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• A History of Banking In Great Britain;
• Chapter I.: Banking In England.
• Section I.: A Record of Beginnings.
• Section II.: Foundation of the Bank of England.
• Section III.: An Era of National Development.
• Section IV.: State of the Irish Currency.
• Section V.: Failure of Currency Reform—inflation and Reaction.
• Section VI.: The Committee On Banking of 1840.
• Section VII.: On the Bank Acts of 1844 and 1845.
• Section VIII.: Commercial Crises.
• Section IX.: Monetary Panics.
• Section X.: General Conclusion.
• Chapter II.: Banking In Scotland.
• Chapter III.: The Theory and Mechanism of Banking.
• Chapter IV.: Definitions of Economic Terms.
• Chapter V.: The Theory of Value.
• Section I.
• Section II.
• Section III.
• Chapter VI.: The Theory of Credit.
• Section I.
• Section II.
• Banking In Russia.
• Chapter I.: The Early Stages of Money and Credit.
• Section I.: Prefatory.
• Section II.: Introduction of Paper Money.
• Section III.: Financial Reconstruction Under Alexander II. And the Founding of the State Bank.
• Chapter II.: Methods and Operations of the State Bank.
• Chapter III.: Banking Vicissitudes From 1862 to 1875.
• Chapter IV.: The Eastern War Period.
• Chapter V.: Private Banks.
• Chapter VI.: The Bourse.
• Chapter VII.: The Precious Metals.
• Chapter VIII.: Foreign Exchanges.
• Chapter IX.: The Debt and Finances of Russia.
• History of Savings-banks In the United States.
• I.
• II.
• III.
• IV.
• V.

SECTION X.

GENERAL CONCLUSION.

I NOW may conclude by some remarks on the existing banking system of England. On its foundation in 1694, the Bank of England received no monopoly in its favor, and not till 1708; and this monopoly, with some modifications, has endured to the present day. The Bank of Scotland, founded in 1695, at first received a monopoly in its favor for twenty-one years; but it was not renewed; and at the very notion of the bank claiming a monopoly of banking, the Scotch rose up with their usual democratic fervor, and scouted the idea that a single company should possess a monopoly of banking. Since then, banking in Scotland has been allowed to develop itself freely and spontaneously, so as to meet the growing requirements of the country. And though there have been some terrible catastrophes, such as the Ayr Bank, the Western Bank and the City of Glasgow Bank, these disasters never shook the solid system of the older and well-managed banks. There have also been commercial crises, as there must necessarily be in every commercial country; but there have not been any such monetary panics as those which have shaken England to its foundations—a very good proof of what has been advanced, that although commercial crises are innate and inevitable in the modern system of credit, yet the monetary panics are brought about by bad banking legislation and bad management of the bank, and that they are preventable.

Under the circumstances, I think that the monopolies conferred on the Banks of Scotland and England were justifiable as temporary measures, in consequence of the subject not being properly understood, and the number of wild, reckless speculations which were abroad. I think that the monopoly of the Bank of England was justifiable up to 1742; or at latest up to 1762; but after that it has been nothing but an unmitigated evil. For it was after 1762 that the industrial energies both in England and Scotland burst forth with unparalleled splendor; and they required an immense extension of banking accommodation. This was supplied in Scotland by the chartered banks throwing out branches in all directions, and carrying banking accommodation into all the principal towns of the country; and these, of course, were not independent institutions, governed by their own will; but they were integral parts of their head offices, and under the supervision and control of their experienced managers and directors. But in England, when the very same accommodation was required to develop the multiplied industries—canal making, agricultural and manufacturing—with which the country was teeming, the Bank of England would neither establish branches of its own in the various provincial towns, nor would it permit powerful and local solid banks to be founded in them. The consequence was that hundreds of country traders sprung up as bankers to supply the indispensable currency. The majority of them were perfectly unfit from their want of capital and experience to do so; and they were all perfectly independent of each other, without any central control and supervision. No doubt great things were effected by them; but when terror and alarm came in 1793 and 1797, they were swept away in multitudes. These local banks being, the majority of them, not possessed of any sufficient capital to bear such a strain, flung themselves for support on the Bank of England. Thus, in 1797, there were Mr. Pitt, the whole mercantile world, and hundreds of country banks all tugging at the money bags of the Bank of England. Thus, the bank, by its unjustifiable monopoly, not only prevented solid banks being founded, capable of maintaining themselves, but brought hundreds of country banks on its shoulders; and the directors, dazed and confused, were wholly unable to manage the bank under such an unexampled strain, and thus brought on a stoppage. Up till 1762, I think that the bank was adequate for the wants of the country.

It would be impossible to over-estimate the services of the Bank of England to the State—it was a great pillar of State. It was entirely owing to the reorganization of the finances, and the extension of solid credit by the bank, that under the masterful and sagacious guidance of William, England gradually rose from the nadir of her degradation under the two last Stuarts, when she was scarcely better than a wretched little island in a stormy sea, and very little more than an appanage of the Crown of France. It was the Bank of England alone that enabled William to prosecute his Continental wars; that supplied the funds for Marlborough’s immortal campaigns, when the name of England was heard for the first time on the Continent with terror and respect, after an eclipse of half a century, and which steadily led her onward through the matchless Ministry of Pitt, till in 1763 she attained that place in the scale of nations which she has since held.

But statesmen are mostly purblind; they live from hand to mouth; their energies are exhausted in providing for the wants of the moment, and maintaining themselves in power; and they usually fail to see that many institutions which may have been useful in their day have become inadequate and insufficient under changing circumstances. Things, they think, will last their day; after them the deluge; until at the last the organization comes down with a crash, and then they are compelled to pay attention to it. After 1762, one such pillar as the Bank of England became wholly insufficient for the expanding wealth and commerce of England. It required many such. In the natural course of things a multitude of joint-stock banks would have grown up to meet the wants of expanding commerce. Decades of years passed away, and still the Ministers allowed the solid progress of commerce to be throttled in the grasp of a single joint-stock company. And instead of the gradual formation of powerful institutions, which would have given additional support to the State and to each other, multitudes of small banks sprung up, which not only were no support to each other, but which in moments of danger threw themselves on the single bank, and were an additional source of embarrassment to it and aided to bring it down. It seems to me a deep blot on the financial statesmanship of Mr. Pitt that he always steadfastly resisted the formation of powerful banks.

I do not share the opinion of Sir Robert Peel, that the suspension of cash payments in 1797 was a “fatal” measure; on the contrary, I believe that it was absolutely indispensable. Nor did the suspension of cash payments to the public in any way involve the necessity of the depreciation of the bank note. In 1797, the Scotch banks, without any protection from legislation, agreed among themselves to suspend cash payments to the public. But they rigorously maintained their system of exchanges among themselves. By this means no single bank could continue to over-issue, because it would have been called upon to redeem its over-issues. This state of matters continued for twenty years; and during that period the Scotch bank notes never sustained any depreciation beyond that of the Bank of England note, which they were bound to follow. When the time came they resumed payments in cash to the public without the slightest trouble or difficulty. And why was this not the case in England? The reason was this, the Clearing House of London was a purely private institution, to which the Bank of England was not admitted. Now, from the evidence given before the Parliamentary committees, the management of the bank was most reckless during this period, and we know that she must have sustained immense losses. Now, when the notes she issued never came back to her in due course, what did she do? No outsider, of course, knew what these losses were. But to cover them up, she had nothing to do but to issue fresh torrents of paper, which were continually aggravating and inflating the channel of circulation, and sending up prices.

If banking had been allowed to develop itself in England in its natural course, as it did in Scotland, there would have been a considerable number of joint-stock banks in London who would have established a clearing house; and every bank would have been obliged to redeem its over-issues in specie, and by this system of exchanges, the excessive issues would have been removed from circulation and the notes would have been kept at par, even though inconvertible with respect to the public, as the Scotch bank notes were. But the Bank of England not being in the Clearing House, was never called to account for its over-issues, and so could issue unlimited torrents of inconvertible notes, which fell to a ruinous discount, shaking the value of all property.

Moreover, the unparalleled increase of manufactures, agricultural improvements, in consequence of the enhanced price of cereals and stock, commerce and population demanded an increased amount of currency, and country banks multiplied in all directions. In 1814, there were 900 country banks pouring forth torrents of paper currency; and this flood of paper, combined with the excessive issues of the bank itself, at last reduced the bank note to 14s. 6d. But in 1814-15-16 hundreds of these banks failed, and many millions of their notes were withdrawn from circulation. In consequence of this, the bank note rose almost to par, and if the bank had been managed with common prudence, it would have risen quite to par, and cash payments would have been resumed in the ordinary course of business without the least disturbance.

The circumstances of this period afford one lesson of great importance. It is this: Governments and States should never issue paper money themselves. When States and Governments once begin to issue paper money, they never can resist the temptation to issue it in boundless quantities, so that it soon begins to depreciate, they have no power to redeem it, and the depreciation is incurable. Even those statesmen in 1813, who were most anxious to revert to cash payments, were constrained to allow that in process of time the argument passes over to depreciation. When depreciation has continued a certain time, all contracts and engagements are made in the depreciated paper and under inflated prices, and to compel them to redeem their debts in solid cash would be ruinous to all debtors. If the depreciation in 1814 had been brought about by issues of State paper money, England would have been in exactly the same position as Russia, Austria and many other States which have indulged in that fatal practice and were never able to resume cash payments. But in England this paper currency was supplied by the banks; and when the depreciation of the notes seemed absolutely hopeless, the failure of hundreds of banks withdrew many millions of paper currency from circulation, and enabled the remainder to right itself suddenly, at the cost of terrific suffering to those who had entered into engagements, based upon the inflated prices of this rotten paper. The sufferings endured for many years, and were produced by the disappearance of this rotten paper, and not by the Bank Act of 1819, as is so often ignorantly asserted.

When governments want funds for public purposes, they should apply to the banks, and not issue paper money themselves. It is the duty of banks to supply the paper currency of the country, and not the Government; and to take measures to keep it at its par value by properly adjusting the rate of discount. The Government has no power to keep its paper money at par value by raising the rate of discount. In the dreadful calamities of 1870-71, the Government of France did not issue their own paper money; they applied to the Bank of France, and by the admirable management of the bank, its inconvertible notes, which for a short time suffered a very small depreciation, soon recovered, and for years circulated at an absolute par value with specie. When the Government wants accommodation, the banks should treat it exactly as they would do any other customer. They should grant it the accommodation required, if advisable, and charge it the market price for it. And it is the business of the banks, and they alone can take measures, to maintain their notes at their par value, even though inconvertible to the public, and then they would avoid the curse of irredeemable paper money. But if the Government issues torrents of inconvertible paper money it will drive all specie out of the country, and affect all values with the most ruinous fluctuations.

And so the bank went on till 1826, when the great catastrophe of 1825 awoke the sleepy Ministry from their lethargy, which nothing but such a cataclysm could have done; and it was the clearly expressed opinion of all statesmen that the Bank of England was far too small a machine for the requirements of the country, and that its monopoly was an intolerable evil which must come to an end, and that the Scottish system of banking was far superior to the English. The bank was coerced into giving up a part of its monopoly, and allowing joint-stock banks to be formed in the provinces at a distance of not less than sixty-five miles from London, on the condition that they should do no business in London or within sixty-five miles therefrom. Now, this was not the Scottish system of banking, which is to have the head offices in the leading cities, Edinburgh and Glasgow, with a network of branches in all quarters of the country, all under one management. But the provincial joint-stock banks of England were, on a large scale, only a number of isolated banks, and forbidden to have their head offices in London.

But a few years afterwards, another most important breach was effected in the supposed monopoly of the bank. And now we see the important historical consequences of a total misconception of the nature of banking. In former days, it was understood that the express business of banking was to issue notes; and that was supposed to be the definition of banking. Now, that was not strictly accurate. The business of a bank is to create and issue rights of action, credits, debts (termed deposits) to its customers. And their customers might circulate these rights of action either by means of notes or cheques. No doubt, in the early days of banking, when it was a luxury of the rich, notes vastly predominated over cheques. Still, these documents are identical and their sole function is to circulate banking credits. Nevertheless, notes were conspicuous in the public eye, while cheques escaped observation.

In 1742, when the words of the monopoly clause were tightened, the bank’s privilege was defined to consist in issuing notes. But the use of cheques instead of notes gradually increased; and their greater safety than notes, in masses of a dense population, made London bankers discontinue issuing notes in 1793 of their own accord, and restrict their customers to the use of cheques. Thus it was shown, what had never been dreamed of before, that in such places as London banking could be carried on without the use of notes at all.

In process of time persons who were anxious to establish joint-stock banks in London began to scrutinize the words of the monopoly clause, and they found that it did not prohibit the formation of joint-stock banks which should carry on their business in the then mode of London bankers without the use of notes. This opinion was declared to be correct by the Law Officers of the Crown, who pronounced that such banks were perfectly legal at common law. Thus the second great breach was effected in the monopoly of the bank, and joint-stock banks were founded in London. But still this was not the Scottish system of banking. All these banks, London and provincial, were merely isolated and local banks, having no communication with each other.

I will now explain in what the essential superiority of Scotch banking consists. Money always has a tendency to accumulate in agricultural districts, or the supply exceeds the demand; and in manufacturing districts the demand exceeds the supply. Now, in Scotland, all the banks have some branches in the agricultural districts and other branches in the manufacturing districts. Consequently, the branches in the agricultural districts remit their surplus money to the head office, which transmits it to the manufacturing districts. And all this is done under one management, which does not conflict with its separate parts. But this could not be done in England, where all the banks are purely local. Consequently, banks in the agricultural districts had to send up their surplus money to establishments in London, and so lose their absolute control over it; and banks in the manufacturing districts remitted their bills to this establishment in London to be discounted and had the money sent down to them. Thus the monetary nervous system was severed into three parts, under three managements, instead of being all under one management, as in Scotland. These London establishments were the great discount houses, of which the chief was Overend, Gurney & Co. The danger of this system was that the agricultural banks lost all control over their own money, which was involved in the speculations of the London discount house; and the manufacturing banks were dependent for their very existence on their bills being discounted by the London house. The great panic of 1866, which brought about the fall of Overend, Gurney & Co., contributed greatly to break up this system.

Since then, a far more healthy and natural system has been growing up. The Act of 1826 provided that if the provincial banks formed under it chose to establish their head offices in London and do London business they must give up their issues of notes in the provinces. The National Provincial Bank was a great provincial bank, with a large multitude of branches and an issue of £450,000 of notes in the provinces. But, in course of time, it found it expedient to establish its head office in London, even at the cost of giving up its issues in the provinces. This was similar to a genuine Scotch bank, with its head office in the capital and branches in every part of the country. Besides that, several banks in the southern counties agreed to amalgamate and open their head office in London, under the name of the Capital and Counties Bank, giving up, of course, their provincial issues. Moreover, the process of healthy amalgamation has been proceeding rapidly. Banks in Birmingham and Manchester have amalgamated with London banks; provincial banks have amalgamated with each other, and several private banks have amalgamated with joint-stock banks. Thus the banking system of this country has been gradually, and in recent times even rapidly, assuming the natural system—i. e., the system it would have assumed if it had been allowed to develop itself free from the monopoly of the Bank of England. And the more rapidly the process of amalgamation proceeds the better; till at last the system will be reduced to the natural one—namely, a comparatively small number of very powerful banks instead of a vast multitude of small ones.

Then as this system proceeds with an accelerated pace, the great question will come of the restoration of the power of issuing notes to these great banks. The Bank Act of 1844 was of service in its day as a temporary measure until fuller knowledge and experience was obtained on the subject, and to give statesmen and financiers time to think upon devising a better system. But every one knows that it is utterly unsuited to the gigantic development and magnitude of modern commerce. All the theories upon which it is founded are utterly disproved; and Sir Robert Peel’s extraordinary hallucination that all commercial crises originate in excessive issues of notes, which every one knew to be fallacious in his own day, has been scattered to the winds by 1847, 1857, 1866 and the crisis of 1890. Was it excessive issues of notes that tempted the great house of Baring to wreck its splendid name in wild speculations in South American securities?

The experience of every commercial crisis for the last 130 years has incontestably demonstrated the indispensable necessity of the expansive theory in a great commercial crisis, in accordance with the unanimous doctrine of all the great financial authorities of former times, and given the coup de grâce to the restrictive theory which is enacted by the Bank Act of 1844.

The great question will have to be considered of the restoration of the power of issuing notes to the banks of great power and undoubted solidity. No doubt, the unlimited power of issuing notes has left very evil memories in this country, somewhat similar to the horror of banking caused in France by the catastrophe of Law’s Mississippi scheme. But that was owing to the erroneous nature of the system so long maintained by our purblind statesmen of allowing a single joint-stock bank to have a monopoly of banking in London, and preventing solid and powerful joint-stock banks being formed in the provinces, while every tinker and tailor, grocer and cheesemonger might issue unlimited torrents of notes at his own sweet will. But the question stands in a wholly different position at the present day. There is nothing more odious and intolerable than privileges and monopolies in banking. No English-speaking race will tolerate a dominant bank. When the monopoly of the Bank of Scotland expired, and when it growled because another bank was founded, the republican spirit of the Scotch utterly scouted the idea that one set of persons should have a monopoly of banking. Sir Robert Peel, who in 1826 was keen in favor of the Scotch system of an equality of banks, in 1844 completely turned his back on himself, and cited the example of the United States. But unfortunately the Bank of the United States had failed, utterly insolvent, six years before; and its action and its influence had been condemned in the severest terms by the President and every independent writer in the country. The people of the United States will not tolerate a dominant bank. No English colony will tolerate a dominant bank. But the system exists in England, and therefore it must be dealt with cautiously, temperately and tenderly. If, during the long period of its monopoly, the bank had extended its branches into all the great provincial towns, as the Bank of France has done, the case might have been different. But it lost the opportunity and it can never return. By the breaches in its monopoly a vast number of joint-stock banks have grown up in London and the provinces, daily growing in magnitude and some even approaching in magnitude to the bank itself. The bank is therefore no longer the absolutely supreme power; it is only primus inter pares. Now, a bank in this position is wholly unable to bear the stupendous strain cast upon it in the crisis of 1890. The system of banking ought to be an aristocratic republic. All banks ought to act together as they wisely did in that year. The Bank of England, under present circumstances, is quite incompetent to support the whole banking and mercantile interests, as it used to have to do in former times. The banks must unite to support the mercantile community, as they did for the first time in the recent crisis, and to be able to do this effectually they should be on an equality.

There is nothing more odious and intolerable to English-speaking people than peculiar privileges and monopolies in banking. We freely admit that according to the prevailing ignorance on the whole subject, and according to his lights, the Bank Act of 1844 was probably the best thing that Sir Robert Peel could have done. But circumstances have changed. Floods of light have been thrown on the subject. The whole system of banking has been rapidly assuming a much healthier and more stable form, and the one it would have assumed in the course of nature, if it had not been forcibly prevented by law. Why then cling with fetish superstition to an act which is demonstrated to be founded on a whole series of erroneous theories, is in flat contradiction to all experience both preceding and subsequent to itself, and has failed in all the purposes it was intended to effect except one? The Bank Act of 1844 prohibited any new banks, private or joint-stock, formed after its date, from issuing notes; so that we have now a number of joint-stock banks which have the right to issue notes; and a great number of others, far larger and more powerful, which are prohibited from issuing notes. The National Provincial Bank was for many years allowed to issue notes to an unlimited extent; and never abused its rights. Now it is the greatest bank in England next to the Bank of England; and because it has greatly increased the solidity of the banking system by removing its head office to London, it has had to suppress an issue of £450,000 of notes in the provinces.

The fact is that the still prevailing feeling with respect to notes arises from the dangerous system on which they were formerly allowed to be issued, and a total misconception of the nature of banking. No one would dream of reviving the old system of allowing every small trader in the country to issue notes ad libitum. In fact, it was only tolerated in former times because powerful banks were not allowed to be formed. Again, banking is almost universally supposed to consist in “borrowing money from one set of persons and lending that same money to another set of persons.” And Mill supposes that issuing notes is an extension of a banker’s business—which is, no doubt, the popular idea. But as we have fully shown, this is a pure fallacy and delusion. The essential business of all banks is to issue circulating rights of action, credits or debts to their customers, recorded in the first instance as entries in their books, termed deposits, and their customers may circulate these rights of action, credits or debts, either by means of notes or cheques. It lies with the customer to determine whether he will circulate these credits by notes or cheques, and not with the banker. And notes and cheques are absolutely identical in law and economics. As a matter of fact, notes of late years have been constantly diminishing both in absolute and relative importance as compared with cheques. We believe that there is not a single bank in England, private or joint-stock, which has the right of issuing notes, which has in circulation anything like their legal maximum. The total amount of banking credits in the United Kingdom may be taken in round numbers as about £1,000,000,000. It is these banking credits which are, for all practical purposes, the current money of the country. And the amount of these banking credits, circulated by means of notes, is absolutely insignificant, as compared with those which are circulated by means of cheques. In Scotland, with banking credits to the amount of £95,000,000, there are only £5,000,000 of notes in circulation; because in recent times cheques have come greatly more into use in Scotland, and have superseded notes. A similar cause has greatly diminished the circulation of notes in England. And yet notes alone are the subject of alarm, and are held to be currency; and cheques are wholly overlooked and neglected; and it is supposed that it is only necessary to provide for the safety of notes. The truth is that banks must provide for the safety of the whole of their liabilities both notes and deposits. Now, while banks were few in number and confined to the rich, and moreover were isolated from each other, notes were the most convenient form of circulating banking credits. But now that banks have multiplied in number, and entered into relations with each other by means of clearing houses, when population has so vastly increased, and almost every one keeps a banking account, cheques have not only superseded notes to a vast extent, but have increased to an enormous amount; so that the quantity of notes is constantly diminishing and the quantity of cheques is constantly increasing; and both are equally currency and banking liabilities. It is not then in issuing notes at the present day that the great danger of bad banking consists; but in granting the original credit; and when the credit is once granted, it is wholly immaterial whether it is circulated by notes or cheques; the liability and the danger is exactly the same in either case.

Now there are certain circumstances, especially in commercial crises and in country districts, where the issue of notes is indispensable. To suppress £1 notes in Scotland would at once destroy one-third of the business of the banks, compel them to shut up multitudes of their branches, deprive large extents of thinly peopled districts of all banking accommodation, and compel the banks to keep double the quantity of gold they are now required to do under the present system. It is sometimes alleged that £1 notes tend to increase a panic; this no doubt was the case under the former system. But it is not the case when notes are issued by powerful and well organized banks like those of Scotland. When the Western Bank was known to be failing, the demand for gold was absolutely insignificant. When its customers drew their balances they took them in the bank’s own notes and paid them into other banks. The other banks then called upon the Western Bank to meet its notes in the Clearing House in the usual way. This bank stopped payment, not from any run for gold, but from being unable to meet its exchanges. A certain number of banks still kept an insignificant amount of notes in circulation, which can only be done by the option of their customers. And it shows that their customers find notes more convenient than cheques. But the customers of non-issuing banks also want notes; and these banks are obliged to get them from the Bank of England. This is not only a heavy expense to themselves, but a severe strain on the resources of the Bank of England, because all the notes issued to the non-issuing banks are so much subtracted from the banking power of the Bank of England. Now, why should the customers of such splendid institutions as the National Provincial Bank, the London and County Bank, the Capital and Counties Bank, and many others, be deprived of the right of having the notes of these banks if they choose to have them? These banks are permitted to create banking credits to any unlimited amount they please; but directly it is proposed to allow their customers the choice between notes and cheques it sends a tremor of alarm through every old woman in the country of either sex.

Thus the whole question now stands on a totally different footing to what it did in former times. The subject, supposed to be so complicated and incomprehensible, is now reduced to the most perfect simplicity and the strictest scientific demonstration, which is now perfectly well understood. It is perfectly well recognized now that the whole mystery of banking consists in keeping strong reserves of specie as compared to total liabilities, notes and deposits, and steadily adjusting the rate of discount by the bullion in the bank and the state of the foreign exchanges. That is the whole secret of banking, and it was the ignorance and neglect of these principles which has been the cause of all the monetary panics during the last century.

It is the rate of discount, and not a cast-iron limit imposed on the issues of notes by the Bank of England, which is the true, sole and supreme controlling power of credit and the paper currency, and which is the true method of carrying into effect the principles of the Bullion Report and of Sir Robert Peel himself until 1844. It is these principles combined with the power to issue notes adequate to meet a commercial crisis, together with placing all the great leading London banks on an absolute equality, and so enabling them to act together instead of in antagonism to each other, as was too often the case formerly—though they cannot prevent commercial crises, which are innate in the modern system of credit, yet will forever avert a monetary panic.

It is then the very essence of banking reform that all joint-stock banks should be placed on an absolute equality like the Scotch banks, as Sir Robert Peel and all the statesmen of 1826 desired. But in order to effect this thorough and effectual banking reform, one thing is indispensable. It is that Government should pay off the public debt to the Bank of England. It is this debt which bars all reform. The act provides that all the privileges of the bank shall remain untouched until all the public debts to it are discharged. Chancellors of the Exchequer are apt to vaunt of the millions of the public debt they have paid off. It would have been infinitely more to the public advantage if they had paid off the comparatively trifling debt due to the bank. At all events, that is the point which all persons who are anxious to promote banking reform must steadily keep in view, and bring their influence to bear on the Government to effect. All mere tinkering with the present system, such as permitting the bank to issue two or three more millions of notes on public securities, is wholly ineffectual. It is not only utterly vicious and dangerous in itself, but the more it is extended the more dangerous it becomes. As a matter of fact, in a great monetary panic, this kind of property becomes absolutely unsalable and inconvertible. In the crisis of 1890, the action of the bank alone saved the world from the most terrific monetary panic recorded in history. But it ought not to be repeated. It is neither consistent with the dignity of this great mercantile country, nor with common sense, that the Bank of England should expose itself to the mockery and jeers of our not too ardent friends abroad, by running about to scrape up a few millions of gold on the Continent; when she had double the quantity required stored up in her own vaults which she could not touch. England ought to be sufficient for herself. Fortunately, the crisis took place in a time of profound peace. We fervently hope that we may maintain perpetual peace with our neighbors across the Channel. But who can tell how long this may last? Every one knows that the furies of revolution permeate every country on the Continent, and that they are only kept under restraint by the overwhelming hand of force. But this very force is an intolerable burden upon nations, and in process of time may break down from its own weight. How could the bank have effected its recent operation if we had been at war?—and in a period of war it would have been certain to happen.

No doubt, the proposal to restore the power of unlimited issues to the bank rouses alarm in many persons who have heard by dim tradition how the bank misused its powers during the present century. But these persons forget that the bank had powers of unlimited issues for more than a century, and used them with consummate skill. It was the suspension of cash payments in 1797, and the power of the bank to issue unlimited quantities of paper money that debauched the minds of the directors. Then, instead of controlling their issues by rule of thumb, which they had observed with the greatest success during a century, they maintained that they were no longer bound by these practical rules, but issued paper money and notes on certain theories which they formed out of their own imagination, each of which was supposed to be the perfection of wisdom by its inventors, and condemned as utterly erroneous by the succeeding generation. Adam Smith started the theory that it was perfectly safe to issue any amount of notes on the discount of good mercantile bills. This theory was maintained with exceeding pertinacity by the directors of the Bank of Ireland and the Bank of England; but it was utterly condemned by the Bullion Report, and by Mr. Horsley Palmer, the Governor of the Bank in 1832, who said that it was the worst method that could be conceived. Mr. Horsley Palmer, then, and his directors concocted a new theory, which was equally supposed to be the perfection of wisdom. But this theory utterly broke down in practice; and Lord Overstone, who certainly was a practical banker of the highest eminence, said that the wonder was, not that this theory had broken down in practice, but that it should ever have been thought of at all. Lord Overstone then concocted a wholly new set of theories of his own, which were embodied in the Bank Act of 1844—which was again supposed to be really the perfection of wisdom; and, by putting the bank in a strait waistcoat, had forever put an end to commercial crises. But, alas! the logic of facts blew all these theories to the winds; and showed that the very act which was supposed to have prevented all commercial crises, not only did not prevent them, but was the very thing which, when they reached a certain degree of intensity, surely and certainly, in exact fulfillment of the predictions of the highest authorities of former times, brought on a monetary panic. Thus the Bank Act of 1844 has gone the way of all its predecessors.

Many persons have implicit confidence in the consummate practical wisdom of Sir Robert Peel. But these persons are probably not aware that Sir Robert Peel had three totally different states of mind on the subject. In 1811 he was one of the majority who carried that unique vote that 27 equals 21. In 1819, he was converted, and became the ardent adherent of the doctrines of the Bullion Report, Horner; Huskisson, Ricardo, Thornton; and maintained these doctrines till 1844, when he delivered himself over, bound hand and foot, to the theories of Lord Overstone, Colonel Torrens and that sect. And we have shown that the doctrines of Lord Overstone were diametrically antagonistic to those of the Bullion Report.

In 1856, we demonstrated that all these great directorial banking theorists had entirely missed the true method of controlling credit and the paper currency—which is the rate of discount. And before the committee on the panic of 1857. Mr. George Warde Norman, who was an ardent adherent of the Bank Act of 1844, acknowledged that it was amply sufficient for all purposes. This is now universally recognized to be true; and the bank has been managed with the greatest success on this principle ever since 1857. Thus it is evident that the question of restoring the power of unlimited issues to the bank, when the true principle of controlling credit, which is acknowledged to be amply sufficient, is universally recognized and acted upon, stands upon a totally different footing now from what it did when the directors were deluded by a series of fantastic theories which utterly broke down in practice.

The power of unlimited issues is absolutely indispensable to enable the bank to meet a great emergency promptly and successfully, when millions of notes have to be issued without delay to avert a monetary panic, and perfectly safe when done under a high rate of discount, so as to prevent the exchanges being turned against the country. It is the completion and the coping-stone of the doctrines of the Bullion Report; and the theory of banking, credit, and the paper currency is now absolutely complete.

It has long been the fancy that the whole business of credit, banking, commercial crises, and monetary panics is pure haphazard empiricism and rule of thumb; and not capable of being brought to strict scientific demonstration. Considering the stupendous advance of modern times—when science is advancing by leaps and bounds and bringing under its dominion every department of human knowledge, and bringing under its sway subjects which would have been beyond the dreams of the most sagacious and far-seeing philosophers of the last century,—it would be fatuous to suppose that the human intellect is incapable of bringing economics, or the science of commerce or exchanges,—which is a pure science of facts—under the strictest scientific demonstration, if the same general methods are adopted as have been employed in every other department of knowledge which has been brought under scientific control and adapted to the peculiar circumstances of economics. It was the essential glory of Bacon, the founder of inductive philosophy, to foresee and proclaim with the voice of a trumpet that the same methods and principles by which the physical sciences were to be constructed were to be applied to the construction of all other sciences. And has not every economist of note, J. B. Say, John Stuart Mill, and hosts of others, maintained that economics can only be erected into a positive, definite science by following the same principles and methods by which the physical sciences have been constructed?—and if it has not hitherto been done, it is only from the inaptitude of those who have attempted it.

But the science of pure economics—that is, of commerce or exchanges, including credit, banking, the foreign exchanges, commercial crises and monetary panics—has now been brought to the strictest scientific demonstration, and its principles are now universally recognized and acknowledged to be true. Economics is a pure science of variable quantities. It is a science of causes and effects measured numerically, produced by the properties of men; and its types and standards of reasoning are to be found in the sciences which treat of the causes and effects measured numerically, produced by the properties of material substances. The special science of variable quantities, termed economics, must be governed by the rules which govern the science of variable quantities in general. The principles which govern the varying relations of economic quantities must be the same which govern the varying relations of the stars in their courses. The same general method of investigation is common to them all. In all, the inductive logic reigns supreme. A new inductive science is created, and a new monument raised to the everlasting glory of the monarch of philosophy.

It only remains to bring banking legislation into harmony with the demonstrated and acknowledged principles of economic science. Nor is it any part of our duty to suggest how that is to be done. Our duty is solely to set forth the true scientific principles of the subject. It is the part of the highest and most responsible statesmen and financial authorities to determine and devise the measures by which banking legislation is to be brought into harmony with demonstrated economic science. The wisdom of statesmen, in this country at least, has been usually Epimethean. It would redound to the immortal honor of a powerful government for once to display Promethean wisdom, and bring the banking system of this country into harmony with demonstrated scientific truth, before another catastrophe arrives, and to create a system which would last to the end of time.

CHAPTER II.

BANKING IN SCOTLAND.

UP till 1695, there were no such persons as “bankers” in Scotland. The records of commerce are so scanty, that we are unable to say whether the custom of discounting bills of exchange had been introduced into Scotland before then. But if there were any persons who discounted bills of exchange, they did so with the money itself, and therefore they were technically money lenders or bill discounters, and not “bankers,” who, as we have shown, invariably purchase money and debts by issuing their own circulating credit in exchange for them.

The successful institution of the Bank of England led to the project being formed to establish a bank in Scotland. Mr. John Holland, a merchant of London, was the author of the scheme, and he got eleven Scottish merchants to join him. On the 17th July, 1695, they obtained an act of the Scottish Parliament, authorizing the Crown to grant them a charter of incorporation They were however purely a private company, and had no connection with the State. The authorized capital was £100,000, and they received a monopoly for twenty-one years.

As the Scots were supposed to know nothing about banking, it was provided that, for a certain number of years, the governor and twelve directors should be English, and the deputy governor and twelve directors should be Scots. However, it was soon found that the Scots took so kindly to the business that the arrangements were changed, and all the directors were Scots; but thirteen trustees were chosen to manage the English business and affairs in London. The first call was for £10,000. The bank at first received no money from the public. They found that, on the subscription paid in by their shareholders, they could maintain £50,000 of their notes in circulation, which John Law justly said was equivalent to an augmentation of capital to the country. Their notes were at first for £100, £50, £20, £10 and £5.

In 1696, they opened branches at Glasgow, Aberdeen, Dundee and Montrose, but not finding them to pay withdrew them. In 1704 they began to issue £1 notes. It appears that, up to this time, their profits were very large. A rival pamphlet states the dividends at thirty-five, forty and fifty per cent., and accordingly these profits attracted competition. In 1716, the monopoly of banking granted by their charter expired, and no attempt was made to renew it. Several bodies of persons tried to force an amalgamation with them, but their offers were steadily refused.

At the time of the Union a considerable number of persons, both civil and military, were creditors of the Crown; and the equivalent sum stipulated by the act of Parliament was not sufficient to discharge their claims. In 1714, they obtained an act of Parliament to constitute their debts; but no Parliamentary provision was made to satisfy them till 1719, when £10,000 was set apart for the purpose, to be paid annually in preference to all other claims. The act of 1719 empowered his Majesty to incorporate the proprietors of the debt into a body politic or corporate, with powers to do and perform all matters appertaining to them to do, touching or concerning the said capital sum, and the yearly sum payable in respect thereof, as his Majesty by the said letters patent should think fit to grant. In pursuance of this act, the proprietors were incorporated in 1724.

This was one of the bodies of persons who tried to force themselves on the Bank of Scotland. When they were repulsed by the bank, they petitioned the King to grant them powers of banking. This petition came to the knowledge of the bank in 1726, and they did everything they could to oppose it. A cry was got up against them that they were hostile to the House of Hanover; that they charged too high interest for their loans; that they were too particular in the securities they required; that they would not lend on their own stock, and other things. To all these various charges they, or a friend for them, replied. They said that such a thing as two banks in one country was never heard of, and that if Scotland had two banks, England should have ten. By this time they had called up three-tenths of their capital, or £30,000, and they alleged that that was sufficient to circulate all the credit that could be required in Scotland. They very justly said: “For the quota of credit in a banking company must be proportioned to the stock of specie in the nation, learned and understood by long experience, and not extended to a capital stock subscribed for, which cannot in the least help to support the company’s credit, if the specie in a nation decay.”

The last call which had been made was partly paid up in the bank’s own notes, just as the subscription to the new stock of the Bank of England had been partly paid up in its own notes. An outcry was raised against this, but the directors well answered: “But the objectors do not at all consider this point. For the payments are many of them made in specie, and bank notes are justly reckoned the same as specie, when paid in on a call of stock; because, when paid in, it lessens the demand on the bank. Thus the directors, from their own mercantile instinct, and equally innocent of Roman law and the profound principles of algebra which were not then discovered, perceived the great doctrine of Roman law that the release of a debt is in all respects equivalent to a payment in money: or that − × − = + × +. It was also said: “A certain stock of specie circulating in the country is needful for currency of payments in markets, and among the meaner sort of people, bearing a due proportion to what is running on paper credit upon the faith of the banking company. Notwithstanding the opposition of the Bank of Scotland, the charter with the powers of banking was issued to the Equivalent Company on the 8th of July, 1727, with a capital stock of £151,000.

Granting that all the charges against the Bank of Scotland were futile and groundless, we may well rejoice that its monopoly was not allowed to continue. A writer who professed to be independent of either bank touched the right point in reply to a statement on behalf of the old bank: “The power of monopolies is, I believe, an exploded doctrine. Did ever any nation make an exclusive bank perpetual, or for longer than twenty-one years—or, if such an instance can be given, was the measure right? * * * If the old bank should reply, ‘We are in possession, and what have we done to have our possession disturbed?’ the answer upon the abstract question is plain by another question, ‘What have we, the other subjects, done to be secluded; or by what law are we secluded from the advantages you enjoy’?” The writer then says, after comparing the rival companies: “The obvious reflection which arises from comparing these two is, that these candid and fair dealers have also dealt profitably for themselves, as is but reasonable. They have taken very good payment for all the services they have done to the nation; and what title they, or any other set of men, have to an hereditary or indefeasible monopoly of banking, is hard to understand. * * * As ready as our Parliament was at the Union to accommodate petitioners, a perpetual monopoly of banking was a thing so manifestly pernicious, that no private man could have the assurance to aim at it, far less could any parliament be so unthinking as to grant it.”

On the south of the Tweed, there was found a parliament so unthinking as to grant a monopoly of banking to a single company for 130 years, and the consequences fully justified the opinions of the sagacious Scot. A monopoly in banking is as utterly pernicious as any of the monopolies which the parliaments of Elizabeth and James I. rebelled against. Scotsmen may feel justly proud that they resisted it from the beginning. Scotland was allowed to develop her system of banking by the talents of her native men of business, unmeddled with by Parliament; and it is now recognized and admitted by all persons of authority that she possesses the best organized system of credit and banking in the world. The alarm and jealousy created by the new bank soon wore off, as it was discovered that, so far from injuring the old bank, the inevitable consequence followed, which an enlarged experience of commerce would have enabled us to predict; it increased the prosperity of both banks. The stock of the old bank rose to 400 per cent. and that of the new bank also rose very high.

The Royal Bank, as it was named, had only been in existence two years when it invented a further development of the system of banking which, in the unanimous judgment of all persons who know that country, has done more to develop its resources and promote its agricultural and general prosperity than any cause whatever. This is the system of cash accounts, or cash credits, of which we have given a full exposition elsewhere. This system deserves the most attentive consideration, because it is entirely of the nature of accommodation paper, which has fallen into such disrepute in England from the enormous abuses of it which have taken place. It also realizes all the advantages which are practicable from the schemes of land banks, which were devised by the seething brains of Chamberlen, Briscoe, Law and others. It has advanced the wealth of Scotland by centuries. It is a striking instance of the aphorism of Demosthenes: “If you were ignorant of this, that credit is the greatest capital of all towards the acquisition of wealth, you would be utterly ignorant”; and of the aphorism of Daniel Webster: “Credit has done more a thousand times to enrich nations than all the mines of all the world.”

In 1731, the Bank of Scotland again tried to establish branches at Glasgow, Aberdeen and Dundee; but, after two years, was obliged to discontinue them, and the plan was not tried again till 1774. The unlimited power of issuing “promises to pay,” placed in the hands of hostile parties who had not acquired sufficient practical experience of the subject, naturally led to great over-issues. To protect themselves from the consequences of these over-issues, as well as from the attacks of each other, the Bank of Scotland, in 1730, introduced a clause into their notes, making them payable at the option of the directors at the end of six months after demand, with the legal interest up to that time. This practice was adopted by all the other banks; for the manifest advantages of banking were so strikingly displayed that, after the expiring of the monopoly of the Bank of Scotland, banking companies started up in all directions, and inundated the country with their notes. When the holders of the notes demanded payment of them, the companies threatened to take advantage of the optional clause, unless the demanders would content themselves with a part of what they wanted. Moreover, as there was no restraint on the amount of their notes, many of the companies issued notes for 10s., 5s. and even lower than that. In Perthshire, there were notes for 1s. and even for 1d.; and the Perth Banking Company was founded partly to put an end to that nuisance. The inevitable consequences followed; these paper notes drove all the gold and silver out of the country, and the exchange with London fell. Adam Smith says: “While the exchange between London and Carlisle was at par, that between London and Dumfries would sometimes be four per cent. against Dumfries, though this town is not thirty miles from Carlisle. But, at Carlisle, bills were paid in gold and silver; whereas, at Dumfries, they were paid in Scotch bank notes; and the uncertainty of getting these notes exchanged for gold and silver coin had thus degraded them four per cent. below the value of coin.” At this time, owing to the degraded state of the English coin, the foreign exchanges were against England; and the market price of gold was £4 per ounce; so that the whole depreciation was about six and a-half per cent. Thus, we see that the Scottish bank notes were practically inconvertible; and, in reality, bills of exchange were payable six months after demand—a circumstance of great importance, and one which must be specially observed, as this instance was brought forward by Sir Robert Peel in introducing the Bank Act of 1844, and he was not rightly informed of the circumstances.

The manifest consequences of this state of matters followed. All the gold left the country, as it always does from an excessive issue of inconvertible paper, and the banks were all obliged to employ agents in London to collect money for them at an expense of seldom less than one and a-half or two per cent. Adam Smith says: “This money was sent down by the wagon, and insured by the carriers at an additional expense of three-quarters per cent., or 15s. on the £100. These agents were not always able to replenish the coffers of their employers as fast as they were emptied. In this case, the resource of the banks was to draw upon their correspondents in London bills of exchange to the extent of the sum they required. When these correspondents afterwards drew upon them for the payment of this sum, together with the interest and commission, some of these banks—from the distress into which their excessive circulation had thrown them—had sometimes no other means of satisfying this draft but by drawing a second set of bills either upon the same or upon some other correspondents in London; and the same sum, or rather bills for the same sum, would in this manner make more than two or three journeys, the debtor bank always paying the interest and commission upon the whole accumulated sum. The gold coin which was paid out, either by the Bank of England or by the Scotch banks, in exchange for that part of their paper which was over and above what could be employed in the circulation of the country, being likewise over and above what could be employed in that circulation, was sometimes sent abroad in the shape of coin; sometimes melted down and sent abroad in the shape of bullion, and sometimes melted down and sold to the Bank of England at the high price of £4 per ounce. It was the newest, the heaviest and the best pieces only which were carefully picked out of the old coin, and either sent abroad or melted down at home; and while they remained in the shape of coin, those heavy pieces were of no more value than the light, but they were of more value abroad or when melted down into bullion at home.”

At this period, the Scottish banks had got themselves into a very alarming condition, from their ignorance of the true principles of regulating a paper currency, as well as of the effect of an excessive issue of inconvertible paper in depressing the exchanges and causing an export of gold; and not perceiving that, while in this state, bringing gold into the country was like pouring water into a sieve, like the toil of the Danaides. They had been far too prodigal in granting cash credits and allowing them to be converted into dead loans, without observing the rules which were specially applicable to them. And everything seemed to show that matters would get worse, as numerous other companies were forming to add to the currency, which was already excessive. United in a common danger, the two principal banks agreed to combine their influence and obtain an act to put a stop to the abuse. By their influence the Act, Statute 1765, c. 49, was passed, suppressing all notes under 20s. and prohibiting these to be issued with the optional clause, and enacting that all such notes should be payable to the bearer on demand. The banks also curtailed their cash credits very extensively and called up fresh capital. Owing to these combined measures, silver immediately reappeared in circulation; the value of the Scottish currency was restored to par, and from that time to the present, although the issue of bank notes was absolutely free until 1845, the Scottish currency has never varied from par.

The Bank of Scotland and the Royal Bank continued to be the only chartered banks in Scotland till 1746. In that year the British Linen Company was incorporated for the purpose of carrying on the manufacture of linen and banking in connection with it. The company, however, soon found, what ample experience has since confirmed, that the same company should never carry on banking and another business at the same time. They soon found it expedient to discontinue their linen manufacture and confine themselves to banking; and it has since become one of the most powerful and wealthy of the Scottish banks, but it did not introduce any new feature into Scottish banking. These three banks, the Bank of Scotland, the Royal Bank and the British Linen Bank, are the only banks in Scotland which are constituted with the full powers and privileges of a corporation—that is, their liability is limited to the amount of their subscription; and the members are not liable, in their private capacity, for the debts of the corporation beyond their subscribed stock.

In 1770, that abominable system of accommodation paper, which is the sure precursor of mercantile convulsion, was first fully manifested on a great scale. The Scottish banks had learned a very wholesome lesson, and contracted their issues within the bounds of prudence. This was a source of prodigious annoyance and vexation to a multitude of speculators and adventurers. The increased prudence which the banks exercised in granting advances, not only alarmed but enraged their projectors in the highest degree. Adam Smith (Wealth of Nations, Bk. II. ch. 2) gives a long account of the circumstances of the country at this period, and describes the foundation of a new bank, the notorious Ayr Bank, which was designed to remedy the distress which was owing, its projectors said, to the ignorance, pusillanimity and bad conduct of the banks, which did not give a sufficiently liberal aid to the spirited undertakings of those who exerted themselves in order to beautify, improve and enrich the country. This new bank comprised the Duke of Hamilton and many other proprietors of immense wealth, and it was based upon the fallacy that, because the capital and property of its proprietors was undoubted, it might therefore issue notes to any extent without depreciation. It was the avowed principle of this bank to advance upon any reasonable security the whole capital which was to be employed in these improvements, of which the returns are the most slow and distant, such as the improvements on land. This bank accordingly issued its notes with the utmost profusion, and very soon found them coming back on it for payment. To meet these demands, it began to draw upon London; and when the bill became due, it paid it by another bill, together with interest and commission. It continued to exist for two years, and it had then £200,000 of its notes in circulation and £600,000 in drafts upon London, for which it paid eight per cent. in interest and commission, while it gained five per cent. on its own notes.

The exports of 1771 and 1772 rose to a height which they did not again reach till 1787. While commerce was in this apparently prosperous, but in reality, bloated and diseased condition, on the 10th June, 1772, a partner in one of the great London banks, Neale & Co., decamped with £300,000. This man was a Scotsman named Forsyth, who had a large Scottish connection; these were blown upon by the failure of their London agent, and a complete commercial panic set in. The Ayr Bank had branches in Edinburgh and Dumfries. On the 17th a run began on its Edinburgh branch, and it stopped payment on the 25th, along with a crowd of speculators. The whole of Scotland was shaken to its foundation. The liabilities of the Ayr Bank amounted to £800,000. There had been no disaster similar to it since the Darien scheme, and there was none like it again till the failure of the Western Bank. The credit even of the other banks was almost gone. Besides the three public banks, only three private ones survived. It is said that the winding up of this unfortunate bank was not completed until 1830.

By the Act, Statute 1774, c. 32, the Bank of Scotland was authorized to double its capital. At this time the least fear of any Jacobite rising had died away. The measures taken after the suppression of the rising in 1746 had introduced peace and civilization into the remotest districts of the Highlands. Scotland shared in the great outburst of industrial energy which had developed itself in England, and had been the cause of the immense multiplication of country bankers. In this year, the Scottish banks began to throw out branches in all directions to promote agricultural improvements, and henceforth Scotland increased in wealth by gigantic strides produced by the system of cash credits. By the Act, Statute 1784, c. 12, the capital of the Bank of Scotland was raised to £300,000. By the Act, Statute 1792, c. 25 it was raised to £600,000; and by the Act, Statute 1794, c. 19, it was raised to £1,000,000; and by the Act, Statute 1804, c. 23, it was raised to £1,500,000, of which £1,000,000 was called up. All this shows how the industry of the country was increasing.

The news of the suspension of cash payments by the Bank of England in 1797 reached Edinburgh on the 1st March. The managers of the public banks met at Sir William Forbes’ to consider what was to be done. It was agreed to follow the example of the Bank of England and suspend all payments in cash. A public meeting of the principal inhabitants was called by the Lord Provost, and attended by the Lord President of the Court of Session and the other dignitaries. The meeting came to the unanimous resolution to support the credit of the banks and to receive their notes as specie. This resolution was advertised in the papers and sent to all the principal towns. This resolution caused a little commotion at first, but it soon subsided; and during all the period of the revolutionary war the suspension of cash payments continued; and not a single action was ever brought against them to enforce payment, although they were unprotected by any act of Parliament; and in a short time business proceeded more prosperously than ever. By the admirable system of the Clearing House, which the Edinburgh banks had adopted in 1776, the Scottish bank note currency never varied from par with the Bank of England note. The next occurrence which we may mention was the foundation of the Commercial Bank in 1810. At this time the high Tory regime was at its highest and palmiest state, and the banks were alleged to carry their politics into their business. Whig bills of exchange were looked upon with very cold and unfavorable eyes. The Whig party then determined to found an opposition bank, which was named the Commercial, which has since attained as high an estimation as any of the older ones in public opinion. This bank subsequently obtained a charter, but the liability of its shareholders was specially declared to be unlimited.

The long and dreadful catalogue of failures in England in 1825, chiefly caused by the monopoly of the Bank of England preventing large and solid banks being founded, and which were attributed to the issues of £1 notes by the country bankers, caused the Ministry to intend to abolish £1 notes in Scotland and Ireland at the same time as they did those of England. But this raised such a ferment, headed by Sir Walter Scott, that the Government consented that committees of both Houses should be appointed to consider the subject. The result was so eminently favorable to the Scottish banking system, which had been freely developed by practical men of business without the interference of the Legislature, that the attempt was abandoned. The report of the Lords said that: “With respect to Scotland, it is to be remarked that during the period from 1766 to 1797, when no small notes were by law issuable in England, the portion of the currency of Scotland in which payments under £5 were made continued to consist almost entirely of notes of £1 and £1 1s.; and that no inconvenience is known to have resulted from this difference in the currency of the two countries. This circumstance, among others, tends to prove that uniformity, however desirable, is not indispensably necessary. It is also proved by the evidence and by the documents that the banks of Scotland, whether chartered or joint-stock companies or private establishments, have for more than a century exhibited a stability which the committee believe to be unprecedented in the history of banking; that they supported themselves from 1797 to 1812 without any protection from the restriction by which the Bank of England and that of Ireland were relieved from cash payments; that there was little demand for gold during the late embarrassments in the circulation, and that, in the whole period of their establishment, there are not more than two or three instances of failure. As, during the whole of this period, a large portion of their issues consisted almost entirely of notes not exceeding £1 or £1 1s., there is the strongest reason for concluding that, as far as respects the banks of Scotland, the issue of paper of that description has been found compatible with the highest degree of solidity; and that there is not, therefore, while they are conducted upon their present system, sufficient ground for proposing any alteration with the view of adding to a solidity which has so long been sufficiently established.” The report of the committee was adverse to any legislative interference with the system of Scottish banking. This report is somewhat too couleur de rose, inasmuch as it takes no notice of the dreadful catastrophe of the Ayr Bank. It is known as a fact that a whole multitude of joint-stock and private banks started up in Scotland during the period of great industrial energy after 1766, but we are not aware that there is any record of their numbers. But, in 1826, besides the three public chartered banks with forty-four branches, there were twenty-two joint-stock banks with ninety-seven branches, and eleven private bankers in Scotland, or in all 194 banking offices.

No interference with Scottish banking took place till 1845, when Sir Robert Peel, having carried his Bank of England Charter Act and Joint-Stock Banking Act, which has since been totally repealed, with scarcely a breath of opposition, determined to regulate those of Scotland and Ireland as well. The principal provisions of this Act, Statute 1845, c. 38, are as follows:

(1.) All persons had been prohibited by the Statute 1844, c. 32, from commencing to issue notes after the 6th May, 1844, in the United Kingdom, and all such persons in Scotland as were lawfully issuing their notes between the 6th May, 1844, and the 1st May, 1845, were to certify to the Commissioners of Stamps and Taxes the name of the firm and the places where they issued such notes.

(2.) The commissioners were to ascertain the average number of such bankers’ notes in circulation during the year preceding the 1st May, 1845.

(3.) Such bankers were authorized to have in circulation an amount of notes, whose average for four weeks was not to exceed the amount thus certified by the commissioners, together with an amount equal to the average amount of coin held by the banker during the same four weeks. Of the coin, three-fourths must be gold and one-fourth silver.

(4.) In case the bank exceeds the legal amount, it is to forfeit the excess.

(5.) If two or more banks unite, they are authorized to have an issue of paper to the aggregate amount of issues of the separate banks, as well as the amount of the coin held by the united bank.

(6.) Notes of the Bank of England not to be legal tender in Scotland.

The reader will see that there are some striking points of difference between the restraints laid upon the English and Scottish banks; for, while the former are bound down to an absolute fixed limit of issue, the latter are permitted to issue to any amount, provided they hold an equal amount of coin above their authorized issue. Moreover, if any number of banks unite, they may have an aggregate authorized issue equal to that of the separate banks; but in England, if the number of partners of the united bank exceeds ten, they forfeit their power of issuing notes altogether. This absurd restriction as to the number of partners in a bank was never in force in Scotland, and is simply one of the methods by which the banking system of England was sacrificed to the Bank of England. It must be observed that the coin required to be held against the amount of notes in circulation above their authorized issue is in no way appropriated to their payment of these notes; it is merely a rough-and-ready method of compelling them to hold a greater amount of gold in proportion to their general liabilities. Whether this act has in any way conduced to the greater security of the Scottish banks, we will not take upon ourselves to say. All we can say is, that the two most dreadful calamities in Scottish banking, many times exceeding that of the Ayr Bank, have occurred since it was enacted. But it is the cause of one great nuisance. All payments in Scotland are made at two fixed terms—the 15th of May and the 11th of November. To effect these payments the banks have to issue millions of notes, which are emitted and get into circulation in the morning and are retired before evening. But for this one day’s issue of the notes it is necessary to have an equal amount of gold to back them. So millions of gold are sent down to Scotland from the Bank of England, and having lain a short time in the vaults of the Scottish banks, are trundled back again to London. The terrible catastrophe of the City of Glasgow Bank in 1878 produced a complete change in the constitution of all the joint-stock banks in the United Kingdom. Their shareholders compelled them to adopt the principle of limited liability. But we shall defer the consideration of this question to a later chapter.

The following table exhibits the position of all the Scottish banks on the 19th October, 1895:

CHAPTER III.

THE THEORY AND MECHANISM OF BANKING.

ON THE MEANING OF THE WORD BANK.

BEFORE we proceed to explain the mechanism and effects of banking, we must ascertain the meaning of the word bank, because great misconception prevails respecting it. At one time, there was considerable discussion in Italy as to the origin of the word Banco. Many writers said it came from “abacus,” a calculating machine. But Muratori entirely disapproves of such a derivation. “To me, on the contrary,” he says, “the word seems to have come from the German word banck, which is a very ancient word in that language”; and he says that the term was first used for a store of goods in the town of Brescia. Ducange also says: “Bank is of Franco-German, or Saxon, origin; no other is to be sought for.” There is no doubt whatever that these learned authors are right. The word banck in German has two meanings: (1). A heap or mound, like a sandbank; hence a store, like the goods in a shop. (2) A bench or seat; because the surface of a sandbank is usually smooth and level. Many writers who are not acquainted with the technicalities of business suppose that the word bank as a place of business comes from the second of these meanings; because they suppose that the “banco” was the counter upon which the money-changers kept their money. But the technical meaning of the word banking, and the invariable meaning of the term as used by the Italian economistes, and the invariable meaning of the word when it was first introduced into English, conclusively prove that the preceding opinion is erroneous; and that, as a technical term in commerce, it is derived from the first of the meanings given above—i. e., a heap or mound.

The word bank originated in this way. In 1171, the City of Venice was at war both with the Empires of the East and the West. Its finances were in a state of great disorder, and the Great Council levied a forced loan of one per cent. on all the property of the citizens, and promised them interest at the rate of five per cent. Commissioners were appointed to manage the loan, who were called “Camera degli Imprestiti.” Such a loan has several names in Italian, such as “Compera,” “Mutuo,” etc.; but the most usual name is “Monte,” a joint-stock fund. This first loan was called the “Monte Vecchio,” or the old loan; subsequently two other similar loans were contracted, and called the “Monte Nuovo” and the “Monte Nuovissimo.” In exchange for the money, which became the actual property of the Government to be employed for public purposes, the citizens received stock certificates, or credits, which they might transfer to any one else; and the commissioners kept an office for the transfer of the stock and the payment of the dividends. At this time, the Germans were masters of a great part of Italy, and the German word banck, meaning a heap, or mound, came to be used simultaneously with monte, and was Italianized into banco, and the public loans were called indifferently monti and banchi.

It was this office, the Chamber of Loans, which such multitudes of writers have supposed was the famous Bank of Venice. But this is a complete mistake. It was in no sense a bank, in the modern meaning of the word; it was simply the National Debt office; similar to the National Debt office of the Bank of England; it was the origin of the funding system. Thus in the “Volpone” of Ben Jonson, the scene of which is laid in Venice, Volpone says: “I turn no monies in the public bank”—meaning, “I do not dabble in the Venetian funds.” So an English writer, Benbrigge, in 1646, speaks of the “three bankes” at Venice—meaning the three public loans or monti. So in Florian and Torriani’s Italian Dictionary, published in 1659, it says: “Monte, or standing bank, or mount of money, as they have in divers cities in Italy.” That the word banco in Italian means a public debt might be proved by numberless quotations. Thus a recent writer, Cibrario, says (Economia Politica del medio evo): “Regarding the theory of credit, which I have said was invented by the Italian cities, it is known that the first bank or public debt (il primo banco o debito publico) was erected in Venice in 1171. In the thirteenth century paper money is mentioned at Milan; the credit was paid off. A monte or public debt (un monte o debito publico) was founded in Florence in 1336.” This passage shows that banco is the equivalent of monte, and of a public debt. At Genoa, during the wars of the fourteenth century, the Bank of St. George was formed of the creditors of the State.

Every economist in the south of Europe knows that the word bank means a public debt. Thus the distinguished Spanish economist, Olozaga, speaking of the Venetian loans, says: “El Monte Vecchio (Banco Viejo). * * * el Monte Nuevo (Banco Nuevo).” So Baretti’s Italian Dictionary 1839, says: “Monte, a bank where they lend or take money at interest.” So Evelyn speaks of the Monte di Pietà at Padua, where there is a continual bank of money to assist the poor. So Blackstone says: “At Florence, in 1344, Government owed £60,000, and being unable to pay it, formed the principal into an aggregate sum, called metaphorically a mount or bank.” Every one acquainted with the writings of the Italian economists knows that they invariably use the words monte and banchi as absolutely synonymous; but I am informed by my friend Professor Loria of Sienna that the word monte is not used now in Italian for a bank. This was also the meaning of the word bank when it was first introduced into English. Thus Bacon says: “Let it be no bank or common stock.” So Gerard Malynss says: “Mons Pietatis, or bank of charity. In Italy there are Montes Pietatis; that is to say, mounts or banks of charity.” Benbrigge, in his Usura Accommodata, 1646, says: “For their rescue may be collected Mons Pietatis sive Charitatis, or banks of piety or charitatis, as they of Trent fitly call it.” Again, “For borrowers in trade for their supply, as their occasion shall require, may be erected Mons Negotionis or banke of trade.” Tolet says: “Mons fidei, a banke of trust which Clement XII. instituted at Rome; he that put his money into this banke was never to take it out again”; for which the lender received seven per cent. interest, like the subscribers to the original Bank of England stock. He also speaks of Mons Recuperationis, or banke of recovery, in which the interest was twelve per cent. The difference between these two, which were public debts, was that the first was a perpetual annuity, and the second a terminable annuity, in which the higher rate of payment was repayment of the principal.

In the time of Cromwell, several proposals were made for erecting public banks. Samuel Lambe, a London merchant, recommending them in 1658, says: “A bank is a certain number of sufficient men of estates and credit joint together in joint stock; being as it were the general cash keepers or treasurers of that place where they are settled, letting out imaginary money (i. e., credit) at interest at two and a-half or three per cent. to tradesmen or others, who agree with them for the same, and making payment thereof by assignation, and passing each man’s account from one to another with much facility and ease.” So Francis Cradocke, a London merchant who was appointed a member of the Board of Trade by Charles II., strongly advocated the introduction of banks into England, and says: “A banke is a certain number of sufficient men of credit joined together in a stock, as it were, for keeping several men’s cash in one treasury, and letting out imaginary money (i. e., credit) at interest for three or more in the hundred per annum, to tradesmen or others that agree with them for the same; and making payment by assignation, passing each man’s account from one to another, yet paying little money.” And he says that, “the aforesaid bankers may furnish another petty bank (or mount) of charity.” Thus these writers perfectly well understood the nature and constitution of a bank. They knew well that the function of a bank is to advance imaginary money, or credit, and not metallic money, as is the popular delusion of the present day. In a little tract, entitled “A Discourse Concerning Banks,” and supposed to be by a director of the Bank of England, we find this description: “There are three kinds of banks; the first for the mere deposit of money [like those of Venice, Amsterdam, Hamburg, etc.]; the second for profit. The banks of the second kind, called in Italy Monti [i. e., public debts], which are for the benefit of the income only, are the Banks of Rome, Bologna and Milan. These banks were made up of a number of persons who, in time of war or other exigencies of State, advanced sums of money upon funds granted in perpetuum, but redeemable. * * * The third kind of banks, which were both for the convenience of the public and the advantage of the undertakers, are the several banks of Naples, the Bank of St. George at Genoa, and one of the banks of Bologna. These banks having advanced sums of money at their establishments, did not only agree for a fund of perpetual interest, but were allowed the privilege of keeping cash.”

The Bank of England was of this last kind. It was a company of persons who advanced a sum of money to the Government and received in exchange for it a perpetual annuity, or a right to receive forever a series of annual payments from the State. This annuity is in legal phrase termed a bank annuity; in popular language, “The Funds.” There has only been one instance in England of a bank which did not receive cash from the public. Some time after the foundation of the Bank of England, a company of persons united to advance a million pounds to the Government. They were incorporated as the “Million Bank.” This company existed till nearly the end of the last century, and thus it resembled the original Bank of Venice. Thus, from these passages, and many more might be cited if necessary, it is perfectly clear that the word bank, as a term in commerce, is the equivalent of monte; and meant a joint-stock fund contributed by a number of persons. So when the word bank was introduced into our American colonies before the Revolutionary War, Professor Sumner says (“History of American Currency,” p. 6, n.): “Bank, as the word was used before the Revolutionary War, meant only a batch of paper money, issued either by the Government or a corporation. The impression seems to have remained popular that the essential idea of a bank is the issuing of notes. * * * The notes issued in ‘banks,’ or masses, as loans were pure paper money.” So, in a valuable history of the notes issued in the United States, it says that an issue of paper money to the amount of £50,000, authorized to be issued by the Treasury, was styled a bank.

The essential feature of all these “banks” was this: The subscribers advanced the money as a loan or mutuum; it thus became the absolute property of the borrowers, and in exchange for their money the lenders received a credit—i. e., a certificate, or promise to pay interest, which they might transfer to anyone else. And those persons whose business it was to trade like these banks—i. e., to buy money and in exchange for it to issue credit of various sorts—were termed “bankers,” and only those. Thus, as a technical term in business, to “bank,” means to issue credit.

ON THE MEANING OF THE WORD BANKER.

Here, again, great misconception prevails as to the meaning of the word banker and the nature of the business of banking. Gilbert says: “A banker is a dealer in capital; or, more properly, a dealer in money. He is an intermediate party between the borrower and the lender. He borrows of one party and lends to another; and the difference between the terms at which he borrows and those at which he lends forms the source of his profit.” So a report of the House of Commons says: “The use of money, and that only, they regard as the province of a bank, whether of a private person or incorporation, or the banking department of the Bank of England.” Notwithstanding the apparently high authority of these passages, which have misled so many unwary persons, these descriptions of the nature of the business of banking are entirely erroneous. In former times, there were many persons who acted as intermediaries between persons who wanted to lend and those who wanted to borrow. They were called “money scriveners.” The father of John Milton was a money scrivener, but no one ever called a money scrivener a banker. At the present day, many firms of solicitors act as intermediaries between persons who wish to lend and others who wish to borrow. They may have some clients who wish to lend and other clients who want to borrow; and they act as agents between them. The first set of clients may entrust their money to the firm to lend to the second set, and the solicitors receive a commission on the sums which pass through their hands. But no one ever called a firm of solicitors who transact such business “bankers”; which shows that there is an essential distinction between the business of money scriveners and such a firm of solicitors and the business of “bankers.” Solicitors who transact such agency business do not acquire any property in the money which passes through their hands. They receive it merely as a bailment or a depositum. They are only the custodians or the trustees of the money; and it is only entrusted to their custody for the express purpose of being applied in a particular way. The actual property in the money passes directly from the lender to the borrower through the medium of the trustees or bailees, and if the latter appropriated the money in any way to their own purposes it would be a felony, and they would be liable to be punished for embezzlement. But the case of a banker is wholly different. When his customers pay in money to their account they cede the property in the money to the banker. The money placed with him is not a depositum or a bailment; it is a mutuum or creditum; it is a “loan” or sale of the money directly to himself. The banker is not the bailee or trustee of the money, but its actual proprietor. He may trade with it or employ it in any way he pleases for his own profit or advantage. The banker buys the money from his customer, and in exchange for it he gives his customer a credit in his books, which is simply a right of action to demand back an equivalent amount of money from his banker at any time he pleases, and the customer may transfer this right of action to any one else he pleases, just like so much money.

When the client of a solicitor entrusts money to him, to lend to some one else, he retains the property in it until the arrangement with the borrower is completed; and then the property in the money is transferred directly from the lender to the borrower, without in any way vesting in the solicitor. But when a customer pays in money to his banker, the property in it instantly and, ipso facto, vests in the banker; and the customer has nothing but a right of action against the person of the banker to demand back an equivalent sum. So long as the money remains in the possession of the customer, it is a jus in rem; but when he has paid it into his account he has nothing but a jus in personam.

Galiani says (Della Moneta, p. 323): “Banks began when men saw from experience that there was not sufficient money in specie for great commerce and great enterprises. The first banks were in the hands of private persons with whom persons deposited money; and from whom they received bills of credit (fedi di credito), and who were governed by the same rules as the public banks now are. And thus the Italians have been the fathers and the masters and the arbiters of commerce; so that in all Europe they have been the depositaries of money, and are called bankers.” So Genovesi says (Delle dezioni di Economia Civile, part II., ch. 5, § 5): “These monti (banks) were first administered with scrupulous fidelity, as were all human institutions made in the heat of virtue. From which it came to pass that many placed their money on deposit, and as a security, received paper, which was called and is still called bills of credit. Thus private banks (banchi) were established among us, whose bills of credit acquired a great circulation, and increased the quantity of signs and the velocity of commerce.” And this was always recognized as the essential feature of banking. Thus Marquardus says (De Jure Mercatorum, Lib. II., ch. 12, § 13): “And by ‘banking’ is meant a certain species of trading in money, under the sanction of public authority, in which money is placed with bankers (who are also cashiers and depositaries of money) for the security of creditors and the convenience of debtors, in such a way that the property in the money passes to them; but always with the condition understood that any one who places his money with them may have it back whenever he pleases.”

A “banker” is therefore a person who trades in the same way as the public banks did; they acquired the property in the money paid in; and in exchange for it they gave bills of credit; which circulated in commerce exactly like money and produced all the effects of money. And, moreover, when they bought or discounted bills of exchange, they did it exactly in the same way; they bought them by issuing their own credit, and not with money. And experience showed that they might multiply their bills of credit several times exceeding the quantity of money they held; and thus for all practical purposes multiply the quantity of money in circulation. Thus the essential business of a banker is to create and issue credit to circulate as money. In the neighborhood of the Royal Exchange, many firms announce themselves as “Money Changers and Foreign Bankers.” Thus they show that they know that money changing is not “banking.” By foreign bankers they mean that, in exchange for specie, they will give their customers bills of credit on their foreign correspondents.

The following is a true definition of a “banker”: A banker is a trader who buys money and credits, debts or rights of action, payable at a future time, by creating and issuing credits, debts or rights of action, payable on demand, as will be more fully exemplified further on.

ON THE CURRENCY PRINCIPLE.

We must now explain the meaning of an expression which has acquired much importance, and which must be clearly understood before we come to the exposition of the system which the Bank Charter Act of 1844 was designed to carry out.

The express function of a bank being to create credit, it has sometimes been maintained that a bank should only be allowed to create exactly as much credit as the specie paid in, and no more; and that its sole function should be to exchange credit for money and money for credit; and thus the quantity of credit in circulation would always be exactly equal to the money it displaced. This doctrine is that which is distinctively known by the name of the Currency Principle. It is the doctrine which the supporters of the Bank Act of 1844 asserted to be the only true one, and which that Bank Act was especially designed to carry out. The doctrine is supposed to be of modern origin, and the latest refinement in the theory of banking. But this is far from being the case; it was first formulated in China in 1309. That country had been plagued for 500 years with the excessive issues of inconvertible paper by the banks. The author of a work named Toao-Min, exhibiting the evil consequences of excessive issues of paper money, and speaking of the times before such mischief arose, said: “Then it was ordered that, at the offices of the rich merchants who managed the enterprise, when the notes were paid in, the money came out; when the bills came out the money went in; the money was the mother, the note was the son. The son and the mother were reciprocally exchanged for the other.”

Several banks have been constructed on this principle, such as those of Venice, Amsterdam, Hamburg, Nuremberg and others. These places, small in themselves, were the centres of a great foreign commerce, and as a necessary consequence large quantities of foreign coin of all sorts, of different countries and denominations, were brought by the foreigners who resorted to them. These coins were moreover greatly clipped, worn and diminished. The degraded state of the current coin produced intolerable inconvenience, disorder and confusion among the merchants, who, when they paid or received payment of their bills, had to order or receive a bagful of all sorts of different coins. The settlement of these bills, therefore, involved perpetual disputes—which coins were to be received and which were not, and how much each was to count for. In order to remedy this intolerable inconvenience, it became necessary to institute some fixed and uniform standard of payment, so as to insure regularity of payments and a just discharge of debts. To effect this purpose, the magistrates of these cities instituted a Bank of Deposit, into which every merchant paid his coin of all sorts and countries. They were weighed, and the bank gave him credit in its books for the exact bullion value of the coins paid in. The owner of the credit was entitled to have it paid in full-weighted coin on demand. These credits, therefore, insured a uniform standard of payment, and were called “bank money,” “Moneta di Banco,” and it was enacted that all bills upon these cities above a certain small amount should be paid in bank money only. As this bank money was always exchangeable for coin of full weight on demand, it was also at a premium, or agio, as compared with the worn, clipped and degraded coin in circulation. The difference was usually five to nine per cent. in the different cities. The term agio is misleading, because it is evident that it was the “Moneta di Banco,” which was the full legal standard, and the current coin was at a discount. These banks professed to keep all the coin and bullion deposited with them in their vaults. They made no use of it in the way of business, as by discounting bills. Thus the credit created was exactly equal to the specie deposited, and their sole function was to exchange credit for money and money for credit. These banks were examples of the currency principle. They were of no use to commerce further than to serve as a safe place to keep the money of the merchants, and to insure a uniform standard for the payment of debts. They made no profits by their business, and no bank constructed on the currency principle can by any possibility make profits. The merchants who kept their accounts with the bank paid certain fees to defray the expenses of the establishment.

These banks were banks of deposit, because the money and bullion placed with them were merely placed there for safe custody and keeping. But they were not banks in the true sense of the word, because the money deposited with them did not become their absolute property to deal with as they pleased. They were simply trustees of the money. They were, however, banks in a certain sense; because the primary meaning of banco is a store, and they were stores of money. They were not the bankers, but the treasurers of the merchants; and they were obliged to take a solemn oath that they would keep in their vaults all the money deposited with them. Nevertheless, both at Venice and Amsterdam, they violated their solemn oaths, and advanced large sums to the Government, which ultimately led to their ruin.

ON THE MECHANISM OF BANKING.

Banks of the nature of those of Venice, Amsterdam, Hamburg and others, founded on the “currency principle,” never existed in England; and we must now explain the mechanism of the great system of banking—or the great system of the commerce in credits, debts or rights of action, as it has been carried on in England.

It was during the great civil war, as we have already explained, that the goldsmiths of London first began to receive the cash of the merchants and country gentlemen for safe custody, on condition of repaying an equal sum on demand, and to discount bills of exchange with their own promissory notes; that commenced the business of banking. Now, this money was not placed in their hands to be locked away in their cellars, as plate and jewelry are often given into the custody of a banker for mere safe custody as a depositum, and to be restored in specie. The money was sold to the banker to become his actual property, according to the well-understood custom of bankers; that is, it was a mutuum or creditum; and was to be restored only in genere. The goldsmith bankers agreed not only to repay the money on demand, but also to pay six per cent. interest upon it. Consequently, in order to make a profit, they were obliged to trade with it.

We must now explain how a banker makes a profit by the money his customers sell to him. Suppose that customers pay in £10,000 to their accounts. They cede the absolute property in the money to the banker; it is a mutuum or creditum. The banker buys the money from his customers, and in exchange for it he gives them an equal amount of credit in his books; that is, he creates rights of action against himself to an equal amount, giving his customers the right to demand back an equal amount of money at any time they please, and also the right to transfer their rights of action to any one else they please, exactly as if they were money, and the banker agrees to pay the transferee the same as his own customer. This right of action, credit or debt, entered in the banker’s books is, in banking language, technically termed a deposit. After such an operation his accounts would stand thus:

Now, though his customers have rights of action against the banker to demand exactly an equal sum of money to what they have paid in, yet persons would not pay money to their banker if they meant to draw it out immediately; just as no one would spend all the money he has at once. Nevertheless, some will want to draw out part of their funds; but if some customers want to draw out money, others will, probably, pay in about an equal sum. Observation shows that, in ordinary and quiet times, a banker’s balance will seldom differ by more than one thirty-sixth part from day to day. The banker’s cash is, therefore, like a column of gold with a slight ripple on the surface; and, if he retains one-tenth in cash to meet any demands which may be made on him, that is ample and abundant in all ordinary times. If, then, in the above example, the banker retains £1000 in cash to meet any demands upon him, he has £9000 to trade with and make a profit by; and it is just in the method in which bankers trade that so much misconception exists. It is commonly supposed that, when a banker has the £9000 to trade with, he employs it in purchasing bills of exchange to that amount, and that he receives a profit only on the £9000; but that is a complete misconception of the nature of banking. A banker never buys bills of exchange with money. That is the business of a bill-discounter or money-lender. The way in which a banker trades is this: He sees that £1000 in cash is sufficient to support £10,000 of liabilities in credit; consequently, he argues that £10,000 in cash will bear liabilities to several times that amount in credit. One of the most eligible methods of trading for a banker is to buy or discount good commercial bills; and he buys these bills exactly in the same way as he bought the cash—that is, by creating credits in his books, or debts or rights of action against himself to the amount of the bills, deducting at the same time the interest or profit agreed upon, which is called the discount. A banker, therefore, invariably buys a bill of exchange with his own credit and never with cash, exactly in the same way that he bought the cash. That is, he buys a right of action payable at a future time by issuing a right of action payable on demand; and this right of action or credit is also in banking language termed a deposit—as the right of action created and issued to buy the cash.

Suppose that the banker buys £40,000 of bills of exchange at three months, and that the agreed-upon profit is four per cent.; then the sum to be retained on these bills is £400. Consequently, in exchange for bills to the amount of £40,000 he would create credits, debts or rights of action—technically termed deposits—to the amount of £39,600. Hence, just after discounting these bills, and before his customers began to operate upon them, his accounts would stand thus:

The balance of £400 being his own property or profit. By this process the banker has added £39,600 in credit to the previously existing cash, and his profit is clear; he has not gained four per cent. on the £9000 in cash, but four per cent. on the £40,000 of bills he has bought. This is what the business of banking essentially consists in; and thus the correctness of the definition of a banker given above is manifest.

It is also evident that a banker’s profits depend upon the quantity of credit he can maintain in circulation in excess of the cash he holds in reserve. Thus it is seen that the very essence and nature of a bank and a banker is to create and issue credit payable on demand; and this credit is intended to circulate and perform all the functions of money. A bank is therefore not an office for borrowing and lending money, but it is a manufactory of credit. As Mr. Cazenove well said: “It is these banking credits which are the loanable capital;” and, as Bishop Berkeley said, “a bank is a gold mine.” So we ought not to speak of the money market, but of the credit market.

ON THE LEGAL RELATION BETWEEN BANKER AND CUSTOMER.

It must be carefully observed that the legal relation between banker and customer is simply that of debtor and creditor.

When a customer pays in money to his account with his banker, he cedes the absolute property in the money to the banker and receives in exchange for it a right of action, or credit or debt, to demand an equivalent sum of money any time he pleases, but not the identical money. In speaking of banking, it is too often implied that the money placed with the banker still belongs to the customer. But this was decisively refuted by Lord Chancellor Cottenham. It must therefore be carefully observed that a banker in no way resembles the treasurer of a public fund, or a solicitor or a money scrivener, who are only trustees or bailees of the money placed with them by their clients. If a banker were the mere trustee of the money placed with him, he would have no right to use it for his own private profit.

It is often the custom of persons to say that they have so much money at their banker’s; but such an expression is wholly erroneous and misleading; they have no “money” at their banker’s; they have nothing but an abstract right of action to demand so much money from their banker, which they give in exchange to their banker for money. As a consequence of this relation between banker and customer, if a customer were to leave a balance at his banker’s for six years without operating on it, or receiving interest for it, the banker might, if he chose to be so dishonest, refuse to pay it, because the statute of limitations does not apply to trusts. Another consequence of this relation is that a cheque is a bill of exchange and not a draft. It is an order addressed by a creditor to his debtor, and not one addressed to his trustee or bailee. To call a cheque a draft is to mistake the relation between banker and customer.

ON THE LEGAL CONTRACT BETWEEN BANKER AND CUSTOMER.

It has been shown that the legal relation between banker and customer is simply that of debtor and creditor. Nevertheless there is an important distinction between an ordinary debtor and a banker debtor. At common law, an ordinary debtor is not bound to accept a bill drawn upon him by his creditor without his own consent, even though he admits the debt; nor, if the creditor assigns the debt, is he bound to pay the transferee. The debtor has simply engaged to pay his creditor, and no one else. Nor has the transferee any right of action against him, because there is no privity of contract between the debtor and transferee; and the creditor has no power to stipulate that the debtor shall pay the transferee unless he expressly consents to do so. The transferee can only sue the debtor under the name of the transferer, or the transferer can sue the debtor as the trustee of the transferee. If, however, the debtor had entered into an obligation, under seal, promising to pay the assignee or bearer; or if he had accepted a bill payable to order, or to bearer, then the transferee might sue him in his own name, because the consent of the debtor had created a privity of contract between himself and the transferee. But the case of a banker debtor has always been different. When persons have money in their own possession they can transfer it to any one else, any moment they please. Persons, therefore, would not place their money with bankers unless they had exactly the same facility of transferring their right of action against their banker as they had of transferring the money itself.

Consequently, from the very first institution of banking, it was always the fundamental contract that customers might either demand payment themselves from their bankers, or that they might transfer their right of action made payable to order, or to bearer, or to anyone else as freely as their money; and the bankers agreed to pay the transferee as readily as their own customers. By the very nature therefore of the consensual contract, termed the custom of bankers, a banker having funds of his customer is in the position of an ordinary debtor who has accepted a bill payable to order or to bearer. Hence, while the simple admission of funds by an ordinary debtor in no way compels him to accept, or to pay, a bill drawn upon him without his own consent, the simple admission of the possession of funds by a banker operates ipso facto as a legal acceptance of any bills or cheques drawn upon him by his customer, and gives the holder of them a right of action against him.

ON THE MEANING OF DEPOSIT IN THE TECHNICAL LANGUAGE OF MODERN BANKING.

The word depositum is one of that class of Latin words which, in classical Latin, meant a material thing, but which in modern times has come to mean only an abstract right. A depositum, in Roman law, means anything which is placed in the gratuitous charge or custody of some person for the sole purpose of safe-keeping, without the property in it passing to him, or his being allowed to use it in any way for his own advantage, or even being allowed to retain it as a security for a debt due to him.

It is part of the duty of a London banker to take charge of his customer’s plate, jewelry and securities, if required to do so. This plate, jewelry and securities so committed to their charge for safe custody is what in Roman law is called a depositum. The banker acquires no property in such a depositum; he can make no use of it for his own advantage; he receives no remuneration for keeping it, and he has no lien on it if his customer becomes indebted to him. So, if a customer tied up a sum of money in a bag and placed it in the custody of his banker, it would be a depositum; and the banker would be bound to redeliver the specific bag of money to him on demand, untouched. It is said that in the 1893 crisis in America, numbers of customers withdrew their balances from their current accounts, tied them up in bags and redelivered them to their bankers to keep for them as deposita; and then of course the bankers could not touch them. It is almost universally supposed by lay writers that when a customer pays in money to his account with his banker, it is a deposit; and that the deposits of a bank are the cash held in reserve. This, however, is a pure delusion. When a customer, in the ordinary way, pays in money to his account with a banker, he loses all property in it; the banker acquires the absolute property in it to use for his own advantage; such money, therefore, is not a depositum; it is a mutuum or a creditum. If the money so paid in were a depositum, it would mean that the banker acquired no property in it; that the property in it remained with the customer who placed it in his banker’s hands for pure safe-keeping, and that he could demand back that specific sum of money at any time he pleased. But every person who thinks knows that such ideas are erroneous.

In exchange for the money the banker makes an entry of an equal sum in credit in favor of his customer; that is, he issues a right of action to him. And it is this entry of a credit or right of action in his customer’s favor which in the technical language of modern banking is termed a deposit; that is, he buys the money by creating a deposit. So when a banker discounts a bill for a customer, he buys a right of action from him exactly in the same way as he bought the money. He creates a credit in his books in his favor; or he issues a right of action to him. This credit, or right of action, is the price the banker pays for the bill. And this credit or right of action created to purchase the bill is termed a deposit, equally as the right of action created to purchase the money. The money and the bills are the banker’s assets. The deposits are the rights of action he has created to purchase his assets. Every advance a banker makes is done by creating a deposit. His depositors are those persons who have rights of action against him to pay money, or his creditors. A deposit is simply a banking credit.

IN BANKING LANGUAGE A DEPOSIT AND AN ISSUE ARE THE SAME.

It must therefore be observed that, in the technical language of modern banking a deposit and an issue are the same thing. A deposit is simply a credit in a banker’s books. It is the evidence of the right of action which a customer has to demand a sum of money from the banker. As soon as the banker has created a credit, or deposit, in his books in favor of a customer he has issued to him a right of action against himself.

The word issue comes from exitus, a going forth; and in mercantile law to issue an instrument is to deliver it to any one so as to give him a right of action against the deliverer or issuer. It in no way increases the banker’s liability to write down this credit, or deposit, on paper in the form of a bank note or cheque. Such documents are only made after the credit or deposit has been created; and their sole purpose is to facilitate the transfer of the credit or deposit to some one else. Now, as every advance a banker makes is by issuing a right of action against himself to his customer, and as a banker has an unlimited right of buying any amount of debts or obligations from his customers which he thinks prudent, every banker has the right of unlimited issue. Bank notes and cheques, then, do not increase a banker’s liability. The liability is created as soon as the banker has entered the amount to his customer’s credit in his books. The note, or cheque, is merely a convenient method of transferring from hand to hand the pre-created liability which has already been issued. Deposits, then, instead of being so much cash, as is so commonly supposed, are nothing but the credits or rights of action the banker has created as the price to purchase the cash and bills which figure on the other side of the account as his assets. A sudden increase of deposits is, therefore, nothing more than an inflation of credit, exactly similar to a sudden increase of bank notes. Deposits are nothing but bank notes in disguise.

ON THE METHOD OF UTILIZING BANKING CREDITS.

The banker, then, having issued these credits, deposits or rights of action against himself to his customers, they cannot, of course, transfer them by manual delivery in that form to any one else. In order to be capable of manual delivery they must be recorded on paper or some other material. And this might be done in two forms: 1. The banker might give his customer his own promissory notes, promising to pay a certain sum to his customer, or to his order, or to bearer on demand. 2. The customer might write a note to his banker directing him to pay a certain sum to a certain person; or to his order, or to bearer on demand. These orders were formerly called cash notes, but they are now termed cheques. These paper documents do not create new liabilities; they merely record on paper the credits, debts or deposits which have already been created in the banker’s books, and their sole use is to facilitate the transfer of these rights of action to other persons. There is one juridical distinction between bank notes and cheques. A bank note is the absolute obligation of the banker to pay it; a cheque is only the contingent obligation of the banker to pay it, provided that the customer has sufficient credit on his account to pay it. If, however, he has, then the obligation of the banker is absolute. The holder of a cheque with funds to meet it on the drawer’s account has the same right of action against the banker as upon one of his own notes. So far as regards economics, bank notes and cheques are absolutely identical. They are both equally circulating medium or currency. Bankers’ notes were at first merely written on paper like any other promissory notes, and they were for any sums the customer might require. In 1729, Child & Co. introduced the practice of having their notes partly printed and partly written like a modern cheque. They were not, like modern bankers’ notes, for fixed definite sums; but, like modern cheques, for any sum that might be required.

London bankers appear to have issued their own notes till about 1793, when perhaps the panic of that year may have shown them the danger of having large amounts of their notes in the hands of the public, which their enemies might collect and present for payment. In 1793, they discontinued issuing notes of their own accord, but they were never forbidden to do so until the Bank Act of 1844. Most erroneous conclusions have been drawn from the fact of the London bankers having voluntarily discontinued issuing their own notes. Lay writers, who know nothing of the mechanism of banking, have asserted that the London banks are, like the banks of Venice, Amsterdam, etc., pure banks of deposit; that they do not create credit, and that their whole business is to “lend” out the money they “borrow” from their customers. All such ideas are, however, pure delusions. Bankers now, as ever, make all their advances by creating credits or deposits in their books. But instead of giving their customers two methods of circulating these credits, by means of notes or of cheques, they are now restricted to one method—cheques. But whether a bank credit is circulated by means of a note or a cheque makes no possible difference in economics.

The Bank Charter Act of 1844 allowed the banks which were then issuing notes to continue to do so to a certain limited amount, but forbade any new bank to commence doing so. A considerable number of the banks which issued notes in 1844 have disappeared, and the notes of private banks have diminished by several millions. Many ill-informed writers have drawn the conclusion from this circumstance that the currency of the country has been diminished by so much. This, however, is a pure delusion. The system of banking has enormously increased since then, and the amount of banking credits has increased by scores of millions, and these increased banking credits being circulated by cheques are currency in exactly the same way as notes.

OPERATIONS BY MEANS OF NOTES AND CHEQUES.

When, therefore, a banker has created a credit or deposit in favor of his customer, he can put this credit into circulation either by means of the banker’s own note or by means of a cheque, and when he does so, the following different results may take place: 1. The customer himself or the holder of the note or cheque may demand payment of it; if they do so, the banker’s liability is extinguished. It is a resale of money to the holder of the note or cheque, and the banker buys up the right of action against himself. 2. The note or cheque may circulate in commerce and effect any number of transfers of commodities or payments exactly like an equal sum of money; and it may ultimately fall into the hands of a customer of the same bank, who pays it into his own account, and the whole series of transactions is finally closed by the mere transfer of credit from the account of the drawer to that of the holder, without the necessity of any coin. 3. The note or cheque may, after performing a similar series of operations, fall into the hands of a customer of another bank. So the banker becomes debtor to the customer of another bank. But if the bank A becomes debtor to the customers of bank B, the chances are that about an equal number of the customers of bank A will have about equal claims against bank B. If the mutual claims of the customers of each bank are exactly equal, the respective documents are interchanged, and the credits are readjusted among the accounts of the different customers without any payment in money. Thus, if the mutual claims among any number of bankers exactly balanced, any amount of credits, however large, might be settled without the use of a single coin. Formerly, if the mutual claims did not balance, the differences only used to be paid in money or bank notes. But now, by an ingenious arrangement of the Clearing House, which will be described shortly, the use of coin and bank notes is entirely dispensed with, and all the banks which join in the clearing are really and practically formed into one huge banking institution for the purpose of transferring credits among each other, just as credits are usually transferred from one account to another in the same bank, without a single coin being required.

HOW CREDIT IS CAPITAL TO A BANKER.

It is now seen how credit is capital to a banker. For what is the commodity which a banker deals in and makes a profit by? He opens his place of business and has an array of clerks with their desks, ledgers, etc. He then gives notice that he is ready to buy gold from any one who has it to sell. And what is the commodity with which he buys the gold—what does he give in exchange for it? His own credit. The commodity he gives in exchange for the gold is a right of action to pay an equivalent of gold on demand, i. e., his own credit. He then gives notice that he is ready to buy good commercial debts—which are credits or rights of action—which any one has got to sell. And what does he buy these credits, debts, or rights of action with? Again, with nothing but his own credit—with rights of action against himself. His own credit is the commodity with which he buys these other credits. The banker charges exactly the same price for his credit as if it were money. The only commodity the banker has to sell is his own credit, for which he charges exactly the same price as if it were money. Hence he makes exactly the same profit by selling his credit as if he were selling money. Now, as we have seen, anything which gives a profit is capital. Hence, as a banker’s credit produces him exactly the same profit as money would, it is evident that his credit is capital to him just as much as money is.

Again, credits, debts or rights of action are goods, chattels, commodities, merchandise. Now, under the term circulating capital, Smith expressly includes the goods or commodities in shops. The trader buys them at a lower price from one person and sells them at a higher price to another person, and so makes a profit by them; and thus the goods in the shop are capital to him. And Adam Smith expressly includes bank notes or banking credits and bills of exchange under the term circulating capital. So a banker buys the goods or commodities termed credits, debts or rights of action from one person, his own customer, and sells them at a higher price to another person—namely, the acceptor or debtor. The debt the banker buys is increasing in value every day from the time he buys it until it is paid off. These goods or commodities termed debts in the portfolio of a banker produce him a profit just in the same way as the goods, commodities or merchandise in the shop produce profits to the trader. Hence the bills in the portfolio of a banker are circulating capital, exactly in the same way as the goods, commodities or merchandise in the shop of a trader are circulating capital.

ON THE SCOTTISH SYSTEM OF BANKING.

The credits, or rights of action, created by bankers in the operations which we have been describing, were employed to buy commercial bills which arose out of the transfer of commodities; and it has been shown that they create credit to several times the amount of the cash in their possession. And some writers suppose that this is the limit of legitimate credit. It is very commonly imagined that credit can only be used to transfer existing commodities. We have now to describe a species of credit of a totally different nature, invented in Scotland, to which the marvelous progress of that country is mainly due. It is credit created, not for the purpose of transferring or circulating commodities already in existence, but for the express purpose of calling new products into existence. It is entirely of the nature of accommodation paper; and it will show that there is nothing in the nature of accommodation paper more dangerous or objectionable than there is in real paper, as it is called; but, on the contrary, that they stand on exactly the same footing of security; and also that credit is equally applicable to call new products into existence as to transfer those already in existence.

When, after a long period of inactivity, the energies of a people are suddenly turned into an industrial direction, they find innumerable enterprises which would be profitable if only they possessed the means of setting them agoing. The quantity of money which was sufficient for a non-industrial people is now found to be wholly inadequate for the increased demand for it; and the only consequence will be that, if there is a greatly increased demand for the existing quantity of money, the rate of interest will rise enormously; and to such an extent as to preclude all possibility of profit from such enterprises, even if effected. It is, therefore, invariably found, that whenever this takes place, multitudes of schemes are set afloat for increasing the quantity of money. For many centuries after the Conquest, England was essentially a feudal and military—an agricultural and pastoral people. Its law was almost entirely feudal, and related to the tenure of land. Merchants and commerce were held in very subordinate esteem, and commercial law had no existence. In the sixteenth century, the energies of the nation were absorbed in religious controversies; and in the first half of the next century in constitutional struggles and politics. At length, in the reign of Charles II., men, weary of polemics and politics, began to devote themselves more to industry and commerce; and this was greatly stimulated by the manifest advantages of banking which had just been introduced into England. Among fields of enterprise at that period, none seemed more promising than agriculture. But unfortunately all the available specie was absorbed in commerce; none was to be had for agriculture; or, at least, only at such rates as to be practically prohibitive. In no species of industry are the profits so moderate as in agriculture. Hence, if capital has to be borrowed to effect improvements in agriculture, it is requisite that it should be at a very low rate of interest. The usual rate of interest in the time of Charles II. was ten per cent., and few improvements in agriculture could bear that. But by the introduction of banking and the foundation of the Bank of England, the rate of interest in commerce was reduced to three per cent. It was this real want, and the enormous advantage which banking had been to commerce, which gave rise to the schemes of Asgill, Briscoe, Chamberlen, Law, and others, for the purpose of creating paper money based upon land; and to found land banks, to assist agriculture, as the mercantile banks had assisted commerce, which were so rife at this period.

One of these schemes was attempted to be carried out in 1696. The Ministry of William III. was not, as is now the case, formed exclusively of one party of the State. William III. reigned and governed; and the Ministry was his Ministry, and not that of the Parliament, as it is now. His Ministry was partly Whig and partly Tory. The Whig portion of it, who were in close connection with the mercantile community of the city, succeeded in founding the Bank of England in 1694, which was essentially a Whig project, and intended to assist the finance of the Government and commerce. The immense benefit of the Bank of England was so evident that the Tory portion of the Ministry endeavored to found a bank which should also assist Government, and besides that, be specially for the benefit of agriculture. It was attempted to be founded in 1696, and it was called the Land Bank. But the attempt did not succeed, and its failure was one of the causes which produced the stoppage of the Bank of England in 1697. There were, no doubt, defects in the scheme which fully accounted for its failure; but the want was very real, and the idea was perfectly sound. Among the projectors of a scheme for basing paper money on land, the most celebrated was John Law. He has given an elaborate exposition of his theory in a work entitled “Money and Trade Considered”; and he laid a scheme before the Parliament of Scotland in 1705, which they fortunately rejected, or there would have been a catastrophe in Scotland as great as that of the Darien scheme in 1699. Law had the opportunity of reducing his theory to practice in France in 1720, under the name of the Mississippi scheme. This is not the place to give an account of Law’s scheme. But ten years after its failure in France, the Scotch banks, by the admirable invention of cash credits, pushed credit to the utmost extent of its legitimate limits, and realized all that was practicable in the schemes of Asgill, Briscoe, Chamberlen and Law. And it is to these cash credits that the principal progress of Scotland in agriculture and all public works is due, as well as the personal wealth of its merchants. Moreover, after the end of the Seven Years’ War in 1763, an ingenious merchant devised a scheme of land banks in Germany, and it is to these land banks that the principal part of the progress of agriculture in central Europe is due.

ON CASH CREDITS.

The Bank of Scotland was founded in 1695 with unlimited powers of issue, both in amount and denomination. At first it only issued notes of £100, £50, £10 and £5. Though several times urged to do so, they did not issue £1 notes at first, but in 1704 they began to do so. The bank received a monopoly of banking for twenty-one years; but in 1716, when the monopoly expired, it was not renewed. In the year 1727 the proprietors of the Equivalent Fund were endowed by royal charter with powers of banking, and they assumed the name of the Royal Bank. In the very contracted sphere of commerce in Scotland at that time there were not sufficient commercial bills in circulation to exhaust the credit of the banks. They had, as it were, a superfluity of unexhausted credit on hand; and the bank devised a new scheme for getting its credit into circulation, which was the most marvelous development of credit ever imagined. It agreed, on receiving sufficient guarantees, to open credits of certain limited amounts in favor of trustworthy and respectable persons. A cash credit is a drawing account created in favor of a person who pays in no money, which he may operate upon precisely in the same manner as on an ordinary account; the only difference being that, instead of receiving interest on the daily balance of his account, as used formerly to be the case in Scotland, he is charged interest on the daily balance at his debit. A cash credit is, therefore, an inverse drawing account. Cash credits are applicable to a totally different class of transactions to those which give rise to bills of exchange, one difference being that bills of exchange arise out of the transfers of commodities, and are payable in one sum at a fixed date; whereas cash credits are not issued on the transfer of commodities or on any previous transactions. They are expressly intended to promote the formation of future products. They are not repayable at any fixed date; but they are a continuous working account which continues open as long as the operations are satisfactory. It is a condition of all cash credits that the persons to whom they are granted should accept all advances in the bank’s own notes.

If every future commercial profit has a present value, which can be brought into commerce and exchanged, the same is equally true of the land and of every commercial work or enterprise. The present value of every future profit from land or any commercial work can be brought into commerce and bought and sold exactly like the present values of the future profits of traders; and if the credit be strictly limited and redeemed by the future profits of the land or commercial work, credit may be created to purchase the present value of these future profits from land and commercial public works, exactly in the same way as it is created to purchase the present values of the future profits from traders.

CASH CREDITS GRANTED IN AID OF PERSONS.

Every man in business, however humble or however extensive, must necessarily keep a certain portion of ready money by him to answer immediate demands for small daily expenses, wages and other things. This could, of course, be much more profitably employed in his business, where it might produce a profit of fifteen or twenty per cent., instead of lying idle. But, unless the trader knew that he could command it at a moment’s notice, he would always be obliged to keep a certain amount of ready money in his till, unless he were able to command the use of some one else’s till. Now, one object of a cash credit is to supply this convenience to the trader, and to enable him to invest the whole of his capital in his business; and, upon proper security being given, to furnish him with the accommodation of a till at a moment’s notice, in such small sums as he may require, on his paying a moderate interest for the accommodation. Almost every trader in Scotland has a cash credit at a bank, by which he can draw out such sums as he may want for his daily business, and replace such as he does not want before the close of the bank hours. Almost every young man in Scotland commencing business does it by means of a cash credit. Thus, for instance, lawyers, or writers to the signet, commencing business, have occasion for ready money from day to day before they can get in payments from their clients. It is a great bar to any young man to commence the business of a solicitor without capital, which must either be furnished to him by his friends or others. It is an immense advantage to him and to them to have it supplied by a bank, by means of a cash credit, on a mere guarantee, a mere contingency, which they never would give if they thought there was any danger of its being enforced. So the great employers of labor, manufacturers, builders, ship-builders and others, have cash credits by which they can pay their laborers. These credits are granted to all classes of society; to the poor as freely as to the rich. Everything depends upon character. Young men in the humblest walks of life may inspire their friends with confidence in their steadiness and judgment, and they become sureties for them on a cash credit. This is in all respects of equal value to them as money; and thus they have the means placed within their reach of rising to any extent that their abilities and industry permit them. Multitudes of men who have raised themselves to immense wealth began life with nothing but a cash credit. As one example among thousands, Mr. Monteith, M. P., told the committee of the House of Commons in 1826 that he was a manufacturer, employing at that time 4000 hands, and that, except with the merest trifle of capital lent him, and which he soon paid off, he began the world with nothing but a cash credit.

The banks usually limit their advances to a certain moderate amount, varying from £100 to £1000 in general, and they take several sureties in each case. These cautioners, as they are termed in Scottish law, keep a watchful eye on the proceedings of the customer, and of inspecting his account with the bank and of stopping it at any time if irregular. These credits are not meant to degenerate into dead loans, but they are required to be operated upon by constantly paying in and drawing out. The enormous amount of transactions carried on by this kind of account may be judged of by the evidence given before the committee of the Commons in 1826. It was then stated that on a credit of £1000 operations to the extent of £50,000 took place in a single week. Others stated that on a cash credit of £500 operations to the amount of £70,000 took place in a year. One witness stated that in a very moderately sized country bank operations to the amount of £90,000,000 took place in twenty-one years, and that the whole loss to the bank during that period was £1200. At that time, it was conjectured that there were about 12,000 cash credits guaranteed by about 40,000 sureties, who were interested in the integrity, prudence and success of the customers. The witnesses before the Lords declared that the effects of these were most remarkable on the morals of the people.

ON CASH CREDITS GRANTED TO PROMOTE AGRICULTURE AND THE FORMATION OF PUBLIC WORKS.

We have now to consider the way in which the Scottish system of cash credits has been applied to promote agriculture and the formation of all manner of public works.

The two Scottish banks which were first founded applied their cash credits to assist the industry of traders, and tended much to foster it. Agricultural industry had not then awoke. The Scots were a fierce, turbulent people, who thought a great deal more of harrying their neighbors than of peaceful agriculture. The land was bound down under the fetters of the feudal system. But, after the suppression of the rebellion in 1746, the feudal system was to a great extent broken up, and a great spirit of enterprise awoke; and then, for the first time, Scotland became an industrial nation. At this time, there were in many parts of Scotland large tracts of reclaimable land and multitudes of people, but they remained unemployed, because there was no money in the country to set their industry in motion. Now, suppose that a proprietor of one of these tracts of land had had £10,000 in money, and that he employed it in paying wages to laborers and in buying seed to sow; then, in course of time, the value of the produce of the land would replace the sum expended in bringing the land into cultivation. Then the money so employed would have been expended as capital. But at that time there was, comparatively speaking, no money in the country. It was just then emerging from the bonds of feudalism. The chiefs had vast tracts of lands, and no doubt lived in a state of rude abundance, from their herds and flocks and the natural produce of the soil. But commerce had never penetrated into these Highland strongholds; and consequently the greatest chiefs were very seldom blessed with the sight of coin. But at this period began the transition from feudalism to industrialism, in which money was absolutely indispensable. It was at this time that the banks, having habituated the people during forty years to receive their £1 notes in all respects as money, and having acquired their thorough confidence, threw out branches in all directions, and sent down boxes of their £1 notes. Farmers at that time had no votes in Scotland, and consequently the landlords had no motives to keep their tenants in political thraldom, as was too much the case in England. They adopted every means possible to develop the resources of the soil. And as it was not to be expected that the farmers would lay out their capital and industry on the soil without security of tenure, it became the custom, almost universal in Scotland, for landowners to grant their tenants leases of nineteen years; and in many cases, for particular reasons, much longer than that. Upon the security of these leases, and also upon that of personal friends, the banks everywhere granted cash credits to the farmers, the advances being made exclusively in their own £1 notes. From the strong constitution of the banks, and the universal confidence they had acquired, their notes were universally received as cash; and though they were demandable in cash at the head office, no one ever dreamt of demanding payment for them. With these advances in £1 notes, the farmers employed the laborers in reclaiming the land, bought seed and sowed the crops. The notes were employed in exactly the same way as money would have been, and they produced exactly the same effects as money would have done. The land was reclaimed, and sown, and stocked; and, in a few years, bleak and barren moors were everywhere changed into fields of waving corn, and they produced a continuous series of profits. With the value of the produce, the farmers gradually repaid the loans and reaped a profit.

Now, if it be admitted that money expended in agricultural improvements is used as productive capital, how can it be denied that credit, employed in exactly the same way, and which produces exactly the same effects as money, and produces exactly the same profits, is also equally productive capital? The £1 notes were universally received by the people as of exactly the same value as money; and therefore they were in all respects money; they produced exactly the same profits that money did. Now, as we have seen, that capital is anything which produces a profit, it is evident that the £1 notes were just as much productive capital as the money. The only difference was that, in using money, the employer made capital of the realized profits of the past; in using credit he made capital of the expected profits of the future. But the results are exactly the same in either case. Every one acquainted with Scotland knows perfectly well that the prodigious progress in agriculture made in that country during the last 140 years has been almost entirely effected by means of these cash credits. Not only has almost the entire progress in agriculture been effected by these cash credits, but all public works of every description—roads, canals, docks, harbors, railways, public buildings, etc., have also been made by the same means. It was stated to the committee of the House of Commons in 1826, that the Forth and Clyde Canal was executed by means of a cash credit of £40,000 granted by the Royal Bank. So when a road has to be made, the trustees obtain a cash credit, and pay it off out of the rates. So when a railway, a dock, a harbor, a public building, a canal, is to be made, the directors obtain a cash credit and so pay the wages of the men.

It is thus seen how credit is applied to the formation of new products equally well as to the transfer of existing ones. Credit is purchasing power equally as money; and it may be applied to purchase labor to form new products equally well as to transfer existing ones. The principle of the limit, however, being exactly the same in both cases—namely, that it is the present value of the future profit. When money is used to produce a profit, it is expected that the profit will replace the money advanced; when credit is used to produce a profit, it is expected that the profit will redeem the debt incurred. Hence credit can do whatever money can do; but we have shown that credit is the inverse of money. Hence, in mathematical language, all the propositions which are true with respect to money are equally true with respect to credit, only with the sign changed.

Exactly the same effects were produced in England by the use of bankers’ notes. The success of the Bridgewater Canal had exactly the same effect as the success of the Liverpool & Manchester Railway eighty years later. The period from 1776 to 1796 was just as great an era in canal making as the subsequent period in railway building, considering the wealth of the country at the respective times. In the course of twenty years, England, from being the most backward country in Europe in water communication, was covered with a network of canals such as no other country but Holland can boast. These canals were made by the notes issued by the country bankers. Burke says that when he first came to London there were not twelve bankers out of London. In 1793 there were 400. However, these bankers, not having the solid constitution of the Scottish Banks, were swept away in multitudes in the panics of 1793 and 1797. But, nevertheless, though the bankers were swept away, the solid results of their issues of notes remained. Thus it is now clearly demonstrated that credit may be used as productive capital, exactly in the same way and in the same sense, and for all the purposes, that money is.

THE SCOTTISH SYSTEM OF CASH CREDITS.

All these marvelous results, which have raised Scotland from the lowest depth of barbarism up to her present proud position in the space of 200 years, are the children of pure credit. It is no exaggeration, but a melancholy truth, that at the period of the revolution in 1688, and the foundation of the Bank of Scotland in 1695—partly owing to such a series of disasters as cannot be paralleled in the history of any other independent nation; partly owing to its position on the very outskirts of civilization, and far removed from the humanizing influence of commerce; divided into two nations, aliens in blood and language—Scotland was the most utterly barbarous and lawless country in Europe. And it is equally undeniable that the two great causes of her rapid rise in civilization and wealth have been her systems of national education and banking.

Her system of banking has been of infinitely greater service to her than mines of gold and silver. Mines of the precious metal would probably only have demoralized her people, and made them more savage than they were before. But her banking system has tended immensely to call forth every manly virtue. It has taught them industry, steadiness and moral rectitude. In the character of her own people, Scotland has found wealth infinitely more beneficial to her than all the mines of Mexico and Peru. The express function of the banks was to create credits, incorporeal entities, created out of nothing, for a transitory existence; and, when they had performed their functions, vanishing again into the nothing from whence they came. And has not this credit been capital? Will anyone, with these results staring him in the face, believe that there are some persons who are supposed to be economists who maintain that the results of credit are purely imaginary? That credit conduces nothing to production and the increase of wealth? That credit only transfers existing capital? But even if it did no more than that, it has been shown that circulation or transfer is one species of production; as is indeed now admitted by all economists of note, and that these persons who say that credit is capital are such puzzle-headed dolts as to maintain that the same thing can be in two places at once!

Circulating credits of all kinds have exactly the same effects as money, both in circulating existing commodities and in promoting the formation of new products. And they may be used as productive capital, exactly in the same way and in the same sense that money is. It must be observed that all these cash credits are for a distinct purpose, quite different from the discount of mercantile paper. The marvelous results they have produced are due to a system of pure accommodation paper. They are not founded on any previous transactions; nor are they for the purpose of transferring existing commodities. They are created for the express purpose of bringing new products into existence which, but for them, would either have had no existence at all, or at all events would have been deferred for a very long period, until solid money could have been accumulated to effect them. They are founded on exactly the same principles as the discount of mercantile bills. In discounting mercantile bills, the banker merely buys up the right to a future payment to be made out of the profits of the transaction. In creating cash credits the banker merely buys the right to a future payment to be made out of the future profits of the land or other public works.

The invention of cash credits has advanced the wealth of Scotland by centuries. We have an enormous mass of exchangeable property created out of nothing, by the mere will of the bank and its customers, which produces all the effects of solid gold and silver; and when it has done its work, it vanishes again into nothing, at the will of the same persons who called it into existence. What the Nile is to Egypt, that has her banking system been to Scotland; and it was fortunate for her that the foundations of her prosperity were laid broad and deep before the gigantic fallacy was dreamt of that the issues of banks should be inexorably restricted to the amount of gold they displace; that no increase of money can be of any use to a country; and before Mill had proclaimed to the world that to create credit in excess of specie is robbery!

The reader will now perceive the gigantic utility of the £1 note system to Scotland; and comprehend the consternation and fury of the Scottish people when various attempts have been made by Parliament to suppress them. When Parliament suppressed £1 notes in England, in consequence of the evils they were alleged to produce, owing to the bad organization of the English banking system, before the monopoly of the Bank of England was first broken up in 1826, it was intended to have suppressed them also in Scotland. But all Scotland rose up against it; and, headed by “Malachi Malagrowther,” raised such a commotion that an inquiry was granted which first made the Scottish system of banking understood, and the attempt was abandoned. Still, however, constant jeers and gibes were addressed to the Scotch people by persons who knew nothing about the subject, about their fatuous attachment to their “dirty £1 notes.” But the Scotch knew their value to the country far better than their assailants. The Scotch knew that the prosperity of their country was bound up with the cash credits; and cash credits were bound up with the issue of £1 notes. To have suppressed the Scotch £1 notes at that time would have destroyed two-thirds of the business of the banks. The extent of commerce in Scotland at that time was not sufficient to support the public banks. It was stated that at that time two-thirds of the business of the Scottish banks consisted in cash credits, though we are informed that now, in consequence of the great development of commerce, the ratio of cash credits to the mercantile business of the banks has considerably diminished.

Happily, however, no such attempts will ever be made again, now that the subject is better understood. Parliament is, however, justified in taking any measures it may be deemed necessary to secure their perfect safety and convertibility. So completely has the tide of opinion changed, that the question now is whether £1 notes can be reintroduced into England. But, with the present transitional state of banking in England, it is premature to discuss that question.

ON THE CLEARING HOUSE.

One of the great improvements in modern times, in the organization of credit, is the institution of clearing houses; and as the effect of these, like everything else in banking, is the subject of great misconception, we must explain their operation. It is usually stated that the Clearing House is an example of the principle of compensation, like that effected by the foreign merchants at the Continental fairs. In foreign treatises the Clearing House is usually called a Maison de Compensation, or de Liquidation. This, however, is a complete error.

It has been shown that if any number of customers of the same bank have transactions among themselves, and give each other cheques on their accounts, any number of transactions may be settled by mere transfers of credit from one account to another without a single coin being required, so long as the receiver of the cheque does not draw out the money. Such transfers are novation. The clearing system is a device by which all the banks which join in it are formed, as it were, into one huge banking institution, for the purpose of transferring credits from one bank to another without the use of coin; just in the same way that credits are transferred in the same bank from one account to another without the use of coin. The Clearing House is, therefore, not a Maison de Compensation, but it is a Maison de Novation. Every banker has every morning claims on behalf of his customers against his neighbors, and they have claims on behalf of their customers against him. These claims are called bankers’ charges. Formerly it was the custom for every banker to send out his clerks the first thing in the morning to collect these charges, which had to be paid in money or bank notes. Having collected these charges, he credited his customer with the sums due to him. Now, when the banker had paid the charges against him, there was of course so much credit extinguished. The money and bank notes collected by the banker became his actual property, but he was obliged to create an equal amount of credit on behalf of his own customers; so that, on the whole, an exactly equal amount of credit was recreated to what had been extinguished. And so the final result was that there was exactly the same amount of credit in existence. But each of his neighbors had also claims on behalf of their customers against him. Consequently, every banker was obliged to keep a large amount of money and bank notes to meet these claims. By this a very large amount of money and bank notes had to be retained for the purpose of meeting these bankers’ charges; it was simply transferred and re-transferred from bank to bank; it never got into general circulation at all so as to affect business or prices, and it could be made no other use of.

It was stated before the House of Commons, many years ago, that one bank alone, the London and Westminster, was obliged to keep £150,000 in notes for this sole purpose. And if one bank alone, then comparatively in its infancy, was obliged to keep such a sum in notes idle for this purpose, what would have been the sum necessary to be retained at the present day by all the banks, if it were not for the Clearing House? To remedy this inconvenience, an ingenious method was devised, it is said, by the banks at Naples in the 16th century. The banks instituted a central chamber to which each sent a clerk. These clerks exchanged their different claims against each other, and paid only the difference in money. By this means the different credits were readjusted among the different customers’ accounts just as easily as before; and a large amount of money and notes were set free for the purpose of circulation and commerce; and were in fact, for all practical purposes, equivalent to so much increase of capital to the banks and to the country.

This system was first adopted in this country by the banks in Edinburgh. And we have now to show that no permanent extinction of credit takes place as in compensation; the final result is only a transfer of credit, that is a novation. Suppose that a customer of the Commercial Bank has £100 in notes of the Royal Bank paid to him. He is then creditor of the Royal Bank. He pays these notes into his account with the Commercial Bank. He desires the bank as his agents to collect the proceeds of these notes from the Royal Bank, and to place the amount to his credit. Suppose that, in a similar way, a customer of the Royal Bank has £100 in notes of the Commercial Bank paid to him. Then he is creditor of the Commercial Bank. He pays these notes into his account with the Royal Bank, and constitutes them his agents to collect the proceeds from the Commercial Bank and place them to his credit. Each bank is then debtor to the customer of the other. The full way of proceeding would be for each bank to send a clerk to the other to collect the notes in money. Each bank then having obtained payment of the notes in money would place to the credit of its customer, and put the money which would become its own property into its own till, just as if the customer had paid in the money himself. In this case it is evident that there is no permanent annihilation or extinction of credit; because by the process each bank, instead of being debtor to the customer of the other, becomes debtor to its own customer. Thus it is evident that in each case there is a novation, and not a compensation. This method of settling the claims of the customer would require £200 in money.

The same result may be obtained in a much simpler way. Let the agents of the two banks meet. The agent of the Commercial Bank says to the agent of the Royal Bank: “In consideration of your giving up to me the notes held by your customer by which I am debtor to him, and so releasing me from my debt to him, I agree to credit my customer with their amount, and so become debtor to him.” This is a novation. The agent of the Royal Bank says to the agent of the Commercial Bank: “In consideration of your giving up to me the notes held by your customer, by which I am debtor to him, and so releasing me from my debt to him, I agree to credit my customer with this amount, and to become debtor to him.” This is also a novation. The agents of the two banks then exchange notes, and each bank having received £100 in its own notes—that is, being released from its debt to the customer of the other, which, as we have seen, is equivalent to a payment in money—enters the amount to the credit of its own customer. By this means, each bank, instead of being debtor to the customer of the other, becomes debtor to its own customer, and the use of £200 in money is saved. The release of the debt of each bank to the customer of the other is the consideration for the creation of the debt to its own customer. No doubt the £100 of notes from each bank are withdrawn from circulation and replaced in its own till. But an equal amount of credit is created and placed to the credit of each customer, so that upon the whole the quantity of credit remains exactly the same. Thus, the debt of each bank to the customer of the other is extinguished by the new debt created in favor of its own customer. And the whole transaction consists of two novations.

The reason why the operations of the merchants at the Continental fairs were compensations in which both credits were extinguished, and the operations of the Clearing House are novations, in which new credits are created, which pay and extinguish the prior ones, but create an equal amount of new credits, so that the whole amount of credit remains exactly the same as it was before, is this: In the case of the merchants they were principals; they were mutually indebted to each other; when, therefore, they exchanged their mutual debts they were canceled and extinguished, and no new debts were created to replace them. But, in the case of the Clearing House, the banks are not principals, they are only agents for their customers; consequently, when they receive their own notes, and so are released from their debts to the customer of the other, they are bound to create an equal amount of credit in favor of their own customer, which cancels and extinguishes the former debts, but leaves exactly the same amount of credit existing. Hence, the Clearing House is a Maison de Novation, and not a Maison de Liquidation or Compensation.

The system of clearing was adopted by the city bankers in 1776, but the Bank of England was not admitted to it. Nor were the joint-stock banks admitted to it till 1854; when the charges of the joint-stocks pressed so heavily on the private bankers that they were obliged to admit them. The Bank of England was not admitted till 1864. The charges of the London bankers consist of cheques and bills of exchange, and not in notes; but that makes no difference in the principles of the case. A cheque or bill on a bank by a customer who has funds on his account to meet it is in all respects equivalent to a note of the banker himself. They collect the cheques and bills due to their customers and rearrange the credits due to the various parties exactly in the same way as if they were notes. Before 1864, the differences payable by the banks were settled by bank notes, and it is said that about £250,000 were required for that purpose. But in 1864, when the Bank of England was admitted, the system of clearing was further improved, so that the use of coin and bank notes is now entirely dispensed with. Every clearing bank keeps an account with the Bank of England, and the inspector of the Clearing House keeps one also. Printed lists of the clearing banks are made out for each bank with its own name at the top, and the others placed in alphabetical order below it. On the left side is the debtor’s column and on the right side the creditor’s. The clerk of the Clearing House then makes up the accounts between each bank, and the difference only is entered in the balance sheet according as it is debtor or creditor. A balance is then struck between the debtor and creditor side, and the paper delivered to the clerk, who takes it back to his own bank. The balance is then paid to or received from the Clearing House. If the bank is debtor it gives a white ticket to, and if it is creditor it receives a green ticket from, the Clearing House. By this most ingenious system not a single coin or bank note is used, and the sums transferred by this means at the present time are about £7,000,000,000 a year.

HOW MERCANTILE BILLS OF EXCHANGE ARE PAID.

We have now to show how erroneous are the ideas of those writers who, like Torrens and Mill, and the sect who supported the Bank Act of 1844, think that all bills of exchange are paid in money or bank notes.

All merchants and traders not only buy goods on credit, but they also sell them on credit. Hence, they are not only indebted on their own acceptances to those from whom they have bought goods, but they hold the acceptances of those to whom they have sold goods. Now, a merchant knows when his own acceptances are coming due, and if he has not sufficient funds on his account to meet them, he has only two methods of providing for them. He must either sell his goods in the market or he must discount the acceptances he holds with his banker. The latter is, of course, the preferable plan. Accordingly, when his balance is low, and his own acceptances are falling due, he simply takes a batch of the acceptances he holds and discounts them with his banker, who buys them by creating a credit, debt, right of action or deposit in his favor, and thus increases his balance. The merchant, of course, makes his own acceptances payable at his banker’s; consequently, on the day they mature and become debts, they are simply cheques; and the whole mass of bills and cheques pass through the Clearing House; and, as we have shown in the description of the operations there, the whole transactions are settled by pure transfers of credit, without the use of a single coin or bank note. Hence, in our present highly organized system of credit, bills of exchange are not paid in money or bank notes at all, except only in a very few isolated cases; but they are paid exclusively by the constant creation of new banking credits. Hence, in our present system, the constant creation of banking credits is a matter of vital necessity. If the London bankers were suddenly to give notice that next day they would stop discounting, the result would be that nineteen out of twenty merchants would be ruined. But more than that. As the merchants would, of course, exhaust all their means to maintain themselves, they would instantly draw their balances, and thus the bankers would draw upon themselves a run for gold. It is perfectly well understood by all bankers that “an excessive restriction of credit causes and produces a run for gold.” And thus bankers and merchants will all come down in one universal crash.

ON THE TRANSFORMATION OF TEMPORARY CREDIT INTO PERMANENT CAPITAL.

We shall now give an example of the doctrine that the release of a debt is in all cases equivalent to a payment in money, which may surprise some of our readers, and of which we have not seen the slightest notice anywhere else.

When it is published to the world that the Bank of England has a paid-up capital of £16,000,000, and that the several joint-stock banks have paid-up capital of some millions, most persons take it for granted that the banks have these sums paid up in hard cash. Nevertheless this is a profound error. Of course it is impossible for any outsider to have any precise knowledge as to how much of these amounts was ever paid up in actual money. But it may probably be said with safety that not so much as one-half of these various amounts was ever paid up in real money, but by another method which we shall now describe; by which it will appear that at least one-half of these millions of “capital” was never anything more than the bank’s own credit turned into “capital.” To explain this, we may observe that the first subscription to the Bank of England was £1,200,000; paid of course in actual money. It was advanced to Government, and the bank was allowed to issue an equal amount in notes, which were of course an augmentation of the currency. In 1696, the bank stopped payment, and its notes fell to a discount of twenty per cent. In 1697, Parliament undertook the restoration of public credit; and it was determined to increase the capital of the bank by £1,000,000. But not one penny of this was paid up in actual money. The act directed that £800,000 of the subscription should be paid up in exchequer tallies or exchequer bills; and the remaining £200,000 in the bank’s own depreciated notes, which were received at their full value as cash. Thus, of its first increase of capital, £200,000 consisted of its own depreciated notes. The bank was authorized to issue an additional amount of notes equal to its increase of capital. At subsequent increases of capital the subscribers might pay up any amount they pleased in the bank’s own notes, which were always held as equivalent to a payment in money, and an increase of capital. In 1727, the Bank of Scotland increased its capital. The subscription was paid up partly in the bank’s own notes. An outcry was made against this. But the directors justly answered, “But the objectors do not at all consider this point, for the payments are many of them made in specie; and bank notes are justly reckoned the same as specie, when paid in on a call of stock; because when paid in, it lessens the demand on the bank.” Hence the directors clearly understood that the release of a debt is in all respects equivalent to a payment in money. The bank had issued its notes, and was, of course, debtor to the holders of them. These debts were negative quantities. The subscribers might either pay in money, which was + × +, or release the bank from its debts, which was − + −; and the effect of either transaction was exactly the same. At every increase of capital the same operations would be repeated; payment in money and in the bank’s own notes would always be treated as equivalent. And hence, at every fresh increase of capital, a certain amount of the bank’s own temporary credit was turned into permanent capital. Thus we see that the Parliament of England and the directors of the Bank of Scotland, who were probably equally innocent of Roman law and algebra, simply from their own mercantile instinct treated the release of a debt as in all respects equivalent to a payment in money.

Banks, therefore, which issue notes may increase their capital by receiving their own notes in payment, by which they turn their own credit into capital. But banks which do not issue notes may increase their capital exactly in the same way. A customer of the bank who has a balance to his credit is in exactly the same position as a noteholder. If he wishes to subscribe to an increase of capital he simply gives the bank a cheque on his account. This is equally a release from a debt as a payment in the bank’s own notes, and an increase of capital. If the customer has not sufficient on his account to pay for the stock he requires, he may bring the bank bills to discount. The bank discounts those bills by creating a credit or deposit in his favor; which, of course, is a negative quantity exactly like a bank note. The customer then gives the bank a cheque on his account—that is, he releases the bank from the debt it has created, and that debt released becomes increase of capital. This is the way in which the capital of all joint-stock banks is increased; and it may go on to any extent without any payment in money. And, consequently, it is wholly impossible for anyone who has not had access to the books of the bank to ascertain what proportion of the capital consists of payment in money, and what proportion consists of the bank’s own temporary credit turned into permanent capital.

CHAPTER IV.

DEFINITIONS OF ECONOMIC TERMS.

I.—

DEFINITION OF ECONOMICS.

ECONOMICS is the science of exchanges, or the science which treats of the scientific principles and mechanism of commerce in its widest extent and in all its forms and varieties.

The word economics is compounded of the Greek words οἷκος and νόμος. Οἶκος in Greek means property of every description. Throughout the whole range of Greek literature, from Homer to Ammonius, the word οἶκος is used as absolutely synonymous with πλοῦτος and χρῆμα, to denote wealth of every sort. It is the technical term in Attic law for a person’s whole substance, or estate, of every form. It includes not only such property as lands, houses, money, jewelry, corn, cattle, and such things of a material form; but also such property as consists only in the form of abstract rights—such as rights of action, debts, bank notes, bills of exchange, the funds, shares in commercial companies, the goodwill of a business, copyrights, patents, and many other kinds of abstract rights, which are termed in law incorporeal wealth.

Νόμος in Greek means a law; hence economics is the science which treats of the exchanges of all kinds of property which constitute commerce. Hence it may be defined as the science which treats of the principles and mechanism of commerce in all its forms. It is sometimes called the theory of value, or the science of wealth; or it may be called the science which treats of the laws which govern the relations of exchangeable quantities. Michel Chevalier did me the honor to say that he considered this to be the best definition of the science which has yet been proposed. Pure economics, then, is the science which treats of exchanges—of all exchanges, and of nothing but exchanges. And it is a fundamental law of the philosophy of science that when the concept of the science is once determined, all questions and problems in the science must be stated in accordance with that concept, and no other. Thus, economics being the science of exchanges, all economical questions and problems must be stated in the form of an exchange and in no other, such as that of addition or subtraction, or any other.

II.—

DEFINITION OF WEALTH, OR OF AN ECONOMIC QUANTITY.

Next, after clearly explaining the nature and purpose of a science, it is necessary to define clearly all the technical terms used in it. In almost every science a considerable number of the definitions used are taken from words of common discourse which have a variety of meanings. But in a formal scientific treatise it is indispensably necessary to select one of these divers meanings as suitable for the science, and to use it uniformly in that sense throughout the work. Nor is it sufficient to enumerate a number of isolated objects under a term or definition. As pointed out by Bacon long ago, a scientific definition essentially requires some principle or quality which is common to all the objects which are classed under it. It is not sufficient to allege that lands, houses, jewelry, money, cattle, corn, labor and services, debts, rights of action, the funds, etc., are wealth, without clearly defining the quality or principle which is common to them all, and which constitutes them wealth—i. e., that which constitutes the essence of wealth. This is what Whewell calls the colligation of facts. It is also a principle in framing definitions that, when once the quality, or principle, is agreed upon, which is the basis of the science, all quantities whatever which have that quality in common must be included in the definition, however diverse they may be in nature or form, and even though they possess no other quality in common but that single one. So Bacon earnestly inculcates as the foundation of all true science a careful collection of all kinds of instances in which the given nature, or quality, is found:* “The investigation of forms proceeds thus: a nature, or quality, being given, we must first of all have a muster or presentation before the understanding of all known instances which agree in the same nature, or quality, though in substances the most unlike. And such collection must be made in the matter of a history, without speculation.” This is what Plato designates as the one in the many—i. e., the same quality appearing in quantities of the most diverse forms. What, then, is the common property, or principle, which constitutes things wealth?

III.—

ARISTOTLE’S DEFINITION OF WEALTH.

Ancient writers for 850 years unanimously held that exchangeability, or the capability of being bought and sold or exchanged, is the sole essence and principle of wealth, and that everything whatever which can be bought and sold or exchanged is wealth, whatever its nature or its form may be. Thus Aristotle says, “Nicomach Ethics,” Book V.: “χρήματα δὲ λέγομεν πάντα ὅϭων ή ὰξία νομίσματι μετρεῖται.”—“And we call wealth all things whose value can be measured in money.” So Ulpian, the eminent Roman jurist, says: “Ea enim res est quæ emi et venire potest.”—“For that is wealth which can be bought and sold.”

All the most eminent modern economists have come to agree in this definition. Thus Mill says:* “Everything, therefore, forms a part of wealth which has a power of purchasing.” Here we have a perfectly good general concept, or definition, which contains only one general idea, and it is therefore fitted to form the basis of a great science. It is a concept as wide and general as the dynamical definition of force. That single sentence of Aristotle’s is the germ out of which the whole science of economics is to be evolved, just as the huge oak-tree is developed out of the tiny acorn.

A quantity means anything which can be measured; hence, an economic quantity means anything whatever whose value can be measured in money, or which can be bought and sold or exchanged. The sole criterion, then, of anything being wealth is, can it be bought and sold? Can it be exchanged separately and independently of anything else? Can its value be measured in money? This criterion may seem very simple; but, in fact, to apply it properly, to discern what can and what cannot be bought and sold separately and independently of anything else, or to perceive all things whose value can be measured in money, requires a thorough knowledge of some of the most abstruse branches of law and commerce.

IV.—

THE THREE SPECIES OF WEALTH, OR OF ECONOMIC QUANTITIES

Having, then, adopted exchangeability, or the capability of being bought and sold, as the sole essence and principle of wealth, we have next to discover how many different orders or species of quantities there are which satisfy this definition. First, there are material things of all sorts, such as lands, houses, money, jewelry, corn, cattle, etc., which can be bought and sold, or whose value can be measured in money. Everyone now admits all these things to be wealth, and therefore we need say nothing more about them here. There are, however, two other orders of quantities of a totally different nature—one of which may be typified by the term labor, and the other by the term credit—which can be bought and sold, or whose value can be measured in money; and in modern times there has been a vast amount of controversy as to whether they are to be admitted as wealth or not, and it is these species of quantities which we have now to consider.

V.—

ANCIENT DIALOGUE SHOWING THAT LABOR IS WEALTH.

There is a very remarkable work of antiquity extant which is the earliest treatise that we are aware of discussing an economical question. It is a dialogue called the “Eryxias; or, On Wealth,” and is frequently bound up with the works of Plato. It is attributed to Æschines Socraticus, one of the most distinguished disciples of Socrates. Critics, however, unanimously pronounced it to be spurious, without being able to assign it to any definite author. High authorities consider it was probably written in the early Peripatetic period. This dialogue is to the following effect: The Syracusans had sent an embassy to Athens, and the Athenians had sent a return embassy to Syracuse. As the Athenian ambassadors were entering the city on their return, they met Socrates and a party of his friends, with whom they entered into conversation. Erasistratus, one of the envoys, said he had seen the richest man in all Sicily. Socrates immediately started a discussion on the nature of wealth. Erasistratus said what he thought upon the subject, as everyone else did, and that to be wealthy meant to have much money. Socrates asked him what kind of money he meant, and he instanced the moneys of several countries. At Carthage they used as money leather discs in which something was sewn up, but nobody knew what it was, and he who possessed the greatest quantity of this money at Carthage was the richest man there. But at Athens he would be no richer than if he possessed so many pebbles from the hill. At Lacedæmon they used iron as money, and that useless iron. He who possessed a great quantity of this iron at Lacedæmon would be rich, but anywhere else it would be worth nothing. In Ethiopia again they used carved pebbles as money, which were of no use anywhere else. Among the nomade Scythians a house was not wealth, because no one wanted a house, but greatly preferred a good sheep-skin cloak. He showed that if anyone could live without meat and drink, they would not be wealth to him, because he did not want them.

Socrates showed that money is only wealth because it is exchangeable—because it can purchase other things. Where it is not exchangeable, where it cannot purchase other things, it is not wealth. He then asked why some things are wealth and other things are not wealth. Why are some things wealth in some places and not in other places? And at some times, and not at other times? He showed that whether a thing is wealth or not depends entirely upon human wants and desires; that everything is wealth which is wanted and demanded; that things are only wealth, χρήματα, where and when they are χρήσιμα—that is, where and when they are wanted and demanded; and that nothing is wealth when and where it is not wanted and demanded. Thus we see that though some persons might be puzzled at the meaning of the word wealth, there is no possibility of mistake when we refer to the Greek, because χρῆμα, which is one of the most usual words in Greek for wealth, comes from χράομαι, to want or demand. Consequently, the word χρῆμα, wealth, means simply anything whatever which is wanted and demanded, no matter what its nature or its form may be.

It is, then, human wants and desires which alone constitute anything wealth. Anything whatever which people want and demand and are willing to pay for is wealth. Everything, therefore, which can be bought and sold is wealth, whatever its nature or its form may be; and anything which no one wants or demands is not wealth.

Socrates then showed that gold and silver are only wealth in so far as they enable us to obtain or purchase what we want and demand; and that if anything else will enable us to purchase what we want and demand in the same way that money does, it is wealth for the very same reason that gold and silver are. He then instanced persons who gained their living by giving instruction in the various sciences. He said that persons are able to purchase what they want by giving this instruction, just as they are able to do with gold and silver. Consequently, he said that the sciences are wealth—αί ἐπίϭτημαι χρήματα οὖϭαι; and that those who are masters of such sciences are so much the richer—πλουϭιώτεροί εἰϭι. Now, in instancing the sciences as wealth—that is, of course, a general term for labor, because labor in economics is any exertion of human ability or thought which is wanted, demanded, and paid for—thus the author of this dialogue showed that labor is wealth.

Socrates showed that the mind has wants and demands as well as the body, and that the things which are wanted and demanded for the mind and are paid for are equally wealth as those things which satisfy the wants and demands of the body and are paid for. Thus all of the great professions—law, physic, surgery, engineering, and many others—are great estates, which produce utilities, which are as much wealth as the utilities which satisfy the wants of the body.

Now, labor cannot be seen nor handled; it cannot be transferred by manual delivery; but it may be bought and sold; its value may be measured in money; therefore it satisfies Aristotle’s definition of wealth. If any person wants any other to do any labor or service for him, and pays him for it, its value is measured in money as exactly as if it were a material chattel. Suppose that a person gives fifty guineas for a watch or a horse, and also fifty guineas for the opinion of an eminent advocate; the value of the opinion is measured in money as exactly as the value of the watch or the horse; and therefore they are all equally wealth.

So if a person earns an income of some thousands a year as the manager of a great mercantile company—banking, insurance, railway or any other—his services are as much wealth to him as corn or cattle to a farmer, or goods to any trader. Hence, the author of this dialogue showed that personal qualities in the form of labor are wealth, which no one perceived till Adam Smith; and thus he anticipated by about 2176 years one of the great extensions which Smith gave to the science.

VI.—

MODERN ECONOMISTS INCLUDE LABOR UNDER THE TERM WEALTH.

It has been shown that the economists expressly excluded labor, or services, from the term wealth. But, in accordance with the author of the “Eryxias,” Smith enumerates under the term fixed capital:* “The acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. These talents, as they make part of his fortune, so do they likewise that of the society to which he belongs.” So also he says: “The property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and most inviolable. The patrimony of a poor man lies in the strength and dexterity of his hands.”

J. B. Say dwelt with emphatic force on the doctrine that personal qualities are wealth. Among many other passages, he says:† “He who has acquired a talent at the price of an annual sacrifice enjoys an accumulated capital; and this wealth, though immaterial, is nevertheless so little fictitious that he daily exchanges the exercise of his art for gold and silver.”

“Since it has been proved that immaterial property, such as talents and acquired personal abilities, forms an integral part of social wealth, you see that utility, under whatever form it presents itself, is the source of the value of things; and what may surprise you is that this utility can be created, can have value, and become the subject of an exchange, without being incorporated with any material object. A manufacturer of glass places value in sand; a manufacturer of cloth places it in wool; but a physician sells us a utility without being incorporated in any manner. This utility is truly the fruit of his studies, his labor, and his capital. We buy it in buying his opinion. It is a real product, but immaterial.”

Say calls all species of labor and services immaterial wealth, because they are vendible products, but not embodied in any matter. This is an excellent name, and we shall adopt it to distinguish this order of economic quantities from material things and abstract rights.

We must, however, guard against an erroneous expression of Say’s. He says that the manufacturers of glass and cloth place value in sand and wool. This, however, is an error. The artisans place their labor in sand and wool, but it is the demand of the consumer which alone gives value to the glass and the cloth.

Senior has a long and eloquent passage to the same purpose:‡ “If the question whether personal qualities are articles of wealth had been proposed in classical times, it would have appeared too clear for discussion. [We have already seen that the question was discussed in classical times.] In Athens everyone would have replied that they, in fact, constituted the whole value of an ἔμψυχον ὄργανον. The only differences in this respect between a freeman and a slave are, first, that the freeman sells himself, and only for a period and to a certain extent; the slave may be sold by others and absolutely; and secondly, that the personal qualities of the slave are a portion of the wealth of his master; those of the freeman, so far as they can be made the subject of exchange, are part of his own wealth. They perish, indeed, by his death, and may be impaired or destroyed by disease or rendered valueless by any change in the custom of the country which shall destroy the demand for his services [thus Senior sees that value depends on demand and not upon labor]; but subject to these contingencies they are wealth, and wealth of the most valuable kind. The amount of revenue derived from their exercise in England far exceeds the rental of all the lands in Great Britain.”

So also Senior says: “Even in our present state of civilization, which, high as it appears by comparison, is far short of what may be easily conceived or even of what may be confidently expected, the intellectual and moral capital of Great Britain far exceeds all the material capital, not only in importance but in productiveness. The families that receive mere wages probably do not form a fourth part of the community; and the comparatively larger amount of the wages even of these is principally owing to the capital and skill with which their efforts are assisted and directed by the more educated members of the society. Those who receive mere rent, even using that word in its largest sense, are still fewer; and the amount of rent, like that of wages, principally depends on the knowledge by which the gifts of nature are directed and employed. The bulk of the national revenue is profit; and of that profit the portion which is merely interest on material capital probably does not amount to one-third. The rest is the result of personal capital, or, in other words, of education. It is not in the accidents of the soil, in the climate, in the existing accumulation of the instruments of production, but in the quantity and diffusion of this immaterial capital that the wealth of a country depends. The climate, the soil, and the situation of Ireland have been described as superior, and certainly not much inferior to our own. Her poverty has been attributed to the want of material capital; but were Ireland now to exchange her native population for seven millions of our English north-countrymen, they would quickly create the capital that is wanted. And were England north of the Trent to be peopled exclusively by a million of families from the west of Ireland, Lancashire and Yorkshire would still more rapidly resemble Connaught. Ireland is physically poor, because she is morally and intellectually poor. And while she continues uneducated, while the ignorance and the violence of her population render persons and property insecure, and prevent the accumulation and prohibit the introduction of capital, legislative measures, intended solely and directly to relieve her poverty, may not, indeed, be ineffectual, for they may aggravate the disease the symptoms of which they are meant to palliate, but undoubtedly will be productive of no permanent benefit. Knowledge has been called power; it is far more certainly wealth. Asia Minor, Syria, Egypt and the northern coast of Africa were once among the richest, and are now among the most miserable countries in the world, simply because they have fallen into the hands of a people without a sufficiency of the immaterial sources of wealth to keep up the material ones.”

So Mill says:* “The skill and energy and the perseverance of the artisans of a country are reckoned part of its wealth no less than its tools and machinery.” And why not the skill and energy and perseverance of other classes as well as of artisans? He also says: “Acquired capacities, which exist only as a means, and have been called into existence by labor, fall exactly, as it seems to me, within that designation.” So Madame Campan inscribed over the hall of study in her establishment at St. Germain: “Talents are the ornaments of the rich and the wealth of the poor.” So Cardinal Newman says:† “If gold is wealth, power, influence; and if coal is wealth, power, influence, so is knowledge.”

We have, then, already found two distinct kinds of things which can be bought and sold, or whose value can be measured in money: (1) Material things which can be seen and handled, such as money, corn, cattle, lands, houses, etc., which can be transferred by manual delivery. (2) Things like labor and knowledge, which can neither be seen nor handled, but which can be bought and sold; and though these two kinds of things have nothing in common besides the capability of being bought and sold, they are each for that reason comprehended under the term wealth.

VII.—

DEMOSTHENES SHOWS THAT PERSONAL CREDIT IS WEALTH.

But personal qualities may be used as purchasing power in another method besides that of labor. If a merchant enjoys good “credit,” as it is termed, he may go into the market and buy goods, not with money, but by giving his promise to pay money at a future time—that is, he creates a right of action against himself. The goods become his property exactly as if he had paid for them in money. It is a sale or an exchange. The right of action is the price he pays for the goods; it is termed a credit—in French, a créance—because it is not a right to any specific sum of money, but only a right of action to demand a sum of money from the merchant at a future time. Hence, a merchant’s credit is purchasing power, exactly as money. The merchant’s purchasing power is his money and his credit. They are both, therefore, equally wealth, by Mill’s definition. When a merchant purchases goods with his credit, instead of with money, his credit is valued in money, because the seller of the goods accepts his credit as equal in value to money; his credit is valued in money exactly as his labor may be. Hence, by Aristotle’s definition of wealth, which is now universally accepted, the merchant’s personal credit is wealth.

So Demosthenes says:‡ “δυοῖν ὰγαθοῖν ὄντοιν πλούτου τε καὶ πρὸς ἄπαντας πιϭτεύεϭθαι, μεῖζόν ἑϭτι τὸ τῆς πίϭτεως ύπάρχον ᾑμῖν.”—“There being two kinds of wealth—money and general credit—the greater is credit, and we have it.” So also again.* “εἰ δὲ τοῦτο ὰγνοεῖς ὅτι Πίϭτις Ἀφορμὴ τῶν παϭῶν ἐϭτι μεγίϭτη πρὸς χρηματιϭμὸν πᾶν ἂν ὰγνοήσειας.”—“If you were ignorant of this—that credit is the greatest capital of all toward the acquisition of wealth, you would be utterly ignorant.” Thus Demosthenes shows that personal credit is ἁγαθά—wealth, property, goods, and chattels—and ὰφορμή, or capital.

Thus, though personal credit, like labor, can neither be seen nor handled nor touched, yet it can be bought and sold, or exchanged; its value can be measured in money; it is purchasing power, and therefore it is wealth. And as we have seen that Adam Smith declares that a man’s labor is his most sacred possession, of which no person has the right to despoil him, so to all bankers, merchants and traders, their credit is their most sacred possession, of which no one has the right falsely to despoil them. Hence the personal credit of all bankers, merchants, and traders is an integral and colossal portion of the national wealth—just as the industrial faculties of workingmen of all kinds are. So also the credit of the State, by which it can purchase money and other things by giving persons the right to demand a series of future payments from it, is national wealth.

VIII.—

MODERN ECONOMISTS INCLUDE PERSONAL CREDIT UNDER THE TERM WEALTH.

It has been shown that the economists steadfastly refused to admit that personal credit is wealth; because they alleged that, to allow that would be to maintain that wealth can be created out of nothing. But contemporary, general, and mercantile writers were entirely against them on that point. Thus Daniel de Foe says:† “Credit is so much a tradesman’s blessing that it is the choicest ware he deals in, and he cannot be too chary of it when he has it, or buy it too dear when he wants it: it is a stock to his warehouse; it is current money in his cash-chest.” So that keen metaphysician, Bishop Berkeley, who has many searching questions on economics in his “Querist,” asks (Quest. 35): “Whether power to command the industry of others [i. e., credit] be not real wealth?” So Melon says:‡ “To the calculation of values in money there must be added the current credit of the merchant and his possible credit.”

So Dutot says:§ “Since there has been a regular commerce among men, those who have need of money have made bills, or promises to pay money. The first use of credit, therefore, is to represent money by paper. The usage is very old; the first want gave rise to it. It multiplies specie considerably; it supplies it where it is wanting, and which would never be sufficient without the credit; because there is not sufficient gold and silver to circulate all the products of nature and art. So there is in commerce a much larger amount in bills than there is in specie in the possession of the merchants. A well-managed credit amounts to tenfold the funds of a merchant, and he gains as much by his credit as if he had ten times as much money. This maxim is generally received among all merchants. Credit is, therefore, the greatest wealth to everyone who carries on commerce.”

So Smith says:* “Trade can be extended as stock increases, and the credit of a frugal and thriving man increases much faster than his stock. His trade is extended in proportion to the amount of both [i. e., his stock and his credit], and the sum or amount of his profits is in proportion to the extent of his trade, and his annual accumulation in proportion to his profits.” So Junius says: “Private credit is wealth”; and Franklin says: “Credit is money.” Smith expressly includes “natural and acquired abilities” under the term fixed capital. Now, mercantile character or personal credit evidently comes under the designation of “natural and acquired abilities.” Hence personal credit is included by Smith under the term capital.

No person has more explicitly declared that personal credit is wealth than Mill. He says, in the preliminary remarks: “Everything, therefore, forms a part of wealth which has a power of purchasing.” He then says:† “For credit, though it is not productive power, is purchasing power.”

“The credit, which we are now called upon to consider as a distinct purchasing power.” He also says:‡ “The amount of purchasing power which a person can exercise is composed of all the money in his possession, or due to him (i. e., the bank notes, bills, and credits he has), and of all his credit. Credit, in short, has exactly the same purchasing power with money.” And many other passages to the same effect. Now, if Mill lays down as the fundamental definition of wealth, “Everything that is purchasing power is wealth,” and if he says, “Credit is purchasing power,” then the necessary inference is that credit is wealth. That is a syllogism in which Mill is safely padlocked, and from which there is no escape.

IX.—

ON ABSTRACT RIGHTS AS WEALTH.

But there is yet another or a third order of quantities which can neither be seen nor handled, but which can be bought and sold, or exchanged, and whose value can be measured in money; and these are abstract rights of various sorts—rights and rights of action. Suppose that a person pays in a sum of money to his account at his banker’s, what becomes of that money? It becomes the absolute property of the banker. The customer cedes the absolute property in the money to the banker, but he does not make him a present of it. He gets something in exchange for it—and what is that something? In exchange for the money the banker gives his customer a credit in his books, which is a right of action to demand back an equivalent sum of money whenever he pleases. But it is not a title to any specific sum of money in the banker’s possession. It is a mere abstract right of action against the person of the banker to demand a sum of money from him. The transaction is a sale or an exchange; the banker buys the money from his customer by issuing to him in exchange for it a right of action; and the customer buys this right of action with gold. Furthermore, the banker agrees that his customer may transfer this right of action to anyone else he pleases, by means of a bank note or cheque. So this right of action may pass through any number of hands, and effect any number of exchanges, exactly like an equal amount of money, until the holder demands payment of it, and it is extinguished. When the holder of the cheque demands payment of it from the banker, the banker buys up the right of action against himself with gold; and the holder of the cheque sells his right of action for gold. The transaction is therefore a sale or an exchange, and an act of commerce. Hence the whole series of these transactions are sales or exchanges. When the customer pays in money to his account it is an exchange; when he pays away his cheque in commerce it is an exchange; every time the cheque is transferred it is an exchange; and, finally, when payment is demanded from the banker it is an exchange. All these transactions are acts of commerce.

This right of action is termed a credit; because anyone who chooses to take it in exchange for goods or services knows that it is not a title to any specific sum of money in the banker’s possession; but it is only an abstract right to demand a sum of money from him; and the person who takes it only does so because he has the belief or confidence that the banker can pay if required. It will be convenient to state here that this right of action is also termed a debt; and that both in law and common usage the words credit and debt are used quite indiscriminately to mean a creditor’s right of action against his debtor. The reason of this will be explained in a future section. Similarly, when a merchant sells goods “on credit,” as it is termed, to a trader, he cedes the property in the goods to the trader, exactly as if he had sold them for money. And in exchange for the goods the trader gives the merchant his promise to pay, or a right of action to demand money at a future time—say three months after date. This right of action is also termed a credit or a debt. It is the price the trader pays for the goods. And if it be recorded on paper in the form of a bill of exchange, it may be exchanged against other goods, and circulate in commerce, exactly like an equal sum of money, any number of times, until it is paid off and extinguished. Again, suppose that the State wants to borrow money for any public purpose—such as a war or for some great public work. It buys money from those who are willing to sell it, and in exchange for the money it gives them the right to demand a series of payments from the State, either forever or for a certain limited time. This right to demand a series of future payments is termed an annuity, and is the price the State pays for the money. In popular language, they are termed the funds. And the owners of these rights may sell them again to anyone they please. They are salable commodities, just like any material goods.

Suppose, again, that a person subscribes to the capital of a joint-stock company—banking, railway, insurance, canal, dock, or any other. He pays the money to the company, which is a distinct person, quite separate from any individual shareholders, and receives in exchange for it the right to share in the future profits of the company. These rights are termed shares; and they are also salable commodities; they may be bought and sold like any material chattels. So, when a trader has established a successful business, he has the right to receive the future profits to be made by the business. This right to receive the future profits is a property quite distinct and separate from the house or shop, and the actual goods in them. It is additional to them. It is the product of labor, skill, thought, and care as much as any material chattels, and is a part of the trader’s assets. It is termed the goodwill of the business, and is a salable commodity.

Thrale, the great brewer, appointed Johnson one of his executors. In that capacity it became his duty to sell the business. When the sale was going on, says Boswell, “Johnson appeared bustling about, with an inkhorn and pen in his button-hole, like an exciseman; and on being asked what he really considered to be the value of the property which was to be disposed of, answered, ‘We are not here to sell a parcel of vats and boilers, but the potentiality of growing rich beyond the dreams of avarice.’ ” This latter phrase was merely Johnsonese for the goodwill of the business. The price realized was, we are told elsewhere, £135,000.

When the banking house of Jones, Loyd & Co. sold their business to the London and Westminster Bank, it was said in the papers that the price paid was £500,000. Similarly, every successful business has a goodwill attached to it which is a salable commodity and an asset of the trader’s.

Now, these abstract rights cannot be seen nor handled nor touched. But they can be bought or sold or exchanged. Their value can be measured in money. They can be transferred from one person to another as easily as any material chattels. Therefore, they satisfy Aristotle’s definition of wealth. They all possess that quality of exchangeability which ancient writers unanimously, and modern economists now at last agree, is the sole essence and principle of wealth. And, therefore, by the fundamental laws of natural philosophy, these abstract rights are all wealth.

X.—

GENERAL RULE OF ROMAN LAW THAT RIGHTS ARE WEALTH.

Now, in the Pandects of Justinian, which are the great code or digest of Roman law, it is laid down as a fundamental general rule: “Pecuniæ nomine non solum numerata pecunia, sed omnes res tam soli quam mobiles, et tam corpora quam jura continentur.”—“Under the term wealth, not only ready money, but all things, both immovable and movable, both corporeal things and rights are included.” So the eminent Roman jurist Ulpian says:* “Nomina eorum qui sub conditione vel in diem debent, et emere et vendere solemus. Ea enim res est quæ emi et venire potest.”—“We are accustomed to buy and sell debts payable at a certain event or on a certain day. For that is wealth which can be bought and sold.”

So it is also said:* “Æque bonis adnumerabitur si quid est in actionibus.”—“Rights of action are properly reckoned as goods.” So also:† “Rei appellatione et causæ et jura continentur.”—“Under the term property both rights and rights of action are included.”

So Sir Patrick Colquhoun says:‡ “The first requisite of the consensual contract of emptio et venditio is a Merx, or object to be transferred from the buyer to the seller, and the first requirement is that it should be in commercio—that is, capable of being freely bought and sold. Supposing such to be the case, it matters not whether it is an immovable or a movable, corporeal or incorporeal, existent or non-existent, certain or uncertain, the property of the vendor or another: thus a horse or a right of action, servitude or thing to be acquired, or the acquisition whereof depends on chance. A purchaser may buy of a farmer the future crop of a certain field; wine which may grow next year on a certain vineyard may be bought and sold at so much a pipe, or a certain price may be paid, irrespective of quantity or quality, and the price would be due, though nothing grew, or for whatever did grow. In the second case the bargain is termed emptio spei, and in the first and last emptio rei speratæ, which all such bargains are presumed to be in cases of doubt. The cession of a right of action being legal in the Roman law, the right of A to receive a debt due by B may be sold to C.”

Thus it is clearly seen that abstract rights of many various sorts, including rights of action, which in law, commerce, and economics are termed credits, or debts, are expressly included under the terms Pecunia (wealth), Res (property), Bona (goods or chattels) and Merx (merchandise) in Roman law.

XI.—

GENERAL RULE OF GREEK LAW THAT RIGHTS ARE WEALTH.

For nearly 500 years after Constantine removed the seat of government from Rome to Constantinople, the language of the Court was Latin, but the people were Greek. Consequently, as the official language was Latin, it was unintelligible to the mass of the people. The great code of Roman law, termed the Pandects, was published in ad 530, but all the pleadings in the courts were carried on in Greek. The Latin Pandects soon fell into desuetude; they were superseded by Greek treatises, translations, and compilations. The Latin Institutes of Justinian did not hold their place in the curriculum of legal education for more than ten years. They were superseded by the paraphrase of Theophilus, one of the Professors of Law who were charged with the compilation of the Institutes; and this paraphrase became the text-book for the education of law students throughout the Eastern Empire. At last, in the ninth and tenth centuries, under the Basilian dynasty, all the Pandects, Institutes and Legislation of Justinian were set aside as obsolete. A reformed digest or code was published in Greek, which was called the Basilica, which may mean either the Imperial Constitutions or the Code of the Basilian dynasty, like the Code Napoléon, and this henceforth became the law of the Eastern Empire, and has remained to the present time as the common law of all the Greek population in the East, and is the common law of the modern Kingdom of Hellas. And the Roman definition of wealth is adopted and confirmed.

Thus it is said:* “τῷ ὀνόματι τῶν Χρημάτων οὺ μόνον τὰ χρήματα, ἁλλὰ πάντα τὰ κινητὰ καὶ ἀκινητὰ, καὶ τὰ ϭωματικὰ καὶ Δίκαια δηλοῦται.”

“Under the term χηήματα, or wealth, * * * rights are included.” Also† “τῇ τοῦ πράγματος προϭηγορίᾳ καὶ Αἴτιαι καὶ τὰ Δίκαια περιέχεται.” Under the term πράγματα, goods and chattels, both rights of action and rights are included.

Thus it is seen that by express enactment in Greek law, the words χρήματα and πράγματα include rights and rights of action. These rights and rights of action are also included under the terms Ἀγαθά (goods), περιουϭία (estate), Ἀφορμἡ (capital), Οὺϭία and Οἶκος (wealth), and other similar words; they are also called οὺϭία ἀφανής (invisible wealth). And these words include all the three orders of economic quantities.

XII.—

GENERAL RULE OF ENGLISH LAW THAT RIGHTS ARE WEALTH.

It is exactly the same in English and every other system of law; abstract rights or property are included under the term “Goods,” “Goods and Chattels,” “Chattels,” “Merchandise,” “Vendible Commodities,” “Incorporeal Chattels,” and “Incorporeal Wealth” in English law. And under similar terms in every other system of jurisprudence. And under wealth and capital in economics.

A chattel means any property of any sort which is not freehold.

Thus Sheppard says:‡ “All kinds of emblements, sown and growing, grass cut; all money, plate, jewelry, utensils, household stuffs, debts, wood cut, wares in a shop, tools and instruments for work, wares, merchandise, carts, ploughs, coaches, saddles and the like; all kinds of cattle, as horses, oxen, kine, bullocks, goats, sheep, pigs; and all tame fowl, swans, turkeys, geese, capons, hens, ducks, poultry and the like, are accounted as chattels. All obligations, bills, statutes, recognizances, judgments shall be as a chattel in the executor. All right of action to a personal chattel is a chattel.”

So in Ford’s case§ it was resolved by Popham, Chief Justice of England, and the Court, that: “Personal actions are as well included within the word ‘goods’ in an Act of Parliament as goods in possession.” So Lord Chancellor Hardwicke said:∥ “The chattels are * * * the debts (i. e., rights of action) due and to be due, * * * and debts come within the words and meaning of the act, and would pass in a will thereby.”

Burnet, J., said: “A bond debt is certainly a chattel * * * the conclusive case is Ford’s case, that personal actions are included in the word goods in an Act of Parliament as goods in possession.” Parker, L. C. B., said: “But goods and chattels include debts (rights of action). * * * Goods and chattels comprehend things-in-action in the construction of any Act of Parliament.” Lee, C. J., said: “The inquiry is whether choses-in-action are not included under goods and chattels? And I agree, choses-in-action will be included herein.”

So Blackstone says:* “For it is to be understood that in our law, chattels, or goods and chattels, is a term used to express any property, which having regard either to subject-matter, or quantity of interest therein, is not freehold.” * * * “Property, or chattels personal, may be either in possession or action. * * * Property in action is where a man has not the enjoyment (either actual or constructive) of the thing in question, but merely a right to receive it by a suit or action-at-law.” So Mr. J. Williams says:† “Personal estate is divided in English law into chattels real and chattels personal; the latter are again divided into choses-in-possession and choses-in-action.”

We are dealing exclusively with the commerce in rights of action—i. e., their creation, transfer and extinction—which constitutes the great system of credit; and, therefore, we shall henceforth confine our attention to them. Rights of action, then, being now shown to be goods and chattels, it is absolutely necessary to observe that it is the abstract right of action itself which is the “goods” or “chattels,” and not any material upon which it may be written down. Rights of action, i. e., credits, or debts, may be bought or sold with perfect facility even in the abstract state. It is, however, very usual to write them down on paper in the form of bank notes, cheques, bills of exchange, and other instruments. By doing this they become capable of manual delivery, and are transferable from hand to hand like money or any other material chattel. Abstract rights of action are incorporeal chattels; but when written down on paper they become corporeal chattels or material commodities, exactly like money. Hence, the reader must observe that writing a right of action down on paper in no way alters its nature. Doing so is merely a convenient form of rendering it capable of being transferred in commerce. But it is exactly of the same nature and effect whether written down on paper or not.

XIII.—

MODERN ECONOMISTS INCLUDE RIGHTS OF ACTION, i. e., CREDITS, OR DEBTS, UNDER THE TERM CIRCULATING CAPITAL.

It has been shown that the economists steadfastly refused to admit credits, or debts, i. e., rights of action, to be wealth. But it has been shown in the introduction that Smith expressly classes bank notes and bills of exchange under the term circulating capital; hence Smith expressly recognizes the three orders of exchangeable quantities, and that credits are wealth and capital. Thus Smith expressly includes money under the term circulating capital. And under money he includes bank notes, bills of exchange, etc., which he terms paper money—which term is not quite correct because, though under certain circumstances, bank notes and bills of exchange may be, and in an immense number of cases are money, as will be seen further on, still they are not absolutely money. But they are all included under the term paper currency. Among several passages, it will be sufficient to quote one here:* “Suppose that different banks and bankers issue promissory notes payable to bearer on demand to the extent of one million, reserving in their different coffers £200,000 for answering occasional demands. There would remain therefore in circulation £800,000 in gold and silver, and £1,000,000 in bank notes; or, £1,800,000 of paper and money together.” He also observes that credits in the Bank of Amsterdam were termed bank money. Thus we see that Smith in this and numerous other passages places paper credit exactly on the same footing as money, as independent property, and of the same value as gold and silver.

So J. B. Say says:† “The exclusive possession, which in the midst of society clearly distinguishes the property of one person from that of another in common usage, is that to which the title of wealth is given [not unless this property is exchangeable]. * * * Under this title are included not only things which are directly capable of satisfying the wants of man, either natural or social, but the things which can satisfy them only indirectly—such as money, instruments of credit (Titres de créance) and the public funds.” Thus Say expressly includes instruments of credit and the funds, which are mere rights of action, under the term wealth; and he also includes bills of exchange, bank notes, and bank credits—which are all credit—under the term capital. Thus he says that if a bank can maintain in circulation a greater quantity of notes than it retains specie in reserve, it augments by so much the capital of the country. So he also says:‡ “We must include under capital many objects which have a value, although they are not material. The practice of an advocate or notary, the custom of a shop, the representative of a sign-board, the title of a periodical work, are undoubtedly property (Biens); they may be bought and sold, and be the subject of a contract, and they are also capital, because they are the fruit of accumulated labor.” How are bank notes and bills of exchange, which Say admits to be capital, the fruit of accumulated labor?

So Mill says:§ “We have now found that there are other things such as bank notes, bills of exchange, and cheques [which are credit] which circulate as money, and perform all the functions of it.” He also designates bank notes as productive capital.

Whately is the only English economist that we are aware of who has drawn especial attention to incorporeal property. He says:* “The only difficulty I can foresee as attendant on the language I have been now using, is one which (i. e., defining political economy as the science of exchanges) vanishes so readily on a moment’s reflection as to be hardly worth mentioning. * * * In many cases, where an exchange really takes place, the fact is liable (till the attention be called to it) to be overlooked, in consequence of our not seeing any actual transfer from hand to hand of a material object. For instance, when the copyright of a book is sold to a publisher, the article transferred is not the mere paper covered with writing, but the exclusive privilege of printing and publishing. It is plain, however, on a moment’s thought, that the transaction is as real an exchange as that which takes place between the bookseller and his customers who buy copies of the work. The payment of rent for land is a transaction of a similar kind, though the land itself is a material object; it is not this that is parted with to the tenant, but the right to till it, or to make use of it in some other specified manner. Sometimes, for instance, rent is paid for a right of way through another’s field, or for liberty to erect a booth during a fair, or to race or exercise horses.”

And Whately says in a note to this passage: “This instance, by the way, evinces the impropriety of limiting the term wealth to material objects.” Thus in this passage is found the first dim perception, that we are aware of, that all exchanges consist of the exchange of rights against rights, as will be shown further on.

The stupendous importance of this doctrine, that rights and rights of action are goods, chattels, merchandise, vendible commodities and wealth, consists in this: that modern commerce is almost exclusively carried on by means of rights of action, credits, or debts. Money is only used to such an infinitesimal degree that it may almost be neglected. The principal use of money in commerce now is to keep such a stock of it as may be necessary to maintain the convertibility or value of the circulating credits. Moreover, in recent times, rights in the form of securities of various sorts, and rights of action in the form of public and private debts, form a most important article of import and export between countries, and have exactly the same effects on the foreign exchanges and the movements of bullion as material goods, as will be shown further on.

XIV.—

THERE IS NO SUCH THING AS ABSOLUTE WEALTH.

The preceding considerations show that there is no such thing as absolute wealth—that is, there is nothing which is in its own nature, and in all circumstances, in all places and in all times, wealth. The sole essence and principle of wealth is exchangeability. For anything to be exchangeable it is necessary that someone besides its owner should desire and demand it, and be willing to give something to obtain it. It is only, therefore, human desires and wants, and the capacity to give something to obtain it, that constitute anything wealth. Things are wealth only in those places and in those times where and when they are wanted, demanded, and paid for; and consequently they cease to be wealth when they cease to be wanted and demanded. Therefore, the very same things may be wealth in some places and not in others; and at some times and not at others; and become wealth more or less as the demand for them increases or decreases. Hence the amount of wealth in any country is simply the mass of exchangeable commodities in it.

XV.—

ECONOMICS, OR COMMERCE, CONSISTS OF SIX DISTINCT KINDS OF EXCHANGE.

It has now been shown that, for 1300 years, ancient writers unanimously held that exchangeability is the sole essence and principle of wealth. That anything whatever which possesses the principle or quality of exchangeability; everything whatever which can be bought or sold or exchanged; everything whose value can be measured in money, is wealth, no matter what its form or its nature may be. The ancients also showed that there are three distinct orders of quantities which possess the quality of exchangeability, or whose value can be measured in money—namely, (1) material things; (2) personal qualities, both in the form of labor and credit; (3) abstract rights. And reflection will show that there is nothing which can be bought and sold, or whose value can be measured in money, which is not of one of these three forms; either it is a material thing or it is a personal service or quality, or it is an abstract right. Hence, as it is positively known that there is nothing which possesses the quality of exchangeability, or whose value can be measured in money, beyond these three orders of quantities, the science is now complete.

Now, if all material things be symbolized by the word money; if all personal services be symbolized by the word labor, and if all abstract rights be symbolized by the word credit, these three distinct orders of economic quantities may be symbolized by the words money, labor, and credit. And all commerce in its widest extent, and in all its forms and varieties—that is, the science of pure economics—consists in the exchanges of these three orders of quantities. There being, then, three, and only three, distinct orders of economic quantities, it is evident that they may be combined two and two in six different ways. These six different kinds of exchange are: 1. A material thing for a material thing; as when gold money is given in exchange for lands, houses, corn, jewelry, etc. 2. A material thing for labor; as when gold money is paid as wages, fees, or salary, for any service done. 3. A material thing for a right; as when gold money is given to purchase a bank credit, a bill of exchange, copyrights, patents, shares in commercial companies, the funds, or any other valuable right. 4. Labor for labor; as when persons agree to perform certain amounts of reciprocal services for each other. 5. Labor for a right; as when a person performs services for another, and is paid in bank notes, cheques, or bills of exchange. 6. A right for a right; as when a banker buys one right of action, such as a bill of exchange, and gives in exchange for it a credit in his books, which is another right of action; or when a person purchases copyrights, patents, or any other abstract right, and gives in exchange for them bank notes, cheques, or bills of exchange.

The economists only admitted material products to be wealth, and only treated of one species of exchange—that of products for products. Beccaria admitted that services are wealth, and said that all exchanges consist of the exchanges of products for products, products for services, and services for services, thereby admitting three kinds of exchange. But, as a matter of fact, there are three orders of economic or exchangeable quantities, and therefore there are six distinct kinds of exchange. The business of banking consists in the exchanges of credit for money, and of credits for credits. An operation “on credit” is one in which one or both of the quantities exchanged is a credit or debt. The system of credit means the commerce in rights of action, credits, or debts, and is the subject-matter of this work.

XVI.—

ON THE MEANING OF THE WORD PROPERTY.

There being, then, three orders of quantities which possess the quality of exchangeability, they must, by the laws of natural philosophy, by the unanimous doctrine of ancient writers, and at last by the acknowledgment of all modern economists, all be included under the term wealth. The next thing to be done is to find a general term which will include them all. And this general term will be found in the word property. And when we understand the true and original meaning of the word property, it will throw a blaze of light over the whole science of economics and clear up all the difficulties which the word wealth has given rise to. In fact, the meaning of the word property is the key to the whole sciences of jurisprudence and economics. Most persons, when they hear the word property, think of some material things, such as lands, houses, cattle, corn, money, etc. But that is not the true and original meaning of the word property. Property, in its true and original meaning, is not anything at all material or otherwise, but it is the ownership or absolute right to something. Savages have very feeble notions of abstract rights. Their ideas of wealth are something which they can lay hold of—something which they can only acquire by violence and which they can only retain by bodily force. They have no idea of abstract rights separated from anything material. So in archaic jurisprudence, wealth or property is described as anything material, which can only be retained by manual force and transferred by manual delivery. In early Roman jurisprudence a person’s possessions were called mancipium; because they were supposed to be acquired by the strong hand, and if not held with a very firm grasp would probably be lost. But as civilization and firm government succeed, men’s ideas are transferred from the actual material things to the personal rights in them. Thus, in the course of time, the word mancipium, which originally meant the material things which were held by the hand, came to mean the absolute right to them; and in early Roman law, mancipium came to mean absolute ownership. Thus Lucretius says:* “Vitaque mancipio nulli datur, omnibus usu.”—“And life is given in absolute ownership to none, but only as a loan to all.”

In process of time the word property came to be denoted by a term which meant a pure abstract right. All the possessions of the family belonged to the family (domus) as a whole; but the head of the house (dominus, δεϭπότης) alone exercised all rights over them. He alone had the absolute ownership of his familia, or household, including his wife, children, slaves and all its possessions. Hence this right was called dominium, δεϭποτεήα, and dominium was always used in Roman law to denote absolute ownership. So long as the patria potestas subsisted in its pristine rigor, no member of the family could have any individual rights to things; but in the times of the early emperors the extreme rigor of the patria potestas was relaxed. In some cases individual members of the family were allowed to have rights to possessions independently of the head of the house and its other members, and this right was termed proprietas. Sometimes the dominus granted the exclusive rights to certain things to his sons and slaves. This right was termed peculium. The emperors Augustus, Nero, and Trajan enacted that the sons of the family might possess in their own right, and dispose of by will, as if they were domini, what they acquired in war. This was termed castrense peculium. This right of holding possessions independently of the other members of the family was considerably extended by subsequent emperors, and was always called proprietas. Proprietas, therefore, in Roman law, meant the absolute and exclusive right which a person had to anything independently of anyone else, and was synonymous with dominium. Neratius, a jurist of the time of Hadrian, says: “Proprietas, id est, dominium.”—“Property, that is, ownership.” So Gaius says: “Non solum autem proprietas per eos quos in potestate habemus adquiritur nobis.”—“Not only, therefore, do we acquire absolute property through those whom we have in our power.” So also Justinian: “Transfert proprietatem rerum.”—“Transfers the property in the goods”; and in other instances too numerous to cite.

Thus the word proprietas in Roman law never meant a material thing; it meant exclusively the absolute right to it; the thing itself was termed materia.

XVII.—

MEANING OF THE WORD PROPERTY IN ENGLISH.

So also in early English the word property invariably meant a right and not a thing. Thus grand old Wycliffe says: “They will have property in ghostly goods where no property may be, and have no property in worldly goods where Christian men may have property.” So Bacon invariably uses the word property to mean a right and never a thing. He says one of the uses of the law “is to dispose of the property of their goods and chattels.” He explains the various methods by which property in goods and chattels may be acquired. So he speaks of the “property or interest in a timber tree.” In Comyns’ great digest of the law there is not a single instance of the word property being applied to material things. He uses it invariably to mean absolute ownership. Thus up to the middle of the last century property was invariably used to mean absolute ownership, and was never applied, at least in any work of authority, to material substances.

Every jurist knows that the true meaning of the word property is a right and not a thing. Thus Erskine says:* “The sovereign or real right is that of property, which is the right of using and disposing a subject as our own, except so far as we are restrained by law or paction.” This meaning of property has been understood by economists as well as by jurists. Thus Mercière de la Rivière, one of the most eminent of the French economists, says:† “Property is nothing but the right to enjoy. * * * It is seen that there is but one right of property—that is, a right in a person, but which changes its name according to the nature of the object to which it is applied.” Nor is the word property in any way restricted to the rights to material substances, but it is also applied to the rights to abstract rights.

Thus landed property means rights to lands and houses; real property means rights to realty; personal property means rights to personal chattels. Funded property is the right to demand a series of payments from the State; literary property is the right to the profits from works of literature; artistic property is the right to profits from works of art; dramatic property is the rights to the profits from dramatic representations; newspaper property is the right to the profits from publishing certain newspapers. So there are many other kinds of incorporeal property, such as shares in commercial companies of all sorts, the goodwill of a business, a professional practice, patents, tithes, advowsons, shootings, fisheries, market rights, and many other kinds of valuable rights. So, when a person has sold goods “on credit,” and has acquired a right of action in exchange for them, termed a credit, or a debt, he has a property in this right of action and can sell it like any material chattel.

This appears still more clearly in the law of Scotland, in which what is termed real property in England is termed heritable rights, because the rights to them pass to the heir; and what is termed personal property in England is termed movable rights in Scotland, because the rights to them pass or move to the executor; and under the term movable rights, credits, debts, or rights of action are included. Hence, abstract rights are the subjects of property exactly in the same way as material chattels. When the Socialists and Communists wish to destroy property it is not the material things they wish to destroy, but the exclusive rights which private persons have in them.

We shall find further on that there is a whole class of words which, like mancipium, in early times and in classical Latin meant material things, have in the progress of civilization and jurisprudence and in modern mercantile law come to mean abstract rights; and by a reverse process, most unfortunately, many words which really mean abstract rights have been perverted to mean material things, to the great confusion of jurisprudence and economics.

The word property means absolute, entire, and exclusive ownership. It is the absolute right to deal with the objects material, immaterial, and incorporeal in any way the owner pleases, except in so far as he is restrained by law.

The term property comprehends:

1. The jus possidendi, or the right of possession of the object.

2. The jus utendi, or the right of using it in any way the owner pleases.

3. The jus fruendi, or the right of appropriating any fruits or profit from it.

4. The jus abutendi, or the right of alienating or destroying it.

5. The jus vindicandi, or the right of recovering it, if found in the wrongful possession of anyone else.

Property or dominion, then, does not mean any single right, but an aggregate or bundle of rights; it comprehends the totality of rights, which can be exercised over anything.

XVIII.—

ON THE RIGHT OF PROPERTY AND THE RIGHT OF POSSESSION.

But though all property is a right, it must be observed that all rights are not property. There is an essential distinction between the right of property and the mere right of possession or of use. Thus, where one person lends his horse or a book or other chattel to another; or delivers goods to him as a common carrier by sea or land, to be carried from one place to another; or deposits goods or valuables with him as a warehouseman for the mere purpose of being safely kept, or by way of pledge or lien; or hires a house, a horse, or land or plate or any chattel; or finds valuable goods,—in these and other cases he has the mere right of possession of the various things, and he can bring an action against anyone who deprives him of their possession; but he has no right to use the goods except in the way and for the specific purpose for which they were delivered to him. He has, therefore, only a specific right to hold them, and not the absolute ownership in them, to deal with them in any way he pleases. Some of the most subtle and important doctrines in economics are based entirely on the distinction between right of property and right of possession.

XIX.—

APPLICATION OF THE POSITIVE AND NEGATIVE SIGNS TO PROPERTY.

Economic quantities or economic rights are, then, of three distinct orders: (1) Rights or property in some material thing which has been already acquired; (2) rights or property in labor or services; (3) rights or property in something which is only to be acquired at some future time.

Now, we observe that the first and the third of the economic quantities or rights enumerated above are inverse or opposite to each other. Property, like Janus, has two faces placed back to back. It regards the past and the future.* We may buy and sell a right to a thing which has already been acquired in time past; and we may also buy and sell a right to a thing which is only to be acquired in time future.

Now, it is one of the innumerable applications of the algebraical signs + and −, that if any point in time be taken as 0, then time before this epoch and time after this epoch are denoted by the opposite signs, + and −, which sign is used to denote either time being a matter of pure convention. Let us denote time present by 0, time past as + and time future by −. It will then be represented thus: + 5, + 4, + 3, + 2, + 1, 0, − 1, − 2, − 3, − 4, − 5, etc.; and it is evident that the totality of time from any year preceding the given era 0, to any year subsequent to the given era, will be the sum of the positive and negative years. Thus, if we take the Christian era as 0—years before it as positive and years after it as negative—then the total period from the foundation of Rome to the present time will be + 753 years, together with − 1893 years, or 2646 years altogether.

Hence, the products which have already been acquired in the past or positive years may be termed positive products; and the products which are to be acquired in the future or negative years may be termed negative products. Now, in all mathematical and physical sciences, it is invariably the custom to denote similar quantities, but of opposite qualities, by the opposite signs + and −. Hence, as a matter of simple convenience, and following the invariable custom in mathematical and physical science, if we denote property in a product which has been already acquired in time past as positive, we may, as a mark of distinction, denote property in a product which is only to be acquired in time future as negative. Now, property in a thing which has already come into possession in time past is corporeal property; and, as we have assumed above, time past as positive, corporeal property may be termed a positive economic quantity; and, as property in a thing to be acquired at some future time is incorporeal property; and, as we have above denoted time future as negative, incorporeal property may be aptly designated as a negative economic quantity. And, as in all mathematical and physical sciences, the whole science comprehends both positive quantities and negative quantities, so the whole science of economics comprehends both positive economic quantities and negative economic quantities, both corporeal property and incorporeal property. By this means we double the field of economics as usually treated, and we do in economics what those have done in the various mathematical and physical sciences who introduced negative quantities into them. By this means we are enabled to obtain the solution of problems which have hitherto baffled all economists, and it is by this means only that the theory of credit can be explained.

XX.—

EVERY SUM OF MONEY IS EQUIVALENT TO THE SUM OF THE PRESENT VALUES OF AN INFINITE SERIES OF FUTURE PAYMENTS.

The investigation of the theory of the value of land demonstrates a proposition of great importance in economics. It is seen that the £100,000 given to purchase the estate in land expected to produce £3000 a year, is in reality the sum of the rights to its future products forever. Each annual product has a present value, and the value of the land is simply the sum of this infinite series of present values. But the same is evidently true of every sum of money. Hence, every sum of money is not only equal in value to a certain quantity of material goods, or to a certain quantity of services, but also to a perpetual annuity. An annuity is the right to receive a series of future payments. The lowest form of an annuity is the right to receive a single future payment, such as a bank note, a cheque, or a bill of exchange. The highest form is the right to receive an infinite series of future payments, such as the land or the funds. And there may be also the right to receive a limited number of future payments intermediate between the other two, which is called a terminable annuity. Hence, an annuity or the right to receive a series of future payments is an economic quantity, which may be bought or sold or exchanged, or whose value may be measured in money, like any material chattel. As when a sum of money is given to purchase land, or the funds, or municipal or other obligations, such as railway debentures. So an annuity may be paid to secure a certain sum of money at a given time, or on a given contingency, such as a life or fire insurance.

It is thus seen that economics comprehends three great departments: (1) material things, (2) personal qualities, (3) annuities.

The first school of economists restricted their attention to the first of these departments and refused to take any notice of the other two. Adam Smith, J. B. Say, and J. S. Mill have given much attention to the second, and treated labor as a marketable commodity; they have also noticed the existence of the third department, but they never made any attempt to exhibit the commerce in rights. And yet, at the present day, it is the most extensive of any, because it comprehends the whole theory of the value of land, the funds, mercantile credit, banking, the foreign exchanges, shares in commercial companies, and all other incorporeal wealth.

XXI.—

PERSONAL CREDIT—A SUCCESSFUL TRADER IS AN ECONOMIC QUANTITY, ANALOGOUS TO THE LAND.

Now, a person exercising any profitable business or profession is an economic quantity exactly analogous to land. The land has produced profits in the past, but it has equal capacity to produce profits in future. So a merchant or a professional man may have accumulated a quantity of money as the fruits of his skill, industry, and ability in the past. But, over and above his accumulated money, he has the same skill, industry, and ability to earn profits in the future. His capacity to earn profits in the future is exactly the same as his capacity to have earned profits in the past. And, of course, he has the right or property in his expected profits of the future. And he may trade in two ways—he may trade, with the money he has already acquired, the profits of the past; or he may trade by purchasing goods by giving in exchange for them the right or property to demand payment at a future time out of the profits he expects to earn in the future. Personal character used to trade in this way as purchasing power is termed credit. And, as we have seen that anything which has purchasing power is wealth, it follows that money and credit are equally wealth. But it is evident that money and credit are inverse and opposite to each other. Hence, if money is a positive economic quantity, credit is a negative economic quantity.

XXII.—

ALL ANNUITIES ARE NEGATIVE ECONOMIC QUANTITIES.

Hence, it is seen that all annuities or rights to receive a series of future payments, whether the right be to receive a single future payment or a limited or an infinite number of them, are negative economic quantities. These negative economic quantities comprehend all mercantile and banking credit, such as bank notes, cheques, bills of exchange, and all instruments of credit; exchequer bills, navy bills, dividend warrants, etc.; the land, the funds, terminable annuities, shares in commercial companies, the goodwill of a business, a professional practice, copyrights, patents, tolls, ferries, market rights, advowsons, benefices, shootings, fisheries, leaseholds, policies of insurance of different kinds, and many other valuable rights; amounting in value to scores of thousands of millions in this country, of which there is scarcely a notice in the usual text-books on economics.

XXIII.—

WEALTH IN ECONOMICS IS AN EXCHANGEABLE RIGHT.

It follows from the preceding considerations that the true definition of wealth in economics is an exchangeable right. Now, there are three kinds of rights or property which can be bought and sold, or whose value can be measured in money.

I. Corporeal or material property or rights. There may be the right or property in some specific material substance which has already come into existence, and has come into the actual possession of the owner. This species of property in Roman and English law is termed corporeal property, because it is the right to certain specific corpus. It is also called material property, because it is the right to certain specific matter. Hence, we term this species of property corporeal or material wealth.

II. Immaterial property. The property which a man has in his own mental and intellectual qualities, in his own labor, or in his capacity to render any sort of service. As Smith says: “The property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and inviolable.” Now, a person may sell the right to demand some labor or service from him. As all these services, though they require some bodily instrument to give effect to them, are in reality operations of the mind, we may call them immaterial property, or immaterial wealth, as J. B. Say, the French economist, does.

III. Incorporeal property. There is lastly a third kind of property or right, wholly separated and severed from any specific corpus, or matter in possession. It may either be in the possession of someone else at the present time, and may only come into our possession at some future time; or it may be even not in existence at the present time. Thus we may have the right or property to demand a sum of money from some person at some future time. That sum of money may no doubt be in existence at the present time, but it is not in our possession; it may not even be in the present possession of the person bound to pay it. It may pass through any number of hands before it is paid to us. But yet our right to demand it at the proper time is present and existing, and we may sell or transfer that right to anyone else for money. We may also have the right to something which is not yet even in existence, but will only come into existence at a future time. Thus, those who possess lands, cattle, fruit, trees, etc., have the right or property in their future produce. This produce is not in existence at the present time; it will only come into existence at a future time; but the right or property to it when it does come into existence is present and existing, and may be bought and sold like the right to any material product. This species of property is called in Roman law and English law incorporeal property, because it is a right, but separated from any specific corpus. Hence, it is called incorporeal wealth. But all these three different kinds of rights possess the quality of exchangeability; they can all be equally bought and sold or exchanged; the value of each of them can be measured in money; they are all equally merchandise, or articles of commerce. They are each, therefore, Pecunia, Res, Bona, Merx; χρήματα, πράγματα, οἵκος, οὐϭία, ἀγαθά, etc., goods, chattels, merchandise, vendible commodities, wealth, in the jurisprudence of all nations. And, as it is the quality of exchangeability which alone constitutes anything wealth, and is the sole quality which economics regards, it follows that all these three kinds of rights are equally wealth in economics. And all the fundamental concepts and definitions, and all the laws of economics, must be enlarged and generalized, so as to comprehend indifferently the exchanges of these three orders of rights.

XXIV.—

ECONOMICS, OR COMMERCE, IS THE SCIENCE OF THE EXCHANGES OF RIGHTS.

We have found that the true meaning of wealth in economics is an exchangeable right, and that there are three orders of these exchangeable rights; hence, these three orders of rights may be exchanged in six different ways.

1. The right or property in a material thing may be exchanged for the right or property in another material thing, as when the property in so much gold is exchanged for the property in so much corn or cattle, timber, jewelry, etc.

2. The right or property in a material thing may be exchanged for the right to demand so much labor or service, as when the property in so much gold is exchanged for the right to demand so much labor in any form.

3. The right or property in a material thing may be exchanged for the right to an abstract right, as when the property in so much gold is exchanged for the right to a bank note, cheque, bill of exchange, the funds, or any other incorporeal property.

4. The right or property in so much labor or service may be exchanged for the right to demand so much labor or service from someone else, as when persons agree to perform reciprocal services for each other, which are estimated as equivalent.

5. The right or property to demand so much labor or service may be exchanged for an abstract right, as when labor or service of any kind is paid for in bank notes, cheques, or bills.

6. The right or property in one abstract right may be exchanged for the right or property in another abstract right, as when a banker buys or discounts a bill of exchange, which is an abstract right, by giving in exchange for it a credit in his books, termed in banking language a deposit, which is another abstract right; or, as when a publisher buys the copyright of a work by giving bills of exchange for it.

Thus it is seen that all exchanges are of rights against rights, and these six kinds of exchange constitute commerce in all its forms and varieties, or the science of pure economics.

XXV.—

ON MONEY AND CREDIT.

In the early ages of the world there was no such thing as money. When persons traded, they exchanged the products directly against each other; as is the custom at the present day with savage people. Thus in Iliad, vii., 468, we have:

• • “Νῆες δ’ἐκ Αήμνοιο παρέϭτασαν οἷνον ἄγουσαι”
  • . . . . . . . . . .
  • “ἔνθεν ἄῤ οἰνίζοντο κάρη κομόωντες Ἀχαιοί,
  • ἄλλοι μὲν χαλχῷ, ἄλλοι δ’ αὶθωνι ϭιδήρῳ,
  • ἄλλοι δὲ ῥινοῖς, ἄλλοι δ’αὐτῇϭι βόεϭϭιν,
  • ἄλλοι δ’ ἀνδραπόδεϭϭι.”
• • “From Lemnos’ isle a numerous fleet had come
  • Freighted with wine. . . .
  • . . . All the other Greeks
  • Hastened to purchase, some with brass and some
  • With gleaming iron; some with hides,
  • Cattle and slaves.”

This exchange of products against products is termed barter. And the inconveniences of this mode of trading are obvious. What haggling and bargaining it would require to determine how much leather should be given for how much wine! how many oxen or how many slaves! In the Homeric poems there is not the faintest allusion to anything of the nature of money. But even in those days it had been discovered that it would greatly facilitate commerce if the products to be exchanged were referred to some common measure of value. There are several passages in the Iliad which show that, while traffic had not advanced beyond barter, such a standard of reference was used. We find that various things were frequently estimated as being worth so many oxen. Thus in Iliad, ii., 448, Pallas’s shield, the ægis, had one hundred tassels, each of the value of one hundred oxen. In Iliad, vi., 231, Homer laughs at the folly of Glaucus, who exchanged his golden armor, worth one hundred oxen, for the bronze armor of Diomede, worth nine oxen. In Iliad, xxiii., 703, Achilles offered as a prize to the winner in the funeral games in honor of Patroclus, a large tripod, which the Greeks valued among themselves at twelve oxen, and to the loser a female slave, which they valued at four oxen. But it must be observed that these oxen did not pass from hand to hand like money. The state of barter continued; just as at the present day it is quite common to exchange goods according to their value in money, without any actual money being used.

XXVI.—

ON THE NECESSITY FOR MONEY.

The necessity for money arises from a different cause. So long as the products exchanged were equal in value there would be no need for money. If it could always happen that the exchanges of products or services were exactly equal, there would be an end of the transaction. But it would often happen that when one person required some product or service from another person, that other person would not require an equal amount of product or service from him in return; or even perhaps none at all. If, then, such a transaction took place between persons with such an unequal result, there would remain over a certain amount of product or service, due from the one to the other. And this would constitute a debt; that is to say, a right or property would be created in the person who had received the less amount of service or product to demand the balance due at some future time. And at the same time a correlative duty would be created in the person of the other, who had received the greater amount of product or service, to pay or render the balance due when required. Now, among all nations and persons who exchange or traffic with each other, this result must inevitably happen. Persons want some product or service from others; while those others want either not so much, or even perhaps nothing at all, from them. And it is easy to imagine the inconveniences which would arise if persons could never get anything they wanted, unless the persons who could supply these wants wanted something equal in value in return at the same time.

In process of time all nations hit upon this plan; they fixed upon some material substance, which they agreed to make always exchangeable among themselves, to represent the amount of debt. That is, if such an unequal exchange took place among persons, so leaving a balance due from one to another, the person who had received the greater amount of service or product gave a quantity of this universally exchangeable merchandise to make up the balance; so that the person who had received the lesser amount of service or product might obtain an equivalent from someone else. Suppose a wine-dealer wants bread from a baker; but the baker wants either not so much wine, or even no wine at all, from the wine-dealer. The wine-dealer buys the bread from the baker, and gives him in exchange as much wine as he wants, and makes up the balance by giving him an amount of this universally exchangeable merchandise, equivalent to the deficiency; and if the baker wants no wine at all, he gives him the full equivalent of the bread in this merchandise. The baker wants perhaps meat, or shoes, but not wine. Having received this universally exchangeable merchandise, from the wine-dealer, he goes to the butcher or the shoemaker, and obtains from him the equivalent of the bread he has sold to the wine-dealer. Hence the satisfaction that was due to him from the wine-dealer is paid by the butcher or shoemaker.

This universally exchangeable merchandise is termed money; and these considerations show its fundamental nature. Its function is to represent the debts which arise from unequal exchanges among men, and to enable persons who have rendered any sort of services to others, and have received no equivalent from them, to preserve a record of these services; and of their rights or title to obtain an equivalent product or service from someone else, when they require it.

XXVII.—

ARISTOTLE, BISHOP BERKELEY, THE ECONOMISTS, ADAM SMITH, THORNTON, BASTIAT, MILL, AND JURISTS HAVE SEEN THE TRUE NATURE OF MONEY.

The true nature of money is now apparent. It is simply a right or title to demand some product or service from someone else.

Now, when a person accepts money in exchange for products, or services rendered, he can neither eat it, nor drink it, nor clothe himself with it; nor is it any species of economic satisfaction for the service he has done. He only agrees to accept it in exchange for the services he has rendered, because he believes, or has confidence, that he can purchase some satisfaction which he does require at any time he pleases. Money is therefore what is termed credit. A whole series of writers from the earliest times have perceived that the true nature of money is merely a right or title to acquire a satisfaction from someone else—i. e., a credit. Thus Aristotle says:* “ὑπὲρ δὲ μελλούϭης ἀλλαγῆς (εἰ νῦν μηδὲν δεῖται, ὅτι ἔϭται ἐάν δεηθῇ) τὸ νόμιϭμα οἷον Ἐγγυητής ἐϭτιν ἡμῖν. δεῖ γὰρ τοῦτο φέροντι εἷναι λαβεῖν.”—“But with regard to a future exchange (if we want nothing at present, that it may take place when we do want it) money is as it were our security. For it is necessary that he who brings it should be able to get what he wants.”

So a London merchant, F. Cradocke, in the time of the Commonwealth, says: “Having now pointed out the inconvenience of these metals (gold and silver) in which the medium of commerce, or universal credit, hath formerly been placed. * * * Now that credit is as good as money will appear, it is to be observed that money itself is nothing but a kind of security which men receive upon parting with their commodities, as a ground of hope or assurance, that they shall be repaid in some other commodity; since no man would either sell or part with any for the best money, but in hopes thereby to procure some other commodities or necessary.” So an old pamphleteer in 1710 saw the same truth. He says:† “Trade found itself unsufferably straightened and perplexed for want of a general specie of a complete intrinsic worth, as the medium to supply the defect of exchanging, and to make good the balance where a nation or a market, or a merchant demands of another a greater quantity of goods than either the buyer hath goods to answer, or the seller hath occasion to take back.” So the great metaphysician, Bishop Berkeley, says in his “Querist”:

It is one of the special merits of the economists that they clearly saw the true nature of money. Among many others, Baudeau, one of the most eminent of them, says:* “This coined money in circulation is nothing, as I have said elsewhere, but effective titles on the general mass of useful and agreeable enjoyments, which cause the well being and propagation of the human race. It is a kind of bill of exchange or order, payable at the will of the bearer. Instead of taking his share in kind of all matters of subsistence and all raw produce annually growing, the sovereign demands it in money, the effective titles, the order, the bill of exchange, etc.” So Edmund Burke† speaks of gold and silver as “the two great recognized species that represent the lasting credit of mankind.” So Smith says:‡ “A guinea may be considered as a bill for a certain quantity of necessaries and conveniences upon all the tradesmen in the neighborhood.” So Henry Thornton, the eminent banker, one of the authors of the Bullion Report, says:§ “Money of every kind is an order for goods. It is so considered by the laborer when he receives it, and it is almost instantly turned into money’s worth. It is merely the instrument by which the purchasable stock of the country is distributed with convenience and advantage among the several members of the community.”

This great fundamental truth was also very clearly seen by Bastiat. He says:∥

So Mill says: “The pounds or shillings which a person receives weekly or yearly are not what constitutes his income; they are a sort of ticket or order, which he can present for payment at any shop he pleases, and which entitles him to receive a certain value of any commodity that he makes choice of. The farmer pays his laborers and his landlord in these tickets, as the most convenient plan for himself and them.”

It is so clearly understood that money is, in reality, nothing more than the right or title to demand something to be paid or done that some jurists expressly class it under the title of incorporeal property. Thus Vulteius says: “Nummus in quo non materia ipsa, sed valor attenditur.”—“Money, in which not the material, but the value is regarded.” That is, we desire or demand other things for the direct satisfaction they give us; but we only desire money as the means of purchasing other things.

Gold and silver money, therefore, may be justly termed metallic credit.

Thus it is seen that writers of all classes, philosophers, merchants, bankers, economists, and jurists, are all perfectly agreed upon the nature of money. It represents indebtedness or services due to the owner of it, and it represents the right or title which its owner has to demand some product or service in recompense for some service he has done for someone else.

XXVIII.—

ON SUBSTANCES USED AS MONEY.

The necessity for money has arisen among all nations, the most barbarous as well as the most civilized. As soon as the members of any community, however barbarous, begin to exchange among themselves, unequal exchanges must necessarily arise, and therefore indebtedness is created. And some substance is hit upon to represent these services due, and the rights which its holders have to demand some product or service, in satisfaction of the services they have done to someone else. A great many different substances have been used by different nations to represent this universal want. The Hebrews, we know, used silver. No money was in use in the times of the Homeric poems; but some time after them, though we cannot say when, copper bars or skewers were used as money throughout Greece, which Pheidon of Argos, in the eighth century, bc, superseded by silver coins. The Æthiopians used carved pebbles; the Carthaginians used leather discs with some mysterious substance sewn up in them. Throughout the islands of the Eastern Ocean, and in many parts of Africa, shells are still used. In Thibet and some parts of China, little blocks of compressed tea are used as money. In the last century dried cod was used in Newfoundland, sugar in the West Indies, tobacco in Virginia. Smith says that in his day nails were used as money in a village in Scotland. In some of the American colonies powder and shot; in Campeachy, logwood, and among the North American Indians belts of wampum were used as money. We read of another people who used cowries as small change, and the skulls of their enemies for large sums. It is said that in Virginia, in 1667, the proprietors were reduced to such straits as to use dried squirrel-skins as money, and many other things have been used in various countries for the same purpose.

But when we consider the purposes for which money is required, it is easily seen that no substance possesses so many advantages as a metal, The use of money being to preserve the record of services due to its possessor for any future time, it is clear that money should not alter by time. A money of dried cod would not keep very long, nor would it be easily divisible. Not many bankers would care to keep their accounts in dried cod, tobacco, sugar, logwood, or dead men’s skulls. One of the first requisites of money is that it should be easily divisible into very small fragments, so that its owner should be able to get any amount of service he pleases at any time. Taking these requisites into consideration, it is evident that there is no substance which combines them so well as a metal. Metal is uniform in its texture. It can be divided into any number of fragments, each of which shall be equal in value to any other fragment of the same weight; and, if required, these fragments can always be reunited, and form a whole again of the value of all its parts, which can be said of no other substance. All civilized nations, therefore, have adopted metal as money; and of metals gold, silver, and copper have been chiefly preferred.

XXIX.—

THE CHINESE INVENTED PAPER MONEY.

We have now to treat of a material used as money which, in latter times at least, has had incomparably more influence in the world than all the gold and silver—namely, paper.

The Romans invented the business which in modern language is termed banking. The Roman bankers invented cheques and bills of exchange, but they did not invent bank notes. The use of cheques and bills of exchange by the Romans was extremely narrow, restricted to the immediate parties, and they were never made transferable, as far as we are aware, so as to get into general circulation and serve the purposes of money.

The invention of paper to be used as circulating money is due to the Chinese. In the beginning of the reign of Hiantsong of the Dynasty of Thang, about the year 807 ad, there was a great scarcity in the country. The Emperor ordered all the merchants and rich persons to bring their money into the public treasury, and in exchange for it gave them notes called fey-thsian, or flying money. In three years, however, this money was suppressed in the capital, and was current only in the provinces. In 906 ad Thait-siu, the founder of the Soung Dynasty, revived this practice. Merchants were allowed to deposit their cash in the public treasuries, and received in return notes called pian-thsian, or current money. The convenience of this was so great that the custom quickly spread, and in 997 there was paper in circulation to the amount of 1,700,000 ounces of silver, and in 1021 it had increased to 2,830,000 ounces. At this period a company of sixteen of the richest merchants were permitted to issue notes payable in three years. But at the end of that time the company was bankrupt, which gave rise to much public distress and litigation. The Emperor abolished the notes of this company and forbade any more joint-stock banks to be founded. Henceforth the power of issuing notes was kept in the hands of the Government. These notes were also called kiao-tsu, and were of the value of an ounce of silver. In 1032 there were kiao-tsu to the value of 1,256,340 ounces in circulation. Subsequently banks of this nature were set up in each province, and the notes issued by one provincial bank had no currency in any other. These were the first bank notes on record—that is to say, notes issued in exchange for money, or convertible into money, and not paper money or paper created without any previous deposit of specie. Besides these bank notes the Chinese issued paper money to a vast amount.* It would be too long here to give a complete history of the paper money of China, but we have given some full notices of it elsewhere.† But it may interest our readers to know the process of its manufacture.

About 1288, Marco Polo traveled in China, and discovered the existence of this paper money. In Book II., c. 18, he gives an account of its manufacture. He says that it was made in Kambalu. The inner rind of the mulberry-tree was steeped and pounded in a mortar, and then made into paper, resembling that made from cotton, but quite black. It was then cut into pieces nearly square but of different sizes. The smallest were of the value of a denier tournois, the next for a Venetian groat, others for two, five, and ten groats, others one to ten gold besants. Several officers had to subscribe their names and place their seals on each note, which was then stamped with the royal seal dipped in vermilion. Counterfeiting was a capital offence. It had then a forced currency, and no one dared to refuse it on pain of death. Caravans of merchants arrived with their goods, which they laid before the King, who selected what he pleased, and paid them in this money. When anyone wished to exchange old money for new, it was done at the mint at a charge of three per cent. If anyone wanted gold or silver for manufacture, he could obtain bullion at the mint in exchange for the paper. Marco Polo mentions many cities where he observed this money in circulation.

Credit and paper, either payable in specie or inconvertible, now forms the great circulating medium or currency of the world, and as we shall show hereafter, amounts to nearly one hundred times the quantity of specie in this country.

XXX.—

THE FUNCTION OF CREDIT IS TO BRING INTO COMMERCE THE PRESENT VALUES OF FUTURE PROFITS.

The true function of credit is now apparent.

It is a very common idea that credit is the “goods” which are “lent,” or the “transfer” of them. Such ideas are wholly erroneous. In all cases whatever, a credit is the present right to a future payment. And the true function of credit is to bring into commerce the present values of future profits.

When an estate in land is sold, the present value of all its future profits is expressed, and brought into commerce by the money paid for it. The total amount of the shares in any commercial company—banking, insurance, railway, or any other—denotes the value of the existing property of the company, together with the total present value of their future profits. So the money paid for the goodwill of a business, a copyright, patent, a professional practice, etc., is the present value of the future profits. So when a merchant or trader trades on “credit,” he brings into commerce the present value of a future profit. He buys the goods or the labor, and gives as their price the right to demand a sum to be paid out of the expected future profits. So when the State contracts a loan for any public purpose it buys the money, and gives as its price the right to demand a series of payments out of the future income of the people. So when municipal corporations and other public bodies contract loans for public purposes, they buy money by giving as its price the right to demand a series of payments out of the future revenues of their constituents. That is, they bring into commerce the present value of their future income. So credit in all its forms, and to whatever purpose it is applied, simply brings into commerce the present value of a future profit. The famous French wit, Rivarol, well said: “Man conquers space by commerce, and time by credit.”

XXXI.—

THE FUNDAMENTAL CONCEPT OF MONETARY SCIENCE.

The preceding considerations now enable us to perceive the fundamental concept of monetary science.

We have seen that writers of all classes are agreed as to the fundamental nature of money. It represents debts which are due to persons who have done services to others, and have received no equivalent services in return. It merely represents the right to demand these equivalent services when they please; and its special function is to measure, record, and preserve these rights for future use, and to transfer them to anyone else. If all the services exchanged in society exactly balanced, there would be no need for money. Supposing, then, that there was nothing but metallic money in use, the following axiom is evident: The quantity of money in any country represents the quantity of debt which there would be if there were no money. But as we have seen that, in civilized countries, these debts, or rights, are recorded in the simple form of rights against particular persons, whether written or unwritten, as well as in metallic coin, which are rights against the general community, the terms circulating medium, or currency, include these debts in both forms. Hence, it is clear that the circulating medium, or currency, represents nothing but transferable debt; and that whatever represents transferable debt is circulating medium, or currency, whatever its nature or form may be, either metal or paper, or anything else. Consequently this proposition necessarily follows: Where there is no debt there can be no currency.

All erroneous theories of currency have been founded on not perceiving the fundamental nature of currency; and the greatest monetary disasters the world has ever seen have been produced by violating this fundamental axiom.

XXXII.—

ON THE DISTINCTION BETWEEN MONEY AND CREDIT.

It has now been shown that money and credit are essentially of the same nature, money being only the highest and most general form of credit. They are each a right or title to demand some product or service in future. Nevertheless, there is a very important distinction between money and credit, which must now be pointed out. In economics all money is credit, but all credit is not money. No one can compel anyone else to sell him anything for money or credit. When, therefore, anyone has taken money in exchange for anything, it is in reality only credit, because he only takes it in the belief that he can exchange it away for something else. But suppose that a sale has taken place, and that a debt has been incurred thereby, public policy requires that the debtor should be able to compel the creditor to accept something in discharge of his debt. It would cause infinite misery if creditors could arbitrarily refuse anything they pleased in payment of their debts. Hence, in all countries the law declares that, if a debt has been incurred, the debtor can compel the creditor to accept some specific thing in payment of it. Whatever that something is which a debtor can compel a creditor to accept in payment of a debt which has been incurred, is money or legal tender. From this it follows that some things may be money in some cases and not in others. Gold coin in this country is money or legal tender in all cases, and to any extent. Silver is only money or legal tender to the amount of 40s. If a creditor chooses to accept of payment of a larger amount than 40s. in silver, it is entirely of his own free will.

In England, as between the public and the Bank of England, bank notes are nothing but credit. The bank cannot compel anyone to receive its notes, and any holder of its notes can compel the bank to cash them on demand. Between private persons, a bank note for £5 is not money or legal tender for that exact amount of debt. But in debts above £5, bank notes are money or legal tender. But even this is only so long as the bank pays its notes in cash on demand. If the bank were to stop payment, its notes would cease to be legal tender in any case. In Scotland and Ireland, Bank of England notes are not legal tender in any case.

If two persons are mutually indebted to each other in equal amounts at the same time, each may compel the other to accept the debt he owes as legal tender for the debt which is due to him. Each debt is therefore money or legal tender, in respect of the other, and neither party can demand specie from the other. So, if a creditor voluntarily accepts payment from his debtor in a country bank note without indorsement, he makes it money even though the bank should fail; or, if he voluntarily accepts a cheque from his debtor, and has the credit transferred to his own account, he makes it money, and it is a final closing of the transaction even though the bank should fail immediately after. This is a principle of supreme importance in modern commerce, as will be shown more fully hereafter.

XXXIII.—

REASON WHY PAPER CAN SUPERSEDE MONEY.

The reason why paper can supersede money is now apparent.

An order to receive a coat could never serve as a substitute for a coat, because it cannot serve the same purpose as a coat. An order to receive meat or bread or wine cannot supersede meat, bread, or wine, because it cannot serve the same purpose as meat, bread, or wine; and so on regarding orders for other material chattels. An order for such things can never serve as a substitute for the things themselves; because they are heterogeneous quantities of a totally different nature, and cannot serve the same purpose as the things themselves. But an order to pay money can serve the same purpose as money, because they are homogeneous quantities. A piece of money, like a piece of paper, is nothing more than an order to receive a useful, material chattel; and, provided that the order is sure to be obeyed on demand, it is of no consequence whether it be of metal or paper. Consequently, the exchange of paper for money is nothing more than exchange of a particular right for a general right. As Daniel Webster, the eminent American jurist, said: “Credit is to money what money is to goods.” That is, credit is an order for money and money is an order for goods. To be useful, money must be exchanged away for other things just as paper is. And if paper can be exchanged away for exactly the same things that money can, paper has exactly the same value as money. As the Italians say: “Che oro vale, oro è.”—“That which is of the value of gold is gold.”

XXXIV.—

THE SAME QUANTITY MAY REQUIRE TO BE REGARDED IN DIFFERENT ASPECTS IN DIFFERENT SCIENCES.

We have now a most important observation to make. The same quantities may be common to different sciences and require to be regarded in different aspects in each. Thus jurisprudence and economics are inseparably allied; and money and bank notes, bills of exchange and abstract rights, are both juridical and economical quantities; but they differ in some respects according as they are regarded in a juridical or an economical aspect. Thus, in jurisprudence, money is the absolute payment and satisfaction of a debt, and a closing of the transaction; and bills of exchange are not the closing of the transaction, unless they are accepted as such. Also, in jurisprudence, money is corporeal property; abstract rights and rights of action are incorporeal property; but if these rights and rights of action are recorded on paper, parchment, or any other material, they become corporeal or material property, just like money. But, in economics, a payment in money is not the closing of the transaction. The economists held that a complete exchange is the obtaining a satisfaction for a satisfaction. In economics, money is only an abstract right recorded and preserved in gold to obtain a satisfaction. Money, in economics, is only a bill of exchange in gold. So in economics, rights, whether purely abstract or recorded on paper, are exactly of the same nature. A piece of money is no more an economic satisfaction than a piece of paper. Hence in economics, money and rights of action, whether written or unwritten, are of exactly the same nature. They are all simply rights to demand something in future; hence, as many jurists have seen, they are all, in economics, equally incorporeal property, or credit. But, as they all possess the quality of exchangeability, they are all equally wealth.

XXXV.—

THERE IS NO NECESSARY RELATION BETWEEN THE QUANTITY OF MONEY IN ANY COUNTRY AND THE QUANTITY OF COMMODITIES AND THEIR PRICE.

We have now to demonstrate a proposition of the greatest importance in economics, and on which errors of the most serious nature are very prevalent. Many writers on economics have supposed that the quantity of money in a country bears some necessary relation to the quantity of commodities in it; and many more think that the prices of commodities are determined by the ratio which the quantity of metallic money bears to the quantity of commodities. That this is a very serious error may easily be shown. Suppose that A and B are mutually indebted; that A owes B £10, and B owes A £13. Then, it is quite clear that their debts may be settled in three different ways:

1. Each may send a clerk to demand payment of his debt from the other in money; this method would require £23 in money to discharge the two debts.

2. A may send £10 to B to discharge his debt, and B may send back to A the same £10, with £3 additional to discharge his debt. This method would require £13 to discharge the two debts.

3. They may meet together and set off their mutual amounts of debt and pay only the difference in money. By this means the two debts would be discharged by the use only of £3.

Now, it is quite clear that a very different quantity of money would be required to carry on any given amount of business, according as either of these methods of settling debts was adopted. Between the first and the third methods there is a difference of £20. These £20 would not influence prices, but would only be required to settle debts in a clumsy way. So that it is clear that by a simple change in the method of doing business, £20 might be withdrawn from its employment, and set free to be applied to new transactions. The adoption of the third method of settling debts in the place of the first would in no way affect prices, because these amounts of money would have to be retained for the sole purpose of settling debts, and would in no way enter into the sales of commodities, and therefore in no way affect their prices. At the same time, it would greatly alter the ratio between money and commodities. Now, when these transactions are multiplied by millions, it is evident that there may be large quantities of money in a country which may exercise no influence on prices; and the ratio between money and commodities may vary greatly, according as one or other of these methods of doing business is adopted. Now, if a country which habitually used the first method were to change its custom and adopt the third method, it is quite evident that a very large quantity of money might be disengaged from its usual employment and applied to promote new operations; and, therefore, for all practical purposes, it would be equivalent to an addition to the previously existing quantity of money, as by this improvement in the method of settling debts many times the same quantity of business might be done on the same basis of specie. Hence, the various methods of economizing the use of money are, for all practical purposes, to be considered as an increase of the resources of the nation.

But the methods of proving this proposition are by no means exhausted. I was examined as a witness before the Gold and Silver Commission of 1887, and I somewhat startled the Commission by saying that, though every system of credit must rest on a basis of specie, there is no necessary relation between the basis of specie and the superstructure of credit raised upon it. The proof of this is extremely simple, and may be best illustrated by a practical example. Before bankers discounted bills of exchange, there used to be fairs at the great Continental cities, Lyons, Nuremberg, and many others, held every three months. Merchants in France and other countries did not make their bills payable at their own houses, where they must have kept large sums in specie to meet them, but they made them payable only at these great fairs. In the meantime their bills circulated throughout the whole country, and performed all the functions of money. On a fixed day of the fair the merchants met together and exchanged their acceptances against each other. By the principle of compensation, which will be more fully described in a future chapter, these acceptances exchanged, reciprocally paid, discharged, and extinguished each other. Boisguillebert, the morning star of French economics, says that at the fair of Lyons 80,000,000 of bills paid and discharged each other without the use of a single coin. Hence, when all debts balance each other they may all be settled without the use of a single coin. Now, this is equally true whether there were 80 or 800 or 8000 millions of debts to be settled. Hence, it is evident that so long as the debts to be settled exactly balance, there is no use for any money, however large they may be in actual amount. In such a case money is only required in case there should be any undischarged balances of debts.

Again, suppose that creditors and debtors have accounts at the same bank. The debtor gives his creditor a cheque on his account. The creditor pays it into his own account; and the banker transfers the credit from the account of the debtor to that of the creditor, and this is a complete payment of the debt without the use of money. This operation is termed a novation. Now, it is evident that the larger a bank is, the more of its customers will deal with each other, and the greater will be the number of transactions settled by means of novations, without the use of money. But the system has been carried to a greater degree of refinement still, by a device called the clearing system, which will be more fully described in another chapter.

XXXVI.—

ON BARTER.

When material products are exchanged directly for material products the transaction is termed barter.

XXXVII.—

ON SALE OR CIRCULATION.

To understand economics as a science, we must revert to the original concept of it by its founders, the economists, as the science of exchanges, or of commerce, to which all the most intelligent economists in the world are now reverting, as the only one by which it can be created into a science, after the temporary confusion into which it was thrown by the unfortunate system of J. B. Say and John Stuart Mill, which is rapidly sinking into oblivion.

The economists only admitted an exchange to be where a material product was exchanged for material product, i. e., a barter; that is, where each side obtained a satisfaction. But, in modern times, such exchanges are comparatively rare. Persons usually want to obtain things from others, while these others want nothing from them. To obviate the inconveniences which would arise if no one could get what he wanted, unless he could supply the other party at the same time with what he wanted, people hit upon the plan of adopting some particular commodity, which should be universally exchangeable. The buyer, therefore, gave the seller in exchange for his product an equivalent in this universally exchangeable merchandise, so that he could get any satisfaction he pleased from anyone else who could render it. This universally exchangeable merchandise is termed money. The person who has got the money has not got a satisfaction; his desire is not consummated or completed. In order to obtain a satisfaction, he must exchange away the money for some product he does desire. Hence, the economists termed a sale a demi-exchange. Le Trosne says:* “There is this difference between an exchange and a sale, that in an exchange everything is consummated or completed (consommé) for each party. They possess the thing which they desired to procure, and they have only to enjoy it. In the sale, on the contrary, it is only the purchaser who has attained his object, because it is only he who is in a position to enjoy. But everything is not ended for the seller.” And again: “Exchange arrives directly at its object, which is completion (consommation); it has only two terms, and is ended in one contract. But a contract in which money intervenes is not completed (consommé), but it is necessary that the seller should become a buyer, either himself or by the interposition of the person to whom he transfers the money. There are, therefore, to arrive at completion (consommation), which is the ultimate object, at least four terms, and three contractants, of whom one intervenes twice.” When, however, the person who had sold his product for money, and, therefore, furnished a satisfaction to the other party, had himself exchanged away the money and obtained a product for it, he, too, had acquired a satisfaction, which he could enjoy, and the exchange was completed (consommé). For this reason, money was called the medium of exchange. This “sale” the economists termed circulation. Sale or circulation, therefore, the economists defined to mean the exchange of a product for money. Circulation, therefore, meant purchase with money; in contradistinction to exchange of products, or barter.

But credit is used in all respects in the same way as money to purchase or circulate commodities. Hence, sale or circulation always denotes an exchange in which one or both of the quantities exchanged is money or credit. The sum total of these sales is properly termed the circulation. Hence, any sum of money or credit may add considerably to the circulation, because every time it is transferred it is a sale, and, therefore, it augments the circulation. Just in the same way, the circulation of a newspaper is not properly the number of copies sold, but the number of its readers. Hence, the circulation is the quantity of money and credit multiplied into the number of their transfers.

As the use of money and credit is to set industry in motion; and, inasmuch as they have no use unless they do that, their beneficial effects are not measured by their actual amount, but by the industry which they generate. Money lying locked up in a box, or credit unused, only represents latent power, and not actual power. They may be called power or wealth in the latent state, they resemble the steam-engine of a mill which is not going, and which is of no use until it is set in motion. And, as the produce of the mill is measured by the quantity of the motion of the engine, so the useful effect of money and credit is measured by their quantity of motion, which is called the circulation. The circulation, which is the sole test of their useful effect, is, therefore, the product of their amount multiplied into the velocity of their circulation. The quantity of motion of the engine is called its duty. Hence, the circulation of money and credit may be called its duty. It is so essential to have a clear conception of the useful effect produced by any amount of money or credit, that we may add another illustration. The effect produced by any body in motion is measured by its weight or mass multiplied into its velocity, which is termed its momentum. If the mass be diminished, yet by increasing its velocity, the effect or momentum may still be the same. If a body weighing 100 lbs. move with a velocity 1, its momentum will be 100; but if we diminish the weight to 50 lbs., and can double its velocity, the effect or the momentum will still be the same—100. The useful effects of money and credit are exactly analogous. Their useful effect is the result of their combined amount and velocity of circulation, which is termed circulation. If we can make £50 circulate with twice the velocity of £100, the useful effect or circulation will be the same. Hence, it may be said that the circulation is the momentum of money and credit.

XXXVIII.—

ON EXCHANGE.

An exchange is the interchange of things of a like nature; either products for products, or money or credit for money or credit. Thus we speak of the foreign exchanges or the value of the money of one country in terms of the money of another. Or we ask for the change (i. e., the ’change or exchange) of a £5 note or a sovereign. A bill of exchange is a right of action to be exchanged at the proper time for money. So we exchange one book for another, or a picture for a statue. So in “Lear,” when Albany throws down his glove to the traitor Edmond, the latter, throwing down his own, says: “There’s my exchange”; and a little further on Edgar says to Edmond: “Let’s exchange charity.” So in “Hamlet,” Laertes says: “Exchange forgiveness with me, noble Hamlet.” When the interchange is between products and money or credit, the one who gives the money or credit is said to buy the product, and the one who gives the product is said to sell it, and the quantity of money given is termed the price. When the exchange is between money or credit for money or credit, each side is said to buy and sell, and each quantity of money or credit exchanged for the other is termed the price of the other. Thus we buy a horse or a house or land or a bill of exchange with money or credit. An officer formerly bought a commission in the army, but he exchanged from one regiment into another.

XXXIX.—

ON THE MEANING OF CIRCULATING MEDIUM AND CURRENCY.

We have now to consider two terms, circulating medium and currency, which are both of comparatively recent origin, which have in recent times given rise to many controversies, but which are admitted to be synonymous, and, consequently, if we can positively determine the meaning of one of them, that will also necessarily determine the meaning of the other. The term circulating medium does not occur in Adam Smith. It seems to have come into use in the last decade of the last century. The first occasion on which we have met with it is in the debate on the Bank Restriction Act of 1797. Mr. Fox said:* “He wished that gentlemen, instead of amusing themselves with new terms of ‘circulating medium’ and the like,” etc., which shows that it must then have been of very recent origin. Mr. Pitt, in his reply, said: “As so much had been said on the nature of a circulating medium, he thought it necessary to notice that he did not, for his own part, take it to be of that empirical kind which had been generally described. It appeared to him to consist of anything that answered the great purposes of trade and commerce, whether in specie, paper, or any other term which might be used.” It is quite evident, therefore, that Mr. Pitt included under the term circulating medium or currency, money and credit in all its forms. Which continued to be the invariable usage in all Parliamentary debates, until Lord Overstone perverted men’s minds with a fantastic definition of his own, which he beguiled Sir Robert Peel into adopting.

The verb to circulate, like many others in English, has both an active and a neuter meaning. 1. It means that which circulates commodities, i. e., which causes commodities to circulate, where it is an active verb. 2. That which circulates itself, where it is a neuter verb. Smith uses the word circulate in both senses in different passages. Thus, speaking of gold and silver, he says: “Their use consists in circulating commodities. The great wheel of circulation is altogether different from the goods circulated by it. The revenue of the society consists altogether in these goods and not in the wheel that circulates them.” In these two passages circulates is active. A little further on, he speaks of the different sorts of paper money, but he says that the circulating notes of banks and bankers are best known, where circulates is neuter. In the following sentence both senses occur: “Let us suppose, for example, that the whole circulating money of some particular country amounted at a particular time to one million sterling, that sum being sufficient for circulating the whole annual products of their land and labor.”

The ordinary meaning of words in scientific language leaves no possible doubt as to which is the true meaning of circulate, in the expression circulating medium. A medium, in scientific language, means some middle thing by which something else is effected. Thus, money is termed the medium of exchange, because it is the medium by which exchanges are effected. Hence, the circulating medium is the medium by which the circulation of commodities is effected. Now, it has just been shown that by circulation the economists meant sales. And how are sales effected? By the means or medium of money and credit. Buying with money effects the circulation of commodities; but buying with credit equally effects the circulation of products; in whatever form the credit may be, either written or unwritten. Hence, money and credit are equally circulating medium; and the total amount of the circulating medium means the total amount of money and credit in all its forms.

XL.—

ON THE MEANING OF CURRENCY.

The meaning of the word currency, which all writers admit to be synonymous with circulating medium, is much more recondite, and has given rise to protracted controversies in modern times, which, however, we shall not notice at present. We shall in this section merely explain the true meaning of the word. The word currency is, in fact, a technical term in mercantile and constitutional law, and the following is the true meaning of “current” and “currency” in English law: It is a general rule of law that a person cannot transmit to another any better title to a thing than he has himself. As it is said:* “Nemo plus juris ad alium transferre potest quam ipse haberet.”—“No one can transfer to another a greater right than he has himself.” It is also a general rule of law that, if a person loses a thing or has it stolen from him, he does not thereby lose the property in it. Consequently, he can not only recover it from the finder or thief, but also from anyone else in whose possession he may find it, even though that person bought it or took it in pledge honestly and in good faith and gave full value for it, and not knowing that it was not the lawful property of the seller or pledger. This right of recovery is termed the Jus vindicandi in Roman law. But to this rule of law, money always was, from the very necessity of the case, an exception. If the true owner of the money finds it in the possession of the finder or thief, he can reclaim it. But if the finder or thief has once purchased goods with it, and the shopkeeper has taken it honestly, in the usual way of business, and without knowing it has been stolen, he can retain it against the true owner, even though he should be able to identify it. That is, the person who acquires money honestly, in the way of business, has a good title to it, even though the transferer had not. Thus it is said in law that “the property in money passes by delivery.” Thus, after the money has once been passed away in commerce to an innocent receiver, the true owner has lost his Jus vindicandi. It is this peculiarity which affects the property in money, which passes by delivery, which is denoted by the words “current” and “currency” in English law. And when an Act of Parliament declares that any instrument shall be “current,” it means that the property in it shall pass by delivery to the innocent purchaser. This quality of currency is also called negotiability. And when the representatives of money, such as bank notes, cheques, bills of exchange, etc., came into use, the law merchant applied the same principle of currency to them. They are like money so far as this, that the property in them passes like the property in money. Thus, if they are lost or stolen the true owner may recover them if he can find them in the hands of the finder or thief, but if the finder or thief succeeds in passing them away for value in the ordinary course of business to an innocent purchaser, that innocent purchaser acquires the property in them, and may retain them against the true owner and enforce payment of them from all the parties liable on them. This doctrine has been affirmed in a whole series of cases in the courts of law which we shall notice shortly. It follows from this that in strict law this principle of currency can only be applied to those rights of action which are recorded on some material. An abstract right cannot be lost, mislaid or stolen or passed away in commerce. For a right of action to be currency in strict law, it must be recorded on some material, so as to be capable of being carried in the hand, or in the pocket, or put away in a drawer, or dropped in the street, or stolen from the drawer or the pocket and carried off by the finder or thief, and transferred in commerce.

So far, then, as regards mercantile law there is no difficulty; the meaning of the word is perfectly clear. But if the word currency is used to denote a certain class of economic quantities, synonymous with circulating medium, a difficulty arises; because there is an immense mass of credit which has produced exchanges, and has circulated commodities, and is, therefore, circulating medium, which is not recorded on any material at all, in such a way that it can be lost or stolen and carried off, and transferred in commerce by manual delivery. Thus the gigantic mass of banking credits and the book debts of traders have all effected a sale or circulation, and therefore they are all circulating medium; but they have not the attribute of currency in a legal sense, because they cannot be mislaid, lost or stolen and picked up and passed away in commerce by manual delivery. So also private debts between persons, termed verbal credits; they only arise from the transfer of goods or money, and they exist equally whether they are recorded on paper or not. They are equally circulating medium. Private debts among traders affect prices and effect sales exactly like so much money. Consequently, though they are not currency in strict law, yet if that word is still to be retained as a scientific term denoting a certain class of economic quantities, synonymous with circulating medium, they must all be included under that term, because they can all be recorded on paper at pleasure and put into circulation, when they do actually become currency in strict law; and their nature and effects are exactly the same, whether they are recorded on paper or not.

In the great discussions in Parliament which arose out of the suspension of cash payments by the Bank of England, no attempt was made to define the term currency; but all the speakers assumed that it comprehended money and credit in all its forms. This truth was well expressed by Lord Titchfield in the House of Commons in the debates of 1822. Speaking of the various forms of credit used as substitutes for money, he said:* “When it was considered to how great an extent these contrivances had been practised in the various modes of verbal, book, and circulating credits, it was easy to see that the country had received a great addition to its currency. This addition to the currency would have the same effect as if gold had been increased from the mines.”

XLI.—

THE DIFFERENT FORMS OF CURRENCY.

Adopting, then, the terms circulating medium and currency as absolutely identical and synonymous and as designating a certain class of economic quantities, its different forms are: 1. Coined money—gold, silver, and copper. 2. The paper currency—bank notes, cheques, bills of exchange, promissory notes, exchequer bills, dividend warrants, and all orders and promises to pay money. 3. Simple debts of all sorts, not recorded as circulating paper, such as credits in bankers’ books termed deposits, book debts of traders and private debts between persons; because all these debts may be recorded on paper at the will of the parties and thrown into circulation; moreover, simple debts can be transferred with perfect facility without being recorded on paper. All these denote that a transaction has taken place and are a title to future payment. From these considerations it follows that the circulating medium or currency of any country is the sum total of all the debts or titles to future payment belonging to every individual in it—that is, all the money and credit in it.

Postage stamps must also be included under the term currency. They are a most usual form of remittance; they pass in small payments, and since the post-office is bound to cash them, they are in fact penny notes. Though the point has not been actually decided at law, there can be no doubt that if anyone were to steal postage stamps, and they were taken honestly in payment, it would be held that they possess the attribute of currency; hence they are in every sense strictly currency.

XLII.—

ON PRICE.

When any economic quantity is exchanged for any other economic quantity, each is termed the value of the other. But when one or both of the quantities exchanged is money or credit, it receives a special name—it is termed price. Price, therefore, always is value expressed in money or credit. Now, the value of money is any other economic quantity which can be obtained in exchange for it—either a material chattel, or a service, or a right, such as a debt. If money be taken as the fixed quantity, the more of the other quantity which can be obtained in exchange for it, the greater is the value of money. The less of the other quantity which can be obtained for it, the less is the value of money. Or if the other quantity be taken as the fixed quantity, the less the money given for it, the greater is the value of money; and the more the money given for it, the less is the value of money. Hence it is seen that the value of money varies inversely as price.

But credits, or debts, are commodities or merchandise, which are brought into commerce and bought and sold or exchanged like any other merchandise. Now, when any commodities or merchandise are brought into commerce they are always divided into certain units for the convenience of sale. Coals are sold by the ton, corn by the quarter, tea and sugar by the pound, cloth by the yard, wine and other liquids by the gallon, quart, or pint, etc. So, for the convenience of commerce, bullion is divided into units called coins. In a similar way, when the commodity or merchandise termed credit or debt is brought into commerce it must, for the convenience of trade, be divided into units. The unit of credit or debt is the right to demand £100 to be paid one year hence. The sum of money given to purchase the unit of debt is also termed its price. And as in all other sales, the less the quantity of money given to purchase the unit of debt, the greater is the value of money; and the greater the quantity of money given to purchase the unit of debt, the less is the value of money. Hence the value of money, with respect to debts, varies exactly in the same way as it does with respect to any other merchandise. But in the commerce of debts it is not usual to estimate the value of money by the quantity of debt it will purchase. As money naturally produces a profit, it is clear that the value or price of a debt to be paid only one year hence must be less than the actual amount of the debt. The difference between the present value or the price of the debt and the amount of the debt is the profit made by buying it. This difference or profit is termed discount.

XLIII.—

THE VALUE OF MONEY VARIES INVERSELY AS PRICE, AND DIRECTLY AS DISCOUNT.

To discount a debt is to buy it by paying down the present value of its amount payable at a future time. Hence it must be observed that the term value of money has two distinct meanings in commerce. There are three great branches of commerce; the commerce in material commodities, the commerce in labor, and the commerce in debts. And the expression “value of money” has two distinct meanings, as it is applied to these three branches of commerce. In the commerce of material commodities and in the commerce of labor it means the quantity of the commodity or of the service which money can purchase; in the commerce of debts it means the discount or profit made by buying the debt.

XLIV.—

ON INTEREST AND DISCOUNT.

Profits made by trading in debts are made in two ways:

(1) When the person who buys the debt agrees to defer receiving the profit until the end of the time agreed on.

In this case the profit is termed interest. Thus, when a person buys a debt of £100 payable one year hence, at £5 per cent. interest, he pays down the £100, and receives in exchange for it the right to demand £105 at the end of the year. The debt is the price of the money, and the money is the price of the debt. When the debtor pays the debt he brings the £105 in money to his creditor, and buys up the right of action against himself. Thus every “loan” of money, as it is called, is a sale or an exchange; the lender transfers the property in the money to the “borrower,” and in exchange for it receives the right of action to demand the principal and interest at the end of the year. This right of action is a new creation of property, and is the credit, or the debt. All “loans” of money are sales or exchanges; they are acts of commerce, and, therefore, enter into the science of economics.

(2) Where the difference, or profit, is retained at the time of the purchase of the debt.

In this case the profit is termed discount. But discount itself is of two kinds: (a) In the ordinary books of algebra it is said that discount is where the profit is retained at the time of the purchase; and the sum paid for the debt is such a sum as, improved at the given rate of interest, should be equal to the full amount of the debt at the end of the period of advance. It is, therefore, the present value of the sum agreed upon at the agreed upon rate of profit. This may be called algebraical discount. It is used by insurance companies in determining the present value of future payments and in some other cases. (b) But this kind of discount is never used by bankers and dealers in money. In banking it is invariably the custom to retain the full amount of the profit agreed upon at the time of purchasing the debt. Thus, if a banker discounts a bill of £100 for a year at five per cent., he deducts and retains the full £5 at the time of the purchase, and gives his customer a credit for £95. That is, he creates a right of action of £95 to purchase the right to £100 at the end of the year. As this method of discount is invariably used in banking and money lending, it may be termed banking discount.

The rate of interest or discount is the ratio of the profit to the amount of the debt, made in some given time, as the year. The profits made by interest and algebraical discount are exactly equal, but banking discount is more profitable; because in the example given in the former case, a profit of £5 is made on the advance of £100, in the latter case on the advance of £95.

So long as the rate of discount is low, there is not much difference in the profits by way of interest or banking discount. But as the rate increases, the profit increases at a very rapid ratio, as may easily be seen. If a person “lends” £100 at twenty per cent. interest, he advances £100, and at the end of the year receives £120, which is a profit of twenty per cent. If he discounts a bill for £100 at twenty per cent., he advances only £80, and at the end of the year receives £100, which is a profit of twenty-five per cent. If he lends £100 at fifty per cent. interest, he advances £100, and at the end of the year he receives £150, which is a profit of fifty per cent. If he discounts a bill of £100 at fifty per cent., he advances only £50, and at the end of the year receives £100, which is a profit of 100 per cent. So, discounting a bill of £100 at sixty per cent. is a profit of 150 per cent. If a person lends £100 at 100 per cent. interest, at the end of the year he receives £200, which is a profit of 100 per cent. If he discounted a bill of £100 at 100 per cent., he would advance nothing, and at the end of the year he would receive £100, or his profit would be infinite.

It would be out of place here to investigate the whole theory of banking discount; but we have given a full exposition of the subject in our Theory and Practice of Banking and Elements of Economics.

XLV.—

ON PAYMENT AND SATISFACTION.

The words payment and satisfaction are often supposed to be synonymous, but they are not so. The word payment means anything whatever which is taken in exchange for anything else. It originally came from the Sanskrit paç, which is the same word as the Greek πήγω, Doric πάγω, ϰήγνυμι. In old Latin this was pago or paco, the same as paciscor, and also pango, pegi or panxi, pactum; to covenant, agree with, or come to terms with. Thus it is said in the Laws of the XII. Tables: “Rem ubi pagunt, orato.”—“If they come to terms, let it be settled as agreed upon.” “Ni pagunt, in comitio aut in foro ante meridiem causam conjicito.”—“If they do not come to terms, bring on the cause before midday either in the comitium or the forum.” Hence, pacare is to come to terms with, to appease; hence the Italian pagare and our pay.

When one person has parted with anything else to another person, or done him a service, he is entitled to receive from him some equivalent, unless it was meant as a donation. But at the same time he has the right to accept anything he pleases as an equivalent. Thus, where two persons agree to exchange any material products, each is payment for the other; because each product satisfies and appeases the claim of the other for an equivalent. When goods are paid for in money, it is sometimes supposed that it is only the money which is payment for the goods. But the goods are equally payment for the money, because each person has got what he agreed to take in exchange for his product. So when money is paid as wages for work done, the money is payment for the work, but the work is equally payment for the money. So when persons agree to exchange different kinds of work, each is payment for the other. So when a merchant agrees to take a trader’s bill at three months in exchange for goods, the bill is payment for the goods; it appeases the claim of the merchant because he has agreed to take a right of action in exchange for the goods. And the goods are equally payment for the right of action. When the bill becomes due, the trader has to pay his bill; that is, he has to appease the claim which the holder of the bill has for money. And when he pays the bill he buys up the right of action against himself.

The money is the payment for the right of action; and the right of action is payment for the money. Hence to pay means simply to appease. When a man pays his debt he appeases the right or claim which his creditor has to demand a sum of money from him. When he pays his rent he appeases the right which the owner of the house or land has against him for compensation for its use. But it does not follow that a payment is a final closing of the transaction. The only legal word which denotes a final closing is satisfaction. If a bill is taken in exchange for goods it is payment; but it is not satisfaction (unless it is expressly received as such) until the bill itself is paid. If, however, the owner of the bill neglects to follow up his legal remedy, the bill becomes not only payment, but satisfaction; by doing so the owner of it has made it money. And economists go further; they say that money itself is only a higher order of bill; that, though when a person has received money it is payment, yet it is not satisfaction until he has exchanged away the money for some object he desires. Thus, though a shoemaker is paid when he has got money for his shoes, yet he has not got a satisfaction until he has got bread or meat or clothing or something else he desires for the money.

XLVI.—

ON CAPITAL.

Adam Smith’s use of the word capital strikingly exemplifies the defect of his definitions. He enumerates as capital—(1) Material things; (2) personal qualities; (3) abstract rights, such as bank notes, bills of exchange, etc., which are credit. That is, he enumerates all the three orders of economic quantities as capital. Now, when we are told that all these things are capital we have no more notion of what capital is than if we were told that they are all abracadabra. We do not want an enumeration of what things are capital; but we want a definition of what capital is.

The word capital is derived from the Latin caput, which means the source of a spring or the root of a plant—namely, the source from which any increase flows. Thus Plautus says: “O scelerum caput.”—“O source, or fountain, of crimes.” “Perjurii caput.”—“O fountain of perjury.” Stephen, in his Thesaurus, thus defines the word: “Κεφάλαιον—Caput unde fructus et reditus manat.”—“Capital, the source from which any profit or revenue flows.” So Senior says: “Economists are agreed that whatever gives a profit is properly termed capital.” And de Fontenay says: “Wherever there is a revenue you perceive capital.” This is a good general definition; and the “whatever gives a profit” must be interpreted in as wide and general a sense as the “anything whose value can be measured in money” is in the definition of wealth. The definition of capital is, therefore, this: “Capital is an economic quantity used for the purpose of profit.”

XLVII.—

ANY ECONOMIC QUANTITY WHATEVER MAY BE USED AS CAPITAL.

Now, as Aristotle pointed out, any economic quantity whatever may be used in two different ways—(1) The proprietor may use it for his own personal enjoyment; (2) he may trade with it—i. e., he may use it so as to produce a profit. When any economic quantity whatever is used so as to produce a profit—i. e., is traded with—it is termed capital.

Economic quantities, it has been shown, are of three distinct orders—(1) Material things; (2) personal qualities, both in the form of labor and credit; (3) abstract rights. And each of these quantities may be used in either of the above ways.

I.Material Things.—Suppose that a person has a sum of money. If he expends it on his own personal gratification or household expenses, such money is not used as capital, because he makes no profit by it. But if he lends it out at interest, or if he buys goods with it for the purpose of selling them again at a profit, or if he buys into the funds, or the shares of any commercial company, then he uses his money as capital; and the goods are also capital, because he intends to sell them again at a profit; and the funds and the shares are also capital, because they produce him an annual revenue. So, if the owner of land lives on it himself and uses it for his own personal enjoyment, he does not use the land as capital. But if he lets it out to farmers or to builders to build houses upon and receives a rent for so doing, then he uses the land as capital. Some great noblemen possess large tracts of land upon which part of London is built; that land yields them enormous revenues, and therefore it is capital to them. And so any material thing whatever may be used as capital. So, if a person spends money merely on a general education, of which he makes no profitable use, that money is not used as capital. But if he spends his money in acquiring a professional education, such as that of a schoolmaster, an advocate, a physician, a surgeon, or an engineer, or any profession by which he intends to earn an income, then he uses the money as capital. And the professional knowledge which he has thus acquired is capital to him, because he makes an income by trading with it.

II.Personal Qualities.—Personal qualities may also be used in both ways. But personal qualities are of two forms; they are of the form (a) of labor and (b) of credit.

(a)Personal Qualities as Labor.—If a man digs in his own garden for his amusement, or if he sings, acts, or gives lectures for the delectation of his friends, such labor is not used as capital. But if he sells his labor in any way for money, then he uses his labor as capital. Thus Huskisson said he had “always maintained that labor is the poor man’s capital.” So Mr. Cardwell, speaking to his constituents, said: “Labor is the poor man’s capital.” So a writer in a daily paper said: “The only capital they possess is their labor, which they must bring into the market to supply their daily wants.” And speaking of them the “Economist” said: “They have no capital but their labor.” So Froude said in “Oceana”: “And the land would be within the reach of poor men who have no capital except their labor.” So Cardinal Manning said: “I claim for labor the rights of capital. It is capital in the truest sense. * * * The capital of money and the capital of strength and skill must be united together.” So his knowledge, skill, and abilities are capital to anyone who earns an income as an advocate, physician, actor, engineer, or as manager of a great commercial company, or in any other profession. His services are wanted, demanded, and paid for by his clients; their value is measured in money; hence they are χρήματα, or wealth; and as he makes an income by their employment they are capital. This income is measurable and taxable, just in the same way as if he made an income by selling corn, cattle, or any other material chattels. All modern writers admit that labor is a marketable commodity which can be bought and sold like any material chattel, and consequently it is wealth; and as a person can sell his labor for a profit, and make an income thereby, it may be used as capital.

(b)Personal Qualities as Credit.—So personal credit may be used in two ways. If a person buys goods on credit for his own enjoyment, as for household use, such credit is not used as capital. But a merchant may use his credit for the purpose of profit, and therefore as capital. He may use it for the purpose of purchasing goods or materials or in employing labor, by giving a promise to pay at a future time, instead of actual money. He sells the goods and makes a profit by so doing, just as if he had paid for them in money. Or he may employ laborers by means of his credit, and sell the products for more than they cost, and so make a profit; in these ways he uses his personal credit as capital. When personal qualities, either in the form of labor or of credit, are used in this way to produce a profit, they are termed personal capital.

III.Rights.—When personal credit is used as a purchasing power, a right of action or an economic quantity of the third order is created. And as this right of action may be bought and sold or exchanged, like any material chattel, it is a marketable commodity. The traffic in these rights of action is the most colossal branch of modern commerce. It is in buying and selling these rights of action that bankers make their profits. But as the commerce in these rights of action is the subject-matter of this work, we shall say no more about them here. But any other right may be used as capital. If a man buys the funds or shares in any commercial company, or municipal or other obligations, such as railway debenture stock, all these and many other classes of rights produce him a profit, hence they are capital to him. So the copyright of a successful work is capital to the author, and if he sells it to a publisher it becomes fixed capital to him. There is a class of traders whose especial business is to buy and sell rights, such as shares in all kinds of commercial companies and public securities; they keep a stock of this kind of property on hand, just as other traders keep a stock of material goods. These persons are termed stock jobbers.

XLVIII.—

THERE IS NO SUCH THING AS ABSOLUTE CAPITAL.

It has been shown that there is no such thing as absolute wealth—that is, there is nothing which is in its own nature wealth, and that whether anything is wealth or not depends entirely upon human wants and desires. So, also, it must be carefully observed that there is no such thing as absolute capital. As Mill justly observes, the distinction between capital and non-capital does not lie in the kind of commodity, but in the mind of the owner; that is, that whether anything is capital or not, in no way depends on the nature of the thing itself, but solely and exclusively on its method of use.

Many writers, from an imperfect consideration of the subject, say that capital is simply the accumulation of the products of past labor. But this is a vital error which must be carefully guarded against; because all the accumulated products of past labor are not capital, but only that portion of them which is traded with or used for the purposes of profit. Moreover, many things may be used as capital which are in no way the accumulated products of past labor. As Senior says: “Economists are agreed that whatever gives a profit is properly termed capital.” Now, it has been shown that any economic quantity may be used as capital. Not only may many material products be used as capital which are not the products of past labor, such as the land, but personal qualities both in the form of labor and credit may be used as capital. Now, how is labor itself the accumulated product of past labor? How is personal credit the accumulated product of past labor? Also incorporeal quantities may be used as capital or for the purposes of profit, as well as any material chattels. Now, how are banking credits, bank notes, cheques, bills of exchange, etc., the accumulated product of past labor? In fact, in this great civilized country the enormously greater amount of capital is purely personal and incorporeal.

Some statisticians, indeed, endeavor to estimate the amount of capital in the country. But it is evident that such attempts are wholly futile. How can they form any estimate of the amount of capital unless they tell us what they reckon as capital? Because it is utterly impossible to estimate the amount of economic quantities which are being used as capital at any given instant. The very same quantity may be used as capital at one instant and as income at the next. And it has been shown that persons trade with, and make capital of, not only the realized profits of the past, but also the expected profits of the future.

CHAPTER V.

THE THEORY OF VALUE.

[* ] Nov. Org., Bk. II., Aph. 11.

[* ] Preliminary Remarks, p. 5.

[* ] Wealth of Nations, Bk. II., ch. i.

[† ]Cours, Considérations Générales

[‡ ] Political Economy, p. 10.

[* ] Principles of Political Economy, Bk. I., ch. iii.

[† ] Historical Sketches, Free Trade in Knowledge, p. 50.

[‡ ] Against Leptines, 484, 20.

[* ] For Phormion, 958.

[† ] The Complete English Tradesman, ch. xvii.

[‡ ]Essai Politique sur le Commerce, ch. xxiv.

[§ ]Réflexions sur le Commerce et les Finances, ch. i., art. 10.

[* ] Wealth of Nations, Bk. I., ch. x.

[† ] Principles of Political Economy, Bk. III., ch. xi. § 3.

[‡ ] Ibid., Bk. III., ch. xii. § 3.

[* ]Liber 34, ad Edict.

[* ] Digest, 50, 16, 49.

[† ] Digest, 50, 16, 23.

[‡ ] Summary of Roman Law. Digest, 18, 34, § 1, 2.

[* ] Basil., II., 2, 214.

[† ] Basil., II., 2, 21.

[‡ ] Grand Abridgment, Part I., s. v., Chattels; also Touchstone, Vol. II., p. 468.

[§ ] 12 Co. 1.

[∥ ] Ryall v. Rowles, 1 Vesey, 348.

[* ] Bk. II., Pt. I., ch. v.

[† ] Encyl. Brit., vol. xviii., art. Personal Estate.

[* ] Wealth of Nations, Bk. II., ch. ii.

[† ]Traité d’Economie Politique, p. 1.

[‡ ]Cours d’Economie Politique, Part IV., ch. v.

[§ ] Principles of Political Economy, Bk. III., ch. xii., § 1.

[* ] Lectures on Political Economy, p. 6.

[* ]De Rerum Naturâ, III., 971.

[* ] Institutes of the Law of Scotland.

[† ]L’Ordre Naturel des Sociétés Politiques, ch. xviii.

[* ] See Maynz, I., 197, on Droits Futures.

[* ] Nicomach, Eth., B. V.

[† ] An Essay on Public Credit, p. 25.

[* ]Introduction à la Philosophie Economique.

[† ] Reflections on the French Revolution.

[‡ ] Wealth of Nations, Bk. II., ch. ii.

[§ ] An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, p. 80.

[∥ ]Œuvres, Vol. II., Maudit Argent, p. 80.

[¶ ]Harmonies Economiques, Capital, p. 209.

[† ]Harmonies Economiques, Organisation Naturelle, p. 25.

[* ] Klaproth, Journal Asiatique, Vol. I., p. 256.

[† ] Dictionary of Political Economy, art. Currency, p. 666.

[* ]De l’Intérêt Sociale, p. 905, 916.

[* ] Parliamentary History of England, Vol. XXIII., p. 340.

[* ] Digest, 50, 17, 54.

[* ] Parliamentary Debates, N. S., Vol. IX., p. 868.