the panic. As it was the unusual amount of these private promises to pay," and the extravagance of the purchases in which they originated, that first produced the enhancement of prices, so now the demanded fulfilment of them causes prices to recede, and makes speculators eager to sell, and multiplies the applications to banks and usurers for loans. The whole distress is then imputed to "the tightness of the money market,” though the amount of money in circulation is just as great as ever, probably greater, and though money has been as passive, or has played as insignificant a part in the matter, as the carts and ships in which the merchandise that was bought on speculation is transported. The speculator who makes an eager appeal to a bank for assistance, does not ask that the circulation, or bank issues, shall be increased for his sake; he does not want coin or bank-notes particularly, but will be entirely satisfied with a check which will suffice to take up his note, and the only effect of which will be to transfer, either at that bank or another, a certain amount of the deposits from the credit of one person to that of another, without adding a dollar to the circulation. Every one knows, that, in a large commercial city, nearly all promissory notes are paid in this manner, or, if bank-notes are used, it is only to be carried across the entry, or across the street, to another bank, without remaining an hour in circulation. In such case, a bank-note for $100 or $1,000 is only a substitute for a check, and is hardly entitled to be called "money"; it is only a ticket for the transfer of credit, and has no effect whatever on prices.

When, in a period of financial pressure, a complaint is made of "the scarcity of money," it means only that capital is wanted on credit, or, in other words, that there is a greater demand for loans than the banks and other dealers in loans can supply. There is always a certain amount of disposable capital in the market, seeking investment in loans. It is accumulated chiefly by savings from income, which are made by persons who are unwilling or unable to manage their capital for themselves by engaging in industrial enterprises, and therefore seek to lend it to others. A considerable portion of this floating fund is accumulated in the banks, making up both their capitals and deposits, and thus constituting far the larger part of what they are able to lend to their customers. Hence it is, that what are

called the "loans and discounts" of the banks so largely exceed the amount of their circulation. Cut off altogether their power of issuing bank currency, and their ability to make loans would not be diminished, on an average, more than one fifth. The aggregate loan by the Massachusetts banks amounts almost precisely to one hundred millions, and their average circulation, as we have just seen, is only about twenty-three millions; and from this last sum must be deducted about three millions for the specie reserves, which are kept only for the security of their circulation, and would come into active use, or be disposable for loans, if that circulation were taken away.

And here we can see another reason why the banks are unable to increase or diminish at pleasure the issue of their notes. It is only by reducing their loans and discounts immensely, that they can be sure of acting at all upon their outstanding circulation; cut off thirty millions, for instance, from the loans and discounts by the Massachusetts banks, and as seventy millions would still remain in the hands of their customers, the larger part of the twenty-three millions of their notes might continue to circulate; in other words, the portion of the loan which was withdrawn might be paid back to them almost exclusively in coin or the notes of banks in the neighboring States, or by transferring a large amount from their deposits. On the other hand, when they are not diminishing, but extending their loans, their circulation may come back upon them in spite of themselves.

Hence, also, if the complaint against the banks for undue "expansion" in a speculating period, and undue "curtailment " when the crisis comes, means anything, it means an expansion and curtailment, not of bank currency, but of bank loans and discounts. There would be some truth in this statement, though it may still be said, that the difference in the amount of the loan is not large enough to have any considerable effect on prices. The loan from the Massachusetts banks, which a little exceeded ninety-three millions early in December, 1854, when the financial pressure was at its height, rose to over ninety-nine millions in September, 1855, when the market was quiescent and the rates of interest low. The difference was only six per cent, and the amount of six millions could not raise general prices more than one or two per cent. And even

this difference is not to be laid to the fault of the banks, but of their customers, who, when the demand for loans was greatest, withdrew five millions from their deposits, and over one million from their specie reserves. The banks, who only play the part of brokers in this matter, bringing borrowers and lenders together, made smaller loans because less capital was placed at their disposal.

The other portion of floating or disposable capital, which is in the market for borrowers at varying rates of interest, but does not get into the banks, or is only lodged there temporarily on deposit, is much more fluctuating in amount, and is the real agent or subject of that "expansion" and "contraction" which are so much complained of. During the period of quiescence which follows a commercial crisis, people go on quietly making savings from income, and, having learned from recent woful experience the folly of new speculations and hazardous investments, they prefer not to engage in any enterprise on their own account, but only to lend their surplus funds on good mortgages or first-rate personal security, and, in this last case, only for short periods. But as almost everybody at such a time is afraid of speculation, new enterprises are not started, trade is quiet, and there is not, consequently, much demand for loans, and that little demand is fully supplied by the banks from their regular funds. Lenders then compete with each other, and strive to tempt merchants and manufacturers to borrow by offering the use of capital at low rates of interest. Even the banks, under such circumstances, are sometimes compelled to reduce their rates of discount, in order to find borrowers and keep their capital employed. Purchases of approved stocks already for some time in the market, whether of national or State funds, banks, manufactories, or railroads, have no effect in diminishing the amount of disposable capital in the loanmarket, but only transfer the ownership of portions of it to other individuals. If A, who seeks to invest $50,000, cannot find a borrower who will take it on good security and pay him. a satisfactory rate of interest for it, and finally decides to buy Reading Railroad bonds, or New York State stocks, he only transfers his $50,000 to B, who sells him these bonds or stocks, and who will now come into the loan-market to find a borrower for the funds which he has received. The supply of dis

posable capital, then, will be just the same as before. If, however, a State, a city, or a railroad comes forward to contract a new loan, and thus issues an additional amount of stocks or bonds, the capital which it receives is permanently taken out of the loan-market, and expended, perhaps in constructing water-works, new roads, or other internal improvements.

I have already explained the phenomena of the gradual declension of the rate of profit, which takes place in every country as it advances in opulence and gradually extends its enterprise over the whole field for the profitable employment of fixed capital. This declension is soon manifested in the loan-market, steadily operating against the rate of interest, and causing it, though with many fluctuations, to move slowly downwards. The savings from income, which at first, for the most part, were invested as soon as made, either in constructing roads, docks, and canals, or in furnishing manufactories with costly machinery, are finally driven more and more into the market as floating capital, seeking borrowers, because it is found that the work of fixed capital is so nearly completed, that no farther application can be made of it except at great hazard, or with a prospect of very small dividends. After the loan-market becomes gorged, however, and the losses experienced in former speculations are gradually forgotten, the low rates of interest and the facility of obtaining loans again allure the multitude into hazardous enterprises. New schemes are brought forward, and old ones resuscitated. Docks, copper-mines, new railroads, laying out new cities, cutting lumber, driving tunnels through mountains and under rivers, opening trade with Australia, and many similar undertakings, are proposed as excellent means of investing capital and obtaining large returns. Merchants catch the infection, and make large importations of goods. The scale of expenditure is enlarged, as people are tempted to spend in proportion to their expected gains; and thus prices begin to rise. The merits of every new scheme are so loudly trumpeted, that those who first invested in them are enabled to sell out their shares at a high profit. The plethory of the loan-market is so far relieved, that the rates of interest rise, and the cautious and prudent capitalists are as much delighted as the daring speculators.

After a time, the period of payment arrives. The notes

which have been given for heavy purchases on credit, come to maturity, and anxious borrowers find to their dismay that the tide in the market has turned, and there is now very little floating capital to be had, and that only at high rates. There is an immense increase in the demand for loans, and a great diminution of the supply, as many capitalists have caught the infection, and preferred to speculate with their funds, rather than to lend them on interest. The banks, indeed, continue to lend as usual, as their capital exists for no other purpose; but their means are strictly limited, and they can only supply the ordinary amount of accommodation to their customers, whose wants are sadly increased. They are besieged with applications which they cannot grant, and are then blamed for having first contributed to heighten the excitement, by offering loans at low rates some months before, and now refusing to lend except in small sums and on harder terms. The charge is wholly unjust, for by furnishing a steady supply to the loanmarket, not enlarged in a period of speculation nor diminished in a time of pressure, their operation is like that of the balancewheel in a machine, tending to deaden the shock of transition, and to moderate both extremes. The difficulties which the speculators labor under compel them to make forced sales of their shares or of the merchandise which they have bought at inordinate prices; and this eagerness to sell creates suspicion, and soon leads to an exposure of the rottenness of many of the schemes in which they have engaged. These fictitious values are destroyed, and their fancied wealth disappears like a dream. Public confidence being thus shaken, a general desire to realize property, as it is termed, or to convert mere evidences of debt into coin or other actual possessions, ensues; and then follow many failures, and general agitation and distress.

The cycle of events which I have described, is so far independent of any action of the currency, that it might all occur in such a city as Amsterdam was, when it had but one bank, and that one only a bank of deposit, in which the merchants lodged all their surplus funds, and effected all payments among themselves by a mere transfer of credit on the books. There, also, a period of quiescence in trade might cause an accumulation of floating capital, and a consequent facility of obtaining