than twenty-two millions of dollars, and that the banks, in fact, let out every dollar of this sum to other persons, receiving interest therefor; I say the banks let out all the deposits, because the specie actually held by these institutions in their vaults is more properly regarded as a security for their circulation than for their deposits. Observe, now, the economizing effect of the banks in regard to the use of money. It appears that the merchants and other capitalists of this State, in order to be prepared for sudden calls and daily emergencies, find it necessary to keep sums of money by them or on hand, which amount in the aggregate to twenty-two millions of dollars. If there were no banks, this great sum of gold and silver, divided into many parcels, must remain, disused and rusting, (if the precious metals did rust,) in safes, tills, and drawers. There would be a loss of profit or interest on the whole amount. Through the machinery of the banks, these many parcels are collected together, and while their owners have just as much the benefit of them as ever, that is, can effect all their payments equally well, and save the trouble of counting the money to boot, the banks put all the money into profitable use, or convert it from dead into active capital. The saving thus effected to the State of Massachusetts, reckoning it only at the rate of legal interest, is six per cent on twenty-two millions, or $1,320,000 a year. In places where there are no banks, -in Valparaiso, South America, for instance, - there is more than one large mercantile firm which, on account of the extent of its transactions, is obliged to keep, on an average, at least $100,000 in gold coin constantly in its safe; this is so much subtracted from its active capital, and the annual rate of profit there being at least as high as ten per cent, the annual loss to such a house equals ten thousand dollars.

The discounting operations of the banks, which are their chief function in this country, lead directly to an explanation of the system of credit, a system which plays so important a part in the theory of wealth, and in all mercantile transactions, that it needs to be very plainly and fully set forth. "The functions of credit have been a subject of as much misunderstanding, and as much confusion of ideas, as any single topic in Political Economy. This is not owing to any peculiar difficulty in the theory of the subject, but to the complex nature

of some of the mercantile phenomena arising from the forms in which credit clothes itself; by which attention is diverted from the properties of credit in general, to the peculiarities of its particular forms."

Credit may be briefly defined as a means of putting capital into the hands of those who, for the time being, can use it to the best advantage, though they are not the owners of it. The utility and profits of capital depend, as we have seen, upon its activity, upon the speed, skill, and judgment with which it is consumed and reproduced. The capitalist himself may be deficient in all the important requisites for managing his own property; he may have inherited it, and therefore have had no experience in the mode of acquiring and using it; or from the very fact that he is a capitalist, or a man of fortune, he may not be willing to give time and labor to its superintendence, preferring to consult his own ease and amusement; or his capital may be so large, that, although in active business himself, he may not be able to superintend or manage the whole of it, but may feel obliged to lend a large portion of it. From these various circumstances, there is always, in every wealthy community, a vast amount of capital to lend, much more than is generally supposed. For capitalists, banks, and other lending institutions are commonly thought to manage and superintend their own property, when they simply direct its investment, or determine to what persons or institutions they will by preference lend it. But not so. The real manager of capital is he in whose hands it exists, not in the form of money, stocks, or other securities, but in the form of goods, - whether of raw material to be manufactured, or of tools and machinery for manufacture, or of ships and other means of transport, or of merchandise for transport and sale. There may be half a dozen applications of credit, half a dozen lendings, between the proper owner and this manager of the capital. For instance, the owner may prefer to lend his capital to, or invest it in, a bank; the bank may lend it to a broker; the broker may employ it in buying up a promissory note; and the original giver or promisor of this note is probably he in whose hands the actual property represented by all these transactions is really placed, for the time being. He is the manager of the capital, whose true owner is not probably known to him even by name.

And here we must again remark, that the true subject of credit, that which is lent, and for which interest is paid, is not money, but merchandise, or some one of the myriad forms of material wealth. Money, as such, it has been demonstrated again and again, bears no profit, and therefore yields no interest. What the merchant or other needy person actually borrows, is not the little slip of paper, called a check, that he carries to the bank; nor yet the bank-bills which he receives in payment of the check; nor even the gold and silver coin, which, if he chooses, he can obtain for the bank-notes. The proof that these things are not what he really borrows for six months, a year, or some other period, is, that he endeavors to get rid of these things as soon as he can; if possible, on the very day on which he received them. He no more thinks of keeping the bank-notes or coin on hand, than of retaining the check in his possession. What he really keeps for the six months or year, and therefore what he really borrows and pays interest for, is the goods which he purchases with the bank-bills. A capitalist's property, though it may exist under his own eye only in the shape of notes, bank-bills, stocks, and other representatives of wealth, does not actually consist in them, but in merchandise, or articles of material wealth, which, in many cases, he has never seen; and these are what he lends upon interest. There is always a vast amount of such capital in being, which is not managed by its proper owners.

On the other hand, as Mr. Mill remarks, credit is "the means by which the industrial talent of the country is turned to most account for purposes of production. Many a person, who has either no capital of his own, or very little, but who has qualifications for business which are known and appreciated by some persons of capital, is enabled to obtain either advances in money, or more frequently goods on credit, by which his industrial capacities are made instrumental to the increase of the public wealth; and this benefit will be reaped far more largely, whenever, through better laws and better education, the community shall have made such progress in integrity, that personal character can be accepted as a sufficient guaranty, not only against dishonestly appropriating, but against dishonestly risking, what belongs to another." Every act of legislation, which, however benevolent in design, really diminishes the security of creditors,

is an act inflicting hardship and wrong on the very class of persons whom it is intended to benefit, the class who have not so much capital as capacity to use it, and who must, therefore, depend on credit as the only means of turning their tal

ents to account.

Another occasion for giving credit arises from the varying demands for capital in different employments. One who has capital enough for the average demands of his business may find, owing to the fluctuations of trade, that, at one period, half of his whole capital would remain useless for some months, if he could not, during that time, lend it to another; and at another period, that the productiveness of his own stock would be greatly enhanced if he could increase it by one half for a few months. In other words, in order that his business may be most profitably and most economically managed, he must have the power of varying the amount of capital engaged in it from one month to another.

Now, it is the chief function of banks in this country to promote and facilitate these operations of credit, and thereby to economize both the capital and the industrial talent of the nation, allowing no portion of either to remain unemployed even for a few weeks. They bring borrowers and lenders together; they allow an individual to borrow this month and to lend the next, - nay, to borrow to-day and to lend to-morrow, according to his varying occasions, necessities, and inclinations. They do not, in this part of their office, directly add to the productive wealth of the country; but they keep what there is in the highest possible activity, and cause it to be applied constantly to the best advantage. Credit, however enlarged, cannot increase capital, cannot create wealth, whether productive or unproductive. It can only transfer from one hand to another the wealth already in being. "Credit has a great, but not, as many people seem to suppose, a magical power; it cannot make something out of nothing. If the borrower's means of production and of employing labor are increased by the credit given him, the lender's are as much diminished. It is true that the capital which A has borrowed from B, and makes use of in his business, still forms part of the wealth of B for other purposes; he can enter into engagements in reliance on it, and can even borrow, when needful, an equivalent sum on the security of it;

so that, to a superficial eye, it might seem as if both B and A had the use of it at once. But the smallest consideration will show, that, when B has parted with his capital to A, the use of it as capital rests with A alone, and that B has no other service from it than in so far as his ultimate claim upon it serves him to obtain the use of another capital from a third person, C. All capital, (not his own,) of which any person has really the use, is, and must be, so much subtracted from the capital of some one else."

We are now prepared to explain the nature and functions of a bank; and I will take, for this purpose, one of the simplest cases, a bank established in one of our New England country towns, with a capital of not more than $100,000. We will suppose that this town, originally without any institution of the kind, has gone on increasing in population, manufactures, wealth, and trade. There are now a number of persons in it, of easy circumstances, who still make savings from income, but have not the inclination, or perhaps the capacity, to employ these savings profitably in any active business. These have capital to lend; and there are others in the town, young tradesmen and manufacturers, who have not capital enough to give full scope to their industry, talents, and enterprise, and who are therefore eager to borrow. But the borrower may often have much difficulty in finding a lender who has to spare just the sum that he wants, and for the time that he wants it; and even the lender may often have a portion of his spare capital lying idle for weeks, and even months, before he can find borrowers who will take it all on good security, and and pay interest for it at short periods. Still further, the traders in the town, as we have seen, may have frequent occasion both to lend and to borrow, according to the varying demands of their business. When their stock is low, they may have a considerable sum on hand or unemployed, which they would be glad to let out at interest if they could be sure of obtaining it again as soon as needed, or whenever a favorable opportunity offered for purchasing an additional stock of goods. But it would be difficult, if not impossible, to find a borrower who would take it upon these terms; for interest can be paid only out of profits,

* J. S. Mill's Political Economy, Vol. II. p. 36.