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RATIONAL BANKING 
 
 VERSUS 
 
 BANK MONOPOLY. 
 
RATIONAL BANKING 
 
 (||f)e 'gfame&B for Repression in ©rct&e) 
 
 VERSUS 
 
 BANK MONOPOLY. 
 
 O. E. WESSLAU. 
 
 EDITED BY 
 
 BANCROFT COOKE. 
 
 LONDON: 
 
 ELLIOT STOCK, 62, PATERNOSTER ROW, E.C. 
 
 1887. 
 

 
 
 
 Digitized by the Internet Archive 
 in 2017 with funding from 
 
 University of Illinois Urbana-Champaign Alternates 
 
 
 https://archive.org/details/rationalbankingtOOwess 
 

 33 2.1 
 
 Wriv 
 
 CONTENTS. 
 
 PAGE 
 
 IV. 
 
 V. 
 
 THE ORIGIN, THE FUNCTION, AND THE PURPOSE OF 
 BANKING IN GENERAL - 
 THE DEVELOPMENT OF BANKING IN ENGLAND 
 ON SOME GENERALLY RECOGNISED EVIL CONSEQUENCES 
 OF THE BANK ACT OF 1844 
 EXCESSIVE USE OF THE VALUE MEASURER AS A 
 MEDIUM OF EXCHANGE, AND THE EVIL CONSE¬ 
 QUENCES THEREOF - 
 
 LABOUR AND CAPITAL SEVERED—USURY PROTECTED 
 AT THE EXPENSE OF LABOUR AND CAPITAL 
 FREE NOTES THE RATIONAL MEDIUM OF EXCHANGE - 
 THE EFFECT OF STATE SUPERVISION OVER NOTE ISSUING 
 OBJECTIONS TO FREE BANKING REFUTED 
 FORECAST OF RESULTS OF FREE BANKING IN ENGLAND 
 
 1 
 
 9 
 
 16 
 
 20 
 
 31 
 
 37 
 
 41 
 
 50 
 
 55 
 
 i 
 
 % 
 
 828359 
 
, 
 
 
 
 
 
PREFACE. 
 
 The endeavour to aid Mr. Wesslau in elaborating the 
 opinions which he has for years held on the subject of this 
 pamphlet has, after due investigation, convinced me of the 
 soundness of his theories, and of the importance of the re¬ 
 forms herein advocated. I trust that however startling the 
 conclusions may appear, an unbiased consideration of the 
 views enunciated may lead all who are interested in economic 
 questions to further the agitation of which this small 
 treatise is intended to be a forerunner. 
 
 The extension of the franchise and consequent transfer¬ 
 ence of governing power to the people has struck a fatal 
 blow at legislation in favour of class privileges and monopo¬ 
 lies. Much of the beneficent legislation of the last fifty 
 years has consisted in the abrogation of laws passed to pro¬ 
 tect the interests of the classes in whom the legislative 
 power was formerly vested. For many who have admitted 
 the right of the people to a just share of political power, the 
 growing strength of the democracy has created a fear lest a 
 counter demand should be made, resulting in one-sided 
 legislation of a socialistic nature, designed to gratify un¬ 
 reasonable claims of the masses, who, while conscious of 
 grievances, are ignorant alike of their precise nature and of 
 the true remedies which may and ought to be applied. To 
 militate against the growing tendency to look with favour 
 towards the adoption of communistic theories, it is necessary 
 to crown the progress made towards political equality and 
 freedom of trade by the abolition of all remaining legal 
 
Preface . 
 
 viii 
 
 inequalities and special monopolies, instead of legislating to 
 mitigate evils which are consequent on their existence. 
 
 The depression in trade has caused an outcry on the part 
 of labour against capital. It is obvious that the abundance 
 of capital seeking investment on the one hand, and the 
 large number of unemployed suffering from the want of 
 necessaries, which the co-operation of work and capital pro¬ 
 duce on the other, is an enigma which the theory of over¬ 
 production cannot explain. The civilized world suffers 
 from under-consumption and not from over-production. 
 The relative attitudes of capital and labour and their 
 apparent inability to fully co-operate to mutual advantage 
 would point to the conclusion that some artificial obstacle 
 to prosperity must exist. If it can be proved that deterrent 
 legislation is, as in the evil days of protective duties, again 
 responsible, the way may be opened to a new era of national 
 prosperity, to promote which should be the earnest aim 
 of all. 
 
 BANCROFT COOKE. 
 
 Rowantree, Birkenhead, 
 January 13 , 1887 . 
 
INTRODUCTION. 
 
 The great prosperity which resulted from the abolition of 
 the Corn Laws and Protection Duties in Great Britain ought 
 to have induced the nation to take further steps in the 
 same direction—viz., towards an entire Free Trade system. 
 But such has not been the case. We are proud of our so- 
 called Free Trade, and we seem determined not to re-intro¬ 
 duce the same economic follies, at least not in the same 
 shape ; but during the four decades which have elapsed since 
 the repeal of the Corn Laws we have advanced very little, if 
 at all, towards sound national economy. 
 
 The reason for this is that we have lost our faith in those 
 who should lead us on in economic progress—namely, the 
 political economists. 
 
 There are plenty of signs in the world that political 
 economy has lost whatever small influence it had on men’s 
 minds, both here and abroad. While professors are paid to 
 teach political economy at the universities, despots and 
 Parliaments legislate in many countries in direct opposition 
 to that science, not even heeding the fearful results they 
 produce by such legislation. 
 
 In Great Britain we introduce more and more State inter¬ 
 ference in our trades; anti-economic measures are eagerly 
 advocated and easily carried; all political parties favour, 
 to some extent, State socialism. Political economy is 
 nowhere, and has been nicknamed ‘ the dismal science ’ 
 According to popular writers and philanthropists who have 
 the confidence of the people, political economy has failed 
 to produce the promised prosperity. They say that it may 
 enrich the State, but while it tends to make the rich richer 
 it makes the poor poorer ; that its doctrines are unchristian, 
 not to say diabolic; that the survival of the fittest in the 
 vulgar tongue means something like ‘ the devil take the 
 hindmost;’ that applied to human beings this law causes 
 the most unfit men to survive—namely, the most greedy, 
 selfish, and cruel; that free demand and supply means 
 intense competition and mutual extermination; that the 
 
X 
 
 Introduction . 
 
 only remedies political economy proposes consist in miserly 
 saving, yet keener competition with foreigners, more 
 machinery, and checks on marriages; that the future which 
 it points to is dark in the extreme, etc. 
 
 As long as these accusations against political economy 
 are true, it is not surprising that people refuse to accept its 
 teachings. These would leave them the only choice 
 between the dreary, helpless, desperate state of things, and 
 the terribly distasteful remedy of complete socialism. Faith 
 in Providence and a high destiny for humanity prompt our 
 leading men to reject the conclusions of the economists, and 
 to hope for something better. Hence the upholding of our 
 free economic system against socialistic agitations on the 
 one hand, and, at the same time, fragmentary experiments 
 with State socialism on the other. 
 
 Dogmatizing in opposition to the nobler instincts of man 
 has in political economy, as in some other branches of 
 human knowledge, proved erroneous. Happily for humanity 
 the dismal theories of the economists will not stand the 
 tests of either logic or practical experience. The recognised 
 authorities in economy have started from the unwarranted 
 supposition that the laws of our country are now, with some 
 few unimportant exceptions, brought into harmony with 
 true economy, and that very little remains to be done in 
 the way of strictly political economic reforms; the dismal 
 theories are the outcome of the efforts of the economists to 
 reconcile the existence of a great number of evils, which 
 they do not perceive to be artificially produced, with their 
 own theories of the great leading feature in our modern civi¬ 
 lization—namely, division of labour. They have assumed 
 that the tremendous obstacle to the natural organization of 
 labour which monopoly in banking constitutes is a useful 
 arrangement, or at least an absolutely necessary evil. 
 
 The old fallacy, that banking should not be left free, has 
 prevailed against the important economic truth that bank¬ 
 ing, the chief medium of exchange, ought to be left 
 entirely free to regulate itself according to circumstances, 
 and that it can not be subjected to State interference with¬ 
 out the gravest consequences to the community. 
 
 Banking is, as we shall show in these chapters, the only 
 possible mechanism of general and free division of labour. 
 Restricted and vitiated banking therefore means restricted 
 exchanges, curtailed division of labour, reduced production, 
 insufficient consumption, reduced wealth, scarcity of work, 
 and despotism of capital. 
 
Introduction . 
 
 XI 
 
 It is therefore not surprising that writers who start with 
 the supposition that banking must not be free arrive at 
 very dismal conclusions, and that nations who believe 
 them have to go through dismal experiences. 
 
 Political economy, so far, has been an incomplete and in¬ 
 exact science, because the true theories of banking have 
 been unknown. It is therefore quite natural that some of 
 the conclusions of the economists may be wrong, while 
 others are perfectly true, and it would be illogical to reject 
 all indiscriminately. On the contrary, the fact that we 
 have benefited largely from following such teachings of the 
 economists as have stood the test of logical inquiry 
 should commend to us all clearly established economic 
 truths. When true and complete theories of banking have 
 superseded the vague authoritative dogmas which hitherto 
 have held their place, political economy will, we hope, 
 become the trusted guide of legislators. 
 
 Though all writers on banking we know are, with one 
 exception, opposed to Free Trade in banking, the general im¬ 
 pression which the careful student receives from the perusal 
 of their works is in favour of freedom. They all point to 
 dangers of free note-issuing, which even according to their 
 own reasoning appear impossible. Their unanimous praise 
 of the Scotch free banking, the only real experience the 
 world possesses of free banking, upsets their own theories. 
 Those authors who are aware of these contradictions try to 
 moderate their startling effect by attributing the extra¬ 
 ordinary success of the freedom in Scotland to specially 
 favourable circumstances which that country presented 
 during the 150 years the free system was in operation ; but 
 they do not perceive that these favourable circumstances 
 were results which followed, and always must follow, Free 
 Trade in banking. 
 
 Several of the best modern economists have either 
 plainly said or hinted that they were well aware of the fact 
 that the true theories of banking were not discovered. 
 Some, like M. Chevalier, leave the all important question of 
 free note-issuing open, simply stating the different theories 
 of the opposing economists. What John Stuart Mill writes 
 amounts to the same: he dismisses the problem with the 
 somewhat curious conclusion, that free note-issuing is very 
 good north of the Tweed, but very bad south of it. Mr. 
 Macleod concludes in favour of the present English system, 
 but he starts from strange premises. He, for instance, con¬ 
 fuses the economic term ‘ capital ’ with the commercial term 
 
Xll 
 
 Introduction. 
 
 ‘ capital/ and lays down the startling dogma that bankers 
 create capital. If we consider that in economy capital 
 means those material results of previous labour which are 
 consumed in a production, it is not surprising that Mr. 
 Macleod should conclude in favour of monopoly. 
 
 Of all economists we know, the Hungarian writer, Horn, 
 who published in Paris, has the clearest and correctest ideas 
 of banking. In his clever book, ‘ La liberte des Banques/ he 
 throws a great light on the subject. Unfortunately he 
 makes one mistake which has done much to prevent his 
 theories from being accepted. He recommends plurality 
 of State supervised banks where prejudice prohibits entirely 
 free banking. This mistake he made probably because he 
 regarded the intelligently managed ‘banqueirs/ establish¬ 
 ments in France as the general type of private banks, and 
 did not foresee that following his advice would produce 
 such paper-money-manufacturing usury institutions as the 
 American and Swedish banks. 
 
 The objection which might be raised against our theories, 
 that they are more or less in opposition to all writers on 
 banking, loses its importance on examination. 
 
 Now there exist in England two influential classes of 
 philanthropic politicians—viz., those who favour benevolent 
 State socialism, and those who uphold rigid political 
 economy, to both of whom this small work more especially 
 appeals. We feared that if it be known to the former that 
 it is written on the lines of strict political economy, and to 
 the latter that we are in opposition to their favourite 
 authorities, neither of them will give our theories the 
 attention we think they deserve. We have therefore 
 been anxious to point out in this short introduction, to the 
 benevolent State socialists, that the teaching of true political 
 economy is not dismal, but that it holds out the brightest 
 prospects to humanity: and to the advocates of political 
 economy, that we differ from their authorities only in points 
 where they differ among themselves, where they are vague, 
 illogical, and in opposition to all practical experience. 
 
 If our theories of banking can establish a hearty co¬ 
 operation between these two classes of philanthropists, now 
 opposing each other, its ultimate object, the adoption of 
 rational banking throughout the Empire, will not be far off. 
 
RATIONAL BANKING 
 
 VERSUS 
 
 BANK MONOPOLY. 
 
 -x><- 
 
 I. 
 
 THE ORIGIN, THE FUNCTION, AND THE PURPOSE OF BANKING! 
 
 IN GENERAL. 
 
 To form a correct idea of the irresistible and overpowering* 
 influence for good or evil which the banking of a nation 
 exercises over its prosperity, political power, intelligence, 
 and morality, we must have a clear knowledge of the cir¬ 
 cumstances which necessitated its origin, of its function in 
 the great general co-operation, and especially of the ultimate 
 aim and end of a good banking system. 
 
 Even the best English books on banking, though instruc¬ 
 tive and technically useful, quite fail to afford this know¬ 
 ledge, and the greatest confusion prevails both in men’s 
 minds and in books respecting the economical theories of 
 banking. 
 
 We must therefore begin with first principles if we wish 
 to be generally understood. 
 
 We shall not begin with the well-known benches of the 
 Lombard money-changers, from which the word ‘ bank ’ is. 
 supposed to be derived, nor describe all the blunders which 
 have been constantly perpetrated in all countries in con¬ 
 nection with coin and banking, from the times of the iron 
 money of the Spartans to the new German Reichsbank. 
 All this would not further our object, nor free the reader’s 
 mind from popular prejudices. Also there are many reliable 
 works on such subjects already extant, and want of space 
 compels brevity of treatment. 
 
 1 
 
2 
 
 Rational Banking versus Bank Monopoly . 
 
 But it is necessary to describe briefly how the true economic 
 function of banking, unrecognised or misunderstood, has 
 steadily progressed, notwithstanding all the obstacles which 
 foolish laws, absurd theories, and strong prejudices have 
 thrown in its way, and how we have become possessed of at 
 least some few good methods without understanding the 
 theories of banking. Banking, like most business occupa¬ 
 tions and institutions, owes its origin to the instinct of self- 
 preservation. Through this instinct the idea of personal 
 property evolved very early. Private property once recog¬ 
 nised, common prudence suggested accumulation. Man 
 began to labour to meet not only daily needs, but also 
 future wants. The inducement to labour was strengthened, 
 its value better understood, and how to economise his labour 
 became the chief care of man. Reason and experience 
 pointed to the fact that when labour was divided between 
 two or more workers, it became more productive and at the 
 same time less oppressive than when carried on single- 
 handed. Thus division of labour, or co-operation, was, as 
 it has remained, the fundamental principle of all society. 
 
 We cannot dwell as much on the great importance of 
 division of labour as we should wish; but we may perhaps 
 take for granted that it is generally understood, that without 
 co-operation man would still be in a savage state, and that 
 all wealth and material progress are due to division of 
 labour, either voluntary or compulsory. We shall merely 
 give the outlines of the arguments that lead to this con¬ 
 clusion. 
 
 The earth could produce many thousand times more 
 of the things that man requires for his wants, comfort, 
 and enjoyment than are used. A wise Providence has 
 ordained that none of these products, with perhaps the 
 exception of water, should be obtainable or applicable to 
 man’s want without labour of some kind. Therefore wealth 
 is originally only obtainable through labour. The better 
 the labour of a community is organized, the more wealthy 
 will that community become; and as we can do nothing to 
 increase Nature’s store, of which there always is enough, it 
 is perfectly correct to say that accumulated labour is wealth. 
 Now the more labour is divided the better organized it is, 
 and the more productive and easy it becomes. Every 
 article of present daily use is an example of the facility with 
 which the most complicated labour is accomplished, when 
 thousands work for each individual and each individual 
 works for many thousands. 
 
Rational Banking versus Bank Monopoly . 
 
 3 
 
 Division of labour probably first existed between the 
 members of each family, the men taking such work as 
 suited them best, and assigning special work to the women, 
 sharing the products. When division of labour was extended 
 beyond the family circle, and when patriarchal authority no 
 longer presided over the contribution of labour and division 
 of products, co-operation took necessarily the form of 
 exchange of products. The hunter hunted for the fisher¬ 
 man who fished for the hunter, and they exchanged 
 products. 
 
 The great advantages of co-operation by exchange of 
 products induced each family to devote its members to 
 special occupations, according to aptitude, property, or other 
 circumstances. Thus trades and professions originated. 
 
 All exchange of products and services were no doubt first 
 effected through direct barter. This kind of traffic had 
 many evident inconveniences, and so indirect exchanges 
 were introduced. Instead of exchanging fish for grain or 
 fruit for tools, goods were first exchanged for some durable 
 article in general demand, which was stored and passed in 
 exchange when the products of others were desired. This 
 originated buying and selling, and gave another considerable 
 impetus to co-operation. 
 
 Several kinds of goods, according to time and place, have 
 been used as mediums of exchange, as we use coin. What¬ 
 ever medium is used for this purpose naturally becomes the 
 measure of value. Gold, silver, and copper were used thus 
 long before they were coined, as they had all the requisite 
 qualities : they were in general demand, were very durable, 
 could be divided to any extent without losing their value, etc. 
 
 As these metals easily received and retained impressions, 
 it was found convenient to stamp on each piece, first its 
 weight, and then a name signifying its alloy and weight. 
 Thus coin came into existence. 
 
 So far we have reviewed the progress of banking only on 
 the lines of previous writers on the subject, but we can 
 follow them no further. Even here, at the first mention of 
 coin, they, with very few exceptions, make a mistake, or 
 rather accept a fallacy to which they afterwards adhere, 
 and which, leading them into confusion and to conclusions 
 which are opposed to all sound economy and commonsense, 
 adds greatly to the difficulty of their task. 
 
 This mistake is the use of such words as ‘ money ’ and 
 4 currency/ These words should never be used by econo¬ 
 mists, because in reality there is nothing specially corre- 
 
 1—2 
 
4 
 
 Rational Banking versus Bank Monopoly. 
 
 sponding to them. They have no definite meaning, and are 
 applied to a great variety of things of most different natures. 
 In political economy, as in other sciences, it is absolutely 
 essential to avoid using words of vague and varying meaning. 
 If we were to write a treatise on gas, and to call all gases 
 vapour instead of using their real names, the treatise would 
 be absurd and incomprehensible. 
 
 Thus 'money 5 may mean gold, silver, copper, coin, 
 Government notes, the notes of private banks, free notes, 
 superintended notes, cheques, drafts, Consols, bonds, shares, 
 wealth, riches, capital, credit, etc. 
 
 ‘ Currency 5 may mean good gold coin or the most 
 depreciated private note, Government bills or postage- 
 stamps, international credit or I.O.U/s. 
 
 Things so widely different cannot be treated under one 
 head, and we contend that whichever is spoken of should 
 be mentioned by its name. A collective name for many 
 things may sometimes be convenient, but the words ‘ money 5 
 and ‘ currency 5 are so intimately and specially associated 
 with things of opposite nature that they cannot be used 
 without mental confusion. If their use could be discon¬ 
 tinued in all economical and financial discussions, political 
 economy, and even theories of banking, would cease to be a 
 puzzle to many sensible people. 
 
 Most writers on banking have called coin money or 
 currency, and then laboriously attempted to find or create 
 theories which would hold good not only for coin, but for 
 many other special meanings of these general terms. They 
 seem to apprehend nothing but the coin which they call 
 money. To many of them 'banking 5 is only dealing, ware¬ 
 housing, and lending money; ‘ interest 5 is the price and 
 value of money; ‘ want of capital 5 is dearth of money, etc. 
 Their explanation of the different stages of the development 
 of banking is therefore more in harmony with the ideas of 
 the people who at various periods initiated them, than with 
 real economical facts. 
 
 When coin came into general use another considerable 
 extension was given to co-operation. Exchanges were 
 rendered easy under the form of buying and selling. A 
 few men began to occupy themselves entirely with assisting 
 the public in exchanges, and became merchants and shop¬ 
 keepers. 
 
 From the first coin had two functions, that of an article 
 of exchange, and that of a measurer of value. The latter is, 
 and probably ever was, the more important, as only the 
 
Rational Banking versus Bank Monopoly. 
 
 5 
 
 smaller purchases and transactions were, as they are now, 
 made with coin. Direct exchange of goods for goods did 
 not cease because coin had come into use. Large transac¬ 
 tions were carried on in this way still, the only difference 
 being that the goods exchanged were ‘ valued ’ in coin. 
 Wholesale business is carried on in this way yet between 
 wholesale firms, England and her Colonies, and between 
 merchants of different countries. 
 
 But before the wholesale exchange of goods could be 
 largely developed, a new medium of exchange had to be 
 introduced, and this was ‘ credit .’ Buyers and sellers could 
 not always meet each other, nor bring their goods simul¬ 
 taneously, especially when living far apart; and it was both 
 dangerous and expensive to send a messenger with coin 
 each time goods were wanted. It was obviously convenient 
 to send the goods upon trust until returns of other goods 
 were made, and then to pay the difference in coin. Then 
 it was found that the balance could be kept and booked 
 from one transaction to another, and thus credit and book¬ 
 keeping came into existence. 
 
 From these innovations the great advantage at once 
 resulted that large transactions could be carried on with 
 little or no coin, and yet calculated with as great a nicety 
 as though effected with coin ; or, in other words, co-operation 
 became much more easy, not only between neighbours, but 
 between all civilized people all over the world. It will be 
 perfectly clear that co-operation could not have largely 
 developed without credit and with coin as the only medium 
 of exchange, when the following evident economic truth is 
 thoroughly grasped: 
 
 Gold, silver , or coin imported into a normal market to 
 be used as a medium of exchange will not remain , but will 
 leave that market again if all else remains unchanged. 
 
 If we suppose a market so situated that extra coin im¬ 
 ported to be used as a medium of exchange could not leave, 
 what would happen ? The coin would go down in value in 
 exact proportion to the imported quantity, and being the 
 measurer of value, this sinking of the value of coin would 
 manifest itself in a rise of the price of goods in general. 
 Consequently, if the quantity of coin were doubled the 
 price of goods would be doubled, and the larger quantity of 
 coin would facilitate the exchange of exactly as much 
 produce as the smaller, and not more. In reality, no 
 market can be found from which coin cannot be exported. 
 When extra coin is forcibly introduced into a market, a fall 
 
6 
 
 Rational Banking versus Bank Monopoly . 
 
 in its value, or, which is the same, a general rise in the 
 price of goods first follows, but this soon causes influx of 
 goods from abroad and re-export of the imported gold. 
 
 The impossibility of increasing the circulating coin per¬ 
 manently by importing it is a most important fact generally 
 overlooked by people who theorize on banking, and always 
 by those who make bank laws. Were it but better appre¬ 
 ciated, we should hear less about loans from England to 
 improve the position of the ryots in India and fellahs in 
 Egypt, etc., as such loans will simply raise the cost of pro¬ 
 duction for these poor people, without procuring any higher 
 price for their goods produced for export. Such loans 
 always have and always will ruin those countries which 
 receive them. 
 
 The very limited use coin can be put to, and the fact that 
 no market can hold more than is natural to it, which, com¬ 
 pared with the business transacted, is a very small quantity, 
 proves the immense importance of credit. 
 
 When once introduced, credit was soon applied to all 
 kinds of exchanges, even such as were originally effected 
 with coin. The buyers, though solvent, could not always 
 command the necessary amount of coin to pay cash for their 
 purchases; they obtained credit from the seller and de¬ 
 ferred the payment of the coin. Such credit was a great 
 advantage to the purchaser, who thereby increased his 
 working capital. But it was a sacrifice on the part of the 
 seller, and also a risk. For this he recouped himself by 
 charging interest or a higher price for the goods as compen¬ 
 sation for the loan of his capital. 
 
 As the advantages of increasing capital by goods obtained 
 on credit and by loans were great enough to admit of charging 
 a high interest, loans of capital in the shape of coin were 
 resorted to. 
 
 The seller could not always give the buyer the credit he 
 required, not knowing him, or not being able to spare the 
 capital. If the buyer had ever so good a reputation for 
 solvency, but was short of coin, he could generally find no 
 other way to complete his transaction than by borrowing' 
 the requisite capital in the shape of coin from some one 
 who had a sufficiency. This service could not be expected 
 without compensation, and interest was paid upon the 
 borrowed capital. Lending coin against interest, or interest 
 and commission, became a trade, and initiated banking. 
 
 The first bankers probably only lent their own coin ; but 
 gradually they began to receive such unemployed capital in 
 
Rational Banking versus Bank Monopoly. 
 
 7 
 
 the shape of coin as others did not wish to keep by them. 
 The coin-lender or banker lent this capital to others, charging 
 them a higher interest than he himself paid. This was the 
 first stage of the development of banking. 
 
 Thus primitive banking took the form of coin-lending* 
 and whilst apparently extending the use of coin it actually 
 laid the foundation of a new medium of co-operation, which* 
 whilst retaining the coin as measurer of value, was to super¬ 
 sede it as a medium of exchange to a very great extent— 
 in London, for example, of about 98 per cent, in all wholesale 
 transactions. Nevertheless, the opinion has unfortunately 
 prevailed that banking is ‘ dealing in coin / or, to use the 
 vague popular expression, ‘ money / 
 
 Dealing in coin is not the true function of banking, but is 
 simply one of the means it uses to fulfil the all-important 
 part it takes in the great division of labour which we call 
 civilization. To prove this, it is only necessary to briefly 
 summarise the preceding sketch of the development of 
 banking. 
 
 We have seen that co-operation was the first source of 
 wealth, and that in our modern society it is so more than 
 ever, and to such an extent that wealth and co-operation 
 are, economically speaking, almost synonymous. Exchange 
 of products was the only possible way in which co-operation 
 could be carried on under a system of individual freedom. 
 As direct exchanges were necessarily limited, indirect 
 exchanges became the next step forward in the development 
 of co-operation. Coin was invented, but its use as a medium 
 of exchange being strictly limited in consequence of its 
 being the value measurer, credit became necessary. Direct 
 credit met with the same insurmountable difficulties as 
 direct exchanges, and indirect credit became indispensable 
 for the further development of co-operation, and indirect 
 credit could not be carried on without banking. 
 
 Banking, consequently, is the chief mechanism of co¬ 
 operation, the indispensable medium of exchange for all the 
 great business in a civilized country, a final squarer of 
 accounts, and an institution which enables all to take part 
 in the general co-operation of the world, keeping account of 
 their contributions, and securing to them a share in the 
 products. 
 
 If it is clear that credit cannot develop without a banking 
 system, nor exchange without credit, nor division of labour 
 without exchange, then obviously the function of banking 
 is to facilitate co-operation, and coin-lending is only one of 
 the means it uses for that great purpose. 
 
S Rational Banking versus Bank Monopoly . 
 
 We can easily conceive a banking system without coin or 
 •currency lending, nay, without coin altogether. Suppose 
 •our economic development had taken another direction, 
 and that a community existed without coin. A central office 
 for the squaring of the co-operation, with a due respect for 
 private property, might be established in the following way : 
 Cheque-books could be given to each person in proportion 
 to his means. For each exchange or purchase the buyer could 
 give a cheque to the seller for the amount of gold, or what¬ 
 ever be the value measurer of the country, agreed to as the 
 price. The seller could transfer the cheque to some one 
 else, in paying for his own purchase, endorsing it either to 
 order or bearer ; or he could take it to the central office and 
 have it put to his credit, and make his payment by drawing 
 u cheque on the central office. 
 
 All transactions could thus be carried on by debiting the 
 buyers and crediting the sellers. This system has actually 
 been put into practice by banks. The Mark Banco of 
 Hamburgh was never coined, and was nevertheless, or 
 rather in consequence thereof,, the safe value measurer for 
 centuries throughout North-Eastern Europe. Hereafter we 
 shall see that from force of circumstances our own banking 
 has developed in this direction, and that the London 
 Clearing House is not far different from such a central 
 office of co-operation as we have here described. 
 
 The foregoing explanation will enable us to assume as 
 axioms: 
 
 First. That banking was forced into existence as the in¬ 
 dispensable medium of extending co-operation co-existent 
 with the right of property and individual liberty. 
 
 Secondly. That the function of true banking is not to 
 deal in and warehouse coin, but to facilitate co-operation in 
 production and distribution. 
 
 Thirdly. That a banking system is good when it supplies 
 mediums of exchange equal to the demand of all economi¬ 
 cally sound business, with the smallest possible increase in 
 the use of the value measurer as medium of exchange. 
 
Rational Banking versus Bank Monopoly . 
 
 9 
 
 II. 
 
 THE DEVELOPMENT OF BANKING IN ENGLAND. 
 
 The preceding exposition of the nature and object of 
 banking will, we trust, make quite intelligible the following 
 short summary of the different stages of the development 
 of banking in England, and assist us in forming an idea of 
 the disastrous effects of the Bank Act of 1844. 
 
 The first general precursors of bank-notes, viz., bank 
 drafts, were a considerable step forward. They were in¬ 
 vented to avoid the necessity of carrying large quantities of 
 coin—an inconvenient and dangerous practice. 
 
 The facility with which these drafts circulated, and their' 
 convenience in squaring a number of exchanges, greatly 
 promoted their use. But in England the bank-note origin¬ 
 ated with the receipts of the goldsmiths of London for coin 
 deposited. The holders of the receipts, when they wanted 
 to dispose of the deposited amounts, found it convenient to 
 transfer the receipt instead of drawing the coin, and large 
 amounts of coin would therefore have remained for long 
 periods in the strong-boxes of the goldsmiths, had they 
 not discovered it to be both safe and profitable to lend them 
 to others. 
 
 When the goldsmiths found that their receipts or notes 
 circulated readily, and came for payment in quantities, and 
 at intervals fairly regular and calculable, they began to 
 lend fictitious receipts payable to bearer along with the 
 coin, and increased thereby their profits. 
 
 There was no law to restrict their business in any way. 
 It was to their own advantage to be prudent and honest. 
 Some failures seem to have taken place among the gold¬ 
 smiths, but they could not have been frequent or very 
 disastrous, as they did not affect the credit of that body in 
 general. 
 
 These primitive bankers seem to have been popular and 
 generally sought by the business-men of London, to whom 
 they were very.helpful. 
 
 Their real economic importance was, however, not under¬ 
 stood. They seemed only useful as dealers in coin, whilst, 
 in fact, the new and improved medium they offered for 
 exchanges caused business to develop rapidly, and to this 
 
10 Rational Banking versus Bank Monopoly. 
 
 increased co-operation the goldsmith became indispensable. 
 All the business which passed through their books would 
 have had to cease if they had been repressed without being 
 replaced, because it would have been impossible to work it 
 with coin. The large quantity of coin would have raised 
 prices too much. 
 
 If the goldsmiths did not wittingly exercise prudence and 
 moderation in the issue of their notes, their lousiness soon 
 compelled them to cultivate these virtues. When they 
 found their notes return in quicker ratio than they issued 
 them, they had to stop or curtail the issue, or all their coin 
 would have been cleared out, which would have meant to 
 them the loss of their credit, honour, and position, and 
 rendered any further banking business impossible. 
 
 The economic explanation of the demand for the gold¬ 
 smiths’ notes and bank-notes in general is this : The notes, 
 though requiring no more financial experience or education 
 in the handling than coin, and being used by the public as 
 such, were in reality nothing more than a medium for the 
 direct exchange of products and services, just as a great 
 general ledger might have been. They circulated in pro¬ 
 portion to the business, and did not send up prices as a 
 corresponding imported quantity of gold would have done. 
 
 As circulating notes were being used as coin, the public 
 soon recognised them as such, and called them 'paper- 
 money.’ The business of circulating notes was therefore 
 considered equivalent to money coining. 
 
 Now the function of coining had been regarded from 
 olden times as a princely privilege all over Europe, for no 
 other reason than that princes claimed it as such. The 
 same opinion prevails yet, but without any other reason 
 than the convenience of such an arrangement.- History 
 furnishes many reasons why kings and Governments should 
 not have anything to do with coining, for they have fear¬ 
 fully abused and mismanaged it. Base coinage was-for the 
 rulers a source of revenue, but for their subjects a source 
 of much trouble. The base coinage of the German Princes 
 was carried to such an extent that it was found expedient 
 not to coin the mark-banco of Hamburg at all, in order to 
 avoid its deterioration. 
 
 It is, however, of little moment who presides at the coin¬ 
 ing ; we merely wish to point out that coining being con¬ 
 sidered a royal privilege, it seemed natural that Government 
 should interfere with what was looked upon as paper- 
 coinage, and therefore it usurped the rights of the gold- 
 
Oy </ 
 
 Rational Banking versus Bank Monopoly . 11 
 
 smiths. To this shallow view of things, coupled with the 
 desire of the Government for a convenient means of raising 
 capital, the world owes most of the State banks, and we our 
 Bank Act. 
 
 Prejudice had its full swing. There was no knowledge 
 of political economy to suggest any objection. A natural 
 commercial liberty, which had not been misused, was sup¬ 
 pressed quite unnecessarily, and only to gratify the prejudice 
 against free note-issuing. 
 
 The greater number of note-issuing State banks have, 
 like the Bank of England, their issue determined on a most 
 extraordinary principle. The debt of the State to the bank, 
 either by direct loan, or through the bank holding Govern¬ 
 ment bonds, was, and still is, in many cases, at once the 
 basis, regulator of, and security for, the notes. It is sur¬ 
 prising that such a system should have been adopted at a 
 time when notes were looked upon as ‘ money.’ 
 
 This principle, had it been possible to carry it out to the 
 full, would have been very convenient for prodigal Govern¬ 
 ments. According to it, the more the nation incurred debt 
 the more it enriched itself; the more money it spent the 
 more it had left. When put to a severe test it has led to 
 depreciation of the notes, and suspension of gold payment. 
 
 It matters very little what kind of security is held for 
 State notes, it is the clumsy interference of Government 
 with banking at all which constitutes the great evil. 
 
 We have pointed out this absurdity only to show the 
 total absence of principle and common sense in the most 
 important of our economic laws. 
 
 The establishing of the Bank of England, and the grant 
 of the privileges, the most important of which still exist, 
 to the Bank, would in our day be styled a gigantic job. 
 The King or the Government wanted gold, and to obtain it 
 the people were deprived of a most precious liberty—viz., 
 the right to carry on co-operation in the only effective way 
 practicable under existing circumstances. The only excuse 
 for the Government is that it did not realize what it was 
 doing. 
 
 The amount of the loan which the Crown received as the 
 price of the Bank monopoly was small to begin with ; but 
 through successive Bank charters and new advances the 
 debt of the State to the Bank has now reached about 
 £14,000,000. 
 
 This is a very small sum compared either with the National 
 Debt as a whole, or with the sum the English people yearly 
 
12 Rational Banking versus Bank Monopoly , 
 
 lose in the gigantic obstruction to trade caused by the 
 absence of rational banking, as we shall explain further on. 
 
 The history of banking in England from the first Bank 
 Act up to the year 1844 is the history of the State Bank 
 itself. 
 
 It is narrated in many ways in various books, but to one 
 who reads it in the light of true political economy it 
 illustrates almost on every page the absurdity of State 
 interference with the banking of the people. This long 
 period, though full of incident, shows no real steps in 
 advance toward rational banking in England, the stagnation 
 being a natural consequence of State interference. 
 
 The Bank Act of 1844 was indeed founded on some new 
 theories; but these were of the most superficial and futile 
 kind, and out of harmony with sound economy. Conse¬ 
 quently, three years after it was passed it brought about 
 precisely the state of things it was intended to prevent— 
 namely, over-issue and scarcity of gold. As all this has 
 been well described in several works (especially in Mr. 
 Herbert Spencer’s able but too fragmentary paper on ‘ State 
 Interference in Banking ’), and as we have but little splice, 
 we must refer the reader to these works for incidents. But it 
 will be instructive to consider the economic position of the 
 people under the Bank monopoly. During the long period 
 from the establishment of the Bank of England to 1844, 
 millions of Englishmen had a very hard struggle to improve 
 their position, whilst, for the majority of the people, it was 
 a constant problem how to live at all. It could not be 
 otherwise. $©-#perati#n through exchange had long before 
 become the leading feature of the economic development of 
 the country, especially in the towns. Exchange of products 
 and services was a necessity, not only to prosperity, but 
 to livelihood. 
 
 The great majority of the people having neither capital, 
 coin, nor credit, and depending for their living entirely 
 upon the exchange of their services against products, suffered 
 exceedingly when the action of the Government threw suc¬ 
 cessive obstacles in the way of co-operation and of exchange. 
 One of the worst, though the least understood, of these 
 obstacles was the Bank Act, curtailing and corrupting as it 
 did the only possible medium of co-operation, namely, 
 banking. Coin , of which the market in its miserable state 
 could not hold much, and the ruinous direct credit , or 
 money-lending, were the only means left to carry on the 
 division of labour. The result was that work was scarce and/ 
 
Rational Banking versus Bank Monopoly. 
 
 13 
 
 under-paid, that enterprise or business was extremely ham¬ 
 pered, and proved risky and productive of indebtedness. . 
 
 At first, and especially in the country, the people did not 
 fully feel the effect of this limitation of exchange and con¬ 
 sequent obstruction to co-operation, because the direct 
 co-operation—that As, co-operation without exchange—and 
 compulsory division of labour was carried on by the feudal 
 mediums of co-operation, viz., the masters. Work was 
 exchanged directly against products. Food and clothing 
 being derived from the ground, the landowners in the 
 country exercised the same economic functions as the banks 
 in the towns. They provided the work, often using com¬ 
 pulsion, and distributed the products, that is, they distributed 
 as little as possible, and kept for themselves as much as 
 they could. 
 
 But gradually, as the population increased and competi¬ 
 tion became more keen, the evil influence of the unsound 
 economic system of the nation began to affect the land- 
 owners, especially through the loans they contracted. They 
 found it more advantageous to let the land at a high rent 
 than to personally conduct its cultivation; in few words, 
 our modern economic system was developed. Its charac¬ 
 teristics are supposed to be individual initiative and 
 freedom of action. According to this, supply and demand 
 should be the only regulators of division of labour, i.e., give 
 every man his work and his share in the product. 
 
 There are obviously only two directions in which the 
 economic development of a nation can progress, either 
 towards entire State regulation of all labour or towards 
 entire freedom in the division of labour—that is, a free and 
 natural balance between demand and supply. The English 
 people have wisely chosen the latter direction, though in it 
 they progress very slowly. 
 
 During the centuries through which England has pro¬ 
 gressed from feudalism to free division of labour, the people 
 have suffered terribly, because they have been losing the 
 mediums of co-operation which feudalism supplied, whilst 
 the essential parts of the mechanism of free division of 
 labour have been obstructed by foolish legislation. Most 
 unreasonable monopolies and most foolish prohibitions 
 existed to an incredible extent. The most pernicious of 
 these, after the Bank Monopoly, were perhaps the pro¬ 
 tective duties. Protection obstructed the co-operation of 
 our nation with other nations, as the Bank Law obstructed 
 the co-operation between man and man, between labour and 
 
14 
 
 Rational Banking versus Bank Monopoly . 
 
 capital, between workers and thinkers, etc. Protection 
 openly prevented the exchange and supply of food while 
 the people were starving, whereas the way in which the 
 Bank Law worked its evil effects was hidden from the people. 
 The smaller evil, the Corn Laws, was therefore abolished; 
 and the larger one, Bank Monopoly, yet remains to be 
 abolished. 
 
 The blind and illogical struggle of the people for easier 
 co-operation had no chance against monopoly. From lack 
 of economic knowledge the right direction to progress in 
 banking was not found. But at last a great step in advance 
 was taken, and co-operation developed enormously. This 
 step was not the result of any action on the part of Govern¬ 
 ment, nor of the oppressed business men of England. No; 
 it is an astounding fact that the grandest development of 
 English banking, the first condition for the great modern 
 extension of England’s business, wealth, and power, was due 
 entirely to the happy discovery in the year 1833 of a flaw 
 in the Bank Act! 
 
 In spite of the careful wording of the Act, the object of 
 which was to monopolise practically all joint-stock banking 
 in London, it was found legal to carry on joint-stock bank¬ 
 ing by companies composed of more than six partners, so 
 long as note-issuing did not form part of the business. The 
 directors of the Bank of England of course protested, but 
 commonsense prevailed. Minor legal difficulties were, how¬ 
 ever, raised, with the result that only one joint-stock bank 
 was formed up to 1844, viz., the London and Westminster 
 Bank. But the Bank Charter of that year sanctioned the 
 new interpretation of the Bank Act, and prevented chic- 
 anerie. 
 
 Then began the establishing of large non-issuing banking 
 companies in London, which not only enabled the people to 
 reap greater advantages from accomplished improvements 
 in other directions, but gave also a grand, direct impulse 
 to all business. The great obstruction to business was 
 now less intense, and the prosperity which resulted was 
 great. 
 
 Since 1844 the export and import of Great Britain alone 
 has increased from £110,000,000 to £700,000,000. It is as 
 impossible as it is also useless to try to determine how 
 much of this increase is due to Free Trade and other causes, 
 many of them great and powerful, and how much to this 
 extension of banking; but every business man can under¬ 
 stand that such an amount of business as we now put 
 
Rational Banking versus Bank Monopoly. 15 
 
 through would be perfectly impossible without the present 
 hanking accommodation. 
 
 The patience of the English people under this Bank Act 
 would seem very strange if the history of banking and the 
 popular prejudices respecting coin and banking did not 
 account for it. Though the English have made the Bank 
 Act themselves, they seem to regard it as a law of nature, 
 and in spite of its defect, they dare not mend it. 
 
 It is found so meritricious that a temporary suspension 
 of it is sometimes proved necessary and the only means 
 of escape from national financial ruin, and yet it is not 
 abolished! When once the impending calamity is averted, 
 the old cause of it is speedily reinforced. Then it is 
 found that a small loophole in the shape of a flaw in the 
 Bank Act, which enables the people to lessen its oppres¬ 
 siveness a little, produces the most remarkable financial 
 development the country ever experienced; and yet the 
 bad law is upheld—no inquiry into its working is suggested 
 in Parliament, though it seems natural the people should 
 try to find, or invent, some more of these happy flaws, 
 
 The new feature slowly introduced by the non-issuing 
 private bankers and made general through the large bank¬ 
 ing companies was the cheque system. With the large new 
 banks, banking accounts and cheques became most im¬ 
 portant mediums of co-operation. 
 
 Both cheques and banking accounts were originally intro¬ 
 duced, and the system afterwards extended, with the same 
 narrow object as all other improvements in banking, viz., 
 to facilitate coin-lending; but regarded from an economic 
 point of view, they fulfilled the object of real banking much 
 better than coin-lending could possibly do. 
 
 Though both banking accounts and cheques were actually 
 promises to paj^ coin, they circulated capital in all possible 
 forms, measured in coin, in the most easy and simple way, 
 with the assistance of very little cash. In the bank-books 
 one customer was debited whilst another was credited, with¬ 
 out any payment of the actual value measurer, coin. 
 Cheques squared accounts just as coin, whilst in reality 
 they were, as bank-notes are, only mediums to keep account 
 of contributions towards the general co-operation and dis¬ 
 tribution of products. Instead of writing the amount due 
 to the bearer to the credit of a banking account, it was 
 credited to the bearer on this portable account, the 
 cheque. 
 
 The next great step in advance took place when the use- 
 
16 
 
 Rational Banking versus Bank Monopoly . 
 
 fulness of the cheques and banking accounts was extended 
 through the establishment of the London Clearing House. 
 This, again, was the outcome of a blind groping for means 
 to simplify coin-lending, and save labour in the bank 
 offices. 
 
 But from the economic point of view it fulfils, within the 
 narrow scope which the Bank Act allows, in a perfect way 
 the most important function in the general division of 
 labour. It affords the easiest, and simplest, and cheapest 
 way of exchanging all kinds of capital and services, exactly 
 measured in coin, without the use of coin. 
 
 But unfortunately this valuable piece of mechanism, the 
 crowning wheel in the machinery of co-operation, relieves, 
 owing to the Bank Act, only a very small part of the great 
 demand for extended division of labour; and the most 
 important parts, the preparatory wheels or local banks of 
 a rational character, are wanting all over the Empire. 
 
 That such is the effect of the Bank Act of 1844 we hope 
 to make clear in the following chapters. 
 
 J 
 
 III. 
 
 ON SOME GENERALLY RECOGNISED EVIL CONSEQUENCES OF 
 THE BANK ACT OF 1844. 
 
 The monopoly of the Bank of England, and the centraliza¬ 
 tion which it naturally implies, produce many evil conse¬ 
 quences, and of these we shall now treat. 
 
 They may be divided into two classes—viz., those gener¬ 
 ally re cogni sed , and those not generally recognised. The 
 former require, of course, but little explanation ; the latter, 
 and incomparably the most important, we must treat more 
 exhaustively, because they have not been explained before, 
 and because, being the key to the solution of a great 
 number of difficult economic enigmas of our times, the im¬ 
 portance of their effect, and the obscure nature of their 
 influence, alike demand a full explanation. 
 
 In this short chapter we have only to do with the 
 generally recognised evil consequences of the Bank Act of 
 1844. 
 
 By the following provisions this Act gave the Bank of 
 England an effective monopoly of note-issuing: 
 
Rational Banking versus Bank Monopoly . 17 
 
 1st. ‘That no bank which issued notes before 1844 be 
 allowed to extend its issue/ 
 
 2nd. ‘ That no other bank be allowed to issue notes at all/ 
 
 With the growing business of England, the permission to 
 some few banks to keep a limited amount of notes in circu¬ 
 lation cannot take away from the Bank Charter its character 
 of a monopoly. Moreover, the Bank of England is, by 
 another provision, entitled to take up two-thirds of the 
 issue of any bank which may forego its right of issuing 
 notes. 
 
 The Bank of England itself is allowed to issue fourteen 
 million pounds of notes (plus the above-mentioned two- 
 thirds of the issue renounced by the private banks), against 
 the debt of the State to the Bank of a corresponding 
 amount. 
 
 Besides this the Bank may issue notes up to any amount 
 for which it has in its possession equivalent value in 
 precious metals. 
 
 These privileges, which monopolize a most valuable 
 public right, evidently do not confer very great advantages 
 on the Bank of England. If the Bank Act were suspended 
 for ever the Bank of England would, in spite of competition, 
 profit enormously by it; and most of the directors are 
 probably well aware that their monopoly of issue is nothing 
 but a white elephant. 
 
 The Bank of England, like all note-issuing banks, must 
 look closely after its metallic cash. When the stock of gold 
 goes down the Bank must of course lessen and avoid in¬ 
 creasing liabilities payable on demand, especially in the 
 form of notes; it must lend and discount a reduced amount. 
 Instead of declining some bills and securities, and only 
 taking others, the Bank reduces its payments by raising the 
 rate of discount all round, which seems fairer, and is 
 decidedly more profitable to the Bank. A high rate of 
 interest naturally debars a great amount of business ; and 
 when a large number of transactions are made impossible, a 
 less amount of notes is demanded and issued. The Bank 
 having thus reduced its issue of notes, there is a better 
 demand for those in circulation, and they do not come back 
 to be exchanged for gold in the same proportion as before. 
 Fewer notes coming back, less coin being paid out, and the 
 regular influx of gold remaining as before, the reserve of 
 gold soon increases. 
 
 This is how the raising of the rate of discount increases 
 the gold reserve. 
 
18 
 
 Rational Banking versus Bank Monopoly. 
 
 But there is another theory, at first sight apparently less 
 unpalatable, in that it does not give prominence to the 
 coincident curtailment of business; it is that the raising of the 
 rate of discount causes gold to leave foreign markets, where 
 the rate is lower, and to come into the vaults of the Bank. 
 
 Now many business-men in England know through ex¬ 
 perience that wherever the gold may come from, the 
 process by which it gets into the vaults of the Bank is 
 exactly such as we have described it. 
 
 The theory just mentioned seems to presuppose that 
 foreign capitalists keep their capital in bar-gold or English 
 sovereigns; that capital can be withdrawn from foreign 
 places in sufficient amount to reduce the rate in London 
 without raising it abroad; that gold can be shipped from 
 one market to another without causing a variation in the 
 rate of exchange which would force it back again—all 
 which never could happen. It also seems to imply either 
 that the Bank of England pays interest on deposits, or 
 that very large amounts of gold are coined when the rate 
 of discount is high. That the latter is not the case is 
 proved by the fact that the coinage has not been large in 
 the years in which the Bank-rate has been high. Of the 
 years from 1840 to 1883 the coinage was highest in 1872, 
 amounting to over £15,000,000, but the average rate 
 was 4^ per cent. In 1863 the average rate reached 7-J per 
 cent., while the coinage was only about nine and a half 
 millions. 
 
 The theory of a high rate of discount attracting gold 
 from abroad must therefore be regarded as a figure of 
 speech. It may have the effect of lowering the rates of ex¬ 
 change, which would be the necessary preliminary pheno¬ 
 menon before foreign gold would come here to be melted or 
 pawned ; but such a lowering of the foreign exchange would 
 be the result of sales of goods abroad in exceptional 
 quantities—a consequence of a general fall in prices caused 
 by the curtailed business in England which must follow 
 the raising of the Bank-rate. 
 
 In virtue of its privileges, but by no means in virtue of 
 the importance of its business, the Bank of England is the 
 centre of finance, not only for Great Britain, but for the 
 whole empire. This centralization system extends the 
 direct influence of the Bank over a very large amount of 
 business, and a still larger amount is influenced indirectly. 
 The discount-rate (as being an index of the general policy 
 of the Bank), is the standard and guide of a great number 
 
Rational Banking versus Bank Monopoly . 19 
 
 of business establishments. Consequently, when the rate is 
 raised by the Bank of England, it causes, even apart from 
 the reduced quantity of notes and gold in circulation, a 
 general curtailing of business; a general disinclination to 
 discount or lend; a general tendency to withhold credit. 
 Each advance of the rate of discount of the Bank of 
 England causes, therefore, great trouble to all who are not 
 discounters, severe losses to many, and ruin to some. 
 
 To create a panic instead of only a disturbance is merely 
 a question of the figure of the advance. By suddenly rais¬ 
 ing the rate very high the Bank could produce a fearful 
 catastrophe. 
 
 The evil consequences generally complained of as result¬ 
 ing from this system are: 
 
 1st. That too much power is given to the Directors of the 
 Bank of England, and that they have not the liberty to use 
 their power judiciously, but have often no other choice 
 than to disturb the whole commerce of the empire or cause 
 the Bank to stop payment. 
 
 2nd. That disturbances are caused artificially when the 
 state of trade is perfectly healthy. 
 
 3rd. That the evil done is not compensated by the end 
 obtained—viz., replenishing the gold reserve of one single 
 bank. 
 
 4th. That causes quite foreign to English business, and 
 even to business in general, may create a demand for gold 
 from the Bank, and induce it to advance its rate of dis¬ 
 count, thereby producing all the evils which generally 
 follow such a measure. 
 
 5th. That the supply of credit (a medium of exchange 
 which in our days clears 99 per cent, of all business passing 
 through the banks of London, while coin only clears 1 per 
 cent.) is dependent on one small gold reserve belonging to 
 one bank. 
 
 6th. That one or more rich men can, by drawing a 
 certain amount of gold simultaneously from one bank, 
 manipulate prices at their option, and even throw all busi¬ 
 ness into confusion. 
 
 7th. That the fact of the whole financial system of the 
 country being made amenable to what may be described as 
 a convenient handle for mischief, and such an enormous 
 amount of promises to pay based on one single gold reserve, 
 easily manipulated or secured, places the country, in case 
 of war with a European Power or a political disturbance at 
 home, in extreme danger. 
 
 2—2 
 
20 Rational Banking versus Bank Monopoly. 
 
 8th. That through the limited suppty of notes financial 
 depressions develop into panics. 
 
 9th. That the Bank Act, while exposing commerce and 
 prosperity to all kinds of losses and dangers, has never 
 been found useful except when suspended. 
 
 These objections to the Bank Act are general among 
 business men who have given the subject any attention, 
 and although not using the exact wording in which one 
 usually hears and reads the complaints, we have tried to 
 give an exact expression to the general opinion on the 
 subject. 
 
 The objections are important enough to invite an inquiry, 
 and the objectors are numerous and influential enough to 
 bring about a reform if they would only cease recommend¬ 
 ing remedies worse than the disease, and drop their un¬ 
 reasonable prejudices against rational banking. No sensible 
 Government would meddle with such an important matter 
 by doing patchwork in the wrong direction for the sake of 
 doing something; and what Government in England could 
 legislate in the teeth of a strong prejudice which possesses 
 almost every mind ? 
 
 IY. 
 
 EXCESSIVE USE OF THE VALUE MEASURER AS A MEDIUM OF 
 EXCHANGE, AND THE EVIL CONSEQUENCES THEREOF. 
 
 The two leading features of the Bank Act of 1844 are (1) 
 the State supervision over the notes, and (2) the monopoly 
 of issue. 
 
 The State supervision over the Bank of England’s notes 
 makes them practically as safe as coin, and they circulate 
 consequently all over the country with the same facility 
 as coin. Their effect on their market, which is the whole 
 country, is therefore exactly the same as that of coin. 
 The notes are handled by the people, the banks, and, what 
 is more important, by the Bank of England itself, as coin; 
 and in issuing them the Bank need use none of the nice 
 considerations which under a free system, such as the 
 Scotch banking was before 1844, become paramount. The 
 notes of the Bank of England are therefore paper coin, and 
 their issue is, as far as the effect on the market is concerned, 
 equivalent to production or importation of so much gold. 
 
Rational Banking versus Bank Monopoly. 
 
 21 
 
 The fact that the Bank does not issue any notes which are 
 not coin has strongly influenced, and does yet influence, the 
 business of the Bank, tending to give it the character of 
 coin-lending, as is indeed the case with most State banks. 
 
 Now we have seen in our first chapter that money-lending 
 against pawned securities is not fully developed rational 
 banking, but simply the first step of primitive banking, and 
 one of the ways in which banking strives to fulfil its mission, 
 namely, to work the exchanges. Whether the stereotyping 
 of the Bank of England in this primitive form has impelled 
 and confirmed the business of the private banks in the 
 same direction, and thus explains to some extent the great 
 difference we find between English and French banking 
 methods, would be an interesting inquiry, but out of place 
 here. We have only to deal with the fact that our private 
 banks work their business in the same way as the Bank of 
 England, and that it consists chiefly in lending their own 
 capital, the deposits of coin they attract, and the credit 
 to those who present the best securities. 
 A kind of business which requires large capital, large credit, 
 and large turn-over to pay at all, except, of course, when it 
 is worked as usury or pawnbroking. 
 
 The other leading feature of the Act of 1844, namely, the 
 monopoly of note issue, which prevents the existence of 
 issuing banks of a rational kind (the fourteen issuing banks 
 we have are more deposit banks than issuing banks), tends 
 more powerfully and more directly to make small local 
 banks unprofitable when not worked on usurious principle. 
 The result of the two leading features of our banking system 
 is that we have no banks in poor districts, however capable 
 they may be of economic development; nor in thinly popu¬ 
 lated districts, however rich they may be in raw materials ; f 
 nor in thickly populated places, where work is in great 
 demand but capital scarce and inert; nor amongst small 
 people beginning trades—amongst, so to say, the roots of 
 production. 
 
 Where there is no banking the co-operation must be 
 worked with coin. That in England an excessive use of 
 coin is now unavoidable becomes evident when we consider 
 the following facts: 
 
 It does not pay a bank under the present system to open 
 accounts with small firms. Most English banks demand 
 from £50 to £100 deposit, and they do not like to see this 
 deposit drawn out. In London there are only one or two 
 banks which make it a business to open small accounts, 
 
22 
 
 Rational Banking versus Bank Monopoly. 
 
 and these are more savings than commercial banks. In a 
 place in France of about 7,000 inhabitants, we found there 
 three or four competing commercial bankers aiding large 
 and small producers most effectively. How can a small 
 producer or distributor afford to keep a balance of £100 or 
 even £50 in a bank for the single advantage of facility in 
 cashing his cheques ? He has his capital invested in houses, 
 furniture, machines, tools, raw material, goods in process of 
 manufacture, and must also give some short credit to his 
 customers. 
 
 Only those who are capitalists as well as producers and 
 distributors can afford the luxury of a banking account, 
 and therefore a very great number have none. They 
 do their business with cash entirely. And do such as 
 have a banking account, generally opened by the paying in 
 actual cash, clear all their business through the bank, or 
 even a large proportion of it ? All the small, a majority of 
 the medium, and many of the large holders of banking 
 accounts, square the larger part of their business with cash. 
 It is not the custom in this country, as in France, to draw 
 and accept bills for all purchases in the home trade. Bills 
 are used to some extent, but are not the rule. They are 
 drawn exceptionally, and mostly to serve as a security for 
 cash loans. Purchases of both raw material and manu¬ 
 factured goods are generally made for cash either on delivery 
 or in a short time after. When paid for by cheques these 
 are very frequently turned into cash at once. 
 
 The use of coin is greatly increased by the fact that in 
 many small centres of trade there are, as we have men¬ 
 tioned, no banks at all. In such places the bulk of the 
 transactions are, sooner or later, settled by cash. All 
 business men who buy in small quantities, all who sell in 
 small quantities, all who employ labour and pay wages, are 
 compelled to use a great amount of coin, as no small notes 
 exist. All the turn-over of the working-classes—all the 
 wages they receive and all their purchases—is cleared by 
 coin. 
 
 From what has been said, we trust it is clear, that in 
 England the banking system compels the use of a very large 
 quantity of cash in proportion to the business transacted. 
 Owing to the absence of small bankers of the French style, 
 working the co-operation with bills—to the absence of 
 banks issuing small notes, and to the absence in many 
 places even of banks and bank offices of the English type— 
 a very great part of the English co-operation is entirely 
 
Rational Banking versus Bank Monopoly. 23 
 
 unassisted by banking, and has to depend exclusively on the 
 supply of coin and coin notes—that is, notes for which a 
 corresponding quantity of gold has been locked up in the 
 bank or exported. This system necessitates large quantities 
 of gold to work even a comparatively small business, and 
 for any increase of our activity, especially in productive 
 trades, we must augment the supply of gold considerably. 
 
 To understand the ruinous effect which the compulsory 
 presence of such a comparatively large quantity of gold, and 
 the constant attempts to import more, must have on the 
 business of the people, we must fully realize the importance 
 of the economic axiom mentioned in the first chapter, viz., 
 that gold, like any other goods imported into a market in 
 excess of the consumption—that is, increasing the stock— 
 will leave that market again, or if artificially prevented from 
 leaving, will fall in value in exact proportion to the quantity 
 imported in excess. This is, or ought to be, a self-evident 
 fact; it has been proved a thousand times, and is proved 
 every day by facts and by statistics to those who take the 
 trouble to read them aright. 
 
 But it seems that deductions from statistical figures un¬ 
 accompanied by intelligent explanations have but little 
 power to convince. This axiom is anyhow not believed in 
 by the Parliaments of the Continent and of the United 
 States. Their economy is founded on quite opposite pre¬ 
 mises. Besides, there exists a general opinion that gold, 
 imported to be used as medium of exchange (coin), in such 
 business as promises to become wealth-producing, will not 
 lower the value of coin and leave, but will stay in the 
 market. As it is necessary to disprove this fallacy, and as 
 we shall have to deduce from the above-mentioned economic 
 truth conclusions which will appear stupendous, we shall 
 try to be as plain as possible, and to call in evidence such 
 proofs as we can examine every day. 
 
 It is evident that the value of any kind of goods, or indeed 
 of anything, is regulated by the proportion of demand to 
 supply. When the demand for an article increases and the 
 supply remains the same, this article goes up in price. 
 When the supply increases and the demand remains the 
 same, it goes down in price. All the markets of the civilized 
 world illustrate this fact. Wherever there is an excess of 
 one kind of goods, the low price causes shipment to some 
 place where it will command a higher price. The difference 
 in price pays for the transport, risk, and trouble. 
 
 We shall now show that gold is subject to exactly the 
 
24 
 
 Rational Banking versus Bank Monopoly . 
 
 same economic laws. Let us suppose that a million pounds’ 
 worth of gold ingots are forcibly moved, say from Berlin to 
 London. If the gold is not consumed for any special 
 object apart from commerce, but thrown on the market in 
 some shape, there is an alteration in the relative supply of 
 gold in the two markets of £2,000,000, as there is £1,000,000 
 more in London and £1,000,000 less in Berlin; but if the 
 gold is destroyed, hoarded, or re-exported from England, 
 the change in the relative supply is only £1,000,000. In 
 either case the stock of gold ingots, or uncoined gold, is 
 £1,000,000 less in Berlin. Suppose that the demand there 
 remains the same, the holders of the remaining gold in 
 ingots will be harder to make terms with. Such holders 
 may be manufacturers requiring gold for their pro¬ 
 ductions, dealers in precious metals who keep it in stock, 
 banks who keep it as a reserve, the Royal Mint, which is 
 bound to supply coin to the Government, etc. Gold would 
 therefore be less freely offered to or by these parties. 
 
 The first effect would be to raise the price of gold in 
 ingots sufficiently to cover the small difference between 
 ingots and coin which might exist as a coinage fee. Gold 
 ingots and coin would then be equal in value, and gold¬ 
 smiths, and other consumers of gold, would melt coin, 
 which would thus become scarcer. The banks, or the 
 State Bank, would consequently have to meet a heavier 
 demand for gold coin, and would have to take measures to 
 increase their stock. This they could do only by importing 
 gold from abroad. If they took such action they would pro¬ 
 bably import it from England (the market where most of 
 the new gold from the gold-producing countries is landed), 
 paying for it in the usual course by drafts on London. 
 
 There would thus be an increased demand in Berlin for 
 drafts on London, and the rate of exchange would certainly 
 go up—that is, the pound sterling would be quoted higher 
 on the Berlin Bourse. The effect of the pound sterling 
 fetching a higher price than German notes, and even than 
 German gold, is that German products sold to England 
 obtain a higher price than when sold in Germany, though 
 the nominal price quoted in gold be the same. 
 
 This is equal to a premium on the export of German 
 goods to England, and thither an additional quantity of 
 German goods would consequently go in preference to seek¬ 
 ing home consumption, which, besides, would be already 
 curtailed by the scarcity of gold. This extra export of 
 goods pays the drafts remitted against the gold ordered 
 
Rational Banking versus Bank Monopoly . 
 
 25 
 
 from London, which thus would come back to Berlin from 
 where we supposed it removed. 
 
 We see from this that forcible export of gold from a 
 market raises the price of gold in that market, both as com¬ 
 pared with foreign gold and with goods in general. 
 
 Also, that transactions intended to be actual transfers of 
 gold from one market to another resolve themselves 
 (through the incapacity of markets to hold more or less coin 
 than is natural to them) into transfers of goods other than 
 coin. 
 
 We shall now see how the supposed forcible removal of 
 gold to London would affect the English market. 
 
 The gold would either be thrown on the market or kept 
 out of it. The latter case could happen only under 
 unusual circumstances, such as immediate consumption for 
 a special abnormal purpose, secret hoarding, or re-exporta¬ 
 tion. In such cases it would have no direct effect on the 
 market. All the effect would be indirect—namely, 
 cheapening of German goods, as we have already seen, 
 consequently lessened export to Germany, increased import 
 of German goods, and a corresponding stagnation in the 
 production in England. 
 
 If, on the other hand, the imported gold were thrown 
 on the market, it would increase the quantity of coin. 
 Whether it were put through the Mint, added to the Bank 
 reserve to increase the issue of coin notes, or absorbed in 
 manufactures, thereby taking the place of gold which else 
 would have been withdrawn from circulation, would make 
 no difference. 
 
 As the ultimate result is the same, let us suppose that 
 the gold is coined. The new coin would, on issue, be in¬ 
 vested in some manner, something would be actually bought 
 by it either for consumption, storing, or manufacturing. 
 
 In any case goods of some kind are withdrawn from the 
 market, stocks are reduced, and prices go up. That is 
 equivalent to gold falling in value. The high prices, in 
 face of the increased rapidly circulating stock of gold in the 
 country, do not check the home consumption, but impede 
 the export, which falls off*; the consumption increases, 
 partly for reproduction and partly as a result of larger 
 profits, and is supplied by increased import; the diminished 
 export and increased import are balanced by payment of the 
 difference in gold, which thus leaves the country again, and 
 the gold supply recovers its disturbed level. 
 
 It is then evident that the power of imported gold to 
 
26 Rational Banking versus Bank Monopoly . 
 
 send up prices is, at least, twice as effective when the gold 
 is used for coin or otherwise thrown on the market, as when 
 it is withheld from circulation or hidden. 
 
 The supposed case of forcible removal of gold is one 
 which seldom if ever happens in reality. Under normal 
 circumstances removals of large quantities of gold, except 
 the regular supply from the mines, are not frequent, and 
 are generally made for abnormal purposes. As gold forcibly 
 removed from one market to another always returns again 
 to the market from which it came, the double journey is 
 generally avoided by variations in the rate of exchange, 
 and the final result, removal of goods, is arrived at directly. 
 
 When a large amount of capital, measured in gold and 
 treated for as gold, is to be removed from one nation’s 
 market to that of another as a loan, tribute, indemnity, or 
 from any other cause outside general commerce, it might at 
 first be supposed that gold would be actually sent. But 
 the transfer of the amount is usually accomplished in the 
 following way: Drafts are drawn from the country where 
 the capital is to be received on the country which has to 
 pay. These drafts are sold in the home market, and as 
 they are many and heavy they must be sold cheap. The 
 rates of exchange therefore go down. This constitutes a 
 premium on import of goods, and an obstacle to export 
 in the receiving country. Import increases and export 
 decreases, until the increase of the former and decrease of 
 the latter (other things remaining normal) altogether 
 correspond with the amount of the imported capital, which 
 thus has been delivered in goods, though it was agreed to 
 be paid in gold. 
 
 The fall in the price of the gold to be imported is antici¬ 
 pated before the gold can be shipped, and the prompt ship¬ 
 ment of goods anticipates its return. Thanks to short¬ 
 sighted Parliaments and prejudiced Ministers we have plenty 
 of examples of such operations. The effect of imported 
 gold, or rather, of gold intended for import, on prices and 
 on the rates of exchange, causes large international trans¬ 
 actions to result very differently from amtieipati©ia. 
 Large war indemnities ultimately prove to the country 
 which receives them, not a source of wealth, but a total 
 upset of values in general, causing first a great falling off* 
 of the export, an enormous increase in consumption, and a 
 crop of bad speculations; and then, as a reaction, ruined 
 production and commerce, and loss of capital. The 
 ‘ Grander Zeit,’ or flush period in Germany, was soon 
 
Rational Banking versus Bank Monopoly. 
 
 27 
 
 followed by a crash from which that country suffered for 
 many years, and which was worse for her than the payment 
 of the indemnity was for France. 
 
 When the real value of gold indemnities is understood 
 we shall have one less inducement to war. 
 
 The railway loans to many minor foreign countries 
 furnish similar examples. Countries where land is of little 
 cost, where iron and wood are plentiful, labour cheap, 
 employment scarce, and provisions abundant, have not 
 found any better way to construct a railway with their own 
 material, and by their own work-people, than by borrowing 
 the whole amount of the cost in foreign countries. 
 
 The result is that when the railway is made it costs twice 
 or three times as much as it ought to have done, and the 
 statistics of the years during which the loans have been 
 drawn show that to make a railway in such countries 
 demands the importation of astounding quantities of velvet, 
 jewelry, perfumery, wines, sauces, toys, etc., besides a con¬ 
 siderable quantity of such classes of goods as form, under 
 normal circumstances, the staple production and export of 
 the country. 
 
 All such follies result from overlooking the fact that an 
 import of a quantity of gold must reduce proportionately 
 the value of all the gold in the country, and that such 
 import is naturally replaced by an import of goods. To 
 deny this fact would be to deny that there ever is, was, or 
 can be a variation of the rates of exchange. 
 
 As under the Bank Act of England the most important 
 part of the co-operation can only be carried on with large 
 quantities of coin or coin notes, we must come to the 
 following conclusions : 
 
 That the presence of a large quantity of coin, which the 
 Bank Act renders necessary to the transaction of business, 
 defeats the object of business—viz., profit—by raising the 
 cost of production here and lowering the price of sale 
 abroad. 
 
 We are left the choice between two such desperate con¬ 
 ditions as want of necessary mediums of exchange, or little 
 or no profit on our trade. Each improvement in business 
 must, under our normal circumstances, carry within itself 
 the cause of its destruction, and bad times become the 
 natural state. We deprive ourselves of the most necessary 
 condition for profitable co-operation, namely, low cost of 
 production, while we materially decrease the cost of pro¬ 
 duction for our foreign competitors. We are obliged, under 
 
28 Rational Banking versus Bank Monopoly . 
 
 our normal circumstances, to struggle against the effect of 
 the worst imaginable medium of co-operation by working 
 hard, taking great risks, reducing or sacrificing our profits, 
 and by paying such wages as are paid in the East of London 
 now, or let our workmen starve. 
 
 All improvements and exertions to ameliorate our position, 
 such as the invention of labour-saving machines, perfected 
 division of labour, improved communications, increased 
 capital, opening of new markets, etc., will produce only 
 momentary relief. As soon as these improvements result 
 in an increase in production or an increase in business, the 
 additional coin required to carry it on will^again reduce the 
 profit. 
 
 Production being unprofitable, or tending to become so 
 when extended, as a necessary arithmetical result of our 
 using the value measurer as the chief medium of exchange, 
 makes us think that we suffer from over-production, while 
 90 per cent, of humanity are short of every kind of comfort 
 and luxury, and a large proportion have not even the 
 simplest necessaries of life, all of which can be obtained 
 only by an immense increase of production. 
 
 Similarly, because our system of finance makes work un¬ 
 profitable, we are led to think that employment is naturally 
 scarce, though employment alone can lessen the existing 
 general misery, and our globe supplies inexhaustible stores 
 of raw material. 
 
 Such are the consequences of the Bank Act under this 
 head. They may be summarised thus : Capital and credit 
 are made scarce and dear, while coin is made too cheap. 
 The very contrary should of course be effected by a good 
 banking system. 
 
 We have spoken of the effect of the Bank Act as being 
 most severe under ‘ normal ’ conditions, and hinted that we 
 are just now experiencing this state of things. We have 
 done so because the periods of comparative prosperity 
 which we have experienced since 1844, in spite of the Bank 
 Act, must be considered abnormal. 
 
 These periods of prosperity were due to causes strong 
 enough to counter-balance or hide the evil effects of the 
 Bank Act. 
 
 We shall simply enumerate some of these causes, and 
 briefly point out their effects. 
 
 1st. The establishment of Free Trade gave an immense 
 impetus to business by lowering the cost of production, and 
 enabling us to utilize and co-operate with foreign industry, 
 
Rational Banking versus Bank Monopoly. 29 
 
 thereby giving us a decided advantage in all the neutral 
 markets. 
 
 2nd. The discovery of the flaw in the Bank Act removed 
 a small part of its obstructiveness to business by permitting 
 the establishment of the great joint-stock banks. This 
 facilitated co-operation to such an extent that it has been 
 possible to raise our turn-over enormously, unhampered by 
 a corresponding increase in the quantity of the circulating 
 value measurer. 
 
 3rd. The economic vagaries of other nations with respect 
 to loans. The present amount of State debts, exclusive of 
 the English, reaches the fearful sum of about £3,600,000,000. 
 A very large part of this has been taken up in England 
 since 1844, and every penny of it has been given not in 
 coin, but in goods ! 
 
 Those loans which have not been taken up in England 
 have still given a great impetus to English industry, as 
 each country taking a loan not only anticipates and con¬ 
 sumes in a short time a part of its future earnings for 
 centuries to come, but also prevents its own export of goods 
 other than raw materials. England, borrowing but little, 
 and not at all abroad, has had the greatest benefit from 
 these mistakes. 
 
 But this cause of brisk trade will not occur again. The 
 States either have no more credit, or they cannot pfiy any 
 more interest, or they see the error of their ways. We 
 have now to face the reaction, namely, a great many 
 countries sending us their products as payment of interest 
 without being able to afford any return in English goods. 
 This should be a source of wealth and a blessing to 
 England, but the Bank Act makes it a curse, and a source 
 of misery for our working classes. 
 
 4th. Since 1844 the bulk of the great railway systems 
 have been constructed. A great part of the capital and 
 of the material has been supplied from England, and the 
 consumption of such material as has not come from 
 England has, however, caused prices all round to be high, 
 and the demand godd. 
 
 We shall have gradual extensions of railways, but never 
 such enormous development again. 
 
 5th. Since 1844 we have seen navigation undergo a 
 complete change. Wooden sailing ships have been re¬ 
 placed by iron steamers, mostly of English make, and what 
 we have said concerning the railways applies to this change 
 in shipping. It will not occur again. 
 
30 
 
 Rational Banking versus Bank Monopoly. 
 
 6th. Exceptionally rich gold districts have been dis¬ 
 covered and utilized. This has caused a rise in prices all 
 over the world—a momentary prosperity, and large con¬ 
 sumption. As soon as the ebb in prices began, this 
 ephemeral prosperity came to an end. 
 
 7th. Since 1844 whole nations have been built up in 
 America, Australia, New Zealand, etc., all with mostly 
 English capital, that is, English manufactured goods. 
 These countries will no doubt develop yet, especially if 
 they adopt a less foolish economy; but such a stride as 
 from a virgin state to high civilization will not again take 
 place in so short a time. Whatever progress there may be, 
 it will not have England for its base, as each country has 
 now established a base of its own. 
 
 There were no doubt many more causes of prosperity 
 between 1844 and 1884, but we have pointed out the most 
 powerful. 
 
 The effect of all these impulses to business in England 
 has been to increase our export and import from about 
 £110,000,000 to £730,000,000, and it can be understood 
 that under such circumstances there would be no grumbling 
 against the Bank Act, especially as the prosperous period 
 began almost simultaneously with the last Bank Charter. 
 But the true economist might even during the most 
 prosperous of these forty years have pointed out plenty of 
 proofs that there was ‘ something rotten in the state ’ of 
 Great Britain. While trade was at its best the condition 
 of a very large proportion of working men, and still more 
 of women, was very bad. In those parts of the empire 
 where the abnormal causes of prosperity could not produce 
 direct effects, as in Ireland and India, poverty has been 
 growing steadily. The Irish population has decreased 
 considerably, and so will the English if we do not now alter 
 our method of co-operation. In India about 40 per cent, 
 of the ryots are now paupers. All will be paupers shortly 
 if we do not allow the people to carry on their division of 
 labour by sensible means. 
 
Rational Banking versus Bank Monopoly. 31 
 
 y. 
 
 LABOUR AND CAPITAL SEVERED.—USURY PROTECTED AT THE 
 EXPENSE OF LABOUR AND CAPITAL. 
 
 The total capital of the banks and bankers of Great Britain, 
 together with the amount of deposits with them, the total 
 of the balances in their customers’ favour, and the great 
 amount of capital circulated by the credit the banks create 
 —all this wealth represents a very large proportion of what 
 may be called the working capital of the nation; and the 
 banks have, practically, the control of all this wealth. The 
 business of the country and its whole economy must, there¬ 
 fore, necessarily depend very much upon the manner in 
 which this trust is fulfilled. 
 
 The banks do not profess to employ the capital they hold 
 directly in production or distribution; they simply discount 
 with it, or lend it—that is, they entrust it to other people. 
 It is, consequently, of great importance to whom this work¬ 
 ing capital of the nation is entrusted. 
 
 A bank could never be regarded as a charitable or 
 patriotic institution. It is a business, and the banker, like 
 any other business-man, must be actuated entirely by the 
 consideration of his own advantage—of course, within the 
 limits of honesty. The question, therefore, arises—Is the 
 interest of the banks, under the banking system resulting 
 from our Bank Act, identical with that of the nation; or is 
 it indifferent, or even opposed to it ? 
 
 We can reply to this by finding out to whom the 
 banks give the preference in granting credits. Bound to 
 look after their own advantage, and generally charging the 
 same rate of interest and commission to all their customers, 
 English banks, in granting credits, are as a rule guided by 
 the securities offered. They give preference to the borrower 
 who presents the best and most convenient pledges for the 
 credit, be it his own name, several names, or some kind of 
 capital deposited or lodged. 
 
 As we in England are but little acquainted with other 
 banking systems than our own, it will be useful to point out 
 here that there are banking systems where the bankers are 
 not guided, in discounting, exclusively by the securities. 
 
 We shall mention two systems under which the banker 
 
32 
 
 Rational Banking versus Bank Monopoly. 
 
 has a natural interest in being guided, not by the security, 
 but by the nature of the business which is offered. These 
 we may call the French and the old Scotch systems. By 
 the latter we mean Scotch banking previous to 1844. 
 
 The average French banker of the class so generally and 
 so numerously scattered over France, is interested in dis¬ 
 counting as exclusively as possible for such producers or 
 distributors as make it their business to send the products 
 of the place, neighbourhood, or local markets away to other 
 markets, and who do so with a profit to themselves. 
 
 The reason of this is very simple. The chief business of 
 the banker consists in discounting bills. All bills drawn on 
 other places he can, with his own endorsement, send away 
 to other bankers, generally in some large centre, such as 
 Paris. For these remittances he obtains, in return,Hbills 
 drawn on his own market, and he thus increases his daily 
 cash receipts, and can extend his operations. If he does 
 not receive the full amount of paper in return, he can 
 generally draw his own drafts on Paris for the difference, 
 which suits him equally well. On the other hand, if he 
 discounts promissory notes, or bills drawn from and payable 
 in his own place, he cannot use them in the same way. He 
 must keep them en portefeuille until maturity, and is 
 thereby deprived of the use of his capital for a long time. 
 By taking such paper he would accomplish only a very 
 small yearly turn-over; while, when taking only the first- 
 mentioned kind, his turn-over is limited only to the extent 
 of his connection and the business of the place. 
 
 His interest is, then, identical with the economic develop¬ 
 ment of the country, as his advantage is to hold credit at 
 the disposal of wealth-producing and work-giving people, or 
 those who send away profitably produced goods, and to 
 withhold it from the consumers and speculators, and those 
 engaged in losing or unprofitable concerns, in so far as they 
 attract and consume capital. 
 
 That a bank under the old Scotch system would be in 
 exactly the same position we shall show further on. 
 
 In France there are financial institutions which lend 
 capital against security of land, buildings, goods, funds and 
 shares, etc. ; but they do not form a part of the great net¬ 
 work of bankers who work the co-operation of the country. 
 The existence of this latter kind of bankers is due to a slow 
 and gradual development, and to traditions peculiar to 
 France and some other countries, but which we have not 
 experienced. As, then, the French banking system cannot 
 
Rational Banking versus Bank Monopoly . 33 
 
 exist in England, and as the far better one, the old Scotch 
 system, is prohibited by law, all English banks are working 
 somewhat after the style of the exceptional financial institu¬ 
 tions of France, to which we have referred as lending against 
 pledges. The business of our banks consists chiefly in re¬ 
 ceiving deposits of capital from those who have it to spare, 
 and lending it to those who can use it and pay for its use, and 
 in creating credit in favour of those whom they deem can 
 be trusted, irrespective of the use to which it is put. The 
 English banks have, therefore, no such special interest in 
 common with that of the country as the French bankers 
 have, and as the Scotch banks had, their chief duty and 
 advantage being to look out for good and convenient 
 securities. 
 
 The consequence is that the bulk of the working capital 
 of the country is held in preference at the disposal of firms 
 or individuals who are rich or supposed to be rich, who dis¬ 
 pose of large quantities of goods, shares, or similar securities, 
 who enjoy already a large credit, who do a large business, 
 whether useful or hurtful, profitable or losing. In these 
 classes of men and firms we find all those who borrow to 
 consume, who speculate in the funds and shares, goods, 
 land and house property, who corner markets, deal in 
 limited liability companies, give large credits to consumers 
 or to foreign commerce, who import largely, who over-trade, 
 over-build, and all those who do a losing or spurious busi¬ 
 ness, to the great injury of honest commerce, with the sole 
 object of keeping afloat and being in a position to discount. 
 If we could inquire into all the advances and loans granted 
 by English banks on funds, shares, land, property, dock- 
 warrants, bills of lading, promissory notes, personal guarantee 
 and accommodation bills, the smaller part would be found 
 to have any direct connection with healthy production. 
 
 The banks cannot be blamed for this. The law compels 
 them to be money-lenders, and money-lenders they are. 
 
 While the banks thus gather up the working capital of 
 the country, and hand it over in great part to the non¬ 
 productive businesses, they divert that capital from the 
 wealth-producing and work-giving trades ; and this is a 
 great evil. 
 
 We know that any nation which does not live on foreign 
 loans cannot consume more than they produce; and that 
 consequently not only the export trade, but also the import 
 trade, depends entirely on the production, which, therefore, 
 
 3 
 
34 
 
 Rational Banking versus Bank Monopoly . 
 
 is our only source of wealth, except the interest on money 
 invested abroad. 
 
 If, therefore, the working capital of the country is for 
 the greater part disposed of by those who consume wealth, 
 cater to consumption of wealth, or otherwise handle the 
 wealth when once produced, and if only a small part goes 
 to assist the wealth-producers, it is no wonder that compe¬ 
 tition in every business is great. 
 
 We act like a farmer who spends the bulk of his capital 
 in improving and decorating his reaping-machines and 
 leaves insufficient for preparing the ground and putting in 
 the seed. 
 
 Many English producers, especially manufacturers, who 
 have had an opportunity of seeing what great facilities 
 their French competitors enjoy from their bankers, under¬ 
 stand well how handicapped they are in this respect. The 
 extraordinary quickness with which France ha's several 
 times during this century recovered from the greatest 
 political and financial disasters is accounted for by the fact 
 that the bulk of the wealth of the country is applied to 
 production. Besides, it is not possible that the French 
 nation could have withstood so long the outrageous Protec¬ 
 tive system under which it suffers if it had not the great 
 advantages which its banking system affords. 
 
 The diversion of the working capital of the country 
 from the interests of production causes many serious evils, 
 of which we shall point out only a few of the most evident— 
 viz.: the increase of the number of work-seekers, and 
 decrease of the number of work-givers; difficulty on the 
 part of capitalists to find safe and lucrative investments; 
 despotism of capital; the existence of an army of oppressive 
 and pernicious middlemen ; class hatred; socialistic ten¬ 
 dencies ; advocacy of communistic measures in both imperial 
 and local government, etc. 
 
 One of the consequences of our bank law is, as we have 
 already seen, the absence of small and economically useful 
 banks or bank branches throughout the British Empire. 
 Good traditions of the free time linger yet in Scotland; but 
 in England, Ireland, and the Colonies (where, unfortunately 
 but naturally, the English bank legislation has been more 
 or less copied) the absence of the above-mentioned small 
 banks is conspicuous. 
 
 That this is an evil which seems to be evident even to 
 superficial observers is proved by the advocacy in news¬ 
 papers and periodicals of the introduction of Schulze 
 
Rational Banking versus Bank Monopoly . 35 
 
 Delitzsche Banks, the most miserable and unpractical hybrids 
 between a charitable institution and a bank. Such banks 
 may be an apparently useful makeshifts in a country where 
 economic affairs are managed in so fantastic a manner as in 
 Germany; but in England, where we have some respect for 
 economic facts, we ought to achieve more. 
 
 Small note-issuing banks, or bank branches, being for¬ 
 bidden^^ is open to two great sources of misery, im¬ 
 providence and ruin, i.e., resource to the money-lender and 
 the pawnbroker. These may be indispensable factors in our 
 bad system of co-operation, and we do not blame them; but 
 they are the very worst factors imaginable. The difference 
 between a money-lender and a real bank is, economically 
 speaking, that the money-lender takes advantage of his 
 client’s difficulties to make a profit for himself, finding it to 
 his advantage to increase the difficulties and accelerate the 
 ruin of his client, while the bank (if not vitiated by Govern¬ 
 ment interference) makes its profit by charging a small 
 commission on the profits it facilitates to its clients. The 
 great profusion of the sign of the three golden balls wherever 
 the working-classes congregate, and the large number of 
 money-lenders and financial agents in all business centres, 
 is a standing reproach to our legislators, and a constant 
 reminder that we have a banking system void of all economic 
 principles. 
 
 The day the Bank Act is repealed the money-lenders will 
 suddenly find that helping people to make profits and 
 fortunes is a more profitable business than ruining them. 
 Money-lenders cannot compete successfully with free banks 
 so far as wealth-producing business is concerned, as we shall 
 make clear in the following chapters. 
 
 It is hardly possible to imagine a more effective damper 
 on thrift, enterprise, and an honest desire to work, than the 
 knowledge that the first ‘ bad times/ or the first mistake, 
 may land one in the hands of the money-lender. The 
 effects of this Damocles’ sword are bad in England, but they 
 are even more palpable in Ireland, India, and Egypt, for 
 which latter country we are now responsible. In India and 
 Egypt the money-lender is an institution now indispensable 
 to co-operation. Rational banks are forbidden, but the 
 money-lender who charges 50 per cent, interest and oppresses 
 the people as much as do the respective Governments with 
 all their taxes, and who stands in the way of the prosperity 
 which the taxation presupposes, he is recognised as a useful 
 factor in the production ! The moral suffering which this 
 
 3—2 
 
36 
 
 Rational Banking versus Bank Monopoly. 
 
 absurd system involves, and the social and political effects 
 it produces, are as bad as the immense economic loss. Any 
 freedom-loving man ought to be able to understand that an 
 Irishman would rather remain poor during the whole of his 
 life than work for the benefit of a money-lender under con¬ 
 ditions very little removed from slavery. 
 
 And what sane man could be surprised at the hatred and 
 contempt which the ryots of India and the fellahs of Egypt 
 feel for a civilization which cannot suggest any better way 
 of solving such a simple problem as the division of labour 
 than by usury! 
 
 That Canada owes all its financial depression and slowness 
 in development to the absence of sound principle in its 
 financial legislation, is denied by no one who understands 
 anything of political economy. 
 
 In every new colony we have observed a phenomenon 
 rather puzzling to most people. When the stream of 
 emigration is first directed to a new country, progress is 
 considerable, business good, labour in demand, and profits 
 easy. But when there arises a community with a bank law 
 of the usual type, a change for the worse at once sets in. 
 In the very countries where Nature stores inexhaustible 
 natural riches, and where the scope for labour is almost 
 endless, we find scarcity of life’s necessaries and comforts, 
 and scarcity of work ! 
 
 The cause is, of course, that the vicious banking system 
 upsets all calculation and destroys the motive for work, 
 viz., the profit. It costs the people more to produce and 
 ship their goods than they can get for them, and production 
 must then decline. 
 
 The loss of trade which results to England from the 
 miserable state of her chief customers, her colonies, must be 
 enormous, and is due to the bank laws. 
 
 Such are the principal effects of our absurd bank legis¬ 
 lation, and it is natural that sound logic will trace most of 
 . our national evils to this cause. We have prepared and 
 perfected most wonderfully all the wheels in the clockwork 
 of free co-operation; but we have foolishly nailed the pen¬ 
 dulum to the wall, from fear that it might swing irregularly, 
 and we are puzzled because our beautiful mechanism will 
 not work. When the pendulum is free the clock will go to 
 great perfection ; or, to drop the metaphor, when we have 
 completed our Free Trade system by making banking free, 
 we shall for the first time reap the full benefit of all the im¬ 
 provements we have accomplished during many centuries. 
 
Rational Banking versus Bank Monopoly. 37 
 
 VI. 
 
 FREE NOTES THE RATIONAL MEDIUM OF EXCHANGE. 
 
 If we are to re-organize our system of co-operation in 
 accordance with sound theory and reasonable principles, 
 instead of blindly following the rules which our forefathers, 
 in complete ignorance of the subject, laid down, we shall 
 have to choose between two rational systems, namely, com¬ 
 plete State management on the one hand and complete 
 freedom of competition, regulated by supply and demand, 
 on the other. 
 
 Our present system is a blending, or rather confusion of 
 these two, and like most hybrid systems, it has the faults of 
 both with the advantages of neither. Any change beyond 
 that of mere form must therefore take us nearer to one of 
 the above two rational systems. 
 
 Just now we are gravitating towards entire State manage¬ 
 ment, or, to call it by its real name, socialism. We are 
 urged from all sides to take deliberate steps down the 
 inclined plane which leads to it. Now it is a well known 
 fact that State interference is a remedy which has a strong 
 tendency to be required in a larger measure the more it is 
 applied. If, for instance, we were to try to mitigate one of 
 the e^ils resulting from State interference with co-operation, 
 viz., the bad housing of the poor, by more State interference, 
 and build dwellings at the expense of the State, we should, 
 firstly, check private building through State competition, 
 and, secondly, increase the number of houseless poor through 
 augmented taxation, thus rendering the necessity for State 
 building more urgent than before. Each change in the direc¬ 
 tion of increased State management is therefore a telling 
 step towards Socialism. 
 
 Though the economic circumstances of the country are 
 such as to cause many sincere philanthropists to lean 
 towards socialistic measures, we think that Englishmen in 
 general are almost instinctively averse to the socialistic form 
 of co-operation. We shall therefore not combat here argu¬ 
 ments in favour of socialism, but content ourselves with 
 pointing out that in economic respects socialism would be a 
 failure. It would deprive work, daring, invention, enter¬ 
 prise, and even self-control of their most powerful incite- 
 
38 
 
 Rational Banking versus Bank Monopoly. 
 
 ments; it would have many of the economic defects of 
 slavery and despotism; and the absence of individual 
 liberty which it involves would probably lead to loss of 
 national independence. 
 
 In spite, then, of the clamour of the moment, we may, for 
 the above reasons, reject any reform in our system of co¬ 
 operation which would take us nearer to entire State 
 management, as a step in the wrong direction. Any 
 desirable improvement must therefore be found in the 
 direction of free competition, with maintenance of indi¬ 
 vidual property. 
 
 Our task is thus reduced to stating the reply to the 
 following question: What system of co-operation is the 
 best; general prosperity being the object, and respect for 
 individual property and individual freedom being the con¬ 
 dition ? 
 
 In replying to this question, it will be conducive to 
 clearness to give the entire reasoning which leads to the 
 conclusion that entirely free banking is the best and only 
 rational mode of free (not State managed) co-operation. 
 
 —This cannot be done without a slight and partial recapi¬ 
 tulation, for which no other apology will be required. 
 
 Our globe produces, or could easily be made to produce, 
 a thousand times more material for life’s necessities, com¬ 
 forts, and even luxuries, than the human race now 
 consume. 
 
 Work is required to make this natural wealth available. 
 Human beings can exist, and even enjoy life, by working 
 isolated or associated only in families and tribes; but their 
 work is hard, and their life rough and full of dangers. 
 
 Co-operation on a wide scale is the indispensable condi¬ 
 tion for civilization, wealth, comfort, happiness, and pro¬ 
 gress. The greater and easier the co-operation, the greater^ 
 the general wealth and happiness. When individual 
 property is to be maintained, co-operation can be carried on 
 only by exchange. Facility of exchange is therefore the 
 first condition to the increase of wealth. Exchange neces¬ 
 sarily implies valuation. Direct valuation of goods by any 
 other goods is slow, difficult, and inexact. A general 
 value measurer, such as gold is for us now, is therefore of 
 the greatest importance. The value measurer is such only 
 in that it is the most desirable and safest medium of ex¬ 
 change. 
 
 But we have seen in Chapters I. and IY. that only a 
 small part of the exchange of a busy place or country can 
 
Rational Banking versus Bank Monopoly. 39 
 
 be effected directly by the medium of the value measurer, 
 gold, and that its temporary presence in increased quantity 
 has a destructive influence on production by raising cost. 
 
 For extension of business other mediums of exchange 
 must be found, which can do the work of coin without 
 limitation as to supply, and considering the state of society 
 it is highly desirable that the work should be done in the 
 same simple way as coin does it. Coin, the value measurer 
 and the ideal medium of exchange, is in general demand, 
 not because it is consumed, but because it can easily be 
 exchanged for goods or services. Coin in a man’s pos¬ 
 session is then a power over a certain amount of goods or 
 services, or in other words evidence of certain rights 
 respected by all. It can therefore be superseded in its 
 function by other evidence of rights, while it retains its 
 function of value measurer in all exchanges. Such evi¬ 
 dences of rights would then become mediums of exchange. 
 For clearness’ sake we will call such mediums of exchange 
 as are not coin ‘ instruments of credit.’ We use here the word 
 credit, of course, in its economic sense, meaning thereby 
 not so much deferred payment as the power of purchasing 
 goods and services, valued in coin, and proved by some 
 stamped, written, printed, spoken, or understood evidence. 
 
 It now has to be determined which of the known credit 
 instruments is the most important as an auxiliary medium 
 of exchange, or the one which is most suitable to replace 
 coin and assist it in its function as a medium of exchange 
 without interfering with its function as a value measurer. 
 Coin being the ideal medium of exchange understood by and 
 within the reach of all, and therefore of very extensive use 
 in our productive trades, where want of commercial training 
 and of sufficient means render many of the other credit 
 instruments inapplicable, it is necessary that the credit 
 instrument which we select as a substitute for coin should 
 possess as many as possible of the advantages of coin with¬ 
 out its disadvantages. 
 
 To enable us to examine more easily the known instru¬ 
 ments of credit, we arrange them in the following scale: 
 
 1 . 
 
 2. 
 
 3. 
 
 4. 
 
 5. 
 
 6. 
 
 7. 
 
 Coin. 
 
 State 
 
 bank¬ 
 
 notes. 
 
 State super¬ 
 intended 
 notes. 
 
 Free 
 
 notes. 
 
 Cheques. 
 
 Bills. 
 
 Accounts 
 
 current. 
 
40 
 
 Rational Banking versus Bank Monopoly . 
 
 They have been thus placed in order according to their 
 degree of similarity with coin. We will examine them, 
 beginning with the last, viz., No. 7, Accounts current. 
 
 An amount credited in the ledger of a bank or good 
 commercial firm will buy goods and services to the same 
 amount in coin. Accounts current will then, where they 
 exist, render the same services as coin. A very large busi¬ 
 ness is daily transacted all over the world with no other 
 medium than accounts. They have not the defects of 
 coin, regarded as a medium of exchange, inasmuch as the 
 increased use of them will not directly affect prices of goods 
 as increased presence of coin does. Large amounts may be 
 credited and debited in merchants’ books any number of 
 times without affecting the value of coin. Also, for large 
 businesses accounts current are a cheaper medium of ex¬ 
 change than coin, and the possible use of such a system may 
 be called unlimited. 
 
 Such are the advantages of accounts current over coin. 
 These advantages are very important. But accounts can 
 replace coin only in certain kinds of transactions between 
 certain classes of people. They cannot be used as the general 
 substitute for coin which we are in want of; they are not 
 a portable and easily transferable evidence of credit; they 
 can be used only by people of a certain commercial stand¬ 
 ing ; they can effect exchanges only between people known 
 to each other as solvent and honest; and they are not 
 suitable for small transactions amongst the general 
 public. 
 
 Let us now examine No. 5, Cheques, and No. 6, Bills. 
 These have similar advantages, though to a less degree, to 
 those we have described as belonging to accounts current, 
 and are also free from the disadvantages attached to coin ; 
 besides which they are portable and transferable. But at 
 the same time they have all the restrictions to their use 
 that accounts have, and would therefore not well replace 
 coin. 
 
 No. 4, Free notes, offer the same kind of facilities as 
 accounts current. They are cheap, easily procurable in the 
 exact amount wanted, and at the same time they can be 
 handled in exactly the same way as coin. They can be 
 used by all who can use coin ; they are transferable by 
 simple exchange, etc. If, besides, they are free from those 
 disadvantages which coin has as a medium of exchange— 
 a fact which we shall prove in the following chapter—free 
 notes have then similar advantages to those of all the other 
 mediums of exchange without having any of their defects. 
 
j Rational Banking versus Bank Monopoly . 41 
 
 That No. 3, State superintended notes, and No. 2, State 
 Bank notes, have all the disadvantages which coin has as a 
 medium of exchange, we shall prove hereafter. 
 
 If we now return to the scale on page 39, and read over 
 the different credit instruments from right to left, we find 
 that the advantages fully present in No. 7 are present in 
 some form in Nos. 6, 5, and 4, but not at all in 3, 2, or 1. 
 
 If we proceed from left to right we find that the advan¬ 
 tages realized in No. 1 (coin) are present in Nos. 2, 3, and 4, 
 but not in 5, 6, or 7, or, in other words, that the disadvan¬ 
 tages of coin stop at No. 3, and the disadvantages of 
 accounts current stop at No. 5. No. 4 (Free notes) thus 
 stands out prominently as possessing all the advantages and 
 being free from the disadvantages of all other instruments 
 of credit. 
 
 We thus come to the conclusion that free notes are the 
 perfection of all credit instruments, and the only one which 
 can replace coin advantageously. The other credit instru¬ 
 ments are good and useful in their places, but none of them 
 can prove an adequate sole substitute for coin regarded as 
 a medium of exchange. 
 
 It remains yet to prove what we have so far presupposed 
 —namely, that State Bank notes and State superintended 
 notes are no improvement on coin, but have all its disadvan¬ 
 tages, and that free notes have, as a medium of exchange, 
 none of the disadvantages of coin. 
 
 As these facts are very important links in the chain of 
 our reasoning, and as they are ignored by all who have 
 legislated for banking, and, as far as we know, by all who 
 have written on the subject, we shall devote a separate 
 chapter to them. 
 
 VII. 
 
 THE EFFECT OF STATE SUPERVISION OVER NOTE ISSUING. 
 
 When redeemable State Bank notes are issued they do not 
 increase the quantity of the circulating mediums of exchange 
 in the country, for the reason that gold leaves the country 
 in exact proportion to the issue of the notes, everything 
 else remaining unchanged. 
 
 There is no lack of proof drawn from experience, for 
 this economic fact, and its explanation is as follows. A 
 
42 Rational Banking versus Bank Monopoly. 
 
 quantity of State Bank notes known to be safe and redeem¬ 
 able at sight would—being equivalent to coin—have the 
 whole country for their market; when issued they would 
 buy some kind of goods or services; a scarcity of this kind 
 of goods or services would be caused, and would be filled 
 from other places than that in which the notes were first 
 issued. Capital employed in buying services having a 
 tendency to become invested in goods for immediate con¬ 
 sumption, we need speak here only of goods. If the 
 goods purchased for the new notes came from abroad, a 
 quantity of gold corresponding to the issued notes would 
 leave the country at once in payment for this extra import, 
 as the notes could not be used for payments out of the 
 country. We suppose here, of course, an isolated, ideal 
 transaction; in reality the phenomenon would be com¬ 
 plicated by variations in the rate of exchange, and a great 
 number of other transactions; but the final result would 
 always be that the issued notes would take the place of a 
 corresponding quantity of gold, which would remain abroad. 
 If, on the other hand, the goods absorbed in the first 
 instance were home products, the home production would 
 first increase; everything else remaining the same, the 
 consumption of raw material, provisions, etc., would increase 
 and wages rise. The increased activity in one place would 
 soon spread, and the advance in prices would permeate the 
 whole country, if the first cause, that is, the quantity of 
 issued State Bank notes, was sufficiently important. An 
 advance in prices all over the country means necessarily 
 less export, and more import: the difference would be paid 
 in gold corresponding to the quantity of the issued notes. 
 (In reality the gold might not actually be paid; it might 
 be kept back from intended gold shipments to the country, 
 etc., but the actual result would be so much less gold in the 
 market than would have been there if the supposed extra 
 issue of State Bank notes had not taken place.) We 
 find, then, that the issue of State Bank notes affects the 
 country in exactly the same way as imported gold, des¬ 
 cribed in Chap. IV. The advantage from State Bank notes 
 is then limited to the interest saved on the quantity of 
 gold they replace—a very small advantage indeed, and 
 more than counterbalanced by the deterioration of the 
 value measurer, and the insecurity which results from in¬ 
 creasing the promises to pay while still the gold is banished. 
 Strange to say, this so-called advantage of saving the 
 interest of the replaced gold is the only one mentioned by 
 
Rational Banking versus Bank Monopoly. 43 
 
 most writers on banking as resulting from all kinds of 
 notes. They are quite right so far as State Bank notes are 
 concerned, but it is strange that the effects of free banking 
 in Scotland did not suggest to them the vital importance 
 of free bank-notes. 
 
 It has been said that State Bank notes have proved very 
 useful, at least when first introduced, as may be gathered 
 from the history of banking in several countries. But the 
 fact is that it was not the notes which caused the noticed 
 improvement, but the simultaneous extension of banking, 
 which could have been carried on very well without notes, 
 and very much better with free notes. 
 
 It may further be urged that when State Bank notes are 
 issued they cause an increase in business, and thereby 
 enable the market to carry increased mediums of exchange. 
 Our reply to this is that the increase of activity is entirely 
 temporary, and lasts only during the interval necessary to 
 raise prices high enough to check production and export, 
 and thus send the gold out. When the gold has left the 
 country, and the corresponding capital is consumed, things 
 turn out much the same as before, if not worse by reaction. 
 
 Private notes supervised by the State are the worst kind 
 of notes. The State supervision is either efficient enough 
 to make the note safe in the estimation of the people, or it 
 is insufficient, only lending an empty prestige to the notes, 
 and giving the people a delusive guarantee. The latter 
 kind of supervision would be an act of deception on the 
 part of the Government, and though it has been practised 
 more than once, we may consider it obsolete. It remains 
 to examine how the notes of private banks made, relatively 
 speaking, safe by law would affect the trade of the country. 
 
 In the first place they would affect the trade of the 
 country as coin does, because the Government having 
 undertaken to look after the security, the people would 
 make no distinction between the notes of the different 
 banks, but cause them to circulate indiscriminately all 
 over the country. Excess of issue could only be discerned, 
 therefore, when the reaction had fully developed, that is, 
 after production and export had been seriously affected. 
 Superintended notesheing equal te-c.C)in_in„.their financial 
 and economic effects would cause banking to take the 
 objectionable form of coin lending, inducing none of the 
 delicate and intelligent handling so conducive to prosperity, 
 which results naturally from free banking, or even from the 
 French banking method. Then we find that State super- 
 
44 
 
 Rational Banking versus Bank Monopoly. 
 
 vised banks cannot achieve the public object for which 
 they are established, namely, to augment the mediums of 
 exchange. They cannot make any_considerable use of 
 their right of note issue except when they can secure a 
 sufficient gold reserve, and when the general market of the 
 country is in a condition to carry an increased quantity of 
 notes. But these conditions are fulfilled only when business 
 is flourishing, and when prices are favourable to production 
 and export, or in other words, just when there is enough 
 coin and coin notes in circulation, but not too much to 
 send prices up and hamper export. Such periods are the 
 opportunities of these banks, and they naturally take 
 advantage of them to issue as much of their notes as they 
 can force into the market. The notes drive the gold out of 
 the country, and its scarcity soon becomes embarrassing, 
 because it is wanted to pay for the increased import inflated 
 by great consumption, unwise production, and artificial 
 flush times. When the circulation of the notes is thus at 
 its height, and a great need for them is developed, the 
 banks find it absolutely necessary, in consequence of the 
 increasing scarcity of gold, to withdraw their notes as 
 quickly as possible, and a crisis is created which lasts until 
 prices have again dropped sufficiently to tempt those who 
 have means left to again start production and export. 
 Thus these banks increase enormously the circulating 
 mediums of exchange when such an increase is undesirable, 
 andTwithdraw them when the demand for them is greatest. 
 In countries where this absurd system is in vogue the 
 people pay dearly for any short period of prosperity which 
 they can snatch through exceptional favourable circum¬ 
 stances, and such periods are infrequent. 
 
 The notes being taken indiscriminately all over the 
 country, no supervised bank has any control over the sur¬ 
 rounding market, or what ought to be its own market. 
 Such banks do not care to have a merely local control, the 
 whole country being their market. The interest of each is 
 to circulate its notes as far from the bank as possible, and 
 liberal terms are given to distant customers. A more 
 effective way of gorging the country with notes could 
 hardly be imagined, and the country is full of them to 
 overflowing; the notes are always in excess of the quantity 
 compatible with sound business. 
 
 The result of course is that prices are kept as high as 
 possible, production as dear and as small as possible, work 
 scarce as possible, and business as unprofitable as possible. 
 
Rational Banking versus Bank Monopoly. 45 
 
 Excessive import and a tendency towards foreign indebted¬ 
 ness are apt to become chronic amongst people who thus 
 deliberately corrupt their value measurer, introduce base 
 paper coinage, and bring on themselves all the evils of 
 gold-producing countries without being able to produce an 
 ounce of gold. 
 
 Free notes have no such effects on the economy of the 
 country where they are circulating. The fundamental 
 reason for this is that, free from all State supervision, they 
 never acquire the attributes of coin. In whatever form 
 they may be issued, and in whatever way they may be 
 handled, they always remain credit ins tr uments^vith no 
 other effect on the market than cheques would have. 
 WEIe”State supervised notes are coin—bad paper coin— 
 free notes are cheques. They can be used as coin where¬ 
 soever coin can be used: they do not produce the effect of 
 coin on production and export, but accomplish fully the 
 objects of cheques in the same way as cheques. 
 
 To well grasp this argument minute investigation is 
 necessary. We must first inquire into the nature of free 
 bank notes. The general impression is that as soon as 
 everybody in this empire is permitted to issue notes pay¬ 
 able to bearer on demand—or what is generally called 
 bank notes—everybody would set about issuing notes, 
 everybody would soon have too many notes out, every¬ 
 body would stop payment, and everybody would be 
 ruined. 
 
 As a matter of fact, everybody would not, and could not, 
 issue notes ; because the following conditions are, by force 
 of circumstances, attached to free note-issuing : 
 
 First Condition.—The issuer of free notes must be of 
 good standing , and have ample means . 
 
 When all State interference disappears, notes will have 
 to circulate entirely on their own merit. Who would, under 
 such circumstances, take an unknown man’s or a poor 
 man’s notes as cash ? Just as many as would now take an 
 unknown or poor man’s I 0 U as cash. 
 
 A man of small means would find note-issuing a most 
 difficult, not to say impossible, way of raising capital. He 
 would gain his object much sooner, and with far less ex¬ 
 pense, through bills or promissory notes at fixed due dates, 
 or any other instrument of credit. And if a poor man, by 
 some chance, did get some one to take his notes, would 
 they not be presented for payment at once, and then where 
 would the issuer’s advantage be ? It is, then, out of the 
 
46 Rational Banking versus Bank Monopoly. 
 
 question that anyone except firms and companies of good 
 standing would ever attempt to issue notes ? 
 
 Second Condition.—Notes can be issued only by carrying 
 on a banking business. 
 
 The reasons for this are as simple as they are conclusive. 
 If free notes were issued in any other way, they would be 
 presented for payment at once. If notes are not lent nor 
 used for discounting, they can only be given away as pre¬ 
 sents, or used as payment for goods or services. If a rich 
 man were to issue notes for these two latter purposes, they 
 would be taken out of politeness; but they would at once 
 either be presented for payment, or passed through banks 
 and clearing-houses as cheques. No one would have any 
 interest in circulating them, and everywhere they would be 
 subject to a commission, if they were received at all, which 
 would be quite enough to send them home very soon. But 
 even if a rich man not carrying on a banking business could 
 succeed in circulating a quantity of notes, it would be about 
 the last thing he would desire to do. There is hardly any 
 greater business nuisance imaginable for a rich man than 
 to have small amounts coming due constantly and irregu¬ 
 larly. Why should he expose himself to this, when he can 
 buy largely on long, fixed credit, pay with cheques on his 
 banker, or secure his supply in many other ways less expen¬ 
 sive, troublesome, and annoying than note-issuing ? Banking 
 is therefore the only possible way, and the only advantageous 
 ay, of issuing notes. 
 
 Third Condition.—The issuing banker must issue his 
 notes only through customers carrying on business in the 
 locality where the notes are issued. 
 
 When banking is entirely free, notes will not circulate 
 beyond the neighbourhood of the issuing office—that is, 
 where the bank is well known. Banks being numerous, 
 under a free system the people will have to look at the 
 notes before they take them as cash, and they will very 
 soon adopt the habit of refusing all notes they are not 
 accustomed to. Every banker will, to defend his own 
 market, treat other banks’ notes as cheques, and charge a 
 commission on them. These and many other circumstances 
 will prevent the notes from leaving their natural market. 
 Even in England, where note-issuing is monopolized by 
 some few banks of unquestionable standing, where Govern¬ 
 ment watches over a strictly limited issue, and where, con¬ 
 sequently, there are fewer causes to keep the private notes 
 within their respective markets, these notes circulate only 
 
Rational Banking versus Bank Monopoly. 47 
 
 round the banks of issue. At some distance from the 
 issuing office few of the notes are found, and many an 
 Englishman has never seen an English private bank-note, 
 although there are now in England fourteen note-issuing 
 banks, besides the Bank of England. 
 
 If, therefore, a free note-issuing banker were to lend his 
 notes to people outside his own market, they would all 
 come back at once, either to be exchanged for gold, or as 
 payments which would otherwise have brought him gold. 
 Such a transaction would diminish the banker’s metallic 
 cash, and it would be useless to send away the notes at all. 
 If a banker would lend capital to customers outside his 
 natural market, he would not send his notes, as they might 
 come back all in a lump, and cause him some inconveni¬ 
 ence ; he would send gold, a cheque, a draft on some other 
 bank, or some such document. If he wants his notes to 
 circulate, he must pay them out in the only place where 
 they have a chance of staying—namely, his own market. 
 
 Fourth Condition.—The free issuing hanker must work 
 only with people whose business consists in f urthering pro¬ 
 duction or export from the district. 
 
 If an issuing banker lends his notes to a customer, the 
 latter will buy goods with them, and consume the goods ; a 
 scarcity of this kind of goods is thereby caused, and is filled 
 from other markets, without countervailing export; the 
 import must be paid for, but as the notes are not accept¬ 
 able outside the market, they must be exchanged for gold 
 or gold’s equivalent (a draft on some one outside the 
 market) before the payment can be made. Lending his 
 notes to consumers amounts, then, for the issuing banker, 
 to the same as lending his ^ gold. He might lend his 
 gold to consumers, but he would not thereby circulate his 
 notes. 
 
 Fifth Condition.—The issuing hanker must endeavour to 
 work only with people who have a profit on their business. 
 
 If the producers or exporters to whom the free notes are 
 lent spend more on their goods than they obtain for them 
 when sent out of the market, they cause a deficiency of 
 goods exactly as a consumer would do. A losing production 
 is, economically speaking, a consumption pure and simple. 
 The issuing banker must avoid unsuccessful producers or 
 exporters on the same grounds as he would consumers. 
 
 Such are the chief conditions which the force of circum¬ 
 stances imposes on bankers who wish to create a note 
 circulation. Anyone who takes the trouble to study the 
 
48 
 
 Rational Banking versus Bank Monopoly . 
 
 ^ - 
 
 matter will find that these conditions are safer and much 
 more to the purpose than any conditions or regulations 
 which the Government could impose. 
 
 Having now gained some insight into the nature of free 
 notes, it will be possible to grasp thoroughly the important 
 fact that free notes, as we have described them, will not 
 affect the country in the same way as the use of coin or 
 State-supervised notes. 
 
 Every issuing banker must keep a certain quantity of 
 (^gbld in stock to meet such quantities of notes as are likely 
 to be presented for payment. If a banker carries on his 
 business in such a way as to leave himself short of coin, he 
 may be obliged to stop payment, even though only tempo¬ 
 rarily and though he be wealthy, and thereby lose his credit, 
 his business, his connection, and the result of all his work. 
 He must, therefore, carefully avoid over-issuing. 
 
 But, on the other hand, the more notes he can keep in 
 circulation, the larger is his profit through interest on the 
 notes, and through the increased turn-over. 
 
 Self-preservation on one side, and the desire for profit on 
 the other, thus determine the limits of a banker’s issue. 
 
 Free notes produce—but, note it well, only within their 
 own market—the same effect as coin would produce circu¬ 
 lated through the same channels. It is the important fact 
 that the effect of free notes is necessarily limited to their 
 own market, which gives them, as a medium of exchange, 
 the great superiority over coin. We have already given 
 the reasons why the free notes do not leave their own 
 market. 
 
 If, therefore, the banker issues in excess, the notes do not 
 spread further in the country, but come back to be ex¬ 
 changed for gold, which can and does leave the district. 
 We shall explain why. An issuing banker works, as we 
 vJhave seen, only with producers or exporters (from the dis¬ 
 trict). When the customer of the bank gets the notes, he 
 spends them in raw material, tools, wages, etc.; an extra 
 import into the district follows, and there is a balance 
 against the market in which the bank works, which may be 
 paid in gold, or left to be paid by the produced goods. The 
 fact that the notes come into the market through the 
 channel of production causes at once an increased activity; 
 many people buy and sell more, many produce more, and 
 many consume more, and more notes are therefore required. 
 Thus the free notes improve their own market, and make 
 it more fit for their own circulation. When the note-issuing 
 
Rational Banking versus Bank Monopoly . 49 
 
 is extended, it tends to increase the import, but this import 
 is paid for by the fresh products, and not in gold. As the 
 producers and exporters have a profit on their goods, and 
 the workpeople may save something out of their wages, the 
 new products have a higher value than those which have 
 been consumed in their production. Consequently, there 
 remains a balance in favour of the market of the issuing 
 bank, and gold has a tendency to flow into that market 
 rather than to leave it. The balance will be added to the 
 working capital of the district, and the prosperity will be 
 permanently increased. 
 
 Should the banker now send out too many notes, prices 
 would advance, because too many would compete in buying 
 the products of the district and the services of the people. 
 Production would then have to stop, or be carried on at a 
 loss. As we have seen, the result would in either case be 
 the same—gold would leave the market. The chief gold 
 stock is with the banker, and he has to part with it, 
 obtaining his notes in return. A drain on the gold stock 
 is a danger and great inconvenience to the banker, and he 
 will, therefore, always avoid over-issuing. He can easily 
 do this. His metallic cash always tells him the exact state 
 of the market, and with such a sure guide the banker soon 
 learns to avoid not only runs, but all increase in the return 
 of notes as compared with issue. He cannot help but find 
 out by experience that any attempt to flood his market 
 with notes is bound to bring a reaction which will reduce 
 his circulation, and that his only way of increasing his note 
 circulation is to improve the condition of his market; this 
 he can do by choosing the best producers as his customers, 
 by giving his support to all promising enterprises, and 
 avoiding over-issuing. If the banker pays attention to the 
 indication of his metallic cash, he can easily keep his 
 market in a steady, progressive state. 
 
 With coin and State supervised notes no such natural 
 regulations exist. The whole country is always bepoming 
 over-supplied with coin-notes—we mean over-supplied in 
 proportion to the business doing—and the wdiole market is 
 constantly in a state which requires part of the circulating 
 value-measurer to be withdrawn, and only issued gradually 
 through the channels of production, in proportion Ho the 
 improvement in the market. But there is no onaAQ do >this 
 del icate work . A State bank oF"my centre oFissue or gold- 
 stormg, can only act" when the gold begins to leave the 
 country—that is, when the mischief is done, when produc- 
 --- 4 — 
 
50 
 
 Rational Banking versus Bank Monopoly. 
 
 tion is checked, when foreign competition has prevailed, 
 when time, capital, trade, and connection are lost. Besides, 
 there may be cases when all the trades of the country are 
 suffering from over-inflation of prices through excess of 
 issue while some political or somo gr^at avt.p.gnfl.1 
 keeps up the gold-supply andstill encourages a large issue. 
 The state of the metallic cash of a national bank is not so 
 true an indication of the condition of trade in the country 
 as the private banker’s metallic cash is of the state of his 
 smaller market. The crisis towards which a country de¬ 
 prived of free banking is naturally drifting when no excep¬ 
 tional cause of prosperity is at work is in a free banking 
 country prevented, all the causes of it being carefully 
 removed in detail by the bankers. The normal state of a 
 free-banking country is, therefore, one of steady, uninter¬ 
 rupted progress; while the country with State-supervised 
 notes has a tendency to drift towards economic crises, and 
 experiences only short and infrequent periods of that kind 
 of prosperity which, in reality, is only the reaction from 
 extreme depression, and is produced by enormous sacrifice 
 of capital and great suffering amongst the people. 
 
 Such is the difference between State-supervised notes, 
 adopted by every civilized country and recommended by 
 most writers on banking, and free notes, the use of which 
 is forbidden by law all over the civilized world. 
 
 VIII. 
 
 OBJECTIONS TO FREE BANKING REFUTED. 
 
 Of all the prejudices in the commercial world, that against 
 free banking is probably the strongest and certainly the 
 most general. The o bjections - put forward against it are 
 many and various. And yet these objections are all 
 based on mere supposition, because no fact exists or has 
 existed in any country at any time which can be cited in 
 defence of them; and the prejudice is unreasonable and 
 unreasoning, being at variance with all sound political 
 economy. Almost every economic and commercial incident 
 in the world directly or indirectly illustrates the correctness 
 of the theories in favour of free banking, or the principles 
 on which they are founded. 
 
Rational Banking versus Bank Monopoly. 51 
 
 Bat, after all, the prejudice against free banking is both 
 pardonable and easily explained. During hundreds of years 
 bank-notes have been called ‘ money/ and the evils which 
 have resulted from bad ‘ money ’ have been very great and 
 very numerous. A safe ‘ currency/ or safe ‘ money/ is 
 therefore considered as the first result which a bank law 
 should attain. It is only natural that most people should 
 feel frightened at the idea that everybody in this empire 
 should be allowed to issue bank-notes, or, as it is generally 
 put, to coin paper-money. With such superficial views of 
 the question, it is no wonder that people should at first 
 consider a great number of the objections against free bank¬ 
 ing as both reasonable and weighty. But after having 
 found in Chapter VI. what stringent conditions free 
 banking imposes on the issuer of notes, and that only well 
 managed banks can attempt such a business, we may dis¬ 
 miss all objections raised against note-issuing by other than 
 bankers as entirely groundless, because it would never be 
 attempted by such. It suffices then to meet the objections 
 raised against free issuing banks or bankers. 
 
 It is said that i f banking were free, dishonest men cou ld 
 take to banking, secure a large circulation for their nor.re?. 
 and when a large nuinb'CT were duf/Tail or decam p. 
 
 Let us“see“lf such aThiftg would be likely to^ccur. 
 
 To begin with, it will be necessary for a dishonest banker 
 to have a good name. His j»ea1 chara c t e r mna L^emain a 
 secret to all, as a man whose dishonesty was known would 
 finZTTnilpossible to circulate his notes. He must also have 
 a consid$rahle_captal. We must also suppose that he has 
 pQrseveranceandTThtelli genc e enou g h to j v prk j qp a con- 
 siaefrablqJbfl*sineg s~^^ klm/sdrtch 
 
 alone~mlI-trrPcuIate notes, because we know by experience 
 that the note circulation is small compared with the business, 
 and that in all banks the proportion of coin and notes to the 
 turn-over of the bank tends to diminish as the business 
 grows. (A good London bank does about 1J per cent, of its 
 business with cash.) 
 
 If we suppose all this, we are still short of a very important 
 factor, namely, a sensible motive for failing or running 
 away. It would pay the dishonest man better to carry on 
 a good ousiness, or to sell it instead of ruining it. But let 
 us, for argument’s sake, suppose that there was a motive 
 for dishonesty, and let us see whether he could gain any 
 advantage at all by running away or failing fraudulently. 
 Against the notes he issues he receives no coin, no goods— 
 
 4—2 
 
52 
 
 Rational Banking versus Bank Monopoly. 
 
 simply claims on his customers. He cannot work his busi¬ 
 ness without a substantial metallic cash reserve, and a great 
 part of that is also in his customers’ hands. Thus his 
 customers have more of his cash than he has of theirs. If 
 he runs away he cannot take the claims with him. He 
 might have rediscounted all bills and warrants; but we 
 know that cash accounts are the best means of circulating 
 notes, and he could not discount these. As under a free 
 system the total of granted cash accounts will always exceed 
 considerably the circulation of notes, we find that even if 
 we suppose a number of highly improbable contingencies 
 the fraud feared is simply impossible. 
 
 It was not by chance that so few banks failed in Scotland 
 during the 150 years of freedom which preceded the Bank 
 Act of 1844. The almost complete absence of bank failures 
 is the more conclusive if we consider that during this time 
 the Government committed all sorts of financial absurdities, 
 and caused fearful panics in England; that times were very 
 troubled, and that the true theories of banking were un¬ 
 known. 
 
 / It has further been objected that a banker might begin 
 with an honest note-issuing business, gradually go in for a 
 deposit business, obtain a large amount of deposits, and 
 \jdien decamp. 
 
 If such a thing did happen t he loss would be ca used by 
 the deposit business, and not by the note-issuing. Deposit 
 ban ks - can -easi ly ~r u ln tlie msel Tes ~m<d~thousaiids of their 
 customers (or shareholders, if they are unlimited), and they 
 may now be carried on by anyone. Note-issuing, which 
 cannot be put to any bad use, is forbidden by law. If the 
 two branches were carried on by one bank, such bank would 
 have to be far more cautious and more rational than a bank 
 which does not issue notes. Note-issuing is therefore a 
 most healthy check on a bank, and tends to keep it straight. 
 A note circulation would hamper a dishonest or imprudent 
 banker, and he would get rid of it before he took any undue 
 advantage of deposits. Besides, it is evident that note cir¬ 
 culation decreases as deposits increase. Deposit accounts 
 make other and cheaper instruments of credit possible than 
 notes, such as cheques and bills. Notes are used in con¬ 
 nection with cash accounts, and cheques with deposit 
 accounts. If a bank doing an issuing business combined 
 with other business were to go wrong, it would be found 
 that the note-issuing had acted as a safeguard for the 
 creditors and shareholders by enforcing moderation, and by 
 precipitating an early disclosure of the true state of affairs. 
 
Rational Banking versus Bank Monopoly. 53 
 
 But let us suppose what would not occur often, namely, 
 that an issuing bank did fail, and even, what is highly im¬ 
 probable, that it failed with as many notes out as its market 
 could carry. Would such a failure be very disastrous? 
 We must, again, remember that under a free system the note 
 circulation is small in proportion to the turn-over of the 
 bank, and that this proportion tends to diminish. At the 
 end of the free period of Scotch banking, the aggregate note 
 circulation of all the Scotch banks was below four millions, 
 and in 1840-1841 it was as low as three millions, while the 
 deposits reached forty millions. The amount which could be 
 lost by note-holders would not only be small, but would be 
 divided over a very great number. Few people now keep in 
 their own hands a large amount of cash, and with more 
 banks still fewer would do so. The amount lost by unpaid 
 notes when an issuing bank failed would therefore be small 
 for each holder; but when a deposit bank fails, thousands 
 may lose their fortunes! Our wonderful Bank Law thus 
 protects our purses; but our fortunes it not only leaves 
 unprotected, but actually undermines. 
 
 A great argument of the opponents of free banking is 
 that the wo rking man might he the loser , if a. fr^o h^k 
 failed. Shouldwe then keep the working man in constant 
 poverty in order to protect him against a remote chance of 
 losing a few shillings through a bank failure ? Compared 
 with such reasoning it would be wisdom to recommend the 
 cessation of all railway traffic for fear of accidents. Such 
 arguments do not require refutation. We may, however, 
 point out that the working man has the right to refuse any 
 note he may suspect, or he may have it endorsed by the 
 person who pays it to him; that few working men would 
 keep even a full week’s wages in notes, as it is either con¬ 
 sumed or placed in a savings bank; and, finally, that all 
 the holders of cash accounts in the failing bank would be 
 entitled to pay their debt to the bank in notes, and would 
 therefore be able to cash the notes in the hands of others 
 after the bank had failed. This they would probably be 
 willing to do at a small discount. The risk of the working 
 man would thus be imperceptibly small, or something like 
 a small discount, or a few shillings once perhaps in a 
 century. 
 
 Another objection raised is that when many banks are 
 allowed to issue notes, ignor ant peo ple whWcannot distin¬ 
 guish the notes of one bank from those of another may be 
 made to accept valueless paper in payment. 
 
54 
 
 Rational Banking versus Bank Monopoly . 
 
 Sucli a thing has happened, though seldom, in countries 
 where the Government supervise the banks, and where all 
 notes circulate indiscriminately, and where consequently no 
 one notices what bank has issued the notes received; but 
 in a country where it is generally known that the Govern¬ 
 ment has nothing to do with the notes, only simpletons 
 could be taken in by papers resembling notes. Even care- 
 fully-executed forged notes could have no chance of a 
 circulation that would repay the forger. As the free notes 
 do not circulate all over the country like Government notes, 
 but have a limited market, run in fixed channels and 
 reappear^often iii^hn^TiaiiksT- forged ones could more 
 qui c kly be detected and t raced toUdieir^cm^ 
 
 G o^rnmenb su^pervisecljxot es. In any caseTit would always 
 be eas iexJbiX&rg^^heques and to deceive by cheques ; but no 
 one dreams of prohibiting cheques because'mot^nnly--^tupid 
 people but a great many clever people are taken in by 
 them ! 
 
 It has been said that if an issuing bank were to stop 
 payment, there would be a run on all the other issuing 
 banks, and a general panic might follow. 
 
 There is no experience to justify such fear, nor can a 
 reasonable ground be given. Under a free system cen¬ 
 tralization disappears, and each bank stands more indepen¬ 
 dently of other banks than under any other system. To 
 arrive at having a good note-circulation, a bank must be 
 very useful to its market, and will therefore be popular. 
 All who derive advantage from the bank will do their best 
 to prevent a run, and all the cash-account customers will 
 not only have a special reason for protecting the bank, but 
 will have great power to do so, as they can without any 
 risk to themselves cash notes up to the amount of their own 
 balance. As note-issuing is not a business likely to bring 
 about the failure of a bank with a large circulation, there 
 would be a special reason for each failure, which would be 
 generally known; and as each bank would be well known 
 on its market, only those banks would be affected by a 
 failure which had suffered from the same cause. 
 
 Some people seem to fear that in case of complete absence 
 of State regulation, a great quantity of ver y small not es 
 would be issued, a nd that t hese wou ld drive alTthe silver 
 out of the country and generally prove a great nuisa nce] 
 ^Tt must Te~remembered that the s maller the amo unt 
 represented by each note, the smaller is th e p rofit on the 
 issue] It costs as much to print, number, check, and issue 
 
Rational Banking versus Bank Monopoly. 
 
 55 
 
 a note for five shillings as one for a hundred pounds. The 
 issuing bank would, therefore, not send out more small 
 notes than the market could hold regularly. Whether 
 small notes would supersede silver or not would of course 
 depend on the public. If there existed any dislike to notes 
 under a certain amount, such notes would come back too 
 frequently to give the bank any profit. They would oblige 
 the banker to keep a silver cash reserve as well as a gold 
 one, for if he at any time refused to oblige his customers or 
 even outsiders with silver, his small notes would not circu¬ 
 late at all. Thus the public would have it in their power 
 to decide the minimum amount at which a note becomes a 
 nuisance. In busy centres no small notes would pay, and 
 would probably not be issued; but in outlying, poor, and 
 isolated districts, small bankers might be able to make one 
 shilling notes pay, and in such places, where change is 
 scarce, no one would object to them. 
 
 Many countries have had State bank notes of very small 
 amounts, and instead of proving a nuisance they were found 
 very convenient for all kinds of business requiring a great 
 quantity of change, as they weighed very little and could 
 be easily carried or sent in parcels and letters. An amount 
 in small notes would go in a pocket-book, while the same 
 amount in silver would be a burden. There was only one 
 objection to these small notes; being State notes they had 
 a very wide and protracted circulation, and were only re¬ 
 newed when they happened to be paid into the State bank. 
 They therefore became dirty and ragged. But free private 
 notes would make their appearance frequently in the bank, 
 and could easily be renewed. 
 
 Of the objections against free banking which have come 
 under our notice, these seem the most sensible. 
 
 IX. 
 
 FORECAST OF RESULTS OF FREE BANKING IN ENGLAND. 
 
 If free trade in banking were introduced now throughout 
 the British Empire it would in a short time open a period 
 of . growing prosperity, an d close a term of that norma l 
 de pression wEh ch"iF~insep arable hamp ered division o f 
 
 labour, and which becomes^ntense when, as now, it is not 
 counteracted by some special causes of activity in trade. 
 
56 Rational Banking versus Bank Monopoly. 
 
 The effects of free banking would be great and prompt, 
 because it would enable us for the first time to enjoy the 
 benefit of all modern improvements, up to now neutralized 
 by the absence of rational banking. Co-operation will, 
 when free, benefit enormously from the last fifty years’ pro¬ 
 gress in government, colonization, means of communication, 
 and science. Free banking would, by supplying an un¬ 
 limited wealth-producing medium of exchange, incapable of 
 being abused, give for the first time to this widespread 
 Empire the greatest development to co-operation compatible 
 with our system of civilization. This is saying much, but it 
 may be interesting to point out here not all of these results 
 —that would be impossible—but the most important of 
 those which can be proved from experience or by deductions 
 from the preceding chapters. 
 
 Free banking would cause credit to be cheap and coin to 
 retain its highest value; or, in other words, capital to be 
 supplied to labour at a low rate of interest, and cost of pro¬ 
 duction to remain low. The bulk of the capital of the 
 nation would find its way into the channels of genuine pro¬ 
 duction, in preference to those of consumption, speculation, 
 and spurious business. 
 
 The intelligence existing amongst the lower middle and 
 working classes, now often wasted, would be largely utilized, 
 as the banks would derive more profit from intelligent 
 customers than from rich ones. 
 
 The cash credit system would be adopted, as it was in 
 Scotland, by all the issuing banks wherever the presence 
 of natural raw material, large population, or any other 
 facilities for business might exist. The number of work 
 givers would thereby be greatly increased, and a great 
 many people would get a start in life. 
 
 Wages would be high and living cheap, and the working 
 classes would be well off. 
 
 Production would be large, cleverly managed, and profit¬ 
 able. 
 
 Consumption would be in proportion. 
 
 Hence large import and corresponding export. Conse¬ 
 quently Commerce would be flourishing and professions 
 well paid. 
 
 The complaint of £ no work to do ’ would cease. So long 
 as there are men fond of luxuries, pleasure, or refinement, 
 there will be more work in the world than can be done ; 
 only it must be allowed to fall into the natural free division. 
 
 The strife between capital and labour would cease, 
 
Rational Banking versus Bank Monopoly. f5 
 
 because no labour would be lost for want of capital. The 
 despotism of capital would collapse, for the capitalist would 
 depend as much on the workers as the workers on the 
 capitalist. 
 
 Capital would always be waiting on work, through the 
 medium of the banks. An honest and capable man would 
 easily find capital for any paying business, especially for one 
 of production, as the banks would derive a double profit 
 from any healthy increase of production in their markets. 
 
 Capital, though no longer a despot, would find safer and 
 more profitable investment, because the free banks would 
 supply the long missing channels through which it can 
 reach safe and paying production. And through note¬ 
 issuing the banks could pay good dividends, allow good 
 interest on deposits at long and fixed periods, and still 
 charge a moderate interest on advances. 
 
 The great cause of stagnation in business—viz., the great 
 increase of coin for a small increase in production—would 
 disappear, as wou ld c onsequentl y t he tendency o f the cost, 
 of production to exceed the price of sale, which tendency 
 must prevail when we o v erfaauo ur' own countryTwhere our 
 production is financed, with coin taken from countries which 
 
 are our natur^'unstomfii^j^Wit'li free banking no such 
 
 te ndency wo uld^xist^ fifst^^l^au se goTd~ would not be 
 imported, but notes wtdd be used, and we -consequently 
 would not lower the price of sale abroad^^condly^because 
 any over-issue would only affect the ais^nutTat the over¬ 
 issuing bank, and would be speedily correcte(^^third^) 
 because the notes would go direct to production, atrd: create 
 a demand or a market for themselves, failing which they 
 would be retired before they could raiseth^cost of pro¬ 
 duction too much for sale and export j0nTf£n3^ because 
 with not e-issuing banking would pay T -cvqr) op a sma ll sc ale 
 and with a small capital, in all places where there is an 
 opening for it, and the humblest producers in even the 
 remotest parts of the country would have the great benefit 
 of banking, after a method superior to that which London 
 has ever had, and would have the chance of carrying on 
 their business as advantageously as the London firms— 
 namely, 98 per cent, by means of banking, and 2 per cent, 
 with coin. 
 
 The fi nancial ^ position of the nation would be safer. 
 Inst ead of one single '^ghldLstdiE ^ -h erQ w ould. be many — 
 namely, o ne in^ e^dThimk. The quantity of gold in the 
 country would be smaller than now, compared with the 
 
58 Rational Banking versus Bank Monopoly. 
 
 business; but larger than the actual stock now in the 
 country, the volume of business being so much greater. 
 T he gold supply would not fluctuate and produce sudden- 
 changes in the markets as it does now . It would grow 
 steadily, but only in small proportion to the business. A 
 gold panic could hardly be possible, while now one might 
 set in at the end of every period of depression. 
 
 Honesty, thrift, sobriety, and other virtues would be 
 great ly encouraged; as they would be indispensable- ^eon— 
 ditions for aTgooT^cash account. The English would find, 
 as the Scotch found before 1844, a good character to be a 
 discountable capital which would secure them cash for a 
 start in life. 
 
 When the supply of capital is decentralized, and inde¬ 
 pendent business centres (banks) established all over the 
 country, the_tendency of labour to centralize in the _large_ 
 towns will be^much'teSS, if it does not disappear. 
 
 ^No~"one would lose by the free^anfmg reform. The 
 
 monopoly which even some of the directors, if we are well 
 informed, consider of very questionable value. The Bank 
 of England would give up the monopoly of note-issuing, 
 but keep all its other privileges, and certainly its world¬ 
 wide prestige, and it would gain its freedom . Its notes 
 would, of course, cease to be legal tenders. The value of 
 freedom to a bank of such a position and such a prestige 
 would be very great. The loss of the monopoly would not 
 diminish but increase its circulation, and would be a gain 
 in every way, because a monopoly which undermines the 
 business of the whole empire must be very disadvantageous 
 to its chief bank. The bank reform would therefore cause 
 no loss to the Bank of England. Nor would it in any way 
 harm any other bank. The large banks would probably 
 not try to circulate notes, as their connection is already 
 above this primitive instrument of credit; but they would 
 probably have many note-issuing branches for customers. 
 Their business would thereby extend considerably, and the 
 extension would be very safe, as all papers coming through 
 these banks would have the endorsements of the latter. 
 
 The fact that no one would lose anything, and that most 
 people would gain considerably by free banking, would 
 soon induce other nations to follow England’s example. 
 They have not done so with regard to Free Trade, because 
 the protected people are supposed to lose something 
 through Free Trade, and because the reform has not freed 
 
Rational Banking versus Bank Monopoly. 59 
 
 England from periods of depression in trade. It will be 
 easier for America and the Continent to follow the lead of 
 England in banking than in Free Trade. 
 
 And those countries which adopt free banking will have 
 taken an important step towards Free Trade, because the 
 only sensible arguments in favour of Protection are based 
 on two fallacies which free banking will expose—namely, 
 that the various protected nations have no work to do and 
 that they lack capital. 
 
 Every country which adopts free banking will very much 
 increase its prosperity, and consequently its trade with 
 England. Should no country follow England’s example, 
 England would be the leading country in production, and 
 have only a small and weak competition to contend with. 
 
 Emigration would not require State assistance. The 
 right people would go out with sufficient means, intelligent 
 plans, and with a direct view to develop the business of 
 their friends at home. 
 
 The effects of free banking will be very striking in most 
 of our colonies. In such as Canada, Australia, the Cape, and 
 New Zealand, the immense store of natural wealth in virgin 
 soil could be won freely, because the economic dead lock 
 which is now established by law, and which tends to raise the 
 cost of production above the price of sale, would disappear. 
 
 As no reasons can be given why free banking should not 
 do for Ireland what it did for Scotland, we shall here devote 
 a page to free banking in Scotland and its effect. 
 
 The prejudice against free banking is so strong and so 
 general that it would probably be useless for a long time 
 yet to try to overcome it by logic alone. But a hundred 
 and fifty years of experience with extraordinary success, 
 which cannot be explained away, ought to go a long way 
 towards convincing a practical people like the English. 
 All writers on the subject agree in upholding the Scotch 
 banking system as it was before 1844 as the perfection of 
 banking, though they never recommend its acceptance 
 except with such modifications as would change its nature 
 altogether. 
 
 During nearly a century and a half banking was free in 
 Scotland, if we except some small prohibitions solicited by 
 some of the large banks in a fit of jealousy. Banking was 
 free, not because the legislators understood the vital im¬ 
 portance of such freedom, but because no one thought of 
 making a Bank Law. 
 
 When in 1844 rational banking was sacrificed in Scotland 
 
60 Rational Banking versus Bank Monopoly. 
 
 for uniformity’s sake, no one had a word to say against the 
 banks ; on the contrary, only praise was heard. But unfor¬ 
 tunately no one could defend the free system as it ought to 
 have been defended, for the reason that the true theories 
 of free banking were not known. The Government had 
 theories, such as they were, but the friends of free banking 
 had none, and were beaten. 
 
 Walter Scott, though no economist, saw that an injustice 
 was being done to Scotland, and wanted to know ‘ why the 
 Scotch should be forced to take the medicine when it was 
 the English who were sick V The great praise which so 
 many English and foreign writers lavish on the Scotch 
 system, and the glowing descriptions they give of its effects, 
 are by no means exaggerated. When the first bank was 
 started in Scotland the country was one of the wildest and 
 least civilized in Europe, which is saying a good deal when 
 speaking of the end of the seventeenth century. Manu¬ 
 facturing hardly extended beyond a meagre home supply 
 of the rudest wares, and agriculture was entirely primitive ; 
 black-mailing and robbery must have been of almost daily 
 occurrence, judging from the laws enacted in those days; 
 security for life and property was small, and poverty was 
 appalling. If we compare the state of Scotland in 1690 
 with its condition in 1844, we attain an idea of the progress 
 which had been accomplished. No European country can 
 show such an extraordinary development during so short a 
 period. This progress becomes more surprising when we 
 consider that in Scotland at the beginning of that period 
 almost everything except banking was obstructive to pro¬ 
 gress and prosperity, and that the effects of free banking 
 were not accelerated by the great facilities for co-operation 
 which modern progress has established. 
 
 Communication with other countries was slow and 
 dangerous; there was very little shipping, no railways, no 
 canals, only bad roads infested by robbers. There was no 
 Free Trade, no schools, no police. The country was agitated 
 by political and religious strife, and for want of anything 
 better to do for a living many young Scotchmen hired 
 themselves out as mercenaries on the Continent, dis¬ 
 tinguishing themselves through their fierceness and reck¬ 
 lessness. 
 
 Against all these difficulties free banking won for 
 Scotland the race of progress between the countries of 
 Europe. It gave Scotland its model farms, its large and 
 varied manufactures, its fleets of ships, and forty millions 
 
Rational Banking versus Bank Monopoly. 
 
 61 
 
 of deposits in the banks. But it did for Scotland what is 
 worth more than all this; it moulded and educated the 
 Scotch into the best business-men in the world. To free 
 banking they owe thrift, economy, good methods, foresight, 
 and trust in hard work. 
 
 And who dares to say that free banking would not pro¬ 
 duce the same results in Ireland ? It certainly would, and 
 in a very short time, because none of the obstacles to co¬ 
 operation exist now which existed in Scotland then. In¬ 
 creasing prosperity and thrift will produce contentment. 
 All the advantages the country can derive from its connec¬ 
 tion with a great, self-governing, and free-trading Empire, 
 will be made manifest to the Irish when they have free 
 banking. 
 
 But in no country would the effects of free banking be 
 greater than in India, because in no country are the evils 
 consequent on legally prohibited division of labour greater. 
 The British Parliament has for a long time been legislating 
 for India with a sincere desire to benefit its inhabitants, 
 making its usefulness to England a secondary consideration; 
 but increasing poverty has, so far, been the result, and will 
 be the result so long as co-operation is not either entirely 
 State managed or entirely free. The poverty of India 
 under English rule threatens to become as proverbial as 
 was its wealth before the conquest. If those foreigners 
 who seem to envy England the possession of this ‘ brightest 
 jewel of her crown/ and who fancy that the free and self- 
 governing 20,000,000 of Englishmen derive untold riches 
 from wealthy India, and the 250,000,000 of conquered 
 Indians, were to inspect our back streets and slums, they 
 would be surprised to find how little the country of fabulous 
 wealth has benefited its masters. 
 
 They would certainly think there must be something 
 very far wrong in our management of Indian affairs. And 
 they would be right. Production of wealth is prohibited by 
 the fact that co-operation is prohibited. The very improve¬ 
 ments introduced in India have reduced the productive 
 power of the country. We have abolished slavery, com¬ 
 pulsory labour and despotism, and thereby removed im¬ 
 portant factors in the co-operation of the people, without 
 replacing them by others. Such banking as we allow is of 
 no use to the producers, and they have no medium of ex¬ 
 change but coin. 
 
 In countries where such an economy is established the 
 money-lenders are sure to multiply. In India they are 
 
62 
 
 Rational Banking versus Bank Monopoly . 
 
 considered a time-honoured and indispensable institution, 
 and we have not, in all these years during which they have 
 oppressed the people, found the means to free the country 
 from such a curse. The result is that about 40 per cent, of 
 the ryots are paupers, and 20 per cent, more are insolvent, 
 misery is on the increase, the beautiful and interesting 
 industries of the country are dying out, and the hopeless¬ 
 ness of the suffering people is becoming more and more 
 intense. 
 
 What a change we would create if we allowed free co¬ 
 operation to do for these 250,000,000 of India what it did 
 for Scotland; if we allowed entirely free organization of 
 division of labour between all these people, and between 
 them and the rest of the empire ! 
 
 The first result would be that the money-lenders would 
 have to make room for free banks. The peculiar agrarian 
 system of India would not present any serious obstacles, as 
 the reform would increase the revenue of the landowners, 
 who, moreover, could take an interest in the banks. The 
 people would obtain their capital at 5 per cent, interest 
 instead of 50 or 60 per cent., and would find their cost of 
 production in more favourable proportion to the price of 
 sale. The ryot is known to be a reliable payer, not only of 
 his own debts, but also of those of his father and grand¬ 
 father, and such customers are the right sort for cash 
 accounts in free banks. In India none of those obstacles 
 exist now which obstructed economic progress in Scotland. 
 By all the improvements effected under the English rule the 
 country is splendidly prepared to reap the greatest benefit 
 from free banking. The great increase in production which 
 free banking calls forth had, in Scotland, to be raised under a 
 hard climate, in cheap and rough products, from meagre 
 moorlands, as a new experience. In India free banking 
 would simply have to revive an ancient prosperity, decayed 
 through want of it, and to facilitate the growth and manu¬ 
 facture of the most valuable products in a warm climate, 
 and from the most suitable soil. The new prosperity in 
 India would totally eclipse the ancient one, because as a 
 medium of co-operation free banking possesses such con¬ 
 siderable advantages over the ancient one, the feudal 
 system. It is evident that from the very beginning of free 
 banking a healthy change would set in. With ample 
 mediums of exchange, cheap capital, and naturally low cost 
 of production, the Indian farmer would easily supply his 
 wants and soon have products for sale. To ease the minds 
 
Rational Banking versus Bank Monopoly. 
 
 63 
 
 of those who are afflicted with the over-production theory, 
 we may point out that as soon as increased production is 
 in operation in India the consumption would necessarily 
 increase ; that as soon as the cultivator could sell produce 
 he would increase his consumption further. 
 
 This increased consumption, which increased production 
 and increased wealth naturally and necessarily involve, 
 would react on European markets; larger orders would 
 come from India, trade would improve in countries which 
 ship to India, and the consumption of Indian produce 
 would increase. Thus, the improvement in India would 
 improve the European markets, and then again react 
 favourably on India. There would therefore be no over¬ 
 production, but an end to the under-consumption from 
 which we now suffer, and which appears as over-production 
 to superficial observers. Such reciprocal influences can be 
 noticed arising out of even occasional and ephemeral causes 
 of both good and bad trade. Improved, not to say per¬ 
 manently perfected, co-operation in such an important 
 country as India, is therefore sure to react strongly all over 
 the world, as she would draw her supply from many 
 countries, send her produce in return, and thus increase 
 activity everywhere. England, the great free-trading 
 country, would, of course, obtain the bulk of the increased 
 Indian trade. With sufficient capital (and with free bank¬ 
 ing every market would have sufficient capital) the pro¬ 
 ducts of India will not only increase in quantity, but also 
 in number and variety. All the old industries will leap 
 into fresh life, and, under the free division of labour and 
 free exchange with Europe, prove themselves capable of 
 great development and wide application. 
 
 Irrigation will be easily and speedily established where- 
 ever it is likely to pay, because useful public enterprises are 
 greatly facilitated by free banking, not only indirectly, but 
 also directly. The Scotch note-circulation facilitated and 
 cheapened the construction of canals in Scotland to a very 
 great extent. The same work executed with imported coin 
 would have increased the expenses and paralyzed industry 
 in a great part of the country during a considerable time 
 after the construction, which is proved by every great 
 public enterprise undertaken with coin as the only medium 
 of exchange. 
 
 Prosperity in India would accelerate the civilization of 
 all its races, and the more civilization advances the greater 
 will be the demand for European, and especially for English 
 goods. 
 
64 
 
 Rational Banking versus Bank Monopoly . 
 
 Finally, we must express our firm belief that when bank¬ 
 ing has been allowed to establish itself on a truly economic 
 basis, dist rust of the truths of political eco nomy^will dis¬ 
 appear, as the absence of true theories of banking has alone ^ 
 been the stumbling block of its~wtaries, and the cause of 
 
 the sad mistakes and consequent misery which do so much 
 to produce sceptical sneers against ‘ the dry bones of 
 political economy.’ True theories will then be established 
 in perfect harmony with all experience, capable of explain¬ 
 ing all the economic phenomena which now puzzle states¬ 
 men and business-men. The fundamental theories of 
 political economy will, no doubt, be accepted without 
 furthei discussion, as reliable facts, by the bulk of the 
 masses in the same way as other scientific facts have been 
 accepted. 
 
 If, therefore, rational banking could be introduced 
 throughout the empire, all States which form part of it 
 would arrive at a perfect understanding on all economic 
 questions, and have all their interests parallel. This would 
 no doubt strengthen and perpetuate their bond of union, 
 and give to our empire a hitherto unrivalled power and 
 prosperity. 
 
 With Western civilization flourishing in our country and 
 our colonies as it never flourished in any country before, 
 joined to the splendour of ancient empires revived and 
 exceeded in our Eastern possessions, we could prove to the 
 world that prosperity does not bring decay, when it springs, 
 not from degrading slavery, but from a soul-ennobling 
 system of economy in perfect harmony with the natural and 
 moral laws of God. 
 
 Elliot Stocl', Paternoster Roic, London. 
 

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