money, but the excess becomes absorbed in speculation, and that is carried on, not on farms, but in cities. On the other hand, banks of issue located in agricultural sections are admirably adapted to supplying with their issues of notes these annual and comparatively brief periods of demand for money for moving the crops, and farmers whose needs are thus supplied are neither subjected to heavy discounts on the drafts drawn against their produce nor delayed in marketing their crops, or in making their purchases, by the want of money.

Under our present system of currency, during the months from March to August, the bulk of the circulating medium is finding its way, at much expense for expressage, and much cost in loss of interest, from thousands of points all over the country to the cities, and ultimately it becomes concentrated at a few centres; then, during September, October, and November, it has to be redistributed, at like expense; whereas if our six thousand banks were allowed to issue notes as the State banks did before 1862, a great part of this trouble and expense would be avoided.

If country banks were required to keep a reserve of twenty per cent. against their note issues their entire autumnal expansion would cost just one-fifth of what it now costs to fetch currency, and, under a proper system of redemption centres, the expense could be still further curtailed.

We had once in this country a great many banks chartered by the different States and authorized to issue notes payable to the bearer on demand. Confidence of course was essential to the circulation of the State bank-notes. It was therefore vital to banks of issue to maintain their credit, and to this end a reputation for prudent management, as well as for integrity, was essential.

A well-managed bank of issue got its notes into circulation by exchanging them for the notes, drafts, or acceptances of individuals and firms engaged in business," commercial paper," as it is called. The bank's profit was obtained in the form of discount or interest on the commercial paper, the bank notes carrying no interest. To put out a circulation in this way was regarded as intelligent and prudent banking, if care was taken in the selection of the commercial paper "done," if the maturities of this paper corresponded with the probable course, as to time, of the bank's circulation, and if the volume of notes thus put out was adjusted to the capacity of the community to absorb currency,

Manifestly this kind of money is much more economically obtained than the same amount of gold and silver; consequently communities where it prevails are enabled by it to use, productively, whatever proportion of their capital they would otherwise have to keep in the unproductive form of coin.

Under such a system of banking, however, the cost of a metallic currency is not wholly avoided, because some coin has to be kept by the banks. This coin is the connecting link between the bank-note and the monetary unit, for it is the medium of redemption of the notes. Identity of value between the bank-note dollars and the monetary unit is essential both to the bank and to the holder of its notes, for the latter requires assurance as to this identity before extending his confidence to the notes, and the former is ready to furnish such assurance, because it absolutely depends upon that confidence to keep its circulation afloat. This system of banking, beginning in England, acquired its highest British development in Scotland, and grew up in this country as soon as the adoption of the Federal Constitution of 1787, and the monetary legislation of Congress established a foundation for it in the institution of metallic money and a definite and stable monetary unit.

Though there were many imperfections of system, and numerous instances of dishonest, ignorant, and imprudent management, most of the banks of issue under State charters were so managed as to materially promote the prosperity of the communities where they were established. In 1862 the National Bank Act put an end to this system of banking.

In speaking of the banks of issue in a previous part of this chapter it was said that prudent and intelligent banking forbids a bank to lock up a bank's funds in anything that has to be sold in the local market in order to get them out again. The only legitimate investment for the funds of a bank is the commercial paper which represents the actual industrial operations of the community, and which presumably will be paid at maturity.

Now the National Banks are required by law to violate this ancient and wellestablished rule, for while it is true that the capital, wholly or in part, is first invested in bonds, and then the notes issued upon the bonds are available for investment in commercial paper, yet the effect is the same as if the capital were held in money and the notes invested in the bonds. Take a bank with a paid-in capital of $1,000,000 and a circulation of $900,000. The effective force of such a bank as an auxiliary to productive industry should be $1,900,000, but is really less than $1,000000, because, as the bank holds $1,000,000 in United States bonds as a basis of circulation, the bond investment locks up from $1,000,000 to $1,150,000, according to

the class of bonds held, and leaves the bank only from $750,000 to $900,000 effective capital.*

The public, shareholders and note-holders combined, have put into the bank $1,900,000 of money or its equivalent, and they are getting the use of only $750,000 of this sum, while under the former system they would have the use of the whole $1,900,000, while the bank would hold against it not government bonds locked up at Washington, and constantly depreciating in value, but gold and silver coin to the amount of $300,000 to $400,000, and commercial paper constantly and continuously running to maturity and amounting to $1,500,000 to $1,600,000.

Contrasting the two systems as sources of circulation, the one reduces the available money of the community from $1,000,000 to $750,000, an actual contraction of $250,000 on every million, or twenty-five per cent., while the other increases it from $1,000,000 (original capital) to $1,900,000, less $300,000 to $400,000 coin reserved, say to $1,550,000, making an addition of fifty-five per cent. to the local supply of loanable funds.

Another feature of the National Bank system which will prove a source of great weakness in case of disaster is the practical inconvertibility of the notes.

The total volume of National Bank currency outstanding October 2, 1894, as reported by the Comptroller of the Currency, page 4 of his Annual Report, was about $200,000,000. This was redeemable in greenbacks, and the greenbacks are by law redeemable in coin. To meet this obligation the Secretary of the Treasury holds $100,000,000 in gold against the total greenback issue of $346,000,000. Now in case a condition of things should arise leading to a run upon this reserve, holders of the National Bank notes would demand greenbacks for them and then use the greenbacks to obtain gold. Consequently the $100,000,000 of gold is the coin basis of the National bank circulation and of the greenbacks also, which is, or less than twenty per cent., of the circulation resting upon it, while under the old system the coin reserve was from thirty to forty per cent. From this point of view, therefore, the National Bank note circulation does not appear to be as well equipped, as to convertibility, as was the old State bank circulation.

It being clear that, regarded merely as a substitute for coin, bank-notes are more profitable to a community than government notes, the next point is as to the relative liability to depreciation of these two kinds of currency. The first point of difference between them in this respect is fundamental. because it lies in the basis of their issue. As has been seen, the government notes are issued to creditors of the government, while the bank-notes are issued to debtors to the bank.

Thus, for the redemption of its own notes the bank holds the security it exacts from its debtors, while against the government notes there is no provision for redemption but the government power to levy and to collect taxes.

There is another point: No bank has any obligations inconsistent with that of preserving its solvency, so that every bank that is honestly and intelligently managed will generally have assets sufficient to meet its liabilities; but governments are subject to political and other influences tending to extravagance, and nothing is so well adapted for disguising extravagance as the power to issue paper money-nay, nothing is so conducive to extravagance as that, because, generally, currency inflation commands popular applause. On this ground, therefore, it is wiser to use bank-notes than to permit the government to issue paper money.

XV. THE BALANCE OF TRADE.

Every man in business understands what is meant by making his bank account good. He knows that however large may be the aggregate amount of his checks and deposits during the day, all that he has to be careful about is that the resulting balance is in his favor. The balance is the only thing regarded, either by the bank or by the merchant.

When several banks are doing business in the same place, each will receive from its depositors checks upon the others. In settlements between these banks the balances only are regarded. If there is a clearing-house, each pays or receives its own general balance through that institution.

Where there are banks and clearing-houses, therefore, all the varied operations of a great mercantile community may go on without any money passing, except what is required to settle balances, to pay wages, and to carry on the retail trade. The same principle obtains in settlements between cities. The state of the balance between the two cities influences, but does not of itself alone determine, the rate of exchange on New York at Chicago; but the rate of exchange determines currency

For obvious reasons the banks generally hold four per cent. be ads, so that the larger figure is nearer the average than the smaller.

movements between the two cities, and practically brings it about that only the final balance between all the banks in Chicago, on the one hand, and their correspondents in New York, on the other, is settled in money.

The foreign trade of the country is carried on by means of bills of exchange payable in London, Paris, etc., the bankers here purchasing and remitting bills drawn against exports and supplying their own drafts to importers to pay for goods brought into the country. Here, again, it is the balance only that has to be settled in money. If the values imported exceed those exported, rates of exchange rise, and money must be shipped abroad; if exports exceed imports in value, exchange falls, and money comes from abroad.

Amid the countless transactions of great cities, indeed, in the vast volume of commerce between continents the primary use and function of money still survives; values are exchanged (through cheques and bills of exchange), as they were in barter 3,000 years ago and the money comes in at the end only to "even the trade" to settle the balance. What is still more rem. rkable is that to-day settlements are made between nations as Abraham settled with Ephron by weighing the silver and gold, for, whether coined or not, the precious metals in international trade pass by weight, i. e., by intrinsic value only. So difficult is it for men to escape the operation of natural laws.

Czars, Parliaments, and Congresses may coin metal and emit paper money, Latin unions, great nations, and many small communities may accept these and give them currency at arbitrary valuations, each within its own borders, but in the world's clearing-house world-wide values alone are available, and these must come in pure metal and must stand the test of accurate weighing.

Now the law of finance underlying all these instarces is the law embodied in clearing-house rules, viz., that when several kinds of money are circulating in the community, all balances must be settled in that kind only which is available for the settlement of outside exchanges; and from this proposition there is deduced, as a corollary, the following principle, viz., that only what is available to settle balances at any money centre is good money throughout the entire area within which exchanges are focused on that centre.

The reason of this is obvious. A man who has to make good his balance in bank cannot accept from his debtor, or in payment for his services or wages, any thing but what the bank will take, i. e., what is known as bankable funds. The banks exact this because they, too, must meet all demands upon them, including their clearing-house balances, and they can do so only in such funds. The clearinghouse cannot relax the rule, because if it did the community would, under the operation of Gresham's law, very soon lose all its wide-range money and have only a local circulation, unavailable for meeting the demands upon it from other places, and that unavailability would paralyze its business by embarrassing collections, thus discrediting its merchants and eventually crippling the banks themselves.

This being the case, it follows that no commercial community is entirely free to set up a local money of its own; if statute laws do not forbid, natural laws will hinder and embarrass the use of such money, while every commercial community finds its interest promoted by the largest possible local circulation of that currency, among all within its reach, which has the widest range. In the United States no commercial city can afford to be without money that is good in New York. In New York and other financial centres there must always be a stock of money that is good in London.

XVI. THE VOLUME OF MONEY.

Much controversy exists as to what volume of money should be maintained in the United States. The first, and apparently the most popular, theory, is what may be called "the per capita requirement," which is, in effect, that the volume of money in the country should increase in some sort of proportion to the increase in the total number of inhabitants.

The first inquiry must be whether there is really, or can be, any relation between the number of people in the country and the number or the money amount of coins and notes existing at any particular time; because, of course, the whole theory of a per capita requirement of currency depends upon there being such a relation. If any argument exists in support of this postulate, I have not seen it.

The following table contains facts pertinent to the inquiry in hand, the column "Bank Credits" including bank capital and deposits.

APPROXIMATE SUPPLY OF CURRENCY IN THE AGGREGATE AND PER CAPITA IN THE PRINCIPAL COUNTRIES OF THE WORLD.*

*This table is made up from data given in the Report of the Director of the Mint, 1894, and Mulhall's Dictionary of Statistics.

If, as appears from this table, no uniform proportion of currency to population exists as to countries, does any exist as to lesser communities, say our States, counties, cities, and towns, or the cities or provinces of the European countries referred to? The experience and the common sense of every reader may be appealed to in derision of the notion that the number of people in a house, a town, a State, or the whole country, has anything to do with the total volume of the money held or required in each of these communities.

The disparity shown in the tables simply proves that everywhere but here governments accept the doctrine which requires them to refrain from meddling in commercial adjustments, and especially to refrain from any attempt to increase or diminish the volume of money by administrative measures or by legislative enactment.

Another theory is, that the volume of currency should increase with increased wealth. This is indeed the true doctrine on this subject, as may easily be substantiated without going abroad.

The facts connected with currency distribution and movements over great areas and among large populations are difficult of discovery and impossible of precise ascertainment because of the incessant mobility of money; while on the other hand, facts as to the normal movement of coins and notes in any particular locality are readily obtainable. These facts establish the principle that the office and function of money is to pass from hand to hand, and a corollary deduced therefrom is that, except while actually so passing, coins and notes are, as far as their effect goes, not money at all.

Whatever money, therefore, is hoarded, whatever is held up in banks, whatever is otherwise out of circulation, constitutes reserve of material available for circulation, but it is not a part of the active circulation; hence the tables above referred to are misleading, because in interpreting them it is generally assumed that all the money in each country is in circulation, whereas it is never all in circulation, and no one knows how much of it is circulating at any particular time of day or night.

One dollar that changes hands ten times a day does the duty of ten dollars used once in liquidating debt, effecting exchanges, and measuring values, which are the only uses of dollars as money; but the dollars resting in some man's pocket, or till, or safe, are functionless.

Now any theory of money distribution or currency supply must be defective that does not take account of the increased effectiveness of money by reason of repetition of employment, and also of the proportion between active circulation and reserve which obtains in different communities. These two principles are really what control the quantity of money required in any community, at any given time, and because these vary incessantiy and independently, while the population is nearly constant numerically, it is impossible for the per capita requirement theory to have any foundation in reason, or to find any support from facts.

Legislation, therefore, influenced in any degree by efforts to apply this theory, is misguided and likely to prove injurious. To illustrate this view of the subject, money may be compared to the rolling stock of a railroad. Money is an instru

ment of exchange through the transportation of value; railroad cars are instruments of exchange through the transportation of commodities.

Now what railroad manager would disregard these considerations and fix the number and capacity of the locomotives and cars for each road by the length of its track, or in proportion to the population of the country through which it runs?

Manifestly the best thing for railroads generally is that each company should be free and able to adjust the number of its locomotives and cars to its average needs, to hire out its idle stock when its own traffic is dull, to hire from its neighbors in times of activity.

Now within fifty years our railroads have marvellously increased in number and extension; this whole system of car-interchanging has come into existence and attained proportions but little appreciated by the general public, and although producers and consumers of every sort and everywhere are vitally dependent upon the uninterrupted use of the facilities of transportation they afford, there is among the people absolute confidence that the managers of these roads can and will provide cars and locomotives enough for all purposes. No one has dreamed of suggesting that the supply of these should be proportioned to the population; no one has proposed that the government should build locomotives and cars.

If such measures were adopted they would immediately disturb railroad management throughout the United States; every workshop for the manufacture of locomotives and cars would curtail its operations, stop the purchase of raw material, of castings, fittings, etc.; the purveyors of these articles would find their business paralyzed, and, after fifteen years of government effort to increase the supply of rolling-stock, there would be fewer locomotives and cars in the country than if the railroads had been let alone

Is this not a striking likeness of the consequences of the effort made by the government to increase the supply of money in the country by first coining two million dollars' worth of silver every month and afterward buying, with notes issued for the purpose, 4,500,000 ounces of silver monthly? Are not the banks surrendering their circulation; are not credits curtailed; have not gold coins, estimated to amount to $600,000,000, disappeared entirely from ordinary circulation; have not greenbacks become rare?

Since communities, however populous or geographically extended, consist wholly of individuals, and since all individuals are governed, in respect to these matters, by the same impulses and considerations, it follows that the supply of currency in every community will be distributed at any particular moment according, first, to the relative desire of different individuals to use particular amounts, immediately or prospectively; and, secondly, according to the relative ability of these individuals to obtain the amounts they severally desire.

If anything causes a large proportion of the individuals in any community to simultaneously accumulate currency, each having regard only to his own requirements, immediate and future, the aggregate of such withdrawals from the volume of currency will reduce that portion available for active circulation below the current needs in the community, and produce what is commonly called "a scarcity of money." It is a natural law, resulting from the uniformity of human action under like conditions, that a general opinion that such a scarcity is likely to arise tends of itself to produce that scarcity, because every man in endeavoring to provide himself with money enough to tide over the apprehended “squeeze," holds up all the money he can, and so helps to precipitate that very condition against which he is endeavoring to guard.

Now in spite of whatever efforts governments may make, no commuity ever retains for any length of time a greater volume of circulation than will suffice for its ordinary needs.

There is, therefore, always a tendency, under normal conditions of business and of political and social tranquillity, toward the establishment of an equilibrium between the average volume of daily cash transactions and the volume of the cir culation, including in this term the checks, drafts, notes and credits which take the place of "lawful" money. This being the case, when an occasion arises, as above described, impelling a general resort to the holding up of money, scarcity is inevitable.

It is evident, therefore, that no amount of money emitted by the Government can avert periods of scarcity, and there are those who think that the somewhat regular recurrence of such periods is inevitable. It is, however, equally evident that the greater the area covered by any single monetary system, the less likelihood will there be of any occurrence producing a unanimous and simultaneous moveinent toward the holding up of money.

At the same time, if all over this area, through the agency of banks and the other appliances of modern finance, a free movement of money is practicable,