BANKS. 



these phenomena might take place in a country 

 where the currency is purely metallic ; but a very 

 general belief arose in England that the rise of 

 prices, and consequent drain of gold, if not ac- 

 tually generated, were at least heightened and 

 prolonged in this country by the issues of bank- 

 notes, there being formerly no limit by law to 

 their issues. As prices, it was argued, depend 

 on the quantity of money circulating in a country, 

 the more bank-notes that are issued, the higher 

 are prices. Hence, banks, if unlimited in their 

 issues, do, by increasing their issues, raise prices. 

 Then, if a drain of gold sets in from this country, 

 it can be checked or counteracted only by a fall 

 of prices ; while, if banks continue to throw out 

 their notes, or even abstain from calling them in, 

 prices will not fall, and the drain of gold will go 

 on. If the currency were purely metallic, it would, 

 of necessity and spontaneously, be lessened in 

 amount by the withdrawal of the gold for export, 

 and prices must fall. Therefore, banks ought not 

 to be allowed to issue notes to increase the cir- 

 culation to over-issue, as it is called unless 

 they withdraw from it as much gold as they issue 

 notes ; if they were not allowed, our mixed cur- 

 rency of gold and notes would vary as a metallic 

 currency would do ; and the currency would not 

 be kept in an inflated condition by issues of bank- 

 notes when, but for them, it would not have 

 increased, so as to raise prices, or would have 

 diminished, so as to allow them to fall. The 

 object of the existing bank acts, passed in 1844 

 and 1845, was to carry this theory into practice, 

 by preventing the issue of notes beyond a fixed 

 amount, unless against gold held by the issuers. 



There are three fundamental errors in this 

 theory, according to those who oppose it. First, 

 it proceeds on the erroneous supposition that, in 

 a country like ours, where most purchases are 

 made on credit, or are paid for by other means 

 than gold or bank-notes, prices depend on the 

 amount of gold and notes in circulation. A sale 

 is effected by a mere book-entry of the seller, and 

 before the term of credit has expired, the price 

 will be set off by a counter-sale to him ; or, if 

 the price, as is the case in the great majority of 

 wholesale transactions, is paid by a bill or bank- 

 cheque, the holder obtains its value without the 

 intervention of gold or notes ; the bills and 

 cheques are set off in the hands of bankers by 

 the bills or cheques granted by himself. Prices, 

 therefore, are not to be regulated by regulating 

 the currency of coin and notes. The second 

 error is, in supposing that banks can over-issue 

 at pleasure. The extent of their issues depends 

 on the demands of their customers, and their 

 customers, when under a speculative mania, do 

 not effect their purchases by means of bank-notes. 

 There is also the check afforded by the return 

 of the notes to the Bank for gold. The word 

 over-issue is frequently used in these discussions 

 to signify an addition of notes to the circulation, 

 when it is in that state that there is no passage 

 of the precious metals to or from a country to pay 

 for an excess of imports or exports. In this 

 sense, banks may over-issue, on the application 

 of their customers ; but if trade were increasing, 

 so as to require an addition to the circulation, 

 temporary or permanent, the over-issue would be 

 advantageous to the country. If the banks did 

 not meet the demand for additional notes, the 



public must and would be at the cost of importing 

 gold to serve the -necessities of business. Third, 

 when there is a drain of gold, it would be taken 

 from stores -or reserves in banks, and not from 

 the circulation in the hands of the public, although 

 purely metallic ; it is always drawn in this country^ 

 directly or indirectly, from the reserve of the 

 Bank of England ; so that prices are not affected 

 by a diminution of the currency, but only by the 

 bank withdrawing credit. Any attempt, therefore, 

 by legislation to withdraw gold or notes from the 

 circulation on a drain, is to aim at a result 

 different from what would take place under a 

 purely metallic currency. 



On considering the various operations con- 

 nected with banking, it will be found that, inde- 

 pendently of the impulse and elasticity created 

 by the facilities given to commerce, the direct 

 and primary effect of them is the employment 

 of waste money. A bank gathers, as it were, the 

 money of a district into its hands, and allowing 

 each man to use as much of his own share as 

 he requires at the time, keeps the remainder 

 likewise in employment, which would not have 

 been the case had it remained in its owner's 

 hands. 



The rapidity with which all kinds of payments 

 are made, and therefore the frequency with which 

 money can be used, through the instrumentality 

 of banks, form the most striking feature. In a 

 bank-office the same sum of money will have 

 been made the means of paying its amount a 

 dozen of times over in a day without being once 

 uplifted. A, who is due B ,100, gives a cheque 

 for the sum, which is simply an order on the bank 

 to pay the money to B, and which will make it 

 stand in his name instead of A's. B gives a 

 similar cheque to C ; C to D ; and so on. ' Thus 

 it is,' says Mr Gilbart, 'that banks of deposit 

 economise the use of the circulating medium, and 

 enable a large amount of transactions to be 

 settled with a small amount of money. The 

 money thus liberated is employed by the banker 

 in making advances, by discount or otherwise, to- 

 his customers. Hence the principle of transfers 

 gives additional efficacy to the deposit system, 

 and increases the productive capital of the 

 country. It matters not whether the two parties 

 who have dealings with each other keep their 

 accounts with the same banker or with different 

 bankers ; for as the banks exchange their cheques 

 with each other at the clearing-house, the effect 

 as regards the public is the same.'* 



London, in which the government funds are 

 managed, and where all the great pecuniary 

 transactions of the empire may be said to centre,, 

 furnishes a remarkable instance of the econo- 

 mising of money by the interchange of cheques 

 or drafts among bankers. Most of the banking- 

 houses in the metropolis send daily the drafts 

 they have received on other banking institutions 

 to a place of common resort, called the Clearing- 

 house. Here a clerk from each bank attends and 

 exchanges drafts. By the official return, the total 

 value of cheques and bills cleared at the bankers' 

 clearing-house for the year ending 3oth April 

 1882, was ,6,382,654,000. 



Bank of England. This institution, which is. 

 the largest and most important banking establish- 



* Gilbart's History and Principlt* of Banking, pp. 123, 124. 



493 



