Now, as gold can be drawn out of the Bank of England by the cheques of

depositors as well as by the presentation of its own notes for

redemption, the Rate of Discount becomes a matter of prime importance

in the management of the Bank. The whole line of deposits is a line of

liabilities to pay out gold, if the depositors demand it; and, as

deposits come largely through discounts, whenever there is a strong

tendency to draw out gold so as to weaken the reserves of the Bank,

the directors have an effectual remedy by raising the rate of

discount. The higher the _price_ the Bank charges for its credit, the

fewer, so far forth, will be its customers, and the smaller its line

of deposits, and the less likely a continuous drain of gold from its

vaults. The Bank of England is managed throughout by so simple a

manner as the turning back and forth of this magic screw of Discount.

Besides the use of the term "Par of Exchange" in the broad commercial

sense in which we have now been examining it, as indicating the

substantial equality of international debts as between two countries

by the current prices of bills of exchange, there is another and

subordinate sense in which the phrase is employed, namely, as denoting

the _relative value_ of the coins of one nation in the coins of

another. Thus, our present gold dollar contains 23.22 grains of pure

gold; the English pound sterling contains 113.001 grains;

consequently, there are $4.8665 to the English pound; and this is the

"par of exchange" (in the secondary sense) between the United States

and Great Britain. Between the United States and France the "par" is

$1 to 5.18 francs, since the franc is 19.29 of our cents. An English

shilling equals 24.33 of our cents, the new German "mark" is 23.82

cents, and the new Scandinavian "crown" equals 26.78 cents.

_g._ Bank Cheques. In substance indeed and even in form, Cheques are

Bills of Exchange, but the two have such differing legal incidents,

and run so different a course towards extinguishment, that for our

purposes in this treatise they should be put under a separate

discussion. Bills of exchange are expressly drawn "at sight" or for a

day certain, when they become payable by the drawee: cheques _say_

nothing about "sight" or any future date, though they are _really_

drawn at sight, and are payable to bearer on demand: they must,

therefore, be presented for payment within the shortest reasonable

time (all things considered), in order that the holder may legally

claim against the drawer should the banker fail meantime: a cheque is

held as the payment of a debt until it be dishonored on presentation:

the banker bears the risk of the forgery of the drawer's name, unless

his mistake be made easier by the drawer's carelessness in drawing: a

cheque is not payable after the drawer's death. The parties to cheques

are the Drawer, who is a depositor with some banker; that banker thus

becomes the Drawee; and the person named in the cheque is the Payee,

who can indorse his own right over to another person by name or in

blank to bearer. When a cheque is drawn in this way by one _banker_

upon another, it is usually called in this country a _Draft_.

Formerly in England, and in other countries as well, each considerable

dealer kept his own strong box, and when he had occasion to make

payments, told down the solid cash upon his own counter. Afterwards,

the goldsmiths of London solicited the honor of keeping in their

vaults the spare cash of the merchants, and these in their payments

among each other came to employ orders or cheques drawn on the

goldsmiths, and at the shops of the latter the principal payments in

coin were effected. The later introduction of Banks brought along with

it the custom, now continually widening in commercial countries among

all classes of the people, of keeping one's funds with some banker,

and making payments by written orders or cheques upon him. When the

person making the payment and the person receiving it keep their money

with the same banker, there is no need of any money at all passing in

the premises, the sum being merely transferred in the banker's books

from the credit of the payer to the credit of the receiver. The banker

is quite willing usually to do this business for nothing, and even

sometimes to allow the depositors a low rate of interest on all

balances remaining in his hands, in consideration of the privilege

involved of loaning such proportion of the aggregate of these sums as

he deems safe to other parties at a higher rate of interest.

In the larger cities, by an arrangement called the "Clearing-house,"

substantially the same benefits are secured as if all the depositors

of the city kept their cash at the same bank; inasmuch as all the

cheques drawn on each of the different banks, and passing in the

course of the business day into other banks, are assorted before

evening at all the banks, and adjusted the next morning through the

clearing-house, and the credits and debits of each bank are set off as

far as possible against each other, leaving only small balances to be

settled in money.

The London Bankers' Clearing-house was established in 1775; in 1864,

the Bank of England was admitted to it; and since then, the

Clearing-house itself, and all the bankers and firms using it, keep

accounts with the Bank of England, and the balances, formerly settled

by money, are now adjusted by simple transfers of account on the

books of that great Bank. This carries out the grand principle of the

Clearing further than it has yet been carried in this Country,

although the United States Sub-Treasury not very long ago joined the

New York Clearing-house, while the practical details of the Clearing

are simpler and better in New York than in London. The average

clearings in the London house (and there are besides many other

clearing-houses in the United Kingdom) were £5,218,000,000 a year for

1875-80, and the amounts cleared frequently rose to £20,000,000 a day;

which, if paid in gold coin, would weigh about 157 tons and require

about 80 horses to carry it; and if paid in silver coin would weigh

more than 2500 tons and require 1275 horses. This is stated on the

excellent authority of the late Professor Jevons.

The total business of the 23 clearing-houses of the United States in

1880 was over $50,000,000,000; the New York Clearing-house did 65% of

that business for that year; and the average daily clearings there for

the fiscal year 1879 were $76,167,983.

We will now describe mainly from personal observation the New York

Clearing-house, which was established in 1853, premising that the

principle is the same, though the details may be different, in all

other clearing-houses wherever located. Business men in New York, as

elsewhere, usually pass in to their bankers as a deposit all the

cheques and current credits received in the course of a business day.

It is the custom for everybody to draw his own cheque _on_ his banker

to make payments with, and to pass in _to_ his banker the cheques he

receives from others. Say there are sixty clearing-banks in New York

City. Each of these banks sorts out after business hours every day all

the cheques it has received that day drawn on each of the other banks

into separate parcels ready for the clearing the next morning. Each

bank has, then, fifty-nine parcels _to deliver_, which represent the

property of that bank, and are a _claim_ upon the other banks; and

also _to receive_ fifty-nine parcels, which represent the property of

the other banks, and are a claim upon _itself_.

Before ten o'clock in the morning sixty messengers, each having

fifty-nine parcels to deliver, appear at the clearing-house, each

reporting to the manager at once for record the amount of "exchange"

he has brought, which is entered of course as _credit_ to his bank;

and then all take their positions in order in front of the sixty

desks, which occupy the floor of the house, behind which sit sixty

clerks, each representing one of the banks. Each messenger stands

opposite the desk of his own bank, with his fifty-nine parcels already

arranged in the exact order of the bank-desks before him. Of course no

messenger has anything to deliver to the clerk of his own bank. Each

clerk inside his desk has a sheet of paper containing the names of all

the other banks arranged in the same order as the desks, with the

amounts carried out upon it which his messenger has just brought to

each. All these are entered in his credit column. Each messenger

carries also a slip of paper ready to be delivered with each parcel to

each clerk, on which is entered the amount of the cheques he now

brings to each bank. Of course the amount delivered _to_ each bank is

_debit_ to that bank, just as the amount brought _by_ each is _credit_

to that bank.

A signal from the manager, who stands on a raised platform at one end

of the room with his two or more clerks before him, and each messenger

steps forward to the next desk in front of him, delivers his parcel

and also the slip that goes with it, which latter the clerk signs with

his initials and hands back to the messenger as his voucher for the

delivery; and then each messenger advances to the next desk,--the

whole _cue_ moving in order,--at which precisely the same things take

place as before, and so on, until the circuit of the room is made, and

each comes opposite again the desk of his own bank, having passed to

each its "exchange" and taken a receipt for each delivery. This

process takes about ten minutes; when each clerk, who had on his sheet

to start with the _credit_ due to his bank, has now the _data_

(fifty-nine items) by which to calculate the _debit_ of his bank. The

difference between the aggregate of cheques _received_ and _brought_

by his bank is the balance due _to_ or _from_ the clearing-house as to

that bank.

All the clerks report to the manager the amounts _received_ by each,

and as his proof-sheets hold already the amounts _brought_, if the two

columns add up alike, no mistake has been made, and the general

clearing is over. Thirty-five minutes are allowed the clerks to enter,

report, and prove their work. Fines are imposed for errors discovered

after that time. The Clearing-house gives tickets of debit or credit

to all the banks, and the debit ones must pay in lawful money before

half-past one, and the credit ones will get their due from the manager

immediately after. The largest sum ever cleared in New York in one day

was $206,034,920.51 on Nov. 17, 1868, and the smallest $8,357,394.82

on Oct. 30 of the panic year, 1857.

_h._ Crossed Cheques. About twenty years ago there was instituted in

London what is called the Cheque-Bank, which is designed to bring the

benefits of the credit-system in the form of cheques more easily to

all classes of the people. The cheques issued by this institution are

so different in character and in course from common bank-cheques, and

are in some respects so new in principle, that we must give to them a

separate heading and a full explanation.

The Cheque-Bank is a stock company in London under that style, which

has entered into relations with nearly all the banks and bankers of

the United Kingdom, and with many Colonial and foreign banks also, by

which Cheque-Books are furnished for sale by the Cheque-Bank through

these associated banks, which also agree to cash the cheques, every

cheque in which books indicates by printed and indelible perforated

notices upon the forms what the utmost sum is against which that

cheque can be drawn; the aggregate of these perforated sums is the

price for which each book is sold less 1-1/5 penny for each cheque in

it, of which the penny is for the Government stamp required and the

one-fifth for the profits of the Cheque-Bank; and all these cheques in

books of different sizes and amounts are drawn in form _on_ the

Cheque-Bank, and _Crossed_, that is, _only made payable through a

banker_. It is one security against fraud that each cheque bears on

its face the utmost sum for which it can be used, and another is that

it can only be taken up by a banker and thus settled ultimately

through the clearing-house. The Crossed Cheques Act of Parliament in

1876 makes any obliteration of the crossing or essential alteration of

a cheque _felony_ at law.

Cheque-crossing is of two kinds, _special_ and _general_; when any

particular banker's name is written between two transverse lines, in

which form alone crossed cheques differ from ordinary ones, that makes

that cheque payable by him only; when the words "_and Company_" or

"_and Co._" are written between these lines, that makes the cheque

payable only through _some_ banker, that is, the cheque is crossed

_generally_; and when two parallel transverse lines simply are drawn

across the face of a cheque, with or without the words "not

negotiable," that cheque is legally deemed to be _crossed_ and crossed

_generally_. When a cheque is uncrossed, the lawful holder may cross

it either generally or specially; when it is crossed generally, he

may at his option cross it specially; and whether crossed generally or

specially he may add the words "not negotiable." All this facilitates

greatly the _collection_ of cheques by set-off through the clearing;

and has a direct bearing on the fortunes of the Cheque-Bank.

The Cheque-Bank publicly guarantees the payment of all the cheques in

all its cheque-books to the maximum amount for which each cheque may

be drawn; and it may well do this, for no cheque-book is sold except

for money, and the money is ready in the hands of some banker to pay

every cheque when presented; any banker or other person will give cash

for them, or take them in payment for goods or other services, or if

they are drawn for a sum larger than the debt due will give back the

charge to the bearer; and if the cheques be actually drawn for less

than the maximum perforated on them, the Bank itself will give

additional cheques for the balance. The ultimate payment, then, of

these cheques is as sure as anything in the future can be; the buyer

of a cheque-book knows, that the money is already in deposit to pay

them, and that the government-stamps on them have already been paid

for, while the receiver of an ordinary cheque cannot know beforehand

that the drawer has money in deposit against it. Moreover, the holder

of an ordinary cheque must use due diligence in presenting it for

payment as soon as possible, or delay it at his own risk, while the

holder of these has no motive whatever for haste,--time does not

deteriorate them. All money received for cheque-books is left in the

hands of the bankers who sell them, or transferred to other bankers in

order to meet the cheques presented elsewhere, and accordingly an

interest is paid by the bankers to the Cheque-Bank, on the balance of

deposits thus held, and this interest, together with the one-fifth of

a penny for each cheque, is the only source of profit to the

Cheque-Bank. Of course, the longer these cheques remain out before

presentation, the more profitable to the Cheque-Bank; and their

average length of life has been heretofore not far from ten days.

Since these cheques are crossed _generally_ (not specially) with the

words "and Co.," that is to say, since they can ultimately be taken up

only by some banker, they have a more _generalized_ character than

common bank-cheques, they are safer to carry and keep than so much

money would be, there is no difficulty in shopping or paying wages by

means of them, they are very much the same in their nature as bank

bills are, and might easily in certain circumstances become _money_

just as bank bills in some circumstances are money. Each of the

associated banks keeps an account of course with the Cheque-Bank, but

is not obliged to keep a separate account with the purchasers of

cheque-books, which is a great relief to the banks. In this way the

Cheque-Bank extends the use of cheques in the lieu of money to a great

multitude of small transactions, and relieves the other banks from

what would otherwise be a great deal of troublesome accounting and

collection. The ingenuity and the utility of this comparatively new

form of Credit cannot be questioned for one moment; the promoters of

the Bank intended that their cheques should be received by the people

as a substitute for cash and for Post Office orders, and such has been

the effect, many railway and other companies having long ago agreed to

receive them as cash, and the people generally regard them as cheaper

and more convenient than postal orders and even for many purposes than

cash.

_i._ Cash Credits. As the Cheque-Bank in the sense as just explained

has been thus far in the history of Credit peculiar to England, so we

have now to look to Scotland only for an exemplification of a form of

Credit hitherto confined to that country. It is a national

characteristic of the Scotch to be "canny," that is, they _can_, a

word from the old Teutonic _können, to be able_; and, as a

consequence, Scotch Banking has long been famous the world over; and

the one peculiarity of it, with which we are now concerned, goes back

certainly to 1729, as we happen to know from a minute of the Directors

of the Bank of Scotland under that date. That bank was chartered by

the old Scotch Parliament in 1695, one year after the chartering by

the English Parliament of the Bank of England, and under substantially

the same title as that, namely, "The Governor and Company of the Bank

of Scotland." It began to establish branches in different towns of the

realm in 1696, and began to issue bank notes for £1 (a privilege

denied to the Bank of England) in 1704; and it began also at a very

early period to exhibit the two main peculiarities of Scotch banking,

namely, (1) to receive deposits _on interest_ and (2) _to grant credit

on cash accounts_, or, as they have come to be called less properly,

Cash Credits.

This second peculiarity, which has proved extremely beneficial to

Scotland, is for substance this, to create a drawing account in favor

of a deserving customer, who has made as yet no deposits in the bank,

but who draws out money and pays it in from time to time just like an

ordinary depositor, and instead of receiving interest on the daily

balance to his _credit_ (old Scotch fashion), he pays interest on the

daily balance to his _debit_. These accounts are called Cash Credits.

They are not intended to be dead loans, but quick accounts; and they

are not granted except to persons in business, or to those who are

frequently drawing out and paying in money. The individual who has

obtained such a credit is enabled to draw the whole sum, or any part

of it, when he pleases, replacing it, or portions of it, when he

pleases, according as he finds it convenient, interest being charged

only upon such part as he draws out.

David Hume in his Essay of the Balance of Trade, published in 1752,

makes this nice point in favor of Cash Credits: "If a man borrows

£5000 from a private hand, besides that it is not always to be found

when required, he pays interest for it whether he be using it or not.

On the other hand, his Cash Credit costs him nothing, except during

the moment it is of service to him; and this circumstance is of equal

advantage as if he had borrowed money at a much lower rate of

interest." The Cash Credit is always for a limited sum, seldom under

£100, given upon the customer's own security, and that in addition of

two or three individuals approved by the bank, who become sureties for

its payment. Of course, only those banks can furnish such credits

which possess a surplus of credit more than they can sell in the

ordinary way, and these credits are safe and useful only in small

communities, in which men are well known to each other. Some friends

of the parties thus accommodated always guarantee the bank against

loss; but the losses have proved to be insignificant, the gains to be

marvellous; and this form of credit issued on the basis of no previous

transaction in the way of deposits illustrates better than any other

the radical principle, that Credit is Capital.

The Report of a Committee of the House of Lords made in 1826 on Scotch

and Irish banking describes very clearly and fully the system of Cash

Credits: "There is also one part of their system, which is stated by

all the witnesses to have had the best effects upon the people of

Scotland, and particularly upon the middling and poorer classes of

society, in producing and encouraging habits of frugality and

industry. The practice referred to is that of Cash Credits. Any person

who applies to a bank for a Cash Credit is called upon to produce two

or more competent sureties, who are jointly bound; and after a full

inquiry into the character of the applicant, the nature of his

business, and the sufficiency of his securities, he is allowed to open

a credit, and to draw upon the bank for the whole of its amount, or

for such part of it as his daily transactions may require. To the

credit of the account he pays in such sums as he may not have occasion

to use, and interest is charged or credited upon the daily balance, as

the case may be. From the facility which these Cash Credits give to

all the small transactions of the country, and from the opportunities

which they afford to persons who begin business with little or no

capital but their character to employ profitably the minutest products

of their industry, it cannot be doubted that the most important

advantages are derived to the whole community. The advantage to the

banks that give these Cash Credits arises from the call which they

continually produce for the issue of their paper, and from the

opportunity which they afford for the profitable employment of part of

their deposits. The banks are indeed so sensible that, in order to

make this part of their business advantageous and secure, it is

necessary that their Cash Credits should be operated upon, that they

refuse to continue them unless this implied condition be fulfilled.

The total amount of their Cash Credits is stated by one witness to be

£5,000,000, of which the average amount advanced by the banks may be

one-third."

There are only ten Banks doing business in Scotland, and the Bank of

Scotland, the oldest of these, had 86 branches in 1875, and the

average number of branches of the other nine is very nearly the same

with that.

_j._ Circular Credits. These are a device of bankers to enable

travellers and merchants of one country to obtain credit and cash in

foreign countries in sums to suit their convenience, not to exceed in

the aggregate the limit mentioned in the credits drawn. These credits

assume different forms and are called by different names, but they are

all at bottom foreign Bills of Exchange. They are Orders to pay. They

are drawn by Bankers at home upon Bankers abroad. They are bought by

travellers and others, because they are safer to carry than so much

money would be, and much more convenient. In nearly all of those forms

the credits are available for no one else than the payee, whose name

is upon the form as well as the names of the bankers who are the

drawees, and so the credits are not liable to be stolen, although they

may be temporarily (not ultimately) lost. Purchasers of such credits

can obtain money on them in all of the principal cities of the world

in just such sums as they need. They have ultimately to pay for no

more credit than they actually use, because the drawer will pay back

to the payee, in case he has bought and paid for the entire credit

drawn, the cash difference; while on the other hand, arrangements can

always be made beforehand, by which money need not be deposited with

the banker at home any faster than it is actually called for abroad;

and while also a good customer of the bank drawing the credit, one who

keeps ordinarily a good line of deposits, may pay for whatever credit

he has used when he returns from his trip.

There is one kind of these foreign credits that deserves separate

mention, since it has come of late years into quite general use,

namely, "Circular Notes," as they are called. These are sight bills of

exchange, each drawn for a relatively small amount, say £10, and

multiplied in number to the requirements of the buyer, and drawn by

one domestic banking-house, say Kountze Brothers of New York, on one

foreign banking-house, say Union Bank of London, the names of drawer

and drawee only being upon the "notes," the payee or buyer being

expected to indorse each note in the presence of the Correspondent

making the payment. The notes, therefore, are not negotiable except by

the signature of the payee himself from time to time as he needs the

proceeds. This makes them safer than so much money to carry: if

stolen, they could do the thief no possible good. At the same time the

drawer of the notes furnishes the payee a circular letter addressed to

his banking correspondents all over the world, just as in an ordinary

Letter of Credit, containing the name and also the personal signature

of the payee, but unlike the ordinary Letter making no reference to

the amounts of credit furnished, and there are no indorsements of any

kind by the correspondents on this circular letter, which the payee is

cautioned in print on the back _to keep separate_ from the Circular

Notes covered by it. One of these letters runs as follows, the name of

the payee being entered in manuscript and also in autograph:--

"TO OUR CORRESPONDENTS,

GENTLEMEN,

THIS LETTER WILL BE PRESENTED TO YOU BY GRACE PERRY, WHO IS

RECOMMENDED TO YOUR KIND ATTENTION, AND IS SUPPLIED WITH OUR

CIRCULAR NOTES, THE VALUE OF WHICH PLEASE FURNISH AT THE

CURRENT RATE FOR SIGHT BILLS ON LONDON, WITHOUT ANY EXPENSE

TO US. AFTER YOU HAVE EXAMINED THIS LETTER, PLEASE RETURN IT

TO THE BEARER, IN WHOSE HANDS IT WILL REMAIN UNTIL THE

EXPIRATION OF THE CIRCULAR NOTES."

These Circular Notes approximate in certain respects in kind towards

the cheques of the Cheque-Bank of London: both are bought at the

outset and paid for in full on the spot; and both are drawn _upon one

Bank_, which is the ultimate Drawee and Payer. In two essential

respects, however, the notes differ from the cheques: the cheques are

payable to Bearer without any indorsement by anybody, and so have a

much more _generalized_ purchasing-power than the notes, which have to

be indorsed by the payee (not named indeed in the notes but in the

letter accompanying them), as they are negotiated in a way preliminary

to their ultimate payment by the single bank on which they are drawn;

and also the notes, like all other foreign bills of exchange, are

subject in their value to the fluctuations of International Exchange,

while the cheques in their value are independent of commercial

exchanges "in favor" or "against" any country, and entitle the bearer

to so many pounds sterling in value according to English coinage

without any possible discount or premium. These London Cheques,

accordingly, approach much nearer to the character of Money than any

other form of Credit yet devised, except Bank bills undoubtedly

convertible; and already take their place as one of the _media_ in the

international trade, and are sold in New York by authorized agents of

the Cheque-Bank, as they have long been by such agents in all English

and Colonial and in many foreign cities.

These _Ten_ are the principle instruments in Credit-Exchanges

throughout the world; and we pass now, as proposed, to the next

section of our subject, namely, the Advantages of Credit.

3. As introducing these advantages and also as illustrating them, we

call attention first to the antiquity of many of the forms of Credit,

a point upon which much fresh light has been cast by recent

discoveries in, and ability to decipher the cuneiform writing of, the

ancient Assyria and Babylonia. It is to the credit of Credit, that the

earliest of civilized men seem to have perceived its nature, to have

seized upon its powers, and to have realized for themselves some of

its advantages. Credit is natural and legitimate. The moderns have

invented new forms of it, and have tested its capacities to the

utmost, but the ancients know it well in several of its instruments,

and vindicate their own insight into the recesses of Exchanges by

tablets and documents now known and read of all men.

In an earthenware jar found some years ago in the neighborhood of

Hillah, a few miles from Babylon, were discovered many clay tablets

inscribed with records relating to banking, and, what is more, to

banking as carried on for generations by a single family or firm,

which the cuneiform archæologists have translated as "Egibi & Co."

These tablets are now deposited in the British Museum. Those who can

read them say, that the founder of this banking-house, Egibi, probably

lived in the reign of Sennacherib, about 700 B.C. This family has been

traced in banking transactions during a century and a half, and

through five generations down to the reign of Darius. They were the

Rothschilds in the region of the Euphrates: they acted in a sort as

the national bank of Babylon.

The Tigris is always associated with the Euphrates and forever will

be. Nineveh on the former river, like Babylon on the latter, has

yielded from its tablet-records information as to the use of credit in

the more northern capital of Assyria. "Within the palace of

Asshur-bani-pal, the Sardanapalus of the Greeks, who reigned at

Nineveh from 668 B.C., Layard discovered what is known as the Royal

Library. There were two chambers, the floors of which were heaped with

books, like the Chaldean tablets already described. The number of

books in the collection has been estimated at ten thousand. The

writing upon some of the tablets is so minute that it cannot be read

without the aid of a magnifying-glass. We learn from the inscriptions

that a librarian had charge of the collection. Catalogues of the

books have been found, made out on clay tablets. The library was open

to the public, for an inscription of Asshur-bani-pal says, "_I wrote

upon the tablets_; _I place them in my palace for the instruction of

my people._" The Assyrian tablets embrace a great variety of subjects;

the larger part, however, are lexicons and treatises on grammar, and

various other works intended as text-books for scholars. Perhaps the

most curious of the tablets yet found are notes issued by the

Government, and made redeemable in gold and silver on presentation at

the King's treasury. Tablets of this character have been found bearing

date as early as 625 B.C. It would seem from this that the Assyrians

had very correct notions of the promise-character of paper (tablet)

money" (Myers).

In the Metropolitan Museum of Art in New York are Babylonian tablets

bearing distinct records of credit transactions that took place in the

reign of Nebuchadnezzar. The earliest tablet is of the year 601 B.C.

On it are memoranda of loans of silver made by Kurdurru as follows: "1

mina of silver to Suta, 1 mina to Balludh, 1/2 mina to Buluepus, 5

shekels to Nabu-basa-napsate, and 5 shekels to Nergal-dann;--total, 3

minas, 5 shekels of silver." There are more than 50 similar tablets in

this collection; the latest dated, "Babylon, 18th day of 14th year of

Darius," that is, B.C. 505. M. Lenormant, who can read them, divides

these credit documents into five principal types. 1. Simple

obligations; 2. Obligations with a penal clause in case of

non-fulfilment; 3. Obligations with the guarantee to a third party; 4.

Obligations payable to a third person; and 5. Drafts drawn upon one

place, payable in another. These last are letters of Credit. They

contain the names of several witnesses. They are evidently negotiable,

but from the nature of things could not pass by indorsement, because

when the clay was once baked nothing new could be added, and under

these circumstances the name of the payee was often omitted. It seems

to follow from this peculiarity, that the drawee must have been

regularly advised by the drawer. One of the credits in this most

interesting collection had 79 days to run.

The main elements of their civilization came to the Greeks, and

especially to the Greek cities in Asia Minor demonstrably from the

Eastward; the Greek West proved itself quick to catch up the thoughts

and the modes of the East; accordingly, Isocrates in his plea against

the banker, Pasion, describes a formal bill of Exchange bought by

Stratocles in Athens, payable in Pontus, and guaranteed principal and

interest by Pasion; the practical Romans were pupils of the Greeks in

all such matters, and so it came about in course of time, that Cicero

wrote as follows in a letter to Atticus,--"Let me know, if the money

my son needs at Athens can be sent him _by way of exchange_, or if it

be necessary for it to be taken to him,--_permutarine possit an ipsi

ferendum sit_"; and after that the Jews and the Lombards carried the

Letter of Credit all over the world.

It goes without saying, when the most civilized and advanced people of

the world were the first to adopt and have been since the quickest to

expand the use of Credit, that there must be pretty obvious and very

solid advantages from such use and expansion; and we must now note and

weigh a few of these advantages.

(1) There are young men in every advanced community in the world who

have integrity and industry and skill, but little or no _Capital_; and

when such men are enabled to borrow money, as by the Scotch system of

"cash accounts" or otherwise, to start themselves in business or to

enlarge a business already in successful operation, the general

interests of Production as well as their own personal interests, are

greatly subserved by such credit; because in all probability much

capital thus passes out of hands which are _less_ into hands which are

_more_ able to use it _productively_. Those who are best able to make

capital _tell_ by increase are generally those who are most desirous

to obtain it, and frequently those who can offer the best security for

its replacement. Nothing, therefore, is to be said against, but

everything in favor of, such a loaning of capital as shall bring it

under safe conditions from the hands of the idle and the aged, from

those indisposed or incompetent to use it productively, into other

hands at once competent and honest. Such credits as these are a

benefit and only a benefit to all the parties concerned, and to

Society at large. The active operators retain something of profit

after replacing the capital with current interest upon it; the lenders

receive more than if their capital remained idle, or they employed it

themselves; and Society is benefited by a more complete development,

and rapid circulation, of Services. Despite all the instances of

broken faith, it is still an honor to human nature, that men do so

gain by good character the confidence of their fellows, that they are

and ought to be trusted with capital on their simple word or note; and

it is the glory of free political institutions, that under their

influence more than elsewhere, young men do rise by the help of so

slight a stepping-stone as this, in crowds, to the high places of

opulence.

In the important point of view, that thus all of the available capital

of a community is brought out into productive activity, too much can

scarcely be said of Savings-Banks, which take the surplus earnings of

the poor, and not only keep them safely, but pay a fair interest on

each deposit, and loan the aggregate at a higher rate on choice

securities, thus stimulating frugality in a wide circle of depositors,

and at the same time aiding Production by opportune loans to the best

class of borrowers. In the year 1881, there were $443,000,000 invested

in savings-banks in the State of New York, and $230,000,000 in the

small State of Massachusetts.

In this first category of the advantages of Credit, come also the

ordinary bank discounts, made for short periods only, holding the

debtor to the strictest rules of payment, only professing and only

enabled to help customers over the transient hard places in their

business, and _not_ to furnish the funds on which the business is

mainly conducted. Loans drawn from the banks on interest should never

be put into the form of fixed capital, and should only be a _part_ of

the quick or circulating capital, since only the passing necessities

of a business having an independent basis and movement of its own, can

safely be met by bank discounts. The cash credits of Scotland are

quite different both in what they are and in what they imply from the

short and sharp discounts of the banks of our own country.

So far as the capital stock of banks is made up, as it usually is, of

a large number of comparatively small subscriptions, there is the

great advantage just spoken of, of calling a multitude of otherwise

idle sums into activity in production; and so far as no undue

privileges, unjust to other corporations and individuals, are accorded

to banks by law, there is no branch of industry more legitimate and

beneficial than banking. It is no essential part of the functions of a

bank, that it manufacture and issue paper money; that feature is

always rather a source of weakness than a ground of strength; the

money the bank circulates should always be the national money; and if

that too, unfortunately, should be credit-money, the element of credit

in the _money_ should be sharply discriminated in the public mind from

that other and quite different element of credit by which the bank

_loans_ it to its customers.

(2) There is another class of advantages in Credit, which do not

depend so much on the transfer of Capital from less to more productive

hands, as on the facilities which credit affords in economizing the

general operations of Exchange. Here the advantages are derived from

the convenience of _settling accounts_ arising out of exchanges,

rather than from the _character_ of the exchanges themselves. Look a

moment, for example, at foreign Bills of Exchange. They serve to

settle up the accounts arising from the Commerce of two or six

Continents, with but little transmission of money from any, and with

but very little loss of time. Commercial bills drawn in New York on

London have been usually payable at sixty days' sight; the New York

merchant despatching a ship is able to realize at once the value of

her cargo, minus interest for the time his bill has to run; since

bankers' bills have so largely taken the place of "commercial" bills,

the time is much shortened thereby, and this is one reason why

bankers' bills bear a higher price in the market; the merchant or

sender is indeed still liable in part to see that his bill is

ultimately paid by the drawee; but the commercial integrity of the

leading houses and leading banks in all countries is with justice so

firmly believed in and acted on, that on the whole but little anxiety

springs from this source. It is one of the noble things in

international commerce, that men trust each other across the oceans,

and lay millions of value on the faith of a single firm.

Inland bills of exchange equally facilitate settlements within the

country itself; and cheques, which are of the same essential nature as

inland bills, contribute to the same end even more simply and surely,

passing readily in payments wherever the parties are known, and

through credit and set-off doing the work of money more conveniently

and economically than, and within certain limits just as safely as,

money itself could do it. The face of a cheque drawn to the amount of

his deposit in favor of another depositor in the same bank is

transferred in the banker's books from the credit of the drawer to

that of the payee by the stroke of a pen, no money at all passes in

the premises, while the banker is released from one debt by creating

another of equal amount, the drawer is released from one debt by

another to be transferred to the payee, and the payee is paid by the

drawer by the former's receipt of another debt more acceptable to him.

(3) Besides the two essential functions of all banks, namely, the

receiving of deposits and the discounting of bills, most of them

perform a variety of other legitimate operations in Credit, which must

be classed among the advantages of Credit. They buy and sell debts of

all sorts. They make collection of debts for their customers. They

sell their own drafts on distant places. Since 1863, our national

banks have done an immense business in handling the debt of the United

States: they were instrumental in diffusing the national bonds among

all classes of the people: they collect for their customers the

coupons at maturity: they have been and still are the factors of the

government in exchanging, for those who desire it, one species of bond

for another; and the entire debt of the United States has been several

times changed, mainly through the agency of the banks, from bonds at

high rates of interest and for short times of maturity to bonds at

lower rates and for longer times.

(4) The fourth, and probably the chief, advantage of Credit is the

fact, that a new purchasing-power is created by means of it, a new

Valuable, something additional to all existing before in the world of

Values. One can buy other things with Credit, as well as with material

Commodities and personal Services. Credit, therefore, becomes a

Salable under the two peculiar limitations already explained, those of

future Time and personal Confidence, just as Commodities become a

Salable under the peculiar limitations belonging to _them_; and, what

is more to the present purpose, just as some Commodities (all of them

salable) become Capital under the action of the abstinence of their

owners, so some Credits (all of them salable) become Capital under the

action of the Abstinence of their owners. Some commodities and some

credits are expended, that is, sold, for the immediate gratification

of their owners, without ever a thought of a future increase to

accrue; but also, some commodities and credits are reserved by their

owners for use in further production, that is, for future buying and

selling; and the motive in all such cases is the same that creates all

Capital everywhere, namely, the increase to accrue as the result of

such abstinence; and, consequently, we lay down the postulate with all

confidence, and enumerate it as one of the main advantages of Credit,

that some Credits are CAPITAL, with all the powers in production of

that potent agent already exemplified.

It is only fair to apprise the reader right here, that almost all

Economists deny that any new capital is created through Credit. These

deny _in toto_ that the relation of debtor and creditor involves

anything more than the exchange between the two parties of certain

_titles to tangible goods_. Let the reader now hear, and then judge

for himself. Bonamy Price of Oxford University, a professed Economist

and a teacher of acknowledged ability, writes as follows:[8]

"_Omitting the capital which a joint stock company puts into a bank,

the banker possesses no capital, except his premises and any coin that

may be in them, however much commercial and monetary literature may

ascribe capital to banks. Lines and names in ledgers, cheques at the

Clearing-house, debts due to depositors, debts due upon bills by

borrowers, are neither wealth nor capital. They are words and nothing

more. Incorporeal property, under which these kinds of written words

are summed up, is not wealth; it is merely a collection of

title-deeds, but from which the reality is absent. The corpus is not

in those deeds, but the right to acquire that property, even before

possession is obtained, is itself a property. If a title-deed or a

mortgage is declared to be actual wealth by Political Economy, then

the sooner it is consigned to the waste-basket, the better._"

This passage shows how the word, "wealth," tangles men up

inextricably, who, by discarding it utterly, might have become clear

thinkers and useful expositors. It also shows, that Professor Price

never analyzed Valuables into their three kinds, never thoroughly

mastered in a preliminary way the Idea that underlies Economics, never

precisely understood what Money is, and certainly never found out the

radical nature of Credit. Nevertheless, the passage just quoted really

concedes the whole matter in the present dispute,--"the right to

acquire that property, even before possession is obtained, is itself a

property,"--that is all that we claim, namely, that rights are

property, and that new rights (which are property) are created by

Credit, and that some of these new property-rights thus created may

become and do become a new Capital. These new rights, however, this

new and acknowledged "property," are not "_titles_" to any specific

valuables whatever, as Price supposed; "_a title-deed or a mortgage_"

is a totally different thing from a Credit, since the one always

describes and gives a qualified title to _some specific and tangible

thing_, while a credit-right is always a claim against _a person_; the

Roman law drew this distinction perfectly, a credit-right was a _jus

in personam_, while a title-right was a _jus in re_; the common Latin

language as spoken and written marked the difference by separate

words, a credit-right or true debt was a _Mutuum_, while a title-right

or thing loaned was a _Commodatum_; and the Law of our present

national banks explicitly recognizes this universal and fundamental

distinction, by requiring the banks to loan money _on personal

security only_, that is to say, no tangible things whatever, not even

real estate, are allowed to be taken as _original_ security for any

loan. Banks deal only in true debts,--_mutua_,--and when they keep

custody of concrete valuables--_commodata_--for their customers, it is

as trustees or bailees and not at all as debtors.

Our late Oxford friend was far too well informed in general to

contend, that a cheque, for example, is "the right to acquire

possession" of any _specific_ property anywhere; the drawer has indeed

deposited money with the banker on whom the cheque is drawn, but that

money became the banker's money the moment it was deposited and no

longer his own; the cheque, accordingly, is a general claim on the

banker, and not at all on any special fund in the banker's hands; it

follows, therefore, that the excess of the banker's average deposits

over his average reserves to secure them, is a new creation of Credit,

a new resource of Production, a new Purchasing-power now available to

the banker not previously and practically available to anybody, a new

Valuable which he proposes to use and does use for the sake of profits

accruing, consequently a new Capital.

Now let us listen to the objections to this view by a practical

banker, J. H. Walker, of Worcester, Mass., in a little book of his on

Banking published in 1882: "_A man always borrows something of

intrinsic value. What he borrows is not a piece of paper, whatever may

be on it, but a farm, a house, a factory, or a part of them; a store,

a mine, or goods. No man can borrow or lend anything else. The

borrower gets from the lender what puts him in possession of the

things he seeks, and it must be some one of these things. So of all

money (except coin). It has no value in itself. It adds nothing to the

capital of the world. It purports to be and is only a title to

property, a convenient device for transferring the ownership of

property._"

This author is led astray by the worse than useless adjective

"intrinsic," having never yet learned that there is only one kind of

value in the world of Economics, namely, purchasing-power; he sees men

as trees walking through the haze cast over paper-money by John Law in

the last century, as if paper-money must be "_based_" on something

tangible and specific; he makes a narrow and false assumption that the

only objects ever bought or borrowed are corporeal "things," denying

that the debts in which alone he deals as a banker are _realities_ as

much as any "thing" can be; and it all comes in his case, as in the

case of hundreds of others, from a totally inadequate analysis of

Valuables into their three separate and virtually independent kinds,

namely, Commodities and Services and Promises. Mr. Walker, although he

writes a book on purpose to do this, can not explain at all under his

view the Deposits and Discounts of his own bank, and would be as dumb

as an oyster when confronted with the "Cash Credits" of Scotland.

(5) The fifth advantage of the use of Credit, and the last one to be

mentioned in this connection, is, that it dispenses with the use and

wear of large amounts of expensive Money. It is perfectly certain that

Credit answers many of the purposes of Money. Suppose A has bought of

B $100 worth of goods, and B has bought of A $125 worth of goods.

Three ways are open to close up these transactions. A may pay B and B

may pay A _in money_. This would take $225. A may pay B in money, and

B may send that back with $25 more. This would take $125. Or A and B

may mutually balance their credit-books, and B pay the difference in

account. This would take but $25. It is clear then, that, as one or

other of these general methods prevails in practice, the quantity of

expensive money required to do the business of a country is very

different. Just so in international trade. Foreign bills of exchange

lessen enormously the quantity of metallic money that would otherwise

have to be transported.

It is not strange that some thinkers and writers, seeing these

unquestionable benefits of Credit even within the peculiar sphere of

Money itself, have come, like Herbert Spencer and many more, to think

and teach that Credit might answer _all_ the purposes of money. Credit

_does_ take the place of money in part. Can it take the place of money

entirely? Let us see. We have defined Credit as _a right to demand

something of somebody_, and Debt as _an obligation to render something

to somebody_; the denominations of Money are certainly needful in

order _to measure_ this right or obligation; and how can the

denominations of money be established or maintained at all separate

from the use of _some_ money itself as a circulating medium? Moreover,

great as is the undoubted power of Credit, vast as are these five

advantages from its current use, still, each particular piece or form

of Credit waits for something beyond itself; it waits for its own

_extinction_ in future time; which can only come about in one of three

ways, (a) by _set-off_ against another debt with or without a balance,

(b) by _renewal_ which creates a new debt and extinguishes the old,

(c) by its _payment_ in money; and now how can these extinctions come

about without the current use of some money, at least to settle the

balances at the clearing-house?

Furthermore, there have always been heretofore in all commercial

countries longer or shorter periods, called "crises" or "panics,"

during which there was a popular reluctance to accept in exchange the

ordinary instruments of Credit. Money, and much of it, was then found

to be indispensable. Indeed the very advantages of Credit itself,

which have now been explained at length, are dependent on this, that

there be alongside of it to sustain and limit it, _a current and legal

measure of Services in metallic form_, in whose denominations Values

may be reckoned, in whose coins the balances of Credit may be struck,

and whose presence secured everywhere by natural laws alone may enable

_fulfilment_ to join hand in hand with _promise_. If ever Credit

should try to usurp the whole domain of Money, a tolerable standard of

Value or measure of Services would be no longer possible, Credit

itself would lose its foothold, and the vast balloon of Promise,

sailing for awhile through the blue, the joy of projectors and the

wonder of credulous spectators, would of a sudden descend to the earth

collapsed and ruined.

4. There are too some disadvantages inhering in Credit. This admitted

fact makes no valid argument against the use and extension of it;

because there are disadvantages connected with all human devices

whatever,--with all means contrived to reach earthly ends--and even a

child may discover many of these; some objections lie against

everything, and against everybody, and the practical question always

is, Which preponderates, the good or the evil? In respect to Credit

there can be no doubt, that the good outweighs the evil many fold;

still, in accordance with the purpose in this book of both writer and

readers to look on both sides of each significant point in Economics,

we will now give attention to the chief disadvantages inhering in the

nature of Credit.

(1) In the first place, when credit is much given by dealers to

ordinary retail buyers, the reverse results take place from those but

just now characterized as happening under bank credits, namely,

capital passes out from the hands of productive operators into hands

less able and less willing to use it in further production. Indeed, in

most such cases it ceases to be capital, and is expended in immediate

gratification. It is much easier for the average man of fair character

within the present customs of Society to "get trusted" than to pay "as

he goes." Such a man is even called "easy-going." He almost always

over-estimates his resources for the future, and under-estimates his

obligations at the present. It is always a disadvantage in the long

outlook for both parties when such men easily and largely "get

trusted." Let us take a sample case: when an industrious artisan or

efficient merchant has given credit for six months or a year to

dilatory customers, it is so much withdrawn for so long a time from

his active capital; and in order to make up his consequent loss of

profit to the average and expected rate, there must be an addition to

the prices of his wares sold to other parties; and, besides, some bad

debts belong to such a system, and there must be additional prices

somewhere to compensate for this; and thus the customers who pay

promptly bear a part of the burden of the delinquents, who at least do

not wholly escape, inasmuch as they ultimately (if they pay at all)

pay a price enhanced by their own delay. Thus, if the current and

expected profit on his capital be 12%, and the artisan or merchant

sells and gets returns four times a year on the average, something

less than 3% profit may be charged to each article on the average;

while if he only gets returns at the end of the year, at best 12% must

be put on everything at the average, and in reality considerably more,

because of the bad debts that stick like a burr to that way of doing

business. Hence the excellent maxim, "Quick sales and small profits."

(2) There is a greater inherent _uncertainty_ in values connected with

credits than in those connected with commodities, or than with those

connected with personal services. We have already seen repeatedly that

Value has its sphere of operations in the Past, in the Present, and in

the Future. There is some uncertainty connected with what _has been

done_ in reference to value, since the market may prove to have been

miscalculated, and the commodities to have become unsuitable; there is

perhaps more uncertainty connected with what _is now being done_ in

reference to value, because the services bargained and being paid for

may prove to be less steady and skilful than was supposed; but in the

very nature of the case there is still greater uncertainty connected

with what _is to be done_ in relation to its value, because in the

first two cases some at least of the conditions are already fixed,

while in the last one all of them are at least open to hazard. There

is sufficient certainty in all three of the grand divisions of Time to

justify, and probably to reward, operations in each in reference to

value under the peculiar limitations and conditions of each, but

credits are naturally more sensitive in the law of their value than

either commodities or services.

(3) Largely in consequence of what has just been expressed under the

last head, credit-exchanges are more likely than commodities-exchanges

or than services-exchanges to become unduly multiplied and

consequently to fail of ultimate realization. The majority of men are

sanguine in relation to the future. Unless they are in actual contact

with their limitations, they are apt to belittle the rigidity and

inevitableness of such limitations. As the outcome of this, promises

are apt to overpass the powers of fulfilment. No more bales of cotton

of any one year's crop can be actually delivered to buyers, than have

been actually grown and marketed; the services of no more men in any

capacity can be contracted for and rendered, than there are men able

and willing to work; here are impassable limits; but the field of the

future is buoyant with possibilities; and hence credits, whose sphere

is the future, though legitimate and potent under the proper

conditions, lie in a field whose limits are invisible, and within

which _Hope_ is ever a tempter to overdoing.

Is speculation proper? Certainly; if by the word "speculation" is

meant the buying of anything with an expectation based on rational

probabilities of being able to sell it again under different

conditions at a higher price. Speculation in this sense is both proper

and beneficial to the immediate parties to it, and to the general

public as well, because the values of things thus bought and sold

neither fall so low nor rise so high as they otherwise would do, which

is a public gain. Speculators as a rule buy on a falling market,

_which tends to lift it_, and sell on a rising market, _which tends to

lower it_. It is better for all concerned, that the necessaries and

conveniencies of life should bear as steady a market as is possible in

the nature of things, summer and winter, year in and year out; and the

ports of every nation should be open with the slightest possible

hindrance in the way of tax to the corresponding necessaries and

conveniencies from abroad, whenever combinations and "corners" attempt

to lift their prices beyond the level determined by a natural and free

Supply in contact with the current Demand.

Credits occupy the field of Probabilities; that is to say,

probabilities seeming to be such to men of sharp insight and

cultivated forecast. When such men _on such grounds_ buy and sell

"futures" in cotton or corn; when they buy and sell stocks either

"short" or "long"; when they seem to themselves to perceive a sound

reason for lurching over from the "bulls" to the "bears," or _vice

versa_; and when they really think that what they are wont to deal in

has touched bottom in price, and they buy now in view of a rise,

Economics has nothing to say in blame of any or all of these

operations, for they are the same in substance and motive as all other

buying and selling; but nevertheless, it has this to say, that all

these operations in credit-futures lie adjoining to and in dangerous

proximity with another field, for operations within which it has

nothing _but_ blame to utter. Gambling occupies the field of Chance.

There is a great difference between chances and probabilities.

Political Economy has no trouble in drawing a fast and hard line

between them.

But practically the operators in credit-futures experience an immense

difficulty in keeping within this line of rational probabilities. The

coolest heads are apt to become heated, and to lose sight of

distinctions, in the close air of the Stock Exchange and the offices

circumjacent. Some operators openly confess they know nothing which

way the index of reason points, by buying "straddles," as they are

significantly called. A friend and old-time pupil, who has for years

been accustomed to these excitements in New York, said recently to the

writer,--"_The Stock Exchange is a great gambling hell, and that's all

there is of it!_" In buying and selling of all kinds, both sides gain:

in gambling of all kinds, what one side gains the other side loses:

therefore, under a sound money, healthful public opinion, and good

law, gambling never can become formidable. In every lottery scheme, no

matter how honestly managed, the sum of the _prices_ of the tickets is

greater than the sum of the _prizes_ offered, otherwise nothing would

be left for the profits of the managers; therefore, he would be a very

foolish man, who should buy all the tickets of a given lottery with

the certainty of drawing all the prizes; and _he_ is a still more

foolish man, who should take his _chance_ of drawing all the prizes by

buying two or ten tickets.

(4) Another and a principal Disadvantage of Credit is seen in its

usual action on _prices_ through increased Demand, and its consequent

tendency to bring about Commercial Crises. Any man's whole

purchasing-power is made up of three items: first, the property in his

possession; secondly, the values that are owed to him; and thirdly,

his credit. He can buy services of the three kinds with these three

valuables; and the sum of his power to buy is exactly measured by the

aggregate of these three valuables under his control. But while the

first two, his property and debts due, are limited and ascertainable,

the third (his credit) is indefinite and undeterminable beforehand.

Being based upon _confidence_, which is itself sensitive and variable,

a man's credit at one time may be vastly greater than at another,

compared with his other two means of purchase; and if he have the

reputation of doing a safe and regular business, and is favored by

circumstances, he will find himself able sometimes to buy on credit to

an extent out of all expected proportion to his other capital. When,

therefore, credit is offered and received for commodities, it has the

same influence upon their prices as when money is offered and received

for them. It follows, consequently, that there is likely to be a

general rise of prices whenever there is an extension of credit for

the purpose of purchasing; indeed, when money only is used to buy

with, there can not be a _general_ rise of prices, because while more

money may be spent on some things, and they rise in price, there would

be less money for other things, and _they_ would rather fall in price;

but when credit is used freely in addition, and increased purchases go

on in all departments at once, there is apt to be a rise of prices as

to all commodities and a universal spirit of speculation.

At such times, and while prices are still rising, men _seem_ to be

making great gains; everybody wishes to extend his operations by

means of all his money and all his credit; and forms of indebtedness

are multiplied on every hand. By and by it begins to be perceived in

certain quarters that the matter has been overdone; speculative

purchases cease; banks become particular whose paper they discount;

men find it difficult to sell their debts due in order to provide for

their debts owed; they fall back on the sale of their commodities, but

when holders are anxious to sell, prices always fall; a panic now sets

in, more irrational, if possible, than the previous overconfidence;

their inflated credits and commodities collapse in the hands of their

holders; sales at great sacrifices are inadequate to meet the mass of

maturing debts contracted when confidence was high; men fail, and must

fail; the banks cannot help them, or think they cannot; and so

wide-spread commercial disaster comes in.

Such commercial crises swept over the United States in 1837, 1857, and

1873; and will doubtless recur in the time to come. They always arise

from disordered credits, and though not necessarily connected with

credit-money, are much more likely to come in connection with that.

The more strong and conservative the Banks maintain their ordinary

condition, the more powerfully can they operate to prevent or abate a

panic. They ought always to be on the shore and never in the stream.

From the very nature of banks and of the motives that create and

operate them, they are apt to sell for a profit in ordinary times

about all of the credit they safely can; unless, then, they foresee a

stringency some time ahead, and curtail their loans, and otherwise

keep their position strong in reserves and deposits, they will be

powerless to help even their most deserving customers when the panic

sets in; even then by a special association with other banks in the

same city for reciprocal support during a crisis, as was happily

brought about in New York some years ago, something may be done for

their common constituency and good customers to help them out of

trouble by discounts continued to them; especially as it is not money

so much that is needed to allay a panic, nor even credit actually

given, as it is a general knowledge that abundant credit can and will

be given either by some pre-eminent bank, like the Bank of England in

London, or by an association of banks for that special purpose, like

the agreement just referred to as entered into temporarily by the

banks of New York city. As a panic becomes imminent anywhere, some

Bank or banks there ought to be in a position to extend their

discounts freely, at a high rate of interest indeed, so as to

discriminate between customers urgent for and deserving of discounts,

and another class whose need of accommodation is not so sore, and a

third class who are sure to fail if the Panic stalks forward.

A permission given of the Government to the Bank of England to

overpass under these circumstances the Discount-limits laid down by

the Bank Act of 1844, has on three several occasions acted like a

charm to still the ragings of a commercial storm. On each of these

occasions, 1847, 1857, and 1866, the Bank was forbidden by the Privy

Council to discount for less than 10%.

As the inclined plane of rising prices is slowly ascended before a

Crisis, so the fall of general prices afterwards seems to be rather

gradual also till the lowest point of them is reached, from which

another ascent is apt to commence. The following table taken from the

_New York Public_ of the first week of November, 1881, is instructive

on both these points. Taking the prices in 1860 of 43 articles of

prime necessity, which constituted then and afterwards about 3/4 of

the commerce of the country, as the normal standard or 100, the table

gives the comparative gold prices of the same for four years previous

to 1873 and for seven years subsequent, as follows:--

1869 116

1870 118

1871 120

1872 122

1873 113

1874 115

1875 107

1876 100

1878 81

1879 98

1880 103

1881 111

(5) A penultimate Disadvantage of Credit may be noted in the facility

which it offers for contracting great national Debts. There are

certain aspects, under which a Nation may be properly regarded as a

moral person, and as such person may pledge the public faith for the

present and the future, becoming a debtor to its own people or to

foreigners, and thus a public debt may be made a sort of mortgage on

the national property and income. Now, it cannot be fairly denied,

that incidental advantages may spring up in connection with such a

national debt: for example, the bonds, which are its evidences, may

open up to the people a convenient form of investment for presently

inactive capital, and for trust funds of all kinds; there can be

little doubt that certain classes of persons holding these national

obligations are won thereby to a stronger patriotism and become better

friends to stability in government, although this consideration

applies mainly to new governments and to those temporarily endangered;

both England and the United States now make a portion of their public

debt the basis of a national system of Banking, but it is perhaps

questionable whether this can be justly put among the incidental

benefits of the Debts; and again "a moderate debt adds to the credit

of a Nation, and its ability to raise money in an emergency, for

bankers and capitalists are more ready to take such securities as they

are in the habit of dealing in" (Sidney Homer).

On the other hand, the burdens of a National Debt are very apparent:

for example, the annual _interest_ charge to the Union at the close of

our late civil war was $150,000,000, which gradually declined by the

lowering of the interest-rate and by the paying off of principal to

$61,368,912 for the fiscal year ending June 30, 1881; between March,

1869, and August, 1873, the United States paid $378,015,065 on the

principal of its public debt; the collection of the Internal Revenue

alone of the national government cost for the fiscal year 1867,

$7,712,089; and in each of the two years, 1870 and 1881, a little over

$101,500,000 was paid out to reduce the principal of the Debt. All

those vast sums came out of the industry and income of individuals;

and taxation to any degree as all this implies is a mighty disturbance

to industry, and gives rise to an army of officials who eat out a

considerable percentage of all they collect. Moreover, the various

expedients of taxation, which are always practically unequal in their

operation, are apt to give rise to irritation and political agitation,

and even sometimes to threats of repudiation, especially when the

occasion has gone by under which the debt was contracted, and another

generation is called upon to pay off a debt it had no agency in

creating.

Here the vexed question arises, how far has one generation _the right_

to throw upon succeeding ones the burdens of a National Debt? The true

answer to this question is, _it has a very limited right indeed_. The

opposite doctrine implies tacitly when not openly, that the succeeding

generations will have no occasion for extraordinary expenses of their

own, and, therefore, may rightfully be made to contribute to the

extraordinary expenditures of this generation. But it is pure

assumption to take for granted, that the next generations will not

have, of some kind or other, as much occasion for an extraordinary

effort in the way of defence or of improvement as the present

generation has had. It is a common but harmful illusion to estimate

what has now to be done as of much more importance than what will have

to be done. Therefore, to throw the present burden forward on another

generation of men, who are likely to have to make their own special

exertion, just as great and just as imperatively called for, is a

procedure unwarranted by past experience. The view that has long

prevailed in practice, that a great War-debt, for example, might be

easily and justly cast upon posterity, has again and again given rise

to needless and expensive wars; _those_ have been called upon to pay

the piper, who perceived the utter inutility of the expenditure; and

thus bitterness has been added to burden.

Besides, the men to fight the battles, and the capital by which to

feed, clothe, and furnish them the munitions of war, _must come from

that generation_; and there is always great injustice in the

manipulations of a great debt ostensibly incurred to obtain this

capital, and the debt itself is usually in large part rather a

memorial of the war than of the means by which its expenses were

actually defrayed.

The generation of American citizens not yet wholly passed off the

stage was called on in the Providence of God to suppress a Civil War

of enormous proportions, and to eradicate a social institution that

was thoroughly bad; the expense of doing this was many fold enhanced

by timorous counsels in the field, by class legislation in Congress,

and by wretched financiering in the Cabinet; but the Debt, vast as it

was, and needlessly incurred as a large portion of it was, has already

in good part been paid off and must be entirely paid off by the

generation that incurred it. That this great task may be thus

completed, will require (1) an economical administration of the

national Government; (2) an avoidance of intervention in the affairs

of our Neighbors, and of entangling alliances with Foreigners; (3) a

free Commercial System, under which the taxes shall be adjusted only

towards the most productive revenue; and (4) a constant and onerous

home Taxation.

(6) The final Disadvantage of Credit is this, that it is apt to

confuse the minds of men as to its own nature, from its apparent

resemblance to something else, which is at bottom wholly unlike it.

The people of the United States have suffered greatly from this

confusion, and are likely to suffer from it still more in the time to

come, both in their property and progress at home and in their good

name abroad; and it becomes all good citizens, and especially all

those called upon to pronounce on the Law of the Land, to know

thoroughly the radical difference between a _Credit_ and a

_Quittance_, and so to escape the contagious confusion that has

entered and stirred up the popular, and even the judicial, mind of

this country. All through the present chapter has been insisted on and

illustrated the point, perhaps to the weariness of the reader, that

Credit is always essentially the _Promise_ of one person to another,

and that whatever is thus _Promised_ is necessarily and fundamentally

different from the Promise itself. To confound those two things as if

they were or could be made one and the same thing, is in thought

illogical and in practice execrable.

And yet it must be allowed, that there is somewhat in the nature of

Credit, that makes this confusion plausible, or else it never would

prevail; and also that there is something more still to make it

plausible in the nature of Money, which last point can only be cleared

up in the next following chapter under that title.

Mr. E. G. Spaulding of Buffalo, in his copious and excellent History

of the Legal Tender Act, "all of which he saw and part of which he

was," as the chairman of the subcommittee of the Ways and Means at

the time the Act was passed, demonstrates the extreme reluctance of

everybody concerned to give a forced circulation, that is, a

compulsory legal-tender quality, to the first batch of Treasury Notes

to the amount of $150,000,000 in February, 1862. We have already noted

in another place in this chapter, that two successive batches of

similar Notes, each to the same amount as the first, were issued

within less than a year. These Notes then and since called Greenbacks,

bore at the time four essential features: first, they were both in

terms and in reality _national Promises_ to pay to the bearer gold

dollars of the then and present standard of weight and fineness,

because there is no other possible meaning to the words "THE UNITED

STATES WILL PAY TO THE BEARER FIVE DOLLARS"; second, in addition to

their being a forced loan from the people to the amount of notes

authorized, they were given a _forced circulation_ as money by means

of the clause, "_and shall also be lawful money and a legal tender in

payment of all debts public and private within the United States

except duties on imports and interest on the national bonds_," which

clause still recognizes gold dollars as the only universal and

standard money; third, the notes were made _fundable_ in sums of fifty

dollars, "or some multiple of fifty dollars," in six-per-centum gold

bearing bonds of the United States, then called 5-20's, again in this

clause recognizing the radical difference between the legal-tender

paper promises as money and the gold dollars promised in them, in

which gold money the interest and principal of the bonded debt must

still be paid; and fourth, these notes were publicly known and

acknowledged by the Issuer and the receivers to be presently

_irredeemable_, since the Government did not have, and did not pretend

to have, any coin with which to redeem them, and everybody knew that

they were made a legal-tender _because_ they were irredeemable.

These prompt recognitions of the impassable gulf between a Promise and

what is Promised, were confirmed by all that happened afterwards. The

notes, notwithstanding they were legal tender and all bonds of the

United States could at first be bought with them at par, almost

immediately began to droop as compared with gold. The daily quotations

showed a pretty steady decline for two years. On Jan. 15, '64, gold in

greenbacks was 100:155; April 15, 100:178; June 15, 100:197; June 29,

100:250, that is, 40 cents to the dollar; and July 11, 100:285, or 35

cents to the dollar in gold, their lowest point. From this depth they

slowly rose with many fluctuations back and forth from many causes for

14 years. Jan. 1, 1879, they became redeemable in gold, and have so

continued till the present time.

When the Civil War was all over, and these startling vicissitudes of

the paper money were measurably forgotten; though no prominent man,

when they were passed, thought the Legal-Tender Acts constitutional;

the paper money began to be popular; the distinction between a promise

and its fulfilment began to fade out of the minds of the people; there

had always been bank bills circulating as money in the country; these

had been called "dollars" equally with the coin; and in December,

1869, a test case, Hepburn _versus_ Griswold, was decided by the

Supreme Court on the question, whether Congress had the constitutional

authority to make anything but gold and silver lawful money in

satisfaction of _contracts entered into before the first legal-tender

Act was passed_. The question, Can Congress make such notes a legal

tender for contracts made _after_ the passage of the Act? was not

involved in this case; but it was very clear from the Opinion of the

court delivered by Chief Justice Chase, that the majority of the

justices regarded the Act as being unconstitutional in its

application to contracts made _after_ as well as _before_ the Act was

passed. Upon the special question before the Court, the justices were

divided in opinion; five, including the Chief Justice, agreed that the

Act was invalid so far as it made the notes a legal tender on

_contracts executed prior to its enactment_; and the three other

judges were of the opinion that it was valid. Of course, the Decision

of the Court was rendered by a majority of two, that the Act was

unconstitutional. Chase, Nelson, Grier, Clifford, and Field

constituted the majority; Miller, Swayne, and Davis, the minority.

Salmon P. Chase was one of the greatest men of the great period of the

Civil War. He was Secretary of the Treasury at the time the greenbacks

were issued, and they were issued at his instance and advice, but he

was opposed to the clause that made the notes a legal tender. He never

expressed the opinion that the Legal-Tender Acts were constitutional,

nor did he expect that the notes, of which these authorized the issue,

would ever become a permanent national money. This is evident from the

fact that the notes were made _fundable_ at his instance, not so much

with the view of keeping up the value of the notes by giving them a

present market in bonds, as with the view that they would help the

sale of the bonds and would be absorbed by them as soon as the price

of the bonds was above par in greenbacks. Afterwards Mr. Chase thought

that this _fundability_ of the notes into bonds would so far take up

the notes as to stand in the way of the negotiation of further

necessary loans to the Government, and at his instance this provision

of the law was repealed. Consequently, there was nothing inconsistent

between his position as Secretary and his later position as Chief

Justice. He was undoubtedly right in both of these positions. The

making the greenbacks legal tender did not probably add one particle

to their purchasing-power, but rather the reverse, because that

feature implied a doubt on the part of Congress itself as to the

validity and currency of such national promises-to-pay. That he was

also right in his judicial opinion and decision, however subsequently

overruled in his own Court, may be safely left to the inevitable

future appeal to common sense and to the common principles of

constitutional interpretation.

This judgment in Hepburn _versus_ Griswold was favorably received by

the country at large, as being just in the line of the great decisions

of Chief Justice Marshall, and as being exactly in accordance with

Amendment X of the Constitution, namely, "THE POWERS NOT DELEGATED TO

THE UNITED STATES BY THE CONSTITUTION, NOR PROHIBITED BY IT TO THE

STATES, ARE RESERVED TO THE STATES RESPECTIVELY, OR TO THE PEOPLE."

The State of Massachusetts particularly, which has always maintained

and still maintains a strong doctrine of State Rights as over against,

though in harmony with, the Rights of the United States under the

Constitution, applauded this judgment as sound in law and politics,

and as righteous altogether. But the then administration of General

Grant, inexperienced alike in law and politics, and linked in

entangling alliances with the great corporations of the country,

received the Decision with marked dissatisfaction; and it was

especially offensive to the huge railroad companies, whose bonds had

been executed prior to Feb. 25, 1862, inasmuch as it made the

principal and interest of these bonds payable in coin, which they had

hoped to pay off in the depreciated greenbacks, made legal tender for

all debts.

The Administration lost no time in trying to bring about by fair means

or foul, a reversal of this unwelcome decision. E. R. Hoar of

Massachusetts, at that time attorney-general in Grant's Cabinet, was

the principal agent in accomplishing this end by means so

discreditable that he lost in consequence his popularity in

Massachusetts and all chance of further political preferment. The

means chosen and put into effect was the appointment by the President

of two new judges, Strong and Bradley, the first to take the place of

Grier, resigned, and the second appointed under a law increasing the

number of judges to nine, whose opinions on the point at issue were

known beforehand, and who were selected to serve on that very account.

"_It was no secret, indeed it was a matter of public notoriety, that

these justices were appointed in order that the decision of 1869

might be reversed. Their opinions in regard to the constitutionality

of the Legal-Tender Acts had been clearly and publicly expressed. It

was therefore pretty well known what the decision would be when the

question was again presented._" (Hugh McCulloch.)

The second Legal-Tender case, accordingly, that of Knox _versus_ Lee,

decided in December, 1870, reversed the judgment of a year before, _no

new points therefor being raised either by the new judges or by

counsel in the new trial_, the Chief Justice and his three former

associates still adhering to their original opinions. It was then five

judges to four, the special question being, Is it constitutional to

make promises-to-pay a legal tender on contracts executed before the

promises were issued? The judicial answer was in this case, Yes;

provided Congress regarded such action as a necessary means of

preserving the Government in time of War, or any other period of

extraordinary emergency. That is to say, _bona fide_ creditors were

constitutionally bound to receive depreciated notes as legal tender in

satisfaction of contracts entered into when no notes were in

existence; to receive on contracts specifically calling for

"_dollars_" the depreciated notes of the Government merely promising

to pay "_dollars_," but on which the "_dollars_" could not be

obtained! What is that, but the monstrous incongruity that _a promise_

is the same thing legally as its _fulfilment_? What is that but

judicial blindness as to the _nature_ of Credit? What is it but the

old confusion between _names_ and _things_? What is it, finally, but

the dazed and hazy vision, pardonable perhaps in the popular mind but

half-opened to radical distinctions, but unpardonable in learned men

professing to lay down the law in a civilized country?

It is scarcely needful to add, that the Supreme Court of the United

States suffered in the judgment of good citizens by that transaction;

that the best legal and financial opinion of the country yielded

little respect to a decision _thus secured_; and that intelligent

people do not believe that constitutional law _can_ sanction what

contravenes at once common sense and common morality.

Judge Field (and his memory the country will not willingly let die),

one of the majority in the first decision, and writing the opinion of

the dissenting minority in the second, used this strong but just

language, "_It follows, then, logically, from the doctrine advanced by

the majority of the Court as to the power of Congress over the subject

of legal tender, that Congress may borrow gold coin upon a pledge to

repay gold at the maturity of its obligations, and yet in direct

disregard of its pledge, in open violation of faith, may compel the

lender to take, in place of the gold stipulated, its own promises; and

that legislation of this character would not be in violation of the

Constitution, but in harmony with its letter and spirit. What is this

but declaring that repudiation by the Government of the United States

of its solemn obligations would be Constitutional?_"

FOOTNOTES:

[7] John Jay Knox's United States Notes.

[8] Practical Political Economy, 1877, p. 452.