tion to be redeemed in specie, there will be only mortgages to be offered for it, and the Bank will be obliged to refuse payment. Consequently, the history of such Banks has been uniformly dis

astrous.

As a general rule, the currency will not absorb Bank issues, or prevent them from being soon returned for redemption in specie, if those issues have not furnished a means for the immediate creation of fresh values, the proper circulation of which requires an additional amount of money. If Bank-bills amounting to one million of dollars, for instance, are lent to supply the manufacturers with Circulating Capital, additional manufactured goods will be brought into market, in the course of a few months, to the value, probably, of $1,200,000, allowing 20 per cent for profit; and the numerous exchanges occasioned by this additional quantity of merchandise will require additional currency, not amounting, it is true, to one million of dollars, the original amount of the loan, but still sufficing to keep back a considerable portion of the bills from being presented for redemption at the Bank counter. On the other hand, if the same amount of bills should be lent to furnish the manufacturers with Fixed Capital, the additional goods brought to market in the course of the next year might not exceed $150,000, and but a small portion of the bills would therefore be absorbed into the currency.

In ordinary times, when specie is the only legal tender, if the paper issues of the Banks exceed the demands of circulation, there follows a perpetual reflux of the Bank-bills, which will soon drain the specie reserves, and can be checked only by a limitation of the issues. It is not necessary that the bills should be actually presented at the counter with a demand for their redemption in coin. They may also be brought back by the customers of the Banks, who make deposits with them, or return them in payment for their notes which have been discounted, and have fallen due.

It is only in a period of excitement, during a commercial crisis, or an alarm for the solvency of one Bank or of all the Banks, that the notes are directly brought to the counter for redemption in coin. In ordinary times, the real limit upon the circulation of any one Bank is found in the daily settlement of its accounts with other Banks. In the Clearing-Houses recently established by the Banks both in New York and Boston, every Bank each day pre

sents all the bills of the other Banks which it has collected in the day's transactions, and offsets with them its own bills which have been paid into those Banks; only the balance, which is comparatively a small sum, is settled by the transfer of specie. Any redundancy of its own issues is sure to be followed by the presentation at the Clearing-House of a larger amount of its own bills than it has bills of other Banks wherewith to redeem them, and by the consequent necessity of paying the difference in gold or silver coin. Checks drawn upon it against deposits must be met in the same

way.

Through these necessary dealings of the Banks with each other, they become the watchful guardians of each other's solvency, and are connected by the closest ties of mutual dependence and guaranty. The question which was formerly much debated in this country, whether the banking business of the community would be more safely transacted by one great national Bank, resembling the Bank of England or the Bank of France, or by numerous small Banks of comparatively private character and limited resources, as in what was the American system up to 1863, is one of no substantive importance. As our small Banks necessarily deal with each other, by receiving each other's bills and settling their mutual accounts every day, they are virtually bound together into one institution; if the issues of any one of their number become excessive, the others are the first to perceive it, and are the first losers by its insolvency. This remark applies to them, however, only in their single function as Banks of circulation; their two other functions, of receiving deposits and making discounts, may be, and often are, exercised by private merchants and capitalists, just as well as by the Banks themselves. And these two functions constitute far the larger part of the banking business. If the transactions of one great Bank are more publicly known and closely scrutinized, and if it can be managed by a few persons of high reputation for probity, wealth, and intelligence, so the consequences of its failure would be more general and more disastrous. It would not be watched by any rival institution deeply interested in an early detection of its insolvency. Massachusetts had 169 Banks, with an aggregaté capital of over 58 millions, and an aggregate circulation of less than 23 millions. If all this business were concentrated in the hands of one institution, even the rumor that it

was in danger would create a panic that would paralyze the business of the whole State, and its actual failure would occasion almost universal bankruptcy. But under what was the system up to 1863, the unsoundness of one Bank is quickly detected, and the rotten member is easily lopped off without shaking public confidence, or doing more than slight injury to very few individuals. The average circulation of a Massachusetts Bank was but little over $135,000, and that of the largest Banks did not equal half a million. There are many private merchants whose liabilities greatly exceed this amount, and whose failure would be a more serious shock to public credit. And the cases of insolvency are proportionally more numerous among the merchants than among the Banks; of the latter, there were not more than half a dozen failures in

fifteen years.

Nothing can be more erroneous than the common opinion that the Banks are able to increase their loans, and augment their circulation, at pleasure, or according to their own ideas of what is safe and expedient. There are no other funds from which loans can be made but (1.) the capital, (2.) the average amount of the deposits, and (3.) the excess of the circulation over the specie reserve. The first of these is a fixed quantity, determined by the charter and the nature of the case. The amount of the second depends upon the number of the customers of the Bank, and upon the nature and extent of their business; the deposits are made up by those who need to have money at hand, or within call, as it were, but have no immediate occasion to use it; and though their deposits are continually being withdrawn and replaced, or transferred from one person's credit to another's, their average amount is nearly a fixed quantity, and, after a little experience, can be easily determined. The third fund, though generally supposed to be variable, is in truth as much a fixed quantity as either of the others. We have seen that a reflux of the Bank issues is always steadily going on, not through their presentation for specie, but through the receipts in deposit and in payment of the loans and discounts which have come to maturity. The Bank can do nothing to lessen or retard this reflux, except by diminishing the issue of the bills. If it should suddenly and incautiously enlarge its issues to day, there would be an equivalent augmentation of the reflux to-morrow; for as the community was previously supplied with currency enough for its usual

exchanges, the additional amount of money thus thrown into the market must come into the hands of persons who would have no immediate occasion to use it, but would lodge it on deposit in the Banks, and it would thus be immediately returned to the source whence it came.

When specie is the only legal tender, if the currency be mixed, consisting of specie and convertible Bank-bills, the amount of Bank-bills of any given denomination which remains in circulation is determined exclusively by the convenience, the feelings, and preferences at the time, of the people among whom they circulate, wholly irrespective of the regulations and the efforts of the institutions which issue these bills, provided only that they issue them freely, or do not arbitrarily keep the supply below the amount which the community is willing and desirous to receive. The Banks may create a deficiency, but they cannot create an excess, in the circulation of such bills. In the numerous payments which are daily made at the Banks, either in deposit or in liquidation of notes, that element of the currency, be it specie or bills, which is least in demand, least adapted to the present wishes and convenience of the people, will predominate, and will thus be quickly eliminated from the active circulation, till the ratio of the two branches of the currency is reduced to that point which the popular will requires. As the daily payments into the Banks must, on an average, just equal the daily payments out of them, no effort or contrivance of the Bank managers can avert this result. They may pay out, they usually do pay out, nothing but bills, and therefore, as a general rule, only bills are paid in; and thus the proportion of bills to specie continuing in circulation remains unaltered. But if a panic respecting the solvency of the Banks should be created, besides the usual payments in deposit and in liquidation of notes, bills will be presented at the counter to be cashed, or redeemed in specie; and thus the proportion of coin in active circulation is rapidly augmented. After the panic has subsided, finding that so much coin is inconvenient, on account of its weight and bulk, and the trouble of counting it, specie will be freely paid in on deposit; and then the Bank payments in bills. will quickly restore the usual amount of paper to the currency.

I have already borrowed from Adam Smith the ingenious illustration, that "the gold and silver money which circulates in any

country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either." He carries out the comparison still further. "The judicious operations of Banking," he remarks, "by providing, if I may be allowed so violent a metaphor, a sort of wagon-way through the air, enable the country to convert, as it were, a great part of its highways into good pastures and corn-fields, and thereby to increase very considerably the annual produce of its land and labor. The commerce and industry of the country, however, it must be acknowledged, though they may be somewhat augmented, cannot be altogether so secure, when they are thus, as it were, suspended upon the Dædalian wings of paper money, as when they travel about upon the solid ground of gold and silver. Over and above the accidents to which they are exposed from the unskilfulness of the conductors of this paper money, they are liable to several others, from which no prudence or skill of those conductors can guard them."

CHAPTER XV.

PAPER MONEY, AND ITS USE AS CURRENCY DURING A REVOLUTION OR CIVIL WAR: HISTORY OF THE EMISSION OF SUCH MONEY IN THE WAR OF THE REBELLION.

WE have still to consider the circulation of Paper Money properly so called, or. of bills which do not profess to be immediately convertible into specie. These are sometimes issued by the state, in cases of great emergency, and are then usually called legal-tender notes, or bills of credit. The Constitution of the United States declares that "no State shall coin money, emit bills of credit, or make anything but gold or silver coin a tender in payment of debts." It is still a disputed question, whether this prohibition applies only to the legislature of any individual State, or extends also to Congress and the National government. This question has never come up for decision by the Supreme Court of the United States; meanwhile, as we all know, Congress has assumed this questionable authority, and has exercised it ever since