The large percentage of establishments represented in this table, in which the strikes were ordered by labor-organizations, is particularly noticeable. In New York 94.26% of the establishments had strikes which were ordered, in Illinois 83.96%, in Massachusetts 81.91%, and in the United States 82.24%. The "walking-delegate" so-called became the principal personage in all these strikes; he brought the orders to the men from the "central-union" of their special organization, and became in most cases the sole means of communication between the two. "You are the strike," exclaimed the Lord Mayor of London the other day to Mr. Burns, the walking delegate of the dock-laborers now on strike in that city. That the daily bread and home comforts of tens of thousands of men depend on the secret and irresponsible decision of a little knot of agitators, sending out their verbal and often ambiguous written orders by a walking-delegate or two, is one of the monstrosities of Strikes often witnessed in the United States. The laborers sometimes do not know even the causes of the strike. There has been great want and suffering for three months past among the striking coal-miners in the State of Illinois; and a brief editorial in the "Springfield Republican" of Aug. 24, 1889, describes the state of things so justly, that we quote it:—

"Ex-Congressman William L. Scott, who owns coal mines at Spring Valley, Ill., has offered to pay 75 cents a ton for mining to the strikers who in their destitution have been subsisting for some time on public charity. This is 2½ cents a ton more than the miners have asked for, but it is coupled with the condition that each man must seek work individually and not through some outside union committee. Although the men have been reduced to a state of abject want it is said the conditions imposed will prevent a settlement. In that case we may conclude that a few well-fed walking delegates are acting for the men and not they for themselves. It is a strange time to quibble over such a matter. The worst and most oppressive enemy of labor is the parasite who lives upon its distresses."

A strike is a state of war, and like war, there are two parties to it, and it cannot be expected that the party of the other part should not strike back. The "lock-out" is the counter-stroke of the capitalist to the "strike" of the laborer. Lock-outs, however, are comparatively infrequent. Capitalists, as a rule, are conservative and forbearing. Massachusetts took the statistics of lock-outs as carefully as those of strikes, and the following is the table:—

Like war too, strikes and lock-outs are wasteful and demoralizing to both parties. Why should there be a resort to force to settle an industrial dispute any more than to settle any other private dispute? Will such a resort be long tolerated by public opinion in civilized countries? The Legislature of Massachusetts in 1886 provided for a State Board of Arbitration for the settlement of differences between employers and employees. The statute was crude in some respects, and the basis of it not very firmly fixed in the nature of things, but the Bureau of Labor reports that it has been justified by the results in its practical application during the short time of its operation. The broad truth is, that the value of Commodities and the value of Credits is now left to the safe action of Demand and Supply under free competition in every country in Christendom: why should not the value of Services be left to the same safe and inexorable action? Governments gave up long ago all idea of regulating directly or indirectly the prices of merchandise and the prices of commercial claims of all kinds: will they not shortly give up also all idea of regulating directly or indirectly the rates of Wages? They will. The three kinds of things bought and sold are on an exact level in the nature of things, so far as Government is concerned. Wages are abundantly able to take care of themselves in the ordinary way, as goods do, and stocks and bonds; and an enlightened Public Opinion is fast coming to see, that a man's personal service rendered needs no more the oversight of the State in its sale than his horse, or note of hand at interest. Strikes, and lock-outs, and all extraordinary courts or boards to settle quarrels between a labor-giver and a labor-taker as such, since it is a case of ordinary buying and selling, are foredoomed to pass out in the good time coming.

Towards this good end works strongly the common futility of strikes and lock-outs. Carroll D. Wright, chief of the Bureau of Labor in Massachusetts, now the head of the National Bureau of Labor, in his State Report for 1880, gave a succinct account of all strikes in that State from their beginning in 1830. They were 159 in all, of which 109 were unsuccessful, 18 apparently successful, 16 compromised, 6 partly successful, and 10 "result unknown." In Great Britain during the year 1878, there occurred 277 strikes, of which 256 were failures, 17 were compromised, and only 4 were successful. The following table taken from the Massachusetts Report of 1888, gives on a broad scale the results of Strikes in the United States for six years:—

General Summary of Strikes in Five Principal States for 1881-1886.
Percentages.

* In 15 establishments the results were not ascertained.

3. The third popular remedy for low Wages, which has at least the merit of being in the line of economical considerations, as the other two are not, is "Co-operation." The interest in this proposed remedy is much less both in Europe and in the United States than formerly, owing to the failures that have mostly attended the attempts to put the scheme into practice, although there have been some remarkable successes also, particularly in England. The idea of Co-operation is this, namely, that certain laborers within given classes combine of their own accord, (1) either to purchase their necessaries in common and at wholesale, hence at cheaper rates because avoiding all profits of the middlemen; or (2), more especially to engage in the joint production of the commodities they are familiar with, the laborers furnishing the capital also from their little hoards or borrowing it on the strength of their individual or associated credit, managing the business themselves, all being co-partners, and of course all sharing pro rata the entire profits of the concern.

All this is well; and in countries where laborers have been under traditional disabilities, it may be in some cases very promotive of their self-respect, activity, frugality, and general welfare; but any one can see that no new economic principle is involved in the plan. As in all other production, so here, there must be (1) capital from some source, (2) steady and skilful labor, and (3) superintendence or management of the business. It is at the third point that schemes of co-operation have mostly broken down. The faculty of good management is rare; the organizing and executive ability needful to carry through any scheme of co-operation will not come upon call; if any of the co-operators chance to possess it, the scheme may succeed, although he who is conscious of having it will prefer to use it for his own gain in his own way, to say nothing of the practical impossibility of any man's working with the same spirit when the gain or loss is to be largely another's as when it is to be wholly his own; moreover, it has been well said, "it is impossible to hire commercial genius or the instincts of a skilful trader"; so that, while there is no trouble about the workmen uniting the character of capitalist and laborer in their own persons, and no doubt that they will work harder and more skilfully while sharing profits as well as receiving wages, it is still true, that the difficulty of securing a real "captain of industry," and thus a perfect organization and management of the whole business, puts the scheme of co-operation out of the question as a means of raising wages, or promoting the general welfare of laborers.

In this country, where there is nothing to hinder any laborer from becoming a capitalist, where the savings-banks are open to the smallest gains, where nothing is more common than for two or more workmen to organize a firm to carry on some branch of business, where most of the present capitalists proper were formerly laborers proper, and where the shares of most of the joint-stock companies are open to everybody who has the means to buy them, there is only one consideration that seems to justify any special jealousy of laborers as such towards capitalists as such; and that is the fact, that Legislation, every now and then, sometimes on a small scale and then on a gigantic one, now by means of corporate charters and then by other means more indirect and effective, does confer certain extraordinary privileges upon capitalists. So long as capitalists and laborers rest upon their natural rights and positions, neither can get any undue advantage of the other; and just so far as each recognizes their identity of economic interest and the consequent reciprocity of obligation and effort, the prosperity of each will help build up the other; but, on the other hand, so far forth as any advantages are given to capitalists by special laws, either of State or Nation, these become necessarily unjust to laborers, and ultimately also injurious to capitalists; and in this case, the laborers, seeing just what it is that hurts them, ought to combine together and to strike, not capital (their best friend), but a piece of perverted legislation (their worst enemy).

CHAPTER IV.
COMMERCIAL CREDITS.

1. Certain things are essential in every sale of anything, and of course are common to all sales of everything, such as two persons and two desires and two estimates and two renderings; while there are certain peculiarities in the sale of things belonging to each of the three special classes of things salable; for example, in the sale of a commodity there is a rendering of a tangible object that has been prepared for sale in past time, and in the sale of a service a rendering of an intangible something wholly in the present time; while in the sale of a credit there are likewise two peculiarities, one of them relating to future time and the other to a special trust felt in a person by some other person. We must now study these two peculiarities with care; and, mastering these, we shall be master of the Nature of Credit.

a. Some sales are consummated at once, the things exchanged and the ownership in them are mutually passed over then and there, the reciprocal satisfactions are entered upon immediately, and there is at once an economical end.

For example, one neighbor sells another a peck of green peas and takes in pay a peck of new potatoes, both vegetables may be cooked for dinner in the respective families the same day, and the commercial transaction is all over. But there are other exchanges, an immense class of them, different from these in this respect, that though the transaction considered as a mere case of value created and measured is then and there ended, yet considered as to the nature of that preliminary exchange which implies and requires another future exchange to consummate it, it is not then and there ultimately closed, but one (or both) of the parties then exchanging relies on the good faith of some one else to fulfil in the future a pledge expressly or impliedly made in the prior exchange. Commonly some external evidence of the pledge is created and passed at the time, but this is not essential to the validity of the pledge itself. For example, A buys 50 bushels of wheat of B, and B takes in pay for it A's note of hand at six months for $75. The note is not the pledge, but it is a legal and convenient proof of it. As a case in Value, the wheat is sold for the pledge and the pledge is the equivalent of the wheat. Each party rendered the other then and there satisfactory equivalents. All our definitions apply here perfectly.

Still a further and future exchange was contemplated by both parties at the time of making this exchange, and as a silent part of it. A takes what is now his own wheat, and B takes as an equivalent for what was his wheat a right to demand of A in six months an equivalent for the present equivalent (the pledge) for the sake of which B rendered the wheat. The note of hand is the evidence of this pledge, and it belongs absolutely to B. It is his property. He may keep it till maturity and then sell it to A for its face, or he may sell it at once to a bank for its face less the discount for six months. Discount is the difference between the face and the present price of a note of hand. The first peculiarity, then, of Credit is, that it always involves the element of future time. But it involves this secondarily, and not primarily. In other words, a present equivalent is always rendered by both parties in every commercial transaction; but the present equivalent in the case of a credit transaction is the right to demand something of somebody sometime in the future. This distinction is very important, as we shall see clearly when we come to treat of Banking, though it is generally ill-understood at present. Valuables, when they exchange at all, exchange once for all. But there is one kind of valuables, namely, claims, which, when subject to exchange, imply and require another and a future exchange, not necessarily between the parties to the first exchange, but between some two parties; and not, speaking strictly, to consummate the first exchange, because that took and gave its own satisfactory equivalents; but, as involving both time and trust, the credit sale must in the nature of things be followed by another sale of one of the three kinds.

We see, accordingly, that in Credit our science of Economics takes partial possession of future time for certain purposes of its own. Exchange sets its throne and reigns pre-eminently in present time; but its sceptre extends also over past time, so far as all capital is concerned, and so far as all material commodities (the result of past work) are exposed for sale in the present; and its right hand of rule goes forth also to grasp the future, under limitations indeed both as to the stretch of time covered and as to the character of the persons concerned, but still there is there a fair domain and a broad domain, and a realm on the whole winning a wider and wider circuit. It is one of the proud boasts of Political Economy as a science, as it is too one of the exalted traits of human nature, that the lordly impulse to buy and sell does not confine itself to what the Past offers in all its accumulated valuables, nor to what the Present unfolds in the unlimited desires and efforts of congregated men, but reaches out also into the Future, and makes that pay tribute more and more into the vast treasury of its Gains. And this too is legitimate. Man is at once and all the time actor and historian and prophet. The future is not wholly unknown. Given the one assumption, that Earth and Men go on as heretofore, Exchange knows well enough, and better and better, whom of the coming men to trust and for how long a time. The doctrine of averages and of probabilities comes along to guide and to enhearten the investor. Any thoroughly established government of to-day can borrow all the money that it wants on its public pledge to repay the principal fifty years hence. England has borrowed millions of pounds sterling, giving no day certain in the future for its repayment. These funds are called "Consolidated Annuities": the interest on them is paid on a day nominated in the bond: the principal is to be paid when the borrower chooses, or never.

b. The other and final peculiarity of Credit is, that it always involves on the part of one person a commercial confidence in some person as such. The term, Credit, is derived from the Latin Credo, I believe, and the corresponding term, Debt, from Debeo, I owe. Thus the personal element and the future element are wrapt up in the very origin of the words. There is no credit without debt, and no debt without credit. The very words imply a belief of one of the two parties in a commercial promise made by the other, and also an obligation acknowledged by this party as due to the first. There is a basis for credit in human nature. Faith in each other to a certain extent is natural to men. Whatever enlarges the intellectual foresight, and especially the moral character of men, opens a broader and surer field for Credits. Civilization, so-called, and Christianity certainly, deepens and broadens the natural trust of man in man. Despite all the instances of broken faith, and they are too many; despite the shocks and cautions that come every now and then to every man who trusts much in his fellow-men; experience itself justifies and rewards an ever-growing commercial trust. It is one of the noble things in international commerce, as we shall see, that men trust each other across the oceans, and lay millions of value upon the faith of a single firm. As the core of the Christian religion is confidence in a Person, so the very substance of credits is a natural and in general well-grounded faith in persons as such.

A Credit, then, may be defined to be a Right to demand something of somebody; and a Debt to be an Obligation to pay something to somebody. What always lies, accordingly, between creditors and debtors, are Rights coupled with Obligations; and these are Property, just as much as anything is and for the same reason, since they always may be, and usually are, bought and sold by other parties as well as the original parties. In these Rights or Claims, therefore, arises a commerce, domestic and foreign, immense in extent and amount, and the Rights themselves take their undisputed place on an equality with tangible Commodities and personal Services.

Having thus reached an ultimate and satisfactory definition of Credit, we must still pursue a little further our present object, namely, to obtain a clear conception of the nature of this great class of Valuables, by drawing two or three distinctions between Credit-Rights and some other rights very apt to be confounded with them.

(1) The distinction between credit-rights and other rights is well rooted in the Latin language and in the Roman law, while the corresponding English terms are quite ambiguous and need to be used with great caution. In Latin, a true debt is called a Mutuum, because it lies between two persons, a creditor, and a debtor, and is a credit-right independent of the question of fact whether the debtor has now the thing rendered to him or not, indeed whether he has anything at all to pay with or not; on the other hand, a thing merely lent, when the very thing lent is to be returned to its owner, who has not in the meantime parted with his property to the other, is called in Latin a Commodatum. The English tongue has but the one word, Loan, for the two very distinct operations: for the loan of a book, for instance, which is to be returned after use, and which may be legally reclaimed by the owner if he chance to find it anywhere, that is, the Latin commodatum; and for the loan of money, or other such measurable thing, which is to be returned in kind only, and which may not legally be reclaimed except through some action of the borrower, since the ownership of that thing rendered has passed over to him completely, that is, the Latin mutuum. The same ambiguity of course inheres in the corresponding English word, Borrow. The English language is relatively poor in words expressing nice legal distinctions.

Now, as a true debt is a claim on a person and never on a thing, the Roman Law is true to the nature of things and to the vital distinctions of our science, when it names the right to which a mutuum gives birth as a jus in personam, that is to say, a right against the person; while it names the legal obligation arising out of a commodatum as a jus in re, that is to say, a right to the very thing. So strongly is this doctrine, namely, that the security of a true debt lies against persons and not against things, intrenched in the Roman Law, that debts or credits are even termed "nomina," names, in that law, as when Ulpian says, "Nomina eorum qui sub conditione vel in diem debent et emere et vendere solemus": We are accustomed to buy and sell Debts payable on a certain day and at a certain event. The fundamental law of the present national banks of the United States explicitly recognizes this old and good distinction by requiring the banks to loan money on personal security only, that is to say, no tangible things, not even real estate, may be taken as original security for any loan.

(2) Henry Dunning Macleod, who has cast fresh light on the nature of Credit, draws another distinction that lies on the threshold of the subject, namely, that between paper documents conveying titles to specific things, such as a bill of lading, for example, and those conveying credit-rights, such as a bank-note, for example. Bills of lading describe the goods, go out with the goods, are a title to the goods, and have no value separate from the goods; bank-notes have nothing to do with any specific pieces of property anywhere, are in no proper sense a title to anything whatever, but a general claim for something upon some person somewhere that awaits his action for its validity and realization. For instance, a grain-dealer in Chicago sells 1,000 bushels of No. 2 wheat to a party in New York, and ships the grain to that point by rail: two kinds of paper documents arise in connection with this transaction, which are quite diverse in their nature and course of operation: one is a bill of lading, that goes along with the wheat, and gives the person named in the bill a complete title to 1,000 bushels of wheat of a certain description, and the holder of the bill takes the wheat and asks no favors of anybody; and the other is a bill of exchange, drawn by the grain-dealer in Chicago on the consignee of the wheat in New York, which bill of exchange is sold at once by the creditor in Chicago to a banker there, provided the banker has commercial confidence in the two names on the bill and a sufficient motive in the shape of a discount for buying it: thus the bill of lading has in it neither element of Credit, neither Time nor Trust, while the bill of exchange has both of these elements in it.

(3) Attention should be called to a third distinction of the same general nature, as between relations very different in themselves and yet extremely liable to be confounded with each other. Let us take a common instance: a customer of a bank takes a package of valuables of any kind to his banker, such as bonds and bills payable and jewels and plate, and asks him to take care of it for the present in his vault, subject of course to a return to him or any one else to his order at any time: no property in these valuables passes over to the banker, it is not a deposit in the ordinary banking sense, the relation of debtor and creditor does not arise as between banker and depositor, the banker becomes Trustee or Bailee of the package, and is bound to exercise common vigilance in the care of it, but if it be burned or stolen extraordinarily the loss is the customer's and not the banker's. But now, on the other hand, when a customer deposits in the banking sense money or bills payable with his banker, the property in the money and bills passes over to the banker instantly, the relation of debtor and creditor arises, the depositor receives a credit on the banker's books in return for the money and bills rendered, the exchange as a mere case of value is consummated to the profit of both parties, but the return-service to the depositor is the right to demand equivalents of the banker at some future time. In other words, it is a case in Credit.

(4) As this general distinction is vital, we shall lose nothing in the end if we make even a fourth exemplification of it. The United States Treasury receives silver dollars of its own minting from any person who chooses to place them there, and gives out in token what are called "Silver certificates" to the same amount, entitling the bearer to take out the dollars again at will, and thus the certificates being more convenient than the dollars and just as valuable become a part of the money of the country. The Treasury is bound to exercise due care in the keeping of these silver coins, and to return them to the holders of certificates on demand, just as the elevator and railroad companies are under legal obligations to show diligence in keeping and transporting the wheat of our former example; but the United States is not debtor to the holders of these certificates any more than the elevator company is debtor to the wheat shipper, and consequently there is no element of Credit in these certificates. Just so of the later gold certificate. On the other hand, the so-called greenbacks issued by the United States are also a part of the money of the country, but they are credit-money, inasmuch as they are a promise to pay to the bearer some time in the future so many dollars. The Treasury has never kept up any special fund of gold and silver, with which to redeem the greenbacks. They rest back for their value on the good faith of the country. The United States is debtor to the bearers, and these in turn are creditors, and the legal-tender quality of the greenbacks does not alter their character as a form of pure credit. Both the elements of good faith and future time inhere in the greenbacks, as they do also in the bonds of the United States, while in the certificates neither of these elements appears.

However, circumstances easily conceivable and which were actually realized in the case of the famous Bank of Amsterdam, founded in 1609, might make the United States a debtor and the holders of the silver certificates creditors in the commercial sense of those terms. The Directors of the Bank of Amsterdam, towards the close of the second century of its beneficent existence, loaned out to the Dutch East India Company and to the City of Amsterdam large parts of the bullion, on which its certificates ("bank money") were based, unknown to the public, which felt unlimited confidence in the bank, and the result was in 1795, when the French invaded Holland and the facts became known, that bank money which had previously borne a premium of 5% fell at once to a discount of 16%, although the bullion that remained and the debts due the Bank were fully equal to redeem the certificates and were used for that purpose. So, if the United States should use, clandestinely or otherwise, the silver dollars for other purposes than to redeem the certificates on demand, the latter would undoubtedly both in law and fact be transformed from mere token-money (as now) into credit-money valid as against the United States as debtor, like the greenbacks at present.

Have we now compassed our first object? Do we fully understand, from the foregoing descriptions and distinctions, the Nature of Credit? If so, we are prepared to look narrowly into its Forms.

2. Credit-rights are commonly, but not always, recorded upon paper; but it is important to observe, that the paper-document is the mere evidence of the right, and not the right itself, which lies back of the paper as substance to shadow, and persists intact even were the paper lost or destroyed. These paper instruments of Credit are commonly contemplated as of two kinds, Promises to pay and Orders to pay, but there is not at bottom any radical difference between these, the Right as between two persons is not affected by this superficial difference, as we shall see, and the present enumeration of credit-forms will proceed independently of it.

a. Book Accounts. A charge in a trader's books is both a current and a legal evidence that the person charged has received a certain service, and has virtually promised to render the sum charged as a return-service. Book accounts are the most common of the forms of credit; and if the person charged fails of his own accord to complete the exchange thus commenced, the law, in the absence of any proof to make the charge suspicious, collects it, if possible, and forcibly completes the exchange. The convenience of this form of credit is so great, that it is not likely ever to be disused; and as between people who deal much with each other is very useful, inasmuch as their respective book accounts are set against each other in settlement, and only balances are required to be cancelled in money. It is for the benefit of both creditors and debtors, however, even when the same parties are both creditor and debtor, that such credits should be short in time and such settlements frequent, since in book accounts there is no interest on charges however long they run, and since in this way only can the creditor realize the full gain of the exchange, and the debtor keep fair his mercantile name. If it be difficult or impossible to follow strictly the excellent financial maxim, "Pay as you go," the next best thing to that is, "Go and pay." The gains of an exchange are lessened, or its terms become more onerous, just in proportion as delay in its completion is experienced or expected. Book accounts are subject also to this disadvantage as compared with other forms of credit, that their number and amount as against any person are less likely to become publicly known, and therefore he is more likely to be trusted in this form by others beyond the point of his solvency and their safety.

b. Promissory Notes. These differ from Book accounts in that they are always either expressly or virtually on interest, and are consequently negotiable. They are issued by individuals, corporations, and Nations. If the principal be deemed secure, that is, if there be a thorough trust on the part of the holder in the maker of the note, the time of the payment of the principal becomes a matter of comparative indifference, because the interest is compensation for delay, and is often the motive on the part of the holder for rendering that service of which the note is evidence. Indeed a long obligation, other things being equal, is commonly preferred to a short one, and bears a higher price. When a note is sold (negotiated) by the original holder it becomes payable to the purchaser, or to each subsequent purchaser in turn, and thus may run a devious round, may play a part in many commercial transactions, may be set off by the transient holder against a debt owed by him and thus cancel that, and when itself is cancelled by ultimate set-off or by any other mode of payment the last holder takes the return for the service originally rendered by the first holder. The promissory notes of individuals are frequently discounted by Banks in a manner to be presently explained. These are always for short times, and are debts bought by banks on the personal security of the names upon the notes. The notes are founded on the relation of debtor and creditor, which is always a personal relation, and so differ in their nature from a mortgage, which is a qualified title to a specific piece of property, usually real estate. A note secured by a mortgage is, as it were, absorbed into the mortgage, and becomes another thing from a common promissory note, or commercial paper, as it is called. A mortgage rests therefore on other grounds than a commercial trust in the good faith of a person.

Corporations also issue promissory notes, and as such issuers become in a sense moral persons entitled to confidence according to the character and purposes of the individual corporators and the financial means and methods of the corporation itself. It is an old saying, that "corporations have no souls"; economists as such have no need to pronounce on that proposition; the fact is enough for them, that the short notes of corporations are often discounted by bankers on the same ground as the notes of individuals are discounted; and that their long-time obligations, commonly called Bonds, are all the time bought and sold in the market like commodities. Many of the Railroad bonds, of which immense quantities are in the markets of the world, rest back also for their security upon Mortgages of the real estate of the corporations made over to Trustees to hold for the assurance of the holders of the bonds. The personal obligation of the corporators is thus reinforced, much as a common mortgage reinforces the note or bond, to secure which the mortgage is executed. Whenever all the real estate of a railroad company becomes subject to a mortgage, when there are previous partial mortgages or liens, these latter take precedence in due order of any subsequent pledges or bonds secured by what is properly called the consolidated mortgage. Such a mortgage has recently been executed by the Northern Pacific Railroad Company for $160,000,000. Railroad Bonds so fortified in proper and legal terms possess the highest possible credit-security to their holders. When no such consolidated or "blanket" mortgage has been put on the property, first and second and third mortgages sometimes support bonds of primary and secondary and tertiary validity; and sometimes so-called Income-bonds are issued, with or without mortgages behind them, for the payment of the interest on which bonds the net earnings of the corporations are specifically pledged. Frequently also simple long-time bonds resting on corporation security only are negotiated without difficulty.

It must be constantly borne in mind, that certificates of Stock in railroad and all other similar corporations are not credit-documents at all, but are mere evidences of so much proportional ownership in the corporate property. They are not interest-bearing documents at all, although they may draw interest or rather dividends, if the property be prosperous. They are somewhat like deeds to land, in which no element of credit inheres.

Nations too are moral persons in the same loose though binding sense as corporations, and as such often issue promissory notes on interest, commonly called in this country Bonds, in Great Britain Funds, and in some countries Stocks. These are always pure credit. Nations give no mortgages. Yet they often borrow at a less rate of interest than the most solvent individuals or corporations can, as is seen by the fact, that British consols carry but 3%, and yet bear a premium in the present market. The term, "consols," is a popular contraction of "consolidated annuities," the Act to create which at 3%, out of a then confused mass of public debts at various rates of interest passed Parliament in 1757. The maximum of the British debt was $4,500,000,000 in 1815, and has now decreased to $3,467,787,960.

The United States also sold its bonds at 3% for a small premium in 1882. It had borrowed of its own citizens in 1862-65, both inclusive, about $2,500,000,000 on its bonds at different rates of interest and at different times of repayment: some of these bore gold interest at 6% annually, Government reserving the right to pay the principal in five years and pledging itself to pay it twenty years from date, and so these bonds were called "Five-twenties"; others bore gold interest at 5%, becoming payable at ten and demandable at forty years, and so were called "Ten-forties"; and still others bore greenback interest at 7 ³⁰⁄₁₀₀%, the principal payable in greenbacks at three years, or fundable in gold sixes, at the option of the holders, and these were named "Seven-thirties." Over $90,000,000 of this last kind of bonds were subscribed for by the American people in the course of a single week in the spring of 1865. The whole of our national debt issued prior to 1865 was made payable on a day certain; the so-called "consols" of 1865 and 1867 and 1868 were payable not more than forty years from date; while all the bonds authorized from 1870 to 1882 were Consols proper, whose peculiarity is, that they never fall due so as to become a claim for the principal against the Government, but after a day fixed or on a condition fixed are payable "at the pleasure of the United States."[7]

The separate States of our Union, as sovereign in their own sphere quite as much as the national Government is sovereign in its sphere, have unlimited power to contract debts for State purposes through their regularly constituted authorities; and consequently to issue promissory notes or bonds to liquidate such debts. New York commenced in this way in 1817 the magnificent enterprise of the Erie Canal, to connect the great Lakes with the city of New York by an inland water-way for commerce, and the completion of this in 1825 made the State the "Empire State," and the city the undisputed commercial metropolis of the Union. In a similar way Massachusetts undertook in 1862 the completion of the Hoosac Tunnel for a railway lengthwise of the State; and although the process became unduly expensive, and great abuses sprang up in connection with it, no one now questions that the pecuniary and moral resources of the State have been augmented, on the whole, by contracting the debt and providing by taxation for the liquidation of both interest and principal. The credit of Massachusetts, that is, the ability to borrow money at low rates of interest, has been at times greater than that of the United States; mainly because the State in 1862 and onwards refused to avail itself of a depreciated national paper-money (greenbacks) made legal tender for all debts, with which to pay the interest on its then existing State debt, but persisted throughout (alone of the States) to pay that interest so soon as due in gold coin. On the other hand, several of the States of the Union at different times, and under more or less of provocation and justification, have made a partial or entire repudiation of certain portions of their public debts, justly damaging to their individual credit, and even to the good name abroad of the whole people of the United States.

Counties and cities and towns may also issue interest-bearing bonds for public improvements, which have a quasi governmental character, but only under conditions and to a maximum amount prescribed by a law of the State.

c. Bank Bills. These are a form of promissory notes not on interest, and thus differ from the notes of ordinary corporations, and from the bonds of nations and states and municipalities; but the issuing Bank offers, as a sort of compensation for the privilege of circulating notes not on interest, to convert them into coin, that is, to pay them instantly on the demand of any holder. It is this proffered and immediate convertibility into coin that enables the promissory notes of a bank to circulate as money, while the notes of other corporations and individuals equally solid and solvent do not circulate as money. It must be borne in mind, however, that this offer to convert them into the legal and ultimate coin-money does not essentially alter the nature of Bank Bills; they are a form of commercial credit; and although they are commonly issued against another form of such credit, namely, against the interest-bearing promissory notes of individuals and corporations who resort to the bank for discount, this only complicates the exchange without changing its nature. It is a common instance of exchanging one form of credit for another form which happens to have a greater currency or validity than the first, and for this superiority of the bank credit the individual credit pays an interest, in other words, is discounted; and such exchanges of one form of paper credit for another, with or without a premium, may go on indefinitely; especially as credit-money in the form of bank bills, such paper may serve as a medium in many exchanges; but ultimately, and before the entire series of transactions is closed, such bank bills are to be redeemed in coin, or taken in by the banker in payment of some debt due to him, in both which cases they are extinguished as an instrument of Credit.

The Bank of England keeps out in circulation on the average £25,000,000 in bank bills. It has been computed, that the average length of life of a Bank of England bill between its issue and redemption is about three days; and no bill once redeemed or received back over the counters of the Bank is ever issued again. It is then placed on file for record only. The joint-stock and private banks of England and Wales circulate on the average rather more than £4,000,000 of bank bills of their own; and no bank bill of any kind is legal in England and Wales of a less denomination than £5. The ten Scotch banks and their branches keep out in bills about £5,000,000; six out of the nine Irish banks and their branches issue on the average not far from £10,000,000; but both the Scotch and Irish banks are allowed to put out £1 bills.

Bank bills, as a form of paper credit not on interest, but ostensibly redeemable in coin on demand of the holder, have been issued in the United States by more parties and to a larger extent and with more recklessness as to redemption than in any other country. Omitting all reference to Colonial issues, and confining the outlook to the first century under the Constitution, let us note, that when the present national government went into operation in 1789, the "Bank of North America" in Philadelphia and the "Bank of New York" in New York and the "Bank of Massachusetts" in Boston had been opened for business, and all three were State banks issuing bills convertible into coin, though each confined its business mostly to the city in which it was located. Two years later under the auspices of Alexander Hamilton, then Secretary of the Treasury, the first "United States Bank" went into operation at Philadelphia under a charter from Congress that was to run twenty years with a capital stock of $10,000,000. At first no bills were issued by this bank of a less denomination than $10; the money was popular and was converted on demand; the Bank was prosperous, and paid dividends to stockholders never falling below 8% and frequently rising to 10% annually; as the time approached for the charter to expire, the stockholders were anxious for a renewal of their privileges; but the opposition to them in Congress was now strong, owing mainly to the increase in the number of State banks from 3 to 88; and accordingly the recharter was defeated in the House by one vote, and in the Senate also, by the casting vote of the Vice-President, and the Bank was obliged to wind up its affairs in 1811.

Then came in a sort of mania for the creation of new State banks, under the hope that these, now there was no National Bank, might obtain the Custody and temporary use of the national funds, and especially might furnish the country with paper money in the shape of State bank bills. The number of banks went up to 246 in 1816. So many bank bills were put out, and became so much distrusted, and so many were presented for redemption, that the banks could not respond in coin, and in the fall of 1814, there was a general stoppage of specie payment in all the banks of the Country excepting those in New England. General resumption of specie payment by the banks did not take place till 1819. New York bank bills went down to 90%, those of Philadelphia to 82%, those of Baltimore to 80%, and those of Pittsburg to 75%.

Under these circumstances the Second Bank of the United States went into operation in January, 1817, also with a charter to run twenty years, with a capital stock of $35,000,000, of which the national Government subscribed one-fifth. The new Bank helped indeed the State banks to resume specie payments, as was a part of the purpose, but it pushed its own bills into circulation with such eagerness, that it is thought $100,000,000 of them were in the hands of the people, before the first year was out. In this way the Bank fell into difficulties. Its bills were distrusted. Coin came to bear a premium over them of 10%. President Jackson began his famous contest with the Bank seven years before its charter was to expire, and took care that it went out of being the same year that he went out of office, in 1837, namely.

The next year the State banks increased in number to 675, and continued to increase till 1862, when there were over 1500 of them, and when the issue of the "Greenbacks" by the national Government interfered with what had been their exclusive issuing of the paper money after 1837. In 1857, before the commercial panic of that year, the aggregate of their bills stood at $214,000,000, the largest it ever reached. These bills were nominally convertible into coin at the will of the holders, but they were never actually so convertible for any great length of time. The ratio of their volume to the specie reserved to redeem it was always a very high ratio. For instance, the average for the whole country in January, 1863, was 4:1; in Rhode Island 12:1; and in Vermont 28:1. Such a paper money can be called convertible only by a stretch of courtesy.

It was wisely determined by the People to abandon this loose form of paper money, and in 1863 went into operation the present national banking system, under which originally $300,000,000 of bank bills were authorized to be issued in the aggregate, but this limit was extended in 1870 to $354,000,000, and the Act of 1875 removed all restrictions on the total amount, while there have always been restrictions on the amount that can be issued by any one bank in the system. By the law of 1882, national banks may withdraw their bills by depositing lawful money in the Treasury to take them up, and then take back the proportionate amount of the bonds held for the security of the bills. There were outstanding Dec. 26, 1883, $341,320,256 of these national bank bills, but their volume declined under the law of 1882 to $151,702,809 on Oct. 4, 1888. These bills were from the first redeemable in greenbacks, which were themselves, however, irredeemable in gold and silver till New Year's, 1879, since which time till the present all the paper money of the United States of both kinds has been convertible into coin at the will of the holder.

d. Bank Deposits. We are studying in order the forms of commercial Credits, and we have now come to that one which is central in the operations of Banking, and accordingly this is the place for us to understand clearly what a Bank is, who a Banker is, and what are the motives actuating at once the Banker and his Customers. A Bank is an institution for the Creation, Management, and Extinction of Credits. Money of any kind plays a very subordinate part in the general operations of banks, which live and move and have their being in the sphere of pure Credits. Bankers are buyers and sellers of credits. As merchants are dealers in commodities, so bankers are dealers in credits, buying (1) some credits with other credits, (2) some credits with money, and (3) money also with credits. Before unfolding these three operations of bankers in their motives and profits, a glance backward to the origin of banks would be a help to us in grasping their nature and benefits.

The word "bank" meant originally a mass or pile or ridge of earth, as we still say, a sand-bank, and the banks of a river. When first applied to commercial transactions, the word had a different meaning from what it has at present, although the idea of credit has inhered in it from the first: in 1171, the Republic of Venice, being at war, ordered a forced loan from its citizens, and promised to pay interest on it at 5%; and certificates were issued for the sums paid in, and public commissioners were appointed to manage the payment of the interest and the transfers of the certificates, which were made negotiable. The Italian word applied to such a public loan is monte, but as the Germans were then strong in Italy, the German equivalent word, bank, came to be used alongside of it and instead of it. It meant this common contribution of the citizens to the wants of the State, represented by the mass of the certificates, and came to be applied also to the place where the commissioners paid the interest and transferred the shares. Two other such loans were contracted there afterwards, and an English writer, in 1646, quoted by Macleod, speaks of the "three bankes of Venice," meaning these three public debts, including the evidences of them and the place where they were managed.

The Bank of England also was in its origin in 1694 an incorporation of those persons willing to subscribe to a public loan in time of stress, as "The Governer and Company of the Bank of England." The subscribers to a loan of £1,200,000 became an association, or bank, on the condition that the Government should pay interest to the lenders at 8% annually, and also £4000 a year in addition for the management of the bank, that is, of this debt of £1,200,000 which was the sole capital stock of the new Company, which was authorized to issue an equivalent amount of bank bills to circulate as money. The capital stock was of no use, so far as redeeming these bills was concerned, the stockholders must furnish other money for that purpose besides what they have loaned to the State, but the ownership of so much of the public debt divided among the shareholders, made the Bank respectable, and tended to give public credit to its bills, which at first were paid promptly in coin on demand, and thus the Bank, by increasing the volume of money and by showing confidence in the stability of the State, strengthened the revolutionary position of William and Mary, and consequently the Whigs were the friends and the Jacobites the enemies of the Bank. This function of issuing bills or promissory notes designed to circulate as money, thus begun and still continued by the Bank of England, is much less important in modern banking than the other two functions of receiving Deposits and making Discounts, but it was the function on which the turn began to be made from the older to the newer modes of Banking. All that is needful to be said on this tertiary or money-issuing function of Banks has been already urged under the last head.

The two Banks of the United States in succession, as they were more or less modelled after the Bank of England, gave the same prominence to the function of issuing paper money, under the belief that government bonds afford the best security for the redemption of bank bills, an idea that underlies our present system of National Banks also; and, moreover, those two great banks began to teach the people of the United States something of the mysteries of Deposit-banking, the point that we have now in hand. One-fifth of the capital stock of the first Bank, $2,000,000 out of $10,000,000, was subscribed by the national Government; and besides, the proceeds of the national taxes as they were paid in were passed over to the Bank as Deposits, that is to say, the Bank bought this money of the Government, paying for it with a Credit; and then properly used the money as its own in paying expenses and in discounting paper. Bank deposits do not belong to the depositors, but to the bank; which has thus bought money with credit; and when Andrew Jackson suddenly removed from the second Bank of the United States the national moneys deposited there, and placed them "in the custody," as he expressed it, of certain selected State banks, these amounted at the moment to $10,000,000, and the discount line resting in part on these deposits was at the time over $60,000,000, he removed them under a strong misapprehension of the nature of such deposits; and their removal affected credit, and disarranged business to a remarkable degree, and caused intense excitement all over the Union. Depositing those national moneys with the Bank was a trade between the Government and the Bank for the time being. The Government took in return for the moneys a Right to demand of the Bank in future by cheque or otherwise sums at its convenience to the aggregate of the sums deposited; the moneys became the property of the Bank to be used at its discretion in its ordinary business; the Government took its return-service for the moneys in a Credit, that is, a right to draw out at its convenience in the future corresponding sums; there was a commercial understanding in that case between the Government and the Bank underlying the buying and selling involved in the Deposit, as there always is between depositors and their banks; the banks are always bound to order their business in such a way as to be able to respond to every depositor's call for money, when it comes; but banks in general find practically that a cash reserve of one-third of their Deposits is ample to answer the current demands of their depositors, and the remaining two-thirds may be safely used in discounting short-time commercial paper to their own profit; Deposits, accordingly, are not placed "in the custody" of the banks receiving them; they are really bought by the banks of their customers, who receive in return certain privileges and credits that they prefer to the "custody" of their own moneys; and under these general motives on both sides, there has grown up in all commercial countries an immense line of Bank Deposits so-called, and perhaps we may say that the principal function of banks at present is to buy these deposits with their Credit, and then to handle them in further operations to the convenience of their customers and to their own gain.

Under our present national banking system the Government is still a depositor of public moneys in some of the banks designated as "depositaries." At the close of the fiscal year, 1888, there were 290 of such depositary national banks, and the Treasurer held United States bonds of the face value of $56,128,000 and the market value of $68,668,182 in trust for these banks to secure public moneys lodged with them. This system of national deposit with the banks began in 1864. The total held by the banks June 30, 1888, was $58,712,511, an increase during the year of $35,395,633.

But our concern is especially with the Bank Deposits of individuals, with their motives in making these, and with the motives and the methods of the bankers in handling them. In order to draw the confidence of the people in its locality, a bank must not only be, but also seem to be, well-to-do and prosperous. Most bankers find it to their account to become known owners of public stocks; and in many cases, as in the present national banks of this country, are required by law to own such stocks, and this gives them a kind of credit and public standing scarcely to be reached by the ownership of ordinary property. Thus the Bank of England held at the outset £1,200,000, and now holds £15,000,000 of securities, mostly of the public debt of England. As merchants begin by laying in stocks of goods of the kinds they purpose to deal in and offering them for sale, so bankers begin by bringing together money and credits of their own in order to attract to themselves in the way of buying and selling the money and credits of other people. In order to deal successfully in credits the banker must have credit, that is, he must have the reputation of having property of his own, and of being an honest and careful manager of his own affairs and of the affairs of others so far as they are intrusted to him. Each of our present national banks, now (1890) 3150 in number, must have by law a paid-up capital of not less than $100,000, and in cities of 50,000 people their capital must not be less than $200,000 each, except that in places having less than 6000 inhabitants banks with not less than $50,000 capital may be organized at the discretion of the Secretary of the Treasury. The main purpose of all this is to secure strong financial organizations fitted to draw the confidence of the communities in which they are placed, and in this manner and by means also of constant national supervision to attract the Deposits of the people to the banks.

Now, as was said a little while ago, perhaps the central function in banking is for the banker to receive his customer's money and also his credits falling due, and to render to him in return for these a credit, that is, a right to demand from himself an equal sum at a future time or times. The evidence of this right is entered on the banker's books, and usually too on the customer's passbook, and thus becomes what is called a Deposit. The ownership of the money and of the credits deposited passes over completely from the customer to the banker. It is a complete case of buying and selling to the mutual profit of the parties. The banker has the right to do just what he pleases with his deposits, and the customer has a right to draw cheques on his credit as and when he pleases; only the banker's entry of the transaction on his books is a virtual and a legal promise to pay that amount to his customer, and therefore he must be ready to respond to his customer's call, whenever the latter demands, not his own money, but so much of his banker's money. A deposit, accordingly, is not the very thing deposited, but a credit. It is the banker's promise and the depositor's property. It is in this way that a banker buys ready money with a credit.

The motive, then, that leads the depositor to intrust his money to the banker is the desire, not to have that specific money kept safely for him, for he lost possession of it absolutely when it passed the counter, he sold it and took his pay in something else, but rather to have the unquestioned right to call on the banker for such sums (not to exceed the deposit in the aggregate) and at such times as may suit his own convenience. He has such confidence in the integrity and solvency of the banker, finds it so practically convenient to have dealings with him, and comes to have certain minor privileges at the bank in other relations over non-depositors, that he quite prefers a credit on the banker to the possession of the money itself.

The corresponding motive of the banker to receive his customer's funds on these terms is that he finds by experience (his own and others'), that he can safely use a large portion of these moneys deposited in other operations in credit profitable to himself, and at the same time be practically sure of meeting all his customer's calls for money as they are made. Every good banker finds out, that many of his customers wish always to leave a balance in his hands; that while some of them are constantly drawing cheques on him for cash, others of them are as constantly depositing with him in cash; and that consequently he can properly and safely use a large part of the money he has purchased with his credit to purchase other credits with. Deposit-banking, therefore, is not only convenient and profitable for the depositor, but also excellent and profitable for the banker.

Besides these two parties benefited, there is a gain, too, for the community at large in deposit-banking; inasmuch as a new capital as such has been thereby created, a series of new values, which would not otherwise have existed at all. Were there no deposit-bank in that locality, every man now a customer of it would of course keep his own reserves for himself for prospective contingencies: now, all these little reserves are aggregated in the bank, the convenience of them for each customer's contingencies is just as great as if he kept his own in his own safe or wallet, but the banker finds that he can use, say two-thirds of the whole, and still answer each customer's call. Here is a new capital. Here are scattered valuables brought together to be loaned out to a profit, which were otherwise barren and useless for the time being. Industry is quickened in a wide circle, products are created and brought to market, wages are paid and profits are gained, in direct consequence of bringing together under favorable auspices for safe loaning the little hoards and driblets of many individuals, which were practically useless in isolated hands.

It may easily be objected at this point, that it is entirely possible that any banker might be called upon to pay off all his deposit-liabilities at once in money, which, if it happened, would break him of course; so it is abstractly possible that all the lives insured in a Life Insurance Company might terminate in one day, in which case no Company in the world could meet its obligations; and so it is abstractly possible that all the houses insured in a Fire Insurance Company might be burned up in a single night, which, if it happened, would cause the collapse of the soundest company; but in all these cases of possibility there is a certainty that the possibility will not become a fact. Ex nihilo nihil fit. A supposition practically impossible to become a fact can yield no logical inference whatever. The Greek language has a special grammatical form for a hypothesis impossible to be realized in fact: would that the English had also such a form of speech! It would save us a mess of bad reasoning. If, however, any banker may have misjudged for his locality at any time the proper ratio of reserves kept to deposits received, and be crowded in consequence, he must sell some of the securities bought with the excess, or borrow money on them.

Surprisingly large is the amount of bank deposits in all the leading commercial nations of the world. The average public and private deposits of the Bank of England, on which no current interest is paid by the Bank, amounts to about £40,000,000 all the time. The ten joint-stock banks of London carry about £80,000,000 in private deposits, of which those to remain some time draw an interest, but those lodged on current accounts and on call draw none. Scotland has carried deposit-banking further and to greater advantage than any other country in the world. There are now no private banks in Scotland, but the ten joint-stock banks with their numerous branches scattered to every village in the land hold constantly about £70,000,000 as individual deposits, on which current interest is allowed, and so the habit of keeping one's account with a banker has become universal with the people. No one thinks of keeping money to any amount in his house or about his person, and consequently house-breaking and highway robbery have almost ceased. Bankers even attend all the great fairs in the country to receive deposits and to pay off cheques. Credit in this form and in another form soon to be described treads its utmost verge in Scotland. Although in the United States the custom of keeping deposits with bankers and drawing cheques against them has not gone nearly so far as in Scotland, and not nearly so far as it will go in the immediate future, yet the aggregate of individual deposits in the national banks alone, Oct. 4, 1888, was $1,350,320,861, an increase in just seven years of 26%.

e. Bank Discounts. The credits that are discounted by bankers may be either the promissory notes of individuals and corporations already characterized, or the Bills of Exchange soon to be characterized, but the entire function of discount is so peculiar, that the paper subjected to it ought to be enumerated in a classification of the instruments of Credit. The discounting of commercial paper is the second essential function of banking, as the buying and handling of deposits is the first; and it is more in accordance with genuine banking to pass the price of the paper discounted to the seller's credit in the form of a deposit, that is, to buy one credit by creating another, than to pay the money over the counter at once, and thus to buy credits with money. Those who do the latter are called bill-discounters rather than bankers, but most of our bankers do both, though there is a tendency towards the separation of the two in this country also.