has to make the best terms which he can with the lender.

It is no doubt possible, when the rate of discount is exceedingly high, to cause a rapid fall in the price of capital advanced on temporary loan. An increased issue of paper will bring this result about when the drain has reached the highest flow and is on the point of ebbing. The convenience of this excess is so great, and the circulation of such an excess is certain to be so short, if the rebound can be foreseen, that the power of adopting this expedient will always check the rate of discount and turn the tide. Much more certain however is the issue of notes representing smaller sums than those ordinarily circulated. If this expedient be adopted, a certain amount of gold, equivalent to such notes as can be put into circulation, will be liberated from the home currency, and flowing to the bank will fill up the void which has been created, either wholly or partially. Even permission to use such an issue is, as was the case in 1825, sufficient, for the holders of capital anticipate that they will soon be constrained to accept a lower rate of discount, and be obliged to compete as lenders, instead of being an object for the competition of borrowers.

The effect, then, of a drain of gold which has been originated from the necessity of meeting the requirements of foreign purchases in an excess of imports over exports, is all the more manifest when we compare, under the economy of banking, the amount of a foreign trade by the side of the quantity of specie on which it is based, and the service which that specie is made to render to the paper currency at home. The amount of these imports is more than seven times as much, in money value, as the

amount of the gold ordinarily retained by the banks. Upon this sum, then, must fall the function of paying for an occasional excess of purchases. But this sum also sustains the internal circulation of paper, and a vast mass of credit expressed in money.

In the ordinary course of things, and when mercantile credit is good, capital is procured by borrowers at something less than the average rate of interest, for loans made for short terms are always more satisfactory to lenders than loans which cannot be readily recovered. Lenders in this case, acting through their agents, that is, bankers, wish, as a rule, to have their assets as available as they can. When, however, loans have been freely made, and the articles towards the purchase of which these loans have contributed fall in value, and therefore a loss is imminent on the purchaser, attempts will be made by borrowers to procure an extension of such loans as they have already contracted, in order to tide over the depression, and to save themselves against the time when diminished importation will enable them to recover, in some degree at least, the present loss. But the readiness of lenders diminishes with the eagerness of borrowers; the price of the assistance, known as the rate of discount, rises, the number of loans is lessened, and they whose commercial position is most unsound, are obliged to suspend their payments. Such occurrences increase the distrust; every man seeks to entrench himself against risk; lenders are more than ever wary, and increase their reserves of capital. The feeling of insecurity may, and does ordinarily, increase, and what is called a commercial panic ensues; that is, a state of things in which loans of any kind are made with the

greatest difficulty, even when the security is unexceptionable. The deficiency of loan capital does not occur at an early stage in these proceedings, but when the reaction on prices sets in and the speculation is disappointed. In such cases the difficulty has been met, and always successfully, by permitting an issue of bank notes over and above the fixed legal amount, or by the issue of government paper in aid of merchants, under the form of exchequer bills. These bills are really certificates of indebtedness on the part of government, payable at a fixed date, and bearing interest in the interval. The former expedient was adopted in 1847, 1857, and 1866; the latter in 1792, 1811, 1822, and 1825. 'Commercial distress,' it should be added, almost always arises from over or speculative trading, but its incidence is as severe on prudent as it is on injudicious trading. High rates of interest arrest the profits of those who borrow capital in order to carry on trades in which there is the least possible amount of risk, as well as the gains of those who have borrowed in hopes of getting the advantages of a rising market.

It is possible for a country to carry on a large and increasing foreign trade, and to labour under a severe depression of its industry at home. Such facts have

characterised the trade of the year 1867. The exports and imports have increased, but many branches of domestic industry have been adversely affected. The price of all metals has been very low; the production of textile fabrics has been carried on under the disadvantageous condition of a constantly falling market; ship-building has been almost arrested. Added to these, there has been a general and well-founded distrust in the numerous

joint-stock enterprises which have been attempted, and which have failed, partly by an over-sanguine confidence, much more by the gross dishonesty of many among their promoters, and the utter inadequacy of the English bankruptcy law in arresting and punishing offences against mercantile credit. There may be low rates of interest, and great stagnation of business, consequent upon speculations carried on at home, and carried on unwisely or dishonestly.

CHAPTER XVI.

The Distribution of Capital.

The same

THE profits on capital tend to equality. conditions fulfilled, the rate of profit obtainable from advances of capital must be the same; and the circumstances will not vary, whether the possessor of capital uses it in his own business, or lends it to others. There is, as we have seen before, no real difference between the rate of profit and the rate of interest.

If, therefore, all kinds of business were equally safe, and all borrowers equally trustworthy, capital would be equally distributed over all kinds of labour for the produce of which a demand exists. Insecurity alone, when capital has been accumulated, is a hindrance to its equal flow over every field of industry. This sense of insecurity is either entertained towards the intelligence or the integrity of the borrower. Where the average intelligence of traders is insufficient to interpret and provide against

the risks of any business, capital will not be attracted to the calling in which such risks arise; or what is in effect the same thing, the apparent rate of profit in such callings must be greater than it is in others. Thus, for example, capital flows more readily to ordinary kinds of agriculture, especially to those which involve but little danger of failure from the contingencies of weather and markets, than it does to exportation for a new and uncertain foreign demand. Again, where the business is liable to periods of depression, or to the chance of sudden cessation, the attractions of such a calling are less than those which belong to a safer industry, and the apparent rate of profit rises; an index that the competition of lenders for such investments or advances is small. I have already stated that the risks of a strike increase the gains of those who engage in such occupations as are liable to these occurrences, and will increase them until such times as, the power of calculating or predicting such emergencies being taken away, the possessor of capital absolutely declines to employ his resources in such occupations.

Frauds and similar malpractices on the part of borrowers are also hindrances to the easy distribution of capital. It has been more than once found impossible to carry on trade in certain articles, because manufacturers, in their hastę to get rich, have sold worthless goods, or fabricated the trade marks of their rivals on inferior goods, or have in other ways deceived their customers. Again, the want of trustworthy agents in particular localities is not only a bar, but an actual hindrance to the distribution of capital. The rate of interest or profit would approach identity over the world, if commercial honour were generally dominant, and the police of the exchange were