where no bank notes are in circulation? A circulation bank issues notes payable to bearer with which people pay each other. A deposit bank credits it to depositors' accounts, and the balances produced in this way also constitute a medium of payment. Wherein does the difference lie? The difference, we repeat, is one of form only.

The exponents of the currency theory never discerned this. Bank notes are money, they said, and bank deposits are book entries. But we are not concerned here with calling notes and bank deposits by their right names: the question is, what functions they perform; whether both do not supply the place of specie; whether both are not capable of supplying a deficiency in the specie circulation of a country where the cheque is a very common medium of payment. The chief error of Lord Overstone and his followers certainly lay in their not having understood this clearly. Their doctrine was not founded on a true conception of the bank deposit. Between the latter and the bank note they sought to establish a fundamental distinction which does not exist.

To the credit of their opponents, the "Banking Principle" men, it must be recorded that they did not fall into this error. To them the closeness of the relationship between the bank notes and the bank deposit was perfectly clear, and they may be regarded as having rendered a service in making it more widely known. If the controversy between the two schools had been waged round this point alone, we should not have a moment's hesitation in siding absolutely with the latter. But the adherents of the "Banking Principle" have erred so' egregiously on another point in the controversy that we find it difficult to determine toward which of the two sides we feel most attracted.

The point to which we allude relates to the question as to how far a bank can bring itself and the community into danger by an excessive issue of notes. The adherents of the "Banking Principle" hold that no danger can be incurred by either so long as the notes remain convertible.

Should they cease to be so, then, indeed, too large a quantity of them may get into circulation, just as may happen in the case of notes issued by the Government and declared legal tender by enactment. But if the bank paper be convertible, how can it ever become redundant? What the public has no use for it returns to the bank, whose offices are always ready to accept the paper in exchange for specie. A bank can only put a definite quantity of notes into circulation;

any notes which it issues in excess of that quantity get returned to it under an iron law, as it were. This is proved by statistics. When we consult them we are surprised to find how little variation there usually is in the amount of notes in circulation. It was through Tooke more especially that a clear light was brought to bear upon this, and his conclusions have been fully verified by later investigations. There is indeed a remarkable degree of regularity in the demand for bank notes. We do not dispute the contention of the adherents of the "Banking Principle" that so long as bank paper is convertible any quantity of it issued in excess of a certain sum gets returned to the bank at once. It is strange, however, that people should ever have imagined that this constituted a safeguard against the consequences of imprudent bank management. It is precisely in the return of the notes to the bank that the danger lies. If the notes did not return, the bank that issued them could never get into difficulties. The fact is, however, that these institutions give rise to a very serious condition of things if they issue notes to excess.

For how do the notes return? By repayment of advances? Do we learn from the statistics, which Tooke and others have compiled with so much care, that when a bank, by granting credit too freely, issues paper in excess of the requirements of trade, the public repays its outstanding loans, maturing bills are met and so fresh ones are discounted, so that in this way the circulation is once more reduced? Quite the contrary: the statistics show that the redundant notes are offered in exchange for specie or used in purchasing bullion from the bank, the specie or bullion being then exported. In this way the amount of the circulation continues the same, it is true, but its components are no longer the same; "uncovered" is substituted for "covered" circulation, and the ratio between metallic reserve and note circulation becomes less favorable.

Tooke's statistics plead against him instead of for him. It is just because of there being a limit to the amount of notes which a bank can keep in circulation that an excessive paper issue becomes possible. For the paper issue becomes excessive from the moment that a disproportion exists between the amount of notes in circulation and the amount of metal in reserve against them.

"The question of banks of issue will always be misunderstood, and all discussion on the subject mere fencing with big words, so long as people fail to realize that a bank, when issuing paper, is simply an instrument in the hands of the public." Thus wrote a Dutch adherent

of the "Banking Principle" several years ago. So far as concerns the amount of its circulation, a bank is undoubtedly an instrument in the hands of the public; but it is not the instrument of the public in the matter of the items which go to make up that amount, and it is these, more especially, that one has to consider when judging whether a note issue is excessive or not.

(2) HISTORICAL EXPERIENCES WITH NOTE ISSUES

119. THE RHODE ISLAND LAND BANK'

At the close of the Revolutionary War the people of Rhode Island found themselves in extreme poverty and heavily burdened with their share of the national debt. The war had seriously crippled their trade, upon which they were mainly dependent, and in their distress the people, instead of patiently waiting for relief to come by the slow process of rebuilding their trade, turned to paper money for relief. They began to clamor for a paper bank in 1785, and when petitions for such a bank were rejected by the General Assembly, a new party was organized with paper money as its chief principle. They went before the Assembly again in 1786, and their petitions for a paper bank were met with counter-petitions against it, signed by the merchants of Providence, and the project was defeated again by a vote of two to one. They then carried the question into the elections and won a surprising victory, gaining control of the General Assembly by a large majority. This body assembled in May, 1786, and one of its first acts was the passing of a law establishing a paper-money bank of one hundred thousand pounds.

Every farmer or merchant who came to borrow money must pledge real estate for double the amount desired. The money was to be loaned to the people upon this pledge according to the apportionment of the last tax, and must be paid into the treasury at the end of the fourteen years. Great expectations were entertained by the farmers of the beneficent results which were to follow upon this new influx of wealth. "Many from all parts of the State made haste to avail themselves of their good fortune, and mortgaged fields strewn thick with stones and covered with cedars and stunted pines for sums such as could not have been obtained for the richest pastures. They had, however, no sooner obtained the money and sought to make the first payment at the butcher's or baker's, than they found that a heavy discount was taken from the face value."

I

Adapted from the Century Magazine, XLII (1891), 151-52.

The depreciation of the new money began literally with its issue. Every merchant and tradesman in the State refused to receive it for its face value, and the holders of it refused to make any discount. The General Assembly came to the aid of the bank and sought to give its paper money full value by statutory enactment. A forcing act was passed subjecting any person who should refuse to take the bills in payment for goods on the same terms as specie, or should in any way discourage their circulation on such terms, to a fine of one hundred pounds and to the loss of his rights as a freeman. This made matters worse than ever. Merchants and traders refused to make any sales whatever, many of them closing their shops, disposing of their stock by barter, and going out of business. In fact, money almost ceased to circulate at all. Nearly all kinds of business was transacted by barter, rents were paid in grain and other commodities, and the only people who used the paper money were those who had borrowed it on their land. The chief cities of the State, Providence and Newport, presented a very remarkable spectacle. Half their shops were closed, their inhabitants idle, and their streets animated only by groups of angry and contentious men blaming one another for the blight which had fallen upon their business and industries. In order to retaliate upon the merchants and traders for refusing to take their money, the farmers refused to bring their produce to market. A famine was so imminent in Providence because of this withholding of supplies that a town meeting was called to devise means for obtaining the necessaries of life. To provide immediate relief for persons in want of bread five hundred dollars was authorized to be borrowed by the town council. In Newport a mob brought on a riot by attempting to force grain dealers to sell corn for paper money.

In August, about two months after the establishment of the bank, affairs became so desperate that a State convention controlled by the country towns adopted a report recommending the General Assembly to enforce and amend the penal laws in favor of paper money and advising farmers to withhold their produce from the opponents of the bank. The General Assembly, convened in special session for the purpose, passed an additional forcing act, which suspended the usual forms of justice in regard to offenders against the bank, by requiring an immediate trial, within three days after the complaint was entered, without a jury and before a court of which three judges should constitute a quorum, whose decision should be final, and whose judgment should be instantly complied with on

penalty of imprisonment. The fine for the first offense was fixed at from six to thirty pounds and for the second at from ten to fifty pounds. "This monstrous act of injustice," says Arnold, "was carried through the legislature by a large majority, and the solemn protest against it as a violation of every particle of moral and civil right, of the charter, of the articles of confederation, of treaty obligations, and of every idea of honor or honesty entertained among men," which a minority of the members presented, was not allowed to appear on the record.

This second forcing act brought matters to a crisis. A butcher in Newport was brought into the Superior Court on a charge of refusing to receive paper money at par in payment for meat. A great concourse of spectators attended the trial, which was before a full bench of five judges. Leading lawyers appeared for both sides, and their arguments occupied a whole day. Two of the judges spoke against the forcing acts, and the other three were of the same mind. On the following morning the formal decision of the court was announced, declaring the acts unconstitutional and void, and dismissing the complaint. The wrath of the General Assembly at this decision was great. A special session was at once convened, and the judges were summoned, in language of incredible arrogance, to appear before the Assembly to assign the "reasons and grounds" for their decision. Three of the judges obeyed the summons, but as the other two were detained by sickness the hearing was postponed till the next session. At the next session four of the offending judges were removed. Before adjourning the General Assembly prepared a new act to "stimulate and give efficacy to the paper bills." This was called the Test Act, and it contained one of the most remarkable oaths ever prescribed to a free people. Everyone taking the oath bound himself in the most solemn manner to do his utmost to support the paper bank and to take its money at par. All persons refusing to take the oath were disfranchised. Ship captains were forbidden to enter or to go out of ports of the State, lawyers were not to be allowed to practice, men were not to be allowed to vote, politicians were not to be allowed to run for office, and members of the legislature were not to be allowed to take their seats until the oath had been taken. This was so stringent a measure that the General Assembly was afraid to take the responsibility of enacting it, and after considering it referred it to the people of the towns for approval. Only three towns in the State voted in its favor, all the others rejecting it.