fer of specie; the original deposit, which was entered at its intrinsic value at the time of making it, remained as security for the credit transferred from one person to another; and the specie, so lodged with the bank, was exempt from any reduction of value by wear, fraud, or even legislative enactment."

It was presupposed by this arrangement, that all the merchants of the city made their deposits and kept their accounts at one and the same institution; and it answered, of course, only for their dealings with each other, and not with the merchants of other cities or of foreign lands. Banks instituted exclusively for this purpose have died out, I believe, even in the places where they originated. It has been found more convenient to combine this office with the other functions exercised by banks. It is performed by the bankers in London, who are associated into partnerships, from two to six individuals usually forming one house, and by all the American banks. In England as in America, "it is chiefly in the retail transactions between dealers and consumers," says Mr. Mill, "and in the payment of wages, that money or bank-notes now pass, and then only when the amounts are small. Not only the merchants and larger dealers, but persons of fortune, and all shopkeepers of any amount of capital or extent of business, deposit their spare cash reserved for immediate use in a bank, and make all payments, except very small ones, by checks. If all did business at one bank, as we have seen, no actual transfer of money would be necessary, but only a transfer of credit on the books. In London, the institution of the ClearingHouse does virtually combine all the banks into one for this purpose, the checks being very seldom directly paid in money, and the accounts of the bankers with each other being adjusted once a day. In this country, till recently, the checks were directly paid by the institution on which they were drawn; but all checks to any considerable amount were paid in bills of a large denomination, with the expectation that these would not pass into general circulation, but would merely be carried a few steps in State Street or Wall Street, to another bank, where they would either be taken in payment of a note or be lodged on deposit; often, indeed, they were not carried out of doors at all, but were only transferred from the paying to the receiving teller

of the same institution. Such bank-bills form no part of the currency properly so called; they are mere orders from one institution to another for the transfer of credits.

It will be observed that I have not, thus far, entered into any consideration of proper bank currency, viewed as a substitute for gold and silver coin; that topic, from its extent and importance, must be reserved for another chapter. Yet we have seen that the largest operations of domestic and foreign trade are carried on with the intervention of very little money; that the most important exchanges are effected without any transfer of the precious metals; and we have already abundant reason to believe that, in these modern times, the proper sphere of money is in retail transactions, and in answering frequent petty demands. We thus gain a more correct idea of the comparatively limited functions of money, which common persons are led grossly to exaggerate, merely because, at any one time and place, it is a common measure of value, a universal denomination of account. All wealth, all commodities, are estimated in dollars, francs, pounds sterling, and the like; and it is by the aid of such estimates that all exchanges are made. Thus, the idea of money aids us, when the reality is seldom employed. As pounds sterling were a universal denomination of account for a long period, during which there was no such coin as a pound sterling in existence, so the idea, or abstract conception, of numerical values expressed in coin would be a convenient, even an essential, implement or contrivance in mercantile transactions, though all exchanges should be made by direct barter of one commodity for another. Without such a contrivance, the merchant could not keep his books of record intelligibly, or preserve his accounts with individuals in his large and complicated business. Money is even now only a hypothetical or abstract medium of exchange in all the larger transactions of commerce. I almost anticipate the time, in the progress of invention and the discovery of new expedients and facilities in commerce, when it will become so universally; when, at any rate, so costly and useless a realization of the idea as gold and silver coin will be entirely done away. Only practical difficulties, or what may be called difficulties of detail, even now obstruct this desirable consummation.

CHAPTER XX.

THE FUNCTIONS OF BANKS AND THE NATURE OF BANK-NOTES: THE OPERATIONS OF CREDIT.

WHILE treating of banks and bank currency, the subjects of the present chapter, I shall, in order to avoid confusion, refer only to the banking system established in this country, and especially here in New England; at any rate, the references to the Bank of England and other foreign institutions will be only incidental, to elucidate the operations of our own banks. It has been said that our banks have properly three functions, or that they are banks of deposit, discount, and circulation. have briefly explained the first of these three offices, that of deposit, and have shown the benefits resulting from it. Through this function of the banks, dealers are released from the necessity of counting over large sums of money in order to make or receive payments, and from the risk of keeping such large sums by them in their own establishments, where they would be exposed to thieves, fire, and other casualties. They are enabled to make and receive large payments by mere slips of paper, which are only orders for the transfer of credit, on the books of the bank, from the account of one person to that of another. Their money, being useless to them except for the purpose of effecting these transfers of credit, is left undisturbed in the vaults of the banks; and these institutions, being able to calculate the average amount thus left with them continually, are enabled to use it over again, or to lend it to their customers; for credits can be equally well transferred on the bank books, whether the money represented by these credits is actually in the bank safe, or in the hands of a person to whom the bank chooses to lend it, and who may be regarded for this purpose as its agent or cash-keeper, the bank, of course, being responsible for him, or engaging to repay the money, if he does not.

I find, by the latest returns of all the banks in Massachusetts, that the sums thus deposited with them amount to little less

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.