repayment of the loan, these two usually being the signer and an indorser of the note. The buyer can only offer his own personal security, which is not enough; the seller can offer a note signed by the buyer, and indorsed by himself, so as to complete the requisite guaranty. The real nature of the transaction, then, is as follows: the seller, in order to enable a customer to buy his goods, obtains for him from the bank a six months' loan of the purchase-money, charging him two per cent for this service and for guaranteeing the repayment to the bank.

It is the chief function of the banks to discount or buy such notes, which are called real or business paper, to distinguish them from another class of notes, which are denominated fictitious or accommodation paper, because they are not grounded on any debt previously due from the promisor to the indorser. "Real notes (it is sometimes said) represent actual property. There are actual goods in existence, which are the counterpart to every real note. Notes which are not drawn in consequence are a species of false wealth, by which a These supply only an imaginary capital; the others indicate one that is real."*

of a sale of goods, nation is deceived.

But there are no good grounds for this distinction and preference. A loan obtained by a purchaser, on a note indorsed by a friend, may be applied to the purchase of goods, just as much as if the note were indorsed by the person who sold those goods. Then there may be actual commodities or values corresponding to the accommodation or fictitious paper, as well as to real notes; the wealth is no more fictitious, nor are the pretences on which the loan is obtained more unfounded or fraudulent, in the one case than in the other. Again, though all the notes should be given as the results of actual sales of commodities, it is by no means certain that these commodities are equal in value to the whole (aggregate) amount for which the notes are given; for the same goods may be sold over and over again by successive purchasers, so that there may be many notes, each representing the whole value of one and the same parcel of goods. For instance, A may sell $1,000 worth of merchandise to B, and receive therefor B's note at six months;

* H. Thornton's Inquiry into the Nature and Effects of Paper Credit.

within a week, B may sell the same goods to C, and receive his note for the same sum; C may soon dispose of them in like manner, and receive a third note. Before six months have elapsed, there may be a dozen such notes in being, all of which may possibly be discounted at the same bank; yet only one of them represents any actual property.

Up to this point, be it observed, there has been no mention of bank-notes, or of the issue of a substitute for specie currency. The bank might exist, might exercise the two functions now explained of deposit and discount, and pay dividends of a reasonable amount to its stockholders, though the currency of a country should consist exclusively of gold and silver. The establishment of the bank would lessen the amount of these two metals required for making exchanges, - would limit them in great part to the retail trade, or to transactions between dealers and consumers, the business of dealers with each other being adjusted almost exclusively by checks transferring deposits. But it now becomes a question whether the precious metals may not be dispensed with, even for this service. They are used only to be passed from hand to hand; their material and specific qualities - their hardness, weight, &c.—are not needed to fit them for such transfer. A scrap of paper would answer just as well to be passed about, provided only that the receiver of it felt secure that it would not diminish in value while in his keeping, or that his neighbor would always be willing to receive it on the same valuation upon which it had come into his own hands. Instead of effecting a purchase with five hard and weighty silver dollars, it would be even more convenient to effect it with a scrap of paper, which the holder is sure of being able to exchange at any moment, and without difficulty, for that sum in specie. The bank, having relieved the large dealers from the necessity of using specie through its system of checks and deposits, may now relieve the smaller ones, and the community generally, from such necessity, by issuing its own notes for small sums, payable on demand in gold or silver at its own counter. In its immediate vicinity, such notes would evidently be preferred to coin, on account of their superior convenience; beyond that vicinity, they would not circulate, because the distance would oppose an obstacle to their immediate conversion into cash, and be

cause the circumstances and solvency of the bank could not be so well known at a distance.

To return to the bank with $100,000 of capital, which was taken as an example to illustrate the theory of these institutions; we have seen that its capital and deposits combined would enable it to make loans on interest to the amount of $125,000. If we suppose that it can raise its circulation to $50,000 by keeping only 10,000 specie dollars in reserve, it is evident that $ 40,000 will be added to its productive means; or that it will now be able to lend on interest $165,000. It can then easily pay its banking expenses, pay 6 or 7 per cent on its capital to the stockholders, and still have a small surplus to meet the contingency of some loans made by it not being repaid, or, in other words, to make up for bad debts. How this excess of circulation over the specie held in reserve is so much added to its productive means, appears very easily on a little reflection. After it has lent out all its capital and all its deposits, it can still lend its own notes, or its own promises to pay specie on demand, which will circulate as readily as hard money, and for which, therefore, the borrower will pay as much interest as for hard money.

Under ordinary circumstances, it is certain that one dollar in specie held by the banks is a safe basis for the circulation of three or four dollars in paper; for paper being equally available with specie for all domestic purposes, and far more convenient, it would be strange indeed, if the inhabitants of any town or the people of any country should suddenly have occasion to send abroad, or out of their own precincts, a sum in specie equal to one third or one fourth of their whole paper circulation. Such an export from the United States would amount perhaps to sixty or seventy millions in specie, drain upon the currency quite sufficient to so far raise the value of what money remained behind, that the prices of all commodities would inevitably fall much below the average, and there would consequently be an irresistible temptation to export merchandise and import bullion.

a

But the great danger to the circulation of the banks arises, not from the possibility of a sudden demand for a great amount of specie to be sent abroad, but from the occurrence of one of those panics among the people, which are not infrequently

caused by commercial crises, or by the failure of one or more large banks through the gross mismanagement or fraud of their directors, a failure which, among the ill-informed, of course excites suspicions as to the soundness of all the other banks. Against such panics, in truth, there is no adequate protection, except the diffusion among the people of a knowledge of the theory and practice of banking, - a knowledge which would teach them that, by yielding to the excitement, and joining in the run upon the banks, they are acting directly against their own interests, which are not otherwise in jeopardy. An anecdote is told of an eccentric banker, who, when a great crowd had collected about his doors, in consequence of one of these unreasoning excitements, came out and pushed them away with great violence of gesticulation, exclaiming, "Go away, you foolish people! or I will break, and ruin every man among you." He was quite right; in every bank that is managed, I will not say, with common ability and discretion, but with common honesty, the capital and other resources so largely exceed the circulation, that it is impossible for the notes to fail of being ultimately redeemed in specie. In the case of the bank which has been taken as an example, the assets are, the notes and bills of individuals, which it has bought or discounted to the amount of $165,000, and $10,000 in specie, making an aggregate of $ 175,000, as a fund for the redemption of only $50,000 in its own paper. If less than one fourth of these notes of individuals are duly paid at maturity, the bank-notes cannot fail to be redeemed in full; and without a breach of honesty, it is certainly impossible that the directors of any institution should let out their own money and that of others in such a manner as to lose more than four fifths of it. But a great panic may bring home upon the bank more than one fourth of its circulation in one day, each holder of its notes being anxious to secure himself, and careless of the effect upon others. In this case, the bank would be obliged to suspend specie payments, its notes would be dishonored and consequently depreciated, merchants would be deprived of their deposits and customary facilities at the banks, in consequence of which they also would fail to redeem their own notes due to the bank, and a general sacrifice or destruction of property would ensue.

There is one rule for the proper management of a bank, by which the danger of such a catastrophe is very much lessened; I refer to the rule for not discounting any but what is called "short paper," or not buying any notes which have more than a few months to run. If the bank lends all its available means for a period as long as six months, the receipts and loans being pretty equally distributed through all the business days of those months, it is evident that the daily receipts from loans repaid would be equal to the whole amount lent divided by the whole number of days for which it was lent; that is, in the case of the bank we have taken for an example, $165,000 180, or about $916, for the daily receipts. If two months were the limit fixed, then the whole capital would be turned over, or paid in and let out again, once in every sixty days; and the daily receipts would be about $2,748. If, on the other hand, a year was the limit, the receipts each day would be only $458. Now, if we suppose that a run takes place upon such a bank, it would probably take two days to exhaust its stock of specie, $10,000, which was held in reserve. During the continuance of the run, the bank's daily receipts would also continue, but it would make no new loans; all the cash paid in would be held in reserve for the great emergency that had arisen. If it had adopted the two months' limit, the receipts during the two days' run would exceed $5,000; it would thus be prepared for a third day, and probably for a fourth, as the amount of its own notes brought in each day would rapidly diminish after three days' run. The bank would weather the storm. But if a year were the limit it had adopted, the receipts during the first two days would be only $916,- not enough to carry it through the third day. The bank must stop payment. We see an obvious reason, then, why the banks feel obliged to curtail their issues or discounts during the existence of a panic, though by so doing they increase the distress of the community. The bolder policy sometimes adopted, of increasing rather than diminishing the discounts at such a crisis, in order to lessen the distress, and thereby stop the panic, resembles the plan of crowding all sail on a ship in a storm, in the hope thereby of keeping off a lee-shore, though the increased strain thus put upon the vessel may leave her a dismasted hulk on the waters.