posed they may be to do so. In the competition of banks of issue to get out their notes, there may be an extension of the circulation of some one or more of them in a large district, but it can only be by displacing the notes of rival banks.

"That neither is it in the power of banks of issue directly to diminish the total amount of the circulation; particular banks may withhold loans and discounts, and may refuse any longer to issue their own notes; but their notes so withdrawn will be replaced by the notes of other banks, or by other expedients calculated to answer the same purpose.

“That neither the country banks nor the Bank of England have it in their power to make additional issues of their paper come in aid of their banking resources. All advances by way of loan or discount, when the circulation is already full, can only be made by banks of issue in the same way as by nonissuing banks, out of their own capital or that of their depositors." *

In explanation of the only exception to the truth of these principles, I borrow again from Mr. Tooke's able pamphlet. "The only plausible argument," he says, "that I have met with, for a distinction between issuing and non-issuing banks, in their tendency to issue money in excess, (meaning, if translated into correct language, 'to make advances of capital in excess,') is, that in the competition, either of new banks of issue to get a portion of the existing circulation, or of established banks to get an increased share at the expense of neighboring banks, they are induced, with a view of getting out their notes, to make advances to an undue extent, and upon insufficient securities. This, I think, may be admitted as true to some extent; and to this extent there may be sufficient ground for making whatever regulations should be thought advisable to guard against malversation of banks generally, more stringent as against banks of issue." But the object of the regulations adopted for this purpose would be, not to diminish the amount of bank-bills in circulation, but to confine the issue of them to solvent and well-regulated institutions conducted upon sound banking principles.

The greatest abuse of the banking system here in America

* Tooke on the Currency Principle, p. 122.

† lbid., p. 95.

consists in the unrestricted competition of the banks with each other in the attempts made by each one to force its own bills into circulation. To understand the artifices adopted for this end, we must revert to the distinction already explained between the peculiar office performed by bills of a high, and by those of a low, denomination. The smaller notes, not exceeding the value of $10 each, circulate chiefly in the transactions of the consumers with the retail dealers and with each other, in the payment of wages, and in the thousand petty transac tions which make up the whole business of life for those who are not engaged in large commercial operations. These small bills often pass from hand to hand, effecting a multitude of small payments, and remaining out of the bank a long time, before they are at last collected by some small dealer, and returned to a bank on deposit, often in a dirty and worn condition. The larger notes, on the other hand, embracing nearly all that exceed $10 each, circulate only among dealers, the largest of all only among wholesale dealers, and generally do not effect more than one payment before they are returned to the bank; often they are only carried from one bank to another, and then they are exchanged in the first settlement at the Clearing-House, and do not properly pass into circulation at all. It is only through the small-note circulation, then, that a bank can keep out any considerable amount of its bills. The extent of this circulation would properly depend upon the comparative population of the district to which the bank belongs, and not upon the amount of business transacted in that district, except it be business of a particular kind. Thus, manufacturers and other persons employing a large number of operatives have occasion to pay out weekly a considerable sum in wages, and, needing small bills for this purpose, can usually obtain a discount at the bank on very favorable terms, or when all other applicants would be refused. The officers of railroads, and others who have occasion to receive a great number of small payments, can distribute many small bills in "making change" for the larger bills which are tendered to them; and these also can obtain discounts on easy terms, sometimes on doubtful security. Some banks will even make loans to applicants from distant places, on express condition that the bills received shall be carried away, and not be paid into any bank

at the first instance, but be distributed in small sums as occasion may arise. As only applicants of doubtful credit or in straitened circumstances would consent to buy the favors of the banks on such terms, it is obvious that such practices can be carried on only at great hazard.

The difference between the large-note and small-note currency may be further illustrated by the difference between metropolitan and country banks, in respect to the amount of their bills which they are able to keep in circulation. Here in Massachusetts, the Boston banks, with an aggregate capital of nearly thirty-three millions, have a circulation of only seven millions; the banks out of Boston, with a capital of only twenty-six millions, have a circulation of 15 millions. More precisely, the Boston banks have one dollar in circulation to every $4.58 of capital; for the country banks, the proportion is one to every $1.66. The reason for this great difference is, that the Boston banks supply a small-note currency for a population of only 150,000; the country banks for a population numbering at least 835,000. The contrast would be still more striking, if the returns enabled us to distinguish large notes from small ones; it would probably be found, that the larger part of the country-bank currency consists of bills not exceeding on an average $10 in value, while most of the Boston circulation is in bills of $20 and upwards. So small an amount of active currency for so great a commerce as that of the metropolis of New England is enough to prove the correctness of Mr. Tooke's statement, that "the great bulk of the wholesale trade of the country is carried on and adjusted by settlements or sets-off of debts and credits, the written evidences of which are in bills of exchange, (including in that term all promissory notes payable to order after date,) while current payments for what are called cash sales are mostly made by checks; the ultimate balance only, arising out of the vast mass of such transactions, requiring liquidation in a comparatively small amount of bank-notes.

The banks in England cannot issue bills of a lower denomination than five pounds sterling, or nearly $25; the Bank of France issues none below 500 francs, or nearly $100. In both those countries, therefore, the currency which is in the hands of the common people, and by which all small payments are

effected, consists exclusively of gold and silver; bank-notes are confined to the operations of trade, chiefly of the wholesale trade, and to the expenditures of the government and of persons of considerable fortune.

It may well be doubted whether a similar policy ought not to be generally adopted in this country; whether, at any rate, the circulation of bank-bills of a lower denomination than $10 ought not to be prohibited by law. It is evident from what precedes, that I regard a well-regulated bank currency, convertible into specie on demand, as a cheap and convenient substitute in part for the use of the precious metals, and as a necessary instrument of commerce; and that the evils commonly attributed to it, of being liable to issue in excess, and thereby of causing violent expansions and contractions of the total currency, and ruinous fluctuations in prices, are imaginary, no such issue in excess being possible so long as the banks continue to redeem their bills in coin. But a small-note currency cannot be well regulated; the profits resulting from its issue being considerable, there is a keen competition among the banks to obtain as large a share as possible of the business, and this competition leads to injurious and hazardous practices, whereby the solvency of these institutions and the stability of the whole system are perilled. Such a currency is safe only when it is backed by sufficient specie reserves; but as there is a loss of interest on such reserves, there is a great temptation to reduce them to narrower limits than prudence would warrant. The circulation of some of the country banks in Massachusetts is to the specie in their vaults as more than forty to one. It is true, that a portion of the specie which is the guaranty of their circulation is lodged in the Boston banks; but the aggregate bank circulation of the State is to the aggregate specie reserve as more than five to one, a proportion which is hardly consistent with the safety of the whole, and which, as this reserve is very unequally distributed, is certainly pregnant with danger to many. Each bank, looking only to its own safety, and not to the safety of the whole system, relies upon the aid of the other banks, in case of specie being suddenly demanded of it to any considerable extent; it issues, for instance, $100,000 in bills, when it has less than $3,000 in coin, because it knows that, if an emergency should arise,

it could easily obtain $30,000, either in coin or bills, from the neighboring or associate banks. So it could, if the emergency were a limited one, that perilled only its own safety. But if there were a general run upon all the banks, such as might easily be produced in a time of pressure by the reported insolvency of two or three of them, each one would be obliged to take care of itself, and could render no aid to its correspondents or neighbors. Though the run, then, might not be extensive enough to appear serious in the outset, it might still suffice to break half of the country banks in the State; and the alarm being thus quickened into a panic, the demand for coin would so rapidly increase, that a general suspension of specie payments would inevitably ensue. It was thus that all the banks were compelled to suspend in May, 1837. At that time, most of the banks in New England, and many of those in the other States, were in what would be usually considered as a perfectly sound condition; they had suffered no extraordinary losses, their capitals were unimpaired, and their specie reserves bore the ordinary ratio to their circulation. But it was a time of great financial distress, the reaction from a speculative fever that had reached its crisis. While the public mind was in this excited state, the failure of a few really insolvent banks in the Middle States gave a direction to the panic, and an immediate and total suspension became inevitable. As fast as the news spread, the banks, conscious of their inability to meet a storm, closed their doors before the run upon them could begin. Though perfectly provided for ordinary fair weather, they were unable to withstand the first gust of a tempest. But the act was only a suspension; it was not insolvency. After the alarm had had time to subside, the banks reopened their doors, and, here in New England at least, not one in fifty of them failed to redeem every penny of its obligations.

In reference to bank currency, what the public need to be guarded against is not the occasional mismanagement or fraudulent conduct of a few institutions; against these, the watchfulness of the other banks, and the general severity of the laws against fraud, are a sufficient protection. The great evil is the general insecurity of the whole system in a time of pressure; and this evil cannot be obviated so long as there is a bounty