for such merchandise, is entirely competent to issue instruments for its distribution. The modes of issue of the notes or credits of Banks, and the conditions necessary to secure at all times their return without the withdrawal of any considerable amount of the reserves held to meet reclamations, - in other words, to preserve their value at all times at the standard of coin, — will be most readily shown by tracing from the outset the operations of one of these institutions.

A Bank-the capital of which, on commencing business, may be assumed to consist of one million dollars paid up wholly in coin, does not, in discounting bills, or in making its loans, pay out its coin, but issues its notes, or gives credit on its books to be drawn in its notes or in coin, at the pleasure of the holder, and which till drawn are termed deposits; holding, in the mean time, its coin as a reserve to redeem such notes and credits as may be presented for payment. If it paid out coin in making its loans, no adequate advantage would be gained to its stockholders or to the public from its organization; for coin could be loaned as well without as with a Bank. The very object of the Bank, in making its loans in the manner described, is to provide instruments of exchange and distribution other than coin, and thereby obviate its use. It is here assumed that the bills to be discounted were given for, and represent, merchandise having a value equal to their nominal amounts. As they would be paid by its sale and the collection of the proceeds, they would, in the hands of their holders, have a corresponding value, a value equal to that of coin, subject, of course, to the risks which attend all commercial transactions. The notes and credits issued would have a similar value, as the Bank would undertake to appropriate the proceeds of that which the bills represented for their payment. The process of discount consists of a mutual exchange of obligations. As those of the Bank would be discharged to the extent that its notes and credits were taken in, it would receive them in payment of its bills equally with coin. The holders of merchandise, therefore, would receive them equally with coin in its sale, as they would pay their bills equally with coin. As they would be accepted in the sale of merchandise equally with coin, they would be taken by the public, the consumers of merchandise, equally with coin. As the object of all currencies, no matter the form or materials of which they may be composed, is to reach

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by their exchange some other article or articles, the holders of the notes and credits of a Bank would have no adequate motive to exchange, nor would they exchange them for coin, to be used as currency, so long as they would perform, as currency, all the functions of coin. Producers, consequently, in whose favor the bills were discounted, would, from the greater convenience of their use, prefer to receive in their discount, notes and credits to coin, as they could pay them out equally with coin in the purchase of labor and material, in the prosecution of their industries, to the very parties who would be the consumers of the merchandise which they had produced and put upon the market. As fast as such merchandise was consumed, the notes and credits issued would come into the possession of the parties who had been its holders (the makers of the bills), to be used by them in their payments. The obligation created on either side, when the bills were discounted, would in this way be cancelled by mutual offset; but not until merchandise, equal in value, had been fully distributed for consumption.

The pivot upon which all these operations turn is merchandise. That provided, the instruments which represent it, and which entitle their holder to a corresponding amount of the same in value, or to the proceeds of the same, and which, by their transfer, transfer that which they represent, ARE PAPER MONEY - CURRENCY. As soon as they are issued, their movement commences automatically in their appropriate spheres, and continues until they have accomplished their circuit and work. It is merchandise that calls them into being; it is merchandise that gives them their value; it is merchandise that gives them their impulse; and it is merchandise that, by its purchase for consumption, returns them to those who issue them, not to be reissued but in the making of new loans. So far as merchandise is provided, they proceed noiselessly and beneficently in their proper orbits. So far as it is not provided, their course is as erratic and destructive as would be that of the planets, without the guidance and control of that central mass around which they now so harmoniously move.

All local currencies, therefore, are based, not on gold and silver coin, but on merchandise, for which they serve, in the place of coin, as instruments of distribution. Coin is itself money, and needs no symbol for its transfer or distribution. Except a small quantity by way of change, the precious metals

are no longer used as currency. They are held and used chiefly as reserves for the discharge of such paper currencies as are not discharged by merchandise in manner described.

As the Bank, in the payment of its bills, would make no distinction between the notes and credits issued, that is, as it would receive, in payment of bills given for breadstuffs, notes and credits issued in the discount of bills given for iron, -so the holders of merchandise, who would be the makers of its bills, would receive its notes and credits without any reference to the kind of merchandise for which the bills discounted were given. In the same way, if the merchandise of a community were symbolized by the issues of several Banks, such issues. would be received on the same terms by its holders; for the reason that each Bank would receive for the payment of its bills the notes and credits of the other Banks (provided they were of good standing) equally with its own. Whatever the notes or credits, therefore, that any person might hold, they would be directly exchangeable for any article that might have been symbolized, or which he might wish to obtain. In the settlements that would frequently, and in places where there were several Banks would daily be made, each Bank would have to take in all its notes and credits that might be held by other Banks. These settlements would be made by offsetting, as far as they would go, the notes and credits of other Banks which each might hold against those of its own held by them. The balances arising, after the notes and credits of other Banks held by any one Bank had been exhausted would, like all debts, have to be discharged in coin, as the only kind of capital which, as in the case of a balance arising in foreign trade, the party would accept in whose favor it might be found, or which the delinquent would have to offer.

The process of discount consists, as already shown, of a mutual exchange of promises payable by their terms in coin,of the notes and credits of Banks for merchants' bills. The latter are payable, in theory, upon such time as will suffice for the distribution of the merchandise for which they were given, and the collection of its proceeds. The former are payable presently, as they are assumed to represent merchandise fitted and accessible for immediate consumption; and in order that, if their holders desire, they may be used at any moment in the

purchase of the same. They are payable by their terms in coin, that their holders, if they cannot by their direct exchange obtain that of which they are in search, may at once convert them into that form of merchandise, gold and silver, which have at all times the same value, and by means of which their holders are always certain, by direct exchange, to obtain that which they wish to acquire; or which they can safely hold, if they do not wish to convert them immediately into merchandise. The moment they are converted into gold and silver, their full value is treasured up for future use, placing their holder beyond all possible risk of loss. That the notes and credits of a Bank will not be received for merchandise at their nominal value, at all times, is evidence that they have been issued upon inadequate security, and that the safety of their holder requires their immediate conversion into coin.

As Banks guaranty the immediate convertibility of their issues into merchandise or into coin, possessing the means therefor either in their reserves in coin (which all Banks must maintain), or in the merchandise which the bills they have discounted represent, and which, whoever may have its possession, is to be esteemed a fund especially set apart for their pay-. ment, and consequently for the redemption of the notes and credits issued in their discount, they treat all such issues as the equivalent of coin; and charge the same rate of interest on loans made by their means, that they would charge on loans of an equal amount of coin. The borrowers are assumed to be producers; for only such are entitled to borrow at Bank by an issue of symbols, which anticipate to them the collection of the proceeds of merchandise which they have put upon the market. The interest they pay in the discount of the bills taken in its sale is charged to the purchasers, and is finally paid by consumers as a part of the cost of distribution. It properly makes an element in price; as, without the symbols issued by the Banks, the cost of distribution, and with it, price, would be greatly increased, by the use of a metallic in place of a paper currency. Consumers in fact are the parties chiefly benefited by a symbolic currency, as the object and effect of all such currencies are to simplify and cheapen distribution. While Banks derive a profit from their circulation, they can derive one only so long as they conduct their operations prop

erly, and in harmony with the general welfare; only so long as they issue instruments against merchandise actually in demand for consumption. The return to them of their notes and credits, automatically, is the proper test, and the only one, of competent management.

As the liabilities of a Bank are in ratio to the amount of its discounts, and as it must, for its own safety, maintain reserves to take in such of its liabilities as are not returned to it in the payment of its bills, it follows that as its reserves are drawn, it must reduce its discounts, -in other words, its interest-bearing securities, in a far greater degree. If, for example, a Bank having reserves in coin equalling $1,000,000 could safely have a discount line of $5,000,000, it would, if its reserves were reduced to $500,000, have to reduce its discounts to $2,500,000. If its reserves were wholly drawn, the Bank would have to replenish them, or suspend operations altogether.

The preceding statement fully explains the effect of the addition to, or the withdrawal from the reserves of Banks, of a comparatively small amount of specie. In countries like Great Britain or the United States (the currency of the latter being on a specie basis), nearly all additions to their specie go immediately into the Banks, increasing their reserves in an equal degree. These immediately proceed to increase their issues, somewhat in like ratio. So long as they discount nothing but legitimate paper, their position may not be immediately compromised. All sudden additions of the means of expenditure, however, will necessarily lead to over-consumption, to wastefulness, and to enterprises in advance, or beyond the wants, of the community in which they are undertaken. On the other hand, the withdrawal of the reserves of Banks, provided such withdrawal be permanent, compels them to reduce their issues in five-fold ratio to the amount of such withdrawal, reducing the available means of the public in a like degree. Their operations are never in simple, but in far greater, ratio to the amount of specie they hold; hence, unless they are adequately managed, the movements of specie (which is always in a state of ebb and flow), are certain to keep the public in a condition of chronic excitement and agitation, from the constant variations in the amounts of paper money. At one time there will be a plethora of it; at another not a dollar is to be