afford in ordinary times to keep a small sum in bank-bills in their own possession, are now compelled to part with them, in order to pay their debts or to purchase necessaries. The bankbills thus pass into the hands of traders, who immediately pay them into the banks, and thereby increase the Deposits and somewhat diminish the active Circulation. Even if these traders have notes of their own to pay on the same day on which they receive the bills, they often prefer to lodge the bills in Bank in order to increase their deposit, and then pay their note with a check, which transfers this deposit to the credit account of their creditor.

We come now to the question, whether it is possible to make any such use of the Deposits as will alleviate the pressure of a panic, or what is usually called a Commercial Crisis. To alleviate the Crisis, we say; not to avert it, for that is impossible. Trade cannot exist without speculation, for all trade is speculation; and speculation cannot fail to become excessive, when credit is very easily granted, as it always must be in the period after one panic, when the Creditor class find that they have large Deposits lying idle, and when they consequently become eager to lend them, in order to obtain interest for their accumulations. As they were desirous, during the Crisis, to change their investments from prospective private debts to immediate bank debt, so now, after the Crisis, they are eager to obtain good private notes, payable on interest at a future day, instead of their unproductive Deposits. But when abundant credit is offered on easy terms, and prices are unusually low, as another consequence of the recent pressure, merchants will make large purchases, in the hope of profiting by a speedy rise of prices; and in this hope they are not disappointed, as these very purchases cause the expected rise. Others are thus incited to follow their example, and, speculation again becoming excessive, a panic ensues, and the former pressure in the money-market is renewed.

But the fact has not been sufficiently noticed, that the Creditor class of depositors are as much affected by this panic as the Debtors, and that their injudicious proceedings, when thus affected, greatly enhance the very evil which they dread. As the billholders, by making a run upon a bank whose credit is shaken, make the suspension inevitable which might otherwise be averted,

so the Creditor depositors, by allowing the notes due to them to mature without making further loans, cause many to become insolvent whose assets, under ordinary circumstances, would pay all their liabilities and leave a surplus. Mercantile debts are

Thus the capitalist,

paid, as we have seen, only by a free circulation of the Deposits. But when the Creditor class refuse to make further loans, these Deposits accumulate in sluggish masses to their own credit, being seldom transferred on the bank books to the credit of the Debtor class, and every failure thus caused only enhances the difficulty. Because A cannot obtain a loan, he is unable to pay a debt to B, who is therefore also driven into insolvency;` and his failure, by diminishing the receipts of C and D, obliges them also to fail. It is not unlikely that C and D may be largely indebted to the very same capitalist, or "creditor depositor," whose eagerness to change his funds from prospective private debt to immediate bank debt or, in other words, to enlarge the amount of Deposits to his own credit made him refuse the required loan to A, which might have saved him from failure, and thereby averted the failure of B, C, and D. by refusing to make one loan on what he considers as doubtful security, may cause himself to lose twice as much through the subsequent failures which are thus necessitated. He can foresee this result, and act accordingly, if the chain of connection be only a short one. If, for instance, by lending $10,000 to A, he can see that it will enable A to pay B a note for $15,000, and thereby B will be enabled to pay $ 20,000 to himself, a regard for his own interest will induce him to make the loan, though on what he would otherwise regard as insufficient security. What are called "forced renewals" of a note are sufficiently common, and are of precisely this character. But if the chain of connection be a long one, extending through many persons, being unable to follow it, he is fearful lest, by making this doubtful loan, he will only enable B, C, D, E, etc. to pay their notes to other capitalists, so that all the benefit will accrue to them, and the only loss will be his own.

Yet nothing can be plainer than that, if he and all other creditor capitalists were willing to incur this hazard, — acting, in truth, on the principles of a mutual insurance company, — if they would lend, during a pressure in the money-market, to the same amount,

and on the same security, which would satisfy them in prosperous times, then all unnecessary failures would be averted, and both the Debtor and Creditor classes would be equally benefited. Suppose, for instance, there were only three creditor capitalists, X, Y, and Z, and only six debtors, whom we will designate by the first six letters of the alphabet. If X would lend to A and B, and thereby enable them to pay Y and Z; if Y would lend to C and D, and thereby enable them to pay X and Z; and if Z would lend to E and F, and thereby enable them to pay X and Y, the pressure and the panic would be greatly alleviated; for no failures could occur except of persons who could not offer reasonable security for loans, that is, whose debts really exceeded their assets. And these ought to fail; a moderate pressure in the money-market, by winnowing such insolvents out of the trading community, would be a benefit, rather than an injury, to the whole number.

It is evident, from this analysis, that an association of all, or a greater part, of the creditor capitalists might do with perfect impunity what no one of them could accomplish without great hazard and loss. They might so far diminish the pressure and panic, that not a single merchant would be driven into insolvency by it, except his undoubted means were really smaller than his liabilities. All their deposits in the various banks being thrown into a common fund to the credit of this association, loans from this fund might be made, at the common risk, to any extent whatever; for any loan out of the fund would immediately occasion a corresponding payment into it of the same amount. The fund would thus be inexhaustible; for if managed with common prudence, that is, if no loans were made except on fair security, or with reasonable prospect of repayment, the profit or interest on the loans would suffice to pay all expenses, and still leave a reserve, or guaranty fund, which would offset the few bad debts that might be contracted.

Such an association might be called a Great Bank; but it would be one of a peculiar kind. It would be a bank performing the same function for the existing banks that these banks now perform for individuals, — that is, it would be, to use a mathematical expression, a bank raised to the second power, Bank2. The Bank of England, to some extent, is such an institution, as

it stands in precisely this relation to all the Private banks and the Joint-Stock banks in the city of London, all of which have Deposits in the Bank of England, which is thus enabled to make further loans on the strength of these Deposits, without depriving the depositing banks of the full use of their funds. Our proposed Bank, or Association of depositors, however, would be peculiar in another respect, in that it would require neither charter nor capital, would issue no bills, and would perform no function but that of making loans and circulating Deposits. It would not withdraw any funds or Deposits from the present banks, but would circulate and equalize these Deposits, keeping the share of each bank as strictly proportioned as it now is to its amount of business. Its functions would be very similar to those of the Clearing-House, and might perhaps be profitably added to the present operations of the Clearing-House, being conducted under the oversight of the same committee, or of one chosen by the associated depositors.

It appears from this explanation, that there is no good reason why merchants of undoubted solvency should find it any more difficult to pay their notes at one time than another. The fund which affords the means of paying them—i. e. the total amount of the Deposits remains without material fluctuation throughout all conditions of the money-market; or rather, as we have seen, it is a little increased in a time of pressure. And the aggregate of this fund is not diminished by making payments out of it to any amount whatever; for though all commercial debts are paid out of it, they are by the same act paid into it, the operation of payment only shifting the names of the persons to whose credit a given portion of the fund is entered. But so long as the fund is owned and held (say) by a thousand different depositors, any one owner fears to lend during a crisis, lest the loan should diminish his share of the deposits, though it would thereby certainly increase the share of some other owner. But throw all the Deposits into one fund, intrusted to the management of one person or one institution, and, while each depositor may still retain the entire use and direction of his own deposits, the manager of the whole may make loans to any extent without subtracting a dollar from the aggregate. To obtain a loan, and therewith to pay a debt, is not to take away anything

from the total amount of the Deposits, but only to shift the distribution of them on the books, where they are entered to the credit of different persons.

CHAPTER XX.

THE DOCTRINE OF INTERNATIONAL EXCHANGES: THE LIMITS OF FREE TRADE AND THE PROTECTIVE SYSTEM.

Ir has now been shown that prices are determined by the relation of the Demand to the Supply, and that an extension of the market, or an increase of the Demand, can be obtained only by submitting to a fall of prices, so as to bring the article within the reach of a greater number of consumers. In any market, only a certain quantity of goods at a given Price can be consumed; if more goods are forced upon the market than it naturally requires, the Price must fall, and then the consumption may be very much increased.

It has also been proved, that we really purchase commodities with commodities; that we pay for our whole imports with our whole exports; that if, in our traffic with any one country, our imports much exceed our exports, then we pay the balance, not in money, but by transferring to that country the debt due to us from another country, with which our trade is such that our exports exceed our imports. It is only the balance of the immensely long "account-current" of our trade with all foreign countries whatsoever which is struck in money; and this cash balance cannot be more than an insignificant fraction of either side of the account.

The advocates for free trade have always insisted, that we must buy merchandise of England, not only to. induce, but even to enable, England to buy merchandise of us; that we must buy of any country in order to sell to her, and must buy as much as we sell. But it is not so. It is not necessary that we should take enough of English manufactured goods to pay us for all the cotton, tobacco, and wheat which we sell to England. England is able, though of course she is not very willing, to pay us the balance in