CHAPTER XIV.

BANKING.

We have now reached the great financial institution of modern times-banking. It is an agency for performing the all-important service on which civilisation depends -the exchange of commodities produced by different makers on the fundamental principle of division of employments. Thus it does the same work as money or currency; banking and currency are two different machines for performing the same function. They both transfer goods and property from the hands of one person to those of another. That is their one and only task. They do nothing else, and this is a truth sadly unperceived, and yet one which cannot be too firmly grasped, if light is ever to penetrate into this region. They each employ two operations to complete one transaction. The farmer buys three sovereigns with a sheep, and then with those sovereigns he purchases guano; a sheep has been exchanged for guano through the intermediate agency of money. In precisely the same manner the farmer again sells a rick of wheat for a cheque or bill, and his banker with that cheque enables a merchant to buy tea. Wheat has been exchanged for tea by the help of certain writing within banks. There is no difference whatever in the essence of the process, though, of course, the mechanical machinery actually employed in each case varies in

detail. Banking and money are purely tools of exchange, and nothing else.

But banking is not money nor currency of any kind. Endless confusion is generated on every side by this fatal misconception. Money does its work by means of a valuable metal; banking employs for its tools words written on pieces of paper called bills and cheques, which give legal claim to the metal called coin, and for which the courts of law will, if need be, compel that coin to be given. Thus debts expressed on paper are the tools with which banking works. Some little money it touches, as every business must; but both for banking and for the collective trade of a highly commercial country, coin, money, is absolutely nothing but its small change. Many regard the cheque and the bill as money, equally so credits opened in banking accounts; but if they are money, then farewell to all possibility of understanding what money is. Upon such ideas, a letter must often be regarded as money; for many are the payments which a banker effects without a bill or cheque, in compliance with the instructions of a letter. To jumble up into one heap coin, notes, money, banking, currency, cheques and bills, is to refuse to understand what are their natures and manners of working.

We have asked and answered the question, What is money?-let us do the same for a bank. What is a bank? A banker is an intermediate agent between two principals; that is the very essence of his action. He is as truly a broker as a tea-broker in Mincing Lane or a cotton broker in Liverpool. Like them he brings a seller and a buyer together, or rather, which is the same thing in substance, a lender and a borrower; and

pensive tool for performing the same work in comparison with the worry inflicted on cashiers?

Small notes have proved successful over a wide range of countries. In some the two shillings note is found to work exceedingly well. Mr James Wilson, when Financial Member of Council, proposed a ten shillings note for India. One pound notes were put down in England mainly on account of the losses incurred by many comparatively poor persons in the great breakdown of 1825. But those losses came from the bad quality of the issuers. The issuing bank took people's money, repaid them with paper, then did bad business and lost their capital, and serious misfortune overtook the note-holders. The argument of a bad issuer applies quite as much to a £5 or a £100 note, as to the £1. There is, it must be admitted, greater danger of forgery. The persons who take a £5 note and above are more careful in examining the paper than the mass of those who would take a five or ten shillings note. But the admitted good working, on that score, of small notes in America, Austria, Italy, and elsewhere is a complete reply to the objection. With so perfect a convertibility as that guaranteed by the Act of 1844, why not restore the old one pound note? But prejudice and ignorance are not likely to be soon overcome.

INCONVERTIBLE NOTES.

We have now reached the plague spot of paper currency-the inconvertible bank-note. Fortunately in England its true character has long been understood. It lingered awhile in theory after the nation had

acquired a thoroughly sound currency; so fond, so irrepressible are the dreams of relieving distresses of trade by experiments in currency. It is a most satisfactory proof of how thoroughly the people of England have discerned the nature of a currency built up of promises to pay without payment that during the severe commercial depression, which still weighs on the country with unexampled duration, no quack doctor has proposed in any quarter either the repeal of the Bank Charter Act, and still less remedies drawn from the inconvertible note.

A long statement is not needed to make known its qualities, though volumes would be required to answer in detail the ever streaming and irrepressible pleas advanced in support of proposals for its adoption. The marvel is that so many ingenious and acute things can be urged in behalf of such a client.

The inconvertible note is a bad tool. It does bad work, but yet not always. It is capable, under particular circumstances, of doing good work, but then that is not the object of which its advocates are in search. We know that the work of money, of every tool of exchange, is to effect buying and selling by means of an intermediate instrument which gives to the seller a sure guarantee that he will be able, by means of it, to acquire other goods, at his own choice, of equal value with those which he has sold. We have seen that the guarantee furnished by coin is the value of the metal of which it is made. Further, we know that men will give away their goods on credit, relying on payment on a future day; in fact, they take a debt as a guarantee of future payment. The same motive persuades them

to accept the debt expressed on a bank-note. That motive acts on all other sellers, and thus the bank-note circulates as currency, and is not presented for payment, if wanted for circulating use. Then we have seen that the public makes no other use of the metal of coin than as a guarantee of value. Similarly it employs the debt pledged in the note for the same identical purpose of guarantee. It does not seek to sell the gold of the coin to a jeweller, nor to ask payment for the debt, so long as it thinks that debt trustworthy.

This explanation is necessary in order to arrive at a right understanding of the fact, that the inconvertible note, in spite of the hollow principle on which it stands, can, under a special condition, do good work as currency. When the debt is thoroughly trusted, and when no more of these inconvertible notes are issued than the public requires for actual use, and consequently which it feels no desire to send in for payment, they remain in circulation on a full level of value with coin. Thus it happened that after the passing of the Act of Parliament which forbade the Bank of England to pay its notes in coin, those notes suffered no depreciation. The Bank was perfectly trusted as a debtor, there was no excess of issue, and the notes retained their full value of twenty shillings undiminished.

But the situation became vitiated at its very core when too many notes were issued. Their fall of value went on to the extent that a sovereign became worth twenty-seven shillings in notes. Thus one hundred guineas were worth one hundred and thirty-five one pound notes.

That the inconvertible notes should be limited to the