gold within their own walls. In the case of a demand on their reserve, the banks will draw out their deposits, in notes, or, if gold be in demand, in gold, from the Bank of England. Whether, therefore, the reserve of a bank is invested in government securities, or is deposited in the Bank of England, or is in Bank of England notes, it is from the coin in that bank that the gold comes in the case of a run. It is apparent from this that it is essential to the stability of all banks in this country, so long as they themselves do not keep a sufficient reserve of coin in their coffers, that the Bank of England shall always be possessed of coin, and never be unable, on demand, to pay its depositors in gold, or to give gold in exchange for all its notes that may be presented to it. It may be added, that while banks gain, through the annual dividends, in keeping their reserve in government stock, they run the risk of a loss in the event of their requiring to sell it in the time of a panic. For at such a time, when many securities and stocks become unsalable, and all of them suffer depreciation in value, government stock itself falls in price, although less so than the others. Banks often invest portions of their reserve in other stocks than government stock. The higher return obtained on these other is, however, outweighed by the greater risk of depreciation in their value, whether continued unsold or thrown into the market for sale in times of panic.

We have hitherto been treating banks as banks of deposit and loan; but many of these banks, in all countries where banks are known, are also banks of issue. Banks of deposit, as has been mentioned, make loans from their capital and deposits. If from capital, the banker has no greater profit by the transaction than if he had lent out his money in any other way, equally safe, and involving the same amount of trouble. If from deposits, the interest he receives, in so far as it exceeds the interest, if any, paid to the depositors, and a ratable proportion of the expense of carrying on the business of the bank, is pure gain to him. But a banker may give the loan from his own notes, and in that case his gain is still greater. A bank-note is simply a written promise by the bank issuing it, to pay to the bearer, on demand, a sum of money—that is, in coin of the realm. Of course, the borrower would not accept a loan from a bank in its own notes, unless he believed that it could redeem its promise of paying in coin, and that the public were of the same opinion; for the moment that a suspicion arises that the promise will not be made good, the note will cease to pass from hand to hand as coin, or to perform all the functions which coin performs. But when the loan is accepted in a bank's own notes, it is evident that the interest which the bank draws for the loan of its promises to pay is pure profit, except the rateable proportion-as in the other cases-of the expense of carrying on its business, and the expense of the paper and printing of the notes with the government stamp duty. In other words, a bank which can get people to pay to it interest for the loan of its promises to pay, draws the same income-barring the comparatively trifling expense of manufacturing the written promises-as a bank does which has to provide itself with gold for making its loans. The motive which a bank has to extend its issues on loans is therefore apparent, so long, of course, as it is not compulsory on it to retain unemployed in its coffers as much in gold as it issues in notes.

But it does not follow that when a bank makes a loan in its own notes for a definite period, it will really obtain the benefit of the whole of the interest on it for that period; for the borrower does not apply for the notes that he may keep them beside him, but that he may pay them away in making a purchase, or in liquidating a debt, and this, most commonly, on the very day he receives them. If the person to whom the notes are thus paid by the borrower has himself no purchase to pay for, or no payment to make, he may, the moment he gets them, return them to the bank that issued them, to lie there on deposit. If the bank pays interest on deposits, as most banks do, then out of the interest drawn by it on the original loan, it will have to pay interest to the depositor of the notes; in other words, the loan is no longer a loan of its notes, but a loan from its deposits. Or, the person receiving the notes from the borrower, may immediately present them to the issuing bank for coin, instead of depositing them. Here, too, therefore, the loan that was made in notes is now converted into a loan of coin, that was in reserve from previous deposits, or that was part of the bank's own capital; in which cases, the bank obtains no advantage whatever in having made the loan originally in its notes. It might equally well, so far as profit is concerned, have originally made it in gold from its reserve of deposits or capital. Notes generally find their way back to the bank that issued them through other banks, into which they have been paid as deposits, or for the liquidation of debts due to them. These banks suffer the loss of profit or interest on the amount of the notes thus received by them so long as they keep them; they therefore immediately present them to the issuing bank for gold, to replenish their own reserves, or to lend out; or, what is the same thing, they present them to the issuing bank for government stock, or other securities bearing interest, and which that bank has had to provide from its capital and deposits.

It will now be apparent to the reader that there are two checks which prevent a bank issuing notes to any extent it pleases. In the first place, there must be a demand for its notes by borrowers. It is only to people in good credit, and likely to make a profitable use of them, that a bank will lend its notes, and such people will not take an increase of loans unless trade is increasing, and new opportunities be presenting themselves for profitably employing the notes borrowed. True, banks, when imprudently conducted, or when deceived in the character of their customers, frequently lend their notes to reck

less persons, who overtrade with them, and become bankrupt. But banks commit this error, when they do commit it, to a far greater extent by loans of their deposits and capital than by loans of their notes. In the second place, the immediate return of the notes, chiefly through other banks for gold, or for other portions of the reserve of the issuing bank, is a check to its issuing more notes than it has a reserve to meet. This return of notes through banks is called the exchange of notes-the notes issued by a bank being returned to it in exchange for the notes held by it of another bank.

Besides issuing its notes in loans, a bank may issue them in repayment of deposits. In this case, there is the same profit to the bank as in the other case. The bank gets the profit which it makes on the money which was originally deposited or lodged with it, without having to pay interest to the persons who made the deposit or lodgment; the deposit, or money lodged, having now been repaid in its notes. But here, too, these notes are equally liable to be returned to the issuer as when they are issued on loans.

Of all the notes issued, in whatever way, by banks, a certain amount is not returned to them, but is kept in circulation, being what is required by the necessities of the public for use as money, passing from hand to hand. It is of course on this portion that the banks make their profit; and, in consequence of this profit, they are able to afford banking facilities to the public more cheaply than they could otherwise do. The profit is just the interest on the notes in circulation-less the expense of manufacturing the notes, a ratable proportion of the expenses of conducting the banks, and the loss of interest or profit on an unemployed reserve kept from prudence, or by the requirement of law, to meet a return of notes. This interest is paid by the persons who originally borrowed these notes from the banks, and who have not repaid them; or if the banks have repaid deposits with the notes, the interest is paid by those to whom they lent what was originally these deposits. The amount of the bank-notes in circulation varies at different periods of the year: at term-times and quarter-days, when more payments than usual are made, there is a greater quantity of money required by the public than at other times, and the notes in circulation increase in amount. This addition to the circulation is drawn from the banks by the depositors or borrowers. After it has served its purpose, this additional quantity gradually returns to the banks as deposits or in repayment of loans. If the credit of an issuing bank is at any time suspected, the holders of notes will present them for gold, just in the same way as its depositors will call for a return of their deposits; and this risk must be provided against by a corresponding increase of its general reserve, on which, of course, it makes no profit. It has been generally imagined that, when issuing banks suspend payments on a run, the run is one on the part of their note-holders; but this is only a popular error. In a well-established bank, the amount of its notes in circulation is of little importance compard to its deposits; and though the holders of small sums in notes may be more apt than depositors to take alarm and rush in a panic to the bank for gold for its notes, a small proportion of its depositors suddenly demanding a return of their money in gold, as effectually drains a bank of its reserve, as if its whole circulation were to be at once presented to it for gold.

Banks make their loans chiefly in the form of discounts; that is, upon bills of exchange. Commodities in the wholesale market are generally sold on credit. The buyer promises to pay the amount at a certain date to the seller, and his promise is contained in a bill of exchange. The seller transfers it to a bank, which, on the faith of it, advances the amount in loan to him, less discount (q.v.), that is, interest of the money till the bill be due. This is called discounting. But banks lend on other securities. A holder of government stock, for example, will obtain a loan on the security of his stock; the banker being entitled to sell it, and repay the loan from the price, if the borrower fail to make punctual payment. So also, the holder of stock or shares in any public company, as a railway company, or of a debenture or bond due by such, will, where the company is believed to be in a sound condition, or the security is salable, obtain a loan from a bank. The owners of commodities lying in a public warehouse, may obtain a loan on depositing with the bank the warrants or certificates of ownership. Loans, too, are occasionally made for short periods on the mere note of hand of the borrower, when the banker is satisfied of the ability of the borrower to repay the money. It is seldom in Scotland that banks lend on mortgages over land. Borrowers, in these cases, generally take loans to lie unpaid for a few years; but to have his money locked up in that way does not suit the trade of a banker. Where a banker finds the security which he has received to be insufficient, and repayment of the loan is not forthcoming, he will, of course, like any other trader, to avoid making a bad debt, take any other security the debtor can give him—such as a manufactory or a mine. Banks have in this way frequently become involved in manufacturing transactions, in their attempts to make more money of the securities than they would have done by an immediate sale of them; they have become manufacturers and miners, and suffered great losses in consequence. And it is not to be supposed that banks always abstain from making loans when the security is known to be doubtful; far from it; banks, like other commercial establishments, have been, on many occasions, recklessly managed. In trying to push business, they have made loans on insufficient security, and banks are under strong temptation, to which they frequently yield, when a trader largely indebted to them is approaching bankruptcy, to sustain his credit by additional advances, in the hope that he may retrieve his affairs, and pay in full

Bank.

both the old and the new advances.

The result is often the loss of both. Conduct of this kind has been the ruin of many banking establishments in England, of two or three in Ireland and Scotland, and elsewhere.

Bankers perform another very important function: they remit money from one place to another. One illustration will serve to explain how this is managed. A debtor in Edinburgh makes a payment to his creditor in London in this way: he pays the money to a banker in Edinburgh, who, for a small charge, called the exchange, gives him a draft for the amount on a banker, his correspondent, in London. The debtor transmits the draft to his creditor, who presents it to the London banker, and receives the money from him. No actual transmission of the money, however, takes place, for there are debtors in London requiring to pay money to creditors in Edinburgh, and these debtors effect the payment by giving the money to the London banker, and obtaining his drafts on the Edinburgh banker. The one set of drafts are thus set off against the other. Not only may remittances between two places be thus made without the use of money, but the payments in both places may also be made without it. The debtors may pay for the drafts by checks on the banker who grants them, and the creditors may receive the money by drawing checks on the banker by whom the drafts are made payable. For another function of banks, see MARGINAL CREDITS.

The large amount of money transactions carried through without the intervention of coin or bank notes, in a country like England, is inconceivable to those not engaged in business pursuits. The manner in which these transactions may be effected without money, would be at once apprehended, if all persons in the same locality dealt with the same bank, and if all the banks scattered throughout the kingdom were only branches of the same establishment. But in practice, matters are so managed as if this were the case. The checks, bills, or other drafts which come into the hands of a banker, drawn on (that is, payable by) other bankers, are set off and liquidated by drafts, which they have received, drawn on him. The balance or difference only is paid in money. In London, the center of the money-world, there is an establishment called the clearing-house (q. v.), of which most of the London banks are members. There, at a fixed hour daily, attendance is given by a clerk from each of these banks, who presents all the drafts immediately payable which his bank holds on the others; the balance or difference, on the whole, for or against each bank is ascertained; and the bank which holds a less amount of drafts on others than they hold on it, pays the difference by checks on the Bank of England. The lowest clearing for an entire week between the 4th of Oct., 1877, and 2d Oct., 1878, was £71,120,000, and the highest £133,921,000. The total clearings from Ap'l., 1883, to Ap'l., 1884, were £5,838,158,000. There are similar clearing-houses in some provincial

towns.

Bank of England. This bank, the most important in the world, was projected by William Paterson (q.v.), and was incorporated July 27, 1694. It was constituted as a joint-stock association, with a capital of £1,200,000, which was lent at interest to the government of William and Mary, at the time in a state of embarrassment. At its very outset, therefore, the Bank of England was a servant of government; and in a lesser or greater degree, it has enjoyed this character through all the stages of its subsequent history. At first, the charter of the bank was for 11 years only; but in consequence of the great services of the institution to government, its charter has been at various times renewed. The last renewal was in 1844, and the charter of that year still subsists, its terms being subject to modification or revocation by the legislature at pleasure. By the act or charter of 1844, the bank was divided into two departments-the issue and the banking. What led to the division was this: it was supposed that, when a foreign drain of gold from us set in, it would, if the currency or circulation in this country had been purely metallic, have produced a contraction of the circulation, and a consequent fall of prices, and, as an ultimate result, the cessation of the drain. It was further supposed that banks could issue their notes to any extent they pleased; that their excessive issues increased the currency, and therefore increased prices, which in their turn led to foreign drains; and that, on the occasions of these drains, the continued issues prevented the natural and desirable contraction of the circulation, and aggravated the commercial convulsions occurring at such periods. The object of the act of 1844 was to prevent issues of notes beyond a certain amount, unless against an equal amount of gold held by the issuing bank, so that the mixed currency of notes and coin might thus expand and contract like a self-acting metallic currency. Experience, however, has shown, that when these foreign drains occur, the gold exported is taken chiefly from the reserves in the Bank of England, being withdrawals of deposits or loans by the bank; and that the amount of notes in the hands of the public has not been affected by the legislation of 1844. In practice, whenever there are signs of a foreign drain, and the reserve of the bank is diminishing, the bank counteracts the tendency to a drain by raising the rate of discount and restricting its loans; the purchasing power of the public is thereby limited, and prices kept down; and, at the same time, gold is attracted to this country for investment. The circulation is in reality not interfered with. It was also intended by the act of 1844 to add to the security of bank-notes by insuring a supply of gold to meet the payment of them at all times. But the solvency of the Bank of Engfand is undoubted; its notes would at any time be taken as gold; and this effect of the act of 1844, and the supplementary act of 1845, has in the case of the notes of other banks been hitherto inappreciable.

Bank.

In the issue department of the Bank of England, its sole business is to give out notes to the public. Before the separation of the departments, the government was due to the bank £11,015,100. This sum was declared to be now a debt due to the issue department, and for the issues of notes to that amount, no gold requires to be held by it. This was just the same thing as if the bank had originally lent £11,015,100 of its notes to government, and these notes had found their way into circulation. The bank was also allowed to issue additional notes on securities-that is, to lend them to a limit which at present amounts to £3,984,900, and this also without holding gold. The amount of notes which may thus be issued, without gold being in reserve against it, is £15,000,000. All notes issued above that amount can be issued only in exchange for gold. At the passing of the act in 1844, the limit of notes to be issued against the government debt and securities was fixed at £14,000,000-past experience having shown that there was not the least risk of their being at any time less than that amount of Bank of England notes in the hands of the public. The addition of the £1,000,000 is an extra issue, authorized by the act, in consequence of certain issuing banks having since ceased to issue. The bank has to account to government for the net profit of this issue loan of notes of £1,000,000, and the profit the bank derives from its issue department is the interest received on the £14,000,000 of government debt and securities, which, at 3 per cent, is £420,000 yearly. But out of this the bank pays to government, for its banking privileges, and in lieu of stamp-duties, £180,000. If we assume the expense of the issue department to be £160,000, the net profit upon it would be £80,000. The bank also makes a profit upon bullion and foreign coin. These are brought to the bank for notes; they are worth £3 178. 104d. per ounce; but the bank is obliged by its charter to purchase them at £3 17s. 9d. The holders prefer taking this price to having their bullion and foreign coin coined, free of charge, at the public mint, as the delay in the coining is equal to a loss of interest of 14d. per ounce. The amount of notes in the hands of the public averages about £25,000,000; but the amount issued by the issue department is greater. The difference is the amount lying in the banking department, and represents the reserve of gold of that department; that is to say, the banking department retains only a half or three fourths of a million of coin, and transfers the bulk of its reserve to the issue department, in exchange for notes. We therefore require to regard the reserve of the banking department as gold, though lying in the shape of notes issued by the other department. Viewed in its banking department, the bank differs from other banks in having the management of the public debt, and paying the dividends on it; in holding the deposits belonging to government, and making advances to it when necessary; in aiding in the collection of the public revenue, and in being the bank of other banks. For the management of the public debt, the bank receives about £247,000, against which there has to be set £124,000 of charges. The remaining profits of the bank are derived from its use of its deposits, on which it allows no interest, and of its own capital. The capital was originally £1,200,000; in 1816, it reached £14,553,000-the present amount. There is besides a rest of about £3,200,000. In 1877-8 the public deposits varied from £3,422,248 to £19,852,358, and the private from £19,629,343 to £27,321,423; the maximum of deposits, public and private, was £43,047,038.

In 1797, the bank found itself likely to be obliged to suspend payments, and its notes were declared by law a legal tender, although no longer convertible into coin. This state of matters continued till 1821. The notes during this interval not having been convertible into coin on demand, there was no check upon the bank in the amount of its issues; and the currency became depreciated-that is, à £5 note would not exchange for five sovereigns; and every man to whom £5 was due, was thus obliged to accept payment in a £5 note, not worth £5. It is, however, said that the value of gold at the time was enhanced owing to absorption by hoarding and by military-chests, and that the depreciation was more apparent than real. The export of gold following on a rise of prices occasioned by an issue of bank or government notes is unlimited, except by exhaustion, if these notes are not payable in coin on demand, and are issued without any check from without or self-imposed. But as prices estimated in these notes rise, the price of bullion, like other commodities, rises too, and the price of coin which can be converted into bullion, or be used abroad at its previous purchasing power, rises also. Since 1821, the bank has been oftener than once on the verge of a suspension of payments, owing to foreign drains of gold. The separation of the bank into two departments is regarded by many as having a tendency to produce a suspension in times of panic, when the reserve is reduced by withdrawals to supply a foreign drain, or to meet an internal run. Before the separation, the bank, in the case of withdrawals of gold, had the whole amount of gold within the bank to meet them; but now it loses the command of all the gold in the issue department. It cannot get that gold unless in exchange for notes, but, its reserve being reduced or exhausted, it has none to spare. The restriction of credit consequent upon the approach to an exhaustion of the reserve of the banking department, is so great, that the fear of it occasions a panic; and in 1847, 1857, and 1866, on the possible suspension of payments by the banking department, owing to a reduction of its reserve, being apparent, the government of the day took the responsibility of authorizing the bank to lend additional notes, not represented by gold, which was an indirect way of getting at the gold in the issue department, where the object of

Bank.

the borrowers was to obtain gold. In 1857, it was found necessary to take the benefit of this authorization.

The bank of England is situated in the center of London; but it has a branch in the w. end, and nine branches in the provinces.

Joint-stock Banks in England and Wales.-In 1878, there were 119 of these banks, of which 52 in the provinces were entitled to issue notes to the amount of £2,164,221 without its being compulsory to hold any gold against them. But as they are prohibited from exceeding their authorized issue, the amount of notes actually in the hands of the public is always somewhat less. The deposits of the 10 joint-stock banks in London which may be considered London banks, and excluding the national provincial bank of England, the national bank, and the Scotch banks, who, although they carry on business in London, have the great bulk of their business in the country, amount to about £80,000,000, and the acceptances granted by them to about £17,000,000. Their paid-up capital is £9,270,000. Since 1880, some have become limited liability companies.

They all, it is understood, allow interest upon money deposited to remain for some time, but generally do not allow interest on money lodged upon current accounts or at call.

Private Banks in England and Wales.-Of these there were 248, of which 56 were in London. Of the provincial banks, 108 had an authorized issue of £2,295,073.

In the case of all these banks, whether issuing or non-issuing, their profits are chiefly derived from the use of their deposits.

There are also in London, 56 foreign, Indian, and British colonial joint-stock banks. Banks in Scotland.-The earliest banking institution in north Britain was the bank of Scotland, instituted by a charter of incorporation from the Scots parliament in 1695. The original capital was £1,200,000 Scots, or £100,000 sterling. In 1774, the amount of stock was extended to £200,000 sterling; now it is £1,250,000 sterling. In 1727, a new and similar establishment was constituted under the title of the royal bank of Scotland, whose advanced capital is now £2,000,000. In 1746, another association was formed, and incorporated by royal charter, with the title of the British linen company. From £100,000, its capital has increased to £1,000,000. Besides those three banks, there are in Scotland other seven joint-stock banks, with capitals varying from £1,000,000 to £150,000. There are now no private banks. The amount of deposits is probably about £80,000,000, on which interest is allowed. Their authorized issue of notes is £2,676,350, but their actual issue is about double that amount. The western bank, with a capital of £1,500,000, a circulation of above £400,000, having 1300 share-holders, and about 100 branches, suspended payments in 1857, owing to a reckless system of discounting bills. The share-holders, however, being under unlimited liability (see JOINT STOCK COMPANY), neither the depositors nor the note-holders sustained any loss. In Oct., 1878, the city of Glasgow bank, with 133 branches, suddenly suspended payments; the liabilities amounting to £12,400,000, and the estimated assets, £6,300,000, leaving a probable deficiency of £6,100,000. It was found that for three years before the stoppage, the states of the bank's affairs, issued annually to the share-holders, had been falsified, and that advances had been made to four firms against utterly inadequate securities, to the enormous sum of nearly £6,000,000. The directors and the manager were tried for and convicted of tampering with the reports, and sentenced to imprisonment. It was arranged to wind up the bank by liquidation, and although large numbers of the stockholders were utterly ruined, in four years the liquidation was complete, after a payment of £13,644,856. The Caledonian bank temporarily suspended payment. In 1882, the 7 non-chartered banks became limited liability companies.

In consequence of allowing interest on deposits, the banks in Scotland may be said to hold the whole capital of the country, minus only the money passing from hand to hand. This wide-spread system of depositing is greatly aided by the establishment of branches from the parent-banks; and these branches are found in every small town in the kingdom. The entire number of branch-banks in Scotland in 1879 was about 850. At these branch-banks, the agent (usually respectable person in business) discounts bills within certain limits, issues letters of credit, and pays out notes, and also gives cash on demand for them; though, strictly, the notes of a bank are only payable on demand at the head-office. By a strict system of supervision, Scottish branch-banks are usually well conducted, and are of great service in every department of trade. For one thing, they have powerfully contributed to extinguish burglary and highway robbery, as no one thinks of keeping money, except to a trifling amount, either in his house or about his person. At all the great fairs, bankers attend to receive deposits, and to pay checks. Forgeries of Scottish bank-notes are now unknown.

The banks in Scotland, like the banks in Ireland, but unlike the provincial banks in England, are allowed to issue notes beyond their fixed issues, on holding gold equal in amount to the extra issue. But as the gold thus retained is, like the other gold in reserve, liable for all the deposits, as well as for the whole circulation of a bank, if it should fail, the security of the establishment is increased only in a small degree by this arrangement, which, apart from the loss of profit to the bank on the gold unemployed, is attended with inconvenience at those seasons when the circulation is extended. In Scotland, and Ireland also, banks can issue one-pound notes; the English banks are not permitted to circulate notes of less value than £5.