of currency. They are still articles of mere merchandise when they are exported in the shape of coin to satisfy obligations created in foreign countries.

But concurrently with these uses of the precious metals, they are employed as the machinery of trade, and as the form in which obligations are expressed, and therefore may be compulsorily satisfied. In small transactions these obligations are liquidated by the transfer of money, for reasons given in a previous chapter. In transactions between nation and nation, except in cases where gold and silver are the natural products of a country, they are rarely used, the imports and exports of the nation as a rule balancing each other, and the influx and efflux of specie out of or into any one country being determined by causes similar to those which govern the distribution of other products. Nor are all the transactions between the inhabitants of any one country settled by the machinery of the precious metals. The result may be effected by their substitutes. Thus, for example, transactions representing an average of £10,000,000 sterling are daily adjusted in one room in London, the bankers' clearing-house, without the intervention of a sovereign, a shilling, or even a penny. In the absence of these substitutes for the precious metals, the adjustment of these mutual obligations would be so inconvenient as to be practically impossible. Convenience as well as economy induces a community to dispense as far as possible with the machinery of a metallic currency. Every one of these obligations is expressed in quantities of the precious metals. But the business done in three ordinary days at the clearing-house represents more specie than is to be found in all the reserves of all the banks in London.

Even if these were the only transactions in which substitutes are found for money, the specie possessed by the London banks would be made to operate as the machinery of trade more than a hundred times a year. The only reason why a similar machinery does not extend itself over the civilised world is, that nations are still barbarous enough to employ different currencies, and to use different codes of commercial law. If these differences were eliminated, as in course of time they will be, there would be no more reason for paying any more attention to the efflux and influx of gold between this and other countries, than to that of the same commodity distributed in varying quantities over the area of any one community. In Adam Smith's time, there was a rate of exchange between London and Edinburgh. In time to come, when the reforms indicated above are effected, the theory of the foreign exchanges will be far more antiquated and unreal than that of the balance of power.

A country then supplies itself with such gold and silver as it needs for the arts in the same way that it supplies itself with other raw materials—by the exchange of its exports. In the same way it obtains such sums of the precious metals as it needs for the purposes of ordinary retail trade and exchange. The amount which it retains of these metals is increased as its home-trade increases, but is diminished by economies in the substitution of symbols for coin. Thus the general use of cheques has tended to diminish the amount of specie circulating in a country, and, were one-pound notes adopted, a further economy would ensue, in so far as such notes when put into circulation represented a larger sum than might be retained by the bank which issued them and was bound

There is reason

to exchange them on demand for gold. to believe then that the amount of specie circulating within a country varies little from year to year; for, as we have seen before, there is no motive to increase its amount, every motive to reduce it to the least possible quantity consistent with the fulfilment of those functions for which money is adopted as a measure of value. It is possible that at the beginning of the present century there was nearly as much metallic money in England as there now is; for although the population has doubled, and the wealth of the country has grown in a far greater proportion, it is very likely that the enlarged demand for money is compensated by the increased use of banking and drawing facilities, and the abandonment of the habit of hoarding, a practice which was very general sixty and seventy years ago.

The ordinary supply then of gold and silver, in so far as it is employed in the arts, and employed for the purposes of an internal currency, is effected in the same way as that by which other wants are satisfied. It does not seem that these quantities of the precious metals can be materially diminished, just as they will not be materially increased. There may be, as there was during the great continental war, a demand for specie in order to pay troops; and if paper can be substituted for gold and silver, a drain upon the metallic circulation may take place. But in the absence of such a substitute, but little of these metals will pass out of the home circulation. Dealers in the precious metals find it possible to trench on other resources, the amount of which is far less than that in circulation, but which is far more open to these influences. Gold and silver will hardly be extracted from circulation,

except in some slight degree, and usually by offering a premium on them in the shape of imports at a reduced price. But persons who need to export money can obviously procure gold in exchange for notes, and thus by contracting the paper circulation, and thereupon by putting an additional strain on the metallic currency, render any effect on the latter increasingly remote and difficult.

A paper circulation purports to give the holder of the note a right to demand the sum specified in the note at his pleasure. Under no other circumstances will paper circulate at par, i. e. be exchanged at the sum which it represents. If the paper has a forced currency, it will circulate only because the solvency and good faith of the issuing parties is trusted; if it be suspected, or the prospect of redeeming the note be distant, it will circulate at a depreciated rate, this rate appearing in the country which uses the note in a rise in prices, and in transactions with foreign countries in an adverse state of the exchanges. For example, the par of exchange, omitting fractions, between England and France, is twenty-five francs, = £1. If however French notes were inconvertible and had a forced circulation, and the suspicion or risk attending on the use of the paper amounted to twenty per cent., the prices of articles purchased in the French. market would rise by this or more than this amount, and it would take thirty-one francs, speaking roundly, in paper, to procure an English sovereign. This rise in the value of gold, or, to be more exact, fall in the value of inconvertible paper, is manifested in the national currency of the United States. The discredit attaching to this paper at one period was so considerable that it took more that 280 paper dollars to procure 100 gold dollars.

But

with the return of peace, and with an abundant revenue, the government was able to grapple with its public debt and its state paper, and to offer a prospect that ere long it might be able to meet the over-issue and resume payments in gold.

As we have seen above, banks of issue find it possible to circulate a far larger amount of paper than the gold on which the paper is based. A bank, for example, may in ordinary times circulate £30,000,000 of notes, and be quite safe from risk if it retains only £10,000,000 of specie, i.e. has its metallic assets only one-third of its liabilities. It takes care of course, if it is dealing honestly with those who use its notes, that the remainder of its liabilities are covered by property, i. e. by bills of exchange arriving at maturity, or by quantities of government securities. It is only obliged to have all its assets in such a position as that they can be easily convertible into specie.

Now it is plain that if it become necessary to transmit a portion of this gold upon which notes are issued, that it is only necessary to present a certain number of these notes in order to get gold in exchange. But it is also clear that if any notable portion of this gold is abstracted, the bank is by so much nearer the position in which its notes bear a high proportion to the specie on which they rest. If the bank then be not empowered to issue notes on government or other securities, it must not only (to maintain such a proportion as that which has been referred to, and which is assumed to be generally necessary in order to sustain the reputation of the bank) diminish its circulation by all the notes returned on its hands, but by more than this amount, i. e. by just so much more as will restore the equilibrium. Thus, for example, if the ordinary cir