aware of is by John Law,' who says "Some are against all banks where money does not lie pledged equal to the credit."

It was upon this principle that the Banks of Venice, Amster dam, and Hamburg were constructed. These places were the centres of a great foreign commerce, and, as a natural consequence, an immense quantity of coin of all sorts, of different countries and denominations, was brought by the foreigners who resorted to them. These coins, were, moreover, greatly clipped, worn, and diminished. This degraded state of the current coin produced intolerable inconvenience, disorder, and confusion among merchants, who, when they had to make or receive payment of their bills, had to offer or receive a bagful of all sorts of different coins. The settlement of these bills, therefore, involved perpetual disputes,-which coins were to be received, and which were not, and how much each was to count for. In order to remedy this, it became absolutely necessary that some fixed uniform standard of payment should be devised, to insure regularity and a just discharge of debts. In order to do this, the magistrates of these cities instituted a Bank of Deposit, in which every merchant placed all his coins of different weights and nations. These were all weighed, and the bank gave him credit, either in the form of notes, or an entry in their books, exactly corresponding to the real amount of the bullion deposited. The owner of this credit was entitled to have a certain quantity of gold of full weight on demand. These credits, therefore, always insured a uniform standard of payment; and it was enacted that all bills upon the respective cities, above a certain amount, should be paid in these credits, which were called bank money. The consequence was evident: as this bank money was always exchangeable for money of full weight on demand, it was always at a premium, or agio, as compared with the current money. The difference was usually from 5 to 9 per cent. in the different cities. The expression, agio, or premium, is likely to mislead, because it is evident that it was the bank money that was the true standard, and the current money that was at a discount. These banks professed to keep all this coin and bullion in their vaults. They made no use of them in the way of business, as by way of discounting bills. Thus the credit created was exactly equal to the specie deposited, and their 1 Money and Trade Considered, p. 73, edit. 1755.

sole business was to exchange specie for paper, and paper for specie.

They were examples of the CURRENCY PRINCIPLE, and they are the models to which many persons would wish to see all banks reduced, and we shall see that they maintain that paper should fluctuate in quantity exactly as a metallic currency would do if there were no paper; and that if paper is substituted for specie, it can only maintain an equality of value with specie by being exactly equal in quantity to what the specie would have been if there were no paper.

These Banks were of no further use to commerce than that they served as a safe place to keep money, and they insured an uniform standard of payment. They made no profits by their business, but those who kept their accounts with them paid certain fees to maintain the establishment.

We shall not here discuss the soundness of this currency principle, our only object is to state to our readers clearly what it is. Many writers of the greatest influence, such as Colonel Torrens, Lord Overstone, and others, maintain that this principle ought to be applied to all Banks, and that they should not be permitted to create any notes in excess of their bullion.

Mr. Mill says:-" Further consideration shewed that the uses of money are in no respect promoted by increasing the quantity which exists and circulates in a country, the service which it performs being as well rendered by a small as by a large aggre gate amount." The slightest experience will show that this dogma is utterly unfounded. Does it never happen that an increased supply of money can benefit a country? One of the acknowledged wants of Ireland at the present day is want of capital; every one admits that the introduction of fresh capital would be of the greatest service to Ireland.

He says "Another of the fallacies from which the advocates of an inconvertible currency derive support, is the notion that an increase of the currency quickens industry. This idea was set afloat by Hume, in his Essay on Money, and has had many devoted adherents since." Not only is the doctrine which Mr. Mill here derides indubitably true, though it is not an argument in favour of an inconvertible paper money, but it had many devoted adherents long before Hume was born, as every one acquainted with Economical literature knows well enough,

1 B. iii., c. 13, § 5.

He then says:-"The substitution of paper for metallic currency is a national gain, ANY FURTHER INCREASE OF PAPER

BEYOND THIS IS BUT A FORM OF ROBBERY.

"An issue of notes is a manifest gain to the issuers, who, until the notes are returned for payment, obtain the use of them as if they were real capital; and so long as the notes are no permanent addition to the currency, but merely supersede gold or silver to the same amount, the gain of the issuer is a loss to no one; it is obtained by saving the community the expense of the more costly material. But if there is no gold or silver to be superseded-if the notes are added to the currency, instead of being substituted for the metallic part of it-all holders of currency lose by the depreciation of its value, the exact equivalent of what the issuer gains."

Again he says" When metallic money had been entirely superseded and expelled from circulation, by the substitution of an equal amount of bank notes, any attempt to keep a still further quantity of paper in circulation must, if the notes are convertible, be a complete failure. The new issue would again set in motion the same train of consequences by which the gold coin had already been expelled. The metals would, as before, be rcquired for exportation, and would be for that purpose demanded from the banks to the full extent of the superfluous notes, which thus could not possibly be retained in circulation."

We desire to call particular attention to these dogmatic assertions of Mr. Mill, and especially to the facts that he brands as robbery any creation of notes beyond the quantity substituted for specie. We shall now give an actual exposition of the practice of banking, and, perhaps Mr. Mill may be surprised to find what he brands as robbery, and whom he brands as robbers.

On the MECHANISM of BANKING.

67. Banks of the nature of those of Venice, Amsterdam, and Hamburg, never existed in England, and we must now explain the mechanism of banking, as it has been carried on in this country.

During the civil war, the goldsmiths of London began to receive cash of the merchants and country gentlemen, in ex

1 B. iii., c. 22, § 3.

change for which they gave their promissory notes payable to bearer on demand. In consequence of this they were called bankers," and their notes were called "goldsmiths' notes," or "bankers' notes." But the goldsmiths did not charge anything to their customers for keeping their cash; on the contrary, they agreed to pay six per cent. interest for the cash left with them. In order to pay this interest, they were obliged to trade with this money, and it is in regard to the method of this trading that so much misconception exists.

Let us, for the present, leave out of consideration any private property the goldsmiths might have, and let us deal with small figures. Suppose the banker had £10,000 deposited with him by his customers, then, as he created an equal amount of debt against himself in exchange for this money, his accounts would stand thus:

LIABILITIES.

£10,000.

ASSETS. £10,000.

We shall now see the extreme importance of accurately stating Economic questions.

According to the method of stating this, given by Euler, the banker possesses £10,000, and owes £10,000. Euler, as well as all mathematicians, calls the money a positive quantity and the debt a negative quantity, because, if the banker's fortune were estimated, his debts would have to be subtracted from his money. In this case, the money and the debts are equal, and, therefore, according to this mode of statement, the banker would be no richer than before.

Now, so far as the banker himself only is concerned, this view is sufficiently accurate. But it is easily seen that so far as regards Economic Science it is quite inaccurate. For the banker has issued £10,000 in notes, and these circulate among the public and perform all the functions of money, until payment of them is demanded, and then, of course, they cease to exist. But the banker has the £10,000 in cash, which has become his property, and reserving a certain portion of it to meet the usual demand for payment of his notes, he may trade with the remainder, and it is quite clear that, supposing the £10,000 of his notes to be in circulation, whatever portion of cash he also issues is by so much an addition to the previously existing

currency.

Now experience would soon shew him that, if some of his customers drew out their money from day to day, others would probably pay in about an equal sum, so that, at the end of the day, there would probably be not very much difference. From practical observation, we may state that, in ordinary times, a banker's balance in cash will seldom differ by more than a 36th part from day to day. So that, if he retains a tenth part in cash to meet demands for payment of his notes, that is ample and sufficient in all ordinary times.

The goldsmiths, then, soon found that they had a large quantity of bullion on their hands, which was so much dead, stock, and they were able to trade with it in order to make profits to pay interest of the whole. The method of trading they adopted was to discount, or buy, commercial debts, in the form of Bills of Exchange. These Bills being payable in two or three months, their money soon came back to them with a profit.

It is commonly supposed that they advanced money on these bills. If they had done that, they could not have brought more than £9,000, as they kept one-tenth in their tills in cash. This, however, is an error. They did not buy the bills with cash, but. with their Credit; and this Credit was of two forms. They either gave the merchant the amount in their Promissory Notes; or they wrote down the amount to the credit of their customer in their books, and allowed him to draw a bill upon them payable on demand. And, as above stated, they soon found that their credit might safely exceed their cash several times. Hence they found that they could extend their credit safely very far beyond the limit of £9,000. They found that keeping the £9,000 in their coffers, they could safely buy at least £40,000 in bills with their own notes. Now, supposing the rate of discount was 8 per cent., and the bills were at three months, the discount on this sum would be £800, and consequently, in exchange for bills to the amount of £40,000, he would issue £39,200 in his own notes, and his accounts would then stand thus: