keeps is of no profit to him. He sells his obligations for money; he buys obligations with money; and an enormous mass of obligations is built up on a very small foundation of actual money. It is probable that the London banks do not possess altogether as much as £30,000,000 in gold; but by means of this machinery of banking, nearly double the amount of all this gold passes hands under the form of drafts on bankers every week in one particular room in the city of London. No mechanism can be apparently more perfect; for the excellence of mechanism consists in the number and exactness of the operations it performs, in the ease with which these operations are effected, and, to use a metaphor from mechanics, in the reduction of the necessary friction to the least possible quantity.

A small sum of money can therefore be made to represent an enormous amount of property, and by means of these substitutions to effect a prodigious number of exchanges; and unless there were a universal panic, and thereupon those facts recurred, which induce individuals to hoard gold or silver, the creation of these obligations on paper will be developed to the fullest extent, since no one, as we have seen, ordinarily retains more gold or silver than he finds necessary or convenient, a single day longer than he can possibly help.

There are yet other economies. Bankers who receive deposits from persons wishing to put their money in a safe place, gave, from the earliest times in which the trade of a banker has been carried on, acknowledgments of receipt. These acknowledgments can be transferred from hand to hand, and such an obligation may have passed through the hands of a very large number of per

sons, between the time at which it was first given to the depositor, and at last presented in the form of a demand on the banker. 'But why should I not,' the banker begins to argue, 'issue these pieces of paper, which may be so profitable to me, and are so convenient to the public, upon the security of my own property, as well as issue them in acknowledgment of money received? Why should I not, instead of declaring in such an instrument my indebtedness to A. B., declare my indebtedness to any person who presents the piece of paper?' This easy change from a note of receipt to be paid on demand to the depositor or his assignee, to a general note addressed to the bearer, is the origin of the bank-note.

Now if the banker kept exactly as much metallic money in his possession as he had acknowledged in the notes which he has issued, he would get no profit on his business, except in one way—that of making a charge for supplying a great convenience. A bank-note is a great convenience: with proper precautions, its use involves no risk of violence or fraud. If it be lost or stolen, it can be traced. Intrinsically valueless, its practical utility consists in the power which its possessor has of obtaining that which it represents whenever he thinks proper to make a demand. If persons know that they have the power over a sum of money, and that they can exercise this power at their discretion, the power is as effectual as the possession. A large sum of money can therefore be, to all intents and purposes, conveniently carried, counted, and secured, by means of notes issued by a thoroughly trustworthy bank. So great therefore are the conveniences implied in the use of notes, that if the banker reaped no profit by their issue, and therefore could not afford to

offer them to exactly the same amount as the precious metals which they represent, the public would be willing to pay a premium for them. And this, in fact, was the practice with the old banks of deposit, such as those of Venice, Genoa, and Amsterdam. These banks professed to cover all the paper which they issued by the gold and silver which they retained. They broke their pledges indeed, and they all became finally insolvent, for in those days public morality was hardly understood. But they were trusted in the better times of their history. Now it is plain, had they exactly and invariably fulfilled the pledges which they gave, that they could not have paid the expenses of their establishment, unless they made a profit, or set a premium on their notes.

But a banker very soon finds out that the notes which he issues may be considerably in excess of the gold and silver which he holds, and that he may employ a portion of his property in some form from which he may get a profit, in place of keeping it in that form in which, as we have seen, it is quite unproductive. If he issues notes upon no property at all, the issue is fraudulent, and ought to be criminal, for not only has he committed an act of bankruptcy, but he has done it in such a way as makes a loss fall on persons who have had no dealings with him, and have no privity of information as to his trade. It is probably because the issue of notes at the discretion of a banker does not and cannot involve the power on the other hand of exacting adequate security on the note thus issued, and because an unsecured and therefore fraudulent note has worse effects than any other bad debt, that the government of this country has restrained the issue of notes by private bankers, and for the future has prohibited them.

The amount of notes which a banker may issue, in excess of the gold and silver which he retains in his hands, is not, and cannot be, a fixed quantity. The public which takes notes, or (which in effect comes to the same thing) lends a bank deposits on which the banker may trade, takes the note because it is more convenient than gold or silver; makes the deposit, partly because it is safer to put money into a banker's hands than to keep it oneself, partly because it is convenient to have an account with a banker, and thereby to check receipts and payments, partly because bankers are in the habit of encouraging depositors, by offering them a share in the gain which the lender obtains from the borrower. But these conveniences and advantages are all contingent on the fulfilment of two conditions. First, the deposit must be in all human probability safe; next, the depositor must be able to recover his deposit at pleasure, and know, (in case he leaves his money at notice,) that when the period of the notice has elapsed, he shall certainly recover his deposit. Failing these securities, no one would, if he were in his senses, take a note or make a deposit. No commercial undertaking needs so high a reputation, and so unsmirched a credit as that of banking. At any sacrifice the banker must be solvent.

We see then that the banker is obliged to take several circumstances which seem to contradict each other into account, before he can carry on his business successfully. In the first place, he must discover the minimum to which he can, consistently with safety, reduce his stock of metallic money or, what is the same thing, his power of drawing money. If he holds more of this money, or keeps more of this power in his hands than seem to be

necessary, he loses a certain part of his profits. If he holds less, he runs the risk of commercial ruin, of destroying his reputation, or at least of sacrificing his property by a forced or unfavourable sale, in order to save his reputation. There are, of course, occasions on which the banker finds it necessary, if he has common prudence, to fortify himself by enlarging these reserves, but he will never at any time suffer the amount of his reserve to go below what experience points out to him is necessary for the protection of his commercial reputation; and he will of course take care that all the property which he possesses in his bank shall be of such a character as can be converted into specie with the least possible delay and loss.

We must not forget that money, i. e. coined gold or silver, or both, is the measure of value, and that it has been chosen for this end because it has certain properties. Hence, though persons will, for certain purposes and for a certain time, take the representative of money, they will do so only because they are thoroughly convinced that they can claim the money which the symbol represents whenever they please, and on the instant at which they claim it. There must be no risk or delay, else the representative of money falls inevitably in market value below that which it professes to guarantee. Hence it will be seen that any attempt to base an issue of notes on anything besides money, or that which can instantly be turned into money, is sure to be a failure, however valuable the security may be, and is sure to bring discredit on the note. The history of banking is full of examples of the consequences which ensue from issuing notes based on securities or property, or, in short, on anything but the precious metals. In our own country an attempt was