banking ever spreads quickly and extensively. This function is the supply of the paper circulation to the country; and it will be observed that I am not about to overstep my limits and discuss this as a question of currency. In what form the best paper currency can be supplied to a country is a question of economical theory with which I do not meddle here. I am only narrating unquestionable history, not dealing with an argument where every step is disputed. And part of this certain history is that the best way to diffuse banking in a community is to allow the banker to issue bank-notes of small amount that can supersede the metal currency. This amounts to a subsidy to each banker to enable him to keep open a bank till depositors choose to come to it. The country where deposit banking is most diffused is Scotland, and there the original profits were entirely derived from the circulation. The note issue is now a most trifling part of the liabilities of the Scotch banks, but it was once their mainstay and source of profit. A curious book, lately published, has enabled us to follow the course of this in detail. The Bank of Dundee, now amalgamated with the Royal Bank of Scotland, was founded in 1763, and had become before its amalgamation, eight or nine years since, a bank of considerable deposits. But for twenty-five years from its foundation it had no deposits at all. It subsisted mostly on its note issue, and a little on its remittance business. Only in 1792, after nearly thirty years, it began to gain deposits; but from that time they augmented very rapidly.

The banking history of England has been the same, though we have no country bank accounts in detail which go back so far. But probably up to 1830 in England, or thereabouts, the main profit of banks was derived from the circulation; and for many years after that the deposits were treated as very minor matters, and the whole of so-called banking discussion turned on questions of circulation. We are still living in the débris of that controversy; for, as I have so often said, people can hardly think of the structure of Lombard Street, except with reference to the paper currency and to the Act of 1844, which regulates it now. The French are still in the same epoch of the subject. Their great enquête of 1865 is almost wholly taken up with currency matters, and mere banking is treated as subordinate. And the accounts of the Bank of France show why. The last weekly statement before the German war showed that

the circulation of the Bank of France was as much as 59,244,0007., and that the private deposits were only 17,127,000. Now the private deposits are about the same, and the circulation is 112,000,000l. So difficult is it in even a great country like France for the deposit system of banking to take root and establish itself with the strength and vigor that it has in England.

The experience of Germany is the same. The accounts preceding the war in North Germany showed the circulation of the issuing banks to be 39,875,000l., and the deposits to be 6,472,0007.; while the corresponding figures at the present moment are circulation 60,000,000l., and deposits 8,000,000%. It would be idle to multiply instances.

The reason why the use of bank paper commonly precedes the habit of making deposits in banks is very plain. It is a far easier habit to establish. In the issue of notes the banker, the person to be most benefited, can do something. He can pay away his own "promises" in loans, in wages, or in payment of debts. But in the getting of deposits he is passive. His issues depend on himself; his deposits, on the favor of others. And to the public the change is far easier too. To collect a great mass of deposits with the same banker, a great number of persons must agree to do something. But to establish a note circulation, a large number of persons need only do nothing. They receive the banker's notes in the common course of their business, and they have only not to take those notes to the banker for payment. If the public refrain from taking trouble, a paper circulation is immediately in existence. A paper circulation is begun by the banker, and requires no effort on the part of the public; on the contrary, it needs an effort of the public to be rid of notes once issued: but deposit banking cannot be begun by the banker, and requires a spontaneous and consistent effort in the community. And therefore paper issue is the natural prelude to deposit banking.

The way in which the issue of notes by a banker prepares the way for the deposit of money with him is very plain. When a private person begins to possess a great heap of banknotes, it will soon strike him that he is trusting the banker very much, and that in return he is getting nothing. He runs the risk of loss and robbery just as if he were hoarding coin. He would run no more risk by the failure of the bank if he made a deposit there, and he would be free from the risk of

so.

keeping the cash. No doubt it takes time before even this simple reasoning is understood by uneducated minds. So strong is the wish of most people to see their money that they for some time continue to hoard bank-notes; for a long period a few do But in the end common-sense conquers. The circulation of bank-notes decreases, and the deposit of money with the banker increases. The credit of the banker having been efficiently advertised by the note, and accepted by the public, he lives on the credit so gained years after the note issue itself has ceased to be very important to him.

The efficiency of this introduction is proportional to the diffusion of the right of note issue. A single monopolist issuer, like the Bank of France, works its way with difficulty through a country, and advertises banking very slowly. Even now the Bank of France, which, I believe, by law ought to have a branch in each Department, has only branches in sixty out of eightysix. On the other hand, the Swiss banks, where there is always one or more to every Canton, diffuse banking rapidly. We have seen that the liabilities of the Bank of France stand thus:

Notes
Deposits

£112,000,000
15,000,000

But the aggregate Swiss banks, on the contrary, stand :—

The reason is that a central bank, which is governed in the capital and descends on a country district, has much fewer modes of lending money safely than a bank of which the partners belong to that district, and know the men and things in it. A note issue is mainly begun by loans; there are then no deposits to be paid. But the mass of loans in a rural district are of small amount; the bills to be discounted are trifling; the persons borrowing are of small means and only local repute; the value of any property they wish to pledge depends on local changes and local circumstances. A banker who lives in the district, who has always lived there, whose whole mind is a history of the district and its changes, is easily able to lend money safely there. But a manager deputed by a single central establishment does so with difficulty. The worst people will come

to him and ask for loans. His ignorance is a mark for all the shrewd and crafty people thereabouts. He will have endless difficulties in establishing the circulation of the distant bank, because he has not the local knowledge which alone can teach him how to issue that circulation with safety.

A system of note issues is therefore the best introduction to a large system of deposit banking. As yet, historically, it is the only introduction: no nation as yet has arrived at a great system of deposit banking without going first through the preliminary stage of note issue, and of such note issues the quickest and most efficient in this way is one made by individuals resident in the district, and conversant with it.

And this explains why deposit banking is so rare. Such a note issue as has been described is possible only in a country exempt from invasion, and free from revolution. During an invasion note-issuing banks must stop payment; a run is nearly inevitable at such a time, and in a revolution too. In such great and close civil dangers a nation is always demoralized; every one looks to himself, and every one likes to possess himself of the precious metals. These are sure to be valuable, invasion or no invasion, revolution or no revolution. But the goodness of bank-notes depends on the solvency of the banker, and that solvency may be impaired if the invasion is not repelled or the revolution resisted.

Hardly any continental country has been till now exempt for long periods both from invasion and revolution. In Holland and Germany-two countries where note issue and deposit banking would seem as natural as in England and Scotlandthere was never any security from foreign war. A profound apprehension of external invasion penetrated their whole habits, and men of business would have thought it insane not to contemplate a contingency so frequent in their history, and perhaps witnessed by themselves.

France indeed, before 1789, was an exception. For many years under the old régime she was exempt from serious invasion or attempted revolution. Her government was fixed, as was then thought, and powerful; it could resist any external enemy, and the prestige on which it rested seemed too firm to fear any enemy from within. But then it was not an honest government, and it had shown its dishonesty in this particular matter of note issue. The regent in Law's time had given a monopoly of note issue to a bad bank, and had paid off the

debts of the nation in worthless paper. The government had created a machinery of ruin, and had thriven on it. Among so apprehensive a race as the French the result was fatal. For many years no attempt at note issue or deposit banking was possible in France. So late as the foundation of the Caisse d'Escompte, in Turgot's time, the remembrance of Law's failure was distinctly felt, and impeded the commencement of better attempts.

This therefore is the reason why Lombard Street exists; that is, why England is a very great money market, and other European countries but small ones in comparison. In England and Scotland a diffused system of note issues started banks all over the country; in these banks the savings of the country have been lodged, and by these they have been sent to London No similar system arose elsewhere, and in consequence London is full of money, and all continental cities are empty as compared with it.

ORIGIN AND DEVELOPMENT OF THE BANK OF ENGLAND.

Of all institutions in the world, the Bank of England is now probably the most remote from party politics and from "financing"; but in its origin it was not only a finance company, but a Whig finance company, it was founded by a Whig government because it was in desperate want of money, and supported by the "City" because the "City" was Whig. Very briefly, the story was this:

The government of Charles II. (under the Cabal ministry) had brought the credit of the English state to the lowest possible point: it had perpetrated one of those monstrous frauds which are likewise gross blunders. The goldsmiths, who then carried on upon a trifling scale what we should now call "banking," used to deposit their reserve of treasure in the Exchequer, with the sanction and under the care of the government. In many European countries, the credit of the state had been so much better than any other credit that it had been used to strengthen the beginnings of banking. The credit of the state had been so used in England: though there had lately been civil war and several revolutions, the honesty of the English government was trusted implicitly. But Charles II. showed that it was trusted undeservedly: he shut up the Exchequer, would pay no one, and so the goldsmiths were ruined.