  Political Economy is the Science of Sales; and because it is the science of sales, its definitions and principles must cover equally all cases of sales actually occurring or possible to occur. We have seen repeatedly, that only three kinds of things are ever bought and sold, or ever will be, and these are Commodities and Services and Claims. The first two kinds have been fully elucidated already in the two preceding chapters, and it belongs to the present chapter to explain and illustrate clearly the peculiarities of the third kind of things salable. Ours is the only science that has to do with the motives and facts and economic results of all sales as such. The discussions of the present chapter will proceed orderly through the following topics:—
1. Certain things are essential in every sale of anything, and of course are common to all sales of everything, such as two persons and two desires and two estimates and two renderings; while there are certain peculiarities in the sale of things belonging to each of the three special classes of things salable; for example, in the sale of a commodity there is a rendering of a tangible object that has been a. Some sales are consummated at once, the things exchanged and the ownership in them are mutually passed over then and there, the reciprocal satisfactions are entered upon immediately, and there is at once an economical end. For example, one neighbor sells another a peck of green peas and takes in pay a peck of new potatoes, both vegetables may be cooked for dinner in the respective families the same day, and the commercial transaction is all over. But there are other exchanges, an immense class of them, different from these in this respect, that though the transaction considered as a mere case of value created and measured is then and there ended, yet considered as to the nature of that preliminary exchange which implies and requires another future exchange to consummate it, it is not then and there ultimately closed, but one (or both) of the parties then exchanging relies on the good faith of some one else to fulfil in the future a pledge expressly or impliedly made in the prior exchange. Commonly some external evidence of the pledge is created and passed at the time, but this is not essential to the validity of the pledge itself. For example, A buys 50 bushels of wheat of B, and B takes in pay for it A's note of hand at six months for $75. The note is not the pledge, but it is a legal and convenient proof of it. As a case in Value, the wheat is sold for the pledge and the pledge is the equivalent of the wheat. Each party rendered the other then and there Still a further and future exchange was contemplated by both parties at the time of making this exchange, and as a silent part of it. A takes what is now his own wheat, and B takes as an equivalent for what was his wheat a right to demand of A in six months an equivalent for the present equivalent (the pledge) for the sake of which B rendered the wheat. The note of hand is the evidence of this pledge, and it belongs absolutely to B. It is his property. He may keep it till maturity and then sell it to A for its face, or he may sell it at once to a bank for its face less the discount for six months. Discount is the difference between the face and the present price of a note of hand. The first peculiarity, then, of Credit is, that it always involves the element of future time. But it involves this secondarily, and not primarily. In other words, a present equivalent is always rendered by both parties in every commercial transaction; but the present equivalent in the case of a credit transaction is the right to demand something of somebody sometime in the future. This distinction is very important, as we shall see clearly when we come to treat of Banking, though it is generally ill-understood at present. Valuables, when they exchange at all, exchange once for all. But there is one kind of valuables, namely, claims, which, when subject to exchange, imply and require another and a future exchange, not necessarily between the parties to the first exchange, but between some two parties; and not, speaking strictly, to consummate the first exchange, because that took and gave its own satisfactory equivalents; but, as involving both time and trust, the credit sale must in the nature of things be followed by another sale of one of the three kinds. We see, accordingly, that in Credit our science of Economics b. The other and final peculiarity of Credit is, that it always involves on the part of one person a commercial confidence in some person as such. The term, Credit, is derived from the Latin Credo, I believe, and the corresponding term, Debt, from Debeo, I owe. Thus the personal element and the future element are wrapt up in the very origin of the words. There is no credit without debt, and no debt without credit. The very words imply a belief of one of the two parties in a commercial promise made by the other, and also an obligation acknowledged by this party as due to the first. There is a basis for credit in human nature. Faith in each other to a certain extent is natural to men. Whatever enlarges the intellectual foresight, and especially the moral character of men, opens a broader and surer field for Credits. Civilization, so-called, and Christianity certainly, deepens and broadens the natural trust of man in man. Despite all the instances of broken faith, and they are too many; despite the shocks and cautions that come every now and then to every man who trusts much in his fellow-men; experience itself justifies and rewards an ever-growing commercial trust. It is one of the noble things in international commerce, as we shall see, that men trust each other across the oceans, and lay millions of value upon the faith of a single firm. As the core of the Christian religion is confidence in a Person, so the very substance of credits is a natural and in general well-grounded faith in persons as such. A Credit, then, may be defined to be a Right to demand something of somebody; and a Debt to be an Obligation to pay something to somebody. What always lies, accordingly, between creditors and debtors, are Rights coupled with Obligations; and these are Property, just as much as anything is and for the same reason, since they always may be, and usually are, bought and sold by other parties as Having thus reached an ultimate and satisfactory definition of Credit, we must still pursue a little further our present object, namely, to obtain a clear conception of the nature of this great class of Valuables, by drawing two or three distinctions between Credit-Rights and some other rights very apt to be confounded with them. (1) The distinction between credit-rights and other rights is well rooted in the Latin language and in the Roman law, while the corresponding English terms are quite ambiguous and need to be used with great caution. In Latin, a true debt is called a Mutuum, because it lies between two persons, a creditor, and a debtor, and is a credit-right independent of the question of fact whether the debtor has now the thing rendered to him or not, indeed whether he has anything at all to pay with or not; on the other hand, a thing merely lent, when the very thing lent is to be returned to its owner, who has not in the meantime parted with his property to the other, is called in Latin a Commodatum. The English tongue has but the one word, Loan, for the two very distinct operations: for the loan of a book, for instance, which is to be returned after use, and which may be legally reclaimed by the owner if he chance to find it anywhere, that is, the Latin commodatum; and for the loan of money, or other such measurable thing, which is to be returned in kind only, and which may not legally be reclaimed except through some action of the borrower, since the ownership of that thing rendered has passed over to him completely, that is, the Latin mutuum. The same ambiguity of course Now, as a true debt is a claim on a person and never on a thing, the Roman Law is true to the nature of things and to the vital distinctions of our science, when it names the right to which a mutuum gives birth as a jus in personam, that is to say, a right against the person; while it names the legal obligation arising out of a commodatum as a jus in re, that is to say, a right to the very thing. So strongly is this doctrine, namely, that the security of a true debt lies against persons and not against things, intrenched in the Roman Law, that debts or credits are even termed "nomina," names, in that law, as when Ulpian says, "Nomina eorum qui sub conditione vel in diem debent et emere et vendere solemus": We are accustomed to buy and sell Debts payable on a certain day and at a certain event. The fundamental law of the present national banks of the United States explicitly recognizes this old and good distinction by requiring the banks to loan money on personal security only, that is to say, no tangible things, not even real estate, may be taken as original security for any loan. (2) Henry Dunning Macleod, who has cast fresh light on the nature of Credit, draws another distinction that lies on the threshold of the subject, namely, that between paper documents conveying titles to specific things, such as a bill of lading, for example, and those conveying credit-rights, such as a bank-note, for example. Bills of lading describe the goods, go out with the goods, are a title to the goods, and have no value separate from the goods; bank-notes have nothing to do with any specific pieces of property anywhere, are in no proper sense a title to anything whatever, but a general claim for something upon some (3) Attention should be called to a third distinction of the same general nature, as between relations very different in themselves and yet extremely liable to be confounded with each other. Let us take a common instance: a customer of a bank takes a package of valuables of any kind to his banker, such as bonds and bills payable and jewels and plate, and asks him to take care of it for the present in his vault, subject of course to a return to him or any one else to his order at any time: no property in these valuables passes over to the banker, it is not a deposit in the ordinary banking sense, the relation of debtor and creditor does not arise as between banker and depositor, the banker becomes Trustee or Bailee of the package, and is bound to exercise common vigilance in the care of it, but if it be burned or stolen extraordinarily the loss is the customer's (4) As this general distinction is vital, we shall lose nothing in the end if we make even a fourth exemplification of it. The United States Treasury receives silver dollars of its own minting from any person who chooses to place them there, and gives out in token what are called "Silver certificates" to the same amount, entitling the bearer to take out the dollars again at will, and thus the certificates being more convenient than the dollars and just as valuable become a part of the money of the country. The Treasury is bound to exercise due care in the keeping of these silver coins, and to return them to the holders of certificates on demand, just as the elevator and railroad companies are under legal obligations to show diligence in keeping and transporting the wheat of our former example; but the United States is not debtor to the holders of these certificates any more than the elevator company is debtor to the wheat shipper, and consequently there is no element of Credit in these certificates. Just so of the later gold certificate. On the other hand, the so-called greenbacks issued by the United States are also a part of the money of the country, but they are credit-money, inasmuch as they are a promise to pay to the bearer some time in the future so many dollars. The Treasury has never kept up However, circumstances easily conceivable and which were actually realized in the case of the famous Bank of Amsterdam, founded in 1609, might make the United States a debtor and the holders of the silver certificates creditors in the commercial sense of those terms. The Directors of the Bank of Amsterdam, towards the close of the second century of its beneficent existence, loaned out to the Dutch East India Company and to the City of Amsterdam large parts of the bullion, on which its certificates ("bank money") were based, unknown to the public, which felt unlimited confidence in the bank, and the result was in 1795, when the French invaded Holland and the facts became known, that bank money which had previously borne a premium of 5% fell at once to a discount of 16%, although the bullion that remained and the debts due the Bank were fully equal to redeem the certificates and were used for that purpose. So, if the United States should use, clandestinely or otherwise, the silver dollars for other purposes than to redeem the certificates on demand, the latter would undoubtedly both in law and fact be transformed from mere token-money (as now) into credit-money valid as against the United States as debtor, like the greenbacks at present. Have we now compassed our first object? Do we fully understand, from the foregoing descriptions and distinctions, 2. Credit-rights are commonly, but not always, recorded upon paper; but it is important to observe, that the paper-document is the mere evidence of the right, and not the right itself, which lies back of the paper as substance to shadow, and persists intact even were the paper lost or destroyed. These paper instruments of Credit are commonly contemplated as of two kinds, Promises to pay and Orders to pay, but there is not at bottom any radical difference between these, the Right as between two persons is not affected by this superficial difference, as we shall see, and the present enumeration of credit-forms will proceed independently of it. a. Book Accounts. A charge in a trader's books is both a current and a legal evidence that the person charged has received a certain service, and has virtually promised to render the sum charged as a return-service. Book accounts are the most common of the forms of credit; and if the person charged fails of his own accord to complete the exchange thus commenced, the law, in the absence of any proof to make the charge suspicious, collects it, if possible, and forcibly completes the exchange. The convenience of this form of credit is so great, that it is not likely ever to be disused; and as between people who deal much with each other is very useful, inasmuch as their respective book accounts are set against each other in settlement, and only balances are required to be cancelled in money. It is for the benefit of both creditors and debtors, however, even when the same parties are both creditor and debtor, that such credits should be short in time and such settlements frequent, since in book accounts there is no interest on charges however long they run, and since in this way only can the creditor realize the full gain of the exchange, and b. Promissory Notes. These differ from Book accounts in that they are always either expressly or virtually on interest, and are consequently negotiable. They are issued by individuals, corporations, and Nations. If the principal be deemed secure, that is, if there be a thorough trust on the part of the holder in the maker of the note, the time of the payment of the principal becomes a matter of comparative indifference, because the interest is compensation for delay, and is often the motive on the part of the holder for rendering that service of which the note is evidence. Indeed a long obligation, other things being equal, is commonly preferred to a short one, and bears a higher price. When a note is sold (negotiated) by the original holder it becomes payable to the purchaser, or to each subsequent purchaser in turn, and thus may run a devious round, may play a part in many commercial transactions, may be set off by the transient holder against a debt owed by him and thus cancel that, and when itself is cancelled by ultimate set-off or by any other mode of payment the last holder takes the return for the service originally rendered by the first holder. The promissory notes of individuals are frequently discounted by Banks in a manner to be presently Corporations also issue promissory notes, and as such issuers become in a sense moral persons entitled to confidence according to the character and purposes of the individual corporators and the financial means and methods of the corporation itself. It is an old saying, that "corporations have no souls"; economists as such have no need to pronounce on that proposition; the fact is enough for them, that the short notes of corporations are often discounted by bankers on the same ground as the notes of individuals are discounted; and that their long-time obligations, commonly called Bonds, are all the time bought and sold in the market like commodities. Many of the Railroad bonds, of which immense quantities are in the markets of the world, rest back also for their security upon Mortgages of the real estate of the corporations made over to Trustees to hold for the assurance of the holders of the bonds. The personal obligation of the corporators is thus reinforced, much as a common mortgage reinforces the note or bond, to secure which the mortgage is executed. Whenever all the real estate of a railroad company becomes subject to a mortgage, when there are previous partial mortgages or liens, these latter take precedence in due order of any subsequent pledges or bonds secured by what is properly It must be constantly borne in mind, that certificates of Stock in railroad and all other similar corporations are not credit-documents at all, but are mere evidences of so much proportional ownership in the corporate property. They are not interest-bearing documents at all, although they may draw interest or rather dividends, if the property be prosperous. They are somewhat like deeds to land, in which no element of credit inheres. Nations too are moral persons in the same loose though binding sense as corporations, and as such often issue promissory notes on interest, commonly called in this country Bonds, in Great Britain Funds, and in some countries Stocks. These are always pure credit. Nations give no mortgages. Yet they often borrow at a less rate of interest than the most solvent individuals or corporations can, as is seen by the fact, that British consols carry but 3%, and yet bear a premium in the present market. The term, "consols," is a popular contraction of "consolidated annuities," the Act to create which at 3%, out of a then confused mass of public debts at various rates of interest passed Parliament in 1757. The maximum of the British debt The United States also sold its bonds at 3% for a small premium in 1882. It had borrowed of its own citizens in 1862-65, both inclusive, about $2,500,000,000 on its bonds at different rates of interest and at different times of repayment: some of these bore gold interest at 6% annually, Government reserving the right to pay the principal in five years and pledging itself to pay it twenty years from date, and so these bonds were called "Five-twenties"; others bore gold interest at 5%, becoming payable at ten and demandable at forty years, and so were called "Ten-forties"; and still others bore greenback interest at 730/100%, the principal payable in greenbacks at three years, or fundable in gold sixes, at the option of the holders, and these were named "Seven-thirties." Over $90,000,000 of this last kind of bonds were subscribed for by the American people in the course of a single week in the spring of 1865. The whole of our national debt issued prior to 1865 was made payable on a day certain; the so-called "consols" of 1865 and 1867 and 1868 were payable not more than forty years from date; while all the bonds authorized from 1870 to 1882 were Consols proper, whose peculiarity is, that they never fall due so as to become a claim for the principal against the Government, but after a day fixed or on a condition fixed are payable "at the pleasure of the United States." The separate States of our Union, as sovereign in their own sphere quite as much as the national Government is sovereign in its sphere, have unlimited power to contract debts for State purposes through their regularly constituted authorities; and consequently to issue promissory notes or bonds to liquidate such debts. New York commenced Counties and cities and towns may also issue interest-bearing bonds for public improvements, which have a quasi governmental character, but only under conditions and to a maximum amount prescribed by a law of the State. c. Bank Bills. These are a form of promissory notes not on interest, and thus differ from the notes of ordinary corporations, and from the bonds of nations and states and The Bank of England keeps out in circulation on the average £25,000,000 in bank bills. It has been computed, that the average length of life of a Bank of England bill between its issue and redemption is about three days; and no bill once redeemed or received back over the counters Bank bills, as a form of paper credit not on interest, but ostensibly redeemable in coin on demand of the holder, have been issued in the United States by more parties and to a larger extent and with more recklessness as to redemption than in any other country. Omitting all reference to Colonial issues, and confining the outlook to the first century under the Constitution, let us note, that when the present national government went into operation in 1789, the "Bank of North America" in Philadelphia and the "Bank of New York" in New York and the "Bank of Massachusetts" in Boston had been opened for business, and all three were State banks issuing bills convertible into coin, though each confined its business mostly to the city in which it was located. Two years later under the auspices of Alexander Hamilton, then Secretary of the Treasury, the first "United States Bank" went into operation at Philadelphia under a charter from Congress that was to run twenty years with a capital stock of $10,000,000. At first no bills were issued by this bank of a less denomination than $10; the money was popular and was converted on demand; the Bank was prosperous, and paid dividends to stockholders never falling below 8% and frequently rising to 10% annually; as the time approached for the charter to expire, the stockholders were anxious for a Then came in a sort of mania for the creation of new State banks, under the hope that these, now there was no National Bank, might obtain the Custody and temporary use of the national funds, and especially might furnish the country with paper money in the shape of State bank bills. The number of banks went up to 246 in 1816. So many bank bills were put out, and became so much distrusted, and so many were presented for redemption, that the banks could not respond in coin, and in the fall of 1814, there was a general stoppage of specie payment in all the banks of the Country excepting those in New England. General resumption of specie payment by the banks did not take place till 1819. New York bank bills went down to 90%, those of Philadelphia to 82%, those of Baltimore to 80%, and those of Pittsburg to 75%. Under these circumstances the Second Bank of the United States went into operation in January, 1817, also with a charter to run twenty years, with a capital stock of $35,000,000, of which the national Government subscribed one-fifth. The new Bank helped indeed the State banks to resume specie payments, as was a part of the purpose, but it pushed its own bills into circulation with such eagerness, that it is thought $100,000,000 of them were in the hands of the people, before the first year was out. In this way the Bank fell into difficulties. Its bills were distrusted. Coin came to bear a premium over them of 10%. President Jackson began his famous contest with the Bank seven The next year the State banks increased in number to 675, and continued to increase till 1862, when there were over 1500 of them, and when the issue of the "Greenbacks" by the national Government interfered with what had been their exclusive issuing of the paper money after 1837. In 1857, before the commercial panic of that year, the aggregate of their bills stood at $214,000,000, the largest it ever reached. These bills were nominally convertible into coin at the will of the holders, but they were never actually so convertible for any great length of time. The ratio of their volume to the specie reserved to redeem it was always a very high ratio. For instance, the average for the whole country in January, 1863, was 4:1; in Rhode Island 12:1; and in Vermont 28:1. Such a paper money can be called convertible only by a stretch of courtesy. It was wisely determined by the People to abandon this loose form of paper money, and in 1863 went into operation the present national banking system, under which originally $300,000,000 of bank bills were authorized to be issued in the aggregate, but this limit was extended in 1870 to $354,000,000, and the Act of 1875 removed all restrictions on the total amount, while there have always been restrictions on the amount that can be issued by any one bank in the system. By the law of 1882, national banks may withdraw their bills by depositing lawful money in the Treasury to take them up, and then take back the proportionate amount of the bonds held for the security of the bills. There were outstanding Dec. 26, 1883, $341,320,256 of these national bank bills, but their volume declined under the law of 1882 to $151,702,809 on Oct. 4, 1888. These bills were from the first redeemable in greenbacks, d. Bank Deposits. We are studying in order the forms of commercial Credits, and we have now come to that one which is central in the operations of Banking, and accordingly this is the place for us to understand clearly what a Bank is, who a Banker is, and what are the motives actuating at once the Banker and his Customers. A Bank is an institution for the Creation, Management, and Extinction of Credits. Money of any kind plays a very subordinate part in the general operations of banks, which live and move and have their being in the sphere of pure Credits. Bankers are buyers and sellers of credits. As merchants are dealers in commodities, so bankers are dealers in credits, buying (1) some credits with other credits, (2) some credits with money, and (3) money also with credits. Before unfolding these three operations of bankers in their motives and profits, a glance backward to the origin of banks would be a help to us in grasping their nature and benefits. The word "bank" meant originally a mass or pile or ridge of earth, as we still say, a sand-bank, and the banks of a river. When first applied to commercial transactions, the word had a different meaning from what it has at present, although the idea of credit has inhered in it from the first: in 1171, the Republic of Venice, being at war, ordered a forced loan from its citizens, and promised to pay interest on it at 5%; and certificates were issued for the sums paid in, and public commissioners were appointed to manage the payment of the interest and the transfers of the certificates, which were made negotiable. The Italian word applied to such a public loan is monte, but as the The Bank of England also was in its origin in 1694 an incorporation of those persons willing to subscribe to a public loan in time of stress, as "The Governer and Company of the Bank of England." The subscribers to a loan of £1,200,000 became an association, or bank, on the condition that the Government should pay interest to the lenders at 8% annually, and also £4000 a year in addition for the management of the bank, that is, of this debt of £1,200,000 which was the sole capital stock of the new Company, which was authorized to issue an equivalent amount of bank bills to circulate as money. The capital stock was of no use, so far as redeeming these bills was concerned, the stockholders must furnish other money for that purpose besides what they have loaned to the State, but the ownership of so much of the public debt divided among the shareholders, made the Bank respectable, and tended to give public credit to its bills, which at first were paid promptly in coin on demand, and thus the Bank, by increasing the volume of money and by showing confidence in the stability of the State, strengthened the revolutionary position of William and Mary, and consequently the Whigs were the friends and the Jacobites the enemies of the Bank. This function of issuing bills or promissory The two Banks of the United States in succession, as they were more or less modelled after the Bank of England, gave the same prominence to the function of issuing paper money, under the belief that government bonds afford the best security for the redemption of bank bills, an idea that underlies our present system of National Banks also; and, moreover, those two great banks began to teach the people of the United States something of the mysteries of Deposit-banking, the point that we have now in hand. One-fifth of the capital stock of the first Bank, $2,000,000 out of $10,000,000, was subscribed by the national Government; and besides, the proceeds of the national taxes as they were paid in were passed over to the Bank as Deposits, that is to say, the Bank bought this money of the Government, paying for it with a Credit; and then properly used the money as its own in paying expenses and in discounting paper. Bank deposits do not belong to the depositors, but to the bank; which has thus bought money with credit; and when Andrew Jackson suddenly removed from the second Bank of the United States the national moneys deposited there, and placed them "in the custody," as he expressed it, of certain selected State banks, these amounted at the moment to $10,000,000, and the discount line resting in part on these deposits was at the time over $60,000,000, he removed them under a strong misapprehension of the nature of such Under our present national banking system the Government is still a depositor of public moneys in some of the banks designated as "depositaries." At the close of the fiscal year, 1888, there were 290 of such depositary national banks, and the Treasurer held United States bonds of the face value of $56,128,000 and the market value of $68,668,182 in trust for these banks to secure public moneys lodged with them. This system of national deposit with the banks began in 1864. The total held by the banks June 30, 1888, was $58,712,511, an increase during the year of $35,395,633. But our concern is especially with the Bank Deposits of individuals, with their motives in making these, and with the motives and the methods of the bankers in handling them. In order to draw the confidence of the people in its locality, a bank must not only be, but also seem to be, well-to-do and prosperous. Most bankers find it to their account to become known owners of public stocks; and in many cases, as in the present national banks of this country, are required by law to own such stocks, and this gives them a kind of credit and public standing scarcely to be reached by the ownership of ordinary property. Thus the Bank of England held at the outset £1,200,000, and now holds £15,000,000 of securities, mostly of the public debt of England. As merchants begin by laying in stocks of goods of the kinds they purpose to deal in and offering them for sale, so bankers begin by bringing together money and credits of their own in order to attract to themselves in the way of buying and selling the money and credits of other people. In order to deal successfully in credits the banker must have credit, that is, he must have the reputation of having property of his own, and of being an honest and careful manager of his own affairs and of the affairs of others so far as they are intrusted to him. Now, as was said a little while ago, perhaps the central function in banking is for the banker to receive his customer's money and also his credits falling due, and to render to him in return for these a credit, that is, a right to demand from himself an equal sum at a future time or times. The evidence of this right is entered on the banker's books, and usually too on the customer's passbook, and thus becomes what is called a Deposit. The ownership of the money and of the credits deposited passes over completely from the customer to the banker. It is a complete case of buying and selling to the mutual profit of the parties. The banker has the right to do just what he pleases with his deposits, and the customer has a right to draw cheques on his credit as and when he pleases; only the banker's entry of the transaction on his books is a virtual and a legal promise to pay that amount to his customer, and therefore he must be ready to respond to his customer's call, whenever the latter demands, not his own money, but so much of his banker's money. A deposit, accordingly, is not the very thing deposited, but a credit. It is the banker's promise and the depositor's property. It is in this way that a banker buys ready money with a credit. The motive, then, that leads the depositor to intrust his money to the banker is the desire, not to have that specific money kept safely for him, for he lost possession of it absolutely when it passed the counter, he sold it and took his pay in something else, but rather to have the unquestioned right to call on the banker for such sums (not to exceed the deposit in the aggregate) and at such times as may suit his own convenience. He has such confidence in the integrity and solvency of the banker, finds it so practically convenient to have dealings with him, and comes to have certain minor privileges at the bank in other relations over non-depositors, that he quite prefers a credit on the banker to the possession of the money itself. The corresponding motive of the banker to receive his customer's funds on these terms is that he finds by experience (his own and others'), that he can safely use a large portion of these moneys deposited in other operations in credit profitable to himself, and at the same time be practically sure of meeting all his customer's calls for money as they are made. Every good banker finds out, that many of his customers wish always to leave a balance in his hands; that while some of them are constantly drawing cheques on him for cash, others of them are as constantly depositing with him in cash; and that consequently he can properly and safely use a large part of the money he has purchased with his credit to purchase other credits with. Deposit-banking, therefore, is not only convenient and profitable for the depositor, but also excellent and profitable for the banker. Besides these two parties benefited, there is a gain, too, for the community at large in deposit-banking; inasmuch as a new capital as such has been thereby created, a series of new values, which would not otherwise have existed at all. Were there no deposit-bank in that locality, every man now It may easily be objected at this point, that it is entirely possible that any banker might be called upon to pay off all his deposit-liabilities at once in money, which, if it happened, would break him of course; so it is abstractly possible that all the lives insured in a Life Insurance Company might terminate in one day, in which case no Company in the world could meet its obligations; and so it is abstractly possible that all the houses insured in a Fire Insurance Company might be burned up in a single night, which, if it happened, would cause the collapse of the soundest company; but in all these cases of possibility there is a certainty that the possibility will not become a fact. Ex nihilo nihil fit. A supposition practically impossible to become a fact can yield no logical inference whatever. The Greek language has a special grammatical form for a hypothesis impossible to be realized in fact: would that the English had also such a form of speech! It would save us a mess of bad reasoning. If, however, any banker may have misjudged for his locality at any time the proper ratio of reserves kept Surprisingly large is the amount of bank deposits in all the leading commercial nations of the world. The average public and private deposits of the Bank of England, on which no current interest is paid by the Bank, amounts to about £40,000,000 all the time. The ten joint-stock banks of London carry about £80,000,000 in private deposits, of which those to remain some time draw an interest, but those lodged on current accounts and on call draw none. Scotland has carried deposit-banking further and to greater advantage than any other country in the world. There are now no private banks in Scotland, but the ten joint-stock banks with their numerous branches scattered to every village in the land hold constantly about £70,000,000 as individual deposits, on which current interest is allowed, and so the habit of keeping one's account with a banker has become universal with the people. No one thinks of keeping money to any amount in his house or about his person, and consequently house-breaking and highway robbery have almost ceased. Bankers even attend all the great fairs in the country to receive deposits and to pay off cheques. Credit in this form and in another form soon to be described treads its utmost verge in Scotland. Although in the United States the custom of keeping deposits with bankers and drawing cheques against them has not gone nearly so far as in Scotland, and not nearly so far as it will go in the immediate future, yet the aggregate of individual deposits in the national banks alone, Oct. 4, 1888, was $1,350,320,861, an increase in just seven years of 26%. e. Bank Discounts. The credits that are discounted by bankers may be either the promissory notes of individuals and corporations already characterized, or the Bills of Manufacturers and wholesale merchants usually sell their goods on time, as it is called, say three or six months. Debts are thus created, or to say the same thing in other words, Credits are thus given. The manufacturer or wholesaler is creditor and the jobber or retailer is debtor. But a debt is property; and the creditor in this case wishes to avail himself of his property at once for further production; so he either takes a Promissory Note from his debtor, or draws a Bill of Exchange upon him, and this piece of property is ready for sale. Neither piece mentions interest expressly, but the face sum virtually covers it as contemplating discount. Banks have been organized for the express purpose of buying for their own profit and for the convenience of business such pieces of property; some banker, accordingly, buys this particular piece, that is to say, this creditor passes over to this banker the commercial right to demand payment from this debtor at the end of three months, and receives in return from the banker either money direct or so much of the banker's credit, that is, a deposit in favor of the creditor on the banker's books. The following is a common form of a bankable note:—
When Swan has put his name on the back of this note, that is in bank phrase, has indorsed it, in token that he thereby at once sells and guarantees it to the bank, it is then discounted on the strength of the two names, Allen and Swan. As Allen technically takes the advance from the bank for his own benefit, he is technically expected to take up the note when it matures, and if he do not, the bank falls back on Swan, who is equally bound with Allen to see that it is paid at the proper time. Two names are nearly always, not always, requisite to a note acceptable for discount at a bank; and more names merely strengthen the note, since it is discounted on the combined validity of all the names upon it. One obvious advantage of discount is, that it tends to make all capital active and thus productive. It enables the banks to sell their credit and make a gain, to use a part of their money deposits to buy mercantile paper with, and so get a bank interest on them; it enables dealers in commodities The discount line of 3140 national banks reporting Oct. 4, 1888, was $1,674,886,285.29. It is thus through the purchase of discountable notes for money, that banks derive their partial character as money-lenders. Also, such reserve sums as they do not wish to invest in negotiable paper, on account of the time involved before such paper matures, banks frequently loan on call to those customers who have good collateral securities to pledge for the repayment of such loans. The terms of such a contract give the bank full authority to sell such collateral "at the Brokers' Board or at public or private sale, or otherwise at said bank's option, on the non-performance of this promise, and without notice." So far forth banks become direct money-lenders. It ought also to be added, that promissory notes with a single name (or more) are often discounted by banks partly on the strength of collateral securities deposited to fortify the names upon the notes. f. Bills of Exchange. A Bill of Exchange is a written instrument designed to secure the payment of a distant
In the case of this bill, which may serve as a sample of thousands, Storrs is the drawer, who is creditor in relation to Tripp, and Tripp is drawee, but Storrs is debtor in relation to Kent, who is the payee. A bill of exchange is the sale of a debt, in such a way that two debts are so far forth set off against each other, and both transactions are closed without sending any money at all. Tripp owes Storrs, and Storrs owes Kent, and so Storrs pays Kent by an order on Tripp. As this is a bill at four months, Kent will doubtless send it to Tripp for his acceptance, as it is called, that is, his acknowledgment that he owes Storrs to that amount, and that he will pay the sum to the holder of the bill when it becomes due. An acceptance is written on the face of a bill, and an indorsement upon the back of the note: the initials are sufficient for the name of Thus a bill of exchange is the formal sale of a debt, in order to liquidate thereby another debt, when the parties to the transaction live in different and distant places. Storrs does business in Pittsfield, and Tripp in Boston, and it is a matter of comparative indifference where Kent lives, unless there is trouble at the time of collection, for he will perhaps negotiate this bill again, that is, make use of it to pay some debt that he himself owes. It is not often that the same person, as Tripp, happens to owe another person in a distant town, as Storrs, the same amount as Storrs owes another person somewhere, as Kent; but by two bills of exchange, one drawn by each creditor on his own debtor, and then each set off against the other, through the simple and beautiful expedient of bank balances, substantially the same advantages are reached as if it always happened so. Many bills of exchange are drawn at sight, as it is called, in which case the payee presents it for payment to the drawee, there is no acceptance and no discount, and a bill of this kind becomes the same as a cheque. Time bills, however, are usually discounted: the payee indorses his claim over to a fourth party by name, or, by what is called an indorsement in blank, that is, by merely writing his own name on the back of the bill, makes it payable to bearer: when banks buy these bills for discount, it is on the joint credit of acceptor and drawer and payee, and in that order of validity and precedence: a promissory note may be protested by a bank without notice to the maker, but a bill of exchange cannot be without notice to the drawer: a promissory note has two parties to it, a debtor and a creditor; while a bill of exchange has three parties to it, two creditors and a debtor. Inland bills of exchange, both time bills and sight bills, Bankers sometimes change what they call "exchange" for settling debts between distant places in the same country; in some cases there may be a sound reason for this, in other cases there is none, but in all cases it adds a little to the profits of the banks for handling the bills of exchange; the principle of charging an "exchange" is this,—when one place as Chicago draws more bills on another place as New York than suffice to cancel the bills drawn at that time by New York on Chicago, the point at which the larger indebtedness lies is the point for sending drafts to which banks naturally charge a percentage; perhaps the idea, which is actually realized in foreign exchange, that money may have to be sent to liquidate such a balance, may have brought in the custom of charging "exchange" in such cases; and there are instances aside from such a supposed balance, in which there may be an extra cost of collection in some form to the bank, that may justify an "exchange" charge; but there is another principle counterworking and often neutralizing entirely this alleged doctrine of a "balance" of debt as between two distant places, namely, that the chief settling place and commercial Very similar to these inland bills in their nature and course and usefulness are Foreign Bills of Exchange, which, as a vastly important topic, especially in its relations with Foreign Trade, we must now study minutely and completely. Commercial relations between two countries, let us say, for instance, France and England, always give rise to a mutual indebtedness of their merchants; if these reciprocal debts were all to be paid by the actual sending of money to and from, there would have to be a constant and expensive and more or less hazardous outward and inward flow of the precious metals in respect to each country; all which necessity is neatly obviated by the use of reciprocal bills of exchange, and coin is only transmitted to settle the balances on whichever side there may happen an excess of debt at the time. French dealers are always sending goods to England, and English dealers goods to France; and for what they send to England the French merchants draw bills of exchange on the parties to whom the goods are consigned, and the English merchants draw similar bills on their debtors in France; then these bills are bought up by bankers or brokers in either country, and virtually exposed again for sale through new bills drawn against them to any parties who may have debts to pay in the other country. Thus bills on London, in other words, on English debtors, are always for sale in France; and bills on France, that is, on French debtors, are always for sale in London; the reciprocal debtors of the two countries, therefore, instead of sending coin to cancel their debts, buy and transmit these bills. Let us take a sample instance. Pierre & Co. of Paris send a cargo of wine worth £1000 in English money to John Barclay of London. Barclay thus becomes indebted to the Paris firm to that amount, and Pierre & Co. draw at once, so soon as the cargo is despatched, a bill in francs to the equivalent of £1000. If they themselves have no debt to pay in London, they will sell this bill immediately to a Paris banker or broker (if the exchange be then at par) for its full face minus interest for the time it has to run, say two months; this broker is now ready to sell this bill again, or what is the same, his own bill drawn on the strength of it, to anybody in Paris who may have a debt to pay in London; and the party in London who receives it in liquidation of a French debt to him, presents it at maturity to John Barclay for payment. Thus one bill of exchange serves the ends of two creditors and one debtor: Pierre & Co. get their pay for the wine, the London party gets his pay for goods, and Barclay pays his debt, by means of it. A bill drawn in London for a cargo of hardware sent to Paris is similarly negotiated with a London broker or banker, and finds its way similarly to France in payment of some English debt owed there, and ends its course when it reaches the French firm on which it was originally drawn. We are now in position to understand clearly what is meant by the par of Exchange in its commercial (not coinage) import. The merchants in Paris, who have debts due to them from London, draw bills of exchange for the amount of these debts; and, through the agency of middlemen, go into the market to sell these bills to other Paris dealers who have debts to pay in London. If the former class have a larger amount to sell than the latter have occasion to buy, in other words, if there be a larger amount of debts due from London to Paris than from Paris to London, The par of Exchange, accordingly, between two countries, depends on the substantial equality of their commercial debts. In the above example, if the exchange as against London in favor of Paris continue long, and especially if the premium of 1% on bills drawn in London on Paris be sufficient to cover the expense of the transmission of specie from London to Paris, gold will begin to flow from London to Paris, because the debtors there may find it cheaper for themselves to buy and send gold than to pay the high premium on bills; and thus the equilibrium of payments and the commercial par may be restored. Also, this par tends to restore itself, without any sending of specie, in this other perfectly natural and effectual way: if bills on Paris are at a premium in London, for the same reason that they are so will bills on London be at a discount in Paris; therefore, there will be a direct encouragement to the extent of the premium for exportation of goods from England to France, because on every cargo thus sent bills can be drawn and sold in London for a premium; while the more bills on Paris thus offered in London, the more the premium disappears of course, and the par will be restored so soon as the bills on Paris substantially equal the bills on London offered in Paris; and at the same time, so long as the discount on London bills continues in Paris, there is a direct discouragement to further exportations from France to England, because the bills drawn in virtue Here is another instance of a magnificently comprehensive law, by which Nature vindicates her right to reign in the domain of Exchange. It is through this natural and beneficent law of automatic compensations, stimulating exportations on the one side and slackening them on the other, that most of the casual disturbances of the commercial par as between two countries are easily and perfectly rectified. While this great law is in full possession of our minds, let us note in passing how artificial restrictions by one country on the importation of goods from another, commonly called "Protectionism," affects this commercial par as between those two countries. Besides stopping absolutely a mass of otherwise profitable exportations and importations for both countries, it makes less profitable to the country imposing the restrictions whatever foreign trade does take place between them in spite of the restrictions. Suppose England, as is the fact, opens her ports freely to the commodities of France, while France puts restrictions in the shape of heavy taxes upon importations from England; more French goods are likely under these circumstances to seek English ports than English goods to seek French ports, because they are more welcome; consequently, more bills of exchange drawn on London will naturally be offered in Paris than bills on Paris in London, and will so far forth be sold at a discount, while the London bills drawn on Paris will be sold at a premium; in other words, the comparatively few goods that do get out of a "protected" country, realize less to their owners than the natural value, because the bills drawn on them are extremely apt to be sold below par! With this course If, however, notwithstanding the beautiful action of this great law of commerce, the disturbance in the commercial par as between two countries continues obstinate, it indicates one of several things as true of the country, whose bills of exchange drawn on another persist in a considerable discount; (1) it has come to be a pretty steady debtor country as towards the other, by sending thither its national or State or corporation bonds, whose interest and ultimately principal also must sooner or later be remitted in exports extra to the exports needed to pay for the current imports of goods; (2) it has either naturally or by persistence in a bad public policy little or no shipping of its own, so that freights both ways have to be paid to foreigners in the form of exported goods extra to those exported to pay for those imported in transient trade, which of course increases the number and face of the bills drawn in the luckless country on the lucky country or countries; (3) it has made the vast and fatal mistake of excluding by legal barriers of taxes put on for that purpose the goods of foreigners, whose only motive in coming is to take off corresponding goods of the deluded country's own to the profit of both, and so these last-mentioned goods must seek a foreign market (if at all) at reduced rates, their natural market having been Very little, if anything, can be inferred as to the prosperity of a country or even as to the real condition of its "exchanges" in this technical sense of the term, by the transient movements of gold to and from the commercial countries, in their present complex relations as gold-producing and non-gold-producing countries and as debt-settling and non-debt-settling centres. Gold moves back and forth in obedience to several other impulses than to settle the balances in an international trade of Commodities. Gold-producing countries of course export gold just as they would any other native product. If for any reason gold becomes relatively more abundant in one country than in other commercial countries around it, general prices will rise in that country in consequence; which means, that gold is then and there the cheapest article that the people of that country can export to pay their commercial debts with. Also, the imports which a nation pays for in gold, or in bills of exchange bought above par, are often bought with a high profit. Creditor nations, nations that have managed to make themselves settling-places for the world's commercial debts, and nations that welcome imports without impediment from every quarter of the earth (and England may serve as a sample for all these three), will largely pay for imports in gold or in bills bearing a premium. It is a thousand pities, that technical terms which are This counterworking principle, already illustrated as to inland exchange in the case of New York, is best seen internationally in connection with London, which is the settling-place of the world's commerce. When the Romans dredged the Thames and made "the pool" just below London Bridge, they took the first steps towards making that town a commercial centre; since a market for products is products in market, the busy exchange of commodities there has quickened in every age the accumulation of capital and the increase of population; previous to the Dock Laborers' Strike in 1889, about 100 vessels entered the port of London every day, which received about one-half of the total customs revenue of the United Kingdom, and sent out about one-fourth of its exports; the business of out-of-the-way and semi-civilized countries has somehow (and it would not be hard to tell why) centered in London, as well as the business of originally British Colonies everywhere and of all other commercial countries; accordingly, debtors and creditors abound there, bills of exchange concentre there, and debts due from everywhere Another thing must be borne in mind in comparing the merchandise accounts of any country, namely, that whenever the "exchange" is sufficient to cover the cost and risk of the transmission of gold, gold itself is likely to go freely from the country, in which bills drawn on exports are at a premium, or to use for once the old hazardous phrase, "against" which the exchanges have turned, and bills will be drawn on that gold, as upon common merchandise, and sold of course for the sake of the premium; or, if a decidedly higher rate of discount prevail in a neighboring country, gold will naturally go thither from the lower-rate lands, because lenders in the latter will desire to realize the higher rate of current interest on money, and bills will be drawn on this gold as well, which will tend to lower the premium on bills there; unless, then, the premium and the difference in interest abroad will justify the speculation, the gold will not stir; although, if the difference in interest abroad were very considerable and promised to continue for some time, the bills on the gold might sell at a discount and still leave a profit to the senders; but the home bankers can always stop a drain of gold of this kind by raising their own rates of discount. This casual mention of bankers leads on to the weighty point, that the whole business of foreign exchange is falling more and more into the hands of the bankers, because bills drawn by and upon well-known bankers naturally have a better credit than ordinary commercial bills, the names upon which are less widely and favorably known. Accordingly, persons sending cargoes of cotton, London is so prominent as the settling-place of the world's transactions by means of bills drawn on and by London bankers, partly on account of the commercial predominance of England, partly from excellent banking customs there, and mainly because an immense mass of cheap loanable capital exists there, which even foreigners may borrow at London rates, provided only that they can get credit there, that is, leave to draw on a London banker, to whom of course remittances must be made as fast as he accepts their bills. Besides, the Bank of England, as the principal bank in Great Britain, and as closely connected with the Government, acts as a bank of support to the public and private Credit of that country. It does a regular business as a bank of deposits and discounts, but it means to keep its rate of discount somewhat above the rate demanded by the other bankers in London, so as not to come into competition with them much in their ordinary business, and be able to act as a bank of support to them and all others in times of pressure. All banks have about so much credit to sell, and no more; most banks sell in ordinary times about all the credit they have, because their profits depend on that; but if the Bank of England did this, it would become useless in periods of panic. In Now, as gold can be drawn out of the Bank of England by the cheques of depositors as well as by the presentation of its own notes for redemption, the Rate of Discount becomes a matter of prime importance in the management of the Bank. The whole line of deposits is a line of liabilities to pay out gold, if the depositors demand it; and, as deposits come largely through discounts, whenever there is a strong tendency to draw out gold so as to weaken the reserves of the Bank, the directors have an effectual remedy by raising the rate of discount. The higher the price the Bank charges for its credit, the fewer, so far forth, will be its customers, and the smaller its line of deposits, and the less likely a continuous drain of gold from its vaults. The Bank of England is managed throughout by so simple a manner as the turning back and forth of this magic screw of Discount. Besides the use of the term "Par of Exchange" in the broad commercial sense in which we have now been examining it, as indicating the substantial equality of international debts as between two countries by the current prices of bills of exchange, there is another and subordinate sense in which the phrase is employed, namely, as denoting the relative value of the coins of one nation in the coins of another. Thus, our present gold dollar contains 23.22 grains of pure gold; the English pound sterling contains 113.001 grains; consequently, there are $4.8665 to the English pound; and this is the "par of exchange" (in the secondary sense) between the United States and Great Britain. Between the United States and France the "par" is $1 to 5.18 francs, since the franc is 19.29 of our cents. g. Bank Cheques. In substance indeed and even in form, Cheques are Bills of Exchange, but the two have such differing legal incidents, and run so different a course towards extinguishment, that for our purposes in this treatise they should be put under a separate discussion. Bills of exchange are expressly drawn "at sight" or for a day certain, when they become payable by the drawee: cheques say nothing about "sight" or any future date, though they are really drawn at sight, and are payable to bearer on demand: they must, therefore, be presented for payment within the shortest reasonable time (all things considered), in order that the holder may legally claim against the drawer should the banker fail meantime: a cheque is held as the payment of a debt until it be dishonored on presentation: the banker bears the risk of the forgery of the drawer's name, unless his mistake be made easier by the drawer's carelessness in drawing: a cheque is not payable after the drawer's death. The parties to cheques are the Drawer, who is a depositor with some banker; that banker thus becomes the Drawee; and the person named in the cheque is the Payee, who can indorse his own right over to another person by name or in blank to bearer. When a cheque is drawn in this way by one banker upon another, it is usually called in this country a Draft. Formerly in England, and in other countries as well, each considerable dealer kept his own strong box, and when he had occasion to make payments, told down the solid cash upon his own counter. Afterwards, the goldsmiths of London solicited the honor of keeping in their vaults the spare cash of the merchants, and these in their payments among each other came to employ orders or In the larger cities, by an arrangement called the "Clearing-house," substantially the same benefits are secured as if all the depositors of the city kept their cash at the same bank; inasmuch as all the cheques drawn on each of the different banks, and passing in the course of the business day into other banks, are assorted before evening at all the banks, and adjusted the next morning through the clearing-house, and the credits and debits of each bank are set off as far as possible against each other, leaving only small balances to be settled in money. The London Bankers' Clearing-house was established in 1775; in 1864, the Bank of England was admitted to it; and since then, the Clearing-house itself, and all the bankers and firms using it, keep accounts with the Bank of England, and the balances, formerly settled by money, are now adjusted by simple transfers of account on the The total business of the 23 clearing-houses of the United States in 1880 was over $50,000,000,000; the New York Clearing-house did 65% of that business for that year; and the average daily clearings there for the fiscal year 1879 were $76,167,983. We will now describe mainly from personal observation the New York Clearing-house, which was established in 1853, premising that the principle is the same, though the details may be different, in all other clearing-houses wherever located. Business men in New York, as elsewhere, usually pass in to their bankers as a deposit all the cheques and current credits received in the course of a business day. It is the custom for everybody to draw his own cheque on his banker to make payments with, and to pass in to his banker the cheques he receives from others. Say there are sixty clearing-banks in New York City. Each of these banks sorts out after business hours every day all the cheques it has received that day drawn on each of the other banks into separate parcels ready for the clearing the Before ten o'clock in the morning sixty messengers, each having fifty-nine parcels to deliver, appear at the clearing-house, each reporting to the manager at once for record the amount of "exchange" he has brought, which is entered of course as credit to his bank; and then all take their positions in order in front of the sixty desks, which occupy the floor of the house, behind which sit sixty clerks, each representing one of the banks. Each messenger stands opposite the desk of his own bank, with his fifty-nine parcels already arranged in the exact order of the bank-desks before him. Of course no messenger has anything to deliver to the clerk of his own bank. Each clerk inside his desk has a sheet of paper containing the names of all the other banks arranged in the same order as the desks, with the amounts carried out upon it which his messenger has just brought to each. All these are entered in his credit column. Each messenger carries also a slip of paper ready to be delivered with each parcel to each clerk, on which is entered the amount of the cheques he now brings to each bank. Of course the amount delivered to each bank is debit to that bank, just as the amount brought by each is credit to that bank. A signal from the manager, who stands on a raised platform at one end of the room with his two or more clerks before him, and each messenger steps forward to the next desk in front of him, delivers his parcel and also the slip that goes with it, which latter the clerk signs with his initials and hands back to the messenger as his voucher for the delivery; and then each messenger advances to the All the clerks report to the manager the amounts received by each, and as his proof-sheets hold already the amounts brought, if the two columns add up alike, no mistake has been made, and the general clearing is over. Thirty-five minutes are allowed the clerks to enter, report, and prove their work. Fines are imposed for errors discovered after that time. The Clearing-house gives tickets of debit or credit to all the banks, and the debit ones must pay in lawful money before half-past one, and the credit ones will get their due from the manager immediately after. The largest sum ever cleared in New York in one day was $206,034,920.51 on Nov. 17, 1868, and the smallest $8,357,394.82 on Oct. 30 of the panic year, 1857. h. Crossed Cheques. About twenty years ago there was instituted in London what is called the Cheque-Bank, which is designed to bring the benefits of the credit-system in the form of cheques more easily to all classes of the people. The cheques issued by this institution are so different in character and in course from common bank-cheques, and are in some respects so new in principle, that we must give to them a separate heading and a full explanation. The Cheque-Bank is a stock company in London under Cheque-crossing is of two kinds, special and general; when any particular banker's name is written between two transverse lines, in which form alone crossed cheques differ from ordinary ones, that makes that cheque payable by him only; when the words "and Company" or "and Co." are written between these lines, that makes the cheque payable only through some banker, that is, the cheque is crossed generally; and when two parallel transverse lines simply are drawn across the face of a cheque, with or without the words "not negotiable," that cheque is legally deemed to be crossed and crossed generally. When a cheque is uncrossed, the lawful holder may cross it either The Cheque-Bank publicly guarantees the payment of all the cheques in all its cheque-books to the maximum amount for which each cheque may be drawn; and it may well do this, for no cheque-book is sold except for money, and the money is ready in the hands of some banker to pay every cheque when presented; any banker or other person will give cash for them, or take them in payment for goods or other services, or if they are drawn for a sum larger than the debt due will give back the charge to the bearer; and if the cheques be actually drawn for less than the maximum perforated on them, the Bank itself will give additional cheques for the balance. The ultimate payment, then, of these cheques is as sure as anything in the future can be; the buyer of a cheque-book knows, that the money is already in deposit to pay them, and that the government-stamps on them have already been paid for, while the receiver of an ordinary cheque cannot know beforehand that the drawer has money in deposit against it. Moreover, the holder of an ordinary cheque must use due diligence in presenting it for payment as soon as possible, or delay it at his own risk, while the holder of these has no motive whatever for haste,—time does not deteriorate them. All money received for cheque-books is left in the hands of the bankers who sell them, or transferred to other bankers in order to meet the cheques presented elsewhere, and accordingly an interest is paid by the bankers to the Cheque-Bank, on the balance of deposits thus held, and this interest, together with the one-fifth of a Since these cheques are crossed generally (not specially) with the words "and Co.," that is to say, since they can ultimately be taken up only by some banker, they have a more generalized character than common bank-cheques, they are safer to carry and keep than so much money would be, there is no difficulty in shopping or paying wages by means of them, they are very much the same in their nature as bank bills are, and might easily in certain circumstances become money just as bank bills in some circumstances are money. Each of the associated banks keeps an account of course with the Cheque-Bank, but is not obliged to keep a separate account with the purchasers of cheque-books, which is a great relief to the banks. In this way the Cheque-Bank extends the use of cheques in the lieu of money to a great multitude of small transactions, and relieves the other banks from what would otherwise be a great deal of troublesome accounting and collection. The ingenuity and the utility of this comparatively new form of Credit cannot be questioned for one moment; the promoters of the Bank intended that their cheques should be received by the people as a substitute for cash and for Post Office orders, and such has been the effect, many railway and other companies having long ago agreed to receive them as cash, and the people generally regard them as cheaper and more convenient than postal orders and even for many purposes than cash. i. Cash Credits. As the Cheque-Bank in the sense as just explained has been thus far in the history of Credit peculiar to England, so we have now to look to Scotland This second peculiarity, which has proved extremely beneficial to Scotland, is for substance this, to create a drawing account in favor of a deserving customer, who has made as yet no deposits in the bank, but who draws out money and pays it in from time to time just like an ordinary depositor, and instead of receiving interest on the daily balance to his credit (old Scotch fashion), he pays interest on the daily balance to his debit. These accounts are called Cash Credits. They are not intended to be dead loans, but quick accounts; and they are not granted except to persons in business, or to those who are frequently drawing out and paying in money. The individual who has obtained such a credit is enabled to draw the whole sum, or any part of it, when he pleases, replacing it, or portions of it, David Hume in his Essay of the Balance of Trade, published in 1752, makes this nice point in favor of Cash Credits: "If a man borrows £5000 from a private hand, besides that it is not always to be found when required, he pays interest for it whether he be using it or not. On the other hand, his Cash Credit costs him nothing, except during the moment it is of service to him; and this circumstance is of equal advantage as if he had borrowed money at a much lower rate of interest." The Cash Credit is always for a limited sum, seldom under £100, given upon the customer's own security, and that in addition of two or three individuals approved by the bank, who become sureties for its payment. Of course, only those banks can furnish such credits which possess a surplus of credit more than they can sell in the ordinary way, and these credits are safe and useful only in small communities, in which men are well known to each other. Some friends of the parties thus accommodated always guarantee the bank against loss; but the losses have proved to be insignificant, the gains to be marvellous; and this form of credit issued on the basis of no previous transaction in the way of deposits illustrates better than any other the radical principle, that Credit is Capital. The Report of a Committee of the House of Lords made in 1826 on Scotch and Irish banking describes very clearly and fully the system of Cash Credits: "There is also one part of their system, which is stated by all the witnesses to have had the best effects upon the people of Scotland, and particularly upon the middling and poorer classes of society, in producing and encouraging habits of frugality and industry. The practice referred to is that of Cash Credits. Any person who applies to a bank for a Cash Credit is called There are only ten Banks doing business in Scotland, and the Bank of Scotland, the oldest of these, had 86 branches in 1875, and the average number of branches of the other nine is very nearly the same with that. j. Circular Credits. These are a device of bankers to enable travellers and merchants of one country to obtain credit and cash in foreign countries in sums to suit their There is one kind of these foreign credits that deserves separate mention, since it has come of late years into quite general use, namely, "Circular Notes," as they are called. These are sight bills of exchange, each drawn for a relatively small amount, say £10, and multiplied in number to the requirements of the buyer, and drawn by one domestic banking-house, say Kountze Brothers of New York, on one foreign banking-house, say Union Bank of London, the names of drawer and drawee only being upon the "notes,"
These Circular Notes approximate in certain respects in kind towards the cheques of the Cheque-Bank of London: both are bought at the outset and paid for in full on the spot; and both are drawn upon one Bank, which is the ultimate Drawee and Payer. In two essential respects, however, These Ten are the principle instruments in Credit-Exchanges throughout the world; and we pass now, as proposed, to the next section of our subject, namely, the Advantages of Credit. 3. As introducing these advantages and also as illustrating them, we call attention first to the antiquity of many of the forms of Credit, a point upon which much fresh light has been cast by recent discoveries in, and ability to decipher the cuneiform writing of, the ancient Assyria and Babylonia. It is to the credit of Credit, that the earliest of civilized men seem to have perceived its nature, to have seized upon its powers, and to have realized for themselves In an earthenware jar found some years ago in the neighborhood of Hillah, a few miles from Babylon, were discovered many clay tablets inscribed with records relating to banking, and, what is more, to banking as carried on for generations by a single family or firm, which the cuneiform archÆologists have translated as "Egibi & Co." These tablets are now deposited in the British Museum. Those who can read them say, that the founder of this banking-house, Egibi, probably lived in the reign of Sennacherib, about 700 B.C. This family has been traced in banking transactions during a century and a half, and through five generations down to the reign of Darius. They were the Rothschilds in the region of the Euphrates: they acted in a sort as the national bank of Babylon. The Tigris is always associated with the Euphrates and forever will be. Nineveh on the former river, like Babylon on the latter, has yielded from its tablet-records information as to the use of credit in the more northern capital of Assyria. "Within the palace of Asshur-bani-pal, the Sardanapalus of the Greeks, who reigned at Nineveh from 668 B.C., Layard discovered what is known as the Royal Library. There were two chambers, the floors of which were heaped with books, like the Chaldean tablets already described. The number of books in the collection has been estimated at ten thousand. The writing upon some of the tablets is so minute that it cannot be read without the aid of a magnifying-glass. We learn from the inscriptions that a librarian had charge of the collection. Catalogues In the Metropolitan Museum of Art in New York are Babylonian tablets bearing distinct records of credit transactions that took place in the reign of Nebuchadnezzar. The earliest tablet is of the year 601 B.C. On it are memoranda of loans of silver made by Kurdurru as follows: "1 mina of silver to Suta, 1 mina to Balludh, ½ mina to Buluepus, 5 shekels to Nabu-basa-napsate, and 5 shekels to Nergal-dann;—total, 3 minas, 5 shekels of silver." There are more than 50 similar tablets in this collection; the latest dated, "Babylon, 18th day of 14th year of Darius," that is, B.C. 505. M. Lenormant, who can read them, divides these credit documents into five principal types. 1. Simple obligations; 2. Obligations with a penal clause in case of non-fulfilment; 3. Obligations with the guarantee to a third party; 4. Obligations payable to a third person; and 5. Drafts drawn upon one place, payable in another. These last are letters of Credit. They contain the names of several witnesses. They are evidently negotiable, but from the nature of things could not pass by indorsement, because when the clay was once baked The main elements of their civilization came to the Greeks, and especially to the Greek cities in Asia Minor demonstrably from the Eastward; the Greek West proved itself quick to catch up the thoughts and the modes of the East; accordingly, Isocrates in his plea against the banker, Pasion, describes a formal bill of Exchange bought by Stratocles in Athens, payable in Pontus, and guaranteed principal and interest by Pasion; the practical Romans were pupils of the Greeks in all such matters, and so it came about in course of time, that Cicero wrote as follows in a letter to Atticus,—"Let me know, if the money my son needs at Athens can be sent him by way of exchange, or if it be necessary for it to be taken to him,—permutarine possit an ipsi ferendum sit"; and after that the Jews and the Lombards carried the Letter of Credit all over the world. It goes without saying, when the most civilized and advanced people of the world were the first to adopt and have been since the quickest to expand the use of Credit, that there must be pretty obvious and very solid advantages from such use and expansion; and we must now note and weigh a few of these advantages. (1) There are young men in every advanced community in the world who have integrity and industry and skill, but little or no Capital; and when such men are enabled to borrow money, as by the Scotch system of "cash accounts" or otherwise, to start themselves in business or to enlarge a business already in successful operation, the general interests of Production as well as their own personal In the important point of view, that thus all of the available capital of a community is brought out into productive activity, too much can scarcely be said of Savings-Banks, which take the surplus earnings of the poor, and not only keep them safely, but pay a fair interest on each deposit, and loan the aggregate at a higher rate on choice securities, thus stimulating frugality in a wide circle of depositors, and at the same time aiding Production by opportune In this first category of the advantages of Credit, come also the ordinary bank discounts, made for short periods only, holding the debtor to the strictest rules of payment, only professing and only enabled to help customers over the transient hard places in their business, and not to furnish the funds on which the business is mainly conducted. Loans drawn from the banks on interest should never be put into the form of fixed capital, and should only be a part of the quick or circulating capital, since only the passing necessities of a business having an independent basis and movement of its own, can safely be met by bank discounts. The cash credits of Scotland are quite different both in what they are and in what they imply from the short and sharp discounts of the banks of our own country. So far as the capital stock of banks is made up, as it usually is, of a large number of comparatively small subscriptions, there is the great advantage just spoken of, of calling a multitude of otherwise idle sums into activity in production; and so far as no undue privileges, unjust to other corporations and individuals, are accorded to banks by law, there is no branch of industry more legitimate and beneficial than banking. It is no essential part of the functions of a bank, that it manufacture and issue paper money; that feature is always rather a source of weakness than a ground of strength; the money the bank circulates should always be the national money; and if that too, unfortunately, should be credit-money, the element of credit in the money should be sharply discriminated in the public mind from that other and quite different element of credit by which the bank loans it to its customers. (2) There is another class of advantages in Credit, which do not depend so much on the transfer of Capital from less to more productive hands, as on the facilities which credit affords in economizing the general operations of Exchange. Here the advantages are derived from the convenience of settling accounts arising out of exchanges, rather than from the character of the exchanges themselves. Look a moment, for example, at foreign Bills of Exchange. They serve to settle up the accounts arising from the Commerce of two or six Continents, with but little transmission of money from any, and with but very little loss of time. Commercial bills drawn in New York on London have been usually payable at sixty days' sight; the New York merchant despatching a ship is able to realize at once the value of her cargo, minus interest for the time his bill has to run; since bankers' bills have so largely taken the place of "commercial" bills, the time is much shortened thereby, and this is one reason why bankers' bills bear a higher price in the market; the merchant or sender is indeed still liable in part to see that his bill is ultimately paid by the drawee; but the commercial integrity of the leading houses and leading banks in all countries is with justice so firmly believed in and acted on, that on the whole but little anxiety springs from this source. It is one of the noble things in international commerce, that men trust each other across the oceans, and lay millions of value on the faith of a single firm. Inland bills of exchange equally facilitate settlements within the country itself; and cheques, which are of the same essential nature as inland bills, contribute to the same end even more simply and surely, passing readily in payments wherever the parties are known, and through credit and set-off doing the work of money more conveniently and economically than, and within certain limits just as (3) Besides the two essential functions of all banks, namely, the receiving of deposits and the discounting of bills, most of them perform a variety of other legitimate operations in Credit, which must be classed among the advantages of Credit. They buy and sell debts of all sorts. They make collection of debts for their customers. They sell their own drafts on distant places. Since 1863, our national banks have done an immense business in handling the debt of the United States: they were instrumental in diffusing the national bonds among all classes of the people: they collect for their customers the coupons at maturity: they have been and still are the factors of the government in exchanging, for those who desire it, one species of bond for another; and the entire debt of the United States has been several times changed, mainly through the agency of the banks, from bonds at high rates of interest and for short times of maturity to bonds at lower rates and for longer times. (4) The fourth, and probably the chief, advantage of Credit is the fact, that a new purchasing-power is created by means of it, a new Valuable, something additional to all existing before in the world of Values. One can buy other things with Credit, as well as with material Commodities and personal Services. Credit, therefore, becomes It is only fair to apprise the reader right here, that almost all Economists deny that any new capital is created through Credit. These deny in toto that the relation of debtor and creditor involves anything more than the exchange between the two parties of certain titles to tangible goods. Let the reader now hear, and then judge for himself. Bonamy Price of Oxford University, a professed Economist and a teacher of acknowledged ability, writes as follows: This passage shows how the word, "wealth," tangles men up inextricably, who, by discarding it utterly, might have become clear thinkers and useful expositors. It also shows, that Professor Price never analyzed Valuables into their three kinds, never thoroughly mastered in a preliminary way the Idea that underlies Economics, never precisely understood what Money is, and certainly never found out the radical nature of Credit. Nevertheless, the passage just quoted really concedes the whole matter in the present dispute,—"the right to acquire that property, even before possession is obtained, is itself a property,"—that is all that we claim, namely, that rights are property, and that new rights (which are property) are created by Credit, and that some of these new property-rights thus created may become and do become a new Capital. These new rights, however, this new and acknowledged "property," are not "titles" to any specific valuables whatever, as Price supposed; "a title-deed or a mortgage" is a totally different thing from a Credit, since the one always describes and gives a qualified title to some specific and tangible thing, while a credit-right is always a claim against a person; the Roman law drew this distinction perfectly, a credit-right was a jus in personam, while a title-right was a jus in re; the common Latin language as spoken and written marked the difference by Our late Oxford friend was far too well informed in general to contend, that a cheque, for example, is "the right to acquire possession" of any specific property anywhere; the drawer has indeed deposited money with the banker on whom the cheque is drawn, but that money became the banker's money the moment it was deposited and no longer his own; the cheque, accordingly, is a general claim on the banker, and not at all on any special fund in the banker's hands; it follows, therefore, that the excess of the banker's average deposits over his average reserves to secure them, is a new creation of Credit, a new resource of Production, a new Purchasing-power now available to the banker not previously and practically available to anybody, a new Valuable which he proposes to use and does use for the sake of profits accruing, consequently a new Capital. Now let us listen to the objections to this view by a practical banker, J. H. Walker, of Worcester, Mass., in a little book of his on Banking published in 1882: "A man always borrows something of intrinsic value. What he borrows is not a piece of paper, whatever may be on it, but a farm, a house, a factory, or a part of them; a store, a mine, or goods. No man can borrow or lend anything else. The This author is led astray by the worse than useless adjective "intrinsic," having never yet learned that there is only one kind of value in the world of Economics, namely, purchasing-power; he sees men as trees walking through the haze cast over paper-money by John Law in the last century, as if paper-money must be "based" on something tangible and specific; he makes a narrow and false assumption that the only objects ever bought or borrowed are corporeal "things," denying that the debts in which alone he deals as a banker are realities as much as any "thing" can be; and it all comes in his case, as in the case of hundreds of others, from a totally inadequate analysis of Valuables into their three separate and virtually independent kinds, namely, Commodities and Services and Promises. Mr. Walker, although he writes a book on purpose to do this, can not explain at all under his view the Deposits and Discounts of his own bank, and would be as dumb as an oyster when confronted with the "Cash Credits" of Scotland. (5) The fifth advantage of the use of Credit, and the last one to be mentioned in this connection, is, that it dispenses with the use and wear of large amounts of expensive Money. It is perfectly certain that Credit answers many of the purposes of Money. Suppose A has bought of B $100 worth of goods, and B has bought of A $125 worth of goods. Three ways are open to close up these transactions. A may pay B and B may pay A in money. This would take $225. A may pay B in money, It is not strange that some thinkers and writers, seeing these unquestionable benefits of Credit even within the peculiar sphere of Money itself, have come, like Herbert Spencer and many more, to think and teach that Credit might answer all the purposes of money. Credit does take the place of money in part. Can it take the place of money entirely? Let us see. We have defined Credit as a right to demand something of somebody, and Debt as an obligation to render something to somebody; the denominations of Money are certainly needful in order to measure this right or obligation; and how can the denominations of money be established or maintained at all separate from the use of some money itself as a circulating medium? Moreover, great as is the undoubted power of Credit, vast as are these five advantages from its current use, still, each particular piece or form of Credit waits for something beyond itself; it waits for its own extinction in future time; which can only come about in one of three ways, (a) by set-off against another debt with or without a balance, (b) by renewal which creates a new debt and extinguishes the old, (c) by its payment in money; and now how can these extinctions come about without the current use of some money, at least to settle the balances at the clearing-house? Furthermore, there have always been heretofore in all 4. There are too some disadvantages inhering in Credit. This admitted fact makes no valid argument against the use and extension of it; because there are disadvantages connected with all human devices whatever,—with all means contrived to reach earthly ends—and even a child may discover many of these; some objections lie against everything, and against everybody, and the practical question always is, Which preponderates, the good or the evil? In respect to Credit there can be no doubt, that the good outweighs the evil many fold; still, in accordance with the purpose in this book of both writer and readers to look on both sides of each significant point in Economics, we will now give attention to the chief disadvantages inhering in the nature of Credit. (1) In the first place, when credit is much given by (2) There is a greater inherent uncertainty in values connected with credits than in those connected with commodities, or than with those connected with personal services. We have already seen repeatedly that Value has its sphere of operations in the Past, in the Present, and in the Future. There is some uncertainty connected with what has been done in reference to value, since the market may prove to have been miscalculated, and the commodities to have become unsuitable; there is perhaps more uncertainty connected with what is now being done in reference to value, because the services bargained and being paid for may prove to be less steady and skilful than was supposed; but in the very nature of the case there is still greater uncertainty connected with what is to be done in relation to its value, because in the first two cases some at least of the conditions are already fixed, while in the last one all of them are at least open to hazard. There is sufficient certainty in all three of the grand divisions of Time to justify, and probably to reward, operations in each in reference to value under the peculiar limitations and conditions of each, but credits are naturally more sensitive in the law of their value than either commodities or services. (3) Largely in consequence of what has just been expressed under the last head, credit-exchanges are more likely than commodities-exchanges or than services-exchanges to become unduly multiplied and consequently to fail of ultimate realization. The majority of men are sanguine in relation to the future. Unless they are in actual contact with their limitations, they are apt to belittle the rigidity and inevitableness of such limitations. As the outcome of this, promises are apt to overpass the powers of fulfilment. No more bales of cotton of any one year's crop can be actually delivered to buyers, than have been actually grown and marketed; the services of no more Is speculation proper? Certainly; if by the word "speculation" is meant the buying of anything with an expectation based on rational probabilities of being able to sell it again under different conditions at a higher price. Speculation in this sense is both proper and beneficial to the immediate parties to it, and to the general public as well, because the values of things thus bought and sold neither fall so low nor rise so high as they otherwise would do, which is a public gain. Speculators as a rule buy on a falling market, which tends to lift it, and sell on a rising market, which tends to lower it. It is better for all concerned, that the necessaries and conveniencies of life should bear as steady a market as is possible in the nature of things, summer and winter, year in and year out; and the ports of every nation should be open with the slightest possible hindrance in the way of tax to the corresponding necessaries and conveniencies from abroad, whenever combinations and "corners" attempt to lift their prices beyond the level determined by a natural and free Supply in contact with the current Demand. Credits occupy the field of Probabilities; that is to say, probabilities seeming to be such to men of sharp insight and cultivated forecast. When such men on such grounds buy and sell "futures" in cotton or corn; when they buy and sell stocks either "short" or "long"; when they seem to themselves to perceive a sound reason for lurching over from the "bulls" to the "bears," or vice versa; and when But practically the operators in credit-futures experience an immense difficulty in keeping within this line of rational probabilities. The coolest heads are apt to become heated, and to lose sight of distinctions, in the close air of the Stock Exchange and the offices circumjacent. Some operators openly confess they know nothing which way the index of reason points, by buying "straddles," as they are significantly called. A friend and old-time pupil, who has for years been accustomed to these excitements in New York, said recently to the writer,—"The Stock Exchange is a great gambling hell, and that's all there is of it!" In buying and selling of all kinds, both sides gain: in gambling of all kinds, what one side gains the other side loses: therefore, under a sound money, healthful public opinion, and good law, gambling never can become formidable. In every lottery scheme, no matter how honestly managed, the sum of the prices of the tickets is greater than the sum of the prizes offered, otherwise nothing would be left for the profits of the managers; therefore, he would be a very foolish man, who should buy all the tickets of a given lottery with the certainty of drawing all the prizes; and he is a still more foolish man, who should take his chance of drawing all the prizes by buying two or ten tickets. (4) Another and a principal Disadvantage of Credit is seen in its usual action on prices through increased Demand, and its consequent tendency to bring about Commercial Crises. Any man's whole purchasing-power is made up of three items: first, the property in his possession; secondly, the values that are owed to him; and thirdly, his credit. He can buy services of the three kinds with these three valuables; and the sum of his power to buy is exactly measured by the aggregate of these three valuables under his control. But while the first two, his property and debts due, are limited and ascertainable, the third (his credit) is indefinite and undeterminable beforehand. Being based upon confidence, which is itself sensitive and variable, a man's credit at one time may be vastly greater than at another, compared with his other two means of purchase; and if he have the reputation of doing a safe and regular business, and is favored by circumstances, he will find himself able sometimes to buy on credit to an extent out of all expected proportion to his other capital. When, therefore, credit is offered and received for commodities, it has the same influence upon their prices as when money is offered and received for them. It follows, consequently, that there is likely to be a general rise of prices whenever there is an extension of credit for the purpose of purchasing; indeed, when money only is used to buy with, there can not be a general rise of prices, because while more money may be spent on some things, and they rise in price, there would be less money for other things, and they would rather fall in price; but when credit is used freely in addition, and increased purchases go on in all departments at once, there is apt to be a rise of prices as to all commodities and a universal spirit of speculation. At such times, and while prices are still rising, men seem to be making great gains; everybody wishes to Such commercial crises swept over the United States in 1837, 1857, and 1873; and will doubtless recur in the time to come. They always arise from disordered credits, and though not necessarily connected with credit-money, are much more likely to come in connection with that. The more strong and conservative the Banks maintain their ordinary condition, the more powerfully can they operate to prevent or abate a panic. They ought always to be on the shore and never in the stream. From the very nature of banks and of the motives that create and operate them, they are apt to sell for a profit in ordinary times about all of the credit they safely can; unless, then, they foresee a stringency some time ahead, and curtail their loans, and otherwise keep their position strong in reserves and deposits, they will be powerless to help even their most deserving customers when the panic sets in; even then by a special association with other banks in the same city for reciprocal support during a crisis, as was happily A permission given of the Government to the Bank of England to overpass under these circumstances the Discount-limits laid down by the Bank Act of 1844, has on three several occasions acted like a charm to still the ragings of a commercial storm. On each of these occasions, 1847, 1857, and 1866, the Bank was forbidden by the Privy Council to discount for less than 10%. As the inclined plane of rising prices is slowly ascended before a Crisis, so the fall of general prices afterwards seems to be rather gradual also till the lowest point of them is reached, from which another ascent is apt to commence. The following table taken from the New York Public of the first week of November, 1881, is instructive on both these points. Taking the prices in 1860 of 43 articles of prime necessity, which constituted then and afterwards about ¾ of the commerce of the country, as the normal standard or 100, the table gives the
(5) A penultimate Disadvantage of Credit may be noted in the facility which it offers for contracting great national Debts. There are certain aspects, under which a Nation may be properly regarded as a moral person, and as such person may pledge the public faith for the present and the future, becoming a debtor to its own people or to foreigners, and thus a public debt may be made a sort of mortgage on the national property and income. Now, it cannot be fairly denied, that incidental advantages may spring up in connection with such a national debt: for example, the bonds, which are its evidences, may open up to the people a convenient form of investment for presently inactive capital, and for trust funds of all kinds; there can be little doubt that certain classes of persons holding these national obligations are won thereby to a stronger patriotism and become better friends to stability in government, although this consideration applies mainly to new governments and to those temporarily endangered; both England and the United States now make a portion of their public debt the basis of a national system of Banking, but it is perhaps questionable whether this can be justly put among the incidental benefits of the Debts; and again "a moderate debt adds to the credit of a Nation, and its ability to raise money in an emergency, for bankers and capitalists are more ready to take such securities as they are in the habit of dealing in" (Sidney Homer). On the other hand, the burdens of a National Debt are very apparent: for example, the annual interest charge to the Union at the close of our late civil war was $150,000,000, which gradually declined by the lowering of the interest-rate and by the paying off of principal to $61,368,912 for the fiscal year ending June 30, 1881; between March, 1869, and August, 1873, the United States paid $378,015,065 on the principal of its public debt; the collection of the Internal Revenue alone of the national government cost for the fiscal year 1867, $7,712,089; and in each of the two years, 1870 and 1881, a little over $101,500,000 was paid out to reduce the principal of the Debt. All those vast sums came out of the industry and income of individuals; and taxation to any degree as all this implies is a mighty disturbance to industry, and gives rise to an army of officials who eat out a considerable percentage of all they collect. Moreover, the various expedients of taxation, which are always practically unequal in their operation, are apt to give rise to irritation and political agitation, and even sometimes to threats of repudiation, especially when the occasion has gone by under which the debt was contracted, and another generation is called upon to pay off a debt it had no agency in creating. Here the vexed question arises, how far has one generation the right to throw upon succeeding ones the burdens of a National Debt? The true answer to this question is, it has a very limited right indeed. The opposite doctrine implies tacitly when not openly, that the succeeding generations will have no occasion for extraordinary expenses of their own, and, therefore, may rightfully be made to contribute to the extraordinary expenditures of this generation. But it is pure assumption to take for granted, that the next generations will not have, of some kind or other, as much occasion for an extraordinary effort in the way of Besides, the men to fight the battles, and the capital by which to feed, clothe, and furnish them the munitions of war, must come from that generation; and there is always great injustice in the manipulations of a great debt ostensibly incurred to obtain this capital, and the debt itself is usually in large part rather a memorial of the war than of the means by which its expenses were actually defrayed. The generation of American citizens not yet wholly passed off the stage was called on in the Providence of God to suppress a Civil War of enormous proportions, and to eradicate a social institution that was thoroughly bad; the expense of doing this was many fold enhanced by timorous counsels in the field, by class legislation in Congress, and by wretched financiering in the Cabinet; but the Debt, vast as it was, and needlessly incurred as a large portion of it was, has already in good part been paid off and must be entirely paid off by the generation that incurred it. That this great task may be thus completed, will require (1) an economical administration of the national Government; (2) an avoidance of intervention in (6) The final Disadvantage of Credit is this, that it is apt to confuse the minds of men as to its own nature, from its apparent resemblance to something else, which is at bottom wholly unlike it. The people of the United States have suffered greatly from this confusion, and are likely to suffer from it still more in the time to come, both in their property and progress at home and in their good name abroad; and it becomes all good citizens, and especially all those called upon to pronounce on the Law of the Land, to know thoroughly the radical difference between a Credit and a Quittance, and so to escape the contagious confusion that has entered and stirred up the popular, and even the judicial, mind of this country. All through the present chapter has been insisted on and illustrated the point, perhaps to the weariness of the reader, that Credit is always essentially the Promise of one person to another, and that whatever is thus Promised is necessarily and fundamentally different from the Promise itself. To confound those two things as if they were or could be made one and the same thing, is in thought illogical and in practice execrable. And yet it must be allowed, that there is somewhat in the nature of Credit, that makes this confusion plausible, or else it never would prevail; and also that there is something more still to make it plausible in the nature of Money, which last point can only be cleared up in the next following chapter under that title. Mr. E. G. Spaulding of Buffalo, in his copious and excellent History of the Legal Tender Act, "all of which he saw and part of which he was," as the chairman of the subcommittee These prompt recognitions of the impassable gulf between a Promise and what is Promised, were confirmed by all that happened afterwards. The notes, notwithstanding they were legal tender and all bonds of the United States could at first be bought with them at par, almost immediately began to droop as compared with gold. The daily quotations showed a pretty steady decline for two years. On Jan. 15, '64, gold in greenbacks was 100:155; April 15, 100:178; June 15, 100:197; June 29, 100:250, that is, 40 cents to the dollar; and July 11, 100:285, or 35 cents to the dollar in gold, their lowest point. From this depth they slowly rose with many fluctuations back and forth from many causes for 14 years. Jan. 1, 1879, they became redeemable in gold, and have so continued till the present time. When the Civil War was all over, and these startling vicissitudes of the paper money were measurably forgotten; though no prominent man, when they were passed, thought the Legal-Tender Acts constitutional; the paper money began to be popular; the distinction between a promise and its fulfilment began to fade out of the minds of the people; there had always been bank bills circulating as money in the country; these had been called "dollars" equally with the coin; and in December, 1869, a test case, Hepburn versus Griswold, was decided by the Supreme Court on the question, whether Congress had the constitutional authority to make anything but gold and silver lawful money in satisfaction of contracts entered into before the first legal-tender Act was passed. The question, Can Congress make such notes a legal tender for contracts made after the passage of the Act? was not involved in this case; but it was very clear from the Opinion of the court delivered by Chief Justice Chase, that the majority of the justices regarded the Act as being Salmon P. Chase was one of the greatest men of the great period of the Civil War. He was Secretary of the Treasury at the time the greenbacks were issued, and they were issued at his instance and advice, but he was opposed to the clause that made the notes a legal tender. He never expressed the opinion that the Legal-Tender Acts were constitutional, nor did he expect that the notes, of which these authorized the issue, would ever become a permanent national money. This is evident from the fact that the notes were made fundable at his instance, not so much with the view of keeping up the value of the notes by giving them a present market in bonds, as with the view that they would help the sale of the bonds and would be absorbed by them as soon as the price of the bonds was above par in greenbacks. Afterwards Mr. Chase thought that this fundability of the notes into bonds would so far take up the notes as to stand in the way of the negotiation of further necessary loans to the Government, and at his instance this provision of the law was repealed. Consequently, there was nothing inconsistent between his position as Secretary and his later position as Chief Justice. He was undoubtedly right in both of these positions. The making the greenbacks legal tender did not probably This judgment in Hepburn versus Griswold was favorably received by the country at large, as being just in the line of the great decisions of Chief Justice Marshall, and as being exactly in accordance with Amendment X of the Constitution, namely, "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." The State of Massachusetts particularly, which has always maintained and still maintains a strong doctrine of State Rights as over against, though in harmony with, the Rights of the United States under the Constitution, applauded this judgment as sound in law and politics, and as righteous altogether. But the then administration of General Grant, inexperienced alike in law and politics, and linked in entangling alliances with the great corporations of the country, received the Decision with marked dissatisfaction; and it was especially offensive to the huge railroad companies, whose bonds had been executed prior to Feb. 25, 1862, inasmuch as it made the principal and interest of these bonds payable in coin, which they had hoped to pay off in the depreciated greenbacks, made legal tender for all debts. The Administration lost no time in trying to bring about by fair means or foul, a reversal of this unwelcome decision. E. R. Hoar of Massachusetts, at that time attorney-general The second Legal-Tender case, accordingly, that of Knox versus Lee, decided in December, 1870, reversed the judgment of a year before, no new points therefor being raised either by the new judges or by counsel in the new trial, the Chief Justice and his three former associates still adhering to their original opinions. It was then five judges to four, the special question being, Is it constitutional to make promises-to-pay a legal tender on contracts executed before the promises were issued? The judicial answer was in this case, Yes; provided Congress regarded such action as a necessary means of preserving the Government in time of War, or any other period of extraordinary emergency. That is to say, bona fide creditors were constitutionally bound to receive depreciated notes as legal tender in satisfaction of contracts entered into when no notes were in existence; to receive on contracts specifically calling for "dollars" the depreciated notes of the Government It is scarcely needful to add, that the Supreme Court of the United States suffered in the judgment of good citizens by that transaction; that the best legal and financial opinion of the country yielded little respect to a decision thus secured; and that intelligent people do not believe that constitutional law can sanction what contravenes at once common sense and common morality. Judge Field (and his memory the country will not willingly let die), one of the majority in the first decision, and writing the opinion of the dissenting minority in the second, used this strong but just language, "It follows, then, logically, from the doctrine advanced by the majority of the Court as to the power of Congress over the subject of legal tender, that Congress may borrow gold coin upon a pledge to repay gold at the maturity of its obligations, and yet in direct disregard of its pledge, in open violation of faith, may compel the lender to take, in place of the gold stipulated, its own promises; and that legislation of this character would not be in violation of the Constitution, but in harmony with its letter and spirit. What is this but declaring that repudiation by the Government of the United States of its solemn obligations would be Constitutional?" |
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