larger sum than the other. This may depend on the relative extent of their several territo- ries ; on the state of their roads and rivers, and other internal communications ; on the articles in which they respectively deal ; on the size and location of their cities and towns ; on the state of their morals ; on the nature of their governments ; but more especially on the degree or extent to which the credit system, and its various devices to save the use of money, have been adopted. So it is obvious that in the same country, at different times, varying quantities of money will be required to transact the same amount of business : this may depend on a state of peace or war, on times of tranquillity or public disturbance, on actual or apprehended mischiefs in legislation, and on the state of mer- cantile confidence. All these are influences, the intensity of which can neither be measured nor estimated. No man, there- fore, can say what sum of money is needed in any country, at all times, nor at any time. Whatever conjectures may, even by the most observing and the best informed, be indulged on this subject, cannot form any data worthy of consideration.^ If positive quantities are out of our reach, comparative are only less so ; it cannot be doubted that there is sometimes more, and sometimes less money ; and business men often experience fluctuations of this kind, which make this but too plain. There is no gauge, however, by which we can measure or estimate the extremes of these fluctuations, or mark their intermediate pro- gress. Nor is the public voice always correct in this matter ; for very often money is said to be scarce, when its holders are only unwilling to circulate it freely ; and often it is said to be plenty, when its circulation is only rapid, or when credit sup- plies its place. It is often observed that the deposits in the banks are largest at the time when the cry of scarcity is loudest, and smallest when there is no complaint. So that, although there can be no doubt that fluctuations do occur, yet not always at the time, nor in a way to correspond with public opinion. ' See C. H. Rau, Sect. 266 ; Storch, vol. iii, note 12. 120 GOLD AND SILVER. The alarm produced by fear of invasion, by rebellion, by a com- mercial crisis, by large failures, and by many events which dis- turb a commercial atmosphere, often has the effect of producing iliis apparent scarcity of money. At such moments, money is deemed the most desirable possession ; and all who have it pause before they part with it, and retain it if they can. It ceases to circulate freely, and the impression becomes complete that money is scarce. When no disturbing cause is at work, when trade is brisk and confidence high, all are made to feel that money is abundant, because merchandise, at such seasons, is more desirable than money. At such times, too, the devices for saving the use of money are easily kept in operation, and are more effective ; money is thus made more abundant for some purposes^ by sparing it in othei'S. It seems, then, to be as diJE- cult to ascertain the actual increase or diminution of money which produces fluctuations, as it is to find the actual quantity used or required in any country ; and in neither case can any approximation to the truth be near enough to form the basis of sound conclusions. It is certainly better to approach this sub- ject on safer grounds, and to regard it from a point of view which will take in admitted facts. If fluctuations in amount are injurious, causes and prevent- ives become more pressing inquiries than the actual quantities added or withdrawn. It is the varying, and not the actual quan- tity which does the mischief. We have not yet, however, arrived upon safe ground. Not being able to ascertain the sum of money which goes to make up a circulation, nor the sums of increase nor decrease which constitute injurious fluctuations, and knowing that other causes, such as those already indicated, produce the same effects as variations in quantity, there must often be danger of mistake in assigning causes, or in proposing remedies. On a subject involving so many combinations as this, those who are most confident should be the most distrusted. In a general treatise, no useful rules can be given for such investi- gations ; the inquirer must painfully and watchfully observe the facts, and on these rest his conclusions. GOLD AND SILVER. 121 Whatever progress may hereafter be made in the statistics of money, great uncertainty must still cling to this subject. If the amount of metallic money actually existing in any country could be ascertained with exactness, yet it could never be known how much was hoarded, nor how much was in the hands of those who kept it for months, or years, wholly unemployed. So in regard to paper currency. The amount issued may be told ; but how much is in constant use, no one can tell. If such speculations are worth pursuing, we leave them to those who find in them an importance which does not strike us. Hitherto, all that we have seen on the subject has been unsatis- factory. What we may farther say, in reference to the quan- tity of money in circulation, will be under other heads. The effect of quantity upon prices is a question of the highest im- port, and must be fairly encountered. So, also, the agency of increased issues upon the value of the currency, upon the exchanges in stimulatins; over-action in trade. All these are subjects deserving of close attention ; but they involve other facts and considerations than those which concern the actual quantity of money, and the problems which they present can never be solved by weighing gold and silver, or numbering bank-notes. The quantity of coins required by banks to meet their engage- ments is a special inquiry, and will come within the range of subsequent chapters. It involves special considerations wholly different from the question, Avhat amount of the precious metals, in the shape of coins, it is necessary or expedient to liave for the business of a country. The banks have a certain specified duty to perform, and they must form their estimates according to the nature of that duty. But the quantity of metallic money needful in a country is wholly indefinite, and must be left to the results of the spontaneous action of the people, and tlicir gov- ernment. No such approximation is possible, as that which may be made to the quantity required by the banks. Tlie real subject is trade and business, and the modes of carrying it on ; the quantity of money required for this purpose in a year is 122 GOLD AND SILVER. one of that class of questions which, though asked in advance, must wait the reply which time reveals. It may be interest- ing to know how many warehouses, how many clerks, how many ships, and how many carts will be employed during the pro- gress of a year in a particular country ; but the information is unattainable. There is, besides, such a wide range of manage- ment and economy in all these things, that exact quantities and numbers become, in a great degree, unimportant. CHAPTER IV. 2 1. The preciovs metals neither a measure nor a standard of value — TJiei/ are the legal standard of payment — Tlie mint has a standard of coinage — Legal tender — Objections to legal j^^'ice of gohl and silver — Earl of Liverpool — Instances of price fixed hy authority in Great Britain — Seignorage on coins for retail business — Waste and folly of incessant recoinage — Legal tender at market j^i'ice the pi'oper nde in large trans- actions. We have seen that there is a very obvious distinction between price and payment ; that prices are named much more frequently than sales take place, or payments are made. If the price is not satisfactory, neither sale nor payment follow. It is only when a transfer of property occurs that payment is required, and that the equivalent employed to effect that purpose is produced. The parties understand each other as fully when the price is named, as when the payment is made. Prices are named upon assumed quantities of the article, to which the price is affixed ; this specified quantity must be carried in the mind, as well as the value of the unit of the money of account. Actual weight or measurement by the parties ascertains the quantity of goods ; coinage is generally tlie mode of defining the quantity of the precious metals employed in payment. Men are not always aware that they employ the money of account in stating the value of their own national coins. When a sale to the amount of one hundred dollars occurs, and payment is oifcrcd in Ijritish sovereigns, their value is stated in accordance with the then ruling price, from $4.80 to $4.90, and the quantity paid is adjusted accordingly : if the payment be made in eagles, the process is the same ; the quantity of gold in ten eagles is readily stated at the known price, ten dollars each ; but if the eagles arc of (12;j) 124 STANDARD OF VALUE. the old coinage, they may be rated at one dollar and five or six cents. The precious metals are, in no proper sense, a measure of value ; they are simply a convenient equivalent, being of very great value in small compass, susceptible of being brought to uniform quality, and of being subdivided into pieces or coins of any required weight. These pieces are not employed as measures ; they are never produced to express or ascertain a price, or show what a purchaser or seller would give or take for any article. If this were necessary, the equivalent in coins would have to be laid down in every transaction, that the party to whom an arti- cle of merchandise was offered might know its price. When a horse is said to be worth an hundred dollars, the price is better understood than if one hundred dollars in silver or gold coins had been exhibited as the measure of the value. Neither does expressing prices consist in naming coins, or any number of them ; for this facility in stating prices is the same, whether, or not, there exist any corresponding coins — as was exhibited in the case of our colonial pounds, shillings and pence. The same considerations prove that the precious metals are not, strictly speaking, employed as a sign or representative of value. They are neither signs nor representatives, in any prac- tical sense of these words. Such expressions have all sprung from the want of attention to the functions of a money of account.^ > The Eai'l of Liverpool, in his chiborate " Treatise on the Coins of the Realm," thus sums up the imperfections of coin as a measure of value : — " 1 Coins are an imperfect measure, because they fluctuate in value even when made of one metal only. Neither gold nor silver vrill now purchase as much of any article as before the discovery of America. As a measure, neither can now be of the same import as formerly. " 2. If coins are made of both metals, they are liable to vary with refer- ence to each other. In the 43d of Elizabeth, fine gold was to fine silver, at the English mint, as 11 to 1. In 1GG3, it was Uglh to 1. Guineas were then coined as 20 shilling pieces. After many fluctuations, and rising as high as 30 shillings, they were fixed by proclamation at 21 shillings. Fine gold is now [1805] as 15/5^/5 to 1. "3. If the sovereign attempts to fix the rate or value at which coins of STANDARD OF PAYMENT. 125 Another attribute frequently given to the precious metals is, that they are a standard of value. This is equally inaccu- rate. There may be a common equivalent — an article that is commonly given in exchange for other articles ; but there can be no standard of the value of all articles of merchandise. Every commodity may have its standard of quality — a certain grade being assumed, with which all other specimens are to be compared ; but no one article can be assumed or regarded as a standard for other things of a totally different kind. Gold cannot, in the mint, be made the standard for silver ; nor can silver be made the standard for gold. Much less, taking the whole range of articles of human consumption, can there bo any standard of value or price to which all can bo referred, or with which all can be compared. The term standard is, then, inac- curately applied, when it is used with any such signification. It is said, for instance, that the standard of Great Britain is gold ; and that, until recently, that of France and the United States was the double standard of gold and silver. Standard of what ? There can be no such thing as a general standard of value. The term standard, thus used, is a common but ill-chosen expression of the fact, that in Great Britain gold is the standard of payment, and that in France and the United States both gold and silver were the standards of payment; or, to adopt legal language, gold in Great Britain, and gold and silver in France and the United States, were a legal tender in payment of debts. If the term standard is employed at all, it should be standard of payment. That there should be some legal mode of discharging a debt is the settled policy of modern times. In some countries, gold is made a legal tender, in some silver, and in some both these diflPerent metals shall pass, a third imperfection is perceived. Their prices in the market will frequently differ from the rate at which he has valued them in coins ; and when coins of two metals are made a legal tender, there will be two measures of property, occasionally differinf; from each other. The speculator will profit by this, and the debtors will pay debts in the cheapest medium. "A fourth imperfection is that which arises from gradual wear, which will lead to the melting of heavy coins, and keeping the light only in circu- lation." — ''Coins of the lleahn," pp. 10, 1 1, 12. 126 STANDARD OF PAYMENT. metals, in discharge of debts. So -willing, however, arc people to receive payment of what is due to them in the ordinary cur- rcncy, whatever it may be, that it is very rare to see a formal tender of gold or silver, or to hear of such a demand. Their use among the banks, and in payment of foreign balances, does not proceed from its being a legal tender, but from pure com- mercial reasons, which would be equally operative, if the law of legal tender did not exist. Gold or silver w^ould seldom be refused in discharge of a debt, even if no law required it. Few, however, will dispute that it is expedient to provide some legal mode of paying a debt, that every man may be able, in some way, to obtain a legal acquittance of his pecuniary obliga- tions, or at least be discharged from liability for subsequent interest, if the creditor refuses to accept the legal medium of payment. It is in this sense that the word standard may be applied to gold and silver, apart from their quality, with some degree of propriety. Though it is the policy of modern nations to establish a standard of payment, and though gold or silver are the best substances for that purpose, not only by reason of their intrinsic value, but on account of their being so generally and so long used as money, there are objections to fixing the price by law at which gold or silver, or both, shall be received in payment of a debt. This has been done in the face of the admitted fact that both the precious metals fluctuate in value. Nothing has con- tributed more to obscure the subject of money than this fixing by law the price of gold and silver. No one has placed the argument in favor of the government fixing the price of the precious metals, in a more distinct and forcible form, than the Earl of Liverpool. He quotes Mr. Harris as differing on the point from Mr. Locke : — " He [Mr. Harris] thought that the regulation of the value of coins — that is, the nominal value at which they were to be legal tender — was a sub- ject of too much importance to be entrusted at any time to pri- vate judgment ; and it is certain that there has generally been a clause in the mint regulations declaring at what nominal rate or value the coins directed to be made should be current. It is, PIXED PRICE OF PRECIOUS METALS. 1'27 indeed, hardly possible that the people in general, particularly those of an inferior class, should be able to exercise any true judgment on the intrinsic or relative value of the metals of which any coins are composed ; and if they were to attempt to exercise such judgment, they would be exposed to perpetual frauds and impositions from money jobbers, and others, who understand the business better than themselves. The practice of all governments, in every age, has coincided with the opinion of Mr. Harris ; and experience has evinced the necessity of fixing, by public authority, the rate or value of coins of every denomination permitted to be current as lawful money or legal tender." ^ This is a distinct assertion of Avhat many deny, that the price of coins under the prevailing systems of coinage is fixed by authority. The reason of this practice of all governments is sound, so far as concerns the classes the Earl of Liverpool would protect. The system of coinage which prevails in England for silver, is a protection to these classes. The same system can be applied, with proper modifications, to gold, and the protection would be equally complete. The objection that the people, in general, are not able to exercise any true judgment as to the value of the metals, is of no weight ; because there is always, and must be, a market price of gold and silver, which does not and cannot depend on the judgment of people, superior or inferior, as to the intrinsic value of these metals. It is a price determined by the course of trade, and the course of procuring the precious metals. The practice of governments, and legislation on this subject, has been too exclusively guided by consideration of the merest retail trade, and should, therefore, have been confined to that business. It is in the power of governments to fix the price of coins, so far as they can be employed in the retail business ; but beyond that, no public regulation is needed; and none can definitely fix the price of coins or bullion, for commerce will make its own price. It is true that governments can enforce a law of ' " Coins of the Realm," page 16. 128 THE PRICE OF THE PRECIOUS .METALS, legal tender, even against the course of commerce and the laws of trade, as to the payment of debts. This is what is attempted by the prevailing system, which results in one price of the precious metals arising from the trade of particular nations, and of the world ; and another price by public authority, according to which debts must be paid, if so demanded. But this demand is almost never made, and so far the law of legal tender is inoperative. In all transactions between the people of different nations, the commercial price of bullion and coins is alone acknowledged. As the people of no class are in the habit of demanding payment in gold or silver at the mint price, it would not disturb them in the least if, in sums over $20, neither coins nor bullion Avere a tender at any other than the current commercial price. The necessity, then, of fixing the price of coins by public authority is not acknowledged, and does not exist beyond the wants of the merest retail trade. Beyond that it is operative only for mischief, and is practically repu- diated by foreign merchants, and by the domestic also, so far as direct dealing in bullion is concerned. It is evident that the Earl of Liverpool labored under the mistake, that prices are fixed and expressed in coins : if he had not been wrong in this, he would have felt less afraid to leave coins, in large suras at least, to the market rate. It is in naming the rate at which coins shall pass, that govern- ments place a fixed price upon gold and silver. It is done, in the case of domestic coins, by prescribing very accurately the weight of the coin, to make it correspond in value to some spe- cial amount expressed in money of account. In the case of foreign coins, it is done by stating the price directly in the money of account. A very general mistake is involved in this, which may be mentioned here, although it does not concern the present question. It is assumed that the circulation of money, the stating of prices, and the reckoning of accounts, will be faci- litated by a coi'respondence between the coins and the denomi' nations of the money of account. This is only true in the merest retail transactions. In large payments, it has operated unfavorably to the interests of trade, by causing the coins to AS DENOTED BY BRITISH COINAGE. 129 circulate at their nominal rate, after tliey began to be seriously deteriorated by "wear, and by fraudulent usages. When this takes place, as has frc(iucntly been the case, the evil is one which becomes yearly more difficult to cure ; and serious dis- turbance, both of the money of account and of the coinage itself, is the final result, with great national and individual loss. What is needed, in large payments of the precious metals, is not a cor- respondence with the money of account, but accurate weights, and the proper standard of quality. If gold and silver were duly assayed, and weighed in bars of convenient size, with the proper stamp of the mint, their value could as readily be stated in money of account as if it were in coins, and it could be paid and received much more readily. Large payments in gold are now made, in England, by weight ; and the same is true, to a con- siderable extent, in France and the United States. The price of the precious metals is fixed, by law, to the minutest possible fraction. The public authority assumes no arbitrary weight for coins, but requires them to correspond in value to some denomination of the money of account. It orders that a certain quantity of gold or silver shall pass for, or be a legal tender for a certain amount. When, for the first time, an English sovereign was coined in 1810, it was required to contain 5dwts. '3,V,j'y grains of standard gold, or 4 dwts. 17i--,'/j7f grains of pure gold : that is, that quantity of gold was then declared to be worth a pound sterling. That regulation continues, with slight change, to this day ; and the unit of the English money of account is thus unhappily placed at the hazard of every fluc- tuation in the price of gold. As the sovereign was intended to be the actual equivalent to the pound sterling, 46,^/y sovereigns were to be coined from the pound of standard gold. By this method, 5 dwts. 3 ,'yy'„ grains of standard gold were made a legal tender for a debt of one pound sterling, and one pound of gold was made a legal tender for .£46 14.f the community, to the whole mass of the people in such proportions its the course of trade, salaries, wages, fees, and otiier modes of income and expenditure, may bring about ; 238 ILLUSTRATIONS. all take tliem freely in payment, simply because they knoAV they will be as freely received. The only question is, will they pass? Whilst they are performing all this movement, the demand for them by the debtors of the bank, which is urgent and imperious, is operating with incessant and anxious vigor to obtain the quan- tity of bank-notes necessary to meet their daily maturing engage- ments. As these engagements, in the first instances, gave origin to the issues of the bank, the amount in circulation is just the amount required. The demand for them is, therefore, equiva- lent to the whole quantity extant. So long as this demand con- tinues, bank-notes must keep their value, as they are in demand to pay the same amount for which they were issued. The process by which bank-notes, in themselves of no intrinsic value, effect a payment in this circulation is the same as that which gives efficiency to a payment made by negotiating pro- missory notes. The miller who sells a lot of flour for bank- notes, and with the same notes purchases wheat, has exchanged his flour for wheat. The merchant who sells goods for bank- notes, and with those notes purchases other goods, has in fact merely changed one lot of goods for another. Thus the bank- notes are a mere medium of exchange. They are received for what is sold only because they will be received for what is pur- chased. It is not even the solvency of tlie bank, nor the fact of its redeeming its notes in gold or silver, which gives efficacy to such circulation of notes. The real character of the notes employed in any transaction can seldom be known to the receiver ; they may even be spurious, yet the validity of the exchange will be the same. He that sells iron for bank-notes, and with the notes purchases flour, has exchanged his iron for flour, let what may be the character of the notes. To make the transaction complete, it is only necessary that the party receiv- ing the notes for iron should know that they will be received without hesitation for flour. Whatever may be the real value or character of the bank-notes, so long as the parties exchanging merchandise continue to make them the medium, so long will their commerce proceed without hindrance. The exchange of goods, in any particular instance, could not indeed be more BANK NOTES A MODE OF ADJUSTMENT. 239 effectual if, instead of notes, gold itself had been used. We do not allege that the medium is a matter of indifference, nor recommend that worthless rags should be employed for that pur- pose ; but we show that it is not the genuineness of the notes, nor their convertibility, nor the solvency of their issuers, that gives validity to the sales of which they are the medium. What is necessary to be done to secure the confidence of the public in bank-notes, so that they may the better perform the functions we have described, and prevent the abuse of over-issues by the banks, is matter of separate consideration. The view which we desire to present here is simply that the exchange of the iron for the flour is not essentially dependent on the actual goodness of the notes used as a medium. The iron may be sold for a promissory note, and that note given for the flour ; or, the iron merchant may simply charge the flour mer- chant in his books for the value of the iron, and be charged him- self for the flour ; and when these books are settled and balanced, the reciprocal payment will be as effectual as if gold, or silver, or bank-notes, or any other medium had been employed. In one aspect of this circulation of bank-notes they operate like counters or tickets ; they are issued in discount of paper given for goods, they are carried to the vicinity of banks, and paid for goods to persons who deposit them in bank, receiving a credit on the books instead ; the banks receiving each other's notes, exchange them, and being thus acquitted of each other, they owe only to their depositors, and this indebtedness to the depositors is li(|uidatcd by the deposits being used to pay and withdraw the discounted paper. This is the channel in which a vast portion of the bank-notes run ; but they are not confined to this course, and therefore run into a thousand channels, ever varying with the diversities of trade, and the schemes and whims of men. But useful and efficient as bank-notes are in various ways, one of which — the saving in the wear of coin — Ave have not men- tioned, there is a limit to their power ; or, rather, other modes of payment have been devised and extensively employed, of superior eflSciency. We find that the circulation of bank-notes 240 DIMINISHED USE OF I! A X K - N T E S . in Gre;it Britain, and in this country, has kept pace neither with the increase of banks, nor with the immense enlargement of business. The circulation of notes by the Bank of England reached, for the first time, the sum of twenty millions sterling in 1806. Ill 1817 it reached twenty-nine and a half millions ; but for the whole period the average is but little, if any, above twenty millions. This is remarkable, if the immense progress of Great Britain in commerce, agriculture and manufactures be taken into account. It cannot be doubted that, if bank-notes were employed now as in 1806 and in 1817, it would require forty millions from the Bank of England. The circulation of 1856 averaged about twenty millions. The act of 1844, which was restrictive of the issue of notes, may have tended to keep down the circulation ; but the average circulation of the ten years preceding 1844 was considerably under twenty mil- lions. It is obvious, from this, that the proportion of bank- notes employed in Great Britain is decreasing, and has been for fifty years. A comparison of bank returns, in this country, for the last twenty-five years, will exhibit a similar result. As the payments occurring in the business of Great Britain have increased in proportion to the population and productive indus- try of that country, which have nearly doubled, it is evident that other modes of payment or adjustment have, to a largo ex^ tent, taken the place of bank-notes. That which has been most extensively employed, and which, to the greatest extent, sup- planted the circulation of bank-notes in Great Britain, and in the United States, is bank credits, which operate under the name of bank deposits. A very large proportion of the indi- vidual paper of men of business, in the United States, is dis- counted by the banks without taking the form of bank-notes, or being included in the circulation of the banks. The proc3eds of the discounted paper are merely placed to the credit of the party, and take their place as deposits. This form of credit will be next considered.' ' The efficacy nnd power of bank-notes as a currency will 1)e further dwelt upon in the Chapters upon the Bank of England and the banks ol' the United States. CHAPTER X. DEPOSITS IN BANKS. A greater facilitij than hank-notes needful for large operations — Banks become the reservoir of all currency not in actual use for retail trade — Tliis constitutes the great fund employed in large payments — The credits form the fund out of which debts are paid — Each depositor employs his own credits to pay his oivn debts — All the credits ivill pay all the debts — Tlie deposits are virtually a system of accounts kept by the banks for their customers — Indebtedness of business chiefly mutual, and settled by set-off — Demand for deposits — Circulation — Absorbed by the banks in pay- ments of discounted paper — The banks give credits on their books for paper, and receive those credits in 2>aynient. The concentration of payments at the great centres or entre- pots of commerce enables the hanks to afford another facility of payment far more effective and important than bank-notes. In the large payments incessantly going on at these points, count- iner bank-notes would be considered a serious obstruction to busi- ness ; and keeping them on hand for constant use -would bo regarded as a needless risk, burden and expense. At such places merchants and others keep open running accounts with one or more banks, depositing bank-notes and money as fast as received to the credit of their accounts; thus making the banks the receptacle or reservoir of all the currency and money not in actual use for the operations of retail trade. The banks, in this ■way, absorb a very large portion of all the currency in circula- tion. These deposits in the principal cities greatly exceed in amount the circulation of the banks, and their operation or working is far more efficient and active than that of the bank- notes. One effect is not only to return to the banks immediately all the notes not required for circulation, but to save the issue of immense sums. When individual paper is discounted, the 16 . (--^1) 242 DEPOSITS — WHAT TIIEY CONSIST OF. applicant, instead of receiving bank-notes, takes credit for the proceeds in his deposit account, and draws upon this account to meet his maturing payments. The paper discounted is daily falling due, and being paid by checks drawn by the debtors on their bank account. The banks are constantly discounting newly-offered paper, thus keeping up the accounts of the depo- sitors. While these accounts are continually used up and extin- guished on one side, they are continually renewed and extended at the other. It is but to a very small extent, probably not one per cent, of their amount, that deposits are made in gold or silver ; they consist in part of bank-notes absorbed from the cir- culation, but chiefly of credits granted upon the discount of com- mercial paper. The credits thus granted give the option to take bank-notes, if required ; and they serve not only to pay debts at the bank at which the account is kept, but at other banks in the vicinity. This of course leads to large transactions among the banks. Individuals find their liabilities scattered through many banks, all which are paid by checks on the bank in which their account is kept, or by bank-notes taken up by check for that purpose. Thus all the discounted paper, and all individual notes deposited with the bank for collection, are paid by the working of these deposits ; the bank is paid in its own notes, in a check on itself, by charging the debtor in account, or in the notes of or a check upon another bank. Men of business who keep accounts in bank, are creditor and debtor during the year to nearly the whole extent of their business. They give their individual paper as evidence of debt in their purchases : they take paper from others for the amount of their sales. The banks discount the paper they take, and demand payment of the paper they gave. The bunks, in effect, keep a set of books of account for their cus- tomers, in which they are credited for what is due them from others, and debited for the amount of their debts. The conve- nience and advantage of these books may be better understood if we notice that the bank does not merely give its customer a credit for the amount of a bill or note, engaging to return the same bill or note on demand, or the amount when collected. It gives an open credit, which enables the customer to draw as HOW EMPLOYED. 243 occasion requires for any sum, large or small, within the amount of the credit. In this shape the credits of a customer become perfectly manageable and applicable to the payment of his debts as they mature and are presented. What is done for one, is done for all. The whole amount of the commercial or iu'lividual paper discounted at the banks is susceptible of being employed in this very effective way. The banks become so many reser- voirs of the means of commercial liquidation. Notes and bills merely lodged for safe-keeping or collection Avould afford nc advantage to be compared with the actual process. By the mode adopted, the whole proceeds of all the commercial paper discounted is constituted a fund, which being drawn upon as required by checks, becomes more convenient and effective than money in discharge of debts. By a single check, the work of a moment, any sum can be instantly paid with its minutest frac- tion. That which, however, gives real foundation and continuous efficiency to this rapid and easy mode of payment, is. that this great fund mainly belongs to those who are, in fact, creditors and debtors of each other. Each individual is both creditor and debtor; and the chief care of each is so to manage his credits as to make them available in discharge of his debts. This depo- sit fund is a vast facility for this purpose ; it is a safe and good fund for those who use it, because it safely and finally dis- charges their debts. Gold and silver can do no more. If a merchant owes $100,000 in various sums, upon promissory notes, to divers persons, and if various persons owe him $110,000 upon notes given to him, he can in no way be more safely or legitimately accommodated than by being enabled to apply $100,000 of what is owing to him in discharge of the $100,000 he owes. For this purpose it is obviously not neces- sary that the amounts to be thus employed should be converted, or even be convertible into money. The banks merely convert it into a fund, upon which the parties concerned can draw. If a merchant, therefore, who has $110,000 to his credit in bank, draws upon this fund for $100,000, and applies it in payment of that amount of debt, he is debited the amount, and his debt is acquitted. The fund for payments thus furnished on the 244 FUND FOR PAYMENTS. ])ook-5 of the bank is continually replenished by constant streams of fresh business paper, and constantly drawn off and diminished by the amount of debts paid. Its effect is to enable the cus- tomers of the banks to set-off their credits against debts "vvith more or less facility, according to the varied circumstances of each case. Tiie business or commercial paper of a community is thus con- verted, not into money, but into a fund, the amount of which and all the dealings in it are expressed in money of account. All are willing to receive payment of what is due to them in this fund, because with it each one can pay what he owes to others. No more acceptable medium of payment can be found or pro- duced than that which will pay debts ; for, among civilized people, there is no necessity of business more imperious than the payment of debts. No one Avill trouble himself to exact pay- ment of what is due to him in gold or silver, if he can pay the debt he owes by a check on a banker. No individual can desire a greater facility for payment of his debts than that of applying to that purpose the debts which others owe to him. This involves no employment of the precious metals. The money of account, in which all amounts are expressed, is common to creditors and debtors, and understood by both. What one person can do, in applying his credits to his debts, any number can do. Thus the credits become the fund out of which the debts are paid ; but as the operating parties are mainly both debtors and creditors, the whole payment is a mere process of adjustment by which those concerned balance their accounts. It is quite possi- ble, theoretically, to bring the mutual claims of all these persons into a series of accounts with each other in one book, and thus balance them, without checks or money, or any so-called deposit. The banks keep open accounts with each other, which daily exhibit the operation of these payments. The bank upon which its customers have draAvn most largely, whether in notes or checks, will fall in debt to the others accordingly ; but each will be able to present claims upon the others in proportion to the am.ount it has received in checks upon them or their notes. Each will be found to stand, in regard to the others, a debtor BANKS AND THEIR CUSTOMERS. 245 and creditor. These amounts arc adjusted every day, once in two or three days, or as convenience may dictate : each one has a balance, favorable or unfavorable, with every other ; and when their accounts are settled, the whole of these mutual claims, except the balances, are paid and forever extinguished. Banks keeping such mutual accounts soon learn the course of trade, and are able to regulate their business with reference to this mutual indebtedness, so that the balances fluctuate but little, and the amounts to be paid on settlement will rarely exceed five per cent, of the sum paid off. In each bank the same process goes on between individual depositors as among the banks. So far as there are mutual claims among those keeping accounts at the same bank, they will be settled, however complicated, by the working of the deposit account. Each customer of a bank is not only creditor and debtor in certain amounts, with refer- ence to his whole business, but he is debtor and creditor in cer- tain amounts with other customers of the same bank. So far as this mutual indebtedness may exist between the customers of the same bank, their debts will be paid by check on the bank, and what one account gains another loses — the deposits are neither increased nor diminished. The bank is continually granting credits, which go to swell the sum of its deposits ; and it is continually receiving payments in these credits, which ex- tiniruishes so much as is thus received. As banks receive their own notes in payment of all dues to them, so to the same effect they receive the checks on themselves of any of their depositors. The deposit is very rarely of coin or bullion, or other article of intrinsic value ; its circulating value arises from the fact that, like bank-notes, it will make purchases, and pay debts. We have seen that the demand for bank-notes to meet bank engagements, and others as pressing, is stimulated by a necessity the most in- exorable — the necessity, among merchants, of punctuality in their payments. To efiect their payments, merchants spare no anxieties, labors, nor sacrifices. This is the practical and most powerful support of the issues of banks of circulation ; and it applies as strongly to the deposits or credits granted in that shape, as to the notes of a bank — the deposits being far more 2i6 DEPOSITS NOT MONEY. employed in paying debts than bank-notes. A man may refrain from incurring; expenses, to pay which the bank-notes are usually employed ; but he cannot refrain from paying his debts, even when he h.is neither notes nor deposits, unless he is ready to suffer bankruptcy. The checks upon these deposits are, therefore, as good payment as the bank-notes, not because they are, like them, convertible into gold or silver, but because they are, like them, receivable in payment of debts. Nearly the whole of the large purchases of commerce are made upon pro- mises of payment at a future day ; whatever is receivable for these payments must be, for the occasion, as desirable as gold or silver ; for these can make no more effectual payment, and are far less convenient and safe. The bank deposits are the grand receptacle of all the funds not needed for immediate use, and of the large sums required for the heavier payments of trade. Being composed chiefly of credits granted upon the discount of commercial paper, they do not spring from gold or silver, they do not turn into gold or silver, they do not represent gold or silver : if they may be said to represent anything, it is the value of the merchandise, the sale of which upon credit has given existence to the mass of both bank-notes and bank credits. The operation of deposits is, like that of bank-notes, both direct and circuitous. The gold or silver ^Avhich is deposited in banks to credit of him who transfers his ownership by check continues thus to circulate, until the amount or the equivalent is withdrawn or paid to the bank. So the credits granted upon discount of individual notes may be trans- ferred without limit from one to another, each time making a payment, until absorbed by the constantly recurring demand of the bank upon its customers. Nine-tenths of the amount of the deposits in our banks consist of their own notes, and of the credits granted as above ; yet all blend into one common mass, and effect the same results as if the whole deposit had been gold or silver. The successful operation of this most efficient of all the means of payment is not dependent upon the actual employment of the precious metals, coins or bullion. It neither excludes nor BANK OF NORTH AMERICA. 247 requires them. A merchant -who pays, in this ^Yay, to the amount of half a million yearly, may not, altogether, have depo- sited a thousand in coins. The amount to his credit is constantly growing by receipts, as well as diminishing by payments. The result at which he aims, and which he effects, is to apply, in the progress of his business, the proceeds of his sales to the payment of his purchases ; to set-off his credits against his debts. Where the creditor and debtor are depositors in different banks, the debts are paid with equal facility, their payments merely leaving matter for adjustment between the several banks. If we sup- pose that all the business men of Philadelphia had deposit accounts in the Bank of North America, when it was the only bank in that city, the adjustments of all would have been com- pleted on the books of that bank. Each depositor would have to pay a certain amount to others in that city, and others in that city would have to pay a certain amount to him : each depo- sitor could have drawn upon his account for money deposited, and for the jsroceeds of notes discounted, in payment of his debts as they matured- If we suppose that, Avhilst this was the only bank in the city, there were 1000 persons who were thus creditors to, at least, the average amount of $10,000 each, and debtors to at least the same sum ; and that there were 100 per- sons who were each, in like manner, creditor and debtor to at least the sum of $100,000 ; and that there were 10 persons each, in like manner, indebted $200,000 : the sum of this in- debtedness would be $41,000,000 : if this amount were run off three times in a year, it would make a total of $132,000,000, or $11,000,000 for each month. Whatever course might be taken in regard to the suras or balances owing beyond this mutual in- debtedness, nothing else would be necessary for the extinguish- ment of tills large sum of $11,000,000 each month than draw- ing and receiving checks, with corresponding entries on the books of the bank. Thus would be extinguished the individual paper discounted by the bank, corresponding Avith the commer- cial transactions which had given rise to it. For goods received the depositors had issued their notes, and for goods delivered they had received notes ; and all these had been discounted by 248 NATURE OF DEPOSITS. the bank, and converted into a fund available for the payment of all, because it would be of the very same nature as the debts it Avould be employed to pay. The bank which would have pur- chased all these notes merely Avith credits on its books, would receive these credits in payment when the period of maturity arrived. We may attain, perhaps, a more distinct idea of the effect of the deposit system of payment, if we suppose the mer- chants in a city without banks to have adopted a mode of pay- ment or adjustment of this kind. Having opened an office, and appointed their agents for its management, they deposited, in- stead of money or bank-notes, simply their business paper, notes, and bills of exchange, receiving credit for the amount in the books of the office, less the interest till maturity. A fund would be thus constituted of all the commercial paper of the city. When a note or bill matured, the debtor or payer would simply draw his check for the amount to be paid, and thus reduce the sum of his credit so much. If the party paying had not credit on the books to a sufficient amount, he would either borrow from those who had, or pay the deficiency in money. It will be noted that, by this mode of adjustment, the sum applicable for pay- ment would exactly correspond to the amount of the credits granted, less the interest or discount, which would have to be paid in money, or be otherwise arranged. The money paid in by those whose credits were unequal to their debts would go to those whose credits exceeded their debts ; and the money paid in as interest, or as the difference between the proceeds of a note and its face, or nominal amount, would belong to the office. Thus this business would close and balance as soon as all the paper matured ; or it might be continued at pleasure, the new credits being granted according to the regular progress of business. We have supposed deposits thus created to be only used in payment of the paper which gave rise to them ; but they might be employed for other payments. The demand for them to pay the paper on which they were founded would be urgent, and would proceed from the holders of the goods, the purchase of which gave origin to the paper deposited ; and yet there might BALANCES OF TRADE. 249 be intervals, whilst the paper was maturing, in which these depo- sits could be freely circulated as a currency, by means of checks, throughout a whole commercial community. Their value would be undoubted, because the demand by those under the absolute necessity of obtaining them would ensure their commanding at all times, in any article of trade, their nominal value. These credits would, therefore, circulate just as the deposits of a bank circulate ; for if the debtors in these deposit accounts should fail to secure the amount of deposit required to meet their engagements, they must pay in money, and thus furnish the fund to repay the credits or deposits when demanded by those into whose hands the circulation may have carried them. A very efficient circulation of deposits might be originated and kept up on this plan, upon the basis of commercial paper, continually discharged by payment, and renewed by fresh sup- plies. To the extent of the direct adjustment or set-off of debts between the parties to such an arrangement — that is, not in- cluding the circulation of which we have just spoken — the whole result may be attained by simply opening an account at a suit- able office, and charging each accountant with all the notes and bills he is bound to pay, and crediting him with all he produces against others. This would be a direct set-off of each one's credits against his debts, and an exhibit of balances showing what sum each one had to receive or pay. The whole of the equal indebtedness would be extinguished at once, and the amount to be paid on the debtors, balances would be exactly equal to the amount to be received, so that these balances paid in would dis- charge the whole. The course of trade shows that, in any mer- cantile community, these balances range between five and ten per cent. ; so that, in adjusting an indebtedness of a million, the sum of the balances would range between fifty and a hundred thousand. In the working of the actual deposit accounts of our banks, it is rare that these balances are all withdrawn from bank ; they are, in part, lent by tlie holders to the debtors to meet their deficiencies; or, being allowed to remain, tiieir accumu- lation enables the bank to extend accommodations to those whose balances are unfavorable. In process of a fcAv months, the 250 RESULT OF DEPOSIT SYSTEM. balances greatly change ; many of the debtors and creditors change places. The system of adjustment just supposed might be continued from month to month, or year to year, the opera- tion of the book entries being sufficient to effect the payments through any number of fluctuations. The main result of the deposit system, as now managed by our banks, is a mode of keeping the accounts of persons who have large mutual transactions. This will be more apparent, if we suppose another mode of accomplishing the same payments. Let each one who makes a sale of merchandise charge the pur- chaser with the amount; and when he makes a purchase, let him credit the seller with the amount. If an abstract from all the books of those who would otherwise be the depositors were fur- nished for the purpose, an account could be stated with each person, showing all his transactions, exhibiting the resulting balances and the amount extinguished among the whole. The promissory notes and bills of exchange usually employed are evidences of debt arising upon sales of merchandise or other transactions ; the abstract of entries above supposed would fur- nish evidence of the same debts, susceptible of payment in the same way. The actual system of payment now in use in the most commer- cial nations is that the business of trade — that is, the sales and transfers of merchandise — proceed among merchants according to their convenience, and their opinions of what will best meet the demands of consumers, and promote their own interests. This process of distribution by the merchant to the consumer is based mainly upon the confidence of merchants in each other. The goods are delivered at once — the payment is deferred. The goods proceed by a thousand channels to their final desti- nation — the Avhole business of payment is reserved to bo sepa- rately accomplished. These payments are eftected by the em- ployment of separate agencies, professions, institutions and hosts of men ; as well as by the aid of books of account, promissory notes, bills of exchange, bank-notes, bank deposits, and gold and silver. In this system sometimes one way is best, and some- times another ; sometimes one agency or agent, and sometimes CONCLUSION. . 251 another ; sometimes notes, sometimes checks, sometimes gold, and sometimes silver. All these are but various means of attain- ing an end. The usage is always to employ the easiest and least expensive mode that will be effectual. It happens rarely, perhaps, that the parties paying have their choice of all the various modes of payment ; they can choose only among the facilities which may be offered, or may be within their reach. Looking at the whole process of payment in any commercial country, it presents a mass of details, and a complication of pro- cedure, which defies the hand of analysis, or the eye that would pierce through the whole. It cannot be understood nor described by any direct examination : various attempts to do this have failed, as the innumerable treatises upon money and banking amply prove. Our object has been to show distinctly the end to be accomplished ; to exhibit clearly the most effective pro- cesses of payment ; to show how they operate singly, and in various combinations ; and to leave each reader to follow these processes as far and as faithfully as his facilities for informa- tion, and his powers of observation, may carry him. CHAPTER XI. CLEARING-HOUSES. 21. Tlie Clearing-Tioiise of London — Private hankers of London — Con- centration of payments — Mutual adjustment — Clearing-house — Mutuality of debts — Processes and forms at the Clearing-house — Example of clear- ing — Amounts cleared — Bullion Report of 1810 — Sir Henry Thornton — Relations of clearing to commerce — Tlie Banks and their customers — Payments of foreign trade — Domestic paytnenfs of special districts — The Credit System — Keiv channels for the precious metals. The vast accumulation of payments in London led the pri- vate bankers, in "whose hands the business, or a large proportion of the business "was concentrated, to adopt a plan for economi- zing the use of bank-notes, for saving time and trouble, which may fairly claim to be one of the highest exhibitions of the power of the credit system. The country merchants and bankers who made and received their payments in the metropolis, kept their accounts Avith these private bankers, many of whom had thus committed to their keeping very large sums of money. A great average balance remained in their hands, the use of which was one of their principal sources of profit. As no firm with more than six partners was allowed to issue bank-notes in Lon- don, these bankers never felt themselves able to compete with the Bank of England in that department of banking : issuing no notes of their own, they used only those of the Bank of England, when their payments required the use of notes. They all kept accounts with their customers, and immense sums were daily paid by checks and transfers on their books. They paid out, Avhcn required, for these checks the notes of the Bank of England ; and were, of course, obliged to keep a supply con- stantly on hand for that purpose. These bankers, besides having (252) LONDON BANKERS. 253 to pay out bank-notes on the order of their customers, found themselves daily indebted to each other in immense sums accru- ing from tlie system of concentration which has been noted. Each banker was daily receiving from his country correspond- ents drafts and bills for collection and discount, payable at the counters of other bankers ; and all "were thus daily subjected to heavy demands from each for the amounts of these drafts and bills. These mutual demands were greatly increased by the checks and bills and drafts of city customers : so that, each afternoon, every banker was called upon to disburse large sums of bank- notes to every other banker. Payments were to be made and received between more than forty banking establishments ; and this process necessarily involved the daily use of very great sums in bank-notes, or the keeping a heavy deposit account with the Bank of England. This would have required, if notes were used, a large proportion of the actual circulation of the bank ; and, of course, that these bankers should keep this large amount in that disposable form which would prevent their making any profit upon it. Under such circumstances, it is not surprising that the active mindd of the bankers recurred to the mode of payment which Ave are about to describe. It is not now my pur- pose to examine the steps by which they perfected the institu- tion of the Clearing-house, but only to exhibit its uses and powers, as a means of payment or li(|uidation, as managed in the state of perfection to which it has been now brought. Every man who purchases and sells, who receives payments and makes payments, finds at the end of the year a balance for or against himself on the whole year's transactions, small, how- ever, in comparison with the sum of all his dealings. If lie takes credit for all his purchases, and gives it on all his sales, he may apply his credits to his debts, and thus extinguish both ; and that would be perfectly practicable, if his purchases and sales are made with the same person. It would be only balancing their books of account. If he deals, however, with a great many diflferent persons, i)oth in purchasing and selling, and gives and iakes credit in every transaction, he has only to call in his 254 THE LONDON CLEARING-HOUSE. credits, and with the proceeds pay his debts ; but this is imprac- ticable in the complications of business, unless bj means of cir- culating credits, such as bills of exchange, promissory notes, deposit accounts, and bank-notes. The concentration of pay- ments at London arose out of this mutual interchange. Very large sums were to be paid daily, and these daily payments were an adjustment of the accounts between parties who had been both buyers and sellers. One class of merchants have large sums coming to them, but they owe heavy amounts to others ; hence an immense accumulation of mutual demands. If all these had met at one banker's, a very large proportion would have been extinguished at once upon his books. Each banker, however, being for the time owner of all committed to his care, the process of adjustment was modified. All mutual claims meeting upon each banker's books were extinguished there, and the bankers became creditors and debtors of each other for all the credits and debts of their customers which had not met and been settled by the parties, creditor and debtor, being customers of the same bank ; and this very large indebtedness was that which was intended to be adjusted and paid at the Clearing- house. Its mode of liquidation, however, deserves more par- ticular mention. In the old post-office building in Lombard-street, London, is, or was, an apartment devoted to the business of the Clearing- house. This establishment is kept up for the benefit, and at the expense, of certain private bankers in the metropolis, who are associated for that purpose. As the institution implies a very considerable degree of mutual confidence, ic consists only of such as have chosen to enter into the mutual arrangement.^ Two inspectors are appointed to preside over the process, to pre- vent mistakes, and to authorize the payment of balances. Each banker has his drawer or box in the clearing-house, and each one or more clerks, who carry thither, at several stated hours on every day, all the claims which his house, up to that time. ' It has recently admitted into its circle many institutions formerly ex- cluded, especially the joint-stock banks. THE LONDON CLEARING- HO USE. 255 has on all the rest. The respective clerks, after charging them on their balance-sheets, drop into the drawers of each house all the claims upon it. This process is continued until four o'clock in the afternoon. Then each clerk finishes a balance-sheet, which he had commenced and carried on as the claims were deposited. They are provided with alphabetical printed lists of the clearing bankers, with columns ruled for debtor on the left, and creditor on the right side. Each clerk puts the name of his own house at the top of his sheet, which exhibits, when finished, the balance which his house owes to others, and what others owe to it. The summing up at the foot of the debtor side shows how much his house owes altogether, and that on the creditor side how much all owe to it ; and the balance between these totals shows how much his house is to pay or to receive. This amount each clerk is enabled to make up by a constant inspection of the drawer of his house, where he finds the claims against it as they come in. Every bill or check has the name of the banker or firm to which it belongs written across its face, thus indicating to whom the amount must be credited. They keep a minute of the claims upon every house as they deposit the evidences in the drawers, and thus are enabled to make a balance with each, and transfer it to their balance-sheet, by the hour of four o'clock, when no further entries are permitted. They then compare their balances, which must agree, or there is error. If there is a balance due by one house to another, it must, if right, be the very sum which that house claims. After their balance-sheets are all made up and verified by comparison, the inspectors make up from them a general balance- sheet, by debiting each bank with all it owes, and crediting it with all the others owe to it. The balance to be paid by each bank is placed on the same line with what it owes, in a column on the debtor si£1, 560,000,000 of payments in a year. The whole bank-note circulation of 268 ONE-POUND NOTES OF SCOTLAND. Scotland seldom exceeds £3,500,000, or only one -ninth of the deposits ; whilst the circulation of the Bank of England is gene- rally larger than its deposits. The superiority of the Scotch system is fully shown in this double economy of coin and notes. That this economy is the result of their system of management is apparent from the fact that banking is free, and that there was no restriction upon the issue of notes until the Act of 1844, which onl}^ restricted them to the amount shown to be required by their business on the average of several years. In England, coins are used for payments below £5 ; in Scot- land, £1 notes form over two-thirds of their currency ; and yet, in Scotland, the whole circulation of notes is not greater, in pro- portion to the population, than in England. It is now not far from one pound to each person ; but if XI notes were issued in England, it is believed that £30,000,000 would be quickly taken into the circulation, which would make two pounds to each per- son. It is rather rare to see gold coins in Scotland ; their £1 notes almost supply the place of sovereigns. That the people are, in this respect, well satisfied is apparent from the steady determination with which they defend their one-pound currency against the jealous attacks of English currency-mongers.' ■ See the celebrated letters of Walter Scott, on the currency of Scotland, under the riO)n du guerre of Malachi Malagrowther ; II. Report of 1841, Bauka of Issue, Appendix. DOMESTIC EXCHANGE. 269 ^ 3. Bank adjustment in the United States — Clearing between the banks in the United States — Mutual accounts and correspondence — Separation of sale and distribution of goods from payments — Doviestic exchange — • Balances of home trade — The correspondents of banks their mode of clear- ing — Mutual debts the basis of this adjustment — The system of clearing among the banks of New England at the Suffolk Bank of Boston. In the United States, the clearing or liquidation among the banks of all mutual claims, except those arising from their circu- lation, is mainly accomplished on their ledgers, and by their cor- respondence.' There is a constant necessity for this corre- spondence, arising from the mutual transmission of drafts, checks, promissory notes, bills of exchange, &c., for collection. Upon these collections a large portion of their mutual demands arise. It cannot be necessary to particularize that every city or district of country, as a whole, must have claims upon others, and must, as a whole, be indebted to others. These mutual de- mands are entrusted to the banks for collection ; or, what is the same in the view now taken, these claims are purchased by the banks, and collected for their own account. In this country these payments are made through tlic agency of the banks almost wholly ; for, when exchange brokers and merchants inter- vene in the business, they generally employ the banks in some stage of the process. In this way the payments arising upon the trade between the East and the West, the North and the South, and among the great cities on the seaboard, are made upon the books of the banks. Whatever sum is received for account of any bank by another, is credited accordingly, and whatever is drawn for is charged; so every transaction of debtor and creditor is made an item of book account, which runs on from year to year, being balanced as often as necessary to make out the balance-sheet, or state of the bank. So far as the respec- tive charges and credits balance each other, their mutual in- debtedness is paid, and the claims held by the customers of the ' Since this w;is written, clearing-houses have been established in Phila- delphia and New York, of which some notice will be taken in the Chapter on the Banks of the United States. 270 DOMESTIC EXCIIAXGE. one bank against the customers of tlie otlicr are discharged. The effect is the same as if the accounts had been kept directly between them ; the bank has acted ;is their book-keeper. This adjustment, however, among banks has a wider and more com- plex operation, as carried on among a number of banks. One bank may have on its books accounts with one hundred other bunks, and each of the hundred may have accourits with as many other banks. These circles of banks keeping mutual accounts may be ramified over the whole country, running from the far North to the extreme South, and from the East to the far West. The operation is the same in affording a facility to every creditor to present his claim against his debtor through the banks, and to every debtor to make payment in the same way. The banks in this business may be taken as representing the locality in which they are severally situated, and as holding the credits or claims of their customers upon iill, however distant, with whom they dealt : so they respectively stand ready to receive, from their immediate customers, whatever they owe to all others. This is the domestic exchange of the country. The goods have, by the action of merchants and others, been bought, sold, and distributed according to the course of trade, and the demands of consumption ; the payments arc reserved for the agency of banks or bankers. Each locality, or commercial district, is cre- ditor for what it has sent into the market, and a debtor for what it has purchased. The commercial pnpcr to which this commerce has o-lven rise is remitted to the banks, and thus every bank will take credits for the exports of its district, and apply those credits to meet the claims upon that district for its imports. These domestic payments are, then, effected upon the books of the bank, as already stated ; and as such accounts must con- tinue to run, even the balances may remain to be adjusted, from time to time, according to the course of trade, and the corre- sponding course of payments. These balances may be trans- ferred to any part of the United States by mutual checks, drafts, &c , among the banks ; so that a vast adjustment of balances must take idace among the banks, besides the accounts to which the immediate transactions of their customers give I'ise. MUTUAL B A X K ACCOUNTS. 271 This adjustment is readily accomplished by mutual checks, if the trade has been sound and equal ; if not, it may be necessary, at some point, to pay ultimate balances in coin. The banks in the West may fall largely in debt to those of the East for goods purchased for Western consumption ; but that debt may be paid by drafts of the banks of New Orleans upon the Eastern banks the market of New Orleans being that at which a large portion of the customers of the Western banks make their chief sales. So the banks of other districts may become indebted in heavy balances to other baidvs ; but they can meet this indebtedness by large credits to Avhich they may be entitled elsewhere. The result of these bank accounts, and the correspondence by which they are kept up, is the same as if they all had a common clearing-office, at which eacli should be debited and credited with all they had to pay, and all they had to receive. Each bank account would then be similar to the clearing accounts of each bunker at the office in London. The effect of the whole proceeding in our banks is, that the liquidation of the domestic exchanges — the payments resulting from the domestic trade — is accomplished on the bank ledgers, and the balances are dis- tributed according as the parties are entitled. It will be noted that, taking the whole of any series of transactions, the amount to be paid is the same as that to be received ; tliey are, of course, equal. The balances, however, result differently at dif- ferent times: and there is a continual transfer of funds takint two hundred and fifty years of its history, it fully vindi- ' " There was at Venice that which, more than any previous commercial policy, opened men's eyes to an advantage of great importance, contributing alike to the prosperity of the State, and to the benefit of trade. She was the glorious inventress of the Guarantied Bank [banco g.arantito], differing both in its operations and by its security from common banks, as much as fniia those called public banks. For, in the case of the Guarantied Bank, if robbery occurs, if the servants and officials of the bank commit fraud, if the managers administer it badly, the government is held responsible for the whole; no private person suffers any loss. But in the case of other banks, the government is only bound to do justice, by giving all the assist- ance it can in the discovery and punishment of the criminals, and for the recovery of the loss." — Broggia Trattate delle Monete, vol. ii., p. 270, being vol. v, in Cusiodi's Collection of the Ecoiiomisti Italiani. THE DANK OF VENICE. 291 cated, in that period, its power and utility as a financial agent of the republic, and its efficiency in promoting the movements of commerce. There is no question, although we have not the details, that the government had found it perfectly easy to enlarge the amount of the original loan or stock of the bank, as the demand for its funds generally exceeded the supply. All money deposited for the purpose of obtaining a credit in bank was accounted an addition to the original loan, and as such taken into the public treasury as money lent to the State. Every such investment increased the stock of the bank, and replenished the treasury of the republic. If individuals could make purchases and pay debts by transfers in bank, the public treasury could well afford to receive, in payment of its dues, credits in bank, as that would be only equivalent to taking up its own obligations. Thus, the more these credits were employed, the more the demand for them increased, the more rapidly money flowed into the treasury, and the more readily the government could afford to receive payment of its revenues in the funds of the bank.^ The way was opened, by the experience of two centuries and ■ " By degrees the government introduced the usage of making certain payments by drawing upon the bank, in place of making them in specie. It commenced by receiving these drafts into the public treasury without hesitation ; and when this usage became established, a law was passed, that bills of exchange might be paid in money of the bank, whether foreign or domestic, when drawn for above the sum of three hundred ducats. These drafts could not be refused, unless stipulation had been made to the con- trary." — Daru. de Hist. Venice, vol. iii., p. 73. " To give these bank credits great rapidity of circulation, an account of debit and credit was opened with every proprietor, admitting of the prompt transfer of credits ; and that these might be readily effected and accepted with safety, it was decreed that they should not be seized in execution for debt, nor be the subject of mortgage." — Ihid., p. 74. This statement may not be strictly correct, in asserting that the enact- ment, that all payments not otherwise agreed should be made in bank, was the result of the use which the government had made of the bank. This decree was the result of the efficiency of the bank, as long experienced and admitted, and of the confidence that both the people and the government would derive Dictionnaire de Econ. Politique, Paris, 1852, Art. " Banquo.'' 332 M. COQUELIN AND M. GAUTIER. ' The explanation of M. Coquelin is still more unfortunate than the position of M. Gautier. It is really very careless, if not ex- travagant, to say that the chief service rendered by the earlier banks of Europe Avas the employment of this ideal money (mon- naie ideale). It is certainly to the credit of Coquelin, that he perceived and appreciated the use of these moneys of account ; but how could he fail to perceive their universal use, if he really understood their application in those banks ! The reason he gives why the banks ever resorted to their use is nothing to the purpose. The bad state of the coins, and the debasements of the coinage by public authority, "vvere inducements to the establishment of the banks, but had nothing special to do with the ideal money, or moneys of account, which grew out of the usages of the banks, and the mental habits of a commercial people. The agency of these moneys of account in the commerce of that period must have struck the mind of Coquelin with great force, to have in- duced the remark we have cited : it only needed that he should open his eyes a little more, to see that the service rendered by moneys of account in that day have been far transcended by their agency, in later times, in all banks, and in all the transac- tions of the credit system, of which they are the chief instru- ment. To exhibit still more evidently the difficulty of explaining the money of Genoa by those who do not observe the distinction be- tween money and money of account, we subjoin the following long extract from the most elaborate work upon the finances and Bank of Genoa Avhicli has come to our hands. We quote from a chapter, the title of which is : " The different kinds of money used at the Bank of St. George." ' " In a city like Genoa, essentially addicted to commerce, the increase (I'aumento) to which the effective money Avas subject, in the progress of years, could not be overlooked in the payment of debts of long standing ; and, in fact, we find that a law of the ' Memoire Sopra I'antico Debito Pubblico, Mutui, Compere e Banco di S. Giorgio in Genova. Dell Carlo Cuneo. Genova, 1842, 8vo., chap, xxvi., p. 127. The author was Inspector of the Royal Archives. . MONEYS OF THE BANK OF GENOA. 333 republic, bearing date 1G37, recognizes this obligation in regard to ancient debts.' In the Bank of St. George, however, where they -were always careful to observe equality and justice in the payment of their dividends, they always calculated the increase which, in the lapse of time, had taken place in the lire gianuina; and, therefore, they always reduced the lire gianuina to the value it had at the time the payment was to be made. In this way, it was found that the hundred lires di numerate, or gianuina, of which the bank share was originally composed, Avas valued in progress of time at lires 194.4 fuori banco money." Such an increase, however, is not to be confounded with the value of the share in commerce, which, besides the ' above increase, was greater or less, according to the greater or less credit of the bank in public estimation, as happens now every day with the current price of the public funds. The moneta di paghe was, in substance, the value of the paghe written in moneta di numerato, reduced as above into moneta fuori banco. It was of somewhat less value than moneta di nu- ' Tlic increase here intended is not of the quantity of the money, but the price. It is notorious, however, that during the whole of the 15th, IGth and 17th centuries, the value of silver was declining. There was, strictly, no such increase as the words of the author import. He, no doubt, refers to the fact 'that the money of account had changed, as it did in England, and every European country. The lire of the money of account expressed a less value, in the progress of time, than it had done before. The lire of the money of account in 1550 expressed a very different value from that of 1050. A specific coin or weight of silver was nominally of greater value, because the word lire, in which values were stated, expressed a less value iu 1650 than in 1550. So, in England, a shilling once denoted the equiva- lent of the 2>j of a pound of silver; now it only denotes g^ of a pound of silver. The increase spoken of by the author was a depreciation of the money of account consequent upon the abuses of coinage by public autho- rity, by wear of coins, and by frauds, as occurred in France and p]ngland. ^ The author is more happy in stating what was done by the bank in the payment of dividends. Tlio shares consisted originally of lOU lires, as they, were coined in 1407. In declaring tlie dividends two centuries later, they reduced the value of that coin to its true rate or price at the time the divi- dend was declared. This was done by the money of account used iu the bank, which had not followed the fluctuations of the money of account fuori banco. 034 APPARENT INCREASE IN VALUE OF COINS. merato reduced into moneta fuori banco, because, as we have shown, the written paghe did not become numerato until four years ; therefore, the written moneta paghe was subject, in com- merce, to a discount greater or less, according as the paghe were of the first, second or third year/ " The moneta di banco and fuori banco did not then proceed from any special operation or purpose of the Bank of St. George,^ but, as we believe, from a continual inspection of the different money-tariffs published by the Magistrates of Money. Their origin seems to have been in this way : — " The republic, by the above cited law of the 19th of Septem- ber, lt)o7, so much extolled by Carli in his great work upon money, legally established, perhaps before any other nation, that as gold and silver coins were subject to a progressive increase in their current value, it was necessary, not to offend justice, that ancient debts should be paid by reducing the value of the money or coins of the time in which the debt was incurred to that of the time in which the payment was made.^ Hence, the money- ' This very obscure explanation could only be comprehended by those who already understood the subject. The fact was, that the constant use of these paghe, or deferred dividends, as a currency, established for them a specific unit, or lire of specific value, which became the basis of a money of account. In this money of account their value or price was alwa^^s ex pressed, and they were reduced to other moneys of account, according to the use made of them. If used out of bank, they were turned into money fuori banco; if paid into the bank, on account of revenue, they were con- verted into moneta di numerato; if employed in the purcha.^e or redemption of bank shares, they would be converted into moneta banco. The value of these paghe, whether of the first, second or third year, was always expressed in their own money of account. ■■^ These moneys of account did not proceed from any special plan or in- tention of the bank ; their origin was that slow and silent, but sure opera- tion, by which moneys of account are alwa3's furmed in a mercantile com- munity, when a new unit of value is used, in which prices are expressed 'and payments are made. The lire, or scudo, as applied to the bank shares, to bank deposits or coins of full weight (moneta di numerato), to the paghe or deferred dividends, were such new units ; and upon each a money of account was formed, in which the books of the bank were kept, each in their respective department. ^ Here we have a public law of Genoa cited as recognising that gold and EXPLANATION OF THE INCREASE. 335 tariifs were specially intended, in Genoa, to give notice every year, or every six months, of the value of the silver scudo at the time in which the publication was made. Prior to 1730 we have not succeeded in finding any money-tariff in which the distinc- tion is made between moneta di banco and moneta fuori banco ; but in the said statute we find a statement concerning the money of Genoa, which indicates the value of the scudo from year to year, down to 1681, when it was lires 7.12. " It seems that, after this period, the Magistrates of Money believed it to be their duty not to permit any increase beyond that rate, since there are extant some decrees made by these magistrates, in which they threaten with the penalties of bank- ruptcy those who exchange money at a higher rate than that fixed in the tariff; and from 1682 to 1730, we have met with no tariff in which the value of the scudo is i^laced higher than lires 7.12. "We cannot state with precision the reason why the Magis- trates of Money believed it to be their duty to maintain, for so long a time, the value of the scudo at lires 7.12. We find, how- silver coins were subject to a progressive increase of value — a statenaent which can only be true as the price of these metals was expressed in a changing money of account. Carli, the eminent writer on money quoted in tliis paragraph, supplies a remarkable explanation of this difficulty when treating of the money of Milan. He informs us that the apparent increase of the zecchin of Milan in five centuries, from 12G1 to 1750, was as 1 to 14.10: that is, that coin during all that period, of the same weight and standard, was quoted, in 12G1, as worth 1 lire; and as worth lires 1-4. 10s. in 1750. He gives, no doubt, the correct explanation. Prices were ex- pressed in lires and denari, or pennies, which was the common money of .account. The payments of retail were made in copper and billon, or other base money, or at least to such an extent, that the value of the lire was esti- mated, by the mass of the people, through this base money. In the five centuries mentioned, the base money was degraded by the government very nearly in the proportion of tlie apparent increase of the zeccliin. Carli says there were many opinions on the subject ; but he sustains his own in a way to leave no doubt of his correctness. We believe this is the true explana- tion for Genoa. The ordinary money of account, in this long series of years, was changed by the degradation of the lower coins, which the people handled most. Economisti Ilaliani, Carli, vol. ii., p. 12. Custodi's Coliec- iion, Modern Part, vol. xiv. 336 DEPOSITS WITH a premium. ever, that these magistrates, in the tariff of the year 1741, per- haps for the first time, distinguished the moneta di banco from the moneta fuori banco, giving to the silver scudo the value of lires 7.12 in moneta di banco, and the value of lires 9.10 in moneta fuori banco. " From this wc believe it may be inferred that the Magistrates of Money fearing, perhaps, that the continued increase in the value of the silver scudo would prove injurious to the Bank of St. George, determined to put an end to that increase by means of their annual tariffs, and to keep it at the rate of lires 7.12. But as the force of circumstances proved stronger than the power of the magistrates, they Avere obliged to abandon this idea, and to fix the scudo in moneta di banco at lires 7.12, which was the value at which they received and paid it at the Bank of St. George, and in moneta fuori banco at lires 9.10, which was the value in commerce. " The Bank of St. George, however, in 1751, looking more to its own convenience, and seeing that the difference between the moneta di banco and that of fuori banco had gone up already to a premium of twenty-five per cent., determined that from that year deposits of money should be made in the bank in moneta di banco, at a premium of twenty-five per cent., and that they should be repaid at the same premium. " The moneta di permesso enjoyed only a premium of fifteen per cent, over moneta di banco, as we find from the tariff" of 1755. We cannot give any account of the origin of this money? since precise dates are wanting for that purpose ; but as we find in the published tariffs that there were current many scudi much worn, which were permitted to circulate at a value, in moneta fuori banco, less than lires 9.10, it is probable that from this permission the moneta di permesso had its origin.' " We have not intended, by these observations, to furnish any definitive system of the moneys of Genoa, but present them as ' It is not material for our purpose to expose the very serious errors in this paragraph. They are so great, as to create the suspicion of a misprint. The next paragraph discloses that the author had no great confidence in this portion of his labors. GEORGE BATTA GONDOLFO. 337 our opinions, in the liopo of exciting ulterior researches upon this subject ; and as a learned lover of tlie history of his coun- try, George Batta Gandolfo, librarian to the University of Genoa, is collecting precious materials concerning the money of Genoa, with the view of preparing an extensive work, which can- not fail to be of the highest interest, we hope much time will not elapse before we shall have, upon this subject, statements and explanations sufficient to make the whole matter entirely plain." NOTE TO CHAPTER XIV. If the woi-k of G. B. Gandolfo has ever seen the light, it has not Leen our fortune to meet with it. There are, however, materials in abundance within reach of any one desirous of thoroughly understanding the money system of Genoa. They will be found in the works cited ante, pages 186, 187, and in others of like character. From the contemporaneous works on com- merce and money, to which the bankers and merchants of that time resorted for guidance, we can now obtain reliable information ; and by the study of these merchant's guides, in the order of time, the history of Genoese money may be traced. Italy has furnished, besides, many great works on money, being famous for the worst coins, and the best writers on coinage : among these we refer to some of the more distinguished : Davanzati, Serra, Tur- bulo, Galliani, Corniani, Scaruffi, Carli, Yasco. A reference to others may be found in the note at page 108. Although Carlo Cuneo, from whom we have made the long extract at the close of this chapter, has failed in adequate statement and appreciation of the moneys of Genoa, his work, as a whole, is invaluable, and furnishes de- tails which can nowhere else be found, without researches which very few have it in their power to make. The Bank of St. George, doubtless, yet contains all the documents needful to afford materials for its history ; but it seems they are guarded with a jealous care, which places tiicm out of the reach of the ordinary inquirer. Cuneo furnishes a reference to his autho- rities, which shows that his researches were thorough and extensive. The Appendix gives fac-similes of three difierent forms of the manuscript bank bills issued by the Bank of Genoa. The following is from a Commercial Dictionary published in Paris : — "La Banque de Genes date de 1407. C'etait aussi une banque de d6p0t, mais dtablie sur une plus grandc echelle que cclle de Venisc, ct qui a ob- tenu beaucoup plus de c616brit6 en Europe. Son funds primitif fut com- 22 338 NOTE TO CHAPTER XIV. pos^ de proprietes domaniales, appartenant h I'Etat et adniinistrees par une corporation qui devint plus tard le conseil et le gouvernement de la banque. On pcut la considerer comme un grand mont-de-piete commercial destin6 k faire des avances aus citnyens, moyennaut certaines conditions plus ou moins favorables, selon les circonstances. Elle etait administree avec une extreme severity et tout ce que nous savons de son organisation prouve qu'elle fut plutot une institution financifere li6e aux interets du gouverne- ment, qu'une caisse ouverte aux besoins des particuliers. Elle re(}ut un terrible 6chec lois de I'invasion des Autrichiens vers le milieu du dernier sifecle, et elle a cess6 d'exister avec la republique de Genes." — "Diction- naire du Commerce, GiUaumin & Co., Paris, 1839, vol. i., p. 210, Art. "Banque." ^ This is calculated to mislead. The Bank of Genoa was only on a larger scale, because more connected by its constitution with political affairs. Holding among its guarantees such possessions as Corsica and the Isle of Cyprus, and having, by its large number of officers, a strong voice in the government of Genoa, it drew the attention of all concerned in the public affairs of that city. In commercial power and efficiency it was far inferior to the Bank of Venice. This extract is another illustration of the mistaken notions which prevail, even among well-informed persons, in relation to the Banks of Genoa and Venice. CHAPTER XV. THE BANK OF ENGLAND. ^ 1. Opinions and projects on the subject of credit and currency previous to the charter of the Bank of Eii(/hind — Samuel Lam he's plan, IGGo — Evils of the coinage — Dr. Hugh Chamberlain's p>Ian, 1605 — Large model of a Bank, 1618 — Bank of Credit, 16S2 — Bank of Credit, ICm — B.Mur- rafs plan, 1G95 — /. Asg ill's plan, 1G9G — Office of credit, 1698. The insular position of Great Britain preserved the people, in some degree, from some of the mischiefs and vexations of a mul- titude of mints, and a multifarious coinage. The annals of English commerce show, however, that grievances arising from their coinage, even subsequent to the period of the heptarchy, were by no means insignificant. We might illustrate this by citations from writers of every age from William the Conqueror. Matthew Paris, in his "Chronicles," says that "in those days the money of England was so intolerably abused by detestable clippers and false coiners, that neither the English inhabitants, nor even foreigners, could look upon it without being deeply grieved (illceso corde) ; for it was clipped almost to the inner- most ring, and the border of letters either wholly taken away, or very much diminished."' — Ad annum, 1248, 32 Henry III. ^^Ipsis quoque diebus Bloneta Anglicos, cj-c." In the reign of Elizabeth, a reform of the coinage, arising from these and simi- lar abuses, was undertaken; and in the " Summaric of Certain Reasons" for the measures then adopted, wc are informed that, " for these base monies, there has been carried out of the rcalme the rich commodities of the same, as wolle, cloth, lead, tinnc, leather, tallowe, yea, and all kinds of victual, as corne, salt, ' See Diseases of Coin, 169G. (339) 340 LAMBE'S bank, 1657. beer, butter, cheese, and sucli like, so as counterfaieters have, for small summe of monies, carried out six times the value in commodities of the realme." Among the earliest advocates of banks in England whose works are before us, is Samuel Lambe, a well-known London merchant, who lived in the days of Charles the First, but did not publish the pamphlet we are about to notice until the year 1655, in the time of Cromwell, to whom it is thus addressed : " Seasonable Observations humbly addressed to his Highness the Lord Protector," ^ One of his chief objects is to show the advant- age the Dutch people had over England, by reason of their banks : " The benefits they have received by banks are these : By the help thereof they have raised themselves from poor distressed, to high and mighty States. They have increased the general stock of their own country so much, that they can, when they please, ingress the particular commodity of one country, and sell it again at their own price in the same, or another that wants it : they furnish many facilities, as well as profits, in time of war: they have thus grown so strong, that they make peace with other nations on their own terras, as, for instance, Denmark and France : they make war with the English at sea, to whom they there always yielded : they rule over many petty powers in the East Indies." " The prejudice we receive by banks are these : It bi'ings down the interest of money to three per cent., at which rate men in Holland borrow money, and lend it again in England at six or eight per cent. : they furnish money to make purchases in England at the cheapest seasons of the year, which are again sold ten per cent, cheaper than the regular English merchant can sell them in London." This, Lambe says, the English mer- chant cannot do for want of capital, and he cannot borrow the money at less than six per cent., besides " procuring and con- tinuance," that is, a commission for obtaining the loan and rencAval of it. ' Trade, Shipping Banks, by Samuel Lambe, 1657. PLAN OF THE BANK. 341 " The good we may do ourselves by banks, if settled in Eng- land, are many, for no nation ever yet made use of them but they flourished and thrived exceedingly : they -will by well order- ing of them, bring back the gold and silver drained out of this land by tlie Hollanders' banks : they will increase the stock (capital) of this land : they Avill increase the fisheries, navigation and shipping: they will increase the revenues and customs: they will wonderfully employ the poor, and increase manufactures and foreign trade : they will, increase trade in our plantations, and cause ships to be built in New England as good, or better, than any built in Holland," &c., &c. His definition of a bank is "A certain number of sufiicient men of estates and credits joined together in a joint stock, being, as it Avere, the general cash-keepers, or treasurers, of that place where they are settled, letting out imaginary money" (credit ex- pressed in money of account) " at interest, at two and a half or three per cent., and making payments thereof by passing each man's account from one to another, with much facility and ease, and saving much trouble in receiving and paying money." He then illustrates, by an example, how a credit thus given may be transferred very many times, and come at last unto the merchant who first issued it, all the debts for which it was transferred being fully paid. The constitution of Mr. Lambe's proposed bank was peculiar, and illustrates the prevailing opinions on the power and uses of credit. " That the society of good men, or governors, that shall manage the banke be chosen by the several companies of mer- chants of London, viz. : East India, Turkey, Merchant Adven- turers, East Countrey, Muscovia, Greenland, and Guynne Com- panies," each company choosing two or more, and filling their own vacancies. Tlie persons thus chosen and met together "shall choose to themselves two or more of the ablest merchants that trade chiefly, or altogether, for Spain, and the like who trade for France, Italy and the West Indies, for each place two or more, as shall be thought fitting," &c. "Such a society, knowing most English merchants that trade to all parts, and thereby knowing whom to credit, and by their knowledge will 342 PLAN OF THE BANK. well understand how to govern the banke, and by the help thereof to countermine the Dutch in their designs in any part of the world where they prejudice the English by their bankes." The bank was to be open to receive deposits, which were to be repayable on demand ; " interest to be allowed on deposits to the aged and widows" — '• imaginary money, or credit, to be let out upon ticket" (that is, subject to transfer) " at two and a half and three per cent." "All bills of exchange to be received and paid in banke. The chosen men may take a house near the Exchange, and set there certain hours every day : that the good men who manage the banke make up their accounts once in every year : that the profits of the banke go to the good men that manage the same, in lieu of their great care and pains," and defraying all charges : a reserve, however, of a portion of the profits to be made to increase the credit and power of the banke : " that the banke also furnish another banke with competent stock, to let out any summe of money under £5, or XIO, at reasonable rates ; for many poore people are now forced to give intolerable rates, as about Gd. per week for the use of 20 shillings." It is a remarkable feature of this plan of a bank by an intel- ligent London merchant, that it proposes no capital, nor any fund paid in, by the good men who were to manage and to re- ceive the profits. It does not clearly announce that the depo- sits were to be lent, as a source of profit ; if that were intended, it was evidently not the main object. The chief business of the bank was to consist in the issue of credits, to be circulated or transferred on its books. The person at whose instance such credit was to be issued must, of course, give the bank some secu- rity or guarantee adequate to the amount of the credit asked for : this may have been a promissory note, bill of exchange of the applicant, or of some other person, or it may have been gold or silver bullion, or a bond or mortgage. The credit would not have been granted without some sufficient guarantee that it would be redeemed, and the interest paid. As no permanent capital was proposed, it Avas not intended that the credits issued should be permanent, but that all should be redeemable and extinguish- able on the return of the security. EVILS OF COINAGE, lOOG. 343 The plan differed, therefore, materially from any of the conti- nental banks. Taking the Banks of Venice and Amsterdam as types of these, it differed from the first, which only circulated on its books the debt of the State ; and from the second, whicli only circulated the ownership of an actual deposit of coin or bullion ; whilst the proposed bank was intended only to circulate a credit issued for the occasion upon special security : it was in- tended merely to be a substitution of the better credit of the bank for the credit of the applicant. If the credit of the bank should not be more available than that of the individual, it would not be applied for, nor would it be received by those who could not use it in payment. This was, then, a bold conception of the power of credit, and contemplated a high state of confidence and unblemished commercial integrity. Mr. Lambe plainly aimed at a procedure like that now carried on by our system of bank deposits. When a note is discounted according to our modern system of banking, a credit is given for the proceeds on the books of the bank ; and the credit thus given is transferable at the pleasure of the holder, until extinguished by payment of the security on which it is founded. The state of the coin in the 17th century forced the whole subject of money and currency very specially upon public atten- tion. A writer, 1696, commences a pamphlet on this topic in these words : " The inconvenience and mischiefs that the cur- rency of dipt and counterfeit money necessarily occasions are so manifest to everybody, that it is as. needless to point at any of them as it is impossible to enumerate all. It violates all con- tracts, and alters the measure of trade, breeding confusion in all commerce," &c.' Some of the bitterest discontents of the English people with which their annals make us familiar, have arisen from the condi- tion of their coinage. Prudential measures were devised by Edward the Sixth, but not fully executed ; the reform was left to be more fully carried out by Elizabeth, who took all the credit of having accomplished what Edward could not, and Mary dared Currency of Clipt Money, 1696. 344 OPINIONS ON BANKS. not do.' But crying as this evil of debased and deteriorated coins was in England, it fell far short of the corresponding mis- chief on the continent, and did not lead to the remedy adopted there, of establishing banks of deposit, in which the coins might be placed once for all out of the reach of the clipper and sweater, not subject to wear, and safe from the debasing schemes of men in power.^ These banks were multiplied on the continent during the first half of the 17th century. There appears to have been no attempt of the kind made in England during that time. In the latter half of that century, the subject of banks occupied very much of the attention of the English public. A vast number of plans, and projects of banks, were brought before the public. Not one of these, so far as we know, or can learn from a large number of publications of that period now before us, on the sub- ject of money and banks, proposed a bank for the deposit of coins or bullion. They all looked to banks as instruments of credit, the chief advantage of which would be the furnishing some substitute for money — some form of credit to circulate in the place of money. The success of the goldsmiths, and other private bankers of London, in issuing their notes payable to bearer on demand, had been recently remarked, and it had ex- cited the imaginations of men of business as to the power and utility of credit. The goldsmiths not only issued such notes for circulation in place of money, but also bonds, or sealed bills, bearing interest, but payable at a fixed day : these were also employed as a currency. The i^ublic mind thus excited on the subject of credit, and teeming with hopes of some great delivery from the evils of the money system, began to bring forth plans of banks, and schemes of credit. We shall notice a few from publications of that period, of which the author of a "Discourse on Money" says: "I see many printed proposals of banks of a lower rate ; projects and funds of gain and security, &;c., to adventurers, everywhere pub- ' Camden, in his life of Elizabeth, thus speaks of this achievement of the Queen: "Magnum sane, memorandum, quod neque Edwardus potuit neque Maria ausa." — Page 61. 2 Essay on Money and Coins, London, 1757. OFFICE OF CREDIT, 1665. 345 lished and pressed on the people." This he aftenvards calls "fishing for gudgeons."' " The office of credit, by the use of which none can possibly sustain loss, but every man may certaitdy receive great gain and wealth, with a plain demonstration how a man may trade for six times his stock, and never be trusted ; and that, if generally re- ceived, there can afterwards no accident happen to cause a dead- ness or slowness of trade, except wars, nor need men make any more bad debts" — is the title of a pamphlet by Dr. Hugh Cham- berlain, published in 1665. His project is : " Neither bank nor lumbard, because the foundation of credit in bank is money, and here it is goods and merchandise. And for goods received in a lumbard, they deliver out money, and here credit ; and yet it is like both ; for, after the same manner and limitations, in every respect, as goods are received, stored and preserved in a lumbard, shall they be in this office; and credit shall be delivered out and transferred exactly after the manner as it is in foreign banks." The meaning of this is, that parties making deposits of goods shall, for the value agreed, receive a credit for the amount on the books of the office, transferable in the same man- ner as at the Banks of Venice or Amsterdam. The object was to make goods a material for deposit, instead of money, as in the banks of the continent at that day, or the proceeds of notes dis- counted at the present day. The check, or order of transfer, was to be in this form : — Gentlemen: — Pray make A. B. creditor for £100, and mc debtor for the like sum, for which this shall be your warrant. To the Society of the ^ Office of Credits. ^ It was designed that the office should become a great depo- sitory of goods, to the mutual advantage of buyers and sellers. Heavy stocks of goods, instead of being in the warehouse of the purchaser, were to be placed in the depositories of the office, where the seller obtained a credit for them, whilst the purchaser could withdraw them as his sales progressed, and only make his ' London, 109G, page 141. 346 LARGE MODEL OF A BANK. payments at the same rate. The whole scheme is developed Avith ingenuity and earnestness. In 1678, appeared " Proposals to the King and Parliament of a Large Model of a Bank, Showing how a fund of a bank may be made without much change, or any hazard, that may give out bills of credit to a vast extent, that all Europe will accept of, rather than money, by M. Lewis." His preface says : "All men are satisfied a bank is very advantageous to a nation, &c., &c. ; but the great question hath been, how to make a fund that shall be credited by all, without vast quantities of ready cash or bullion to lie dead, which we have not to spare for such a pur- pose." The author of the " Large Model" proposes that the whole kingdom shall be divided into three or four hundred precincts, in each of which shall be an officer of the bank, with officers and assistants appointed or elected by the people of the precinct, which was to be responsible for the conduct of these officers, and for the safety of all money deposited with them. This was upon the principle of the English common law, that every hundred was liable to make good any robbery committed within it. It was supposed this would secure competent and faithful officers. These branches, or offices, were to draw upon each other, accord- ing to the demands of business, so as to make the domestic exchange as easy as possible, by receiving money at any office, and paying it out at any other office. Bills of credit were, upon demand, to be issued to any requesting them, upon deposit of the equivalent amount in money. These bills were transferable certificates of deposit. But bills of credit were to be issued upon deposit of any other articles of value. The author of this scheme asserts that " a bill of exchange, or a bill of credit, that is trans- ferable ujjon a good man is as good as money, for money is nothing but a medium of commerce, or security for a while, that when we part with one thing Ave can spare, we may purchase another thing of the like value." He instances many cases of such bills passing as money in England. " Diverse citizens" bills at this day ai'e accepted as current, though they have no other security but the honesty of the man, and the supposition BANK OF CREDIT, 1(3 82. 347 of an estate ; and yet many are glad to leave tlicir money in such hands, without interest, for safety. I heard a person of quality say that he saw the same money transmitted nine times in one morning, by writing of the credit from one to another, and the money in specie was left untouched at last." The details of this model of a bank are set forth most elabo- rately, and the whole plan consistently developed, with a great variety of ingenious and instructive illustrations. Among other facts referred to, is one in regard to the Bank of Venice, which we have not met elsewhere. It is well known that the bank money of Venice maintained a value far above specie ; and this premium rose so high, as to call for public interposition, which fixed the premium at twenty per cent., and that this was after- wards avoided by a sur agio, or a premium on the twenty per cent. Mr. Lewis informs us that a sagacious merchant of Venice suggested a method, at last, by which the dilficulty was overcome : Whenever the tendency of the bank money was too strongly up- ward, the bank tendered the specie itself in payment of credits ; that is, the party who expected to receive bank money, or credits, in payment, Avas paid in specie by the bank ; so that he who attended at bank to receive a payment, did not know but that he would receive payment in gold or silver. This method could be- brought to bear very effectively upon those who were disposed to monopolize the deposits, or bank money. One chief cause of the premium upon bank credits was, that bills of ex- change were payable in them ; and men who had bills to pay were obliged to procure bank credits for that purpose. Specu- lators, however, would be repelled by the plan mentioned by Lewis. A publication, dated in 1682, bears the title of " Corporation Credit, or a Bank of Credit, made current by common con- sent in London, more useful and safe than money." This was a proposal addressed to the authorities of that city, referred by them to a committee, upon report of which the phm was ap- proved, and the bank authorized. The plan of working tiiis bank did not differ very much from that of Lambc's, Init it required a subscribed and paid-up fund as '* a fund or founda- 348 THE POWER OF CREDIT. tion of honor," Avhich might be paid in tin, lead, copper, steel, or iron, raw silk, wool, or cotton, or in brass or iron wyre, lin- nen cloth or calicoes, or other goods sufficient to raise the money subscribed. Sixteen reasons are given why such a bank would be a public benefit, chiefly referring to the promotion of trade and industry. Five reasons why private interests will be pro- moted, among which are : " The trouble of counting money may be much avoided ; the usual loss by receiving counterfeit and dipt money will be saved ; many fruitless journeys for money will be saved," &c. " The credit here recommended answers all the ends and in- tents of money, for it will pass as far as it is known, and our money doth no more. So of the sealed bags of money in the East Indies, which pass as far as the East India prince hath credit. This credit is better than money, for it will pass from man to man without any damage to itself, or its possessor ; but money occasions great loss of time, as well as trouble, is subject to clipping, counterfeiting and robbery, and is oftentimes the occasion of bloodshed and murder." " But to further satisfy some men how trade can be driven, commodities bought, and debts paid, without money or specie, besides the indubitable certainty of its being practised in the several foreign banks, I shall form an example or two of the manner and conveniences of it. As, suppose A. oweth B. <£100, B. the like to C, C the like to D., D. the like to E., and E. to F., and F. to G., and G. to IL, and II. to I., and I. to A., which if it were possible for them all to know, they might agree upon a meeting, and quit each other by rescounter" (set-off), "and then all are satisfied, without one farthing being paid in specie; where else, for want of this meeting (because each knows but his imme- diate debtor and creditor, and not the mediate), or for want of ready money, they are all puzzled with debts and credits. If all these debts are to be paid by the circulation of <£100 in money, it will be defeated, if any one in the chain is tempted to employ the money otherwise, or if the money is lost or stolen on its pas- sage ; neither of which is so likely to happen if credit be em- NATIONAL BANK, 169 5. 349 ployed, which would quickly and surely discharge every debt without risk or loss." A pamphlet of 1683 thus defines a Bank of Credit : — "It is a fund of goods, or assurances of lands, &c., deposited for the raising of credit thereupon, under the greatest security of con- stitution and persons that can be devised ; upon which fund the depositor is furnished with bank bills of credit for supply of his occasions, which will be as useful as money to him." The bank bills of credit were to be issued with every possible security against counterfeits, the precautions being set forth. "Besides which, two trustees and the storekeeper of the bank out of which the bills shall be issued, do also testifie that the value of the said bills is in the bank : all which officers are upon their oaths, and give good security for the honest discharge of their respective employments, so that no one can hope to make tender of a false or counterfeit bill, or one unduly come to his hands, without being detected ; in which respect these bills are better than gold or silver, besides they save charges in carrying, and time in telling and retelling money in payments, and it is easier and safer travelling with them ; nor can any of these be fraudulently issued out of the office itself, for they are printed in the bank house, on paper made on purpose," &c. In the same year, 1G83, the Bank of Credit is described and explained in a pamphlet, the author of which regards the subject from the same point of view. In 1695, appeared "A Proposal for a National Bank, consist- ing of land, or any other valuable securities or depositums, with a grand cash for the return of money," by Robert Murray. The author dwells at length on the great advantages of the Bank of Amsterdam, Avhich he regards as " incomparably the best and greatest in the world, being built on these three pillars : First, an authentic registry of all receipts and payments above 300 guilders; secondly, the enjoining the payment in bank of all foreign bills of exchange ; and thirdly, the city and government undertaking the security of all money paid in bank." In urging his own plan, he thus speaks of the advantages of banks: — "The great convenience attending banks, and the 350 asgill's other money, igog. difficulty of trade "where banks are wanting, show their necessity and use in all trading countries. To avoid the trouble of telling, retelling, carrying and recarrying, and the danger and loss of counterfeit money, men are under a sort of necessity to trust their cash in the hands of private bankers and goldsmiths, where public banks arc not established ; and this they continue to do, notwithstanding the incredible losses often sustained by frequent failures and insolvency of many, to the ruiu of those that trust them." The author declares himself the advocate of public banks under the control of public authorities, and the guarantee of the state. " The bank intended by this proposal is to be under the authority, care, inspection and control of the public magistracy, as most consonant to reason, nature and political economy." The bank was to consist of all things capable of being a fund of credit, as land, ground-rents, &c., and be divided into 10,000 shares, of .£100 each, or £1,000,000, payable in ten quarterly instalments ; " Avhich sum will be found a stock sufiBcient to cir- culate the said credit from time to time issued :" this money to be deposited in the treasury of the City of London, and branches to be established in some fifty of the chief towns of the United Kingdom, The business proposed for this bank was to make advances upon bank, foreign, inland bills, exchequer tallies, upon goods, upon annuities, and public taxes, such as the poor rates, to honest persons capable of employing their time to good advan- tage, kc. In the same year, 1696, was produced " Several assertions proved to create another species of money than gold and silver," by J. Asgill. The first assertion is, "that there is a necessity of creating another kind of money ;" the third is, " that all pro- posals for making bills of credit current money directly, by act of Parliament, can be of no use;" the sixth is, "that securities on land are capable of all the quality of money, and therefore they are capable of being made money, for land is durable and incorruptible, the earth being the great store-house of the world, where all the magazines of life and defence are kept sweet and LAND CREDIT, 1G98. 351 safe. Such securities are divisible into larorer or lesser sums, and capable of having their value stamped on their face, and of being made transferable bj delivery." In 1698, was published " The Constitution of the Office of Land Credit," a project very elaborately developed, by Hugh Chamberling, the author of the pamphlet noticed ante, page 345. This scheme of a bank was brought out under the sanc- tion of lofty names ; among the honorary managers are four earls, and many other lords, barons, and gentlemen of repute. It is stated that the projector, Chamberling, had devoted thirty years of his life to this subject. Some of his positions are : " That lands and hands are the material and efficient causes of all true, genuine and natural riches : that credit, rightly founded on laixl, must evidently be more secure than any other sort of credit : that credit having all essentials of the usual money, and some other additional advantages, wants nothing but a coercion law, enforcing its currency, to enable it to assume the name of money." The form of the institution, its mode of government, the plan of settling the credit or security upon lands, are all minutely set forth. These notices of projects and schemes of banking some cen- tury and a half old are given to the reader without comment, the object being merely to make known the current of opinion at that time. We might enlarge the list, for plans of banks con- tinued to appear for many years after the Bank of England was chartered; but we have, perhaps, more than satisfied the curiosity of the reader. It is evident that great misconceptions prevailed as to the power and real nature of credit ; this is manifest in all these plans. The subject was not as well understood as it was upon the continent. It is not for many years after the date of these publications, that we find in England any well-written account of the continental banks or credit system. 352 CIIARTER OF THE BANK. § 2. The Bank of England chartered in 1694 — William Patterson the pro- jector — Founded on a loan to the government of £1,200,000 at eight per cent. — Opposition and objections — Commenced business 1695 — Powers indefinite — Bank-notes — Advances to government — Recoinage — Rate of discount — Business of the Bank — Use of deposits — Issue of bank bills — Employing its credit — Goldsmiths, or private bankers, robbed by Charks IL — Safety of deposits in Bank of England — TJse of deposits by depo- sitors and the Bank — Issue of bank bills payable on demand — Bills of exchange and promissory notes on time — Convertibility — Theory of bank- notes not substitutes for specie, but for commercial paper, and should fluc- tuate icith this paper, and not ivith coin — Concentration of payments in London. The Bank of England owes its origin to one of the most fruit- ful schemers of the latter half of the 17th century — the same who was the projector of the Bank of Scotland, and the chief promoter of the disastrous enterprise undertaken by the Darien Company, of planting a colony on the Isthmus of Darien.^ The charter of this bank was obtained in 1694, in the sixth year of William and Mary. The scheme, which was due to the genius of William Patterson, had been on foot several years, and had been urged on the government with great perseverance. It had to encounter, like other schemes for banks, opposition from various quarters. The tories, who were in opposition to the government, opposed it as likely to be an aid to the administra- tion ; the goldsmiths, private bankers and usurers, opposed it as likely to lower the rate of interest, and diminish their pro- fits. The cautious and conservative regarded it as a novelty, fraught with danger to the country ; and they prophesied fearful results, if this bank were chartered. Patterson, who well knew the necessities of the government, then engaged in Avar, and frequently obliged to pay from ten to forty per cent, interest for short loans, in anticipation of the public revenues, had made it a prominent part of his plan to oifer the public treasury XI, 200,000, at eight per cent, interest. 1 Five vessels, containing this Scotch colony, left the port of Leith in July, 1G98 ; and of 1200 persons who embarked, 30 only remained alive to return the next year.' OBJECTIONS TO THE BANK. 353 This was all that secured attention to his project. It "was strenuously resisted, both in Privy Council and in Parliament ; but finally triumphing over all opposition, the charter of the Bank of England Avas issued in 1694. Previous to this date, about .£500,000 of the stock had been subscribed through the efforts of Michael Godfrey, one of the most active promoters of the enterprise in London. The remaining .£700,000 was, after due notice of the opening of the books under the charter, sub- scribed in ten days. The bank was not allowed to go into operation without the persevering and determined opposition of the various classes whose interests were opposed to it. There was no evil omen which was not seized upon, and no objection which the most fer- tile imagination could conjure up, Avhich was not brought to bear against it. It was said that banks could only prosper in repubr lies, and that, if attempted under a monarchy, the monarch would either absorb the bank, or the bank would absorb the monarchy. It was alleged that it would become a monopoly, and engross the whole money of the kingdom ; that it would be subservient to the government, and be applied to the worst pur- poses of arbitrary power ; that it would not assist, but weaken commerce, by withdrawing money from trade to apply to stock- jobbing; that it would produce a swarm of stock-jobbers and brokers, to prey upon their fellow-creatures, and corrupt the morals of the nation. It was said, in one of the pamphlets of the day : " That the Bank of England crept into the Avorld, not being in any votes" (proposed laws) "by that name, but in an act granting to their Majesties several duties upon tunnage of ships, beer, ale, &c., for securing certain recompenses to such as should subscribe £1,200,000 on a fund of eight per cent.," &c. The writer roundly asserts that there were many who, if they had known what kind of bank was wrapped up in that bill, would have been willing to lend tlic money gratis for several years, to obtain such privileges. Another opponent admits there was some excuse for establish- ing the bank, but none for continuing it. " The nation had been for several years engaged in an expensive, hazardous and doubt- 23 354 THE B A N K - I N I Q U I T Y BY LAW. fill war ; the government had drained all their projects to raise the necessary supplies ; but the credit of the nation sunk, occa- sioned partly by the divisions of Parliament, the deficiency of the funds, and most unfortunately by the baseness of our coin, so that neither our money nor our credit would pass at market." In this necessity, the author admits the government had no choice but to accept the alternative of a bank. "And when such an enemy was at our doors, it was too favorable an opportunity for such a fort as this to be erected, which, though then designed for our defence, serves now (1707) to overawe us, and has turned its cannon against the state it was built to protect." After in- dulging in this strain at some length, he proceeds : "We are, God be thanked, greatly recovered from that dangerous crisis, our credit retrieved, our money recoined, great part of our debts paid, and almost all provided for." . . . "We crowd more to get our money into the funds, than heretofore to get it out ; and we are freed from any necessity of supporting the wants of the government. It is, therefore, a matter of prudence whether the bank ought to be continued longer."^ To this continuunce the writer opposes all his powers of logic and abuse. His warnings and denunciations are alike terrible. Of the two evils, he thinks the bank far more dangerous than a standing army; that neither should be allowed in time of peace ; and that both should be dis- banded as soon as the work of war is done. He concludes by exhorting those who have the poAver, "if they would have their peace and liberties safe, by putting it out of the power of any to molest them, and by keeping their elections free, not to repair this fort (the Bank of England), that overawes them, and by their compassion to the poor tradesmen, and their own interest, not to establish iniquity by law."^ This may serve as a specimen of the rhetoric employed against the Bank of England in the first years of its existence. The opposition which began with its birth has followed it down to the present hour. Every recurrence of a renewal of its charter ' A Short View of the Dungers and Mischiefs of the Bank of England. London, 1707. '^ lie gives the bank no credit for all this. P Vv' E R S OF THE BANK. 355 brings forth a host of objectors. It is now, however, so tho- roughly incorporated with the body politic and financial system of England, that its continuance is not only necessary, but indis- pensable. To touch it with unskilful hands is hazardous, to shake its credit is ruinous not only to public, but to private interests. On the 1st of January, 1695, the bank went into operation. Its whole capital, when paid in, and as paid in, was to be lent to the government as a special loan, the interest whereof was secured upon certain specified taxes mentioned in the charter. In addi- tion to the interest of ,£96,000, the further annual sum of £4000 per annum was allowed to the bank for the management of the loan. " The Governor and Company of the Bank of England had full authority granted them, in whatever concerned "borrowing or receiving moneys, and giving security for the same under their seal ; in dealing in bills of exchange, buying or selling bullion, gold or silver ; selling any goods, wares or merchandise deposited with them for money lent or advanced on them, and not redeemed at the time agreed, or within three months after ; in selling such goods as may be the produce of lands purchased by the bank ; in lending or advancing any of the moneys of the corporation ; and in taking pawns, or other securities, for the same." From this, it will be apparent that the banking business of the corpo- ration was not very particularly described or specified. The main fact was, that the subscribers to a public loan of ,£1,200,000 were incorporated as a bank, and left to shape their business, under these general powers, as their interests and the demands of their customers might dictate. Their first object, no doubt, was to invito deposits ; and certainly the security of such a large amount of loan to the government was superior to any ever be- fore offered to depositors in England. The act of incorporation conferred no special power of issuing bank-notes, or other paper, to circulate as money ; but this power seems to have been regarded as incident to the corporate powers conferred in the charter. One of the first notices published by the bank, dated 11th February, 1695, was to the effect that three cashiers named in the notice were the only persons author- 356 STATE OF THE BANK IN 1G96. ized by the bank to give notes on behalf of the company either for payment of money or bills ; that is, either of the three cashiers, and no other person, -were authorized to sign and issue notes, for which the bank ".vas to bo accountable. We find very few particulars in regard to the earliest issues of the bank. No notes were at first issued under £20. When the "infant" bank, in 1696, encountered the difficulties of the national recoinage, it for a time suspended payments, and, as a measure of relief, issued bills under seal, bearing six per cent, interest, with which they redeemed the cashiers' notes, which were payable on de- mand without interest. That the bank issued these sealed bills and the cashiers' notes freely, is evident from a statement furnished to the House of Commons, dated 10th November, 1696, by which it appeared that there was outstanding sealed bills, <£893,800, cashiers' notes, X764,196. The cash then on hand, £35,664, was all they had to meet XI, 657,996 of sealed bills and notes. The advances made by the bank had been chiefly to the govern- ment, only .£231,000 appearing to have been lent to individuals. The government being the chief debtor, was bound to aiford the necessary relief in the emergency. This was done by allowing the bank to increase its stock, in payment of which increase a portion of the outstanding liabilities of the bank were absorbed. So great was the financial derangement growing out of the recoinage then in progress, of the embarrassments of the govern- ment, and the over-issues of the bank, that the obligations of the public treasury were at a discount of forty or fifty per cent., and bank-notes at twelve to twenty per cent. It is evident that the notes of the bank had for a time been received with great favor, or so large an amount as £1,657,996 could not have been issued in less than two years. The government had determined upon recoining in full weight a silver currency depreciated 25 per cent, by wear and clipping : the bank continued to issue its bills for this light coin, though obliged to wait the movement of the mint for the new coins.* > Ante, pp. 80 to 85. RECOVERY FROM FIRST SUSPENSION. 357 The old coins were, by proclamation, declared uncurrent, and the bank could not obtain new coins from the mint fast enough to meet the demands of a community greatly in need of cur- rency. This contributed much to increase the issue of bank- notes. The measure of the government brought an addition to the stock of about £1,000,000, and reduced the liabilities of the bank to the same amount. This, with an act of Parliament, containing many provisions favorable to the bank, raised the stock in a few months to 112 per cent., greatly enhanced the price of the government securities, and gave the bank-notes free currency. The bank recovered from its first suspension, by this aid of the government, in a very short time. It must be noted, however, that the aid rendered by the bank to the government was even more important and substantial than that rendered by the latter to the bank. The charter Avas not only silent with reference to the issue of notes, but also in regard to the payment of specie. That very important matter was left to be regulated by the general laws of the country. The corporate body could issue notes, and having issued them, it was bound to pay them in lawful money, as other persons and bodies corporate would be bound. No general alarm seems to have been felt on the occasion of this first suspension, and the obligations of the bank seem to have been regarded as safe, though not convertible instantaneously into money. We have already remarked that the bank was, under the general terms of its charter, left to shape its policy according to the course of business and the dictates of its own interests. To induce deposits, the bank early made a distinction in the rate of discount between its regular customers and all other appli- cants, of from two and a half to three per cent., the highest rate being six per cent. The first error of the bank, that of lending too freely to the government, had the result, in the end, of esta- blishing its credit the more firmly, for it secured thereby effec- tually the continued and efficient support of the national trea- sury ; and being thus strongly established, it very rapidly secured 358 THREE MODES OF BUSINESS. the confidence of men of business and wealth. Although spe- cially authorized to receive merchandise and personal property in security for loans, very fcAV of its operations took that direc- tion; its business consisted mainly in dealing in bills of ex- change, and other commercial paper, and in receiving deposits. The bank having nothino; in its vaults at the outset but certi- ficates of public debt, to the extent to which the £1,200,000 had been paid up, had only three modes of carrying on banking business open to it. 1. To lend or employ the money deposited by its customers, to the amount it might be safe or expedient to lend or use money which was payable to depositors on demand. 2. To issue bank-notes for circulation as currency, or bonds bearing interest, to be taken by those who desired such security for investments ; and to employ the bank-notes, and the money received for bonds, in the purchase of promissory notes and bills of exchange at such rates as would leave a profit to the bank. 3. To employ its credit, which soon attained a high grade, in discounting bills of exchange and promissory notes for its cus- tomers, giving them merely a credit in account on the books of the bank for the proceeds of the paper discounted, and allowing the parties obtaining such credits to transfer them, in sums to suit their convenience, to other persons. The bank, notwithstanding the check it received in the second year of its existence, rose rapidly in importance and in business. It blended at once, in its operations, all the modes of business above specified : but as these modes of banking are essentially distinct operations, even when carried on by the same bank, we shall consider them separately ; the more so, as the confusion of terms and ideas resulting from these blended processes of the bank has, from that time to the present, produced a degree of confusion in men's minds, upon the subject of banks of circula- tion, very unfavorable to clear perceptions on the subjects of money and banking. The business of receiving, holding and paying out deposits is probably as old as the use of money. It has assumed many dif- ferent forms in different ages, and among different people ; but ANTIQUITY OF BANK DEPOSITS. 359 tlio business has existed at all times, and in all nations, where gold and silver money were employed. It was always, and is yet, unavoidable. A large portion of those who have occasion to receive money, could not and cannot be judges of the genuine- ness of coin or bullion ; they could not weigh and test it with sufficient accuracy ; this, of course, gave rise to a class of men skilled in the precious metals, and with them these metals were deposited for safe-keeping, and convenience of paying. In all ages, the safe-keeping of the precious metals was one of tlic most difficult exigencies to provide for, and one which created unceas- ing anxiety. We find mention of bankers in the history of every ancient civilized people, who exercised their functions very much as they do in China at this day. Our Saviour, in one of his parables, makes the lord of the unfaithful servant say : "Where- fore, then, gavcst not thou thy money into the bank, that at my coming I might have required mine own with usury."' From this, it appears that the bankers of that day were in the habit of paying interest on deposits. The bankers of England, previous to the charter of the Bank of England, and to a large extent for a long time afterward, Avere the goldsmiths. Their business made them adepts in bullion and money, and required safe depositories. Very large suras were entrusted to them by the nobility, gentry, and business men of England." But as these private bankers had been, on two occasions, robbed by the monarchs of England, some dis- trust of their ability to protect money committed to them natu- rally found a place in the minds of depositors. The Bank of England took, from the beginning, the position of a great and powerful corporation. It commanded at once so high a degree of confidence, as to secure large deposits. One of its first by- ' Luke, xix. 23. ^ In tlie reign of Charles the Second, when the money of the bankers, or goldsmiths, was seized in the exchequer, where it hud been deposited for safety, tlio amount was ei,;}28,52G — a great sum for those days. Charles the First had seized £200,000, deposited in the mint, in his time. One of the bankers robbed by Charles the Second had £110,721 taken from him 360 LENDING DEPOSITS. laws assisted in strengthening this confidence, by requiring that the cash of the corporation should "be carefully kept under three or more locks, the keys whereof shall be kept by such three or more of the Govei'nor, Deputy Governor and Directors as the said Court of Directors shall from time to time empower to keep the same, each of said persons keeping one of said keys." The keeping of money for a large number of persons, who only draw it as their wants and occasions require, leaves a con- siderable proportion in the hands of the banker, subject to his disposal, as not at all likely to be called for by the owners. This the banker may lend upon good securities, in the hope that it will not be required, or that, if the Avhole or a part should be demanded, he will be able, by means of the same securities, to raise the amount demanded. The private bankers of England, and indeed of all Europe, had realized large profits from this allowed trading in money not their own. It was, however, not a very unusual occurrence that, in times of alarm and commer- cial panic, a run on such bankers took place, and their discredit and ruin followed upon their inability to meet the demands of customers ; for they found, by experience, that the season of alarm and distrust which produced the demand for deposits, was one in which they could not realize upon the securities taken for loans. The Bank of England could not, of course, be exempt from this difficulty. It must always have been, and must always be, a business of no little hazard, to lend the money of parties entitled to repayment on demand. It is urged by some, that all business transactions in which money is involved should be for money in hand ; but even if all sales of property were for cash, Avhich never has been the case in any civilized country, and never can be, yet many transac- tions in credit would take place. All deposits with bankers are credits given to the bank ; all loans of money by the bank are transactions of credit, as well as all loans from one individual to another. There never was a civilized country in which such transactions did not take place. Of course, periods of alarm, panic or commercial distrust must occur, from one cause or another ; and at such times, neither banks nor individuals can CIRCULATION OF DEPOSITS. 361 immediately recall the money they have lent or deposited. The history of the Bank of England furnishes many such occasions ; but as the bank enjoyed the full confidence and support of the government, it was ever able to bear the pressure of such occa- sions with less damage than any mere private bankers. No depo- sitor in the Bank of England has, during its existence of one hundred and sixty years, ever lost his deposit. During that time, immense sums deposited with private bankers, and inferior establishments, have been totally lost. It cannot be doubted that the bank, despite the losses incident to lending money, to the temptation of employing too freely the money of its cus- tomers, and the sacrifices involved in replacing money upon occa- sions of panic, has realized large profits from this branch of its business, which has been increasing in magnitude and advantage from the institution of the bank until the present time. We have thus presented deposits in the single view of their safety, and the advantage of the bank in lending such propor- tion of them as it may be expedient to employ in that way. And we have only referred to deposits of actual money — that is, of coin or bullion. Other values which are included in depo- sits, such as bank-notes and bank credits, will be considered hereafter. Our object has been to separate the various functions and processes of the business of the bank, and to give the reader a distinct view of each process, without which he cannot under- stand the whole when combined. There is, however, an aspect of deposits of money, which may be deemed equally as important to the bank, and more so to the commercial public, than that which we have presented. The deposits would not reach nearly so large an amount, if they were expected to lie in the bank useless to the depositor. Money is deposited not only for safe-keeping, but for actual and rapid use. The bank allows the deposits to be transferred from one account to another, in as rapid succession as the convenience of the parties may dictate. The circulation of deposits may, by this means, be vastly beyond any possible actual movement of money by counting and delivery out of hank. Without any trammels of counting, weighing, scrutinizing and assaying, such 362 EFFICACY OF CIRCULATING DEPOSITS. as must take place with coins and bullion, these, when once depo- sited, may be transferred by check on the books of the bank a hundred times daily, if needful. This may give trouble to the bank, which must have clerks enough to make these transfers, and keep the accounts of all correctly. The operation of these transfers takes nothing from the bank ; the money remains ; the ownership only changes. The great facility, safety and rapidity of this mode of payment attracts large sums, because the depo- sitors have, in much the largest number of cases, a far more efficient use of their money as it lies in bank, than they would have if it were in their own hands. This use of deposits so swells the amount deposited in bank, as to place a much larger sum at the disposal of the bank for its own profit. Tims the bank could lend a certain proportion of its deposits, and receive interest therefor, at the same time that the owners of the depo- sits were making the utmost use of their money which could be made under any circumstances. This mode of payment offered to its customers by the Bank of England was the same which had been enjoyed, to some ex- tent, on the books of the private bankers ; but the superior credit of the bank, and the far larger number of its depositors, gave much greater efiect to this rapid mode of payment than could take place between the same parties as depositors with diflFerent private bankers. This advantage gradually attracted to the bank a large portion of the money of the country, which became available for a mode of payment, the most effective of which it was susceptible. The money deposited was thus made to perform the same duty, in proportion to the amount, as that which was shut up in the Banks of Amsterdam and Hamburg, with this advantage to the depositor, that he could withdraw his deposit at pleasure. The bank deposits became the most popular and safe mode of effecting the larger payments of com- merce, foreign and domestic, and they absorbed the amount needful for that purpose. It is obvious that, with the compara- tively rapid circulation of deposits, a much less amount would be required for these payments, than if coins had to be employed for that purpose. The deposit system of payments was one not THE ISSUE OF BANK-NOTES. 363 only of great efficiency, but of great economy ; it saved proba- bly three-fourths of the money ^vhich would be required to make the same amount of payments by the actual counting and delivery of coins ; but, in fact, payments could be made ten times faster by deposits than by coins. The money thus econo- mized was lent by the bank to its customers, who would be, in a large degree, the very same who made the deposits. The depo- sitors had, then, not only more eifective use of their money as a deposit, but their united deposits placed at the disposal of the bank a large sum to be lent to them for their accommodation. Another mode of business open to the Bank of England was the issue of bank-notes, or other securities of a similar nature, for which they might find a demand. Bank-notes, properly speaking, were unknown in England at the origin of the bank. The notes of the goldsmiths were regarded in no other light than that of promissory notes of individuals. They never reached that full currency as money to Avhich bank-notes have since attained. The notes of the Bank of England were for a long time, by writers and in public documents, called promissory notes payable on demand, to distinguish them from the usual business notes drawn upon time. As the Bank of England Avas the first to issue bank-notes, now technically so called, in that country, it may assist our perceptions of the true nature and functions of banks, if we regard them from the point of view taken by the bank, when it first issued a form of security which has since occupied so much of the time and attention of the commercial and political world, and about which opinions have been so divided. The bank was authorized by its charter to deal in bills of ex- change, and as bills were much used in England in the domestic, as well as in the foreign, trade, they were of course early ofiered to the bank. It would be apparent to the bank, that the amount of foreign and domestic bills was far greater than the money and bullion in the country. The bills of exchange, therefore, offered to the bank a vastly larger opening for business than any possible operations in money or bullion. It became an in- teresting point to decide in Avhat way the bank could deal in 364 BANK-NOTES AN EXCHANGE OF PAPER. bills of exchange, foreign and domestic, and it may be added promissory notes, with advantage to itself and the public. The subject, as thus presented to them, was much simpler than it is regarded now, when it involves so many complications. Bills of exchange and promissory notes had then, as now, some time to run before maturity, say an average of three months. During that time, these securities were of no use to the holders, unless they could transfer them in payment of debts, or in the purchase of property. This advantage would be rare, for the amounts would be inconvenient, and the exact standing of the parties not always known. But as these securities, among men of business, make a very large item of their posses- sions, they would naturally be used in obtaining loans ; and so far as the bank had money to lend, it would not only look with favor upon such securities, but would incline to carry its dealings in them far beyond the amount of any money it could command. The obvious suggestion would be, to give the holders of these securities of such inconvenient amounts, and limited credit, the notes, in small amounts or denominations, of the bank itself, payable at the same time. The bank would deem it quite safe to exchange its own promissory notes for approved notes or acceptances of individuals, both payable on the same day ; so that, on these transactions, the amount payable by the bank each day would be the same which was payable to the bank. For this exchange of notes, or securities, the bank would of course exact a compensation in the shape of commission, dis- count or interest. The advantage to the customer of the bank would be obvious ; he Avould receive, for instance, in place of a bill of exchange or promissory note for X180, nine notes of the bank for <£20, each of which would be gladly received by all persons in the payment of debts or goods. The inducements to such a business would be quite sufficient to secure its continu- ance on both sides. But the Bank of England, on the suggestion of certain bold and ingenious financiers of that day, decided to go a long step farther, and so to increase the inducements on its side as to insure a large business and great favor with the people. It was BANK-NOTES PAYABLE ON DExMAND. 365 urged upon the bank, that it might not only issue its notes in small denominations, in exchange for individual commercial paper having some time to run, but that such notes might safely be made payable to the holders, or whoever might present them, on demand. It was alleged, in justification of this bold idea, that these small notes issued by the bank would pass into circulation like money, and thus be dispersed over the kingdom ; that they would furnish an immense facility in business, and become almost indispensable in the transactions of domestic trade ; that they could not, and would not, tlierefore, be returned suddenly and in large quantities upon the bank. It was further urged that it would be a very great convenience to the holders of these, if an occasional want of money or coins could be supplied at once by presentation of these notes at the bank ; that it would bo easy for the bank to supply these occasional wants, and that the doing so would give the notes a currency like money, and a favor with the public far beyond any previous anticipations. Upon such considerations, the bank decided to issue notes payable to bearer on demand, in exchange for individual paper j)ayable at a future day. The bank thus undertook to jjcrform an impossibility, in the hope that it Avould not be called upon to redeem the promise, or make the attempt. What the bank could do was to give its own notes, of convenient denomi- nations for circulation, in exchange for individual paper, and payable at the same time ; and in doing this alone, the bank could have rendered a great service to the public with small risk. The bank had not the money, and could not, therefore, purchase the paper offered; the notes offered by the bank were not money, Aough a much better substitute for money than the notes of indi- viduals, which could only circulate to a very limited extent as a medium of payment. The bank issued notes payable to bearer, without endorsement, and this certain!}' added to tlie facility and convenience of their passing rapidly from hand to liand as a currency. It departed from sound i)rinciplcs, when it made these notes payable on demand in gold or silver ; for it must be contrary to sound principles, to undertake to do what cannot be done. The bank-notes were nothing more, and should not have 3GG THE FUNCTIONS OF BANK-NOTES. been held up to the public as anything more, than the mere pro- missory notes of the bank, convenient in form for circulation among all those who chose to take them, not as money, but as promises to pay money. The promise should have been only such as the bank could perform. Strictly speaking, the bank could oidy pay in coin when it received in coin. It could exact payment in coin for the note received of every individual only when the note matured, and not before. The accommodation between the bank and its customei's was mutual in this exchange of notes ; the bank received a profit, and the customer received the bank-notes a better medium of payment, one which would be received out of the bank, as well as in it, in payment of debts, or in the making of purchases. But it should never have been imagined for a moment, that by this process between the bank and its customers they manufactured money. If the notes issued by the bank had been payable in specie only upon the day when the paper taken by the bank was payable, then the bank would receive every day from the public as much as the public could demand from the bank. The bank-notes would, in this case, have served every legitimate purpose which such an instrument could serve. If all the business-paper of England had been thus exchanged for notes of the Bank of England, then all this business-paper could have been paid off and discharged by these bank-notes. This surely was an advantage in itself, and an economy of money very desirable to be achieved. Nothing more than this should ever have been expected of bank-notes. It is true that bank-notes might have been issued on the basis of specie alone; in that case, the specie should have been kept ready for their redemption, pound for pound. But when the notes of a bank are issued in exchange for the notes of indi- viduals, they should in strictness be payable in gold or silver only when the notes of the individual are so payable. The bank would then either receive its own notes back, or something that would pay them when presented. If we suppose the Bank of England to have received from its customers individual notes and acceptances to the amount of .£5,000,000, at the rate of six per cent, discount, and having an SECURITY A G A I X P T ABUSES. 367 avr/age of two months to run, it would then have issued its own nf^tes to the amount of £4,950,000. The bank wouhl thus have furnished to the many debtors whose paper it held for .£5,000,000, a perfectly good paper currency, in which payment of this sum could be made. And these debtors would only have to purchase from the public this <£4,950,000 of bank-notes, and carry with them £50,000 m money, to pay off the whole indebtedness of .£5,000,000, find be freed from their liabilities. Surely, bank- notes m'ght be employed in this way, Avithout calling them money ; and every needful security might be required of a bank against the abuse of this power of issuing bank-notes, without attempting to make them money. In the case supposed above, the bank, if its issues were pay- able on demand, would be under an obligation to pay £4,950,000 in coin, on presentation of its notes. But the holders of these notes had not given coin for them, and the notes for which they were given would not be due for an average of two months. The debtors of the bank needed but one per cent, of the amount in money, and the public needed only that the bank-notes would pay all their debts, and make all their purchases. There is no conceivable use of making bank-notes payable on demand, but as a check on over-issues and abuses. The experience of a cen- tury and a half in Europe proves that it is no adequate check. Other checks and securities, far more safe and reliable, have been applied, and not nearly so burdensome, to banks. The Bank of England, in the first instance, really offered the security of the public debt ; and during its whole history it could ahvays have given, and could now give, that security for its whole cir- culation, if it were only compelled to pay its notes in specie, jjari passu, with the payment of the individual paper held by the bank. Every really useful function of a bank-note can be as fully performed by one payable in specie at two, three or four months, as if payable on demand. It is certainly, uj)on occasion, a convenience to be able to ask for and receive sj)ecie on demand ; but it is a convenience the public can have no right to expect, as it involves an impossibility. It would be a great convenience for merchants, if they could open their port-folios at any time, 368 PROPOllTION OF COIN TO NOTES ISSUED. take out notes and acceptances, and make demand for the amount in specie ; but it is an advantage impossible to be accorded. It is an advantage, in the case of the bank, only maintained for the public at a cost ten times greater than it is worth. This advantage, which the Bank of England only offered, in the first instance, to attract business, and to give currency to their notes, has been paid for since, by the people of England, in a series of pressures, revulsions and currency fluctuations, which have inflicted injuries and losses upon the government and people of Great Britain, in comparison with which the pre- sent national debt may be insignificant. It may be said, how- ever, that this system has advantages which go far to counter- balance these evils. But what should be thought of a system of currency which fluctuates between such a height of advantage on the one hand, and such a depth of evil on the other ? The suggestion was discussed very early in the history of the Bank of England, that there was a certain proportion which ought to be preserved between the liabilities on demand and the amount of coin which ought to be kept to meet them ; and one- third was often named as a safe proportion. This has often been repeated and relied upon, down to the present time. As a principle, it never deserved a moment's consideration ; it could never be anything but a conjecture, and all the history of bank- ing proves it to be utterly fallacious in the hour of trial. The same principle should be applied to the engagements of banks which is applied to the engagements of merchants — what they engage to do, they should be held strictly to perform. If they undertake to pay all their notes on demand in specie, there should be no guessing and no conjecture in the matter, but full and complete preparation to meet the engagement. Dollar for dollar should be the rule, or means to obtain the dollars before they could be demanded. The error committed by the Bank of England was not in agreeing to pay their notes in specie, but in issuing notes pay- able on demand ; in discounting paper having two, three, four or more months to run, and giving their own notes payable in- stanter. No financial contrivance can make this possible, and SYSTEM OF POST- NOTES. 369 no ingenuity ever gave a sound reason for it. We may imagine that all the commercial paper of Great Britain Avas discounted at the Bank of England, and the proceeds issued in the shape of bank-notes ; "we may imagine that these are received by the public as a convenience of the highest order, being the change given by the bank for the very inconvenient paper issued by in- dividuals ; but we cannot imagine that the bank could pay on demand, in gold or silver coin, a sum equal to the whole amount of the commercial paper issued by individuals. It would require ten times as much coin to support those bank-notes as it would to pay oif the commercial paper in exchange for which they were issued. For a million in coin would, in the course of three months, pay off ten millions as it matured from day to day ; but it would require ten millions in coin to discharge ten millions in bank-notes payable on demand. We are far from contending that the Bank of England should have issued notes not payable at all in gold or silver. The bank should have promised only what it could with certainty perform; that is, to pay the bank-notes at the maturity of the notes for which they were given. There may have been then, and may be yet, serious objections in practice to any mode of issuing bank paper in the rather unusual form of post-notes, maturing on an average of about three months. That, however, is the true theory of bank-notes issued in exchange for the commercial paper of individuals ; if a proper effort had been made, practice might long since have formed a sound and available system on this safe basis. It would be very safe to aver that, upon the system of post- notes issued to meet the matui'ing of the notes discounted by the bank, the Bank of England would never have suspended pay- ments of specie ; and, what is of far greater consequence, the bank would not haVe been obliged to regulate its issues accord- ing to the fluctuating movements of specie ; movements which might have their origin in India, or China, or America, and by which the whole interior or domestic business of the country would be ruinously affected, though without any necessary or legitimate connection. 24 370 THE ACTUAL MEDIUM OF EXCHANGE. It should be borne in mind, that the great business of domestic and foreign trade is not governed, though it may be aflfected, by the fluctuations in the supply of the precious metals. The wants of men at home and abroad must be supplied, whether the precious metals are plentiful or scarce. We have shown that the domestic, as well as the foreign, trade is mainly an exchange of commodities ; and that the only use made of gold and silver is in the payment of balances, and in the small dealings of the retail trade. It is a false and unsafe principle to assume that promis- sory notes of banks or individuals must fluctuate in supply as the precious metals fluctuate in quantity. The business, that is, the exchange of its commodities, in no civilized country is accom- plished by coin or bullion, and in the present state of productive industry it cannot be so done. The great transactions in com- modities by which they are distributed in every country, and between difl'erent countries, and thus forwarded for consumption to the retail venders, are carried on, in the first instance, by bills of exchange and promissory notes, the amounts of which are stated in money of account, as were the prices for which the commodities were sold. This business proceeds ordinarily Avith- out any reference to the supply of the precious metals. The individual paper issued in these transactions being exchanged for bank-notes, may be thus paid without any use of coins or money, except the balances and the discount paid the bank. The bank-notes should not, then, fluctuate with the supply of the precious metals, but with the business in which they are issued.' They are nothing more than a substitute, by the bank, of its own promissory notes for those of individuals, by which the latter arc enabled to pay their debts among themselves. If a man of business, who had issued his notes and acceptances for .£10,000, found they had been discounted in the Bank of England, and that XK900 of the notes of the bank had been issued in exchange, he could find no better nor safer medium in which to pay his debt to the bank, than these bank-notes, so far as they would reach. He would, therefore, give any commodities he had pur- • Ante, pp. 163-4. THE F U N C T I \ S OF BANK CURRENCY. 371 chased by this issue of his own paper for <£10,000, to procure the bank-notes with which to pay his debts ; for the bank-notes are, for his purpose, of equal avail and far greater convenience than coin. If he is a hokler of the notes of others for £10,000, he may have them discounted, and thus procure the notes to ex- tinguish his indebtedness ; the bank always keeping a sufficient claim on its debtors to redeem all its notes. It is a process by which individuals change their own notes into bank-notes, and with them pay their debts ; in other words, a process by which men apply the paper which others owe to them to pay the paper upon which they are indebted to others. In any business com- munity, the parties who issue their own notes largely are the same who receive notes largely from others : thus, when this in- dividual paper is converted into bank-notes, it furnishes a con- venient medium for the discharge of these mutual debts ; evex*y one being willing to receive, in payment of debts due to him, that which others will take in payment of his debts. We have already, in the chapter on bank-notes, remarked at some length on their peculiar functions or applications ; our object is now only to recall some of these, and to show how bank- notes become the safest medium for paying the promissory notes or acceptances of individuals. A. B. is the creditor of C. D. for £1000, and holds his promissory note, at four months, for that sum : A. B. curries it to the Bank of England, and receives there for it ,£980 in bank-notes. The bank becomes thus the creditor of C. D. for £1000, and it becomes thus possible for C. D. to pay his debt of £1000 in bank-notes, less the discount. The bank is equally Avilling and ready to receive its own notes in payment, from every one of whom it is a creditor. It has thus issued a common currenby, which all its debtors may take, and return in payment of the debts they owe to the bank. The bank-notes are good, not because the bank has undertaken the impossible task of paying them in specie on demand, but because there is an effective demand for every note issued by the bank, to pay debts due to the bank, and which must be paid at the risk of ruin. The notes issued by the bank in the i)urchase of bullion, and 372 THEORY OF DEMAND FOR BANK-NOTES. on tlie deposit of coin, rest immediately on that basis of bullion and coin : those issued in exchanfre for commercial paper rest immediately on that basis. Supposing the notes resting on these different bases to have been distinguishable, the former would return to the bank only when the convenience of the public dic- tated, or when there was a demand for the bullion or coin for which they were given ; the latter would return by necessity, and upon a different principle. When the bank gave its notes in exchange for commercial securities, it held the person liable, on these securities, for an amount, equal to the discount, greater than its notes emitted. It looked, of course, narrowly at the ability of these parties to meet their engagements at maturity. By the emission of its bills, the bank furnished to the public the very medium of pay- ment which would pay off and finally discharge the commercial paper. According to the course of commerce, the party who purchases merchandise gives his note or bill, payable at a sub- sequent day, and by consequence such purchaser has at his com- mand merchandise which he estimates at as much and more than the amount of his note or bill. He has the very commodities for which he gave the commercial security taken by the bank in ex- change for its notes ; these commodities, in his estimation as a merchant or dealer, are, on being sold, sufficient to command a value in money or bank-notes equal to his own liability. He can redeem the notes of the bank issued for his paper, by sale of the same goods which originated his paper. The merchant depends on sales of his goods for means to pay the debts he con- tracted in their purchase ; and the value of commercial securi- ties depends mainly on the certainty and facility with which merchants can convert their goods into the means of paying their liabilities. The bank furnished a facility for such payment which did not before exist ; and the goods held by its debtors would be freely offered for its notes, they being as available as money to extinguish indebtedness. The public, by this issue, were furnished with a convenient currency, the real value of which would be fixed by the demand of the debtors of the bank. These could neither doubt nor temporize; they must be prepared, COMPETITION AMONG DEBTORS. 373 on the (lay of payment, witli oitlier the money or bank-notes. The demand for bank-notes would be urgent and imperious ; the alternative would be, the notes, or money, or bankruptcy. This demand, as already observed, would more than equal the amount of the notes in circulation, so that every solvent debtor of the bank would be an agent to give value to its notes, to withdraw them from circulation by offering for them as much as he would for a corresponding amount of gold or silver. There could be no depreciation of the bank issues whilst the external demand equalled the amount issued. If the bank discounted, in a week, a million sterling of commercial securities, all running oflf in four months, at the rate of six per cent, per annum, and paid out £990,000 in its own notes, the debtors of the million would, within the four months, be compelled to prepare for payment of that amount as it matured ; and the holders of the notes would soon perceive the operation of the necessity to which these debtors had subjected themselves. The bank-notes would, accord- ingly, be held at the same value as coin, because they would pay the same amount of debt. This result would be more perfectly produced by the working of the bank, after it had been long in operation, when the demand for its notes would bo increased by the enlarged amounts falling dne, and by its widening circula- tion, which would carry many notes beyond the reach of the debtor, and thus force him to pay in money some portion of his liabilities. A merchant may purchase, or not, as he deems most for his interest ; he may select his own time for dealing ; there is no actual necessity in this part of his business. But having once made his purchase, and given his paper, a necessity from which there can bo no escape, nor evasion, is laid upon him to meet his payment. The competition, therefore, among the debtors of, the bank, to secure its notes or money, would equal, if not sur- pass, any other competition in trade. It was this incessant de- mand, pressed by the very merchants who held goods selected with a view to the wants of the public, which gave to bank-notes the value and efficacy of money. Doubtless, the promise of the bank to pay its notes on demand had weight with some ; very 374 BASIS OF DEMAND FOR BANK-NOTES. few, however, received the notes for the purpose of demanding coin, or because coin could be demanded ; they received them because they could be employed with the same effect as money. They were more abundant, convenient and safe ; they answered the same purpose, and were therefore preferred. The immediate question with them was, will these notes be received in payment from us, and not as to the ability or willingness of the bank to redeem them. It was nothing to the receiver of the notes what might be the actual condition of the bank, so that the notes would pay like money. Men received money only to pay it away ; and when notes were offered as a substitute, they were received only when they could be paid like money. Individuals could not investigate the situation of the bank, but they could easily ascertain whether bank-notes would buy goods, or pay debts. If the commercial paper discounted by the bank was payable in a short time, the demand for the notes would be proportion- ably active, as the debtors must be prepared at the day with notes or money. If it happened that a portion of the debtors failed to make good their engagements, and take up their paper, then a corresponding demand for the bank-notes ceased, and a surplus remained in the hands of the public, which must soon or late be presented for payment to the bank, upon which the loss in such cases fell. It is upon the operation of this active exterior demand for its notes, that the Bank of England has been so eminently success- ful during its whole existence of one hundred and fifty years, through many severe trials, and one long period in which it did not pay its notes on demand in specie. If the potency of this demand, in sustaining a circulation of bank-notes, were not seen at a glance, it is abundantly proved by the fact that the Bank of England, during this suspension of twenty-five years, main- tained a vast circulation not redeemable in specie. Its notes were, during this time, the chief medium of payment. It is well- known that every attempt to obtain such a circulation has failed, iinless founded upon a specie basis, or upon an exterior demand equal to the amount of the circulation. The most, arbitrary and J.HE BANK LENDS CURRENCY, NOT MONEY. 875 despotic government has never succeeded in forcing a circula- tion, and in keeping it at par, in violation of these principles. But we shall revert to this subject again. We have thought proper to insist upon the efficacy of the de- mand for bank-notes created by indebtedness to the bank, in supporting a circulation, because many in England supposed that a large portion of the notes of the Bank of England had no other basis than a promise to redeem them on demand. The fact that the bank had promised to pay its notes on demand — a promise held out because it was not expected that performance ■would be exacted — seemed to lead a portion of the public into the belief that in it consisted the Avhole security and value of the notes. This idea once entertained, continual apprehensions were felt by the timid and distrustful, even whilst the notes were daily fulfilling every function which could be required of them. The bank merely designed to offer a currency which would be adequate to all the ordinary payments, and which would command money whenever, from special circumstances, it might be needed. This it performed for more than a century, but unhappily not without creating the impression that its notes were all based, like the credits of Amsterdam, on an equivalent in specie. And as the holders of the English notes knew that such equivalent never existed in the bank, they supposed themselves called upon to believe that the bank, upon emergency, could procure the coin to redeem its issues. The bank could, it is true, at all periods of its history, have furnished to the holders of its notes as much coin as was really needed for the purposes of domestic or foreign trade. In one condition of commerce, the precious metals would flow into the bank ; in another, they would flow out. In all which, the bank was able and bound to accommodate its cus- tomers. The goodness of its notes issued for commercial paper would not depend upon these ebbs and flows of specie, but on tiie solvency of the debtors of the bank ; and this solvency would not depend on the amount of specie in the country, or in the bank, but on the means which the debtors held to comniand the bank-notes. There was a great difierence between furnishing to commerce 376 COMMERCIAL SECURITIES NOT BASED ON COINS. all the coin really required for the payment of balances, and converting at once all the issues of the bank into gold or silver. So far as commerce is concerned, the latter was impossible, and ■wholly unnecessary. Commerce could provide for its own neces- sities, and would have placed the bank in the proper condition for this purpose ; but a panic got up under the idea that bank- notes, to be good, must necessarily be payable on demand, it could neither resist nor allay. There has never been a time, in the history of the Bank of England, when, if a suflBcient amount of its notes had been presented to absorb all its specie, the balance in circulation would not have been perfectly safe and good. The question of depreciation is not touched here ; its important bear- ing on this subject will require more than a passing consideration. Whatever reasons of expediency or sound policy there may have been for requiring a bank to pay its notes in specie, it is no more right to say that the issues of the Bank of England were based upon coin, or a promise to pay in coin, than it was to say that the commercial securities discounted by that bank were founded upon their promise to pay coin. The real basis of the commercial paper was the commodities for which that paper was given ; and that basis was not changed or disturbed by the fact that the evidences of debt to which it had given rise were paid, settled, arranged or extinguished in any other way than by payment in coin. A very small part of these evidences would have been paid in coin, if they had not gone into the bank ; they must and would have been adjusted in some other way. The same goods which formed the basis of the commercial paper, became the basis of the bank-notes into which that paper was converted ; and there was no commercial necessity that the bank-notes should be paid in coin, any more than the commercial securities. There was an advantage in being able to procure coin when specially needed ; but a great mischief, in supposing that bank-notes could not be as good as gold, without being convertible instantly into gold ; that beef and mutton purchased with bank-notes were not as good as if purchased with silver ; and that debts paid with bank-notes were not as fully extin- guished as if discharged in gold or silver. CONCENTRATION OF PAYMENTS IN LONDON. 377 We have said more than belongs to this place, of the nature of the circulation issued by the Bank of England ; the chief de- sign now being to point out the mode and facilities of payment afforded by such a circulation, compared with those before en- joyed. It cannot, however, be necessary to speak of the supe- rior conveniences and advantages of bank-notes as a medium of payment. The sturdiest objector to banks does not deny what is so manifest : his objection goes to the risk of loss, the danger of fraud, and the abuses of credit. In all cases, where banks of circulation have been established and conducted with even a moderate degree of prudence and skill, the notes have almost invariably been preferred to gold and silver. There is, in fact, no comparison between bank-notes kept at their proper value and coin as a medium of payment, in regard to convenience, safety and efficiency. We cannot now conceive of any medium of payment intended for general circulation, superior in these respects to bank-notes fully enjoying the public confidence. Greater permanence may yet be given to the paper, and addi- tional safeguards provided by the engraver against forgery ; but nothing superior in facility will ever probably come to the aid of commerce. Those, however, who have adequate ideas of the power of credit, know that bank-notes cannot exhibit the highest stage of its utility. Ever since the establishment of the Bank of England, there has been an increasing tendency in the payments of commerce to concentrate in London. Although the bank had furnished a medium at par with gold in London, and at par, if not worth more, through all the Island, yet the practice com- menced, and has continued until this day, of giving notes and bills payable in that city ; and of course merchants and dealers received and paid there a large proportion of their credits and debts. Those who had money on hand found it as available in London, and more safe than at home ; those who had to pay money could, with credit, more readily obtain it there tiian at home. But that great city became not only banker for the whole Island, and for the whole British dominions, but for all nations havinji; commerce there. An immense and hitherto un- 378 EFFECTS OF CONCENTRATION. paralleled concentration of payments took place in London. This was in compliance with a law of trade which continually presses upon merchants the necessity of increasing the efficiency, and economizing the means of payment. Great Britain has long been the country which has displayed the proudest triumphs of commercial integrity. All the world has been willing to confide money to the London bankers. It was too obvious to escape the attention of British traders out of that city, that the more the bank-notes and bank credits were concentrated, the more rapidly they could be circulated. A million in the city could perform as many payments in a day, as five millions scattered over the country. The system in the city tended, as we have seen, to resolve itself into the operation of paying by checks, which was safer and more rapid than with notes. There can be no ques- tion among those who have examined the subject, that the saving in the use of bank-notes, in time and in trouble, in making the pay- ments of London has been a vast assistance to British commerce. The accumulation of money there has greatly strengthened the bank, and has enabled it more freely to advance to the govern- ment, and to merchants, than it could otherwise have done. In regard to the payment of specie, the bank was more in the power of the private bankers and merchants in the metropolis ; but they were less dangerous than the same classes in the country. The bank had more command of its circulation than if it had been difi'used among the whole population ; and could, with greater facility, increase or diminish it as the demands of com- merce might require. This system was directly opposed to its interests, so far as it regarded a very great and wide circulation of its notes ; but, in many other respects, it promoted the best interests of the bank, of the public treasury, and the kingdom at large. It was found that, in one period of the year, the agri- cultural counties had a surplus in the hands of their bankers, which could be lent to the manufacturers, whose surplus, in the time of their harvest, could be lent to the aid of the farming in- terest ; and during all the year, these funds were at the com- mand of commerce, when otherwise unemployed. CREDITS IN ACCOUNT. 379 § 3. The Bank of England's credits in account — Deposit of hank-notes — Funds in bank — Conversion of individual paper into bank-notes — The Bank grants credits for private paper, and receives the credits in all pay- ments — The credits torongly blended with deposits — Open credits payable on demand in specie, hazardous — Objections — Paying credits on demand abolishes time on bills of exchange and promissory notes — Mingling credit and money — Consequences — Real nature of the credits in account — Ex- pand with trade, diminish ivith it — Not money — Payment by bank credits not depeiulent on money — Not a question of convertibility. We liave seen how a bank, -with all its capital lent to the government, could do business upon its deposits, and by the issue of bank-notes ; it remains to consider how much larger a business than in either of these ways could be done with its credits. The business of granting credits to its customers, in the manner we are about to specify, did not probably occur to the Governor and Company of the Bank of England until after the bank had commenced business. It was rather a result of the two branches of business we have specified, than a forethought. There is no doubt they intended to employ their credit in every proper and available way, but they did not foresee the vast busi- ness which would be opened on their books for their own profit, and the advantage of the public, by the mere use of credits in ACCOUNT. The progress of their business soon revealed to the bank, that their customers not only needed a place of deposit and security for their coin and bullion, but also for their bank-notes. The deposits of coin, of which we have treated above separately for the sake of distinctness, were swelled by the deposit of large sums in bank-notes. It was soon perceived that a much larger amount of payment was effected by this movement of the depo- sits, than by the circulation of both bank-notes and coin. The chief demand for means to pay debts was not for bank-notes, or for coins, but for funds in bank ; and this demand was early responded to, on the part of the bank, by discounting business- paper, and giving the customer for whom the discount Avas made, not bank-notes or coin, but simply a credit in his account, which to that amount swelled his deposit. This credit rested on the 380 CREDITS IN ACCOUNT. same basis precisely as that upon ■\vhicli the bank-notes were issued, namely, individual business-paper. By this device the deposits of the bank were increased to a sum far beyond the aggregate of bank-notes and coin on deposit. The bank became, to some extent, a book-keeper for its customers ; it gave them a credit for their claims upon others, and charged them with the claims of others upon them. This was the case so far, at least, as the respective claims were discounted ; and the bank charged the same commission, or discount, for this credit in account as it did when it advanced or lent coins, or issued bank-notes. This became soon the most important department of the business of the bank, as Avell as the most profitable ; for the keeping these accounts was not so expensive to the bank as issuing its notes. These credits, as soon as given and entered in the deposit account of a customer, were worked in the same way, and to tho same effect, as deposits of coin and bank-notes. No distinction was made in the management, use or efficacy of a deposit, whe- ther it originated in one of these ways or another. The bank, for every amount of credit thus granted, held the corresponding amount of discounted paper. The return of the corresponding amount of credit was all the payment the bank asked for the business-paper it held. The credits were, therefore, as efficacious to discharge a debt in bank as coins or bank-notes. The bank held the individual notes against the credits it granted ; it sur- rendered them on the return of the same amount of credits, or the amount granted for each note or bill, with the amount of the discount in money. The bank liquefied for its customers the in- convenient and unemployed individual paper in their port-folios, and made it available by transfer, in any desired amount, for the payment of debts. A man with X10,000 of private paper, in twenty notes of various amounts, could do little or nothing with them in payment of his own liabilities; but with credits in deposit to the amount of X9900, he could effect any payment or purchase which he could have done with the money. This would have made a safe and extremely profitable busi- ness to the bank ; but it involved an onerous obligation, and a heavy risk. The credits were entered in the deposit accounts CREDITS PAYABLE ON DEMAND. 381 of tlie customers, which deposits -were made up of bank-notes, bullion and coin, and were, by the practice of the bank, payable on demand in coins. Thus the bank, whilst exchanging a credit on its books for business-paper having several months to run, became liable to pay these credits on demand in coin. This liability became one of great hazard to the bank ; for, whilst any run upon it for payment of notes would be gradual, because the notes were always widely circulated, the demand for depo- sits could be made instantly to a very large amount. The depo- sitors in the bank, from an early period of its existence, have always had it in their power to demand more money from the bank than it could pay, and of course to force it into suspen- sion. * This was not a necessary risk. The credit account should have been purely a credit account, only payable by the bank in money when the paper matured for which the credit was granted. The credit granted by the bank answered every needful purpose, without being payable on demand. The real legitimate operation, whether the bank issued its notes or granted credits, was, that the payment of the discounted paper by the drawers or acceptors should absorb the bank-notes or credits, and return thein, or something that would redeem them, to the bank. This routine of operation would end the transactions in each case. The bank, in receiving a promissory note at ninety days, received but a security for a credit granted by one individual to another ; for this it exchanged its own credit, which, to make the transaction correspond, should also, so far as it concerned payment in money or coins, have been at ninety days. Nothing more should have been attempted, where nothing more could be accomplished, than to make business or commercial paper available for the pur- pose of adjustment, payment of debts, or set-off of mutual claims. The bank could spread all a man's credits on its books, and make them available for the payment of his debts. It could render him no greater service ; it could neither convert his paper into money, nor lend him the amount in money, nor could it safely agree to pay on demand the credits granted on its books. The promissory notes and acceptances issued in the 3S2 TRANSFER OF BANK CREDITS. course of business or time should not have been, by any attempted device of banking, changed into notes or debts payable on de- mand ; it was too hazardous a measure ; there was no need for it. It is enough that a safe method had been found of changing these time securities into a shape in which they could be as fully available for their own payment and final discharge, as either gold or silver. The transfer of credits permitted to the depositors on their written order or check became, in the hands of the great mer- chants and dealers in commercial securities in London, one of the most eflfective modes of payment ever employed. It was freed from the forms and precautions which were practised at the continental banks ; and any conceivable amount of pay- ments could be made in a mornini; by the active movement of a comparatively small sum on the books of the bank. At the Bank of Amsterdam, he who received a transfer in bank for pay- ment, could not transfer or pay away the amount thus received until the next day — a precaution which must have checked the circulation of the deposits to a most injurious extent; but for this regulation, it may be presumed that a third of the actual deposits would have fully sufficed to make all the payments of Amsterdam. There was nothing in the constitution of the depo- sit banks which prevented them from offering the same facilities of transfer as the Bank of England ; but when they Avere esta- blished, the minds of merchants had not conceived such a con- venience, nor the efficacy of such a rapid circulation. The banks once in operation could not easily, without creating apprehen- sion, make any great change in their mode of conducting busi- ness. It is difficult to imagine any scheme of adjusting the large payments of commerce superior to this. It embraces at once all the efficacy of set-off, and all the convenience of rapid circula- tion; the advantages of both these processes enter into and form the basis of this successful mode of payment. It is superior to the mere operation of set-off between individuals, because this requires a meeting to adjust accounts; it is superior to the mere circulation of bank-notes, because it is applicable to any frac- BANK CREDITS NOT MONEY. 383 tionaiy sum ; it saves the risk of counterfeits, of theft, and of fire, and all the trouble and time of receiving, counting or lock- ing up notes ; and, more than all, it saves the necessity of a deposit of coin. The bank takes all the risk of forgery from its customer, who has only to avoid taking checks from those whose honesty he doubts. The merchant's check-book lies open before him, and his deposits can, by his own hand only, be changed in an instant into that which is as available as money. No error in practice or principle which can be laid to the charge of the Bank of England, was more full of risk and dan- ger than this undertaking to pay bank credits on demand. It was an engagement useless as a security to the public, because it could not be kept, if performance was demanded, and it was useless, if performance could not be exacted. To make this more plain, let us suppose that a manufacturer or merchant, de- sirous of making his own paper as available as possible in the furtherance of his business, had issued XIOOO in £:20 notes, pay- able in four months ; that the drawer of these notes, finding his credit not sufficient to give them proper and useful currency, had carried them to the bank, and proposed to give at the rate of two per cent, on the whole amount, if the bank would endorse them ; that, for this commission, or interest, on the notes for the time they had to run, the bank had lent its credit, by endorsing the notes, making them thereby current for all purposes of payment — this would have been all the aid or facility the bank could safely give, by the mere use of its credit. If the bank could not lend the party the money on security of his £20 notes, it could only offer the aid of its credit to make the notes good and avail- able until the day of payment arrived. The bank could not pay the debt of its customer, if it could not lend him the money ; the issuer of the notes endorsed by the bank would have been obliged to pay them at maturity, and upon faith of tliis only could the bank have ventured to endorse them. The bank could not ex- tend its aid to the drawer of the notes beyond their maturity, for that would have been equivalent to paying them. The per- sons into whose hands these endorsed notes would fall, would expect punctual payment, and the bank or drawer must pay; 384 CREDITS BY DISCOUNTS. but as the bank could only lend credit, it could not pay all the debts of those it could aid with its credit. The bank could not, therefore, extend the aid of its credit beyond the maturity of the notes guaranteed, because that would involve payment by the bank. But if the bank could not safely assume the debts of its cus- tomers, at the maturity of notes endorsed by them, it could not agree to pay these endorsed notes on demand in money. Yet this is the very thing which the bank actually undertook to do ; it issued its own notes, payable on demand in gold or silver, in exchange for the notes of merchants and manufacturers, pay- able in three or four months : that is, the bank discounted notes of its customers to the amount of millions sterling, payable on demand ; it virtually made a four months' note payable in- stanter ; it abolished time on notes and bills of exchange, and made them payable on demand, relying on a generous public not to take advantage of the extraordinary offer. But the bank was still more daring ; it discounted notes largely, and carried the amount of the proceeds to the credit of the party, as so much money deposited : that is, in the same column in which the bank gave its customers credit for gold and silver deposits, it gave them credit for the amounts of notes and acceptances having months to run before maturity, and engaged to pay the amount of these securities on demand. It mingled a process of credit with a process of cash, in a mode as absurd in theory as it was dangerous in practice. The men who had given their notes on time had provided for a regular progression of payments, according to the movements of business and the de- mands of consumption ; but the Bank of England virtually abolished the contract of deferred payment between the parties, and became paymaster on demand of debts not due for months, and to an immense amount. The bank had no warrant, in principle or in practice, for this hazardous engagement. Its only excuse was the same which was given for the issue of bank-notes payable on demand, with- out the money to pay, namely, that the bank would not be asked to pay them all at one time. DANGERS OF THE SYSTEM. 385 We regard this error of the Bank of England as the parent of the greater portion of the mischiefs and evils for which banks, in more modern times, are answerable. The banks, from that day to this, have continued to issue notes payable on demand, and to grant credits so payable, in exchange for securities pay- able in from 30 to 120 days. They do this, relying wholly on the forbearance of the public, just as the Bank of England did at first. Sad experience has shown that there are times when the public is not only not forbearing, but when men rush with frantic haste to demand of the bank payment of both notes and deposits. Nearly every bank in existence, conducted on this plan, has, at some period of its history, felt the power and rashness of the public in seasons of commercial panic. The banks lose their power and usefulness at the very moment when the public most needs their assistance. Friends in sunshine, they become enemies in the storm. This mistaken step of the Bank of England, perpetuated by our modern banks, and producing some of the worst results of modern banking, demands more full explanation of its nature, and the causes of its operating so injuriously. It may be less difficult to comprehend the evil, in its origin in one bank, than in the midst of the complications of thousands of banks. We have already, in another place, shown what was as true in the 17th century as it is now, that the great operations of in- dustry and trade are nearly altogether carried on by individual credit. Merchandise and raw materials were, at the origin of the Bank of England, as now, purchased and sold for promissory notes and bills of exchange. There was no time when there were not such securities in the hands of individuals, to represent the chief transactions which had taken place in the previous few months. The average credit may have been two, three or four months ; but, whatever it was, there Avere bills of exchange and promissory notes extant, to show that individuals had undertaken to pay every specific sum in a specific time. To some extent, this individual paper was always circulated in purchases and in payments; but its use, in that way, was always limited and in- convenient. It was upon this mass of business-paper, which or. 386 ADJUSTMENT — THE CONTINENT — ENGLAND. could not have been, in London, in 1696, less tlian five millions sterling, that the Bank of England designed to operate. On the continent, many devices were resorted to, as we have seen in the Fairs of Lyons, and the Banks of Venice and Genoa, to enable the parties to such paper, debtor and creditor, to adjust their mutual claims without the necessity of payment in coin. The parties holding this paper were, for the most part, both debtors and creditors ; they both received it from others, and gave it to others. With them the great problem was, how to pay with the greatest economy and convenience. What each needed, was some plan by which he could use the notes or bills of exchange he held, to pay or satisfy those which others held against him. This facility had been aflforded in England only by private bankers ; but when it came to be offered by the Bank of England, on a larger scale, and with greater security, the opportunity was gladly accepted. He who had liabilities to the amount of -£5000 to pay, in any given month, might have promissory notes and acceptances to a much larger amount in his hands, but be wholly unable to apply them, before they had matured, to the payment of his own, which would mature sooner. The bank offered the required facility — a credit on its books for the paper not yet due ; upon which credit he was permitted to draw for the amount of each of his maturing liabilities as they became due, transferring so much of his credit, upon every occasion, as would be necessary to extin- guish a debt. As the bank dealt with one, so it dealt with all. It liquefied, as it were, upon its books, these promissory notes and acceptances to the amount of millions sterling. In the hands of the holders they were securities, evidences of debt and credit incapable of subdivision, and available, to a very small extent, as a currency or in payment ; but, spread as credits on the books of the bank, they became one of the most efiicient means of payment or adjustment ever employed. The whole of this individual paper became, on the books of the bank, a fund which could be drawn upon and used in payments to its whole amount. Every man concerned in it would be enabled thus to apply his credits to the payment of his debts. No better MONEY NOT NEEDFUL TO ADJUSTMENT. 387 payment could be made, and in the case, none more economical. It could be more economical and easy only where men set-off, in comparing their mutual accounts, their charges one against another. The bank provided, in fact, a system by which it kept books of account for parties holding claims upon each other. If the bank gave, on these books, a credit of a million sterling, receiving therefor the paper of parties indebted to that amount, the bank required no better payment than the return of an equivalent amount of credit for each note or acceptance retired. This whole matter would have been, on the books of the banks, the working of a process of adjustment. It no more required the presence of gold or silver, than it is required by those who balance their book accounts. The money would be required only where the process of set-off or adjustment failed. If any individual could not return the equivalent of his debt in credits granted by the bank, he would have to pay the money : that is, the debtors upon the paper held by the bank would have to redeem the credits granted by the bank in the purchase of the paper, or else pay the money with which the bank could redeem them. This process of adjustment is one which could proceed as steadily on the books of the bank as the progress of industry and trade. Within a certain range it would require no money ; that range would depend on the mutuality of business. So far as a customer of the bank had claims upon others which he could apply to the claims upon himself, he would require no money. As with one, so with all ; so far as the customers of the bank had claims upon each other, no money would be required for their adjustment. So, as between nations; no money is rccpured for payments, except to pay balances. Doubtless, the fluctua- tions of trade would have tiieir effect upon this process of adjust- ment ; but, whatever irregularities might arise from this cause, the process would proceed so long as business continued. This process, in fact, could never fail nor be diminished in its effi- cacy ; but would expand Avhen commerce expanded, and contract when commerce contracted. It would operate, in this rc,sj)ect, precisely as it would between those who had been in the habit of dealing largely with each other upon the faith of their respoc- 388 EVIL OF TREATING CREDITS AS MONEY. tive books of account. If their transactions grew larger, their acccounts would only be longer ; and if their mutual business diminished, the accounts would be shorter. In either case, the process of adjustment would be the same, and equally eftectual, whether the accounts were long or short, or the amounts great or small. "When the Bank of England undertook, as a means of attract- ing business, to pay bank-notes and credits in account, issued for individual securities not due, on demand, it was not foreseen what a Pandora's box of evils Avas being opened, to trouble the commercial world. The bank intended no more than to offer a facility and convenience, which it was believed there would be no temptation to abuse. So far have been the anticipations of the bank from being realized, that, from the very first movement of the bank in this direction, the public seized upon the facility or convenience as being the substance of the transaction, and not, as intended by the bank, as the incident or shadow. The public at once looked upon bank-notes and bank credits, con- vertible on demand into gold or silver, as money, and not, as devices of the credit system, instruments of adjustment. In this aspect, bank-notes and bank credits were a boon, indeed, to men of business. It was no less than an exchange of their paper, payable some months after date, into that which was payable on demand. Bank-notes and bank credits became cash — looked upon and treated as money. This was entirely changing their character and legitimate use ; they should have been regarded as mere instruments of adjustment, having the same effect as books of account. The Bank of England, and all other banks of circulation, have since been held, as a matter of justice to the public, to this convertibility of their credits and their notes; and the important distinction between payments by adjustment, or setting-off debts against debts, and payment in money, has been lost from the mind of the public. It did not result, in the case of the Bank of England, that this giving bank-notes and bank credits, payable on demand, for the paper not due received from its customers, virtually changed that paper into money. It is true, the bank-notes and bank TWO-FOLD CHARACTER OF CREDITS. 389 credits became a currency, with a circulation and powers similar to those of money. Their chief utility or efficacy was not derived from their being payable on demand, but from their use as in- struments of adjustment. They had, thenceforward, two charac- ters — the one as a currency, or substitute for money; the other, as a means of adjustment. They were employed in both charac- ters, but without observing the distinction. The operation of adjustment, by which nine-tenths of the debts were actually dis- charged, was no longer understood ; and the whole eflBcacy of the payments was attributed to the use of bank-notes and bank credits, in their character of money or currency. Without here estimating the increased efficacy thus given to bank-notes and bank credits, we insist that their efficiency was mainly as instru- ments of adjustment. We have already explained the process. If the bank had received a million sterling of individual paper, maturing in an average of three months, for Avliich it had issued bank-notes to the amount of ,£985,000, these would be applica- ble at once to the payment of the individual paper as it matured, not because they Avere payable on demand, but because they constituted a claim upon the bank, which the bank would promptly redeem by giving up the paper of individuals as it fell due. The bank, in this case, would hold a claim upon certain persons of the public for a million, and certain persons of the public would hold claims upon the bank to the extent of <£985,000. The bank would gladly receive this amount of its notes, so far as they would reach, in the payment of the million of securities held by it. Such a transaction between the bank and its customers would require no help of coins or bullion ; they would not be needed, and it would not be economical to use them. Although the notes and credits were convertible, they Avore never for the purpose of such payment converted. The process of adjustment proceeded in the same manner, and to the same extent, as if the bank-notes and bank credits had not been convertible. We are not discussing the question here, whether such notes as the Bank of England issued should have been payable on de- mand or not, nor the restraints and securities which should have 390 CREDITS WORK BY THEIR OWN LAWS. been placed upon such a power : that is a separate topic. We are considering merely the processes of payment as it may be effected by the notes and upon the books of a bank. We wish to show that the process of adjustment by which men are enabled to apply what others owe to them in satisfaction of what they owe to others — that is, to set-off credits against debts — is in no way dependent upon money. It is a process corresponding pre- cisely to that of balancing accounts, or setting-off mutual debts arising upon books of accounts. This balancing of accounts is in no degree dependent upon any use of money. When parties are willing so to regard them, one debt is as good as another ; and, therefore, it is perfectly proper for men to pay debts with debts : and this method is equally effectual and final, whether done by the aid of a bunk, or by the aid of books of account. We are very far from saying that bank-notes or bank credits, payable on demand, should not be paid on demand. Banks, as well as individuals, should be prepared to pay what they engage to pay ; they should make no promises which they have not good reason to believe they can fulfil under all circumstances. The Bank of England, however, never was able, and never expected to be able, to pay all its notes and credits, if payment of the whole were demanded. The belief was, that it could pay all that would be demanded ; and one of the reasons for promising to pay on demand was, to make the bank-notes and credits a cur- rency so desirable and convenient, that payment of them would not be demanded. We do not here, then, touch the question of the securities which the Bank of England, or any other bank which makes such promises, should give for their performance. We are contending that the system of adjusting mutual debts upon the books of a bank, for which they are admirably adapted, should be allowed to operate by itself upon the principles which belong to it. It needs no aid from gold or silver ; and there was no more need of making the items of debt and credit thus ad- justed payable in specie on demand, than there was of making every item of a book account payable on demand, before the parties could be allowed to balance their books. Let us suppose the Bank of England to have had deposited in CREDITS AND THEIR FUNCTIONS. 391 their office, for collection, a million sterling of business-paper, having an average of three months to run, and that, upon appli- cation of the holders, the whole is discounted and credit given to them respectively for the proceeds upon the books of the bank; and that this credit is given solely for the purpose of paying debts to the bank. It is obvious that every person so credited is at once prepared to transfer to the bank so much of his credit as will satisfy or extinguish his debts to the bank. So far as the parties concerned in this million sterling were mutually in- debted, they would be prepared to meet their indebtedness. They would have been thus furnished with the most convenient and effectual mode of payment which can be conceived. Every man thus credited, and against whom the bank held claims, would have it in his power to make his payments without fail as they matured. The effect of this operation would have been very much the same as if the bank had simply charged each customer with his portion of the indebtedness, and credited him with the paper discounted for him. This Avould have been the substance of the transaction as a whole, and it would have effectually dis- charged all the mutual indebtedness involved in the million ster- ling, which would have been, according to the course of business, not less than two-thirds to nine-tenths of the Avhole. This very beautiful, effective and simple process of extinguish- ing debts was complicated, sadly and disastrously, by the ill- considered practice introduced by the Bank of England, It is true that, by means of bank-notes and bank credits, the process of adjustment could go on effectively, wlicther the notes or credits were payable on demand or not ; but the public gradually took up the opinion, that the availability of the bank-notes and bank credits depended upon their convertibility into gold or silver. This was overlooking the whole process of adjustment, the power of which was far greater than any possible employment of gold and silver. The distinction between the agency of coins and the process of adjustment being lost sight of, it was assumed that the precious metals, or money, was the basis of this most effective means of settling debts. The next step was, that bank-notes and bank credits being, by this assumption, based on money, or 892 MONEY NOT THE CRITERION OF CURRENCY. the precious metals, the issue of bank-notes and bank credits should be strictly regulated by the amount of coins which could be kept on hand to redeem them. It was pretty generally in- sisted that the Bank of England should keep on hand one-third enough of specie to redeem its notes and credits, on the presump- :tion that more would never be demanded. This doctrine was maintained and pressed upon the bank for more than a century. Its influence, so far as it prevailed, on the minds of the people and the government was, in some respects, extremely injurious to individual and commercial interests. It assumed, as the crite- rion of the quantity of bank-notes and bank credits to be issued, the quantity of money in a country, instead of the amount of the exchanges of commodities. Manufacturers and merchants pur- chase and sell commodities, and give and take their own notes in settlement of the amount of debts ; and they do this without having one-third, or even one-hundredth, of enough specie on hand to make final payment, and, indeed, without thinking of any payment in specie ; for it is the rarest thing in the world for any merchant or manufacturer ever to exact payment of a debt in gold or silver. It is enough for these men, that they can purchase with their own paper, and sell for the paper of others, which can be applied to pay their own. The business of England in the 17th century, as it is now, was carried on, in its large operations, upon the credit of indi- viduals who issued their own paper for all purchases, and received it for all sales. It is upon the paper thus issued, that the busi- ness of banks of circulation is founded. This individual paper is not based upon, nor regulated by, the quantity of money in circulation, nor would there be any propriety in its being so regulated. Before the Bank of England was established, there were always modes of effecting payments of this private paper, to a large extent, without money. The great point aimed at, in regard to payment of this paper, was not to procure money to pay it, but to pay it without resort to gold or silver. The busi- ness was not to be regulated by gold and silver, but by the in- dustry and energies of the people, and their facilities for trans- portation and consumption. The whole exchange of commodi- MACHINERY OF PAYMENT. 393 ties, and their entire distribution, previous to the final operation of the retail trade, move on in the regular channels, -whilst the payments are reserved for a special and separate department of business. As the trade of a country, foreign or domestic, is not de- pendent upon the precious metals, so neither are the payments. It is obvious to all who know anything of the movements of trade, or the processes of payment in the large way, that neither the one nor the other arc carried on by means of gold or silver. Prices are all expressed in money of account ; the sums named in bills of exchange, promissory notes, bank-notes and books of account, are all expressed in money of account ; finally, all debts and credits are so expressed. What is required, in the processes or machinery of payment, is, that they should be commensurate in power with the work to be done. As so few payments are actually made in gold or silver, it is evident that they are not regarded as adequate to the task to be accomplished. Their agency is now restricted to the retail trade, and to the payment of balances in the foreign and domestic trade. Their use in the banks is purely precautionary, and as a security to the public against over-issue, and for payment of balances between banks. The great payments of trade are not cfiected, directly nor indi- rectly, by means of the precious metals. Out of the retail trade, they are mere commodities, the supply and use of which is regu- lated by the demand for them, and the means of purchasing them. The machinery and processes of payment have very little necessary or actual connection with the precious metals, whether in the shape of coins or bullion. 394 SUSPENSION OF PAYMENTS, § 4. The Bank of England suspends payments from 1797 to 1822 — ■ Order of suspension by Privy Council — Opposition to the measure — Terms of suspension — Dates of extensions — Position and progress of the country during suspension — Dissatisfaction, — Lord King — Converti- bility — Efficacy of payments — Processes of payment the same during sus- pension as before — The real basis of bank issues, the commodities of trade — The credit system — Controversy as to the depreciation of bank-notes during the suspension — Bullion Report of 1810 — Bullionists and anti- Bnllioiiists — Opinion of Tooke in History of Prices — Table of prices of gold and silver, and amount of circ\dat ion, from 1797 to 1821. We are not assuming to give a history of the Bank of Eng- land, nor even the merest sketch, but only such features of its business as may serve to exhibit its agency in the great work of commercial payments. One of the most remarkable events in the history of the bank was its suspension of payment in 1797 — a suspension prolonged for upwards of twenty-five years. This suspension itself deserves a history, to which justice has never been done. It was, without doubt, made necessary by the im- mense advances made to the government during the wars and continental troubles consequent upon the French Revolution. The commercial disturbances of the time were scarcely less than the political, and both operated severely upon the bank. The advances to the government were, however, quadruple the dis- counts afforded to commerce. This caused inability to furnish the needful facilities to industry and commerce, and increased the distrust which the state of affairs at home and abroad was calculated to awaken. Early in the year 1797, which was the year after the attempted invasion of England, a steady drain carried off the specie from the bank at such a rate, that in February the directors became thoroughly alarmed, and laid the facts before Mr. Pitt. He brought the subject at once before the Privy Council ; he had suggested to the authorities of the bank, that it might be expedient for the government to restrain the further payment of specie, to examine carefully the condi- tion of the bank, and to give its notes the benefit of a public guarantee. The Council met on the 25th of February, 1797, and determined, in consequence of the " unusual demands for OPPOSITION IN PARLIAMENT. 395 specie that have been made upon the metropolis, proceeding from unfounded or exaggerated alarms," . . . "that it is in- dispensably necessary for the public service, that the Directors of the Bank of England should forbear issuing any cash in pay- ment, until the sense of Parliament can be taken on that sub- ject." This mandate of the Privy Council v/as obeyed, and pay- ments in specie ceased on the 27th of February, 1797. A large meeting of bankers and merchants of London was held the same day, over which the Mayor presided, at which they resolved unanimously that they would not refuse to take bank-notes in payment of any sums of money to be paid to them, and that they would use their utmost endeavors to make all their payments in the same manner. Some alarm, but no special excitement, ensued among people thus suddenly arrested in their run upon the bank. The Opposition in Parliament did not per- mit so good an opportunity to pass, without employing this as a weapon against the government. Fox, Sheridan and Pulteney made violent speeches against the bank, and the policy of sus- pension. Mr. Fox said, " the measure had destroyed the credit of the bank;" that it was equivalent to "seizing the money of individuals." Mr. Sheridan said he " considered it a farce to call that a bank, whose promise to pay on demand was met by another pi'omise to pay at some indefinite period. It was ridiculous to think of placing confidence in paper upon any prin- ciple but that of its being paid when it became due." Pulteney submitted to the House of Commons a bill for the erection of a new bank, in case the Bank of England did not pay specie on the 24th of June, 1797, " or within four months from the day of suspension." But this outcry and opposition proved power- less against the exigencies of the time ; the bankers, merchants and people supported the government. The policy of non-pay- ment, which at first startled Mr. Pitt, was by him afterwards declared to be, in the peculiar circumstances of necessity in which the government was then placed, like "finding a mountain of gold." On the 3d of March, 1797, immediately following the suspen- sion, the bank was authorized to issue £1 and £'2 notes ; and 396 BANK IIESTIIICTION ACT OF 1797. some Spanish dollars were issued for the same purpose of fur riishing change. The bank had not for twenty years issued notes under £5. On the 3d of May, the Bank Restriction Act passed, being ''An Act for continuing for a limited time the restriction contained in the minute of Council, of the 26th of February, 1797, of payment in cash by the bank." It indemnified the bank for the suspension, prohibited the payment of specie, except for sums under 20 shillings, but allowed depositors of .£500 in specie to withdraw three-fourths of the amount. The bank "was permitted to advance to the private bankers of London any sum in specie not exceeding, in the whole, .£100,000, and X25,000 each to two banks in Scotland. The bank was not to be sued for the non-payment of any note for which they were willing to give other notes ; and no person could be held to spe- cial bail for any debt, for which he had tendered payment in notes of the Bank of England. This act was to be in force 52 days, until the 24th of June. On the 22d of June, an act was passed, continuing suspension until one month after the com- mencement of the next session of Parliament. In November, 1797, a third act was passed, continuing the suspension until six months after the end of the war. In 1802, after the truce of Amiens, the restriction was again, by act of Parliament, continued until March, 1803. Two acts passed in 1803, on the subject of the restriction, and the one of December continued it until six weeks after a definitive treaty of peace. This did not occur until 1815, and then another act until 1816, when it Avas continued to 1818, and thence to July, 1819. It was only continued from this date to February 1st, 1820. This last continuation was contained in Peel's Bill, providing for the resumption of specie payments by degrees, beginning on the 1st of October, 1820, and reaching full payment on the 1st of May, 1823. These continuations by law of the restriction show that the subject was before the people for upwards of twenty-five years. This was an eventful period of the history of Great Britain, distinguished alike for progress in arts and arms, in industry and commerce. The great agent of British finance, during this long struggle, and this wonderful series of successes, was the PROGRESS OF THE NATION. 397 Bank of England. At the date of tlie suspension, its stock of specie had been reduced to £1,080,000. The country was then appreliensive of an invasion by the hitherto invincible Napoleon, and alarm was prevalent. The war had already proved burden- some, and heavy loans had been negotiated. The revenue of tho United Kingdom had grown from =£19,258,000 sterling, in 1792, to £28.12(3,000, in 1797 ; the public debt of £261,735,000 had about doubled itself at the date of suspension. To give some idea of the difficulties encountered by the nation during the sus- pension, we furnish the following statements : — The public revenue, Avhich, as just mentioned, was .£23,126,000 in 1797, increased steadily to £72,210,000 in 1815, and stood at £54,282,000 in 1820. The amount raised by loan and taxation, during that time, was never less in any year than £47,362,000; during nine years it was over £70,000,000; and for the years 1813 and 1814, it was, respectively, £108,397,000 and £105,698,000. During the suspension, loans were negotiated for the govern- ment to the amount of £350,000,000. In January, 1816, the public debt had reached the sum of £885,186,000. In this trying period, the bank made advances to the govern- ment, in anticipation of the public revenues every year, from £10,000,000 to £28,000,000, besides being the chief agent in negotiating and funding over £100,000,000. The specie in the bank increased, in 1798, to nearly £6,000,000; in 1799, it reached £7,564,000. It then decreased, until, in the years 1813, 1814 and 1815, it had fallen to very little over £2,000,000. It fluctuated greatly down to the year of resumption, having been as high as £10,000,000 in 1818, and as low as £4,185,000 in 1819. The circulation of the bank, in 1796, £10,730,000, had been reduced more than a million before the suspension took place in February, 1797. It was then gradually increased to its maxi- mum of over £27,000,000, from 1815 to 1818 ; in 1822, the year of full resumption, it was £18,665,000. The deposits of the bank were £4,892,000 in 1797, being then more than a \riillion below the average of the preceding ten years. They 398 PKOGRESS or the nation. fluctuated greatly during the succeeding twenty years, the highest being over .£12,000,000 in four different years, and not falling to X6,000,000 until 18ii0, when they were at £4,094,000. After this, up to the year 1844, they had not reached £14,000,000. Three millions of acres of land, hitherto unimproved, were in- closed :ind brought under cultivation during this period of sus- pension. In 1801, the quantity of cotton imported was 54,000,000 pounds ; in 1822, it was 143,000,000 pounds. The manufac- tured cotton goods exported in 1801 were of the official value of £7,000,000; in 1822, of £27,000,000. Between 1797 and 1814, upwards of £37,000,000 of subsidies were paid by Great Britain to her continental allies, for their assistance in the war. But we need not multiply figures, to show that the period of the suspension of specie payments in Great Britain Avas one of great progress in wealth, industry, commerce and power, not- withstanding all the disadvantages of an inconvertible paper currency, the vast expenditure of the war, and the great bur- den of taxation. After speaking of this eventful period of British history, in which the nation surmounted so many diffi- culties, and finally came off conqueror in a contest with the most powerful and the most skilful commander the Avorld has ever known, a recent historian of the Bank of England says : — " These things are not Avritten to defend, they are only penned to mitigate the wrath Avhich has been poured upon the Bank Restriction Act. Extraordinary events require extraordinary measures ; and our history, from 1797 to 1815, is unsurpassed in the annals of nations."^ But whatever may be urged by the enemies of the Bank Re- striction Act in their '"wrath," the friends of commercial credit may well claim that the achievements, during a quarter of a cen- tury of suspension, deserve to be faithfully studied and well understood. It is a fact that, during this period, a vast revenue of hundreds of millions of dollars was paid by the people, and hundreds of millions of dollars were raised by public loans every ' History of the Bank of England, by John Francis, vol. i., p. 252. OPPOSITION TO THE RESTRICTION. 399 year, between 1797 and 1815; that thousands of millions of dollars of commercial debts -were paid every year of the suspen- sion, -with little or no intervention of the precious metals — facts which deserve a better explanation than has ever been given. If the countless millions of dollars of debts discharged durin" this quarter of an age of paper money be well and sufficiently paid, it should certainly be understood upon what principles it could be done. There was, doubtless, in many minds, during all this period of inconvertible bank-notes, a vague feeling that these payments were, after all, indebted for their effectiveness to some secret power of the precious metals. The bank-notes carried on their face a promise to pay a certain number of pounds sterling, and although these pounds were never paid in gold or silver, yet the promise was there, and the promise, for the time, was taken for the performance. The efficacy of current payments was seldom attributed to the working of the credit system, where it be- longed ; and a few, at least, considered themselves deeply wronged, because they could not, at pleasure, convert their bank- notes into specie. The fiict that an intense demand for gold on the continent, arising from the wars and disturbances prevailing there, had enhanced the price of gold everyAvhere, did not escape the notice of those opposed to a paper currency, and this increased their "wrath." They regarded themselves as injured to the extent of this increased price of gold, upon every pound that passed through their hands. They scouted and despised the very currency by which the business and government of the United Kingdom were carried on, and to which, whatever may have been its faults, the people and government were at that juncture under infinite obligations. One of the most distin- guished of these objectors, Lord King, in despite and contempt of the law which gave his tenants the right to pay tlicir rents in bank-notes, served a formal notice upon them to pay their dues in gold. He published a pamphlet overflowing with arguments against the suspension, and with solemn reproof for the wrong, done to people who were obliged to receive and pay bank-notes, at par with silver. 400 SUMMARY OF CREDIT SYSTEM. We need not explain at length here, what we have so fully explained elsewhere in this volume, that the payments of Great Britain, during the period of suspension, did not derive any part of their efficacy from the precious metals, nor from the promise to pay — a promise not performed, nor intended to be performed. The efficacy of the payments, during a period of suspension, rested upon the same principles which make payments efficacious, when bank-notes and bank credits are convertible. The object of convertibility not being to make payments by notes and checks upon deposits valid, but to be a security against over-issues, and other abuses in banking. The fact that gold or silver can be obtained for notes, adds nothing to the validity of payment in the notes : if the parties concerned are willing to pay and receive notes in payment for goods or debts, it matters not to the validity of the transaction whether the notes are convertible or not. So far as convertibility is concerned, it is a question of public policy ; a question whether any bank can, with safety to the public, bo permitted to issue notes as currency upon any other security than payment of the notes thus issued in demand in gold or silver. We are not now discussing that subject. Nearly the whole business of every civilized country, except the merest retail trade, is carried on, in the first instance, upon personal credit. Purchases in the large way are made neither with the precious metals, nor with bank-notes, but upon the security of promissory notes, bills of exchange, and other like securities. These securities, whatever their form, and whatever they promise, are expressed, like the entries in merchants' books, in money of account. They are evidence of the amount of credit, and of course of the amount of debt. The issue of these securities accomplishes a movement of commodities to the value Avhich they represent. The next step, is the payment or discharge of these obligations. The parties who have purchased have the commodities, the parties who have sold have the secu- rities. But the holders of securities are themselves debtors for the amount of other securities issued by them for the purchase of the very goods they sold. Thus a great mass of business men transact a vast amount of business by the issue of their own RESULTS OF CREDIT SYSTEM. 401 paper. It becomes a prime object of every one of these men to apply his credits to pay his debts. They all go to the bank, and have their securities converted into bank-notes or bank credits. The bank becomes the holder of the securities for which it has issued notes or credits. The bank gives nothing for these securities but its own paper promises or credits, and these to an amount less the discount. The debtor in any of the securities held by the bank has only to pay the bank in its o^yn issues — the very currency in which the bank paid for tlie secu- rities. In this way, the whole of the debts can be paid, and the whole of the securities can be discharged and retired by the parties who issued them. There is an indebtedness to the bank to a larger amount tlian the issues of the bank, and there is a constant daily effective demand for the issues of the bank, whe- ther notes or credits, by parties who must constantly and daily meet their debts maturing in the bank. There is, in commercial countries like Great Britain and the United States, no other article so extensively in demand as bank-notes and bank credits, for the purpose of discharging debts payable in bank. Such debtors never look for gold or silver to pay these debts ; it "would be utterly in vain. It is evident, then, that the process of payment is the same, "whether the banks are in a state of suspension or not. This process is effective, rapid and economical, because it does not require any aid Aviiatever from the precious metals. The restraints which the law imposes upon banks, and the securities it requires for their good behavior, have nothing to do with the nature and efficacy of the process, further than to secure tiie faithfulness of the servants, and the proper working of the ma- chinery by which the payments are accomplished. In reference to the mode and progress of payment during the period of suspension, we have made our remarks general, because they apply to any banks of circulation in a state of suspension, as well as the Bank of England. We have already explained, in the chapter on bank-notes, how they fulfil the functions of a medium of exchange, circulating like money ; and in the chapter on deposits we have explained how they were employed in pay- 2G 402 BANK CURRENCY. ments. At the hazard of some repetition, wo shall add some- thing here. Notes of the Bank of England bear on their face a certain value, expressed in money of account, and a promise to pay that amount on demand. This promise is not what gives currency and efficacy, for performance is only exacted in times of panic. The real efficacy of the notes proceeds from this, that so large a proportion of business men are either indebted to the bank, or are indebted to those who owe the bank, that the notes are in great demand at the amounts expressed on their face ; for this amount they can be used to extinguish debts in the bank as effectually as gold itself. But the notes are not dependent for their cuirency upon this general demand. There is a special demand of greater potency. The debtors of the bank are not merely men of business, Avhose paper has been discounted by the bank ; they are men of business, who, upon their own credit, and with their own paper, have purchased commodities suitable for general consumption. It is their business thus to purchase and sell, and as a body they hold the chief articles of general and regular consumption. What they have to sell, others are obliged to buy. The bank holds the individual paper with which these commodities were purchased, and the debtors hold the com- modities the people want. These debtors of the bank, then, are not the only persons who need the bank-notes with which to pay their debts, but they are the holders of the very articles, for the purchase of Avhich money would otherwise have to be paid. The process, then, is, that men with their individual paper purchase commodities ; the bank purchases this individual paper by the issue of its own, or bank-notes ; the people among whom these bank-notes circulate, purchase with them the commodities in the hands of the debtors of the bank. The real basis of this issue of bank-notes is the commodities purchased with the discounted individual paper. These commodities are sold to redeem that pa|5er ; the people need these articles, and must have them ; they do not need gold, and can do wholly without it. The basis of banking, then, is this individual paper, and the basis of this paper is the commodities it purchased. The whole process is CIRCULATION OF BANK-NOTES. 403 carried on by an expression of prices and amounts in money of account. The bank-notes may and do circulate Avidely among those who do not employ them in the purchase of commodities ; but they will constantly and finally tend towards the bank, be- cause this consumption of commodities is a great and never-ceasing operation, and all must contribute to it ; the bank-notes must' always maintain their value, because so many must have them or money. If a flour dealer in Liverpool gives his note to B. S. & Co. for £1000 for 1000 barrels of American flour, and B. S. & Co. send that note to the Bank of England for discount, and receive the proceeds in notes of the bank, it is plain, whether the notes thus received, or the notes of a Liverpool bank, are circulated in their place, that an instrument or medium of exchange has been put in circulation that will purchase that flour, whether the notes circulated are at the time payable in gold or not. It is enough for the flour dealer that he can pay his debt, and withdraw his note from the bank, with the bank-notes ; and it is enough for the people that they can purchase flour with the bank-notes, on as good terms as with money. The process would be the same, whether the bank was suspended or not. A dealer in cotton may give his note to an American shipper for <£1000 for cotton ; the Liverpool dealer may sell it to a Man- chester manufacturer, taking his note for £1050 ; it may be manufactured into a variety of goods, and sold for X1500 to a merchant of London, for which his note is taken. If these indi- vidual notes were all discounted at the Bank of England, and the proceeds placed to their credit respectively, it is obvious, without pursuing the cotton further, that the Liverj)ool dealer would bo in funds to pay the £1000 to the importer of the cot- ton, and the manufacturer would be in funds to pay the £1050 to the dealer ; and these payments would neither require gold, nor be less eflcctual than if made in gold. The substance of the transaction is, that the first purchaser of the cotton paid his debt by selling it, and the manufacturer did the same thing. Tliis is, in fact, the main process of the credit system. Men jjurchase, and give their promises to pay ; they sell, and take promises to 404 BULLION REPORT OF 1810. pay ; the bank enables them to apply those they take in pay- ment of those they have given. Commodities, in the large trans- actions of business, pay for commodities ; and the credit system is that by which the books are kept, the securities taken, and the payments finally adjusted. The currency furnished by the bank affords a facility of constant use and application in tlie retail business, ^vhich is thus connected with the larger transac- tions : that is, the breaking up the larger notes of the wholesale operations, by exchanging them at bank for notes or deposits, furnishes the currency by which business in detail is carried on with increased facility and despatch. A very remarkable controversy arose, about midway of the long bank suspension of England. The great demand for gold, for the military expedition of the continent, exhibited itself, in 1810, in an apparent difference between gold and bank-notes, of about 15 to 20 per cent. This was regarded as intolerable by those who were afterwards called Bullionists. The subject was brought before Parliament, and gave rise to the celebrated Bullion Report attributed to Francis Horner and William Hus- kisson, both young men of eminent abilities and promise, but not so well versed in the subject of banking and finance as some of the merchants and bankers whose opinions they disregarded in their Report. The Report insisted strongly upon the deprecia- tion of bank-notes as the cause of the difference between gold and bank-notes. The subject was ably discussed in the House of Commons. The decision of the House was against the resump> tion of specie payments. The discussion was continued after- wards for many years, in joui-nals, pamphlets and books, with great earnestness, talent and practical knowledge. It is not even now settled to the satisfaction of all Avho take an interest in the subject ; Bullionists and Anti-bullionists stand, to this day, arrayed against each other, with as little appearance of agree- ing as they exhibited forty-five years ago. The question is, in fact, as interesting as it Avas then, and the discussion as in- structive. As usual in such cases, there was much truth and soundness in the statements and arguments on both sides. On a view of the whole controversy at this remote period, and BULIONISTS AND ANTI-BULLIOXISTS. 405 from this side of the Athmtic, Avhere there has been no excite- ment on the subject, it strikes us that the advantage in this dis- pute is Avith the Anti-bullionists, who insisted that gold had risen in price, and that there was no considerable depreciation of bank-notes. The Bullionists, believing that all prices are ex- pressed in gold, and believing, with Locke, that a pound of gold or silver must always be worth a pound of gold or silver, and that, therefore, the apparent variation in price of gold was, in fact, only a variation in the price of bank-notes, it was only necessary for them to exhibit the table of the prices of gold ex- pressed in paper, to prove their case. From this point men could not be driven, who could not conceive of gold rising and falling in price. They did not know tliat prices are never ex- pressed either in gold or silver, nor in bank-notes, but always in money of account, which is capable of expressing and registering the fluctuations in the price of gold or silver, as of cotton or wheat. This fact alone disturbs the main position of the Bullion- ists, and compels them to look elsewhere for the solution of the difficulty. According to their own views, the depreciation of bank-notes should have been expressed in the language of trade, as so many per cent, below par. Instead of this, gold was quoted as the fluctuating article, and this clearly evinced the commer- cial opinion. We subjoin a table of the prices of gold relied upon to prove the depreciation ; and we add, in two other columns, the price of silver, and the quantity of circulating bank-notes. We think the table, thus constructed, proves incon- testably that there could have been no such depreciation of bank-notes as has been alleged. All the circumstances show that there was an extraordinary demand for gold ; it would have been strange if there had not been ; and this table proves it, for there Avas no such variation in the price of silver. The highest authority in England on the subject of prices,' after a careful examination of all the facts, decides that there Avas no such fluc- tuation or rise in the price of other articles of commerce, as to ' Tooke's History of Prices and of the State of the Circulation from 1793 to 1837, vol. ii., p. 350. 406 PRICES OF GOLD AND SILVER, denote any depreciation in bank-notes. This examination ex- tended to over forty different articles, of -which tables are given of the prices from 1782 to 1838, and is, probably, as thorough and reliable as any ever constructed. Date. Price of Standard Gold in bars, per oz. Price of Standard Silver per oz. CmcuLVTiox. £ s. d. s. d. £ 1797 3 17 6 5 3J 10,394,000 1798 3 17 lOi 5 1 12,037,000 1799 3 17 9 5 1 13,174,000 18U0 4 5 5 1 15,94C,0U0 ISOl 4 4 5 1 15,384,000 1802 4 3 6 5 8i 16,141,000 1803 4 3 6 5 7i 15,646,000 1804 4 5 7i 17,110,000 1805 4 5 9i 17,134,000 1806 4 5 U. 19,378,000 1807 4 5 9i 18,314,000 ISOS 4 5 8 17,649,000 1809 4 10 5 8 19,058,000 1810 4 10 5 8 22,906,000 18U 4 15 6 6 2 23,323,000 1812 4 15 6 2 23,217,000 1813 4 15 6 2 24,019,000 1814 4 19 6 6 4 26,584,000 1815 4 9 5 lU 27,251,(100 1816 4 6 5 4 26,885,000 1817 3 19 6 5 1 28,470,000 1818 3 19 6 5 4* 26,986.000 1819 3 19 6 6 4i 25,139,000 1820 3 17 lOi 5 OJ 23,891,000 1821 3 17 lOi 4 Hi 22,039,000 CHAPTER XVI. THE BANKS OF SCOTLAND. The Bank of Scotland prompthj chartered, and its whole plan prescribed in advance — John Holland's account of it — Contrast ivith the origin of the Bank of England — The founders of the Scottish Bank merchants who avoided relations with the Government — TJieg looked to it as a means of economizing the use of money — Bank-notes — Trouble with the Royal Bank — Suspension — Modes of relief — Little loss of credit — Identified with the mass of the people by receiving small deposits, and paying interest for them — Forty banks, and 340 branches — Harmony of action — English prejudices and Scotch scorn — Cash credits in account a principal feature — 3fode of operation — Contrasts with the English system — The Scotch system equally effective, and more safe — Failures of banks few, and not disastrous — Suspension of 1797 in England has no effect in Scotland — Report in the House of Lords, 182G — Report in tlie Com- mons — The system not cordially approved in England — One pound notes — Discussions in Englaiid and Scotland — T^essons for England on cur- rency — Sir Walter Scott on the level of gold — Different modes of regard- ing the subjects in England and Scotland — Scotch Banks the pride of the 2)eople — W. Chambers' distrust of the system — Explanations in reply. The first public bank in Scotland was established by act of the Scottish Parliament, in 1695, previous to the consolidation of the two governments. It was suggested by the same William Patterson who projected the Bank of England, but seems to have been indebted for its shape and constitution to John Hol- land, who, with other merchants of London, Avcre participants, with men of capital in Edinburgh, in this enterprise. Its plan was deliberately drawn up in advance, and its privileges and restraints distinctly marked. The Bank of England crawled into existence, being wormed through the English Parliament under cover of an act in reference to "Duties upon the Tonnage of Ships, and upon Beer, Ale and other liquors." The Scotch (-1U7) 408 BANKS OF ENGLAND AND SCOTLAND. Bank had a free birth, and found favor with that class of English merchants who disliked the Bank of England. Holland has given an account of his agency in bringing forth the Bank of Scotland, in a pamphlet bearing this ominous title : — " The Ruine of the Bank of England and all public Credit inevitable," (1715). Holland was only induced to engage in this scheme, by being assured that he could have an "Act of Parliament on his own conditions." The plan drawn up by him has proved the foundation of one of the most successful banking systems which has yet been tried. Prominent among its provisions is the pro- hibition to lend to the King. The Bank of England originated in a loan of its whole capital to the government, and began its actual business by lending its whole credit in the same way — a measure which resulted in its being made and con- tinued a great financial agent of every administration, from that day forward. Mr. Holland did not appreciate the necessity of such an agent, nor comprehend the propriety of its being associated with a bank, or with the business of banking. The readiness to establish a bank in Scotland is seen in the fact that, whilst in England the shareholders lent the government .£1,200,000 for an exclusive monopoly of twelve years, the Bank of Scotland was allowed a monopoly of twenty-one years, with- out any bonus or favor to the government. The Bank of England was moulded by those circumstances in which it had its origin, and which accompanied the earlier years of its history. Its whole subsequent history has a double aspect — one, its connection with the government — the other, its relations with commerce and individuals. This double history proves, whatever may be alleged to the contrary, that the uniting these two kinds of business in one great banking business is in- consistent neither with the true system of banking, nor with the true system of finance. That the Bank of England has, in many ways, inflicted its full share of evil upon the people of England is well known, and at times these mischiefs may have been caused by the connection of the bank with the government. But whilst such evils are seen, felt and remembered, the advantages of the connection are neither observed nor under- BANK OF SCOTLAND. 409 Stood.^ The founders of the Bank of Scotland were chiefly mer- chants, -who had their eyes turned exclusively to the advantages of banking for their own class. They were of that class which had so strongly advocated institutions of credit in England, pre- vious to the establishment of the Bank of England. They were men who knew Avell the functions and practice of the Banks of Venice, Genoa and Amsterdam, and the modes of payment at the Fairs on the continent. They believed in the efiicacy, safety and propriety of circulating credit, although their ideas of the mode of carrying it out may have been far from definite or har- monious. They fully understood that, to a certain extent, to be determined in the progress of business, a system of credit could be made to supply absolutely the place of money. They wished to avail themselves of that economical device as far as it was applicable. The object was not to supplant or find a substitute for the precious metals, but simply to effect the ends of trade, to every possible extent, without them, knowing they must intervene and be employed whenever the exigencies of payment required. The Bank of Scotland issued bank-notes of several denomina- tions, from the beginning of its business, from ,£100 down to £1, and even less ; but as we have already dwelt largely on the functions of that form of currency, and shall have occasion to do so again, in treating of the banks of the United States, we shall make them the occasion of only incidental remark, in speaking of the banks of Scotland. In one aspect of their use in Scot- land, the general observations we have made respecting them apply ; in another, their use is modified by that peculiar feature of the banks of Scotland which distinguishes them from all others. An exhibition of that feature will show how bank-notes operate or circulate, in reference to it. The Bank of Scotland, with all the care and skill of its early management, did not escape a signal reverse. Having a mo- nopoly of twenty-.one years when established, its directors under- took to extend that monopoly beyond the time, by extinguishing ' We shall specially advert to this siilycct in a Chapter on Public Pay- ments. 410 SMALL DEPOSITS. the Royal Bank of Scotland — a rival wliicli threatened to be of sufficient importance to divide the business of the country with them. This narrow policy was met by a measure, on the part of the Royal Bank, which forced the Bank of Scotland to suspend payments in 1727.' Although this was a serious affair for that bank, it was surmounted without any great diminution of its credit or business. The measure of relief from which it de- rived most benefit shows the confidence of the public. It issued notes payable at six months after date, bearing five per cent, interest, and with these redeemed a portion of its circulation of <£5 notes and upwards. This succeeded so well, that it was ap- plied, a few years afterwards, to the notes of £1 and below that amount ; and subsequently, upon emergency, it was for a time resorted to by all the banks of Scotland, until it generated abuses, which being the subject of much complaint, the system was abandoned. Whilst the Bank of England, from its first conception, was identified with the government, the Bank of Scotland, and those which succeeded it, identified themselves with the whole body of the people, from the laborer who could save five pounds to the richest merchants and manufacturers. They became at once, and have continued to be, the savings banks of the poor but in- dustrious classes. The banks paid one per cent, below the cur- rent rate of interest for these deposits, and returned them on demand, or according to stipulation. These savings of the poor help largely to make up the vast sum of deposits which charac- terizes the banks of Scotland. One important result of this has been to give the benefits of these savings to the general cus- ■ The Royal Bank had obtained the use of £20,000 of public money, which was to be distributed in Scotland. The first use which was made of it was to arrest the jealous career of the Bank of Scotland. From that time to this, the Scotch banks have been noted for harmonious co-operation. It is asserted by some writers of good authority, that this proceeding of the bank was wholly unprovoked, and that it used the public money which good-fortune threw in its way, to humble and injure an institution which had such an advantage of them in credit, and in an established business, that it was thought expedient to bring some discredit upon it, as the best means of gaining business. BENEFITS TO THE POOR. 411 toraers of the banks, instead of their being invested in the public debt, or lent upon mortgage, as in England. No doubt this has contributed greatly to that progress in wealth and productive industry which has so much distinguished Scotland for more than a century. It had another good effect, in begetting that care, caution and prudent management for which the banks of Scotland have so well-founded a reputation. This acceptance of small deposits, and paying interest for them, had also the effect of giving the poor a deep concern in the same banks in which were the deposits of the rich, who were owners also of the stock. The interests of both classes were thus bound up in the same banks, subject to the same management and the same vicissitudes. The prosperity of the banks was the security of the poor depositor, and a guarantee of both his interest and his principal. A large circulation was regarded by the poor as not only beneficial, by making currency abundant, but as evidence of the success of the banks. That jealousy of banks so visible both in England and in the United States, does not exist in Scotland ; and yet the proportion of banks in Scotland to the population is far less than in England and the United States : far less, if we regard the principal banks ; but these have been so favored in Scotland, that 40 bunks have been permitted to establish 340 branches : so that Scotland has 380 bank offices for a population of less than 3,000,000 ; these 380 banks, emanating from only about 40 heads, are not, however, like 380 rival establishments struggling for superiority, and aiming to supplant each other in business, if not to crush each other as competitors. There is a harmony and unity of object among the heads, which is diffused among all the branches, which is seen in the regularity and steadiness of their operations, and which is felt throughout the whole comnmnity. No country enjoys a paper currency so free from fluctuations in quantity, as that of Scotland : yet so little are the advantages of the Scotch system known and appreciated elsewhere, tliat there has been a constant itch in England to reform the banks of Scotland, and bring them nearer to Englisli ideas of currency. The Scotch system is so contrary to the notions prevailing in England upon 412 CASH CREDITS. the subject of money and currency, that some of the statesmen and currency-mongers there endure, with bad grace, the stand- ing refutation which the Scotch banks furnish of their opinions. They regard their success as exceptional and accidental ; and, but for personal as Avell as currency prejudices, they would pre- fer giving the credit to the good management of the banks, rather than permit any portion of it to stand for the benefit of the system. The English people do not understand the Scotch system, but the Scotch people do understand the English sys- tem ; and having seen the terrible inflictions it has visited upon England, and from which they are nearly exempt, they return the officious kindness which would disturb their system, operating to their entire satisfaction, and assimilate it to the English sys- tem, which is fraught with dangers, and is not even popular at home, with mockery and scorn. ^ The struggles on this subject, in Parliament and out of it, have been many ; but in all, the Scots have come ofi' victorious, having, in not a feAV instances, extorted the admiration of those who, perhaps for the first time, were fully made to understand the efi'ectiveness and safety of Scotch banking. The chief distinction, however, of the Scottish system of bank- ing is found in the cash credits granted by the bank, and which we designate cash credits in account. These are peculiar to Scotland ; and although they do not constitute the chief business of the bank, they no doubt exercise a controlling influence, and give a special character to the whole practice of the Scotch banks. It is estimated that there are twenty thousand of these accounts, covering a sum of five millions sterling. As the actual deposits in the Scotch banks amount to thirty millions sterling, the cash credits bear nominally but a small proportion to this item of deposits. The importance of the cash credits is to be ' Sir Walter Scott compares this persistent effort to reform the Scotch banks to that of an eccentric but hospitable Scotch laird, who forced the gucots who remained with him over-night, to take one of Anderson's pills before retiring — a practice which lie had long followed, and which he was determined everyone else should follow, who came within reach of his kind- ness. " Oidij one leetle Anderson," — MalacM Malagrowther, Letter I., p. 29. F R -AI OF n X D . 413 considered with reference to their functions and activity, rather than their amount. A cash credit is an account opened by a bank with a customer for an amount from ,£100 to £1000. which is phiccd not to his credit, but at his disposal. The apphcant for this accommodation, which is only granted by the directors of the principal bank, is strictly examined as to his business, means and prospects, and the credit is accorded upon his giving two or three sureties in a bond for the amount of the credit. This bond is so draAvn, as to cover any liability to the bank for the amount, whether drawn upon the credit as drawer or endorser of bills.' No limit is placed to the use of the credit, ' The form of keeping a cash credit account may be seen at pa;^e 70 of the Report from the Lords' Committee, on the circuLation of notes under £5, in Scothmd and Ireland, printed in April, 1827. The form of the bond is as foHows : — "We, A. B. C. D. and E. F., considering tliat the bank has agreed to allow us a standing credit to the extent of one thousand pounds sterling upon a cash credit account, to be kept in the name of one of us, the said A. B., in the books of the said bank, and to be operated upon by him, and may also discount or purchase bills, whereon the name of the said A. B., or the firm of any company of which he is a partner, may stand as a drawer, acceptor or endorser, and that upon condition of our granting these pre- sents : Therefore we, the said A. B. C. D. and E. F., hereby bind and oblige ourselves, as full debtors and co-obligants, and our respective heirs, execu- tors, and successors whomsoever, all conjunctly and severally, to content and pay to the said bank the foresaid sum of one thousand pounds sterling, or such part or parts thereof as the said A. B., or any person or persons having his letter or other written authority, shall value for or draw out by orders or drafts on the said bank, or its manager, cashier, or any of its offi- cers at Edinburgh, or any of its agents, cashiers, or other officers elsewhere, in virtue of the foresaid credit: and also such sum or sums of money as the said A. B. shall stand engaged for or be indebted, resting or owing to the said bank on account of any bills discounted or held by it, whereon his name as an individual, or the firm of any company of which he is a partner, shall stand as drawer, acceptor, or endorser, or any sum or sums for which he or they shall stand engaged or indebted to the said bank Ijy acceptances, endorsations, letters of credit, guarantees, or in any other manner of way whatsoever, and all or any of which obligations as aforesaid tiio said bank shall be entitled to place to the debit of the said account and of the obli- gants hereto, at any time before this bond is discharged and delivered up, and that without intimation to any of the said parties, but not exceeding in 414 CASH CREDITS TERMINABLE AT WILL. it is terminable, at the pleasure of cither party, by payment and discontinuance on the part of the customer, or by withdrawal of the accommodation on the part of the bank. But it is rare all the said principal sum of one thousand pounds sterling, and interest duo thereon ; and that at any time when the same shall be demanded after three months from the date hereof, together with the legal interest thereof, from the time or times of the respective advances until the same be repaid, Avitli a fifth part more of the said principal sum due of penalty in case of failure. And it is hereby specially conditioned and agreed to, that a stated account, made out from the books of the said bank, and signed by one of its accountants, shall be sufficient to constitute a charge or balance against us and each of us, whereof no suspension shall pass at the instance of any of us, except on consignation only of the sum due thereon. And it ia hereby declared that there is nothing hereby meant to supersede or vacato the security which the said bank already holds, or may hold, over any shares of stock of the said bank and profits thereon, belonging or that may belong to any of us for any advances under this bond or otherwise, it being always in the power of the said bank to appropriate or allow of the disposal in any way whatever of all or any of the shares of said stock ; and the said parties to this bond hereby declare that they have no lien over the said shares, or any right to insist upon the application of the same to payment of any debts to be hereby contracted. And further, the said parties agree that the obligation hereby come under shall remain in full force in the same manner and to the same extent as if such shares of stock had never belonged to any of the parties hereto, and it being hereby agreed that the said bank may allow credit on the said shares, or the same to Vje sold, and the price to be paid to the seller, or may apply the same to any other purpose accord- ing as it shall deem expedient, being bound in the latter case to account only to the person or persons to whom the shares belonged. "And further declaring, as the said cash credit account is to be in the name of the said A. B., and he is to conduct the transactions thereon, it is hereby especially provided and agreed to, that all communications on the part of the bank, regarding either the management by him of the accounts or repayment of the balance or balances which may become due thereon, shall or may be made to us, the other parties, through the said A. B., with whom the said bank shall be at liberty to make any arrangements, by affording further opportunities for better management of the accounts according to the rules of the said bank, if deviated from, or in any other way required, or by giving time for repayment of the balance or balances thei'eof, without any direct application to or concurrence by us the said C. D. and E. F. on the subject, until the said bank shall consider this neces- sary for a final settlement. And it shall also have the power, without con- sultation with or consent by xis, to compromise with or give time to any of THE LENDING OF CREDIT. 415 that a termination takes place, except in tlic case of persons retiring from business ; for the advantage is so great to each of the parties, that both strive to make it mutually beneficial, and to prolong it during a -whole business life. A cash credit is a per- petual resource to the holder for any sum Avithin the amount. He draws upon it at any moment, as upon a deposit, for the sum required, and pays interest upon the sums thus drawn, and returns at his convenience any sum in his hands, upon which he receives one per cent, interest less than the rate on sums draAvn out. It is the advantage of the holder of the ci-cdit to deposit his money as quickly as possible, as a regular interest account is kept with him : he is charged with interest, say at five per cent, upon all he has taken, and credited with interest at four per cent, for all he has deposited. At convenient times, gene- rally twice a year, the account is made up and balanced, and a new account is opened. A credit account in Scotland is, there- fore, literally a loan of credit on the part of the bank, which credit is to be paid for in proportion as it is used. "When a bill of exchange is discounted by a bank in England, the proceeds are placed to the credit of the person obtaining the discount as so much money, to be drawn for at pleasure ; and this is sup- posed to bo discounting business-paper. The cash credit of a the parties on the bills discounted or held by it as uforesaid, we, the said C. 1). and E. F. having always full opportunity afforded us by the said bank, whenever we, or either of us, wish and apply for the same, to see any of the ti-ansactions and state of the said ca::h credit account, and other transactions of the said A. B. in which we may be interested by the obliga- tions of this bond ; and the said bank shall only be Ijound to attend to any instructions we may give on the subject in writing, and acknowledged in writing to have been received. It being hereby expressly declared tliat all tiie parties to this bond are pari passxi co-obligants to the said bank ; aud that nil and eacli of us are equally bound to it, and shall not be entitled to plead that any of us are the cautioners for the other; and we, the said A. B. and E. F. consent to the registration hereof, and of the foresaid stated accounts, in the books of council and session, that letters of iiorning on six days' charge, and all execution necessary, may pass on a decree to be in- terponed then and thereto, in form as officers, and for tiiat purpose wo con- Btitute, &c. In witness whereof these presents, written \ipon tliis sheet of stamped paper, by our procurators, &c." 416 ENGLISH AND SCOTCH Scotch bank has no reference to special transactions of business, but is an open credit, to be employed as occasion demands. In England, the bank which deals in promissory notes and bills of exchange, is dealing in paper which represents business transac- tions which are past ; in Scotland, the bank opens credits for its customers, with reference to business Avhicli is to come. In Scot- land, the banks give their customers a credit which helps their standing, and upon which they can draw for the purpose of pay- ment, whenever there is need. The theory of the English banks is, that the currency must follow, and be controlled in quantity, by the business transactions which go before. The theory of the Scotch banks is, that these business transactions being all man- aged by men of business, who decide according to the exigencies of industry and trade Avhat will promote their private interest, and meet the wants of the people, it must prove an important aid to men thus engaged to supply them, in advance of the progress of their business, with a credit upon which they can draw at pleasure. The English doctrine is, that men must do all their business, in the first instance, upon their own credit ; and the banks may then deal in the evidences or securities to which the business has given origin : the Scottish notion is, that aid should be extended to men of trade and industry in advance of their transactions, and as an element in their plans of busi- ness. In England, they think this will lead to over-trading, by the stimulus it aifords to so large a class of dealers : in Scot- land, long experience has taught them that this English appre- hension is wholly groundless. They know that the dealers who enjoy these cash credits are so immediately brought under the supervision of the banks, and their own sureties, that they are, perhaps, the most prudent and safe men of business in the world. ^ The system of banking in Scotland has, by a long and steady ' A witness before Pai-rKuiicnt, in 182G, said : — "I literally have hardly ever heard of a bad debt by cash accounts. The Bank of Scotland, I am sure, lost hardly anything in an amount of receipts and payments of hun- dreds of millions. Thoy may have lost a few hundred pounds in a cen- tury." SYSTEMS CONTRASTED. 417 experience, vindicated itself against objections raised upon English theories ; and its superiority in operation over the practice of English banking is so manifest, as to extort commendations of the strongest kind from Parliamentary Committees. When the necessity of reform in English banking was admitted, and mea- sures of reform were adopted, it was determined that no change was needful in Scotland.' We have shown, in the chapters on bank-notes and on depo- sits, that the fund by means of which nearly all the payments of commerce were effected, was derived from the proceeds of bills of exchange and promissory notes discounted by the banks. These proceeds take the shape of bank-notes or deposits, but chiefly the latter, and in that form become more available in payment than any other currency. We have shown how this took place : that the banks purchased the paper discounted by the issue of these credits, and that they could, therefore, receive the credits in payment of the securities : that these credits could circulate for the average time of the paper discounted, before they would be absorbed by tlie banks in payment of the paper as it matured : that, by means of this circulation, an immense amount of payments was effected, both in and out of the banks : that the demand for this currency, for payment of debts to the bank, gave it full employment, and fully maintained its nominal value : that this system of discounts and currency enabled men of business to employ the paper they take in paying the paper they give : and that, as the debts of trade are in a large degree mutual, this system is, to that extent, a plan of adjustment by which mutual debts are set-off, without being brought face to face in one account. By this system, the basis of the bank-notes and deposits is the merchandise purchased with the discounted paper, and the punctuality and ability of the debtors ; the banks having, at all times, a greater demand on the public than the public has on the banks, with this difference, however, that the claim of the 'Extracts from Parliamentary Reports of 1826 will be given, in this chapter, to prove this. 27 418 THE SAFE POSITION OF THE BANKS. public on the banks is payable on demand, whilst the claim of the banks on the public is on paper, averaging a period of two or three months, which gives the public, in periods of financial diffi- culty, a crushing advantage over the banks. This advantage, however, is one which causes, in such times, a destructive reac- tion on the public. Banks and their customers are alike crushed by this system, in seasons of alarm or commercial revulsion. The Scottish system of banking, so far as it rests upon cash credits, has some very diiferent aspects from the system referred to above. If the banks of Scotland have granted five millions sterling in these credits, they are liable to be drawn upon for that amount, at the pleasure of the persons holding the credits ; but to be drawn upon only for their bank-notes, for that is the agreement. If the holders were to demand gold, it could be refused, and the accounts could be closed. The banks, in fact, pay their notes only to those Avho draw upon these credits. If the notes were drawn, and the gold demanded for them, the banks could not refuse ; but they can, at pleasure, close the credit accounts, and demand immediate payment of all that has been drawn out upon them. The banks of Scotland have, then, an actual practical demand upon the public for an amount as large as the public have on them, with the advantage to the banks, that their claim is all in their own hands, and can be made in a few hours, whilst the demand of the public on the banks is scattered over a wide surface, and cannot be concen- trated upon them for many days. The holder of a cash credit in Scotland is at all times at the mercy of the bank, which can afford to be liberal, because it is never in danger. To a considerable extent, banking in Scotland is conducted as elscAvhere, and it is susceptible of employing, and does em- ploy, every good device of English or American banking. In Scotland, the fund employed in payment of debts is not derived, chiefly as in England and the United States, from the proceeds of discounted paper, but, in a large measure, from the open cash credits. This fund is not based upon actual business transac- tions, or upon commodities Avhich have actually changed hands in the channels of trade. It is a facility of payment granted in BENEFITS OF CASH CREDITS. 419 advance by the banks. The holders of these credits, in the pro- gress of their business, have the choice of paying for what they purchase in bank-notes drawn out upon their credits, or of taking the longest credit they can obtain, and then paying in notes drawn from the banks upon their credits. Individual credits are as common in Scotland, and perhaps more so, than elsewhere. It is usual there to take acceptances for small amounts sold on credit, and to collect them through the banks. The facility of payment furnished by the cash credits makes renewals of credit less common, and greatly aids punctuality, especially in the lower branches of trade. They are a resource, and a means of payment, ever ready at the command of the holder. The notes issued upon them perform the same functions of payment in cir- culation which the notes of other banks do. If, in England, the customer of a bank is denied a discount, the proceeds of which would have been employed in paying a debt, and that debt remains unpaid, a circulation of notes is arrested or pre- vented, with very disastrous results for many individuals. One hundred pounds thus put in circulation in bank-notes or deposits may, in a few days, pay £1000 ; but, stopped at the beginning, it may cause to the persons interested in that circu- lation a loss of perhaps several hundred pounds. The bank in England acts, in refusing a discount, with especial reference to its own position and interests, and perhaps with necessary pru- dence. The banks of Scotland, anticipating the friction of this separate movement of business in the banks, and business out of the banks, have, as a preventive, advanced credits to their customers for a large sum, upon which they can rely, and for the use of which they have to make no special application to the banks. Thus a large fund, applicable for payments, and subject to be drawn as a deposit or paid out in bank-notes, is placed by the Scottish banks at the discretion of their customers, and through them at tlie service of the pubHc, for which no applica- tion is required, and about tlie use of which there is no uncer- tainty. That these credits, thus employed, prevent a vast amount of currency friction, is demonstrated by the undeniable success of Scotch banking, and the great jjrogrcss of tiiat country 420 BASIS OF CASH CREDITS. in wealth. Wc have already adverted to tlie safety of the debts arising upon this practice of the banks : this safety does not rest wholly upon the special securities taken when the credits arc granted. If the banks of Scotland have granted five millions sterling of credits, from two to three millions Avould, according to the average of their use, be drawn from the banks all the time : that is, the average amount out of the banks would be about that proportion. For each sum drawn by any holder of a credit, wc may assume that he either paid a debt incurred for property previously purchased, or made a purchase of commodities just received. Thus, the two or three millions stei'ling at any time actually drawn upon the amount of credits, have been just as much employed in actual business as if they were the proceeds of promissory notes or bills of exchange ; commodities have been purchased or paid for by the amount thus di'awn. The commo- dities thus obtained are the means which the holders of the credits rely upon to secure the amount of currency needful to make good their payments ; for, though they are not bound to any day for restoring the amounts drawn upon their credits, they are required to keep the account active, as the evidence of a pro- gressive and safe business. They enjoy this great advantage, that if they sell a commodity within a few days after the purchase and receive the cash, they can return the amount to the bank at once, and save all but one per cent, of the interest incurred. By the English mode there is a much greater expenditure of interest ; for a note once discounted, the interest for the whole time of the paper is deducted, and is not to be recovered. For the amount upon the cash credits, the debtors are not under the strong necessity of paying at any particular day ; but they are placed under incentives of interest and prudence, which, if they do not enforce payment upon a day fixed, are sufficient to secure prompt attention : the credit account must be active, and interest must be saved. These motives are found so powerful, that the credits are not abused by being converted into standing loans ; the banks of Scotland are not forced to abolish cash credits, because both the day of drawing and the day of payment are at the dis- DEMAND FOR B A N K - N T K S . 421 cretion of their customers. They are fully secured from the abuse of this discretion by their power to close the account, and demand payment of the amounts drawn, at their pleasure. The Scottish banks have ultimate security for their cash credits, in the bonds they take for that purpose Avith substantial names ; but the real basis for the issues of notes made upon these credits, in the commercial or banking aspects of the sub- ject, is the merchandise or commodities which the notes thus drawn have paid for or purchased : with the.-'e, the debtors can obtain currency to replace the amounts drawn. The two or three millions of notes thus drawn upon the credits, and for which the banks are liable to the public, have been exchanged for commodities, or something for which there is a demand, and these commodities in the hands of the debtors form a real and active means of repaying the banks. They form the true bank- ing basis ; for the bond with its sureties is but a precaution against dishonesty and abuse, which is but rarely resorted to for payment. If it Avere not rare that the sureties in these cash credit bonds were called upon for payment, the system would soon be discontinued. It is this real basis of commodities in trade, and movements in industry, which sustains the cash credits in their benefits both to the banks and their customers — which redeems the notes of the one, and pays the debts of the others. The demand for bank-notes in Scotland, notwithstanding the discretion allowed in returning amounts drawn upon the credits, is still great enough, for reasons already stated, to maintain their value : this is proved by their usurping the entire circulation in Scotland.^ The people seem to desire nothing better than the one-pound notes of their own banks ; and all the attempts, on the part of Parliament, to reform their currency, and introduce ' A sovereign in Scotland, according to tlie remark of a recent writer, "is seldom seen, except iii the card-purse of an old maid, or in the cabinet of some recluse virtuoso: and, in one instance, a bank ^Ya8 established, whose foundation was a large amount of guineas ; but they remained in the bank undiminished, and were only taken out to be exchanged for sovereigns at the time of the new coinage." — Lawson's History of nankimj, page 435. 422 CRITERION OF CURRENCY. sovereigns instead of their one-pound notes, has been resisted by the whole nation. The circulation of bank-notes in Scotland is, no doubt, quickened by the cash credit system, which is regarded by the banks as one of the most efficient means of enlarging and keeping up their circulation. The average amount of bank-notes in circulation in Scotland is about four millions of pounds ster- ling ; the amount annually exchanged between the banks, at tho semi-weekly clearing at Edinburgh, is one hundred millions ; and as this does not include the exchanges of banks in the same city, or the movement of the notes in and out of the respective banks, and their branches, it indicates a very active circulation, involving a large aggregate in the whole movement. In England, public men have spent much time in discussing the questions, whether banks should be governed, in the amount of tlicir issues, by the foreign exchanges, or by the fluctuations in quantity of bullion and coin : leading men have long be- lieved that the banks should establish, as a criterion of their circulation, one or the other. In Scotland, the principle has long since been adopted, that the issues of the banks should be governed by the course of domestic trade, and the legitimate business of the customers of the banks : the banks there look upon the movements of specie, and the fluctuations of the ex- changes, as proceeding from causes too special and peculiar to be admitted as indications of what should determine their whole policy, or afiect tho whole business of a country. In regard to the rate of interest, the Scottish banks have, in some degree, been guided by the rates in London ; and they have, therefore, raised the rates upon occasions of premium in the London money-market, and this for two reasons — one, because it was a time in which they could increase their profits ; and another, that they might not be troubled with applications for loans from England. The rate of interest is not so much employed, as in England, to reduce their issues ; for, in times of pressure, that never Avas the course pursued towards their regular customers. They continue their usual advances to their customers, through every commercial pressure and disturbance. The superior working of the Scottish banking system, whether REPORT OX SCOTTISH BANKING. 423 judged by its history or its present position, and however reluc- tantly the admission may be made, is incontestable. But few failures of banks take place in Scotland,' and these have, for the most part, been disastrous only to the stockholders. The banks of Scotland have never inflicted any heavy losses upon the people ; they have never, directly nor indirectly, spread disaster and ruin over the whole community in •which they are placed; they have never contracted their issues so rapidly, as seriously to injure their customers ; they have never suffered any general discredit, by which their notes have been thrown back upon them, to the injury or the cessation of business from impeded circulation. When the Bank of England was obliged, in 1797, to throw itself upon the protection of the government, and accept from the Privy Council an order not to pay specie, the banks of Scotland asked no such order, and made no change in their mode of business. Yet there was no run for gold upon the Scotch banks. This is fully acknowledged in the Report of a Select Committee to the House of Lords, in 1826. " It is proved by the evidence, and by the documents, that the banks of Scotland, whether chartered joint-stock companies, or private establish- ments, have, for more than a century, exhibited a stability which the committee believe to be unexampled in the history of bank- ing ; that they supported themselves, from 1707 to 1812, with- out any protection from the restriction by which the Bank of England, and that of Ireland, were relieved from cash pay- ments : that there was little demand for gold during the late embarrassments in the circulation [in 1825-0]; and that, in the whole period of their establishment, there are not more than two or three instances of bankruptcy. As, during the whole of this period, a large portion of their issues consisted almost entirely of notes not exceeding £1, or £1 Is., there is the strongest rea- son for concluding that, as far as respects the banks of Scotland, the issue of paper of that denomination has been found compati- ble with the highest degree of solidity ; and that there is not, 1 Only five or six in a century. Not more than two have failed to pay their deposits and their circulation. The one of 1857 may prove to be one of the worst. 424 REPORT TO THE HOUSE OF COMMONS. therefore, while they are conducted on the present system, suffi- cient ground for proposing any alteration, with the view of add- ing to a solidity Avliich has so long been sufficiently established." ^ The committee bear, in the same report, emphatic testimony to the advantage of cash credits, and also to the custom of receiving deposits of small sums, and paying on the same about one per cent, below the current rate of interest. The testimony on which the report is founded is printed at length, and we look upon it as quite strong enough to extort this favorable opinion, even from those who regarded the Scot- tish system with no friendly eye. Equally strong and more fully detailed statements, favorable to the Scotch banks, were made in the same year by the witnesses called before the Select Committee of the House of Commons — testimony which drew from that committee an equally decided opinion, that the Scot- tish system needed no present reform. The latter committee, of which Sir Robert Peel was chairman, after stating that they regarded the chief inquiry submitted to them to be, whether Scotland should be permitted to retain her circulation of bank- notes between £1 and £5, in the face of the fact that England, after 1829, would have no bank-notes under £5, say that, upon the evidence submitted to them, they "cannot advise that a law should now be passed, prohibiting, from a period to be therein determined, the future issue in Scotland of notes under £5." They further say that they are " unwilling, without stronger proof of necessity, to incur the risk of deranging, from any cause whatever, a system admirably calculated, in their opinion, to economize the use of capital, to excite and cherish a spirit of useful enterprise, and even to promote the moral habits of the people, by the direct inducements it holds out to the mainte- nance of a chai'acter for industry, integrity and prudence."" It is quite evident, however, that all these strong expres- sions in favor of the Scottish banking system are made, in Eng- land, with great mental reservation. They look upon it as unsound in theory, and practicable only in Scotland. Whilst See pages 3 and 4 of the Lords' Report, 1826, Commons' Report, same year, pp. 9-11. THE CONTRAST RENEWED, 425 they do not question the testimony of the Avitncsscs, they remain unconvinced of the general merits of a system upon which they bestow sucli strong special commendation. Both committees betray great apprehension that the one-pound notes of Scotland will find their way into Enghmd, and, to some extent, displace the metallic circulation under five pounds, for which they had made provision there ; and they both intimate that they would prefer the proliibition of the one-pound notes in Scotland, rather than permit them any circulation in England. They admit that the Bank of England suspended in 1797, after having, since 1777, issued nothing less than five-pound notes ; whilst the Scot- tish banks did not suspend, upon a circulation of one-pound notes. They had reached the conclusion, in England, that the currency under five pounds should be gold; and from th;it con- clusion Scottish experience could not drive them.^ In Scotland, the views of the people are fully settled, on the subject of the currency : their system, which, by the admission of all, has worked wonders for the progress of Scotland, is one of \vliich they only ask the undisturbed enjoyment. In England, on the topics of money, currency and banking, nothing is settled ; and showers of books and pamphlets are poured out upon occasion of every commercial crisis, every renewal of the bank charter, and upon every public event, by which the attention of the people is strongly drawn to the subject. In Scotland, the topic is seldom the subject of agitation, unless as connected with some of the movements or projects of reform. In England, there is a prevailing prejudice against a paper currency, although it is largely employed ; and a preference for a gold currency per- vades all classes. In Scotland, the preference for a paper cur- rency is as strongly marked, in all the channels of business. Neither the rebellion of 1715, nor 1745, nor the disturbances following upon the French Kevolution of 1793 and 1797, which stopped the Bank of England, nor the grand crash among the English banks in 1825, could alarm the Scotch people, or pro- duce a run upon their banks. No currency of modern times has ' English pride refused the lesson ; English fairness let the Scotch banks alone. 426 TWO LESSONS IN BANKING. been more effective, and less fluctuating in value and quantity, than that of Scotland. This is expressly admitted by commit- tees of both Houses of the British Parliament ; it is, in fact, un- deniable, and yet is regarded in England as proving nothing — establishing nothing beyond this, that the people of Scotland ought to be allowed to enjoy it so long as the Scotch bank-notes can be kept on their own side of the Tweed. We refer to this, to sliow in what a narrow spirit the subject is considered ia England. There are two great lessons in currency, tendered by long ex- perience and unquestioned facts, from which the English people have failed to draw the instruction they afford — the banking system of Scotland, and the history of the Bank of England from 1797 to 1822. A thorough, able, and honest examination of these great lessons is yet to come from the friends of the English system. We should not say English system ; there is no system in England, unless it be that of the Bank of England ; all else is unsettled, both in general policy and private opinion. There is a prevalent idea among statesmen and writers upon money, that there should be a broad basis of money or gold coin, under and as a support to the paper circulation ; and it is this idea which banishes all bank-notes under five pounds. Upon this another opinion has more recently grown up, and become a law in the act of 1844, that a paper currency, to be perfect, should fluctuate as a gold currency would do, if it were the sole medium of payment. To the mind of a Scotch banker, a greater absurdity could not be presented in as many words. He would say : — " What ! when a demand springs up for gold, in conse- quence of some foreign war, must we so regulate the issues of our banks, as to reduce the currency of notes in the same pro- portion that the currency of gold i-s carried off! Bather should we increase our issues, and supply the place of the currency that is exported." They know that bank-notes can fully dis- charge the functions of money, for they see it every day ; and not only so, but they are certain that almost no business of Scot- land is carried on by means of a currency of gold. The Scot- tish people can never be made to comprehend why their bank- THE LEVEL OF GOLD. 427 notes, bank deposits, and casli credits, should fluctuate in amount as gold would fluctuate, if exclusively employed. These forms of currency do not come of gold ; they are not founded upon it, and they have nothing to do with it. In Scotland they under- stand, as Avell as they do in England, the use of gold as money ; they know its value as a commodity, but being a costly com- modity, they do not incline to employ it as a currency, ex- cept so far as their bank currency fails of its object; nor do they wish to purchase or hold it as a commodity, except for such special purpose as may promise adequate advantage. Their system of banking enables them to dispense with it almost entirely. In this, they are far from thinking themselves behind their neighbors, in intelligence or financial skill. Sir Walter Scott, in the Letters already referred to, on the subject of the reform in Scotch banking projected in England in 1826, says, in referring to the oft -repeated metaphor, that gold, like water, will find its level : — "A metaphor is no argument in any in- stance ; but I think I can contrive, in the present, to turn this water engine against those who employ it. Scotland, sir, is not beneath the level to which gold flows naturally. Sho is above that level, and she may perish for want of it ere she sees a guinea, without she, or the State for her, be at the perpetual expense of maintaining, by constant expenditure, that metallic currency which has a natural tendency to escape from a poor country back to a rich one." — "In countries where gold is in- dispensable, it must be obtained, whatever price is given for it while the means of paying such a price remains." ^ Scotland, ' See Third Letter of MaJachi Midagrowther to the " Edinburj^h Weekly Journal," page 16. The position of the writer is further illustrated as follows : — "If my friend would consult the clerk of the "Water Company, at his office in the Royal Exchange [Edinburgh], he would explain the matter at once. 'Let me have,' says Mr. Chrysal, 'a pipe of water to my house.' — 'Certainly, sir; it will cost you forty shillings yearly.' — 'The devil it will ! Wiiy, surely, the Lawnmarket is lower than the Reservoir on tho Castlehill? It is the nature of water to come to a level. "What title have you to charge me money, when the element is only obeying the laws of nature, and descending to its level?' — ' A^cry true sir,' replies the clerk; 428 POINTS OF VIEW IN THE TWO COUNTRIES. according to tlie views of Sir Walter Scott, did not employ a gold currency, because it had to be purcliascd and paid for ; and she had no inducement to make so expensive a purchase, in the face of a fact ■which long experience had taught her that she could do better without it ; that her people preferred the bank currency to the gold. The views of Sir Walter Scott, in his celebrated pamphlet, were emphatically seconded by his coun- trymt-n of every class ; and they retained their well-tried paper system, Avhich, though convertible by law, as in England, is so wisely adjusted, that a run upon the banks for gold or silver is an event which has not occurred for a century in Scotland. The position occupied by banks in England and Scotland, in the eyes of the people, is widely diflerent. In England, the people are taught to look to the test of convertibility of liabili- ties into gold, or payment on demand, as the only right crite- rion of the solvency of banks ; they well know, nevertheless, that this convertibility is not possible. Every bank is regarded as having undertaken what, if called upon, it could not perform ; and every man is left to exercise his discretion about the degree of forbearance he can safely exercise. In times of commercial prosperity, the distrust which this view of the banks generates, in a greater or less degree, in all minds may be latent and un- seen ; but the moment any cause of alarm arises, this distrust is roused to fearful energy and action. Every man's apprehensions are multiplied by his estimate of other people's fears ; and in England, as well as in the United States, a run upon the banks, to some extent, is inevitable in a time of commercial derangement or disturbance. When the banks sustain themselves upon such occasions, it is often regarded as a triumphant proof of their solidity and strength, though the merciless process by which the 'but then it was no law of nature brought it to the Reservoir, at a height ■which was necessary to enable us to disperse the supply over the city. On the contrary, it was an exertion of art, in despite of nature. It was forced hither by much hibor and ingenuity. Lakes were formed, aqueducts con- structed, rivers dammed up, and pipes laid fur many miles. Witliout im- mense expense, the water could never have been brought here; and without your paying a rateable charge, you cannot have the benefit of it.'" — Ihid. page 17. SCOTTISH FAITH IX EAXKS. 429 banks defend tlicmselves, by contracting- the currency, has in- flicted losses upon individuals to many times the amount of all the coins in the banks. Under the English system, every attack upon the banks is inevitably attended by an attack of the banks upon their customers, and, through them, upon the -whole com- munity. To save a million of gold, lying unemployed in their vaults, the banks will diminish the active paper currency two or three, or even ten millions. The banks of England are looked upon, then, by the people, as institutions exposed to great risk, and as capable, in times of commercial trouble, of inflicting ter rible losses upon the community in which they are placed ; they are isolated, each one standing iipon its own strength, and fre- quently as prompt to sacrifice each other, in averting the dreaded suspension, as to fall upon their customers by the process of contraction. In England and in the United States, an unappeas- able jealousy of banks pervades a large portion of the people, which requires little special provocation to rouse into active enmity and opposition. In Scotland there is no jealousy of the banks ; they are not hated as monopolists, nor distrusted as unsafe. Tliey stand together as one mass, prepared to uphold each other in every danger, and to sustain their customers in time of trial. The con- tractions of currency which, in England, prove such a severe scourge, the power of employing which the banks there regard as one of their most important privileges, are unknown in Scot- land. The Scottish banks have, from their commencement, received deposits as low as <£10, and some even less, upon which they paid interest at about one per cent, less than the current rate. The deposits thus made for the sake of accumulation, ranging from XIO upwards, have for a long period exceeded ten millions sterling, perhaps they now exceed fifteen. This is the interest ■which the masses have in the banks of Scotland. The confidence of these depositors is so great, that, since the introduction of savings banks in Scotland, the poor commence their savings in them by shillings, and continue their economy, until they have succeeded in accunmlating £10, which they carry to a bank for 430 ESPRIT DU CORPS. a regular deposit receipt. The Scotcli banks are the pride of tlie people ; all their spare money is at interest in them ; and, never hearing the language of distrust or opposition, no fear or apprehension crosses their minds. No one has ever heard of a difficulty in collecting principal or interest, or in reinvesting them together. The people know that all the notes of all the banks are good over all Scotland ; and that, if a suspicion were raised against any one bank, the others would make a point of giving their own notes for those suspected. It would be difficult to find a man in Scotland in whom a doubt existed, or could be planted, of the entire soundness of all their banks, now and hereafter. The system of redemption semi-weekly between all the banks, and their many local exchanges, give them such an oversight of their respective operations, that they have less fear of each other's solvency than the isolated banks of England. The banks of Scotland, consisting mainly of branches of a small number of banks situated in the chief towns, are governed by a policy which is uniform, and equally designed for the benefit of the whole people, and the safety of the banks. This esprit du corps which prevails among the banks in Scotland, has been strongly cen- sured in England as likely to lead to over-issues, relying on mutual aid ; but it must be noted that there is, among the banks there, not only a disposition to protect each other in danger, but an equally strong tendency to watch each other at all times. Their respective interests demand this, and their close associa- tion makes this watchfulness effective. Whilst all, therefore, are disposed to help each one that may need aid, all are equally in- terested to restrain the tendency of any one to go astray. The complete success of the Scottish banking system, during a century and a half, while it commands the admiration of those who study it with proper attention, does not always convince them that it could, with equal advantage, be transplanted in another soil. It might be long before that confidence in banks, which exists in Scotland, could be inspired elsewhere. A popu- lar writer, referring to this, says , — " The credit of one esta- blishment might be doubted for the time — that of the general system was never brought in question. Even avarice, the most FEW SCOTTISH WRITERS OX CURRENCY. 431 suspicious of passions, lias, in no instance I ever heard of, desired to compose her hoards by an accumulation of the precious metals. The confidence in the credit of our ordinary medium has not been doubted, even in the dreams of the most irritable and jealous of human passions." If this extraordinary faith m bank currency is of long growth in Scotland, and therefore not readily transfer- able elsewhere, tliere must at least be something in the system which promoted that steady growth, and which warded off all those accidents and commercial troubles which elsewhere have not only destroyed confidence in banks, but, through them, in- flicted incalculable mischiefs upon the people. It is in this aspect that the history, constitution and practice of the Scot- tish banks has not been properly studied out of Scotland, nor even in it. The value of the system is fully appreciated at home, but no Scottish writer has yet shown what elements in the system have given it such a large and firm growth. We are far from competent to this task, even if our space would admit of it, We refer to one peculiarity in Scotland, without, however, look- ing for its origin : it is fixed in the minds of the Scottish people, that whatever will fully perform the functions of money, in pur- chase and payments, is as good as money for them ; and, if cheaper and more convenient, it is to be preferred and employed. Such a substitute they find their bank currency to be. They see and know that it does not perform these functions in virtue of its being convertible, but that it answers the end designed, like a steam-engine, because it is properly devised for the purpose. They know that men pay their debts by balancing their books of account, and that the debts so paid are well and fully paid ; and they know equally well, that the debts paid by the agency of their bank-notes are also fully and properly discharged. Tliey know that, in all this, there is no intervention of money or the precious metals. In Scotland they look, therefore, upon coined money as a thing to be obtained and employed when there is need for it. They are so satisfied with their present modes of payment, that they have no more desire of replacing their one- pound notes with sovereigns, than a man of business has to wear buttons of gold, or to drink from vessels of gold, because it is 432 OPINIONS IN ENGLAND. a substance of real value. In Scotland the people have no fear of their banking system breaking clown ; they can see no possi- bility of that, so long as they continue their confidence. They do not regard it as resting upon gold ; and if the directors of the Scottish banks were to send their whole stock of gold to London, reserving only what might be needful for change, and the sup- ply of travellers to England, it would create no panic nor run. They know that their banking system is a device to effect pay- ments in their business, not dependent upon gold for its power or validity. In the way of business, those who have bank-notes are sure that they can, at any time, buy as much gold as they may require ; but they no more think of turning their bank-notes into gold, unless it is needed for a particular purpose, than of turning them into precious stones. Such is the long and deeply-settled feeling and opinion of the Scottish people ; and it is no doubt due to some element in their system, the influence of which has not yet been sufficiently understood. Tlie feeling and opinion in England, on this subject, is, as we have already remarked, very different. They look upon the pre- cious metals, but especially gold, as being the only legitimate medium of payment. All substitutes are not only to be subordi- nate to it, but convertible into it on demand. It is true that notes of the Bank of England are, by law, a legal tender — a relic of the long suspension, the retention of which has never been officially explained ; but no doubt it is on the ground that the whole power and means of the government would be applied, if needful, in aiding the bank to pay specie. In England, the idea of convertibility is kept up in connection with all kinds of paper currency, and the people have learned to infer that the effectiveness of paper currency is dependent upon its being con- vertible. The real office of paper currency, its power and economy, arc lost sight of in the absorbing feeling that it should be convertible ; and that being the case, they attribute all the efficacy of paper currencies to the fact of its being payable on demand. All its powers, as it is regarded, are due to gold in the last analysis.^ This is so fully contradicted by facts, past and ' We must remind tho reader, that we are not arguing against the pro- EXTREME JEALOUSY OF BANKS. 433 present, as to show that tlie subject, from some cause, has not received a candid consideration. The Clearing-house of London is a standing and unanswerable proof, that the great payments of commerce can be made with more economy and dispatch by the use of securities, books of account, and set-off, than by any possible use of gold. This prejudice against paper currency in England, to which the people are so much indebted in national, as well as in private affairs, and which they employ so largely, is detected in every glance we take at the condition of the coun- try for the last century and a half. It is seen in the opposition to the Bank of England, from its origin, in the fact that the paper of the Bank of England is not received out of London with anything like the readiness with which the notes of the Scotch banks circulate. The local banks of England have but a very circumscribed circulation, whilst the notes of the Scotch banks circulate with equal facility over all the country. As early as 1777, £1 and £2 notes were prohibited in England. The extreme jealousy with which the Restriction of 1797 was regarded, was seen in the many contrivances which were resorted to, to keep it in force without appearing to give it too full a sanction. The feeling with which the measure Avas viewed may be gathered from the publication by Lord King, in 1803 and 1804, from the Report of the Earl of Liverpool to the King in 1805, from the speeches of the Opposition in Parliament, but more fully from the Bullion Report in 1810, and the discussions which followed, both in and out of Parliament. The jealousy of paper currency is seen in the interrogatories propounded to bankers and mer- chants by the Parliamentary committees which have, at various times during the last half century, had the subjects of money, bankino; and credit before them. The witnesses from Scotland before the Committee of Banks of Issue, in 1841, were pressed with questions in regard to their exclusive paper currency, in priety or necessity of convertibility as a check upon banks, for that is a question which must be considered by itself; but wo are insisting that con- vertibility is not the ground upon which the effectiveness and power of paper currency rests. 28 434 EFFECT OF BANK ISSUES ON PRICES. terms -wbich clearly reveal the doubts of the interrogators.^ After a very full defence and explanation of the system of cur- rency had been given, they were asked, in every manner in ■which the question could be varied, whether the issue of paper did not in some way become a capital, and whether the abund- ance of the paper currency did not, as money or capital, affect prices. The witnesses all replied in the negative ; they well knew that such was not the fact, for the whole circumstances and results were before them. They did not succeed in explaining why prices were not affected, in a manner to satisfy minds so prepos- sessed as their interrogators. As this question is often asked, with- out being properly answered, we offer an explanation which should never be omitted in that inquiry, whatever else may be brought to bear upon it. Whenever the paper currency issued by banks is, by their system of banking, in continual and effective demand, it has no undue effect upon prices, or, in other words, it has no tendency to depreciate, by which prices would seem to be increased. When all the issues of a bank are in demand, to pay debts to the bank maturing every day, thereby producing a daily current of the notes to the bank, they do not affect prices, because, being in constant demand to pay for purchases already made, they can have little influence upon current prices. Their functions are not to originate new business, but to adjust that which is past ; they are subject to an imperative and absorbing demand, which prevents their free action on prices. Prices, as we shall explain in a chapter on that subject, are not so much made in reference to currency or money, as in reference to the feelings, opinions and estimates of men of business. The great purchases and sales of industry and trade are nearly all made upon the individual credit of the dealers, who are not governed, in fixing the price, by the quantity of money, so much as by the probable demand, the needs of consumption, and other like considerations ; purchases and sales being made on the security of individual paper, are not dependent upon the quantity of money. ' Second Report on Banks of Issue, pp. 174-5. MISTAKEN APPREHENSIONS. 435 But apprehensions about paper currency even find place in the minis of intelligent men in Scotland. In referring to an instance of this, we oflcr a word of explanation to that class of men, who, though intelligent and unprejudiced, look upon paper currency as something unsubstantial, dangerous, and only to be tolerated for a time, and until something better can be obtained. We find the following passages in the account of '• The Scottish Banking Institutions," drawn up by William Chambers, for his "Book of Scotland." It is the best popular account of these banks we have found, and will repay the reader for a careful perusal. " Tlie remarkable fact of so many persons trading on borrowed capital, in such a limited country as Scotland, can give but an inadequate notion of the superficiality of wealth, and the liollow- ness of the apparent riches, and easy circumstances, of many individuals in this country. " So complicated is the curious mechanism of credit, which is interwoven throughout the whole fabric of society, that were the thick veil torn aside, which is at present thrown over its various workings, a scene of spectral pecuniary capacity would be ex- hibited, which, while it Avould alarm the political economist, would horrify and astonish those who usually look no deeper than the surface of affairs. But though paper money has been decidedly the moving cause of such a result, it must, neverthe- less, not be viewed in the light of an instrument of evil ; and we have no doubt that, by adhering to a certain mode of manage- ment, the banks will eventually be the means of instituting a solid for a specious wealth. " The Scotch notes were issued only as a succedaneum, until a certain quantity of solid wealth was generated ; and the ques- tion thence arises, Vrhcther the nation has yet arrive'ILL NOT CHANGE HER SYSTEM. 441 their books of account : these dealings miglit be regarded as im- prudent, if all had to be paid in gold or silver : their transac- tions might appear inflated, hollow and dangerous, if brought to the criterion of their ability to pay in coin. But, in the simple mode of payment they adopt, their payments are as good as gold or silver could make them. There is no good reason, then, for the allegation, that the bank currency of Scotland is only a succedaneum — a preliminary step in the progress to more sub- stantial wealth. The time can never come when Scotland will introduce a gold currency in place of paper, on account of her increased wealth. If her wealth were tenfold what it is now, it ■would still be the best mode of effecting the same objects : the Scottish people have now tenfold the wealth they possessed a century ago, yet they show no disposition to lay aside the sim- ple, economical and sure processes of their banking system. It matters not to what low rate interest may fall, in the future abundance of accumulated means, so long as what is purchased must be paid for, so long as men give mutual credit for mutual convenience, so long as the payments of trade are as now mainly separated from the movement of the commodities, so long the Scottish men of business will find it for their advantage, and for the benefit of the whole country, to avail themselves of the facilities furnished by their banks, and of the working of the credit system. The wealth of Scotland is now as secure as that of any country ; and this free use of credit, more than any other thing, has contributed to this result. Its advantages will neither be overlooked nor surrendered for any possible use of gold or silver coins — articles which the Scottish people will never purchase or retain largely, simply because they are very expensive ; and they have learned to make their exchanges of con: modities and mutual services without them. NOTE TO CHAPTER XVI. REGULATIONS FOR EXCHANGE OF SCOTCH BANKERS' NOTES. The following is a copy of the regulations of the banks for exchanging each other's notes, dated Edinburgh, 29th June, 1835 : — " 1. The exchange shall continue to be settled twice a week, on Tuesdays and Fridays, and for Glasgow on Wednesdays and Saturdays ; the notice and amount of the description of notes held to be given by the respective banks at half-past nine o'clock, a. m., and the balances to be paid before one o'clock the same day. "2. The payments shall be made in Exchequer bills, Bank of England notes of the value of £100 or upwards, or gold, at the option of the payer, it being understood that Bank of England notes shall onlj' be employed to pay the fractional parts of £1000. "3. The Exchequer bills shall be filled up in favor of the bank which may be the original holders, and shall bear the distinguishing mark of "Edinburgh Exchange Bill," showing that they belong to the Edinburgh exchanges, and are not intended to be used for any other purpose, and shall be received and paid at par, with the interest that may be due when the transfer takes place. "4. The amount of Exchequer bills to be kept in the circle is fixed at £400,000, to be applied as follows : — Bank of Scotland £63,000 Royal Bank 62,000 British Linen Co 50,000 Sir Wm. Forbes & Co 50,000 ^ Commercial Bank 50,000 National Bank 60,000 Leith Bank 15,000 Glasgow Union Bank 35,000 Western Bank 25,000 and each bank so to arrange their transactions as to maintain their quota in the circle at all times. "5. The Exchequer bills to be of the value of £1000 each. "6. The amount of Exchequer bills held by each bank shall be stated every exchange day, in the clearing-room. " 7. As the Exchequer bills may be expected to accumulate with some of the banks, and to be wanted at others, it shall be imperative on the par- ties so situated to sell or buy Exchequer bills ; that is to say, the party holding the greater amount of Exchequer bills shall be bound to sell to the party in want of them what may be required for the legitimate purposes of the exchanges ; but it shall not be imperative on that party to sell a greater amount than what will reduce their stock to the original quota. (442) NOTE TO CHAPTER XVI. 443 " 8. Interest shall be paid for eight days, equal at present to one shil- ling per cent, upon the purchase and sale of Exchequer bills from the banks, by a draft on London at five days' date, the purchaser also paying the stamp. " 9. The bills put in circulation are to be nearly of the same date, so far as is consistent with these regulations, and to be sent up for exchano-e be- fore due, and new ones are to be provided, of a later day, so as to keep up the stock in the circle, and no advertised bills are to be used in the ex- changes. " 10. The Exchequer bills, within a week after the government notice appears in the Gazette, are to be given up to the original holders, upon receiving other bills, not advertised, with a draft on London, Bank of Eng- land notes, or gold, at the option of the holders of the advertised bills. " 11. The seventh regulation will tend, in a great degree, to equalize the amount of Exchequer bills among the different banks ; but if i^xchequer bills should nevertheless accumulate in the hands of a party, so as to e.v ceed tlieir original quota by more than one-third, they shall have the power to call upon the party holding the smallest amount to purchase the excess; that is to say, the excess above their quota plus one-third. But it shall not be imperative on any party to take more than is required to bring up their stock to two-thirds of the original amount. In this way the fluctuation in the amount of Exchequer bills among the different banks, wliich is an essential part of this arrangement, need never permanently exceed one-third more and one-third less than the original quota of each. The terms of pur- chase to be the same as in the eighth article. " 12. The exchanges are to be made at the Bank of Scotland and Royal Bank alternately, who reciprocally undertake to pay to those banks who are creditors in the exchange the Exchequer bills, bills of exchange, Bank of England notes, or gold, received from those banks who are debtors in the exchange. But the Bank of Scotland, and the Royal Bank, sliall not, nor shall either of them, be in any way responsible for the exchange trans- actions or otherwise soever. " 13. The statement of balances, after they are struck, to be sent to the respective banks, from the clearing-room, by their clerks, and the clerks of the bank creditors to be in waiting to receive the amount due to them at 12 o'clock. The British Linen Company shall send to the Bank of Scot- land and Royal Bank alternately a statement of their exchange transac- tions, signed by the manager. The clerk to bring over Exclioquor bills. Bank of England notes, or gold, for payment of any balance that may bo due by them, and to receive Exchequer bills, Bank of England notes, or gold, for such balances as may be due to them on the day's transactions. "14. Any bank party to this agreement to have the power of witlidraw- ing from it, and receiving back their Exchequer bills at par, upon giving three months' notice." — Lmoson' a lIiHtory of Bankinii, pp. 422-5. CHAPTER XVII. THE BANKS OF THE UNITED STATES. § 1. Banks, agencies or instruments of 'payment — Discussions and differ- ence of views — Banks are dealers in credits — General waiver of payment in specie — Fund for payment made by discounting notes — Banks absorb their oivn issues — Process exemplified — The demand for bank currency makes it good — Commodities of trade held by debtors to the banks — Are sold to pay the banks — Baiik currency the medium — The commodities the basis ; the individual and bank paper mere securities and means of adjust- ment — Circidation and deposits of New York banks in 1857 — Daily pay- ments — Banks of the United States — Deposits, their agency — The banks pay and are paid in their own currency, and by this furnish, to a certain extent, a safe medium for circulation — Mutual debts. The subject of banking has been one of growing interest for several centuries. When the Bank of Venice was the only insti- tution of the kind in Europe, it was little known ; its operations as an institution of credit, and an active agent in the payments of commerce, were understood by few out of the republic. The known fact, that the owners of the public debt transferred their claims on the public, in whole or in part, at pleasure, did not suggest the magnitude of the commercial payments effected at the bank by these transfers. While those who were uninitiated regarded these transfers at the bank as mere changes of invest- ment, by which some sold and others purchased portions of the public debt — others knew that the fund thus transferred was the chief medium of commercial payments, very much the largest portion of which were thus effected. As it was then, so it is necessary now, to look deeper than the mere surface, to ascer- tain the real functions of banks. To very many, a bank is looked upon only as an institution enjoying, by charter, the privilege of issuing and lending bank-notes as a currency. (444) CONFLICTINXG OPINIONS. 445 Nearly all the discussions upon banking, and nearly all the legislation upon that subject, proceeds from this point of view. And what subject has been more largely discussed in the United States — what more the subject of legislation than banking? It is not from this point of view we now regard this topic. We intend merely to consider banks of circulation as agencies of payment. In their exercise of that agency, the bank-notes have but a small part. In the aspect just mentioned, in Avhich the banks have been generally regarded, there are few subjects, the discussion of which has elicited wider differences of opinion. Language has been scarcely adequate to express the bitterness of opposition and dislike towards banks, on one side, and the admiration and eulogy of them, on the other. This discussion has scarcely paused, in this country, for the last half century. Our legislative halls, during that period, have seldom passed a year without devoting more or less time to this fruitful theme. Every order of talent has been applied to it, and every grade of j^ractical knowledge has been employed upon it. That know- ledge has been increased, and that opinions have been multi- plied, is very true ; but opinions are as conflicting as ever, and the main (questions remain unsolved. Opposers of banks are found of every grade, from the mildest objectors to those who would banish every bank from the country, and allow no cur- rency but gold or silver: and friends of banks, from those who think that the banks might be legislated into some shape or con- dition in which they would be endurable, to those who Avould make banking as free as farming or shoemaking. These parties view the subject from different points, and of course, never havinsr the same facts before them, can never reach the same conclusions. But, as not unfrequently happens in such cases, there is much that is correct in the views of both. We shall attempt neither to reconcile these opinions, nor to weigh the arguments of either party : but endeavor to show what the banks do, and how they do it. If we could do this as it should be done, it would not be difficult to find ample justifica- tion for the opposing opinions to which Ave have adverted. The banks of the UiTited States are, proj)erly speaking, dealers in 446 E A N K S ARE DEALERS IX CREDIT. credit. So far as their capital is paid up in gold or silver, it is reserved as a security for their circulation. It is a rare thing that a bank lends gold or silver. Their business consists mainly in purchasing commercial paper — that is, the evidences of debt taken by men of business in the ordinary course of their aifairs ; in paying for that paper with bank-notes, or with credits granted upon their books ; in receiving upon deposit their own notes, and claims or transfers upon other banks ; in allowing a con- stant transfer of deposits, in the way of payment, among their customers and those with whom they deal. The banks, then, are not lenders of money, though compelled to pay their obli- gations in money. They are founded on the idea that an asso- ciation of men, with a paid-up capital, and a corporate existence, is entitled to a higher credit than individuals ; and that the latter might find it greatly for their advantage, to avail themselves, in their business transactions, of this superior credit. We have seen that the credit system rests upon the fact, that the business of purchasing and selling commodities is sepa- rated from the business of payments ; and upon the further fact, that the commodities which men sell are made to pay for those they purchase. So far as credits and payments are concerned, it is a main object of every man to apply his credits to pay his debts ; to employ what is due to him hy others in discharging that which he owes to others. The main agency in this is the banks. It is well known that all the large transactions of busi- ness are made upon the credit of the parties concerned in them; that the great staples of the country, as well as foreign goods in large quantities, are bought and sold upon individual credit. The market value involved in every transaction is expressed in money of account, and apjoears on the face of the bills of ex- change and promissory notes which the purchaser gives, and the seller takes, as evidence of the debt incurred and credit given in each case. These evidences of debt and credit, Avhich represent, in various shapes, the market value of the commodities, foreign and domestic, as they move in the channels of trade, are the very articles in which it is tlie object and proper business of the banks to deal. The parties to these evidences of debt, or this WAIVER or PAYMENT IN C I N j: . 147 commercial paper, having delivered and received the commodi- ties upon Avhich the credits and indebtedness are alike founded, have the remaining duty of payment to fulfil. By the laws of the United States, every such creditor has the right to demand payment in gold or silver ; and no State can, by the terms of the constitution, take away this right. But this right is waived iu business to such an extent, that, out of the retail trade, not one per cent, of the payments are exacted or made in gold or silver coin. The reason is obvious and simple. Men extensively engaged in commercial and industrial pursuits are, by the very nature of their business, both buyers and sellers — both debtors and creditors. It is important to pay their debts, and realize their credits, with the least trouble, ex- pense and waste of time possible. When any two of them have mutual accounts against each other on their books, they compare and balance them : of course debts so paid, and credits so real- ized, are as satisfactorily paid and realized as if gold had passed on each transaction. So each man of business indebted upon promissory notes and bills of exchange, and holding such paper of others for debts due to him, is only desirous of applying his credits to his debts. lie never thinks of looking for gold or stiver to eifect a discharge of his debts, and as little does he think of exacting such payment from those who arc indebted to him. This mode of payment is at once inconvenient, hazardous, expensive, and, if attempted by only one-tenth of the debtors, would be impossible. It does not enter, therefore, into the thoughts of business men ; they perfectly understand the proper sphere of coins and bullion, and know that they are necessary only in the retail trade, and in payment of national or territorial balances. Nothing is better settled and acquiesced in, than this universal waiver of payment in the precious metals. No sane man of business is willing to exact that with which his debtors cannot possibly comply, and that with which it Avould be eiiually impossible for him to comply, if it were exacted of him. Debts, then, though all payable in lawful money of the United States, are very seldom so paid, because they cannot be so paid, and if they could, they would not be so paid. It is every way more 448 BANKS ARE AGENCIES OF PAYMENT. advantageous for men to apply their credits to the payment of their debts, and that is what constitutes the crowning process of the credit system. The banks of the United States are the chief agencies in this mode of payment. They offer the means and facilities of pay- ment which the parties to this business-paper require. They receive tliis paper, having some months to run to maturity, and deducting interest for the time, give the parties bank-notes, or a credit on their books for the proceeds. This is not turning individual notes into money, it is simply turning them into pro- missory notes of the bank, or deposits ; these being of higher credit, and fitted, from the manner in which they arc issued, to be used as a currency or a medium of payment. The real basis of the individual notes discounted by the bank is the commodi- ties which the persons giving the notes received. These per- sons contracted debts to the several amounts of their notes, and against these debts they hold the purchased commodities. They offer the goods thus purchased to the public, and expect, from their sale, to realize the means of paying the debts. The dis- counted paper, therefore, exhibits on its face the true mar- ket value of the commodities purchased by it ; and the bank- notes, or bank credits, given for this individual paper have the same basis, with the added guarantee of the bank. All bank- notes and bank credits issued upon real business-paper are vir- tually issued for commodities actually moving in the regular channels of trade. The purchasers of these commodities expect to realize enough, by their sale, not only to pay for them, but a profit beside. It is this process which is continually absorbing bank-notes, and returning them to the banks. The sellers of goods receive the paper of the purchasers, and dispose of it to the banks, taking therefor bank-notes and bank credits, the latter of which they employ in paying their debts, and the former pass into circulation in the retail business, and in this way soon reach the hands of the debtors of the banks, to whom they are always as valuable as the equivalent, or same nominal amount of gold or silver, and even more desirable, because they pay debts to the E X E JI P L I F I C A T I N . 44l» bank equally well, and with less trouble, expense and hazard. The debtors of the banks are, then, the special holders of the commodities, upon the sale of which their debts are founded ; and they offer these same goods to the public for tlie same amount of bank-notes to which their sale gave orif^in : these goods should be adequate to redeem the bank-notes, or to bring as much money as will redeem them. A dealer who purchases from a miller 1000 barrels of flour, at $4,50, gives his note at three months for $4500 ; the miller carries this note to bank, and receives for it the promissory notes of the bank to the amount of §4430 ; if the dealer sells his flour at half a dollar per barrel profit, he will receive $5000, enough to pay the bank, and leav^e a profit for himself. He can liave no better currency in which to pay the bank than its own notes, aud the bank can do no better than to receive payment in its own obligations. The people who consume flour need to look no further for a cur- rency good enough to buy flour, than these promissory notes of the bank ; for they are as readily received by the dealer in flour, as coins of gold or silver. What is true of flour, applies to every other article of general consumption. The business of the banks and their customers embraces the whole round of the articles of trade, and of the products of industry. Let us suppose, for the purpose of illustration, that the dealer in flour, instead of giving iiis note for $4500 at three months, gives 900 promissory notes drawn by himself, payable in three months, each for $5 ; that the credit of the dealer, together with the endorsement of the miller, is sufficient to give these small notes free currency ; that the miller pays them out to the farmers for wheat, and that these pay them to the mechanics, manufacturers and merchants with whom they deal ; and that,, finally, these classes pay them to the dealer for flour, an article of necessity for all. The dealer in flour can receive no better currency than his own notes for the amount of his debt. His profit of $500 will be realized in money, or in something equally satisfactory. The cases above supposed are simiKar in sub- stance, the difference being that, in the first case, the bank 29 450 now CURRENCY IS MADE. issues the small notes, and in the latter, the drawer of the note for ^vhich the bank exchanges its issues. Wc may employ the same parties for a further illustration. Suppose the dealer in flour, after giving his note in September at three months, for $4500, sells the flour to several parties in October, and receives their several notes at three months, for $2500, $1500, and for $1000. These notes, maturing a month later than the note for $4500, are not applicable to its pay- ment, and without some special device or facility, afford no help towards that payment ; but the bank furnishes the device and the facility. The bank holds the note for $4500, payable in December, and application being made, it discounts the three notes at the instance of the dealer in flour, and gives him credit on its books for the proceeds. Upon these proceeds standing to his credit, under the name of deposits, the flour dealer gives his check, in December, for $4500, and retires his note. If the banks in any community have discounted notes to the amount of a million, averaging sixty days to maturity, granting therefor credits to the amount of $990,000, they will promptly give up any or all the notes going to make up the million, for a return of their credits to the amount. The banks give nothing for the notes discounted but credits on their books : what they gave for the notes they are willing to receive in kind for them. The profits of the bank, being the interest, for which they issued no credits, must of course be paid when the notes are retired. The main business of the banks consists, then, in purchasing commer- cial securities and evidences of debt, paying for them with their own notes and bank credits, and deducting the interest for their profit. In doing this, they not only furnish a medium of pay- . ment in which these commercial securities can be discharged, but a currency which may be employed in the interval, before it is applied to the extinction of these debts. What chiefly makes this currency available and effective is, that there is an active and urgent demand for it, to the whole amount due to the banks ; that is, for more than all the banks have issued. This demand is active, urgent, daily, unremitting : the notes in bank are maturing daily, and the demand, therefore, never flags ; HOW CURRENCY IS ABSORBED. 451 every day has its payments, which are to be effected with money or the issues of the banks. The latter, in any community where there arc banks of circulation, being the chief medium of pay- ment, is the medium most in demand. "We have shown that, in all cases where the notes discounted by the banks were given by the makers of them for commodities of daily use and consumption, these commodities are imme- diately offered to the public for bank-notes, or checks on bank deposits, as the proper fund with which to pay the discounted notes. The commodities, by their sale, give origin to promis- sory notes ; the promissory notes give rise to the bank-notes and credits ; these become, in their turn, a medium with which to purchase the commodities ; and the bank-notes and bank credits coming thus, by circulation, into the hands of the debtors to the banks, are returned to the banks in payment of the dis- counted notes. This is a very simple and sound process of pay- ment ; the discounted notes are founded on the market value of actual commodities, and of course the same basis is beneath the bank-notes and bank credits ; and the purchaser finally pays his debt by the sale of the commodities on account of -which his liability was incurred. If a dealer issues 1000 five-dollar notes drawn by himself, for 1100 barrels of flour, and sells the flour for $5 a barrel, his own notes will make a good medium of pay- ment, to the extent of 1000 barrels. Tlie remaining 100 barrels are his profit, and must be paid for in money, or what is equally satisfactory. The transaction is the same, in substance, when the bank intervenes ; the bank issues the small notes, or credits, and becomes the owner of the note given by the dealer. Tiie latter sells the flour, and thus obtains the notes of the bank, Avith which he pays his own. This process, or what is substantially the same, is the basis of a large proportion of the real business between the banks, their customers and the public. There arc other processes by which payments are effected through the banks, eciually legiti- mate and economical, some of which may not be equally safe for the public. Let us suppose that a miller sells to a dealer 1000 barrels of flour for $5000 ; that the latter sells the samo Hour to 452 EXEMPLIFICATIONS. another dealer for $5250, and he to another for $5500 ; and that it is retailed by the latter at $6, or for a total of $6000 : in this case, three promissory notes are issued, respectively for $5000, $5250, and for $5500, making, in all, $15,750 of whole- sale transactions, besides the amount for which the flour Avas retailed, $6000. If these three notes, having an average of sixty days to run, were all discounted, bank-notes and bank credits to the amount of $15,593 would be issued on the basis of the 1000 barrels of flour. This, at first glance, may appear to be an over-issue. But each of these persons who parted with that quantity of flour for a mere promise to pay, must have deemed the purchaser to be good, and his promise reliable, and so must the bank which discounted the notes. Two parties besides the bank, deeply interested in being right and cautious, have adjudged these notes to be good. The process of payment is simple. The bank has issued notes or credits to the amount of $15,593, and holds three notes, amounting together to $15,750 ; the makers of these three notes must either return an equivalent in the issues of the bank, or the money. The debtor of the note for $5000 has the proceeds of his sale for $5250 to his credit, and with this he pays and takes up his note : so, also, the debtor of the $5250 has the proceeds of his sale for $5500 at his credit, and with this he retires his note : and, finally, the debtor of the note of $5500 gathers up the pro- ceeds of sales at retail, in the shape of bank-notes or credits, and pays off the note remaining in the bank for $5500. Thus these notes provide the medium by which they may all be paid, for every note implies a debtor of sufficient credit to purchase property on the faith of his simple promise to pay ; and every discount by a bank implies a confidence of the bank that the drawer or acceptor of the paper had ability to redeem the issues of the bank to the amount, or pay in money. In cases where banks discount paper not given for property transferred at the time, it is, or should be, on well-grounded confidence that the maker of the paper has the power or means of redeeming from the hands of the public an equal amount of the issues of the bank. The banks being large holders of indi- DAILY PAYMENTS OF N E W Y R K . 453 vidual paper, either discounted or deposited ^vith tlicm for col- lection, they are of course constantly looked to for the means of payment ; and a credit on the hooks of a hank, granted hy the bank, or derived from another quarter, heing all that is required, it is earnestly sought for that purpose. Where there arc many hanks, and large transactions in business and upon credit, the movement of these payments in hanks, and the consequent movement of bank credits or deposits, become far too compli- cated to be followed up by any process of analysis. One great feature, however, must ever be prominent, and that the most effective of all in sustaining the present banking sj'stem ; that is, that every debtor of a bank is an active agent in purchasing and returning to the bank its notes and credits ; that the issues of the banks, whether notes or credits on their books, are more available, convenient and economical for these debtors, than the legal currency of coins. They are more abundant, more easily obtained, and equally effective. It is this which gives to bank- notes and bank credits their efficiency and rapidity of move- ment. The amount of the circulation of the New York banks averaged over $8,000,000 in 1857, and the deposits averaged over $87,000,000. These constitute the medium in which the payments of the City of New York are chiefly made. With these, there is a daily payment to be made of from $30,000,000 to $50,000,000, and they are quite capable of making that amount of payments each day, for both notes and deposits may be paid many times during the day. It is very safe to assume that over $30,000,000 of city bank-notes and deposits are paid each business day in New York. There is a demand, then, upon these notes and deposits in every week, for payments, to the amount of $200,000,000, and in every month for $800,000,000. This demand daily, weekly, monthly, constantly pressing upon a fund of bank-notes and deposits, which may at no time exceed $100,000,000, is certainly active and pressing enough to keep up the value of a fund so much used, and so indispensable to the men who have $200,000,000 to pay every week. That these sums are far within the actual daily payments of New York is apparent from the operations of the Clearing- 454 NEW YORK BANKS. house. The amount cleared daily, in 1857, was over $20,000,000, and these clearings are but the balances on the transactions between the banks. A vast sum of payments is made every day in the business of such a city as New York, Avhich is in no way embraced in the transactions of the Clearing-house. If we assume that the whole of the payments effected yearly through the agency of banks in the United States, is only ten times greater than the amount paid yearly in New York, we shall have an aggregate 400 times greater than the amount of the precious metals in the country ; 500 times the amount of the bank-note circulation of the United States ; 400 times the amount of the bank deposits ; and 30 times the annual value of the whole productive industry of the country.^ These estimates fall far short of the whole of the payments made in the country; for all payments made out of bank are expressly excluded, as well as all the transactions of the retail trade. In all this great adjustment of debt and credit, the office of the precious metals is that of payment, when adjustment fails. Where two banks have claims against each other, to the amount of hundreds of thousands, they only pay the balance in money : so between two cities, it is only the balance upon their mutual indebtedness that is paid in money : it is the same between two states or countries. The functions of the precious metals, then, in this great work of payment, is to pay balances, and to perform, as may be re- quired, the office of a medium of exchange in the retail trade. The great fund employed in this adjustment is created out of the promissory notes and bills of exchange given in the regular course of domestic commerce. In a statement of the condition of the banks of the United States for the year 1856, the dis- counts and loans are put down at $084,000,000. If these run off four times each year, it would make $2,736,000,000. These loans and discounts take the shape partly of deposits, and partly ' If the operations of the Clearing-house in New York were taken as an indication of the trade of the city, these figures would be increased. AYe suppose the amounts cleared daily in New York to be considerably swelled by the stock transactions which pass through the banks ; and we make allowances accordingly. THE FUND USED FOR PAYMENTS. 455 of bank-notes ; both of which are being constantly extinguished and redeemed by being returned to tlie bank in payment, at the rate of from nine to ten millions daily. But the fund thus con- stituted by the discounted paper of men in business is that which, by its transfer and circulation in the form of bank credits and bank-notes, eifects the vast aggregate of payments wo have noticed. The banks of the United States held, on the average, in the year 1856, the sum of $684,000,000; this amount would run off in ninct}' days, absorbing a proportionate amount every day of bank liabilities. But as this paper is discounted upon an average time of ninety days, the credits granted by the hank are applicable, during that time, to other service, and are used to effect a much larger amount of payments than is involved in lifting the securities discounted by the banks. This fund, then, is subject to an additional demand beyond that which arises from the payment of nine or ten millions daily, in retiring the discounted paper — a demand of scarcely less than $300,000,000 daily. The indebtedness Avhich produces this demand arises in many ways beside the sale of commodities, a very considerable proportion being the mere result of dealing in credit. Large amounts of bank credits and bank-notes are con- stantly lent by the holders, and notes of individuals taken therefor. Large transactions in stocks arc continually occur- ring, giving occasion to notes and discounts. Although the sum of liabilities thus incurred is far beyond the amount of the dis- counts, a rapid movement of the deposits makes it practicable to effect payments every day, at least thirty times the amount required to discharge the discounted paper. The a(blitional employment thus given to tliis fund, causing a demand for it every day nearly equal to its whole volume, keeps it at a value, for the purposes of payment, fully ei^ual to the precious metals. It is observable that, Avheu interest is at six, twelve or eighteen per cent, per annum, there is no increased jjrice of the pr^-eious metals. When the price of this fund, which is that employed in the payment of debts, has risen three iiundred per cent., gold and silver have not, as commodities, advanced at all. As a matter of fact, however, they are not the medium in which debts 456 LEGAL TENDER. are paid, and therefore they do not increase in price under the most urgent demand for that medium or fund in which debts are usually paid. The fund employed to eifect the payment of these great sums is mainly that which is called deposits in the banks. For, how- ever great the amount of payments effected by the circulation of bank-notes, it enters into our present estimate only to the amount of the bank-notes daily paid out and received at the counters of the banks. The payments by circulation of bank- notes are, therefore, left out in our approximation. The depo- sits are the chief agent in the work. They consist in credits given by the banks to those who have had notes or bills dis- counted : the banks become the purchasers and holders of this individual paper, and grant these credits in their place. Accord- ing to returns of 1856, the banks of the United States had placed to the credit of their customers, in this way, $230,000,000, this being the average of the Avhole year. If this amount of deposits was moved 200 times in the year, it would pay $46,000,000,000. In many of the large cities, the deposits are, on the average, moved once each day. We thus see that the credits of business and trade furnish, by the intervention of the banks, the very fund out of which the corresponding debts are paid. These debts are, in no pro- per sense of the word, paid in money : they are, it is true, pay- able in lawful money of the United States. Every creditor has a right to payment in gold or silver ; and if debts be not so paid, it is because the creditor, whether bank or individual, is equally satisfied with some other mode. The legal right which every man has to demand payment of what is due to him in the precious metals, has no doubt a powerful effect in keeping other currencies up to the price of the precious metals. The law of legal tender, therefore, though of little pi-actical application in the business of payments, exercises a beneficial and sustaining power, the benefits of which it would be difficult to estimate. When every creditor can exact payment from his debtor in gold or silver, it may be presumed he is satisfied with what he accepts instead ; and no currency, in such circumstances, can WHY BANK CURRENCY IS EFFICIENT. 457 remain long below its proper equivalent in coins, wit limit being quoted and paid at a discount. Let it not be supposed, however, that the law of legal tender is the only, or even the chief, power which maintains the value of the great fund we have pointed out as the medium in which debts are chicflv paid. The main reason why this fund maintains its value is, that it is receivable in discharge of all debts payable at the banks ; and being receivable by the banks, it is of course receivable by all the debtors of the banks, who will sell any article they have for this currency as readily as for money. The indebtedness to the banks is so great, the daily demand for this currency is so press- ing, that it will purchase any commodity of trade, any product of industry, and pay wages or personal services equally as well, and with far more convenience, than any possible use of coins. It is, therefore, so far as it is employed, to all intents, as good and as effective as coin. Those who take it have their choice between currency and coin. We have stated that this medium of payment created by the banks is as effective as gold or silver, because it is receivable for debts, and because it will purchase anything that gold or silver can purchase, and. it may be added, on as good terms. We have already explained why and how the banks can so receive it from year to year. If the banks have a special advantage in issuing this currency, the people enjoy an equal benefit in restoring it to them in payment of debts. The advantage of the banks in the business is too great to make it supposable they will ever voluntarily abandon it. Tliey ])urcliase with merely a credit on their books, or the issue of their })aper, the very best and safest iiulividual promissory notes whicli are made in busi- ness, and on these they have an ample profit. This power of purchasing individual paper with their own currency would cease if then' customers did not enjoy the reciprocal favor of paying debts in the same medium. If the amount of discounts and loans in 185G, rej)orted at $684,000,000, were placed to the credit of 100,000 persons, it would be found that these persons were mutually indebted to within ten per cent., or perhaps loss, of the whole amount. The 458 MUTUAL INDEBTEDNESS. banks might enter up a credit for tlie whole sum, interest de- ducted ; but in less than ninety days the parties would have employed at least ninety per cent, of the whole amount in pay- ing each other, and this ninety per cent, would be thus wholly extinguished. Nearly all men of business who give promissory notes in the course of their transactions, take them also. Whilst each individual obtains a credit for the notes he has taken, he finds that others have credit for the notes he has given. The effect is the same as if the bank had, at the instance of these parties, opened an account with each one, charging him with all the notes he had given, and giving him credit for all that he had taken. The balance would then have to be paid in money. By the actual process in bank, this result is obtained by allowing each customer to draw upon his credits to pay his debts as they mature. Each one who has a larger credit than is sufficient to pay his debts, may call on the bank to pay him that excess in money, which the bank can do, because some of its cus- tomers have balances in money to receive, and others have balances to pay ; and as the amount of these differences would be the same, the banks would receive from the debtor balances the same amount they would have to pay upon the creditor balances. It is this very large proportion of mutual indebtedness which makes the methods of payment adopted by the banks so effi- cient. No man should desire better payment than his own paper; and, in fact, the chief financial effort and object of every man in business is to apply the paper he has received in business to pay that which he has given. This operation proceeds through many a devious process, but with certain and complete success. Of the $684,000,000 of loans and discounts in 1856, at least $616,000,000 may be taken as the amount of indebtedness be- tween the debtors. This large sum is thus extinguished at least four times every year by a virtual set-off; that is, every creditor gives up enough of his credits to pay his debts. The banks having issued credits to the amount of $616,000,000, for indi- vidual paper to that amount, surrender the individual paper to those who return the equivalent in bank credits. The complica- BANK ISSUES NOT MONEY. 459 tions of this process defy human scrutiny as to the djtails, but it is ahvays making progress towards the proper result. A man of business may hold notes of persons residing in New Orleans, Cincinnati, Pittsburg, Chicago, and Buffalo, and his own may be held by persons as widely scattered. The banks give a pre- sent credit on their books for these wide-spread debts, and enable him to face his notes, as they are presented, by checks on his credits, so far as his credits may reach. This machinery of credit brings to every man's door the claims which others hold against him ; and it furnishes every man with a medium of payment adequate to the purpose, and far more convenient than coins or bullion. §2. Baiilc-notes are not money — They are mere proinissory notes of the banks — They are intended to perform the functions of money, aiid can be so employed — Bank deposits can be so employed, but are not money — Both are substituted by banks for the notes of individuals — Banks can make securities of paper, but cannot make money — The convertibility of bank-notes does not make them money, and is not so intended ; it is a max check on the banks — Gold and silver not the basis of bank issues: they are based on the paper discounted by the banks, and this paper is based on the commodities for which it is given — Convertibility a dangerous check — Employed with fatal effect against those ivho rely upon it — It abolishes time on commercial paper. In the ordinary language of trade, bank-notes and bank depo- sits are called money. Writers upon the subject of money too often class all kinds of currency under that general term. But this obliteration of needful distinctions should be discouraged, as unfavorable to clear views : the term money should be re- stricted to coins made a legal tender by law in payment of debts. If this definition is departed from, Avho can tell where to stop. There remains no longer any clear, defined boundar}' between that which is money and that which cannot, with any propriety, be so called. If bank-notes are money, at what rate of discount do they cease to bo such ? If bank deposits arc money, are they such when the bank is in bad credit, or precisely how l":ir must a bank be discredited before its credits cease to be money ? Is a bill of exchange, or promissory note, which circulates freely, 460 CONFUSION OF TERMS. money ? If it be said that all bank-notes and bank credits pay- able on demand are money, then do they cease to be money the moment the banks suspend, and whilst they are circulating as freely, and performing the same functions as before ? If bank- notes payable on demand are money, are they made so by the promise to pay, or by the ability to pay ? If by the former, all notes would be good ; if by the latter, how is the ability to pay to be ascertained ? It is well known to every one, that no banks of circulation and deposit can pay on demand all their liabili- ties ; they may, nevertheless, be perfectly safe. Is their ultimate safety a sufficient ground for ranking them as money ? Do bank-notes become money, in the strict sense of the word, when, like the notes of the Bank of England, they are made a legal tender ? If so, could all bank-notes be made money in the same way ? Questions like these are easily multiplied ; and, if truly answered, must show that the term money has often received an application far too wide. If names or proper designations were wanting, there would be more excuse for this confusion of terms. In Venice and Genoa, the term bank money was applied to the funds of the banks, which were for a long period at a high premium over money of gold or silver. In modern times, we have the terms bank-notes, bank deposits, currency, circulation, and cash. The term money pro- perly means the legal coinage of gold or silver, or other coins, made a legal tender ; the term currency may include all the various substitutes for money which circulate like money, and perform the same or similar functions. Where bank-notes are made a legal tender, they may be called paper-money. It may not be necessary to be always precise in maintaining these dis- tinctions ; but when precision is necessary, they should be kept clearly in view. Bank-notes, deposits, checks, bills of exchange, promissory notes, and other things of like kind, which have been extensively and successfully used as substitutes for money, should not be confounded with money. Almost all these substitutes are really evidences of debt, the amount of which is clearly expressed on their face in money of account. They pass for an expressed BANK-NOTES MERELY P R M I ?: S R Y NOTES. 461 amount, which is payable in money on demand, or at a future day, but which payment is not made, and never cxpeeted, as it is always adjusted in anotlier way. They readily fulfil every function of money, by reason of the great demand, which makes them as desirable as money, and far more soui^ht for. "We may repeat here an illustration we have frequently before employed. If A. and B. have dealt with each other to the amount of ^5000, A. having in his books charged B. with $400, with ^1500, and $600 ; B. having charged A. with $600, with $1600, and §300. These several sums, as they stand on their respective books, are not in any sense money, although the several amounts are stated in money of account ; yet A. and B. may, at any moment, pay each other in full, by balancing these accounts. As they stood on the books, they were but evidences of debt ; and the accounts, when balanced, are but evidences of payment. If A. and B., instead of paying in that way, issue their notes to each other, payable at sixty days from each transaction, these notes, if negotiated in payment for goods, do not become money, but remain evidences of debt. If A. and B. carry these notes to bank, and have them discounted, receiving bank-notes in their place, tlicy each remain debtor for the notes respectively given, and the bank becomes debtor for the bank-notes issued in the purchase of this paper. These bank-notes may perfectly per- form every function of money, but they can be nothing more than the promises of the bank to pay. The bank holds a claim upon A. and B. for the full amount of tiie promises it has issued in this case ; and it expects A. and B. to return an equivalent sum in these promises, or to pay their note in sometiiing that will enable the bank to redeem them. These bank-notes are but the issues of a promissory note of the bank in a convenient form for circulation, in place of the notes of A. and B. ; and they are, in reality, no more money than the notes of A. and B., though far more suitable and effective substitutes. They may become as efficient in the purchase of all commodities as money, and far more efficient and convenient in the payment of debts ; but this by no means converts them into money. They can- not be employed in paying balances of foreign trade, nor 4(y:l SPECIE LITTLE USED IX PAYMENTS. even in the discharge of bahmccs between remote points at home. It is no more the province of the banks to create money, than it is in their power, nor should their issues be treated or regarded as money. Their great function is that of effecting payments ; they open accounts Avith men who are both debtors and creditors, and, by means of tlie facilities they afford these debtors and creditors, adjust their mutual claims, and pay and receive their balances, to the amount of thousands of millions yearly, without any use of money, or any need of it. The great fact, that nine- tenths of the payments of business in the United States, above the mere distribution effected by the retail trade, are made with- out any use of money, is one wdiich should never be left out of view by statesmen and economists. If such payments are effective, correct in theory and practice, should not the principle be understood, and the practice promoted, protected and extended? If a million of men in the United States owe, on the average, $10,000 each upon notes maturing Avithin three months, this would require, if paid in money, the sum of $10,000,000,000. The whole amount of specie in the banks being $60,000,000, the payments above Avould require this amount of specie to change hands nearly twice every day, and besides, to change its location from bank to bank, and state to state, hundreds of miles apart, Avith a rapidity equal to the despatch of the tele- graph — a movement as impossible as it would be absurd, if it •were possible. This great payment is effected with perfect facility by the processes of the banks, Avithout any other move- ment of the $60,000,000 than paying the amount of some comparatiA^ely trifling balances. In the regular operation of banking, the sum of $60,000,000 in specie Avould not change hands once in a year. In the great movements of industry and trade, goods and ser- vices pay for goods and services ; the promissory notes, bank- notes, bank credits, or other currency, Avhich intervene, are devices of adjustment, and not the very payment ultimately aimed at. Men give Avliat they haA^e to spare, to obtain Avhat they desire. If they do not, in the first instance, sell for money, INSUFFICIENCY OF COIN. 463 and with that purchase what they want, they take a security or evidence of debt ; they make their purchases upon their individual credit, and give evidences of debt. The debt and credit extinguish each other in the banks, and the parties have, in sub- stance, exchanged goods; all the rest is merely keeping and balancing accounts between tlicm. These securities are issued, in this country, to an amount not less than $1,000,000,000 every three months, in which period this amount continually runs off and is renewed, making §4,000,000,000 in the year. Of this $1,000,000,000 of securities, the banks become the owners and collectors ; and for lialf this amount, they arc under a constant engagement to pay money on demand. To meet this engagement, the banks hold $600,000,000 against $500,000,000, or twelve per cent, of the amount. Of course, absolute conver- tibility of all this fund of securities into specie, on demand, is an impossibility. If all the gold and silver in the country, esti- mated at $250,000,000, were in the banks, it would be an impos- sibility. It must, therefore, continue to be impossible ; and hence arises one of the gravest difficulties connected with banks of circulation. If bank-notes, like checks upon banks, were confined in their use and circulation to those at whose special instance they are issued, and whose debts arc to be adjusted by them, there would be less occasion for any public intervention or concern. For the public have little interest, whether men thus mutually in- debted discharged their debts by balancing accounts, by bank- notes, or by checks on banks. But the experience of a century and a half has shown that, where bank-notes are offered as a currency, they are freely received, and soon become the chief medium of exchange. It is almost invariably true tliat, wherever bank-notes are offered as a currency, with even the slightest pre- tensions to regularity and security, they arc accepted, and pass rapidly into general circulation. This facility of converting bank paper into a currency is a strong temptation to resort to it, and accounts in part for the multiplication of banks of circu- lation in this country, and elsewiierc ; but it has given rise, also, to that ceaseless jealousy with which this system of banking has 464 SAFETY OF BANK-NOTES. been watched. There is, perhaps, more ground for this jealousy than many friends of the system have been willing to acknow- ledge. If the circulation of bank-notes had been confined to the payment of the debts in which they originate, no more mischief could ensue than now arises from the employment of checks upon banks, which the parties using them are interested to keep within legitimate and safe bounds. But as bank-notes, wherever offered, secure a wide circulation, it is not enough to say, let people take them at their risk, as they take them at their discre- tion. Every one who takes bank-notes for his goods may refuse them, if he will ; and every one who takes them for a debt, takes them in place of gold or silver, which the laAV gives him the right to exact. The question then is, what security or protection should be provided for those who will receive bank-notes as a currency ? Public policy has determined that although the taking bank- notes is optional, yet the best security should be given for their safety as a medium of exchange, of which the nature of the case admits. The circulation of bank-notes is, no doubt, a mutual advantage to tlie bank and the public ; but the bank acts as one body, while the public acts by its individual members, who are only occasionally and variably interested in bank-notes. The bank can, by one act, make all who shall become holders of their notes secure ; and this tends not only to the confidence of the public, but to a more watchful management of the bank. It should not be the privilege of banks, or of individuals, to issue notes in small sums, to circulate widely as a currency, without first giving ample security. The banks can afford to do this, without injury to any legitimate business. In the United States, in more than a score of States, the utmost ingenuity of politi- cians has been taxed to provide adequate restraints upon bank- ing. Two modes have been adopted, which are chiefly relied upon — one, simply the convertibility of all bank paper into specie on demand ; and the other, in addition to convertibility, the deposit, Avith an officer charged by law with that duty, of some public security of the United States, or of one of the States, or of some other stock or bonds, for the notes issued to all the CONVERTIBILITY OF BANK ISSUES. 465 banks of the State. The latter is the best, and far the most suc- cessful yet adopted, and capable of being made still more effectual. In regard to the convertibility of bank-notes on demand, there are difficulties so serious, that scarcely any approach has been made towards overcoming them. We have already, in the chap- ter on the Bank of England, shown how notes on demand came first to be issued, under the belief that the whole sum which might be thus issued would never be demanded at once, and that it would be practicable for the bank to pay in specie all that would be presented. That this was a shrewd guess, when it was made, is very true ; and that it made the bank popular in its early career is also true ; but it has opened some questions so difficult, that more than a century and a half of varied trial, and bitter experience, have failed to solve them. The question of convertibility has certainly labored under disadvantages which have been particularly unfriendly to the progress of truth. Ever since notes payable on demand, now called bank-notes, have come into constant use, there has been a numerous class, both in England and in the United States, who regard them with dis- trust, and yet scarcely endure any discussion which questions the advantage of immediate convertibility. This is a mistake, and its prevalence beclouds the whole subject. If convertibility, in the sense in which it is now understood, be a sound and desira- ble policy, it can be shown to be so both by fact and argument ; at any rate, let the grounds upon which it rests be thoroughly understood. If the question were simply, whether banks or bankers who receive the privilege of issuing promissory notes payable on de- mand, to circulate as a medium of exchange, should give ample security to the public that their notes should be safe and good, it would admit of no discussion. The readiness with which people generally receive paper currency makes this privilege of issuing bank-notes one of great importance, and requiring jealous- care. If no other adequate security could be given, the ques- tion would be settled, for clearly some security should be given ; not merely so, the best security should be given. The abuses to which this privilege of issuing bank-notes is subject, the tompia- 30 '166 FUNCTION OF BANK-NOTES. tion it involves, demands the best possible guarantees. It is now generally acknowledged, that the promise to redeem bank-notes on demand, however desirable performance may be, and however numerous the legal enactments to secure and enforce it, has not proved an adequate protection to the public, either against abuses in the issue of notes, or in ensuring a circulation of bank- notes entirely safe and good. The security now required in many of the States by the deposit of stocks has, it is well- known, proved the most effectual safeguard against loss by the public yet tried. No doubt this mode of security could be carried to a point which would be beyond all ordinary hazard. Con- sidered apart, safety and soundness in the circulation must be preferable to a mere promise of convertibility ; for, after all, if the latter be relied upon, the security consists merely of a pi'O- mise. Penalties cannot make the promise good. Hanging does not prevent murder. If bank-notes were presented regularly for payment at some stated intervals, the ability of banks to pay would be regularly ascertained ; but of the bank-notes issued in the United States, not one dollar in a thousand is ever presented for payment in specie. These notes perform all the functions expected of them, and scarce a thought is entertained of presenting them to the bank for payment. So long as they continue to circulate, their efficiency as a medium of exchange is complete : as to this, they are not dependent upon the promise to pay them in coin. It is not, then, that bank-notes may be useful, that they are pay- able on demand ; it is, that they may be subjected to a constant test of their soundness. But as the incessant application of that test would take away all the convenience in their use, people decline applying it: and the circulation proceeds upon a tacit understanding between the banks and the people, to the effect that, if the notes are not presented for payment, specie pay- ments shall be faithfully maintained : if the notes are presented, payment is impossible. The security of paper currency rests, in the opinion of many, upon this slender basis. They are so wedded to convertibility, that they prefer the pretence, or name, to substantial security in any other mode. The undeniable fact PAY M EXT ON D E JI AND. 467 that convertibility is a mere pretence, that it is not now, and never lias been, possible in England or in the United States, should have secured for the subject better treatment than it has yet received. That the banks, to whom this great privilc of payment; but the long credit stops the j)rocess. The long note can furnish no facility for paying the note preceding it in order, and it must be paid in money, or from other resources. Long credits, therefore, interrupt the regular order of i)aynicnt : and even if the proportion of these long credits do not exceed 500 MISAPPLICATION OF CREDIT FUNDS. ten per cent, of the whole, the effects of the interruption may extend with bad results throughout the whole of the vast opera- tions of the credit system, and be distinctly felt and perceived by the banks. Long credits are, then, not only violations of the proper laws of trade, but they are a dangerous interference with the safe working of the credit system. Another abuse of the credit system deserves more attention than it has received — the misapplication of funds which spe- cially belong to the regular processes of adjustment, by turning them aside to other channels of business, in which they are em- ployed and treated as money. It is a very evident proposition, that all the debts and all the credits are equal, as they are but counterparts ; whatever is the debt of one man, is the credit of another : it is equally evident, then, that, in a direct adjustment, it would require all the credits to pay all the debts. The only reason why the debts, in every mode of payment, do not absorb all the credits is, that the circulation given by the banks to a portion of the credits reduces the amount necessary to pay the debts. It is still true, however, that the proper application of the credits, in the working of the credit system, is to pay the debts, so far, at least, that every man shall have the opportunity and be held to avail himself of it, to apply what is payable to him in payment of what he owes to others. If credits are largely diverted from this, their legitimate channel, the result must be severe pressure in some quarter for means of payment. We have seen that the fund by means of which the chief payments of industry and trade are made, is formed by the discount of the securities created in that business. If, when this fund is formed by the action of the banks, it is used for other purposes — if it is employed in the purchase of real estate, in the erection of buildings, or in the construction of railroads — it is withdrawn from its jDroper channel, which was to follow in the track of the business out of which it originated, and to make the payments accruing upon those transactions. If we could bring into one view all the debts to be paid, and see at the same time the position of the credits applicable to the payment, we should perceive at once the danger and the THE CREDITS REQUIKED TO PAY THE DEBTS. 501 evil of perverting these credits from a (li.si»ositioii so approjiriale for individuals, and so necessary in an industrial and commer- cial point of view. The Avliole public are deeply interested in the faithful progress of these payments. It is, liowever, mainlv a work of individuals. Neither the public authorities, nor the banks, can apply the credits, or pay the debts. The whole process is one of individual effort ; the banks are passive agents, and merely furnish the means of adjustment. If credits have been short, the paying of the discounted paper will create such a demand for the issues of the banks, that there will be little danger of any misapplication or perversion. Individual debtors find that all their means, and all their activity, are required, to keep pace with the rapidly maturing paper. If, however, mo- tives more strong intervene, such as a rage of speculation ; if debts are extensively incurred for building up towns, con- structing railways, or other like works ; if the debtors apply the whole or a portion of their credits to these purposes, which are wholly without the credit system, then they must either to that extent fail to pay the debts of trade and industry, or apply to the banks for accommodation loans, or renewals of their paper as it matures. These shifts are fatal to the sound working of the credit system ; they show that the debtors have parted with the fund which should have been applied in payment, and that tliey are reduced to the necessity of asking the banks to carry the debt for them. This the banks cannot do without innninent risk. When the holder of a deposit draws his check upon a bank and pays a debt, a debt and credit have met, and both are extinguished. A debt is paid, and the bank is acquitted of a liability to the depositor to the same amount. But if the debt is continued by accommodation, or otherwise, the deposit or credit is not used, and the bank remains liable, and not merely so, but liable on demand — a risk which grows dangerous in pro- portion to the extent of such practices. The banks whicii dis- count new notes on time as they are offered, giving bank-notes or deposits in exchange, payable on demand, and which to any considerable extent renew or continue tlic discounted paper, giving further time, must very soon reach a point at whicli they 502 DANGER OF PERVERTING CREDITS. tuul tlieir customers will both collapse. If this wrong practice does not originate in a perversion of the funds applicable to the payment of the continued debts, it leads directly to it. The instances of the misapplication of funds belonging strictly to the operation of the credit system, and the non-payment of debts in consequence, are numerous and flagrant ; the results are full of admonitions. No severe and continued pressure in the chief marts of England and the United States, no commer- cial revulsion has occurred in these countries, no ruinous con- traction of the currency, no general destruction of credit has happened, of which this misapplication of the funds of credit has not cither been the chief, or at least a leading cause. It will not be denied, that our banking system is responsible for a large share of this mischief. "We have seen that all the funds thus perverted are the pro- ceeds of commercial or business-paper discounted by the banks ; these proceeds belong of right to the adjustments of the credit system, but, owing to special circumstances, are applied to other purposes. They are not money, but merely securities. The promissory notes and bills of exchange, before being discounted, would not be susceptible of such perversion, because they are not convenient nor efficient as currency ; but when, by being ex- changed for the notes or deposits of a bank, a currency is made, the danger of perversion begins. The power and functions of money being conferred upon the proceeds of this discounted paper, it begins to be regarded as money. It belongs, however, not the less to the channel of adjustment in which it originated. The character and functions of these issues of the bank make them very efficient, and add greatly to their usefulness ; but with these advantages comes the danger of misapplication ; for these issues are not merely a currency — they are a currency, sup- posed to be convertible, on demand, into money. If the entire issues of the banks were really so convertible, nothing could be said against any use of them which could be made of money ; as they are not in fact, or by any possibility, convertible, the assumption is dangerous, by the facility it afl"ords, and the tempta- tion it ofiers, to employ bank issues as money. THE PROPORTION OF CREDITS NEEDED. 503 Of the hundred million of deposits and circulation which the 2sew York banks report, probably not five millions are at any one time applicable to any other purpose than to the current payment of the debts of industry and trade. These absorb over $30,000,000 daily. If, then, $50,000,000 of the hundred should be abstracted from this legitimate use, and diverted to other purposes, §50.000,000 of debt would remain unpaid : not only so, but the still larger sum which this $50,000,000 would have paid by the ordinary process of circulation would also remain unpaid. The withdrawal of such a large sum from the current payments of the day, and above all, the stoj)page of the circulation of this sum, and the failure of payment involved in such stoppage, would be attended with results so disastrous, that it would be difficult to conjecture where they would end. The ruin of many fortunes might be in the path of this evil ; the sacrifices to be made, the losses by fall of prices, the high rates of interest to be paid, and the manifold other mischiefs involved in this irre^rularitv, show that the funds which beloncf to the payments of the credit system cannot be applied to other uses without consequences as lamentable as they are unjust. It may be true, that ii is not possible to prevent such abuses ; that they are, in some measure, incident to the use of credit. No doubt some abuses are incident to every form of credit, and that it is not possible to avoid all. We believe it would greatly lessen the abuse of credit, if the distinction between money and credit were more carefully studied and observed. If it were fully ad- mitted that, of the $100,000,000 of deposits and circulation of the New York banks, not more than $5,000,000, or at most §10,000,000, could be spared at any one time from current pay- ments for other purposes, banks and merchants would be more watchful to prevent or check such a perversion of credit as would inflict a public injury. It would no doubt greatly assist this repressive influence, if bank-notes and bank deposits were only payable in specie at sixty or ninety days. These funds would then be marked, and their proper destination would be known. They could not be so readily drawn off" and applied to other purposes. The misapplication could be more readily delected 504 CITY A X D COUNTRY BANKS. and defeated. The banks are so much interested to prevent this abuse, that they Avould promptly avail themselves of any additional power or facilities they might employ against it. "We have regarded the banking sysrom of the United States only in its general aspects. There is much that is special which should arrest the attention of those who would become familiar with all the details of the subject. Every part of the country has its peculiarities of business, Avliich impress tlieir special fea- tures on the local banking. Some care may be necessary in drawing very general conclusions ; all which must be modified more or less by peculiar circumstances. The distinction between the business of city and country banks is one of those important circumstances that should not be forgotten in any effort towards improving our banking system, which, as we have explained, owes its power and success to its being one of the principal agents of the credit system. This agency, as Ave have seen, con- sists mainly in exchanging the credit of the banks, in the shape of bank-notes and deposits, for the securities or evidences of debt issued in the course of business. By the purchase of these securities, the banks become the general creditors of persons in business, and are enabled to receive their own issues in full dis- charge of all these debts — debts which, by law, are payable only in gold or silver. The power of the banks to furnish this great facility to the public depends upon the demand which the banks can create for their issues. If the demand for bank-notes and bank deposits is not constant and strong, they cannot long perform the functions of money ; and no such demand can be created or exist, unless it come from the debtors of the bank who are under the necessity of providing the means of paying their debts as they mature from day to day. The concentration of payments involving vast sums makes the demand for bank funds peculiarly pressing and constant in the great cities and marts of trade. This is likewise proportionably the case in cities and towns of less importance. In the country towns, or in strictly agricultural localities, the banks find great difiiculty in absorbing their issues fast enough to sustain the regular movement of their legitimate business. The proper destination COUNTRY BANKS. 505 of these issues is a return to the banks in payment of debts. This completes the circulation which gives them the title of banks of circulation. If the tendency of its issues is not directly and strongly back to tlie bank, in payment of debts due to it, there is good reason to fear that the bank will have diflSculty in sustaining itself. Such, in fact, is the case of the country banks. The circula- tion in their vicinity is not rapid enough, the debtors of the bank are not sufficiently numerous, and their transactions are not large enough to turn the current of the circulation towards the bank in payment of debts. If the issues of a bank are in such credit as to be emploj'ed as money, but not in demand enough to carry them back to the bank in payment, they leave the vicinity of the bank, or pass into other channels of circula- tion, and become liable to be returned, not in payments of debts due to the bank, but as a demand on the bank for specie. Whilst they circulate in the vicinity, they are a medium of pay- ment to the bank, and prove, as such, a great facility to the debtors of the bank ; but when they are carried out of the reach of the debtors, these are, to that extent, less able to pay the bank, and the bank is, to the same extent, exposed to a demand for specie. This is the chief practical obstacle to country bank- ing under our system. The customers of the country banks are, for the most part, rather borrowers of money than credit ; the banks cannot supply this demand for money, and issue bank- notes in place of it. The notes are carried to distant markets, and employed as money, whence they are immediately returned to the issuers with a demand for specie. This disturbs the operations of the banks, and unduly restricts their business. They do not profess to be lenders of specie, and they cannot turn their paper into gold or silver. The return of the notes, however, is perfectly proper and unavoidable. It is just as pro- per for the city banks to exact payment from the country banks for their notes, as it is proper for the latter to issue them. The truth is, that our system of banking is wholly unsuited to a mere country business. Banks of circulation re The last half of 1852 it was two per cent. In 1855 and 1856 it fre- quently rose to seven ; and in tlic panic of 1857, to ten. 51G INTEREST ON CREDIT, AND INTEREST ON MONEi. are controlled, and sometimes from the want of proper control. The domestic debts and credits of every community correspond, being exact counterparts. The credits, properly managed, will pay the debts, leaving of course a great variety of balances to be adjusted among the parties, to go to new accounts, or to be paid in money or in goods. It is perfectly true, then, that it is never for want of the usual means that interest rules high ; it is merely because the means of making payments are in the hands of those who can hold them at a high price, or who are afraid to part with them. This opportunity of asking and obtaining a high price is generally founded on some actual or apprehended event, which may make it unsafe to enlai'ge bank credits. It is not always the scarcity of a commodity which enables the holders of it to raise the price. There may be no scarcity of flour in May, yet the crops may look so very unpromising, as to cause a great advance of the price, in apprehension of a scarcity in August and for the rest of the year. The dealers in credits cannot be expected to forego the opportunity of increasing the price of their article, any more than the dealer in cotton or flour. We abstain from such questions touching the rate of interest, as whether it should be left to find its own level, or be a rate fixed by law. These questions open a wide field of discussion, and deserve very full consideration. It seems to us, however, that a distinction should be taken between interest reserved on bonds, notes, and other instruments secured by mortgage, founded on the sale of real estate, or on the loan of money, where the day of payment is not fixed or long deferred, and those transactions which are merely a dealing in credit. It is certainly more proper for legislation to fix the rate on the first of these classes than on the second. The first is a limited class, and the result of any rate fixed could be observed and corrected as circumstances might dictate. But dealing in credit is so large a business, so complicated in its bearings, influences and results, and restraints so easily evaded, that it maybe difficult, if not impossible, to detect the effect of a legal or fixed rate. There is a general belief that a legal or fixed rate of interest applied to ANNUAL CHARGE OF INTEREST. 517 mere dealings in credit has the cficct of producing liiglier rates of interest, by lessening the competition among lenders and dealers in credit. Whatever confines the business to fewer hands, tends to in- crease the rates, because it gives the greater power to those engaged. The fixed rate is no protection, except so far as the banks respect it. It is very well known that when interest is high, the banks are in such a state of alarm, that they reduce their business to the smallest possible circle. Individuals en- gaged in lending credit find some mode of evading any law which would restrict their charges. Wc cannot doubt that it would be greatly for the benefit of the commercial and business community, that all restrictions upon the rate of interest should be abolished upon paper not having over three or four months to run. Any policy which might tend to reduce the rate of in- terest on credits deserves serious attention. The sum paid in the shape of interest, for the mere facility of applying credits to the payment of debts — that is, for furnish- ing the facility which enables a man to apply the debts which others owe him to the debts ho himself owes — is a vast sum in any country ; but in this country, and in England, it is far be- yond the conjecture of any but those who have examined the subject. The banks of the United States report, for the year 1856, a line of loans and discounts of $684,000,000 ; at the average rate of six per cent., they received upwards of §-1:1,000,000 of interest on this sum. IIow much business is done out of the banks, it is difficult to conjecture. The transactions out of the banks arc probably not less than in them, and at much higher rates. We may estimate the sum paid for discount and interest, out of the banks, at $68,000,000 for 1856, taking ten per cent, as the average rate of that year. The average rate of 1857 could scarcely have been less than fifteen per cent. So that, by this estimate, over $100,000,000 was, iu 1856, paid for interest in the United States. The clearings of the New York banks, in 1S57, were about $7,196,000,000. Tliese clearings accrue upon the payments of 518 GRATUITOUS INTEREST. tncir customers. If Ave suppose that all this amount had cost the payers two months' interest, on the average, we liave a sum of interest of over $71,000,000 paid in New York alone. But another mode of estimating the sum of interest annually paid in the United States would make it much larger. We have, in the preceding chapter, estimated the payments of the city of New York at $30,000,000 daily, and have taken the whole payments of the United States at ten times this sum, or $300,000,000 each day, and of course at $90,000,000,000 for the year. Now, if this vast sum of annual payments under the credit system pays an average of sixty days' interesi'., or say one per cent, on the whole amount, it would make the sum of interest paid yearly no less than $900,000,000. But if the payments of the rest of the country are only five times greater than those of the city of New York, we should still have a total of $450,000,000. We do not say it is too much to pay for the advantages aflforded ; we think these facilities would be worth even a much larger sum, if they could not be obtained otherwise ; but the amount, in any w\ay it can be estimated, is so large, as to demand consideration whether some part of it could not be saved by more economical processes of adjustment. It has been contended by some, that interest ought to be gratuitous ; or, in other words, that as interest is a charge for the mere use of a credit, the government should furnish the needful supply of credits to the people without charge. This idea has been very elaborately repelled, but upon grounds no more sound than the position sought to be refuted. The proper and legitimate fund to meet deferred payments, in evei*y coun- try, is the credits, or exact counterpart of the debts. It is the proper fund, because it is the most available, the most economi- cal, and the most rapid mode of payment. These credits being generally the proceeds of securities or evidences of debt of some kind, are always the property of individuals or corpora- tions. For the use or loan of credits, the owners have as good a right to charge a commission, or interest, as to charge a profit on anytlnng they have to sell, or to exact rent for tlie use of a house. Credits are constantly more in demand than INTEREST ONE EXPENSE OF ADJUSTMENT. 510 any single thing in the marts of trade. There is notliing paid for more ^villinglJ, and no charge can be more legitimate. Buti this by no means obliterates the distinction between credits and money. The arguments advanced by some men of ability against gratuity of interest proceed ^vhoUy upon the ground that all interest is for money, and that it is absurd to expect a government to furnish the people with money for their busi- ness, or to pay them interest. It is true enough, that this Avould not only be absurd, but impossible ; yet it is no more absurd than to assume that credits are money, and that interest is only paid for money. Nine-tenths of the so-called interest paid in commercial countries is paid for the privilege and facility of paying debts without money. Commercially regarded, interest is one portion of the annual expense of adjusting commercial payments. By means of indi- vidual credit — personal confidence — the commodities of trade are permitted to go forth into the channels of trade, to be col- lected, transported, assorted, bought and sold, until they finally reach the hands of consumers ; tlic payments -which all these movements imply being all postponed, and finally concentrated as a separate and special business in the banks, and among brokers and dealers in commercial paper, who make this their particular occupation. The great inquiry arising out of this business is not one of money or currency — it is merely one of adjustment. It is not how may banks be multiplied, or their issues increased, or how abuses of banking may be prevented, or guarantees increased, or convertibility insured, but how may men most promptly, and at the least expense, apply their credits in extinguishment of their debts. It is not a question how money can be obtained for this purpose ; nor how far bank-notes can be substituted for money ; nor is it, in fact, any question of currency or circula- tion, but simply a question of liquidation or set-off. It is so far from being a mere question of money, or any of its substi- tutes, that the problem is how to dispense to the utmost possible extent with all of them. Their use is what constitutes the 520 ECONOMY OF INTEREST. greatest expense of adjustment; economy requires that tlie least possible resort should be had to them. We are fully convinced that much of the friction of the credit system, now so much felt and lamented, and which results largely in that form of expense or charge which is called interest, might be prevented ; and that a saving might, in this way, be effected of more than half of the whole amount thus expended. We do not doubt that the economy thus prac- ticable in England and in the United States would, in each country, be double the public revenue. We do not say that such an economy is possible with the present machinery and methods ; but with improved processes, which would inflict no shock upon existing institutions, and bring no risks with the gradual changes, the cost of carrying on the payments of the credit system might be reduced one-half, if not to one-quarter, of the present charge, with a proportionate reduction of the amount paid for interest ; and that friction which is the cause of so many misfortunes, and so much distress, might be thus reduced to a point as low as human imperfections in matters of this kind would permit. Human ingenuity on the one hand, and human patience on the other, has long been exhausted on the subject of taxation. It would be well for those who are deeply interested in the study of this subject, to inquire whether a door is not open, through the credit system, to a mode of raising the whole, or a large portion of the revenue of a nation, by taking a burden off the national industry, instead of imposing one. The bur- den or tax of interest is now the heaviest which rests upon national industry in England and in the United States, and perhaps in several other nations ; if half of that tax can be saved, the persons benefited could well afford to pay the whole of the national expenditure. The reduced friction would be a boon to industry and commerce almost beyond estimate. How gladly would those concerned pay the tax, if the friction of the machinery of credit, with all its uncertainties, its disappoint- ments, its delays, its anxieties, and the dangers of its occasional crushing revulsions, and explosions could be prevented ! CHAPTER XIX. PRICES. 2 1. Complexity of the subject — Market value expressed in money of accotmt — Prices are not paijments — Money a medium of payment — Prices, sales, and payments distinct things — Elements of prices — Influence of men's interests and passions — Necessity of purchasing — Necessity (f selling — Fashion and fancy — Plenty and scarcity — Demand and supply — Mono- polies — Commercial legislation — Duties — Speculation — Cost of pro- duction — Prices as affected in great marts of trade. The subject of prices, always an absorbing one in commercial circles, has only recently engaged the attention of writers upon political economy. Few of these have brought to tlie tusk that practical knowledge of commerce which is indispensable to its adequate treatment ; and many have brought only that love of theory and system which too often goes before, instead of follow- ing a full knowledge of facts. We fear that a long time must elapse before this subject will be cleared of the difficulties which environ it, and be reduced to that order and certainty desirable in so important a department of knowleilgc. Very few contribu- tions have yet been published which go far to produce sucii a result.' It may be doubted, too, Avhother it be susceptible of ' Since the above was written, a work of eminent ability and great re- search has appeared in England, which is, beyond dispute, the most relia- ble and useful contribution which has yet been made to any department of political economy. We refer to " The History of Prices," by Tlioma.s Tooke, two volumes of which appeared in London in 1S.';8, a third in IHIO, a fourth in 1848, and two more in 1858, in which last two Mr. Tooke had the assistance of William Ncwmarch. Tliese si.>c volumes are a history of prices from 1792 to 1S.')8. 'i'his valual)le production will be specially referred to in the course of this cliaptcr. (521) 522 DEFINITION OF PRICE. reduction to any compreliensive theory, or of any scientific arrangement. Fortunately, it does not come within the scope of the present work to attempt any adequate treatise on prices. It is our purpose chiefly to show that those who, in treating of banking, currency and money, have hastily drawn proofs, conclusions or illustrations from the state of prices, are exceed- ingly prone to mistake. Whatever intrinsic difficulties exist in those subjects, and they are many, they are neither so numerous nor so complex as those which belong to the subject of prices : it is, therefore, manifestly hazardous to explain what is best known by that which is least understood. There are so many conflicting opinions and contradictory theories respecting money and its substitutes, that it is as desirable to ascertain and avoid the sources of mistake as to strive after truth. It would be almost as unsafe to resolve difficulties in astronomy by the state of the weather, as questions about money by the state of prices. The importance of the subject is derived from the fluctuations to which prices have been subject in modern times, and in all times of which any authentic record of prices exists. As fluc- tuations of prices are often vexatious, untimely and hurtful to all classes ; as they often beget a gambling spirit in commerce, and thereby tend to increase and perpetuate the evil, it becomes important to anticipate or to prevent them, and to investigate the causes ; and equally important to avoid attributing them to wrong causes, and thence to avoid introducing false doctrines, false management, and mistaken legislation. The price of merchandise is its market value expressed in money of account. We have shown, in a previous chapter, that among civilized people prices are always expressed in the pre- vailing money of account, whatever that may be ; that whatever coin or coinage, thing or commodity, men may for a time use as a medium of exchange, a money of account is soon formed upon the coin or thing so employed ; the value of this as a unit be- comes firmly fixed in the mind, and supersedes in practice the material article which may have given it origin. A unit of this kind may originate from the use of copper or iron, as well as from gold or silver. MONEY NOT A MEDIUM OF PRICES. 523 This invariable and unconquerable mental lialdt of expres.sinf prices only through the medium of a money of account, is a great feature of this subject, without a knowledge of which it is impossible to study it with advantage. Many persons are per- fectly conversant Avith the money of account, who know little or nothing about coins, and are unable to detect the baldest coun- terfeit : they are skilled in the money of account, but unskilled in money of gold or silver. Coins are made to conform to the money of account to the minutest fraction, and are thus made a convenient medium of payment, but not a medium of prices. They are not employed as a measure, but are themselves mea- sured by the money of account. We have treated this at large in the chapter on money of account, but it is needful to bring the distinction fully to mind now, when we propose to speak directly of prices. Many per- sons entertain the notion that there is some proportion between the money of a country and the prices of its commodities ; and that prices are high or low, in proportion as money is plenty or scarce. There is some truth in this, but it is not true as a pro- position. Prices are not dependent on money ; prices are not payments ; and even payments are not dependent on money. Money, and other means of payment, may be exceedingly scarce or hard to obtain, but there can be no scarcity in the lan- guage of prices. The prices of commodities may fall, because many must sell, and ihe means of payment may be scarce ; but the facility of expressing prices is never thus lessened. The whole of the commodities of a country have their price, but it might not be possible to sell them all in a year. The naming of prices, the making of sales, and the making payments, are each distinct operations ; and, as we have seen, neither of them is dependent for its validity on the presence or use of money. Gold and silver, whether in coins or in bullion, have their ap- propriate uses in commerce, and these are important enough, without attributing to them an agency in which tiicy have no part. There is no strict or determinate relation betwecu the quantity of money in a country, and its range of prices. They act and react upon each other in a way, and to an extent, that 524 ELEMENTS OF PRICES. it is well to mark and study ; but these influences are too unde- finable, and too much blended with other causes, to be exactly appreciated. Of all the causes which materially aff'ect the range of prices in a country, the changes in the quantity of money are, perhaps, the least influential. On this point more hereafter. This may suggest to those who have not taken any extended view of the subject, the necessity of caution in solving questions of money and currency, by reference to fluctuations in prices ; as whatever influence money or currency may actually have on prices, there are so many other ways in which prices may be changed, many of which are remote and unseen, and many not appreciable as to their force, that no more doubtful nor unsafe basis could be selected on which to rest conclusions. The dan- ger of such conclusions is, however, much greater than anything we have yet said suggests. It must be borne in mind that many of the most operative of these elements of fluctuation in prices are under the full play of men's interests and passions. The most powerful springs which move the human heart are found at work in this game ; scope is furnished for all good and all bad principles, for the highest financial abilities and the most unre- mitting industry. These, too, are often pitted against sloth, inertness, ignorance, dulness and indecision. The commerce of the world, in which the whole matter of prices is involved, is a great struggle for that power which accrues to Avealth — a struggle constantly maintained, with varying success, over the whole world, the advantage being generally on the side of the shrewd and skilful, but with abundant occasional evidences that the fortunes of this contest are as capricious as the favors of for- tune have ever been deemed. Supposing, even, that an accurate enumeration of the causes which operate to change prices were made, who then could measure their ever-varying intensity, who could estimate the operation of men's reason and passions upon these causes ; who could foresee the effect of those which are accidental ; who could discover those which are hidden ; who could discern those which are remote, or weigh the effects of commercial alarm, or trace the result of commercial revulsion ? NECESSITY OF PURCHASING. 525 Yet all this, and more, should those be able to do who would settle questions of currency by the condition or fluctuation of prices. These suggestions in relation to prices might suffice to put us upon our guard as to the influence of money or currency upon prices ; but so accustomed are many to draw support for their theories of money and banking from this source, that we pro- pose to refer distinctly to some of the causes which chiefly influ- ence and determine the range of prices in the marts of com- merce. The necessity of purchasing is an element of prices of con- trolling force. Those wlio have the means of purchasing cannot postpone hunger and thirst. Tiiey must secure the means of subsistence, cheap if they can, but dear if they must. The mat- ter does not admit of delay, nor of long negotiation. It is evident, therefore, that those articles termed necessaries of life are only kept, by the extent of the supply, and the correspond- ing wants of those who hold them, from going constantly to the highest prices. The necessity thus imposed is universal ; none can escape its force ; and yet such is the variety^f substances which minister to animal life and comfort, that even this neces- sity, and the knowledge of what it requires to satisfy the cravings of these appetites, furnish little aid to those who would estimate the supply which will meet this demand. In fact, how- ever, men no more agree in the quantity, quality or kind of arti- cles deemed necessary for subsistence and comfort, even in the same circumstances, than they do in stature, in features, or in mind. This necessity, therefore, which acts continually and imperatively upon prices, furnishes no data by which its force can be measured, or by which it can be distinguished from other less powerful influences. It only appears in full view when famine or great scarcity begins to prevail, and then it shows how unimportant every other article becomes, in comparison with food. The necessity of eating is, nevertheless, e(|ually great in times of plenty as in those of scarcity. Prices are then con- trolled by the supply in the face of a necessity to purchase. There is, however, a wide field of conjecture about the sufliciency 52G THE NECESSITY OF SELLING. of that supply, both in reference to the quantity really needed, and the quantity really on hand. It is upon conjectures and estimates of this kind that men of all sorts of minds, from the most astute and well-informed to the most dull and ignorant, from the boldest and most rash to the most timid and cautious, exercise their powers : as such men determine, prices are affected ; and the operations of one man are often sufficient to aft'ect prices over a wide extent of country. The necessity of selling corresponds very nearly to that of purchasing ; for, in general, men can only realize the means of purchase by the process of selling. The compulsion to sell must operate to depress prices as much as necessity to purchase en- hances them. A necessity of selling equally affecting prices, and scarcely less imperative, arises in commerce from the obli- gation punctually to meet engagements. This is one of the most active and operating agencies which affect prices. Mer- chants and manufacturers would, but for this, and the new sup- plies which are coming on behind, be disposed to hold their commodities for the highest prices which could be exacted. They must, however, meet their payments, or become bankrupt ; and to do this they must provide the means, by making sales. Those whose wealth would enable them to hold up their goods, are controlled by those who, from want of means, are compelled to make prompt sales upon small profits. The urgency of making sales for this purpose sometimes, doubtless, becomes ex- cessive, and causes great sacrifices ; but, in general, it operates to steady prices, by interfering with the speculations of heavy capitalists. Who can conjecture the influence of fashion, of fancy, of taste, of extravagance, of inexperience, of hobby-riding, &c., &c., upon the prices of those articles which are subject to such caprices ? The newest productions of the loom, of the needle of the tailor's shears, of the milliner's taste, are sought for with an avidity, a perseverance, and a disregard of price, which bids defiance to all discretion. So it is with the first fruit and the first fish in the market : so Avith old wines, old books, old coins, old paintings, and old statuary. Let any one observe how large CAPRICE — P L i: X T Y — SCARCITY. 527 a portion of men in trade are employed in furnishing commodi- ties to satisfy tliese and similar inordinate desires, and he will be convinced that the prices of no small portion of the articles of trade are dependent upon the mere caprice of the consumers, and the adroitness of the tradesmen. The observer will find that the dealer in these articles resorts, when the rage for pur- chase is up, to prices which will compensate him for the freaks of customers, who often so suddenly change their wants, as to leave a large stock of articles hopelessly on his hands. Here, then, is a rapid fluctuation of prices, caused by wayward- ness, and folly, and caprice; and this happens from year to year, under no more regular control than the most irregular wants of the most irregular people. The results of this are, however, felt throughout all the range of prices, but with what effect who can tell ? The terms plenty and scarcity arc often used in regard to commodities of trade, and with sufficient precision, perhaps, to convey no false idea. It is certainly impossible, however, to ascertain with any exactness the quantity of any principal com- modity ; the attempt is constantly being made, and the approxi- mation may be useful, though only measurably reliable. It is not seldom, that large mistakes are made in these estimates. They are not unfrequently made by interested persons, with a view to influence prices ; and it is well known that many important commodities, such as cotton, wheat, coffee and tea, have their prices, to no small extent, influenced in that way. In regard to many articles, it is often impossible to say when plenty exists, or even when scarcity has occurred. There are, to be sure, occasions when there can be no doubt as to either condition. In the former cases, prices take their course from men's conjectures ; and in the latter, from the apathy produced by undoubted plenty, or the excessive alarm and fagcrness pro- duced by undoubted scarcity. It is well known that, in both extremes, the natural cff"ects arc increased beY<»nd what would appear to be the proper result. In the case of plenty, tlu- cer- tainty of a steady and cheap sui)ply, when needed, relieves the purchaser from any anxiety, and he abstains from purchasing 528 DEMAND — SUPPLY. until the moment of need. The necessities of the holders may be such, that they cannot wait this time ; and they are obliged to urge their stock on a market in "vyhich there is little demand, and of course at reduced prices. On the contrary, when scarcity is apprehended, every one measures the danger by his fears, un- willing to wait coolly for results which may be so disastrous. All pecuniary considerations ai'e sunk in the dread of want, and prices go rapidly to the highest rates. In England, a very defi- cient harvest of wheat has often sold for more money than a very abundant one ; so in the United States, as to cotton. In regard to quantity, prices generally transcend the appa- rently proper limit, on the occurrence of either extreme ; whilst a medium opens a wide region of conjecture, and sometimes leads to very mistaken movements. The commercial terms, demand and supply, do not corre- spond exactly with the more general and absolute terms, plenty and scarcity. The first relate merely to the operations of trade, while the latter refer to actual quantities. This distinction is, perhaps, frequently forgotten, or not observed. The demand which exists for articles of commerce, and the supply which is furnished in response to that demand, can never be placed be- yond the reach of contingencies, so numerous and so varied, as to be out of the reach of any possible specification. If it were the business of government to furnish its subjects with all the commodities they need, it would be possible to make such an approximation of the quantity and kinds wanted as would enable its agents to order them with some precision. Even with such advantages, any attempt to meet the changing wants, de- sires and caprices of men must be unsuccessful. How much more so, where the course of trade commits this business to a host of merchants, all greedy of gain, or fearful of loss, all anxious for business, but consulting chiefly their own interest, acting without concert, and without that knowledge of each other's operations which could alone enable them to pursue their business with intelligence! Men thus situated are left to act according to their various cha- racters — boldly, timidly, irresolutely or rashly — and according SUDDEN CHANGES — JERKS. 520 to the best information tliey can obtain, wbicli at the best must be always very imperfect. Success in the operations of one year encourages them into measures which end in disaster the next ; and this, in its turn, produces over-caution in succeeding times. And these alternations must ever occur in trade, while commerce is carried on by the disconnected enterprise of indi- viduals. And yet the operation of trade in regard to supply and demand, is subject to all the influences which create these alternations ; and so far as prices arc affected by quantities actually on hand, they are subject to corresponding variations. The supply of commodities which is offered to consumers is not only subject to the contingencies affecting the several branches of industry which produce them, but to all the varying opinions, Avishes, estimates and dispositions of the merchants who carry on the business ; and in addition, to all the accidents and delays of transportation by sea and land. The chief stimulus of production is demand ; but this demand proceeds from the masses, of whom some are prudent and foresee- ing, some observing and cautious, some venturous and rash, some with experience, some without, and some utterly foolish and heedless : tliose upon wdiom the demand is made are of like cha- racter ; ajid prices are in no small degree settled, and supplies regulated, by the action of such persons upon each other. Prices adjusted by such agencies can never be foretold, and must rest upon a complex combination of circumstances, such as can- not be fully unravelled nor analyzed. Many of the great fluctuations and jerks which occur in prices arise from the schemes, the hopes, the mistakes, the enterprises, and the deceptions of those engaged in commerce, and have almost no relation with the actual quantities, or cost of produc- tion, of those articles, the prices of which are affected. There are so many insurmountable uncertainties hanging round all questions of supply and demand, that men, in a wilderness of doubts, but grope their way at best ; and the results upon prices are as little to be conjectured as tliose which depend wholly upon chance. Monopolies are the subject of much complaint. The hardship 34 530 MONOPOLIES. and injustice imposed by them are so visible to every eye, that they have been constant objects for the hand of reform. Two centuries ago, nearly every department of commerce and indus- try was under the control of monopoly in almost every country of Europe. Many yet remain, to prove what must have been the injustice suffered by those who lived when they were more numerous. Their influence upon the prices of the monopolized articles is too well known to require much notice. The inhabi- tants of France know well enough that the price of tobacco is greatly enhanced to them by the government monopoly ; but the producers and dealers in the article, in this country, do not so generally know that, if the French monopoly was abolished, the consumption there would be increased, and the price here •would be enhanced. The heavy duties of England upon the same article are equivalent to the monopoly in France ; to aban- don them Avould have the same effect of raising the price in this country. The removal of the European monopolies of our products, or of heavy duties, would at once reduce the price there, and raise it here, upon the commodities thus set free. The amount before realized by monopolies and duties would fall fairly, if not equally, to the producer and consumer, by a double ad- justment of prices. Monopolies, therefore, often react upon those who may not suppose themselves under their influence, and at Buch a distance, that those affected may neither perceive the effect, nor be aware of the cause. The power of the monopoly is chiefly felt in its direct effort to control prices, which its col- lected strength, and unity of action, enable it to attempt with advantage. The effects of these efforts are often made to extend to places where few can clearly detect them, or perhaps suspect their influence. They are yet sufficiently numerou:^, and effi- ciently managed, to produce a very undoubted effect upon cer- tain prices ; and yet there is no possibility of measuring that influence, or determining its comparative force and intensity. Commercial legislation, protective and prohibitory duties, and public revenue, exercise a very important influence upon a large class of prices ; of so wide a subject, we can only touch the threshold. The chief countries of Europe commenced a system COMMERCIAL LEGISLATION. 531 of legislation upon industry and commerce, in modern times, which has been continued, with many changes and vicissitudes, for some two centuries. A similar policy was begun in this country, as soon as it could legislate for itself. The complica- tion of this legislation in Europe is such, that very few can trace its results. The laws relating to navigation and tonnage, the prohibition to export the precious metals, the bounties, the pro- hibition of certain articles, the light duties on some, the heavy charges on others, the discriminating, the protective and the prohibitory duties, the drawbacks, &c., all operating together in each country, and in conflict with those of other countries, make a compound which no human ingenuity or astuteness can so analyze and explain, as to show their specific bearing upon prices. No one in the least conversant with the subject can overlook the important influence exercised in that respect by all this legislation ; and in some instances no one can fail to per- ceive the particular effect ; but the whole result of this combi- nation defies explanation. When, however, to this complication is added the events of war, restrictive systems, embargoes, block- ades, and such measures as the Berlin and Milan Decrees, and the Orders in Council, then the elements which influence i)rices, and their comparative power, baffle human scrutiny. It is worthy of being noted here, as an illustration of the rashness with which men form opinions upon matters which they have not fully examined, and do not understand, that from the year 1800 to 1815, during which time a most animated discus- sion on the subject of banking and currency was maintained in Great Britain, one party drew its arguments and illustrations, and formed its conclusions, upon the condition of prices in that period. The same readiness to form and express opinions on similar grounds has been shown ever since, both there and in this country; all men seeming to think that currency and prices, money and banking, were subjects about which tiio most authoritative decisions might be pronounced, without special knowledge or hesitation. The newest demagogues, the most ignorant and presuming journalists, the experienced and the in- experienced, and in fine all classes of men, supjjosed tiiemselvcs 532 SPECULATION NOT DEFINABLE. fully qualified to solve questions of this kind. It has happened, therefore, that no subject has ever been so bestridden and rode down, so abused by foolish, and so confused by contradictory opinions, emanating from the highest authority down, through every grade of respectability, to zero. The few who, in this time, have devoted prolonged attention to this subject, and proved themselves painful and anxious inquirers after truth, have scarcely been noticed in the mass. It is, perhaps, impracticable, to draAV a line between the ordi- nary processes of dealing and what is termed speculation. What, if done by one man, would be deemed speculative, may be perfectly within the legitimate scope of another's business. What, in times of great confidence and active business, would be deemed quite prudent and proper, would, in seasons of pres- sure and caution, be called reckless speculation. What a man of capital may do without exciting attention, a less rich man may not do but at the hazard of being called a speculator. Speculation cannot, therefore, be defined, although its preva- lence is matter of much lamentation. Its influence in trade is constantly felt, and its operation on prices is very decided and notorious. Its chief design is undoubtedly to give undue, or at least unusual, excitement to prices. Its movements are as various as the conjunctures of commerce, and the men engaged in it. The very uncertainty of the events of trade, and the ever fluc- tuating condition of prices consequent upon it, furnish constant openings for the intervention of speculation. The observing, the well-informed, the experienced, and the bold, are those who are ever ready to avail themselves of those circumstances which are constantly occurring in some branch of trade, by which they anticipate an advance in prices, or produce one by their ow"n management. There are, doubtless, certain limits within which this kind of action is deemed legitimate and honorable. It is too tempting a field, however, not to be occupied by many actu- ated by fraud, by a greedy spirit, by rashness, by the spirit of competition, and by sheer infatuation. This class, though more irregular in their movements, are not unfrequently as successful in their operations as the more deserving : and both frequently EFFECTS OF SPECULATION. 53?, fail of their immediate object, even Avlion tlieir uiovements arc- felt in a change of prices. This multifarious body of speeulator.s may be said to be continually operating upon the market values of the commodities which they touch, and tiirough them upon various others. This influence, like many other elements of prices, can neitlier be measured nor estimated in its actual or comparative force ; it can neither be anticipated, nor can its evil effects, to any considerable degree, be averted, without in- terfering with the freedom of trade to a most injurious extent. It must continue to be a disturbing element of commerce, and prices must hereafter, as heretofore, be subject to its manifold, incessant and active agencies. The tendency of speculation is undoubtedly to widen the range of fluctuations, not only in the prices qf the articles operated upon, but also of many others. This spirit is more rife and active in times of high confidence, when prices are, from that cause, looking up, than when any depressing cause operates to check the movements of trade. It suits the views of the specu- lator to urge upward prices that are tending to rise, rather than to attempt staying the downward course of a falling market. Dealers in stocks speculate on their fall, but merchants only on the expected advance of goods. The general effect of specula- tion, Avhilst moving within moderate bounds, is therefore to sus- tain and enhance prices ; and this effect may be continued for many years, under the operation of favoring causes, such as a steady government and liberally-managed banking institutions, provided there be some restraining power of sufficient strength to repress that Avild extravagance to Avhich, otherwise, specula- tion always hastens. The periods of greatest commercial pros- perity, in Europe and in the United States, have been those in which this state of things existed. Prices must be high, when commerce is active, when new-comers are constantly press- ing into business, Avhen those already engaged are seeking to enlarge their trade, when credit is high, when all are on the alert, when personal credit is sufficient to make all kinds of pur- chases without the use of money, or any of its substitutes. Sueh causes, so long as they continue, must operate on prices ; and 534 SPECULATION — EXPANSION. there is no question that, duly restrained, they promote general prosperity. So all experience proves ; but experience proves, also, that if this restraining power does not exist, or be not effi- ciently exercised, the expansion of personal credit, and the ad- vance of prices consequent upon incessant and uncontrolled speculative action, proceeds to a height at which they cannot remain, and the whole fabric of confidence falls at once. The reaction is rapid and complete, and prices descend below their wonted level. All who are conversant in the walks of commerce can recall the signal efiects of speculation on prices, not only in special in- stances, but in that state of restless activity and watchfulness which prompts men to be ever looking for advantageous pur- chases, and to secure the highest prices for what they sell. Yet what is more common than to attribute such results to an expan- sion of currency, without reserve or qualification. The reverse is very often the true state of the case ; the expansion is the result of the speculation, and not the speculation the result of the expansion. In seasons of confidence, when men's notes are freely received for the commodities of trade, the first step towards the evils of undue expansion is a great issue of bills of ex- change and promissory notes of merchants and dealers, who thus multiply their engagements, without immediately increasing the quantity of goods in the market ; and these bills and notes being, for the convenience of the holders, converted into bank- notes, an increase of circulation takes place, which is called an expansion ; many evils are referred to this which clearly be- long to speculation, and not to expansion of currency. If the Avord expansion be proper in this case, it should be applied to the enlargement of individual credit. In most of these cases, the issue of bank-notes is an alleviation of the evil, and not an aggravation. The ability of the speculating parties to meet their engagements depends on their succcess in selling, for bank- notes, the goods purchased, or for something else which will be received in discharge of their liabilities. The issue of the bank- notes greatly facilitates such sale and payment. If it be said that this high confidence which enables parties to make such EXPANSION OF CURRENCY — PRICES. 535 large purchases on the strength of their own bills or notes would not exist, but for the facility of converting them into bank paper, there is much force in the objection. The fault is, however, one of degree : the advantages of individual credits, and of b;ink- notes, within proper limits, arc generally conceded ; ami the first fault is committed, in tliis case, in the community of men of business, and not by the banks. That an increased issue of bank-notes, consequent upon over-trading may stimulate prices, especially in the retail trade, is very probable, but not to the extent, nor in the way many suppose. For every bank-note issued by discount of commercial paper, an equivalent amount of debt is created to the bank ; and the demand for bank-notes to pay these debts Avill be equivalent to the whole issue. The parties so indebted must sell their goods, to meet these pay- ments, at an advanced price if they can, if not at the best price obtainable. The stringency of this necessity to meet engagements, which is the more felt as the advantage of maintaining credit in bank is appreciated, has oftentimes defeated the object of specu- lators, and compelled them to reduce the prices which they hoped to raise, and thus to counteract the very mischiefs appre- hended from the increased circulation. Large issues do not, then, necessarily enhance prices, but may often be regarded as indica- tions of a probable reduction. The particular action of men, or the course of trade, must always be taken into view by those who desire to attain just conclusions in regard to currency, as well as prices. The same causes, under different circumstances, do not always produce the same results : and their reasoning, in political economy, and upon questions of commerce, wlu) over- look human nature, and its actual or probable action in any given circumstances, cannot be of much value. Whatever be- longs to abstract science may be explained by exhibiting the immutable laws of nature, or the unfailing processes of mechanics, or the demonstrations of mathematics ; but that which depends on the minds, temperaments and passions of men, and the casual occurrences of life, can never be reduced to laws like those which govern bees and ants ; neither can problems arising thus be solved by algebraic formula, or any rule of proi)ortion. 536 COST OF PRODUCTION. Actual value, the cost of production, and price, are by no means equivalent terms. Articles of trade are very often sold above or below their actual value, and they are often sold greatly above or below the cost of production ; but whether one or the other, that estimation at which they are sold is their actual price, a term which belongs to commerce, and really has no ab- solute or necessary connection with either value or cost of pro- duction. The chief inquiry in the market is as to the price ; neither buyer nor seller knowing, or caring to know, the cost of production. This, though not equivalent with price, is an uni- versal and efficient element of prices. Other influences ceasing, prices must constantly tend to correspond with the cost of pro- duction, with the expenses of transportation and sale added. This centre about which prices revolve, is itself so changeable, that no advantage is gained by considering the subject in that aspect. In truth, the cost of production depends so much upon prices, that the inquirer into the cost is carried back into an in- quiry about prices, and so the investigation turns in a circle. Fluctuations of prices arise from such a variety of complex and hidden causes, that no human ingenuity can disentangle the ■web. .The truth is, that even if an analysis could be completed at one time, a similar state of facts might never again exist, or, existing, might not be attended with the same results. The same men do not always act in the same way, under the same motives. Important changes of price are constantly occurring, which can- not safely be assigned to any one cause or to many ; and he is most prudent, who least suffers himself to indulge in positive conclusions, without means of arriving at them or verifying them. We should avoid the path which leads to error, as sedu- lously as we seek that which leads to truth. To the suggestions we have thus made on the subject of prices, we add one more. It is well known, that whatever influ- ences may be operating on the prices of tlic chief commodities of both foreign and domestic trade, there is a constant tendency in these influences to yield to, and be overborne by, others ema- nating from the chief markets or points of distribution. What- ever may be operating on the price of cotton in Georgia or SENSITIVENESS OF PRICES. 537 Alabama, is likely to be overborne by other elements at work in New York. The city of New York is the arena in wliich more power is exerted over prices than in all the rest of the coun- try. This is not always the result of design, or of any special movement among dealers in New York ; it is more the result of the estimates made by men outside of New York, of what has taken place, or may take place there. Merchants and manufac- turers throughout the country know that prices are mainly made there ; and all turn their eyes tliither for the elements on which to base their calculations. More sales take place there than at any other place ; and when sales are forced, they generally occur there. These great markets are subject to so many con- tingencies, both powerful and sudden, that those who are in- terested, wherever they may reside, are obliged to watch these causes and results with great attention, that they may avail themselves of what is for their benefit, and avoid what may be for their injury. It may, therefore, and does happen, that the conclusions and movements of those residing out of the ixreat marts of trade influence the markets within them, in reference to many important articles. The resident m.erchants of New York may, therefore, find prices in the city very much aflected by causes and movements in which they have been passive. The general range of prices, as it rests in the minds of the body of dealers, is one of the most sensitive things in the world. Like the ocean, the least breath of wind from any quarter will rujffle the surface ; and it requires but a breeze of demand or speculation to set the whole in rapid movement, if not wild com- motion, the result and termination of which none can for a time conjecture. One of the results often observed, in regard to prices, is the vast disproportion between causes and results. When harvests arc abundant, even a little beyond the average, the price of the whole product maybe diminished so as to reduce the sum received for the whole by an ;i mount many times the value of the surplus. So, if harvests are short, tiie pn.iluct often sells for more than if they were abundant. It is the same with supplies by foreign importation; a very little over-trading may affect the prices of a large stock of commodities so scrioualy, 538 QUANTITY OP MONEY — PRICES. as to cause heavy losses. If Ave suppose, for instance, tliat the stock of iron in New York, and within the influence of its mar- ket, to be at any time worth $1,000,000, at prices upon which a regular business and consumption is proceeding, the sudden arrival from abroad of $50,000 worth, or only five per cent, of the quantity on hand, may so disturb the market, that pur- chasers may refrain from buying for a time, and sellers may become alarmed and desirous of realizing before an expected fall ; a decline of prices to the extent of ten per cent, on the whole stock may occur, and a loss of $100,000 thus fall upon the holders of the iron, or double the amount of the im- portation. Every observer of the great markets can recall instances of a similar kind, which show how difficult it is to ascertain the causes Avhich determine the range of prices. It is often, however, as easy to see that fluctuations are attributed to wrong sources, as it is difficult to assign the true causes. g 2. The effect upon 2}i'ices of the quantity of money — The theory of Mon- tesquieu acceded to by Hume, Locke, and Harris; denied by Sir James Stetoart, Adam Smith, Lauderdale, Malthus, Eicardo, Torrens, M'Cul- loch — James Mill — Prices are not coins, but expressions of money of account — Wholesale must mainly control retail prices ; the former made upon credit — Propositions of Lauderdale — Malthus cited — Also Torrens — M'Culloch — Malthus — Confliction of opinions — Marquis Gamier cited — Adam Smith cited — Ganihl cited — Humboldt's proportion of gold to silver — Jacob on precious metals — Eise of prices not in proportion to the increase of money — Arthur Young's Ltquiry into the Progressive Value of Money — Tables of prices in Spain — Beaives on Spain — Prices of wheat in France. If the reader bears in mind the vast variety and power of those elements which operate upon prices, to which we have in part referred, he will be prepared to consider the influences, in this respect, of an increase or diminution of money. What- ever the latter may be, the others are in full activity ; their operation does not cease, though other forces are brought into conjunction or opposition. Whatever inherent difficulty there may be, therefore, in the subject, must be much increased by confining the view to money as the chief cause of fluctuations in PROPORTION OP MONEY TO PRICES. 533 prices. It is manifest that no one can ascertain to what extent fluctuation of prices is due to clianges in tlic quantity of money, until he can measure the effect of other influences. If this can- not be done, no conclusions can be safely drawn ; if it can be done only conjecturally, then conclusions resting upon such a basis must be subject to the contingencies of the conjecture- Whatever bears upon the subject of prices, whatever degree of uncertainty hangs over all branches of the inquiry, must be taken into account when the influence of money in tiiese chanties comes to be considered. A prevailing inclination has long existed to establish a pro- portion between the quantity of money in the world and the quantity of all other commodities, and to make that proportion the rule of prices. This plausible idea is very likely to have occurred to such thinkers as had very little practical knowled'^e of commerce. Montesquieu very unhesitatingly gave it the sanction of his high authority, and it has had the circulation of his popular work^ " Si Ton compare la masse de Tor et de I'argent qui est dans le monde, avec la somme dcs inarchandises qui y sent, il est certain que chaque dcnrce ou marchandise en particulier pourra etre comparee a une certaine portione de la masse entiere de I'or et de I'argent. Comme le total de Tune est au total de I'autre, la partie do rune sera a la partie de I'autre." After an illustration drawn from the supposition of there being only one article of commerce, and one individual to purchase it, he concludes : "Les prix se fixeront en raison com- ' "If wo compare the mass of gold and silver in the world with the whole of the commodities, it is certain that every commodity in particular may be compared with a certain portion of the entire mass of gold and silver. As the whole of the one is to the wliole of the other, a portion of one will he to a portion of the other." . . . ..." Prices are fixed at a rate compounded of the whole of the com- modities with the whole of the signs, and of that of the whole of the com- modities in the channels of trade with the whole of the signs" (gold and silver) " employed as money." "The establishment of prices depends always fundamentally upon the proportion of the total of the commodities to tiie total of the signs."— 5^iri< of Laws, book 22, chap. vii. 640 MONTESQUIEU, HUME, AND LOCKE. posde du total des choses avec le total des signes, et de celle du total des choses qui sont dans le commerce avec le total 'des signes qui y sont aussi. . . . L'etablissement du prix des choses depend toujours fondamentnlement de la raison du total des choses au total des signes." ^ This algebraic formula grap- pled the mind of Hume ; but, though it hindered the progress of his investigation, did not prevent his obtaining glimpses of the truth. We find, in his "Essay on Money," many sound and original views. Locke had nearly the same impediments in his way on the subject of prices. So simple and complete does this theory of prices seem, and so plausibly has the idea been presented by Montesquieu, and many others since his day, that we find it cleaving to men's minds, in whole or in part, from that to the present time. So much is it to be lamented, when men of that stamp lend their intellect and popularity to the propagation of error ! It is in vain that others, less distinguished, point out errors of fact and doctrine ; their works are forgotten, while those of such men flourish in constant vigor. The same sophism which, a cen- tury ago, misled the readers of the "Spirit of Laws," the papers of the " Spectator," and the "Essays" of Hume and Locke on money, commits the same mischiefs, with equal success, at the present time. Harris, in an "Essay upon Money and Coins," published only a few years after the " Spirit of Laws," a writer of far more practical knowledge than either of the distinguished men above mentioned, was wholly unable to surmount the theory of Montesquieu, and adopts it broadly, though evidently contra- dicted and disproved by many of his own positions. But this fanciful proposition was not sent to the world without being early contradicted. It was very soon severely questioned and overthroAvn by a writer upon political economy, who will be hereafter, as we trust, better appreciated than has yet been his lot. Sir James Stewart, to whom we refer, sums up this false theory, as he found it in various authors, thus : — "First. The prices of commodities are always proportioned ' L'Esprit du Lois, livre xxii. chap. vii. SIR JAMES STEWART. 541 to the plenty of money in a country. So tliat the augmentation of Avealth even fictitious, such as paper, affects the state of prices in proportion to its quantity. " Second. The coin and current money in a country is the representative of all the labor and commodities of it. So that in 2'>roiwrtion as there is more or less of this representation (money), there goes a greater or less quantity of the thing represented (commodities) to the same quantity of it. Thence it follows — "Third. Increase commodities, they become cheaper; in- crease money, they rise in their value. "Nothing," he says, "can be more beautiful than these ideas. But upon a close examination of these three propositions, I am forced to range this ingenious exposition of a most interest- ing subject among those general and superficial maxims Avhich never fail to lead to error." ' The more celebrated political economists of Great Britain who came after Stewart entertained theories, on the subject of prices, quite at variance with the idea of an adjustment proportioned to the quantity of money. Adam Smith, Lauderdale, Malthus, llicardo, Torrens, and M'Culloch, has each his own theory, or a peculiar mode of explaining the doctrines of others. Of the more known British economists, James Mill is the only one who has fallen into the errors above noted ; and he felt himself obliged to add an explanation, which forcibly exhibits the ab- surdity of this summary method of adjusting prices. Unfortu- nately, however, for the truth, this inclination to algebraic pro- positions and illustrations clings to a whole class of political economists — a school of philosophers much more bent on found- ing a science^ than on studying human nature, human institu- tions, or human happiness. But the prevalent belief in the theory of Montesquieu was not the only ground for the common error on the subject of the rela- tion between money and prices. It is taken for granted too generally, that prices are the naming of so many pieces of * Inquiry into the Principles of Political Economy, book 2, chnp. xxviii. 542 PRICES ARE NOT COINS. money, coins, or parts of coins ; that the naming of a price is an occurrence always connected with a sale ; that the seller is present with a commodity, and the buyer with the coins, and the question to be settled between them is how many of the coins are to go for the commodity ; that a virtual barter is thus insti- tuted of gold or silver, in the shape of coins, for some other commodity ; and that the prices of commodities are the number of coins which arc asked for a certain portion of each article. If this were the case, it would very probably come to pass that a relation or proportion would arise between the quantity of commodities and the quantity of coins, more or less definite. But as any approximation to such a mode of dealing only exists among uncivilized people ; as every commodity is subject to fluctuations of price, depending upon causes and influences pecu- liar to itself; and as commodities in general are subject to changes in price, from causes in no respect connected with the quantity of money, there is no close nor invariable connection between prices and the quantity of coins. It is a great mistake to suppose that prices are chiefly made, discussed and settled in the cases of actual purchases. Prices are named, expressed and discussed a hundred-fold more than actual sales take place. They are the subject of a vast deal of conversation and con- ference, when no sale is contemplated. There is scarcely any topic among circles of business men, from the lowest range of the retail dealing to the largest transactions of trade, more dis- cussed than prices, apart from any contracts or sales. What- ever influence the quantity of money in a country may have on prices, it is far less in the thoughts of those who fix prices, and far less influential than those causes which operate directly on the article of which the price is to be fixed. Whilst the quantity of money in a country may be one of the most general causes operating on prices, because it must operate over the whole range of commodities, it is one of the least influ- ential, one whose effects are the most difficult to detect and point out. In civilized communities, where the credit system is in active operation, general prices are mainly governed by those which PRICES NOT DEPENDENT ON MONEY. 543 prevail in large transactions. For Avith all the complication of influences whicli bear upon them, the actual prices fixed in the wholesale operations, Avhich always precede the lesser move- ments of retail, must control the latter. The retail dealer must be governed, in his selling prices, by his purchasiu" prices. The prices made by the larger transactions of trade Vjecome more extensively known, and thus exert a controlling iulluence. We have seen that the larger transactions of trade are almost exclusively carried on by means of credit; that is. the purchases and sales are made upon credit ; the dealers purchase with their own paper upon time ; they sell, and take the paper of others upon time ; the payments accruing on this paper are, on both sides, adjusted through the banks, without any use of money or coins. Money, in these cases, has nothing to do with the prices, and nothing to do with the payments. The parties to this trade have A^ery little occasion to think of the precious metals in any connection with their business, and perhaps not at all, unless a run upon the banks diminishes their usual facilities of adjust- ment. In the large department of trade which is called wholesale, the quantity of money in a country has nothing to do with prices ; it is not thought of; the parties are not dependent upon any considerations of that kind. The condition of the banks, or dealers in credit, is considered, but not the plenty or scarcity of money in the country. This view of the subject, when fully apprehended, disposes very effectually of the position taken by Montesquieu, and those who have embraced his views. The persons who adopted these views always believed thuL prices were expressed in coins, and that naming a jtrice was equivalent to holding up coins which would pay that price. We have seen, in the chapter on money of account, that this is not so ; that, in civilized communities, prices are always expressed in the prevailing money of account ; and that this is an invaria- ble and unavoidable mental habit among a people conversant with the simplest rules of arithmetic. Such a people not only invariably form a money of account, by which they exj)ross all prices, but they carry in their minds, with equal facility, the 544 PRICES AND MONEY OF ACCOUNT. quantities denoted by a great number of weights and measures, as tons, pounds, ounces, gallons, yards, feet, inches, acres, and miles ; and they understand each other perfectly, in the use of these terms, although no mode of verification is at hand. As, when persons speak of pounds and ounces, they mean ascertained and understood quantities, and not pound or ounce weights merely : so, when they speak of francs, or shillings, or dollars, they mean ascertained and understood values, and not merely the material coin bearing those names. They express them- selves as men did in England before the sovereign was intro- duced, when they spoke of pounds sterling. There was no such coin as a pound sterling ; and yet they understood one another as well as men do now, when they speak of sovereigns. In our colonial times, prices were all expressed in the different colonial moneys of account ; that is, in pounds, shillings and pence, as these terms were understood in the different colonies. There were no coins corresponding to these moneys of account, and there never had been. Yet there was no difficulty in expressing prices in moneys of account ; and in the interior of Virginia and Massachusetts, the people cling, even now, to these old modes of expressing prices. This mode of naming prices, which is uni- versal in civilized nations, also effectually disposes of the notion of Montesquieu. Prices are absolutely independent of coins, both for expression and payment. Coins are thus reduced to their true place of a commodity, bearing the stamp of the govern- ment as to quantity and quality — a commodity, also, which the law makes the standard of payment, where parties cannot agree upon any other mode. There is, then, so little occasion to think of or refer to coins in the matter of prices, that when there is no disturbance in the banking or credit system, there is no element of prices which exercises less influence than the quantity of money. The idea, however, that the quantity of money and prices have some necessary and precise relation has prevailed so exten- sively, and still occupies so many minds, that we shall not leave the subject without reference to the positions taken by some of them. We cannot but think that the best refutation of some of PRICES — LAUDERDALE. 545 these doctrines is to give the reader a few specimens. Their absurdity becomes more glaring, the closer they stand in array. "When," says Lauderdale, "we express the value of any commodity, it may vary at one period from what it is at another, in consequence of eight different contingencies : — " First. It would be subject to an increase of its value, from a diminution of its quantity. " Second. To a diminution of its value, from an augmentation of its quantity. " Third. It might suffer an augmentation in its value, from the circumstance of an increased demand. " Fourth. Its value might be diminished, by a failure of demand. " When, in common language, therefore, we express the value of any commodity, it may vary at one period from what it is at another," not only for the four reasons just mentioned, but for four corresponding reasons, " in relation to the commodity adopted as a measure of value :" that is : — " Fifth. The commodity, money, will be increased in value if the quantity is diminished. " Sixth. It will be diminished in value if increased in quantity. " Seventh. It may be augmented in value by an increased demand. Or, "Eighth. Diminished in value by failure of demand: and prices may be affected accordingly. . . . " It follows that the variation of all value must de- pend upon the alteration of the proportion betwixt the demand for, and the quantity of, the commodity, occasioned by the occurrence of one of the four circumstances above stated ; and that a variation in the expression of value may be occasioned by the occurrence of any of the eight circumstances we have alluded to."' . . . "In every instance of bargain and sale," says Mal- thus, " it will be perfectly correct to say, that the prices of commodities will depend upon the relation of the demand to the ' Lauderdale on Public Wealth, chap. i. pp. 12, 59. 35 546 T R R E N S , M ' C U L L C ir , AND M A L T 11 U S . supply ; or Avill vary as the demand (that is, the money ready to be offered) directly, and the supply inversely." And again : "In reality, prices are determined by the demand in posse, com- pared with the supply in esse."^ Col. Torrcns resolves the whole question of prices into one of effectual demand ; yet, in the course of an elaborate explana- tion, he uses the following language, which, by itself, would rank him as a believer in the theory of Montesquieu : — " In all ordinary states of the market, prices will be deter- mined by the proportion which exists between the quantity of commodities to be circulated and the amount of the currency with which their circulation is effected ; and to occasion a gene- ral fall or rise of prices, the quantity of commodities must in- crease or diminish, while the amount of the currency remains the same, or the amount of the currency must increase or dimi- nish, while the quantity of commodities remains the same."^ The cost of production is the guiding star of Ricardo and M'Culloch, the only clue on this mazy subject of prices. " If the cost of production be diminished, price will be equally dimi- nished, though the demand should be increased to any consider- able extent. If the cost of production be increased, price will be equally increased, though the demand should sink to the lowest possible limit." ^ When such men mistake the boundaries of a subject in which they profess to be, and are deemed, specially skilled, the cur- sory reader should be on his guard. No department of political economy, and least of all that of prices, can be disposed of in this off-hand mode. Although Malthus indulges in it with the others, he was able sometimes to perceive its inappropriatenoss. Mr. Malthus had previously, in the first paragraph of the Introduction to his "Political Economy," given his readers the following caution, than which nothing more wise is to be found in any work on that subject : — " Yet w^e should fall into serious 1 Principles of Political Economy, chap. ii. § 2. 2 Essay on Wealth, page 419. ' Principles of Political Economy, by M'Culloch, part ii. chap. ii. pp. 255, 333, edition of 1849. PRICES — A L (1 E C R A I C FORMULA. 547 error, if we were to suppose that any propositions, the practical result of -which depends upon the agency of so variable a being as man, and the qualities of so variable a compound as the soil, can ever admit of the same kind of proofs, or lead to the same certain conclusions as those Avhich relate to figure or number." "But even these (the great general principles of political economy) will be found to resemble, in most particulars, the great general rules in morals and politics founded on the known passions and propensities of human nature : and whether we ad- vert to the qualities of men, or of the earth he is destined to cultivate, we shall be compelled to acknowledge that the science of political economy bears a nearer resemblance to the science of morals and politics, than to tliat of mathematics." ' It is because this mode of thinking, and this form of expres- sion, lias a specially misleading tendency, that we bring them thus prominently and fully before the reader : it should not re- quire much reflection to conclude that current prices are not the subject of algebraic formulas. Almost all that regards prices must be deduced from careful observation ; from careful com- parison of the present with the past; and, after all, approxima- tions may be all that is attainable. It is less in our power to reach arithmetical certainty in regard to fluctuation of prices in general, than it is for individuals to reach it in their own busi- ness. A wide and irreconcilable difference of opinion has long ' See also p. 134, chap. ii. ^ 7 ; Gamier de la Monnaie, torn. i. p. 39 ; Say on Pulitical Economy, p. 295, Cth American edition. This positive and arithmetical mode of expression, to wliich M;iltiiu3 objects, prevailed extensively amonn; the political economists on the conti- nent, as well as in Great Britain ; and examples might be cited at once curious and instructive. Its misleading tendencies were strongly denounced by Gioja,' who loses no opportunity, in his elaborate work, of placing his condemnation upon such opinions. One of the most flagrant instances we have met with occurs in " Principcs d'Economie Politiquo, par N. F. Canard," crowned by the French Institute in the year 18(11. in which the whole subject of prices is adjusted and settled by the most elaborate iiigc- braic propositions, worked out at length, and the results giveo. See pages Nuovo Prospctto dello Scicnzo Economiche, vol. ii. p. 160. 548 PRICES — SOLUTION BY ALGEBRA. prevailed between writers upon political economy, on the subject of prices. No real progress was made towards a proper treat- 28 to 61, and 161 to 165. We shall endeavor to abridge the problem at page 28. " The sellers and purchasers having met in market, there will of course be a difference between the price asked and the price offered. This differ- ence, from the highest to the lowest price, will form a range within which the struggle between the sellers and purchasers must take place. The first will avail themselves of all their advantages — that is, of the wants and the competition of the purchasers — and the purchasers will profit, on their part, by the wants of sellers and their competition ; and each party will try to bring the other to that point in the range of most advantage to themselves. " This being fixed, let B be that range, x that part of the range which sellers wish to add to the lowest price ; E — x will be the portion which purchasers wish to deduct. Let P be the wants of purchasers, C their com- petition ; J) the wants of sellers, c their competition. "It is clear that the portion x, of the range paid by purchasers, will in- crease in proportion to their wants and their competition: x will then be at the compound rate of P and C, or will increase as P C; for the same reason, the other part, B — x will increase as pc: this will give the propor- tion, X : PC :: B — x : pc, which gives the equation, ^cx = P C (B — x). In this equation, the quantity pc, the wants and the competition of the sellers, gives the power of the purchasers ; and the quantity P C, the wants and competition of the purchasers, gives the power of the sellers. So the power of the purchasers multiplied by that portion of the range which the sellers make them pay, is equal to the power of the sellers multiplied by the other portion of the range which the purchasers throw back upon them. " This equation, which 1 shall call the equation of determination, expresses the equality of each momentum of the tico opposed p>owers, which make the equilibrium. It is to the principle of the equilibrium of these two powers that belongs the whole theory of political economy ; as it is to the principle of the equilibrium of the lever that belongs all the theory of mechanics. PC " From this equation it follows, x = r-— — ; B. If we make pc = 0, PC -\- pc we have x ^= B ; that is, if the competition of sellers is nothing, or if their necessity of selling is the smallest possible, the purchasers will pay all the range. If, on the contrary, we make PC ;= 0, we have x = 0; that is to say, if the competition or the necessities of purchasers is the smallest possible, they will pay none of the range : hence it follows, that the range is the difference between the highest and lowest price, which means be- tween the monopoly of the sellers and the opposing monopoly of the pur- chasers." ALGEBRA INAPPLICABLE TO PRICES. 5-19 ment of the subject, until the appearance of '* Tooke's History of Prices." If we supposed further exeruplilications of algebraic political economy were necessary to nauseate the reader, we might furnish other epecioiens from the famed Beccaria, or the less known Aggazini and Schmalz. It cannot, however, surely be necessary to prove that such reasoning is inap- plicable to the subject. As well might it be applied to the operations of the affections and passions, to the efforts of the intellect, to the exertion of bodily strength, and to the changing forms of disease. Moralists might tell us that love diminished in proportion to the squares of the distances; that our appetites were strong, directly as the demand, and inversely as the sup- ply, of the gratifications desired ; that mental efforts would be powerful, in exact proportion to the culture applied, and weak in exact proportion to the neglect of culture ; that bodily strength would be manifested according to the length and breadth of the muscle exerted. We should not thus have dwelt upon this fallacious mode of reasoning, but that it is constantly repeated ; it meets us, in this country, in nearly every summary of politi- cal economy which has appeared. It is repeated incessantly in the public journals ; and some of the sweeping conclusions we have noticed are de- livered from mouth to mouth, as if they no more admitted contradiction than that two and two make four. It is in vain they arc refuted and shown to be false or deceptive; the disease prevails, and the remedy is forgotten. The following is from a popular treatise published in 1837, in New York: " Other things, then, being equal — "The greater the supplj', the less the exchangeable value. "The less the supply, the greater the exchangeable value. " The greater the demand, the greater the exchangeable value. "The less the demand, the less the exchangeable value. "And, in general, cost being fixed, exchangoaUc value is inversely as the supply, and directly as the demand. "And exchangeable value will be as the cost plus the effect produced by the variation in supply and demand." ' The qualification of other things being equal may save these propositions from being absolutely false, but it reduces them to absurdity, because other things never can be equal, while cvcnj thing that affects itricus is eminently variable. It is strange that men of acute and well-disciplined minds can deal in dogmas, of which their own more detailed doctrines, if taken in their proper breadth, furnish ample refutation. In iMiiS, a treatise was published in Philadelphia, in which we find it broadly stated that — " The effect on prices of the supply of money, or the demand for it be- coming greater or less, is to cause them to rise or fall in tiio sum- propor- Wayland's Elements of Political Economy, png"' '••• 550 EFFECT OF QUANTITY ON PRICES. Some of their differing opinions have been exhibited in the I^receding quotations. From Sir James StcAvart, however, to M'Ciilloch, the leading authors advance theories, on the subject of prices, wholly at variance with the above cited opinions of Montesquieu, Locke and Hume. Whatever be their want of agreement among themselves, or of individual consistency, they generally admit that money or bullion is subject to similar varia- tions in price with other articles of commerce, under the in- fluence of the same causes. Adam Smith says : — " The occa- sional fluctuations in the market price of gold and silver arise from the same causes as the like fluctuations in that of all other commodities."^ If this be correct, the price of these metals cannot be adjusted upon the single element of their quantity. Even Harris" and James Mill, who maintain that the value of money is regulated by its quantity, advance opinions quite inconsistent with this notion. The former, in his first chapter, clearly recognizes the influence of labor, skill, &c., and of supply and demand, in determining prices. The latter thus sums up an elaborate argument on this topic : — "It thus appears, by the clearest evidence, that the quantity of labor, in the last resort, determines the proportion in Avhich com- modities exchange for one another." ^ The quantity of labor expended, the cost of production, the operation of supply and demand, with various modifications, explanations and additions, are the elements which nearly all the celebrated writers upon tion. So long as the necessities and desires of men remain unaltered, will the money actiialhj circulating be applied to the procuring of the very same commodities. If the circulating medium be doubled, the price of every thing will be doubled ; and the like, in whatever other ratio that medium may be supposed to have increased, or in whatever ratio it be supposed to have diminished," ' This doctrine is nearly identical with that of Locke, Montesquieu and Hume ; and shows, conclusively enough, the influence of false teaching, when wielded by men of such reputation and power. ' iM'Culloch's edit. p. 21. 2 Principles of Political Economy, by II. Vethake, LL.D., p. 47. •'' Elements of Political Economy, by James Mill, p. 74 ; see also p. 95. ' Essay on Coins. MARQUIS a A R N I E R . 551 political economy, who have touched the subject of prices, have used to determine the value of the precious metals, and to account for their fluctuations. The quantity is, of course, one of these elements, and is allowed more or loss influence in tliese various theories ; but few attribute to it an exclusive, or even prevalent control. The Marquis Garnier,' a disciple of Adam Smith, argues that no addition to the quantity of money can make any difference in its value, if it required the same proportion of labor to pro- duce it : that if new mines be found, which yield a greatly in- creased quantity of the precious metals, even with a less propor- tion of labor, the value will not be reduced, unless the increased quantity satisfies the demands of commerce, so as to save the necessity of working the old mines, the value being fixed by the labor required to produce the metals at the poorest mines : that there cannot, in regard to the precious metals, be either scarcity or abundance, which are predicable only of commodities subject to be varied in their supply by causes beyond the control of man, such as the uncertainty of the seasons, or perishable goods, such as must be lost or sold for what they will bring : that, besides these, the only exceptions to the rule, that the quantity of an object of exchange has no influence upon its price, ai'c the monu- ments of antiquity, or curiosities of natural history, sought by rich amateurs, and of which the rarity constitutes nearly all the price. A revolution in the value of gold and silver cannot, then," he concludes, '• occur but in one way — by the discovery of new mines sufficiently fruitful to satisfy the whole demand, and to furnish to the consumption all it can absorb, upon terms more advantageous than before ; that is, lor less proportional labor than had, till then, been reciuired in all the known mines." As the Marquis Garnier occupies a high position among political economists, we offer here his views upon tlio iiiliux of the precious metals consetjucut upon the discovery of the Ame- rican mines : — "The gold and silver of America, obtained with an amount ' Ilistoiro de Monnaie, vol. i. chap. iv. p. 47. 552 SUPPLY OF THE PRECIOUS METALS. of labor five or six times less than that hitherto required to pro- duce them, and collected in such quantities as to satisfy the demand of all consumers, have cheapened the old gold and sil- ver of Europe, and other parts of the Avorld, and brought them to the level of the noAV product. " This gold and silver, obtained so cheaply from countries till then unknown, have attracted, by their low price, millions of consumers, who, but for this circumstance, had never thought of possessing them. The sphere of their consumption is prodi- giously increased, and to fill it a corresponding quantity of gold and silver is required. After this revolution, no further super- abundance has resulted in their production ; they have taken, in the scale of values, the new place assigned them by the nature of the mines of which they are the product. This change took place in the first century after the discovery of these mines. The gold and silver of Mexico and Peru had not been sold more than fifty years in the markets of Europe and Asia, before this revolution in their value had been entirely accomplished. Since that epoch two centuries and a half have elapsed, during which time there have been imported into the old world more than $5,613,000,000 [trente milliards de francs) ; this vast importa- tion has had, upon the price of the precious metals, no in- fluence. " In the sixteenth century, a half-mark of silver exchanged, in an average year, for a setier of wheat, Paris measure. At the present time (1819), the same setier, at the mean price of twenty years, will not bring certainly a greater quantity of silver. The prices of grain, as preserved in this country and in England, show in the most authentic manner that, for two hun- dred and fifty years, two gros of fine gold, or thirty gros of fine silver, have been the average price of a measure of grain, equal to from two hundred and forty to two hundred and fifty livres, or pounds. Thus, however great, during that time, may have been the product of those mines, the whole had been absorbed by the consumption, in which it is proper to include the amount employed in commerce with China and the Indies. " The quantity produced at the mines is proportioned to the ADAM smith's OPINIONS. 55o demands of this consumption, and no superabundance could occur."' Adam Smith seems to have been exceedingly puzzled witli this subject, and bis perplexity has jjvoduced a harvest of con- fusion. His difficulty -was undoubtedly that of reconciling the facts, in the history of money, with his theory making labor the standard of value. "The (juantity of labor," lie says (book i. chapter v.) '• Avhich any particular quantity of gohl or silver can purchase, or the quantity of other goods which it will ex- change for, depends always u{)on the fertility or barrenness of the mines which happen to be known about the time when such exchanges are made." This is his opinion in chief. In a long digression placed at a good remove from the above, at the end of the eleventh chapter, the subject of the fluctuations in the value of the precious metals is treated at large. And here, compelled by the pressure of facts, he seems to allow some varia- tion from his theory, and explicitly states that if the demand for silver " should inci'case, while at the same time the supply did not increase in the same proportion, the value would gradually rise:" that if the contrary happened, silver would become cheaper ; and if the supply and demand were kept equal, its value would remain the same." Again: — "But tlie supj)ly had, it seems, so far exceeded the demand, that the value of that metal (silver) sunk considerably."^ "Labor, it must always he remembered, and not any particular commodity, or set of com- modities, is the real measure of the value, botli of silver and of all other commodities." " Corn accordingly, it has already been observed, is, in all the difierent stages of wealth and improve- ment, a more accurate measure of value tlian any other commo- dity, or set of commodities. In all these difterent stages, there- fore, we can judge better of the real value of silver by coinjiaring it with corn, than by comparing it with any other commodity, or set of commodities." These two passages stand on the same page.* He is of opinion, that " about 163G, the cflrct of the ' Marquis Garnier, Ilistoire de Monnaie, torn. i. p. ■'>•'». 2 M'Culloch's edit. p. 81. ' ll'iJ- P- ^'^• 3 M'Culloch's edition of Sinitli, pp. 8G-88. 554 GANIHL ON QUANTITY OF MONET. discovery of the mines of America, in reducing the value of sil- ver, was completed; it rather increased than diminished in value after that period." This digression in the eleventh chapter contains, in its confused form, nearly every idea so clearly stated in the above extract from Gamier. Ganihl quotes another passage from Adam Smith, which contains a different opinion from any of those given above.' "When more abundant mines are discovered, a greater quantity of the precious metals is brought to market ; and the quantity of necessaries and conveniences of life for which they must be exchanged being the same as before, equal quantities of the metals must be exchanged for smaller quantities of commodities. So far, therefore, as the increase of the quantity of the precious metals in any country arises from the increased abundance of the mines, it is 7iecessarihj connected with some diminution of their value."- This passage is regarded by Ganihl as support- ing a doctrine similar to that of Montesquieu ; and he goes into a refutation more elaborate than that of Gamier. He esti- mates the whole stock of the precious metals, when the supply from the American mines commenced, at a milliard of francs ($187,000,000), and the annual supply for three centuries at 120,000,000 of francs (|22,452,000), which has increased the mass to 35 milliards. This sum, after making every possible allowance for plate, for export to the Indies, &c., would still leave 20 milliards ($3,742,000,000), or an increase of twenty-fold as the then (1820) circulation of Europe. " If the doctrine of A. Smith was Avell founded," he proceeds, "it would follow that, as gold and silver have been augmented to twenty times the quantity which existed at the discovery of the American mines, their value must be diminished twenty times ; so that what cost one franc then, would cost twenty francs now. In fact, how- ever, though some agricultural products have increased in price three or four-fold, nearly every thing else, and especially the products of industry, have rather fallen than risen in price." ' Theorie de I'Economie Politique, torn. ii. p. 368. 2 M'Culloch's edition, p. 8G. INFERENCES BY A N I 11 L . 555 To disprove this doctrine, Ganihl relies further upon the fuct that the importation of silver from America to Euroj)e Imd been in the proportion of from 22 to 29 to 1 of gold {\>y Humboldt estimated at 45 to 1) ; " whence it follows, let the proportion of the amount brought from the mines be as 1 to 22, or 20, or 45 it has not had a corresponding influence upon the value in cir- culation, for that stands at 1 to 15J ; a new proof that the value of gold and silver, considered as products preferred, depends not upon their abundance or scarcity, but is subject to different laws." ' " For more than a century," proceeds Ganihl, " the mines of America have poured into Europe the annual sum of 120,000,000 to 140,000,000 of francs, without the smallest diminution of their value; and what is more to tlie point, nearly every country in Europe has devised a variety of substitutes, more or less in- genious, to save the use of gold and silver as money, which is equivalent to an increase of the quanthy. It is impossible to tell the extent to which this process has been carried ; but it is quite certain that this increase of money and its substitutes has not, according to the opinion of Adam Smith, experienced any diminution of its value. It is, then, evident that abundance has no influence upon their value."" We have not space for a more extended examination of this subject. The main facts in the case are undeniable, however some may qualify, attempt to explain them away, or avoid the legitimate conclusions : and these arc, that the depreciation of the precious metals, since the discovery of the American mines, has by no means corresponded with the increase of (juantity, and, by consequence, that the general rise in prices of other commodities does not correspond with this increase. Our object is not to ascertain the exact increase in the amount of the pre- cious metals, nor the precise influence which this increase had upon the prices of commodities in general, but merely to exhibit ' Tom. ii. p. 371. 2 Ibid. torn. ii. p. 372. Ganihl proceeds witli liis !ir;;iiinciit at j;i'C'it length, and adduces many other considerations and facts in .snpiiurt of Iiis position. 556 nuMBOLCT — precious metals. the fallacy of conclusions about prices drawn from the quantity of money. There can be no doubt that the increase of the pre- cious metals has a tendency to depreciate their value ; but the history of two hundred and fifty years of a constant increase shows that this tendency has not, during that time, entirely pre- vailed over other influences of a contrary tendency. The motive of self-interest leads men, by all the means which skill and in- genuity can devise, to resist the tendency of their possessions to depreciate ; and this motive exerts its most powerful influence in regard to money. Hence new uses will be found for it when it is abundant, new avenues of commerce will be opened, new branches of industry will be essayed, until increased production finds employment for the increase of money. If money be in- creased, industry and trade are increased ; and thus the ten- dency to depreciation is met, and strongly counteracted. If the law which is supposed, by many, to govern the value of the precious metals, was not, as we have stated our belief, subject to opposing and prevailing tendencies, gold should have increased its value, as compared with silver, in the proportion of this increase in the quantity of silver ; that is, fifty times. Humboldt, who has, with the best lights, bestowed the fullest attention upon this subject, estimates the gold derived from the American mines, from their discovery down to the year 1803, at 9,915,000 Castilian marks ; and that of silver obtained, in the same period, at 512,700,000, or more than 51 times as much silver as gold.^ The actual annual product of the two metals, at the com- mencement of the nineteenth century, is stated by the same as follows : — Marks. Silver 3,860,840 ^ Gold 75,217 This exhibits the same disparity in the production, at that period, of 50 to 1 in favor of silver. The disproportion is not so great, when he includes in his estimate all the known mines ' Humboldt: Essai de Nouvelle Espagne, vol. il. p. 645 ; an estimate at page 653 makes it 40 to 1. Bullion Report, 1810, Appendix No. 27. 2 Ibid. p. 033. INCREASE OF P R E C I r .-: METALS. 557 of the world, being then as 45 to 1.' The change, however, which took place between the relative value of gold and silver, under the operation of this increased disproportion in the respec- tive quantities, was only from 10 to 1, as it existed before the discovery of the American mines, to about 16 to 1, as it exists now. The whole addition to the stock of the precious metals in Europe made between 1492 and 1803, is estimated by Hum- boldt at $5,706,700,000, or more than thirty times the quantity existing at the date first mentioned, as stated by Jacob.'^ This immense sum was reduced, of course, by accident, by abrasion, by manufacturing, by hoarding, by exportation to the East Indies, and in other ways, so that the amount was greatly abridged. If this reduction, Avhich is variously estimated, be taken at one-half, it left the stock, at the beginning of the pre- sent century, about fifteen times greater in Europe than that which existed at the beginning of the 16tli century. Jacob, after much research, estimates the general rise in prices at 470 per cent.^ Others have carried them higher ; but a slight ex- amination of the proper authorities shows that it is only in England, France, and a few others of the more prosperous com- mercial and manufacturing countries of Europe, that even such a rise as this has taken place. In most countries of Italy, the enhancement of prices is not considerable ; and perhaps, on the average, no advance has taken place there. The whole depre- ciation of the precious metals produced by this increased quan- tity does not, measured by the rise of prices, exceed from 400 to 500 per cent.^ whilst their A'olume has swelled to 1500 per cent. Among very many authorities wo have consulted upon this subject, we prefer that of Arthur Young, so long and favorably known us a statistical writer, and as editor of the '•Annals iA' > Humboldt: Essai de Nouvelle Espagne, vol. ii. pp. 034, 044. 2 Precious Metals, vol. ii. chap, xviii. p. 03. 3 Ibid. vol. ii. chap. xix. p. 84. Bishop riectwood, writing at the begin- ning of the 18th century, estimates prices to have risen GOO per cent. ; but shows that the pound sterling of the 15th century contained as much silver »s two pounds of his day, which reduces the actual advance of prices to .300 per cent.— Chronicon Freciosuin, p. 135. 558 ARTHUR YOUNG ON PRICES. Agriculture," His pursuits and inclinations, his high character, and his habits of accuracy, fitted him for such an investigation. He engaged in it deliberately, and pursued it with every advan- tage, and with all diligence ; and, so far as we know, his con- clusions are unimpeached and vuiimpeacheable. He has, proba- bly, reached an approximation, where certainty was unattainable, as close as can ever be accomplished. The following table contains a summary of the results wrought out by the elaborate investigations of Mr. Young. For the sake of clearness, he took the prices of the year 1810 as a unit or standard, and assuming them as represented by the number 20 ; the prices of previous periods covered by the table are repre- sented by numbers showing the proportions of those prices to the number 20.^ 'Before inserting this table, we place Mr. Young's own account of its origin, and the labor bestowed upon the subject. Arthur Young's name is familiar to those who are acquainted with the letters of General Washing- ton, with whom he corresponded for a long period, chiefly upon agricul- tural topics. "On going into the country, .June, 1811, I entered particularly on the subject, and examined a multitude of authorities, from which I extracted a great variety of prices, carefully referring to every authority, quoting the volume and page, and combining them with all to be found in the books cited by Sir George Shuckburgh, as well as with the detail, more numerous than had before been published, given by Sir Frederick Eden, in his ' State of the Poor,' a work not referred to by Sir George : these prices I reduced, with much labor, to the standard of our present money. The investigation occupied myself, an amanuensis, and an accountant, with other occasional assistance, much the greater ];)art of ten months, and at no inconsiderable expense. It was also necessary to form tables of population, taxes, with the imports and exports, and the bank circulation of the kingdom, for a period of above one hundred years. All these documents were regularly arranged in a manuscript on large paper, extending to above five hundred pages; and in order to gain, for the years 1810 and 1811, the prices of every sort of provision, labor, wool, timber, coal, and the year's purchase at which land sold, I despatched a circular letter to many respectable correspondents throughout England and Wales : the answers received were so numerous and satisfactory, as to leave little to wish for. The present publication will give a general idea of all the results ; and I do not venture it to the public eye, without premising that the authorities collected are preserved for the inspection of those who may have curiosity enough to consult them : if TABLES DEDUCED FROM ARTHUR Y U N C! . 550 3 C i I "zik "i'ii a JS 3 3 "iy. "in i 6 "iy. 3 1 "s" "i"' 7 Hi' t 3 JS £ 1 ivA m |S 02/ 10 l« 12" \3A ■s u n 11 11" , n «i ny uU III ii" 2% h is 12 11';; "■'1 i:ii, lu'., ijT 1-' 1 15:14 It ^A 13 11^ 12 "■ i-ii^ 'i — ill § = 1' ■ 1' 1.'.; IT 16 1334 . 1 20 ■J 1 1 •JO •JO 20 •JO 20 20 20 20 20 20 20 20 20 20 20 Wheat liarlcy and Oats Wheat. Barley and Oats, united... Provi.sions Wheat and Provisions Corn and Provisions, united Victualling— Office Beef and Pork.. Ta.xes Trade Taxes and Trade, united Labor, Corn and Provisions, united. Artisans Wool-combing Coals M anufactures at G reen w'h bospi tal. Postroffice From the foregoing table we deduce the one following, by taking all the averages for each period, and reducing them into one which stands as the proportion of the prices of that period to 20: — PERIODS. ■0 £ = i i ^ ^ u ^t a. — w c ^ ■|E| Jd Ii u ~ « - ~ - R E .M A R K S . H 108 h\ 15 20 The stock of 1 the precious metals em- ployed as m n c J* is stated, upon the e:-tiniatc of Jiicob, in his work on the Precious Mclnls, V. ii. pages 03, 70, 131,167,214, 322. 14th " 21 24 80 11 25 9 27 33 loth " 36 20 80 108 $163,000,000 624,000,000 1,425,600,006 1,824,000,000 16th " 380 875 1 1120 1120 17th " 18th " J c,; f 1701 to 1766.. 1| J 1767 to 1789.. 1 I"" 1767 to 1800.. 2-S [1790 to 1803.. 1804 to 1810 108 122 190 280 1,824,000,000 they do not prove the capacity of the collector, thoy will, at leant, show such an extent of research, and industry of application, a.s shall exempt him from any idea of inattention to the means of rcnderin;; this work peno- rally ufieM." — Inqumj info the rrvyrcusicc Value of Monrij in KmjlaiHi, by Arthur Young ; Introduction. 560 PRICES' RATE OF DEPRECIATION To enable those ^Yho are desirous of making the comparison between the increase of gold and silver and the increase ef prices, we annex a table from Humboldt and others : — PERIODS. Avenge annual importation from America into Europe, of gold and silver. 1492 to 1500 $250,000 3,000,000 11,000,000 16,000,000 22,500,000 35,300,000 39,900,000 17,000,000 34,000,000 64,000,000 235,000,000 1500 to 1545 ... 1545 to 1600 J600 to 1700 1700 to 1760 1750 to 1803' 1803 to ISlC 1810 to 1823 1823 to 1847 1847 to 1851 1852 It appears, from these careful investigations of Arthur Young, that the whole average advance of prices did not exceed 280 per cent, from the 15th to the 19th century, or to the year 1810 ; that is, less than in the proportion of 1 to 3. In that same pe- riod, the increase of the precious metals employed as money was as 1 to 11. Humboldt estimates the receipts from American mines, up to the year 1500, at not over $250,000 yearly, but as having grown to nearly $40,000,000 in 1810 ; that is, as 1 to 160. In the period from the 15tli to the 16th century, general prices were enhanced 2-4 per cent., while the whole stock of money had increased 380 per cent. In the 17th century, prices advanced 80 per cent., Avhilst the stock of coin increased 875 per cent. In the next, or 18th century, prices rose to 190 per cent., whilst the stock of money was increased 1120 per cent. So little do general prices appear, by this statement, to obey any influence arising from the increased stock of money, that it seems doubt- ful if we should allow any portion of the actual advance to go to that account. There were other influences operating on prices, for which allowance must be made ; and, in fact, we shall not go far wrong, if we attribute the whole rise in prices to that increased activity in all kinds of business which increases de- ' Humboldt, Nouvelle Espagne, fol. edit. 1811, vol. ii. p. 611. 2 The remaining figures are from Tegoborski des Gites Auriferes, p. 37. PRICES IN S P A I X , 1 G TO 1800. 561 mand. The increased stock of money proved, no doubt, a .stimulus to industry and trade, and thus operated on prices. It is, at least, very clear, from this showing, that there is no necessary nor immediate connection betAveen prices and the quantity of money. So far as the quantity of money is an element of prices, it seems to be one of the least influential ; and it cannot be one of these causes to which great and sudden fluctuiiiiuns uf prices are ever due.^ If tlie influx of the precious metals from the American mines were calculated to have an immediate or strong effect upon prices, Ave might safely look to Spain for tlie most signal exem- plification, as more than two-thirds of their products were shipped to that country, and thence distributed to the rest of the world. But Ave find no rise in prices there corresponding to the immense influx of the precious metals into the country. In the following table, Ave furnish the average prices of Avheat and barley in Spain for the five years ending 1680, and for every period of ten years after, to the year 1800, together Avith the coinage of the Mexican mint. One hundred fanegas are equal to 152 bushels. The real is equal to J^ of a dollar. Periods ending at the date annexed. Average price nf wheal per fanega, in reals. Average price nf barley per fanega, in reals. Coinage of the mint at Meiieo, in dollars. 1680 5 years .37.0 16.2 17.0 15.0 18.0 12.7 17.4 17.4 18.2 27.5 26.5 28.6 42.2 14.0 9.3 8.4 8.9 8.7 6.2 8.7 8.2 10.6 12.5 14.2 16.7 21.1 IfiQO 10 " 1700, " " $4:!,871,U00 51,7:11,000 05,747,000 81,15:1,000 90,520,000 111,855.000 125,750.000 112,828,000 165,181,000 19;i.501.000 231,080,000 1710, " " 1720, " '• 1730 " " 1740, '•• " 1750, " " 1760, " " 1770, " " 1780, " " 1790 " " 1800 " " Total $1,276,229,000 1 Report on the High Price of Bullion, iiiadn to tlie lloiiso of Commons in 1810, Appendix, p. 182; Bcawes on Sp;iin, p. 27:2; Iliiinboldt, NouvclK- Espagne, fol. edit. p. 580. 36 562 CHRONICON PRECIOSUM. During the period embraced in this table, the mines of Spanish America were yielding an annual product of $33,000,000, a very large proportion of which were poured into Spain. Yet, in the face of this increase of money beyond any parallel in the world, the prices of wheat and barley, although extremely fluc- tuating, remained for eighty years under half the rates of 1680. The rise which took place towards the end of the 18th century, may be attributed, in part, to the neglect of agriculture conse- quent upon the emigration to the new world, and the immense wealth flowing from there. But the subject of prices in Spain present too wide a field for survey now ; the only point pre- sented is the influence on prices of this great influx of the pre- cious metals. We find the following passage in one of the most reliable works we have on Spain. The author, who investigated the sub- ject of prices with special reference to the wages of labor and the price of grain, says : — " We see daily that the price of grain is not ruled by the plenty or scarcity of gold or silver, but by its own superabund- ance or defect, as where we raise more than we can vent, or where we could vent more than we raise : so in laborers, where they are scarce, they command their w^ages ; where plentiful, the wages command them. Hence it is evident that gold or silver is much balanced by the plenty or scarcity of other things, as those by gold and silver ; and upon that balance depends the difierence of prices."^ Although the intelligent and accurate author has the prices of England also in view, as he examined the subject partly in the light of Bishop Fleetwood's " Chronicon Preciosum," yet he expressly applies his conclusions to Spain, the country of which he was writing, and in which he had been thirty years a resi- dent. He regarded the question of the influence of money upon prices as of the " last importance," and therefore gave the sub- ject deliberate and earnest attention. The following is a table of the price of wheat in France, taken ' The Civil, Commmercial, Political and Literary History of Spain and Portugal, by Wyndham Beawes, English Consul at Seville, folio, 1793, page 272. PRICES IN FRANCE, 1080 TO 17 )03 at the average of various periods, from 1675 to 1800. Tiic setier is equal to 2,^^i\'^^^ bushels. The price is carried out in money of the United States.' Number of years of Last year Price of a which 2vera§e is of the setier of REMARKS. taken. average. wheal. 5 years 1680 $6.10 The alterations of the French coins have been so 11 " 1691 4.27 frequent, that the periods liavc been taken between 7 " 1698 6.84 the dates of these alterations, as thev show suffi- 9 " 1711 5.38 ciently the current of prices. Where the altera- 3 " 1714 6.29 tions have occurred several times in a j-ear, and 4 " 1718 3.49 in two or three years, these are omitted, and so are 3 " 1723 2.37 years of famine. In 1740, the setier was at nearly 4 " 1730 2.89 $23; in 1811, it fell below $8; and the average 7 " 1733 3.17 of the following nine years was $3.19. 5 " 1739 3.33 Montveran estimates the quantity of money circu- 9 " 1750 3.19 lating in France, at various periods, to be as fol- 10 " 1760 3.97 lows : — 10 " 1770 4.32 1600... $109,600,000 1753... $259,432,000 10 " 1780 5.20 1681... 208,385,000 1797... 416,361,000 14 " 1797 5.77 1716... 240,601,000 1830... 523,366,000 It is equally clear, from the above statement, that durineiuliiiiro.s of Great Britain, page 156. 566 PAPER CURRENCY AND PRICES. wonder. This increase of material wealth was not only aided by the influx of the precious metals then flowing into the com- merce of the world, but by an increased use of substitutes for money to an extent constituting a principal feature in the com- merce of that period. During the ten years ending 1710, the average circulation of the notes of the Bank of England was ,£758,000 ; this had increased, in the ten years ending 1800, to ^11,470,000, or 1600 per cent. The Bank of Scotland is nearly coeval with that of England ; and in addition to it, many other banks went into operation in Scotland during the 18th century, all of Avhich contributed their portion to the paper cir- culation. Private bankers throughout the country added their paper to the mass of the paper currency — a mass which cannot be estimated, for want of proper data. The practice of circu- lating bills of exchange and promissory notes in payments, as a substitute for money, was greatly extended in this period. During the whole of the 18th century, the balance of trade, with the exception of the year 1781, was in favor of Great Britain with the Avhole world ; it must be clear, therefore, what- ever doubts may rest upon the entire accuracy of these national balances, that Great Britain obtained her full share of the great accession which was then made to the previous stock of gold and silver. In addition to this was employed the vast accession of substitutes which banking and its various facilities produced. Yet, with all this, prices advanced only 11 per cent. ; and to what one, or to how many, of the elements of prices, and in what degree to each one, this advance is to be attributed, no human knowledge or scrutiny can ever disclose. We find in these facts, surely, very little proof that prices are controlled by the quantity of money or currency in circulation, or that there is any regular proportion between them. It is utterly unsafe, therefore, to infer that a currency is in excess, because prices have risen ; or to conclude, if a currency is in excess, that prices must rise ; or if they have risen, that the rise is in consequence of that excess, or that there can or will be any fixed proportion between them. It will be found not unfrequently, on close inspection, that a rise of prices has PERSONAL CREDIT — EFFECT ON PRICES. 567 preceded and been the cause of an increase of money; but as the former is generally first known, and the latter slowly ascer- tained, the order of cause and effect is reversed in the minds of most observers. When the horizon of trade and politics is clear, when no pressure is felt, and no dreaded crisis is irapendino-, when a few years of punctuality and fair dealing have blotted out the memory of frauds and losses, confidence between man and man rises, becomes strong and unsuspecting, grows into credit, and credit becomes even more efficient than money. When credit, therefore, furnishes to multitudes the power of purchasing at will with their own paper, the abuse of this power degenerates into speculation. The active competition which takes place in purchasing, between those who are thus unre- strained in their power of acquiring commodities, produces an immediate advance in prices, and that advance produces its usual efiect of stimulating the movements of the speculators. It is deemed safe to purchase in a rising market. Prices must con- tinue, while this spirit prevails, to advance, and the profits real- ized by first purchasers will tempt others to embark in the move- ment, which grows as it advances. All this enhancement of prices takes place without the use of currency, and is founded wholly upon personal confidence. It is true, that much of the individual paper issued in these purchases may be discounted, and the notes of the banks be thrown into circulation in place of them ; and this may have a slight tendency to swell prices. Prices, however, as we have seen, generally begin and rise in the wholesale transactions, and these are almost altogether upon credit. The effect of the increased circulation is rather, in the first instance, to support the high prices than to create them. The holder of the goods is able more easily to make such sales as will enable him to acquit the liability incurred in their pur- chase, because his creditor, by having his note discounted at a bank, has added to the currency tlie amount of his debt ; and thus he has only to exchange his goods for the cijuivalent amount of bank-notes which his purchase has added to the cir- culation. It is in such seasons, and owing to this liigh confidence, thai 568 S. JONES LOYD ON PRICES. commercial dealings are pushed to an extent which results in an excessive issue of bank-notes ; and surely no human sagacity could tell, in such case, what proportion of the advance of prices was owing to the spirit of speculation, and to the high state of individual credit, and what to the consequent excessive issue of currency. Any attempt thus to discriminate must be abandoned as useless by the careful inquirer. Yet what positive and un- hesitating conclusions have been drawn from data as uncertain ! How often, in such cases, have we been assured that the cur- rency has been depreciated in the precise ratio of such an in- crease of prices ! The commercial events of the last fifty or sixty years must, if properly applied, be decisive of the relations between currency and prices ; and more especially has the experience of this period been distinct in Great Britain and the United States. In regard to the former we are, fortunately for the patience as well as for the information of the reader, not without ample references.' Among those who have recently written on the subject of cur- ' If it be thought that we are taking unnecessary pains in combating the position tiiat currency regulates prices, let it be kept in mind that this false position is by many i-egarded as an axiom never to be doubted or called in question. It is the plausible and ready solution applied by multitudes to many difficulties and doubts in relation to the theory of money and bank- ing. It is repeated on every side by pamphleteers and newspaper writers, and though often refuted, still reappears. As late as 1837, S. Jones Loyd, now Lord Overstone, in a pamphlet, expressed himself thus : — "If the cur- rency be in excess, prices of all articles are affected in a corresponding de- gree." This opinion of Loyd is quoted by J. B. Smith, President of the Manchester Chamber of Commerce, in a pamphlet of 1840, addressed to Mr. Loyd ; and Mr. Smith thus enforces the doctrine : — " Supposing the Bank of England to have a certain amount of paper in circulation, against a cer- tain quantity of commodities of all kinds in the market, at a given period; then, supposing that the bank increased its issues by a million, the quantity of commodities remaining the same, it is quite evident that the natural ten- dency of such an operation would be to raise the money value of commodi- ties. Either the price of commodities must rise, or the money must remain without employment. If the money remained for a time without employ- ment, the necessary effect would be a reduction of the rate of interest, and 60 a rise in the price of commodities would be produced." — /. B. Smith's Letter to S. J. Loyd, page 10. T K E ' S HISTORY OF PRICES. 0(39 rency, in Great Britain, few, if any, have attained lii-rhcr con- sideration than Samuel Jones Loyd (Lord Overstonc), a London banker. His opinion on this subject is deemed none the less important, that he has changed his views since 18o7. A letter of his, published in 1840, contains the follo^ying emphatic pas- sage : — "Fluctuations in the amount of the currency are sel- dom, if ever, the original and exciting cause of iluctuations in prices, and in the state of trade. The buoyant and sanguine character of the human mind ; miscalculations as to the relative extent of supply and demand ; fluctuations of the seasons ; changes of taste and fashion ; legislative enactments and politi- cal events ; excitement or depression in the condition of other countries connected with us by active trading intercourse ; an endless variety of casualties acting upon those sympathies by ■which masses of men are often urged into a state of excitement or depression — these all, or some of them, are generally the originally exciting causes of great variations iu the state of trade." ' To Thomas Tooke, Esq., of London, author of ''A History of Prices, and of the State of Circuhitiun, from 1793 to 1837,"" however, is the world indebted for the most thorough and search- ing examination of this subject. This work has no equal, iu any department of political economy, for indefatigable research, for patient analysis, for the extent and variety of facts on which its conclusions are based, for fulness of illustration, and for lucid arrangement. It furnishes a model towiiich all investigations of this kind must in some degree be conformed, if destined to com- mand eventually the public approval. What it fails in clearness of expression, is fully made up by other merits. This history has, from its appearance, received high commendation f and wo ' Letter to J. B. Smith, page 10. - 2 vols. 8vo. 1833, with a continuiitiDii piihlislioil in I.^4(l. Iiriii-;in- down the history to the end of 1839; a fourth volumo iu 18iS, and ilio tilth and sixth volumes in 1858. 3 "A work equally distinjiui.-liLMl lor the stjuiidiioss and comprehensive- ness of its general views, and the cxti.'nt and accurai-y of ita praotioal infor- mation." — Edinbur occasions when there were bahinccs to pay, and specie was to bo remitted. It could only oflfcr to receive specie in one place, and pay it in another. But, in the processes of domestic ex- change, specie is rarely remitted, even when for a time there may be a balance between one locality and another, the opera- tors keeping their accounts for another turn of the balance. The balance between the cities of New York and Philadelphia might change sides every month in the year, without any transmission of specie, and so between more i:emote points. Every day immense sums may be remitted between such places, at little or no expense, or with a premium to one side ; yet the public treasury, under the present system, can only avail itself of domestic exchange to a very limited extent. The sums remit- ted are so vast in the aggregate, that even the large transac- tions of the government could be carried without being felt ; and though the intervention of the treasury might be an advantage both to it and the public, no such step, by the terms of the law, can be taken. Apart from some irregularities, which, by the novelty and perplexity of their position in conducting a business so foreign to the customs of the country, seemed to be forced upon the offi- cers of the treasury, and which have been discontinued for seve- ral years, the processes of the distribution of the public money seem now to have found the best channels of which the system admits. Although it does not permit that broad and full con- tact with the domestic exchanges of the country, and make available all its facilities, as is the boast of the system of France; nor enjoy the aid of a great bank like the English Exchequer, which can pay any sum in Great Britain by checks on the Bank of England, or in its notes, with as good effect as it could j)ay in gold ; yet for some years large sums have been moved, not only without expense, but with a profit. The profit, however, is probably due to remittances to California, as at San Francisco the Assistant Treasurer has been able to sell drafts of the government on New York at two and a half per cent, prcnuuni.' ' We give here, in connection, extracts from Reports of vmioiis Secre- taries of the Treasury, and Treasurers of the United States, contaliuiii; 614 MR. Meredith's report of is 40. The treasury of the United States, therefore, now looks be- yond its circumscribed duty of receiving coin and paying coin ; it notices the fact, that New York is not only the point of its remarks upon the condition and progress of the Independent Treasury sys- tem. It would be very interesting to have from the Treasurer of the United States a detiiiled report of every movement of public funds, whence and whi- ther, with the expense and profit of each operation, and how it was effected. "Experience has demonstrated some of the requirements of the act to be productive of great inconvenience, if, indeed, there be not some whicli> under the influence of strong necessity, are often violated. Disbursing offi- cers, to whom drafts for large sums are issued, are, by existing arrange- ments, obliged to receive the full amounts of said drafts at one payment from the proper assistant treasurer, while their expenditures must be made in small sums from time to time. The custody of the money is thus forced upon them, without any provision for its convenience, or even safety. If the money is to be disbursed at points distant from the place where it is received, the burden of transferring it is, in like manner, imposed on them. If they adopt the usual and customary mode of keeping and transferring money, they violate the law. If tliey undertake themselves its custody and carriage, they incur great risk and responsibility. The actual carriage of coin from place to place in the same town is burdensome, especially in those Southern ports where silver is the coin chiefly in use. "To alleviate some of the inconveniences attending the system, if con- tinued, I would suggest — " First. That any person having a draft on an assistant treasurer be per- mitted to deposit his draft with the assistant treasurer, and draw for the amount, from time to time, in such sums as he may desire, upon his own orders, payable to any person or persons ; provided that the whole amount of the draft should be actually drawn within a short period, say two weeks after the deposit of the draft. " Second. That any disbursing officer having a draft on an assistant trea- surer, be permitted to deposit such draft, and draw for the amount in like manner: provided that each order should be presented for payment within two weeks after its date. These provisions would, it is believed, effectually prevent the checks or orders being used as currency. " The inconvenience arising from the accumulation of coin at points where it is not required for the public service, is very great ; but it seems to be inseparable from the system itself. To pay a public creditor with a draft on a remote office, which he cannot sell but at a discount, or collect in person without a journey, would be unseemly ; and the government has no means itself of making tranr^fers, in such cases, other than the despatch of special messengers, at some expense, and much risk of loss." — Mr. Mere- dith's Report, December od, 1819. M 11 . G U T II R I E ' S REPORT OF 1 8 -j 3 . G15 largest receipts, but the financial centre of its operations, and the actual centre of the internal exchanges of the whole country. Funds flow from every State, and every district, to that city, "The disbursinjj; agents of the several departments of the government beinr; without safe places of deposit for tlie public money entrusted to them, it wi^js deemed right, and within the provisions and spirit of the law, to require the treasurer, and the assistant treasurers, and depositories designed by hxw, to receive deposits from the disbursing agents of the government, and to pay out the same on their checks. A regulation to that eflfect was issued, and is in operation, and accompanies this report. It is a great con- venience to disbursing agents, and also secures the safety of the public money. The privilege of so depositing has not, as yet, been embraced by all the disbursing agents ; and it has been suggested that some of thera deposit with bank brokers, under an erroneous idea that the act does not apply to them. It is believed that such deposits are in contravention of the law." — }fr. Guthrie's Report, December Qth, 1853, page 1-1. " The treasury receives money directly at its counter, and indirectly by its assistant treasurers and designated depositories at other points, and dis- burses through the same channels. It also issues drafts on the receiving officers of tiie treasury, not designated as depositories for the public money in their hands ; and when paid, treats the amount of the transaction as at once a payment into and out of the treasury by the officers in question. When the disburscnicnts of those officers are greater than their receipts, tho government is saved the risk and expense of transporting the money to a depository, and the officer relieved from the risk of keeping it. . . . " Prior to the 4th of March last, as I am informed, moneys were advanced in largo sums to persons not officers of the government, for the ostensible purpose of purchasing United States stock, for paying interest on the public debt and coupons, and for other purposes of similar character. "In like manner, the practice of issuing transfer drafts in favor of banks or brokers, to remain a considerable time on tho books as an equivalent for the expenses of transportation, and occasionally renewed, in- stead of being paid at maturity, has entirely ceased. Instead thereof, in all cases, the transfer draft has issued only after the deposit of coin lias actu- ally been made, or when it was necessary to transport tho specie, and tlien the money has been deposited at the desired point, as soon as the transport- ation could be effected, by an officer of the department." — Jiep»rf of Mr. Casey, Treasurer of the Uiiilcd Stales, to Mr. Guthrie, November IWi, 1853, page 155. "The Independent Treasury act still continues eminently successful in all its operations. The transfers for disbursement during the fiscal year, to the amount of $.30,107,074 0;i, have been made at a cost of .•?l'.).Tr.2 35, whilst the i,rcmium on the sale of the treasury drafts has amounted to G16 THE treasurer's report of 1855. not only to meet debts payable there, but for distribution 'thence to other places, and for all sorts of financial movements. Money in New York is so readily available at other points, that $30,431 87. The receipts and expenditures during the fiscal year, amount- ing to $131,413,859 59, have all been in the constitutional currency of gold and silver, without any perceptible effects upon the currency, or on the healthy business operations of the country." — Mr. Guthrie's Report, Decem- ber M, 1855, page 21. " For facility and convenience of disbursements, and for greater security of the public money, you have caused to be issued, within the year, 1590 transfer drafts, in amount $41,319,054 18; and the transfers have been conducted and executed with commendable despatch, and satisfactory result. " The operations of the money branch of this office continue to give great satisfaction, not to myself only, but to disbursing officers, government creditors, and to every class of persons having business to transact with it, especially the operations arising under the business extension of it, which you directed should go into effect on July 1st, 1853 (carrying out, in spirit and in fact, the Independent Treasury act of 184G) ; since which they have gradually increased to important magnitude, as will be seen by the follow- ing statement. The amount of coin received and paid during a year, end- ing the 30th of Septembei-, 1855, averaged, in and out, $1,201,792 66 per month. "Treasury drafts paid, or passed to the credit of disbursing ofiicers, num- ber 1423. " The accounts now kept with the disbursing officers are 57 ; and their checks paid and passed to the debit of their respective accounts, number 17,394, and amount to $7,093,208 85. " The arrangement you were pleased to direct as a facility to the receipt of coin here in exchange for drafts on New York, without expense for trans- portation, by causing the issue of regular transfer drafts for $200,000 at a time in my favor, and the deposit thereof with the assistant treasurer of New York, subject to my check on ' transfer account,' as required, com- menced on January 30th last, and has been highly appreciated by persons who desire to make such exchanges. Under it there has been received, in eight months, to the 30th of September last, $2,840,237 01 ; the money for which each check was drawn having been paid, as i-equired, into the trea- sury here before the check was drawn." — Report of Mr. Caseij, Treasurer of the United States, to Mr. Guthrie, November 22d, 1855, page 172. " The Independent Treasury act has been carried into efi'ect, the past year, as fjtr as it lias been practicable for the department to enforce it. Most of the disbursing officers of the government, where conveniently situ- ated, have and continue to avail themselves of the convenience and security MR. Guthrie's report of i8r)(j. G17 it is kept tlievc to Itc ready for use everywhere else. The trea- sury finds it easy to make its payments elsewhere, so long as it has funds in New York ; the disbursing officers find persons in of depositing in the vault of the treasurer, assistant treasurers, and public depositaries, as will be seen by statement No. 89 of this report. Tliose who have not deposited in the vaults of the government, although convenient, construe the act of 184G as allowing the officer a discretion on the subject. This they sometimes exorcise, by making what they term special deposits with chartered and unchartered banks. The security of the public money, and the prevention of its application to any other than public use, call for explicit legislation on this subject, and the extension of the penalties of the act of 184G to those receiving public money from disbursing agents and others who have public money in their hands. The courts have found diffi- culty in applj'ing the act to all cases within its spirit, because thought not to be technically within its terms. "The amount transferred for disbursement, during the past liscal year, was $38,088,113 92, at a cost of $12,945 87 ; whilst the premiums paid on sale of treasury drafts have been $54,924 IG ; leaving $41,978 29 over and above the expenses. It is believed that, with care and vigilance, the trans- fer of public money will hereafter be made through the agencies of the trea- surer, assistant treasurers, and depositaries, without charge and without risk, except under extraordinary circumstances, and in peculiar times. The receipts and expenditures, during the past fiscal 3'ear, have amounted in the aggregate to $14G,8GG,933 48, and have all been paid in the constitu- tional currency of gold and silver, without any disturbing effect upon tlie currency, the banks, or business of the country. However, the withdrawal and prohibition of the small-note circulation of the banks is still deemed essential to a sound and stable currency, and to be called for by the best interests of all the States." — Mr. Gidhrie's Report, December Lv/, 185G, page 42. "The sum of $38,088,113 92, composed of coin ami bullion, has been removed during the year. "This operation has been effected, as a matter of account, by 7.)7 trans- fer drafts issued singly, and G46 issued in duplicate ; and, as a matter of fact, in part by actual transportation, and in the other part by using trans- fer drafts in sums suitable to and supplying the wants of the l)usincss com- munity, so far as they came within the range of our own convenience or requirements. "Accounts have been kept with 75 disbursing officers, whoso credits have been drawn upon and paid to the amount of $G,G95,410 5G, on 17,003 checks. "The sura of $1,544,129 44 has been transferred, during the year, from 618 TRANSMISSION OF PUBLIC FUNDS. every locality desirous of remitting to that city. Many of these officers, therefore, even at distant places, have their credits opened at New York. They can sell their checks upon that credit for large or small sums, and often at a premium, and thus draw from almost any place on New York, receiving coin for the draft. Neither is the treasury without some facility in trans- mitting funds from other places to New York ; this is done by furnishing the assistant treasurer there with drafts on the place whence it is desired to draw funds, in such sums as may suit the convenience of merchants and bankers, who occasionally remit to the point at which the public funds have accumulated. The drafts furnished for this purpose lie until they find a purchaser, and if not used, they are cancelled. In all this, the government holds relations with those who are concerned with the domestic exchanges. These relations, how- ever, are imperfect, for the treasury can only operate by selling its own drafts ; it cannot become a purchaser, and it cannot easily and promptly avail itself of circuitous exchange, or indi- rect remittances, by vrhich at times a particular movement of funds could be effected quicker, and at less expense, than by any direct mode. But, circumscribed as the operations of the treasury are, they bend to the customs of the country ; the transfer drafts drawn by the Secretary of the Treasury, whether sold in the market, or whether the specie is removed, the checks given by disbursing officers on the treasury at New York, or on other officers, are the assistant treasurer at New York to this office, by means of 2079 checks given in exchange for coin previously placed in my possession, and drawn in amounts placed to my credit by the assistant treasurer, in satisfaction of transfer drafts, and of drafts in my favor as agent for paying the com- pensation of the members of the House of Representatives. " These operations, it is evident, have afforded favorable and very accept- able accommodation to our business community ; while, at the same time, they have relieved the department from the onus of transporting that amount of specie, which it would otherwise have been compelled to en- counter." — Report of Mr. Casey, Treasiwer of the United States, to Mr. Guthrie, November, 1856, page 483. TREASURY CURRENCY — ITS BENEFITS. 619 paper operations. He Avho purcliascs a treasury draft takes the paper of the treasury; the government docs not pay him in money, but gives him paper. It will be found, when all these transactions are followed out, that the actual metallic currency is departed from in various ways, and to a largo extent. We regard these modifications of the original system as beiu'^ made in the right direction ; and believe that, as the system becomes more settled, a still larger discretion can be allowed to the oflS- cers, not only without danger to the treasury, but with positive advantage to the public. It will be found, we believe, that however close the officers of the treasury keep to the letter and spirit of the law under which they act, in receiving and paying only coins, the public creditors either do not themselves receive the coins, or that they part with them for bank-notes, or a bank credit, at the earliest possible moment. They fall into the regular channel of busi- ness, as it is carried on outside of the treasury, as soon as they can. They do not receive coins to keep, but to pay away ; and the government currency is exchanged at once for that which will pay debts and make purchases with eciual advantage and less risk. The public creditors are not able to remain on the plat- form of a metallic currency which is occupied by the govern- ment. They are called up and paid, and then step off to min- gle with their fellow-citizens in the use of the prevalent currency. Whether necessary to the government as a system, or not, it is seldom of any advantage to the public creditor. It is more than probable that inconveniences are unavoidably imposed upon pub- lic creditors by this obligation of the treasury to pay only in coins, which far outweigh all occasional advantages. The apparent success of this experiment in the United States should not betray any one into the concession, without further investigation, that this is a wise or even expedient policy for other governments, or in other circumstances. Two things have favored this measure — one at its inception, and the other very soon afterwards. Tiie revenue of the general government of the United States is paid upon indirect taxation. The bur- 620 TWO EVENTS FAVOR THE EXPERIMENT. den is self-imposed. No man is bound, by law, to import foreign goods, nor is any man compelled to purchase public lands ; those who engage in such transactions know the terms of pay- ment before they begin, and they may refrain from the busi- ness, if they regard the terms as too hard. If the whole revenue of the United States were to be collected in gold and silver by direct taxation, the system would fall at the first congressional election after the attempt was made. We do not hesitate to say that the whole income of England could not be collected in gold and silver for two successive years. The people would never submit to it ; and the doctrine, that what is good enough for the people is good enough for the government, would be proclaimed in tones loud enough to secure ample respect for the law of public usage. The other circumstance which favored this experiment in the United States was the discovery and abundant product of the California gold-mines. Without this unexpected but immense accession to our stock of gold, this measure might have fared very differently, and might now be standing by no means favorably with the public. As it has turned out, the public treasury proved to be a reservoir of gold at the time of the commercial revulsion of 1857, and was the means of retaining $25,000,000 of gold in the country, which would probably have been exported, but for its safe position in the public vaults. INDEPENDENT TREASURY. 621 2 4. Independent Treasury a result, of financial difficulties — State banks and a financial system — A mixed currency of government paper and specie — Opposition to banks and paper currency — Mr. Guthrie — Bank of France; luxury of severity — Banks not to be cruslied, but replaced — A financial system founded on the act of ISAij — Treasury notes payable on demand without interest, and at six and twelve months with in- terest — French loans of 1854-5 — Whole loan offered by the people in France, oid of Paris — Board of Treasurers proposed — Principles tchich restrict the issue of treasury notes — Lenders of money, their relations with the treasury — Offices in Washington and Kew York — Special duties in the i)roposed system — Necessary connection of the treasury with domestic exchange — Friction — ^1 remedy required, and the co-operation of the trea- sury — A national institution to form the point of contact between the treor sury and the domestic exchange. The chief feature of the Independent Treasury, as now ad- ministered, is, that it is contrary to the long-settled usages of the people of the United States. This is a more important fact than many seem to apprehend. Usages are stronger than laws ; they may be suppressed for a time, but are sure to assert their dominion over governments, as well as people, in the end. The best writers on the elements of law tell us, that permanent laws are but the reflections of the settled customs and institutions of society, and that enactments which violate settled customs are generally short-lived ; that they are either soon repealed by usage, or modified and bent to suit the customs. There cannot be any doubt that, in this country, the usage is, and has long been, to employ the credit system, and the aid of banks and paper currency, in all the large transactions of industry and trade. Although the constitution itself contains a provision which makes gold and silver the standard of payment, the ])eoplo treat it as a standard to be used only in case of disagreement. They have arranged a mode of payment far more efleotive, and far more economical, and this they employ almost exclusively in large operations. This custom pervades and governs the whole country ; and it is very rare indeed that any disagreement be- tween parties compels a resort to the standard of payment. Taking the whole of the large payments of the country together, it may be safely assumed, leaving out tlie national treasury, that 622 DEPAKTURE FROM USAGE. not one thousand dollars in a million are paid in gold or silver. Tiie men of business make their purchases upon their own credit, and thus issue every year thousands of millions of dollars in amount of commercial paper ; all that concerns the relations of debtor and creditor upon this paper is settled by the aid of the banks, and other devices of the credit system. The people de- posit their money in the banks ; they give and receive checks upon the banks ; they pay and receive bank-notes. The govern- ment alone departs from this universal usage ; it abjures credit, banks, deposits, and bank-notes, and insists upon an exclusive currency of gold and silver. We have already remarked upon some of the results. We now add, without judging by what has occurred, without dwelling further upon tlie evils or inconve- niences already suffered from this measure, that, unless frit- tered away by the effects of the opposing customs of the country, it is certainly destined to be the cause of greater mischiefs. The experiment is to be tried in the State of Ohio, where it will have a much shorter life than it has had as a measure of the general government. Direct taxation and an exclusive currency of the precious metals cannot stand together in a government, the usual currency of whose people is paper. It is indeed unfortunate, that a government and its people should differ so radically as has occurred in this measure of the government of the United States, enforcing an exclusive cur- rency of the precious metals for its treasury ; a timely modifi- cation may avert far worse evils than any yet anticipated. The least that can be looked for, if it be not modified by time, is that it may eventually crush the administration which endea- vors to sustain it. The natural body may carry an unassimi- lated substance a long time without vital injury ; but, soon or iate, it finds a jjosition in which it destroys life. We have stated our objections to the present financial system of the United States thus strongly, not only because we regard them as important, but; that we may be the better understood in our further remarks. We are far from being blind to the motives of those who projected the act of 1846, under which this financial system is carried out. The reasons which influenced them were THE STATE B .\ X K S . C,2^ of the strongest character. The wiJe extent of our territory ; the numerous separate governments of the States, and their various systems of banking and credit ; the flagrant, disastrous and continued abuses of banking — must have been obstacles of the most serious kind in the way of conducting successfully the finances of the United States previous to the act of 184G. We know, indeed, that the diiferences of opinion in all that con- cerned banks, previous to that time, as well as since, rendered it nearly impossible to harmonize the operations of the banks and the treasury. Tlie perplexity arising from the number of the banks claiming a share of the public deposits — claims enforced by the various States in which the banks were situated, and by interested individuals of great political influence — justifidl the ofScers of the treasury, and members of Congress, in looking for some mode of escaping these troubles. Notwithstanding the objections urged against the present system, we do not hesitate to say that no system likely to bo adopted in connection with the State banks would be preferable. A perfectly sound and well- arranged plan of national finance might be devised, but it would savor of partiality ; and nothing of the kind could withstand the hostile influences which would be brought to hear upon it. It is not surprising, in our view, then, that the idea of any close relations between the treasury of the United States and the State banks was given up as involving invincible difficulties. From considerations such as these sprung the act of the Gtli of August, 1846. Some change was inevitable ; escape from the financial troubles which had reigned for many years was indis- pensable. It was the duty of those Avho undertook to devise a new system to consider well the actual condition and the cus- toms of the country. They miglit fairly desire to avoid all con- nection with the State banks ; but tliey could, with no propriety, overlook the fact that the people of the United States employed the credit system, and the agency of lianks, in all important business. It was their duty to make their new measure of iiiiauco consistent with the usages of the people. Tlie tenor of the act of 184G shows that its framers were not forgetfu! of this im- portant consideration. The eighteentii and niueteeiilii sections 624 SPIRIT OF THE ACT OF 184G. provide " that all receipts into tlic treasury shall be in gold or silver coin, or in treasury notes, and that all payments shall be made in gold or silver coin, or in treasury notes, if the creditor agree to receive said notes in payment." This act did not, therefore, propose an abrupt departure from the customs of the country ; it did not propose to enforce an exclusive specie cur- rency for the government. It proposed that all payments to and from the treasury should be made in gold and silver coin, or in treasury notes issued under the authority of the United States. Now, this was offering to the creditors of the govern- ment their choice of specie or the very best paper currency which could be issued in the country. No medium of payment which could be devised would better accommodate the public creditors than treasury notes, issued in forms and denominations to suit the wants and convenience of the people. We think our financial system should have been constructed in the true spirit of this statute. The receipts into the treasmy should have been, since that time, only gold or silver coin, or treasury notes ; and the public payments should only have beea in gold or silver coin, or in treasury notes so issued as to be acceptable and convenient to the public creditors, and the people at lai'ge. The great defect of our present system of finance is not, then, due to the act of 1846, but to the manner in which it has been administered. Whether the manner of this administra- tion was contemplated when the act was passed, we know not ; but it is certain that this provision for treasury notes, which softened the harsh features of the measure, has been wholly in- operative. Whether the passage of the act was aided by this feature, we cannot tell ; but it is to be lamented that the policy clearly indicated by the act, and necessai-y to place it in har- mony with the institutions and usages of the country, should have been, ever since, neglected or purposely abjured. It is not difficult, perhaps, to conjecture how and why this one-sided policy has been pursued under the act of 1846. The opposition to banks in the United States has been constant and vigorous for half a century. It has been stimulated, as well as justified, by the very great abuses of the system ; but, great as A CIRCULATION OF TREASURY X T K S . &15 these abuses have been, the censure and aenunciatiuns puurcJ out upon the banks have been, for the most part, neither enlight- ened nor discriminating. The subject lias not been well enough understood to give the banks due credit for the benefits they confer, nor to point out distinctly the mischiefs they commit. In proportion as the notions of the friends and enemies of banks have been indefinite on the whole subject, their imaginations have governed, and not their judgments. On few subjects has a wider diiference of opinion existed ; on few subjects have men been more ready to pronounce positive opinions, in direct con- flict with each other, where the facts were all before them. So strong is the feeling against banks in many persons, that they cannot endure any thing that resembles banking. Paper cur- rency is tlieir abhorrence ; they look upon every one as wront^ed or cheated, who takes a small note in place of gold or silver. Such persons shudder at the idea of treasury notes being issued in denominations small enough to make them a convenience to the people at large. They know that bank-notes, from one dol- lar upwards, are the general medium of exchange ; they regard this currency with special dislike and distrust ; but they would oppose, Avith all their might, the issue of treasury notes as low as ten dollars by the government, in payment of its debts. Treasury notes, in denominations from five to one hundred dollars, payable upon demand, issued under proper regulations and checks, Avould constitute the safest possible currency for the people of the United States. A hundred millions of .such a cur- rency would be absorbed much more rapidly than it would be safe or proper to issue it ; an issue only to be made in the gradual progress of a system well understood both by the officers of the treasury and the public at large. Yet the pro- posal to issue such a currency for the special benefit of the people, who are regarded as having suflered, and as still sulfer- ing, from the evils of banking, would bo treated with disdain. Large treasury notes, for those who have money to lend, are deemed admissible and proper in national finance ; but the sub- division of these notes, with the view to their becoming a general convenience and security, would be ojipused with billcnie.>s, us 40 626 FRANCE — ITS TREASURY AND BANKS. approaching one of the functions of banks of circulation. This morbid jealousy of banks is not merely absurd ; it becomes a blunder, when carried to the extent of preventing even the con- sideration of measures of finance bearing some resemblance to the processes of banking. In France, they are jealous of banks, and desirous of restraining the development of credit in that form ; the government there, in the administration of a newly- reformed financial system, exerts its power, shapes its processes, and employs all its opportunities to favor the operations of in- dustry and trade, because it would, so far as it can, limit the power of banks, and remove the occasion of establishing them. Here the treasury merely provides for its own currency, its own receipts, and its own disbursements, leaving the whole field of industrial and commercial payments to the banks. The Bank of France is accused, by a late writer, of luxuriating in severity ; ^ and the government therefore afibrds all the alleviation possible within the range of the operations of the treasury : here, where the banks are even objects of the severest attacks on the part of those in authority, we eschew, in doctrine and practice, all sympathy, and refuse all assistance.^ The banks have multiplied * " C'est in September et en October (1850) que la banque a d6ploye ce luxe de severite qui a si fort gene le commerce." — Annuaire D' Economic Pvliliqne, 1857, page 584. 2 The following extract from the Report of the Secretary of the Treasury, in 1855, will show that this opposition to banks is not confined to the ig. norant and unthinking, but is shared by some of the ablest and best men who liave been in the Treasury Department : — " The Constitution of the United States was framed by the men who had felt all the evils thereof; and when provisions were inserted in that instru- ment, that no State should emit bills of credit, nor make anything but gold and silver a tender in payment of debts, and the coining of money was given to the general government, they believed they had provided for a hard money currency, and against the evils of a depreciated one ; but these pro- visions were nullified, when the courts held that the States had power to charter banks, with authority to issue and circulate notes as money. It is now too late for the courts to retrace their steps, and give a broader con- struction to the prohibitions of the Federal Constitution, whilst it is hope- less to expect the States will refrain from granting bank charters with au- thority to issue small notes, or that the States will concur in enlarging thi° BANKS TO BE II K P L A C E D , NOT C II U S H E D . G27 here because there has been no effort to substitute any safer or better device of credit. The people have been offered their choice between a currency of the precious metals and a paper currency, and they have deliberately chosen the latter, in the face of innumerable warnings from the opponents of bank?, both in and out of authority. The constant increase of banks proves, beyond question, that they are regarded by the people at largo as an advantage, if not a necessity. The only way to check the multiplication of banks in this country, or to check their operations, is to replace them by something better, or to furnish the facilities they afford, without the mischiefs or hazards. To propose a currency of the precious metals, which has been persistently rejected, as a remedy for the evils of banking, is not only inconsiderate, but absurd. The men of this day and country cannot be induced to go back two hundred years to a system long abandoned, and now impossible; they would endure quadruple the evils and vexations suffered from banks, before they could be brought to encounter the ex- constitutional prohibition in respect to bills of credit, so as to prohibit this power to banks. The same local and individual interests that induce the granting of bank charters with this privilege, would induce the Legislatures of the States to refuse to Congress the power of prohibiting the use and cir- culation of bank-notes. The thirteen hundred banks now in cxi^tenee under State charters, and the circulation of over §200,000,000 of bank-notes as moiicj, in constant competition with tlie cc)nstitutional currenc}', attest the magnitude of the evil, and justify the worst apprehensions for the future. The gradual increase of banks, banking capital, and bank-note circulation, calls for repressive action under appropriate State legislation. AVhcn theso thirteen hundred banks shall be increased to some two, three, four or fivo thousand, it may be feared their aggregate power will not be easily {)vcr- cotne until a suspension of specie payments, anil universal bankruptcy, shall call for a suppression of the evil, and a restoration of the constitutional cur- rency. If the States shall continue the charter and multiplication of banks witli authority to issue and circulate notes as money, and fail to apply any adequate remedy to the increasing evil, and also fail to invest Oongrcss with the necessary power to prohibit the same. Congress may be ju.stifioil in the exercise of the power to levy an excise on them, and thus render the authority to issue and circulate them valueless. — Report of Mr. (Jutltric, Sccrdari/ of (he Treaauri/, December od, LSoo, pages 22-3. 628 TREASURY NOTES A CURRENCY. pcnse, tlie risks and slow movements of an exclusively metallic currency. When the banking system of this country, the power and efficacy of which for public advantage cannot be denied, Avhatever may be its equally undeniable abuses and perversions, is to be superseded, whether for the special benefit of the public trea- sury, or from commercial considerations, the inquiry must be not how to introduce coins, but how to find a substitute for banks, or how to secure the facilities of banking without its mis- chiefs. The solution of this problem has made little progress, because the discussion has been too much confined to the arena of party politics. On the one hand, the effort has been to force the banks upon the public just as they are; and on the other, the effort has been to reject them altogether, without a substitute. The parties to this discussion have elicited no truth, and set- tled no principles. The people, however, have not stood still in the meantime, but, finding the immense power afforded by banks, they have multiplied them in a rapid ratio, although no progress was making in the solution of the problem involved. We entertain no doubt that a sound financial system for the United States can be successfully constructed upon the act of August, 1846, establishing the Independent Treasury. The public creditors should be offered their choice of payment in coins or paper, as that act contemplates ; and this offer should not be a mockery ; the proffered treasury notes should be issued in such denominations as would make them a positive advantage and convenience to the public. They are issued, in Prussia, as low as five dollars, much to the satisfaction of the people not only of Prussia, but of other German States in which they cir- culate. There is no solid financial objection to issuing treasury notes, in the United States, as low as ten dollars, if such an issue were desired by the people, and of course none to the issue of other and higher denominations, to which they are accus- tomed. Treasury notes payable on demand should, doubtless, be issued with great precautions, and upon a system which would ensure their punctual redemption at all the offices of the trea- sury. They would not be payable with interest, because they TREASURY NOTES UPON INTER K S T . 629 ■would be issued for circulation and for public convenience ; and all the advantage the government ^vould derive from this circu- lation would go, in the first place, to meet the expense of the issue ; and in the next, to the public benefit, and to the allevia- tion of the burdens of taxation. The treasury, then, would receive only gold or silver coin, or its own notes, for all dues to the government ; and would pay all creditors either in coins, or in notes, as they preferred. "When the government issued a treasury note in payment, it would pay one debt by contracting another ; when it received one of its notes for customs or lands into the treasury, a debt would be paid to it, and it would be acquitted of a debt. Treasury notes returned extinguish an equal amount of notes issued. The whole incoming revenue would be a fund constantly applied to the redemption of the treasury notes, a demand for which could not subside so long as there were debts due to the treasury. An issue of this kind should be kept strictly within the amount of probable available revenue ; and then, if presented for the specie, the same amount of the revenue would become payable in specie. The treasury would be obliged skilfully to adjust its issues, and the distribution of its funds, so as to be prepared not only for the regular progress of its business, but for emergencies. To enable such a system to work well, and attain its legitimate growth, it should have assistance like that furnished in England by the Exchequer bills. This would be furnished by treasury notes of $100, $500, and $1000, bearing daily interest, issued in an acceptable form, payable in six, eight or twelve months. These should be accessible, at all the offices of the treasury, in such sums as gradually to attract a class of lenders wiio would iuibitu- ally depend on them for temporary investment. By punctual payment of these securities at maturity, by keeping uj) the sup- ply, the number of competitors for them would constantly in- crease ; and a regular as well as growing demand for them could be established, which would place at the disposition of tho government, upon emergency, almost any desired sum. Tho constant supply of money which would thus be poured into tho treasury in specie, would furnish an un failing resource in every 630 FRENCH LOANS OF 183 4, 1855. locality for the redemption of sucli of the small treasury notes as might be presented for payment in coin. The effect of thus opening a communication between the government and lenders of money, by a security adapted to tbeir wishes, and constantly renewed, so as to give all an opportunity, can only be appre- ciated by those who have studied the English system of Exche- quer bills in that aspect, or the French system as it is now con- nected with the domestic exchanges. The last French loans furnish an illustration : ' — Loan of 1854. Loan, .Tan. 1855. Loan, July, 1855. Francs. Francs. Francs. Amount asked by government 250,000,000 500,000,000 750,000,000 "■ of the sums ofteretl 407,000,000 2,175,000,000 3,653,000,000 " offered in Paris, and from other ) ' \ 214,000,000 1,398,000,000 2,534,000,000 countries J " offered in the departments 253,000,000 777,000,000 1,119,000,000 Whole number of subscribers 98,000 177,000 317,000 Subscribers at Paris, and in other countries. 26,000 61,000 80,000 Subscribers in the departments 72,000 126,000 237,000 Upon the occasion of these three loans, the people out of Paris tendered more than the whole amount required by the government. The offering for these loans astonished all Europe. It was made abundantly clear, that the government of France was not de- pendent upon the capitalists of Paris, of England, of Holland, Belgium or Germany, for loans even of this great magnitude. The second loan of 1855, for over $100,000,000, attracted no less than 2-37,000 bidders in the heart of France, without including Paris. This extraordinary and prompt liberality was almost wholly owing to the relations maintained by the receivers- general of the depai'tments with the men of business. More than 200,000 men were found ready to assist the treasury which had favored them. Those who had money to lend were generally known to these receivers and their officers. The ultimate power of a treasury, thus conducted, is beyond estimate ; but it is a power which would vanish at once, if abused. It is a power Avhich ought to exist in every nation, because it can be so exer- cised as greatly to alleviate the burdens of taxation, and prove a ready resource in cases of financial embarrassment. ' Annuaire de I'Economie Politique, 185G, page 471. A BOARD OF T II E A S U R K R S . 631 If it be objected, that all this involves dangerous abuses, great complications, and subsequent disasters, we reply that the present system involves greater mischiefs and disorders, and final disasters far greater, because the immediate causes are less visible. No system of national finance can be complete without some complication ; but there is skill and ability enough in this country to surmount all this diiliculty. It should not be over- looked, however, that our national system should be constructed with a view to the tendencies of the national mind, and the busi- ness habits of the people ; it will then be not only more popular, but find the most skilful conductors. In the proposed system, there arc special features which make wise provisions neces- sar}^ the administration of which would require special skill and experience in such matters ; of these requisites, and the needful integrity, it is to be hoped the country is not deemed to be desti- tute. The Secretary of the Treasury, the Treasurer of the United States, the Directors of the mints, and all the assistant treasurers, might, ex officio, be formed into a board to which this whole system could, under a well-devised plan, be safely en- trusted. To remove so important and delicate a task from the arena of politics, the members of this board should hold their offices for a fixed period, and be then ineligible ; one-fourth of the board should go out every year. It is very true that, as the people would prefer this cur- rency not only to bank-notes, but to gold or silver, a much larfT^er amount could be thrown at once into circulation than would be expedient. To determine the proper amount to be issued would, from the beginning, be a serious question ; but, grave as the mistakes which have been committed in this respect, there are principles which would safely guide even governments in issuing notes payable on demand. The banks of circulation have been recommended to keep one-third of the amount of their issues in specie as a sufficient protection. This never deserved to be called a rule, or a principle. It is not even a reasonable conjecture. The true principle of such circulation is, that it should be returned by the debtors at a rate cqinil to that at which it is issued. The debtors of a nation, or a bank, are its 632 PRINCIPLES OF A TREASURY ISSUE. proper agents of redemption. If a bank issues notes payable on demand, which the process of paying debts at the bank does not return as rapidly as they are sent forth, it must eventually be called upon to pay them in specie at a time when it may be in- convenient or impossible. The debts due to a bank should absorb all its circulation, or return some currency that would pay it ; whenever this rule is violated, there is danger. The banks incur this danger habitually by discounting paper at the average time of two months, and giving their own notes payable on demand. They stand the hazard of the two months, even if the return current should finally be of the same volume as the one outward. Under this rule, they can never be safe, and people can never feel that they are safe. The rule by which a government may issue paper, is the rate of the receipt of the revenue. The payments into the treasury should return all the notes issued, or the gold or silver that would redeem them. The amount issued should be kept so far within the receipt of the revenue, that no probable deficiency of the income can ever disturb the process of redemption. There will be no difficulty in providing specie to pay all that could be demanded under the exceptions to this rule. In the case of a public treasury issuing notes payable on de- mand, it may occur that, being everywhere acceptable, and having a wide range of circulation, they would remain in the hands of the public, and thus leave the treasury to an increasing use of the precious metals, or to the issue of a larger proportion of treasury bills to meet the constantly increasing demand for them on the part of the public creditors. If this demand were complied with, the amount in circulation would soon run up to a large sum, and they might be thrown back on the treasury at a very inconvenient time. This difficulty would have to be met, for the issues of a treasury may circulate far too widely to be always wuthin the reach of those who would pay duties, or pay for land. As a means of overcoming this, treasury notes might be issued payable within six months on demand, and after that time payable with interest on such days as the government might appoint, but receivable at all times for dues at the trea- TREASURY NOTES FOR I \ V E S T M E N T . G33 sury. No accumulation beyond six niontlis could then be brouglu suddenly upon the treasury, and no loss could accrue to the holder, for his note Avould bear interest from the time it ceased to be payable on demand ; and both banks and individuals all over the country would gladly take them as an invosiment. These notes, however, should be all paid off within the year ; of which payment, day and place, the holders should be duly noti- fied in the public journals. An issue of treasury notes would, upon this plan, in a few years reach the sum of at least §100,000,000, and displace nearly that amount of bank-notes, by furnishing a medium which would be equally good in every part of the country. This is the best mode of reducing the circulation of bank-notes, and limiting their power ; it is only by furnishing something better — a cur- rency more convenient, more acceptable throughout our whole territory, and more reliable — that people can be induced to forego the benefits of the banking system. The use of a bank currency is so rooted in the habits and usages of the people of the United States, that nothing can eradicate it but a better paper currency. They will give up their reliance on banks just in proportion as something else, as consonant with their modes of business, and more safe, is offered as a sub^ititute. The issue of treasury notes for circulation, and to be taken at the option of the public creditors, would be incomplete in another respect, as a measure of national finance, without an issue of larger denominations, bearing interest, for the advantage of those who desire to make investments in government securities. The people should not only have an opportunity of lending to the government — they should be accustomed to it. Financial skill and experience, and the combined knowledge of the various treasurers, could alone tell what amount of these treasury notes, bearing interest from date, should be issued. It should be large enough to attract special attention throughout the country, for they should be made accessible in as many places as practi- cable ; it should also be great enough to supply all, or a con- siderable proportion, of those who desire this kind of security. This demand wotild be different from that which exists for 634 TREASURY TO HOLD RESERVE OF SPECIE. Exchequer bills in Great Britain ; there it has a larger scope, because the amount required is greater, and because the govern- ment receives, in exchange for Exchequer bills, both notes and checks on the Bank of England ; here the treasury would only receive its own notes, gold or silver coins, or bullion. Our treasury would become then, the reservoir of all the s^oare bullion and coins in the country. Now, as soon as the precious metals become abundant, they are shipped abroad, where there is always debt to pay. The banks, too, would promptly avail themselves of a facility affording them not only interest for specie they could spare, but giving them a security which would command the specie in case of emergency. Now, they lose in- terest on all their reserve of gold or silver, and are of course tempted to make that reserve small ; the specie which is not immediately wanted now goes across the Atlantic, and cannot be recovered to meet an unexpected demand. If London, or Paris, or Hamburg, is in pressing need of a supply of the pre- cious metals, a few days only are needed to furnish them ; but we have no such convenient resource. The government here should keep that reserve, which neither banks nor individuals will be at the expense of maintaining. If the government here would but pay interest for the specie offered to it upon six or twelve months' treasury notes, an ample supply might be always on hand to aid the banks, or assist in regulating the currency. The issue of treasury notes upon interest here contemplated should be regarded as a purely financial operation, and bo under the direction of the Board of Treasurers. The money thus ad- vanceil to the government should not be the subject of appro- priation by Congress, or of draft by the Secretary of the Trea- sury, except under regulations, and to an extent, fixed by the Board. It should be an aid to the treasury, but should never be absorbed or broken down by it. No temporary Avants of the treasury should ever disturb the punctual discharge of treasury notes made payable at a day named. So long as this punctuality was observed, they would be sought for and would absorb large amounts of the smaller denominations made payable on demand. These two modes of issue would, with careful attention, work OFFICES — NEW YORK, W A S II I X G T X . C35 together like the wheels of a clock, and ultimately give the trea- sury great power for useful financial regulation in all that con- cerns the currency of the country — a power which would bp efficient in proportion as it could be skilfully and wisely exer- cised, and which would cease, if awkwardly or improperly employed. The effect of this would be, that the people of the United States would sustain an issue of small notes by the government, not bearing interest, which would much more than pay the interest of a large amount of the precious metals, kept in the treasury to support the currency, and strengthen the credit of the country and its institutions in those times of peril and diffi- culty which must be expected occasionairy in the complicated movements of industry, trade and credit. Two features should be prominent in the Independent Trea- sury, if amended in accordance with such or similar suggestions. The Assistant Treasurer of New York should have, under pro- per regulations and supervision, the charge of all the movements and distribution of the public moneys. This would be a respon- sible duty ; but it can be best understood, and best execute