And here we must again remark, that the true subject of credit, that which is lent, and for which interest is paid, is not money, but merchandise, or some one of the myriad forms of material wealth. Money, as such, it has been demonstrated again and again, bears no profit, and therefore yields no interest. What the merchant or other needy person actually borrows, is not the little slip of paper, called a check, that he carries to the bank; nor yet the bank-bills which he receives in payment of the check; nor even the gold and silver coin, which, if he chooses, he can obtain for the bank-notes. The proof that these things are not what he really borrows for six months, a year, or some other period, is, that he endeavors to get rid of these things as soon as he can; if possible, on the very day on which he received them. He no more thinks of keeping the bank-notes or coin on hand, than of retaining the check in his possession. What he really keeps for the six months or year, and therefore what he really borrows and pays interest for, is the goods which he purchases with the bank-bills. A capitalist's property, though it may exist under his own eye only in the shape of notes, bank-bills, stocks, and other representatives of wealth, does not actually consist in them, but in merchandise, or articles of material wealth, which, in many cases, he has never seen; and these are what he lends upon interest. There is always a vast amount of such capital in being, which is not managed by its proper owners.

On the other hand, as Mr. Mill remarks, credit is "the means by which the industrial talent of the country is turned to most account for purposes of production. Many a person, who has either no capital of his own, or very little, but who has qualifications for business which are known and appreciated by some persons of capital, is enabled to obtain either advances in money, or more frequently goods on credit, by which his industrial capacities are made instrumental to the increase of the public wealth; and this benefit will be reaped far more largely, whenever, through better laws and better education, the community shall have made such progress in integrity, that personal character can be accepted as a sufficient guaranty, not only against dishonestly appropriating, but against dishonestly risking, what belongs to another." Every act of legislation, which, however benevolent in design, really diminishes the security of creditors,

is an act inflicting hardship and wrong on the very class of persons whom it is intended to benefit,—the class who have not so much capital as capacity to use it, and who must, therefore, depend on credit as the only means of turning their tal

ents to account.

Another occasion for giving credit arises from the varying demands for capital in different employments. One who has capital enough for the average demands of his business may find, owing to the fluctuations of trade, that, at one period, half of his whole capital would remain useless for some months, if he could not, during that time, lend it to another; and at another period, that the productiveness of his own stock would be greatly enhanced if he could increase it by one half for a few months. In other words, in order that his business may be most profitably and most economically managed, he must have the power of varying the amount of capital engaged in it from one month to another.

Now, it is the chief function of banks in this country to promote and facilitate these operations of credit, and thereby to economize both the capital and the industrial talent of the nation, allowing no portion of either to remain unemployed even for a few weeks. They bring borrowers and lenders together; they allow an individual to borrow this month and to lend the next,nay, to borrow to-day and to lend to-morrow, according to his varying occasions, necessities, and inclinations. They do not, in this part of their office, directly add to the productive wealth of the country; but they keep what there is in the highest possible activity, and cause it to be applied constantly to the best advantage. Credit, however enlarged, cannot increase capital, cannot create wealth, whether productive or unproductive. It can only transfer from one hand to another the wealth already in being. "Credit has a great, but not, as many people seem to suppose, a magical power; it cannot make something out of nothing. If the borrower's means of production and of employing labor are increased by the credit given him, the lender's are as much diminished. It is true that the capital which A has borrowed from B, and makes use of in his business, still forms part of the wealth of B for other purposes; he can enter into engagements in reliance on it, and can even borrow, when needful, an equivalent sum on the security of it;

so that, to a superficial eye, it might seem as if both B and A had the use of it at once. But the smallest consideration will show, that, when B has parted with his capital to A, the use of it as capital rests with A alone, and that B has no other service from it than in so far as his ultimate claim upon it serves him to obtain the use of another capital from a third person, C. All capital, (not his own,) of which any person has really the use, is, and must be, so much subtracted from the capital of some one else."*

We are now prepared to explain the nature and functions of a bank; and I will take, for this purpose, one of the simplest cases, a bank established in one of our New England country towns, with a capital of not more than $100,000. We will suppose that this town, originally without any institution of the kind, has gone on increasing in population, manufactures, wealth, and trade. There are now a number of persons in it, of easy circumstances, who still make savings from income, but have not the inclination, or perhaps the capacity, to employ these savings profitably in any active business. These have capital to lend; and there are others in the town, young tradesmen and manufacturers, who have not capital enough to give full scope to their industry, talents, and enterprise, and who are therefore eager to borrow. But the borrower may often have much difficulty in finding a lender who has to spare just the sum that he wants, and for the time that he wants it; and even the lender may often have a portion of his spare capital lying idle for weeks, and even months, before he can find borrowers who will take it all on good security, and pay interest for it at short periods. Still further, the traders in the town, as we have seen, may have frequent occasion both to lend and to borrow, according to the varying demands of their business. When their stock is low, they may have a considerable sum on hand or unemployed, which they would be glad to let out at interest if they could be sure of obtaining it again as soon as needed, or whenever a favorable opportunity offered for purchasing an additional stock of goods. But it would be difficult, if not impossible, to find a borrower who would take it upon these terms; for interest can be paid only out of profits,

*J. S. Mill's Political Economy, Vol. II. p. 36.

and capital cannot be put to a profitable use without engaging it in some occupation from which it could not be withdrawn at a moment's notice. The traders, however, would be willing to lend their surplus capital for a fixed period, say three or six months, if there were some institution in the town from which they could be sure of obtaining a loan to an equivalent or greater amount, if any occasion should arise for the use of the funds before the period of three or six months had elapsed.

It will be for the convenience of all parties, then, to have a central office in town, where all can come who wish to borrow, and whither all capital may be carried which craves investment in this form. The lenders and traders, therefore, obtain a charter of incorporation as a bank, as they find that, by clubbing their means, they can raise a capital of $ 100,000. They are willing to put all the capital they can possibly spare into such an institution, because, their stock in the bank being transferable, they can readily borrow money elsewhere, or at the bank itself, by offering this stock as security, or they can sell the stock if they desire to regain their whole capital. Having procured a banking-room, and a competent person as cashier, they can commence operations by lending every dollar of their capital, which was paid in only for the purpose of being lent. They gain a trifling advantage, also, by letting their capital only for short periods, from two to six months; thus obtaining compound interest a part of the time, the money received for interest being often let out as well as the capital, before the time arrives for the semiannual payments to their stockholders.

This small gain, however, would not by any means defray their expenses for banking-room, cashier, &c.; and if the bank had no other source of revenue, it could not divide six per cent a year to its stockholders; for it only receives a trifle over six per cent on the capital, and the banking expenses must be deducted. But, for reasons already explained, all persons in town, having cash on hand for their daily emergencies, are ready and eager to deposit this cash in bank, the institution undertaking to keep it safely, and with it to manage all their payments for them, and to return it on demand. Such deposits, therefore, though always coming and going, may amount on an average to $25,000, or one fourth of the bank capital.

The bank pays no interest on this sum, but receives interest for it; for it is able to let out the whole, only taking care to let it for short periods, so that it may be within reach, as it were, if suddenly called for. Thus far, then, the bank, with only $100,000 of capital, receives interest on $125,000, and is thus in a fair way to pay its expenses, and still yield six per cent to its stockholders. It should be observed, that the whole amount of its deposits cannot be suddenly called for, nor even a considerable portion of them. These deposits consist in great part of the funds which the various customers of the bank are constantly transferring from one to another, in the settlement of their accounts with each other; and these transfers are made upon the bank-books, as already explained, without any necessity of ever withdrawing the sum from the custody of the institution.

The usual mode in which banks lend their capital and other funds to their customers is, by discounting promissory notes. We shall, therefore, gain a clearer view of their second function, as banks of discount, by looking closely into the origin and character of such notes. It is usual in every trade to give a certain length of credit for goods bought,-six or eight months, or even a year, according to the custom in the particular trade. This length of credit is virtually offered to the purchaser as an inducement to him to pay a higher price for the goods bought; he is offered either six months' credit, or a discount of five per cent from the price demanded, though the usual rate of interest for six months iş but three per cent; and in nine cases out of ten, the purchaser decides to take the credit rather than the diminished price. The seller offers this credit, though he is in truth not able to offer it, but needs his capital returned immediately. He offers it, however, because he knows he can sell this note to the bank, or transfer the debt to it, receiving the amount minus the interest for the time it has still to run. It might seem to be a less circuitous and less costly mode of transacting the business, if the purchaser of the goods, instead of paying five per cent for six months' credit, should himself obtain a loan from the bank of the necessary sum at only three per cent, and thus be enabled to pay for his goods with ready money. But then the bank, for its own security, requires two persons to become responsible for the