functions of the Bank of England, the Reichsbank, and the Bank of France. With the banks as customers, these clearing-house associations made loans on collateral, rediscounted notes, and made the reserves of all of the banks available for each other in practically the same way as do the great national banks of Europe. The operations were of an identical nature, but there were two essential differences in form and in measure of effectiveness. First, the arrangements had to be devised in the stress of an emergency, and only began to operate after the panic had become acute, and it was no longer possible to forestall the general collapse. Second, there was no general clearing-house association for the country as a whole, and even though the banks of each locality were able by a belated expedient to pool their reserves and transform their commercial paper into available, liquid assets, there was no arrangement for a similar settlement of accounts as between different cities. Hence the struggle which was witnessed, of each locality endeavoring to fortify itself at the expense of every other locality—a spectacle which could not have occurred in any European country and which we ought to make impossible of recurrence here."

Origin and Nature of Credit.-There can be no system of credit until there has been a considerable accumulation of capital; for, when capital first begins to be accumulated, those who possess it apply it directly in aid of their own labor. As a country increases in wealth, many persona acquire capital which they cannot employ in their own business, or can only employ by offering inducements to purchase in the shape of deferred payments. As soon as a sufficient capital exists, a system of credit has a natural tendency to arise, and will continue to grow with the increase of capital, unless it be checked by a general insecurity of property, by imperfect legal securities for the payment of debts, or by a want of confidence in the integrity of the parties who desire to borrow. When the society and laws of a country are in a sound state, and cap!tal is abundant, credit comes fully into operation.

In a recently published article, the Hon. George E. Roberts, Director of the United States Mint, thus lucidly discusses the nature and value of credit as a substitute for money:

"There is a very common misunderstanding of the meaning of the word 'credit' when used as a banking term. Some people associate it wholly with advances of money or goods upon time, but credit is also a substitute for money in cash transactions. When a customer gives merchant a check for a bill of goods and the merchant deposits the check for his own bank account and simul

taneously draws against it, credit is being used, and a great convenience and economy are effected over payments of money from hand to hand. When payments are between distant localities the advantages are obviously greater. The great bulk of the payments between the East and West are accomplished by offsetting the purchases they make of each other. The great bulk of the bank deposits of the country are created in this way, and not by passing money over the counter. All of this involves the use of credit. This method of doing business will not be changed. The public will not go back to a greater use of money from hand to hand; on the contrary, it is certain that the various forms of bank credit will more and more become the means by which payments are made."

In Time Transactions credit is given either in goods or in money. By the former mode goods are supplied to a purcheser, for which the payment is deferred for some fixed period, or indefinitely, and the person who supplies them indemnifies himself for the delay by an increased price. By the latter mode, money is advanced, upon security or otherwise, and interest is charged upon the loan. Both these modes are used, in conjunction with each other, in the large transactions of commerce. A manufacturer,

for example, sells to a merchant, for exportation, goods to the value of a thousand dollars. The merchant however is unable to pay for them until he has received remittances from abroad; and the manufacturer, aware of his solvency, is contented to receive in payment a bill of exchange due at some future period. But in the meantime he is himself in need of money to carry on his business, and instead of waiting for the payment of the bill when it shall become due, he gets it discounted by a banker or other capitalist. Thus, having given to one person credit in goods, he obtains credit from another in money.

Deposits, Discounts and Loans.-It is very important for merchants requiring credit accommodations of banks, that they place their deposits in the kind of banking institution that can most certainly and conveniently_accommodate them in the matter of discounts and loans. Depositors are given preference over outsiders on the loanable funds of the bank in which their money is deposited.

The State Banks, that is to say, banks organized under the laws of a State instead of under the National banking act, are not, in most of the States, required to hold a reserve against savings and time deposits, and therefore, are usually in better position than the National banks to accommodate their depositors by advances to them on notes, drafts, bills of exchange, and collaterals of various descriptions.

The National Banks are required to maintain a certain portion of cash reserves to their liabilities, and when their reserves fall to a certain point they must stop loaning.

Under the new Federal reserve system (see page 462) only those National Banks that are not situated in a central reserve city may make loans on real estate, while in most of the States all State Banks may advance such loans. This makes patronage of State Banks generally desirable in localities where loans on real estate are common.

Where, however, business is to be transacted with persons in other States, the National Banks have an advantage over the State Banks, since the residents of one State are ordinarily not acquainted with the provisions of the banking laws of another State, while they know the general character of the provisions of the National Bank Act.

Trust Companies, in nearly all the States, have most of the characteristics of the State Banks. Besides having authority to execute trusts, they may receive deposits, lend money on real estate and any other security, and their reserve requirements are lower than for National Banks. In fact they are not a distinct class of banking institutions, but only State Banks with additional powers.

"The Money Market," explains Horace White, in a recent issue of The Annals of the American Academy, "consists of the loanable funds in the country. The money which people are using in their daily business, which passes from hand to hand in retail trade is no part of the money market. Such money is not marketable, because it cannot be recalled from the immediate service which it is rendering to society. The bulk of loanable funds of the country consists of bank credits which are bottomed on gold, and the magnitudes of such credits is limited by the amount of 'lawful money' held by the banks as reserves. Bank notes are not available as reserves of National Banks, although they are such for State Banks and Trust Companies.

"The Stock Exchange is a meeting place of the buyers and sellers of invested capital; that is, of incomes present or prospective. This is a comparatively modern institution because invested capital transferable by negotiable in

struments is of modern origin.

There were exchanges in the ancient world where traders met to deal in various kinds of movable goods. The Agora of Greece and the Forum of Rome, and the Fairs of the Middle Ages were such exchanges, but negotiable incomes (stocks and bonds) did not then exist. At the present time no person of intelligence keeps surplus money uninvested. He buys some interest-bearing security, or puts it in a savings bank, in which case the savings bank buys an interest-bearing security, or employs it in such manner as to yield an income.

"Capital is the result of saving. If not the parent of civilization, it is the indispensable promoter and handmaid of it, since capital gives mankind the leisure and the means to take new steps forward in solving the problems of human existence. It is desirable that there should be facilities for Investing the savings of the people without serious delay. Such facilities promote saving. It is desirable also that investments should be convertible into cash without delay. The raison d'etre of a stock exchange is to supply a place where money can be invested quickly and recovered quickly, or investments made upon which the investor can borrow money if he so desires. It is an incidental advantage that the stock exchange informs all investors, and intending investors, daily and without cost to themselves, of the prices at which they can buy or Bell the securities. on the active list of the exchange. These prices are made by the competition of buyers and sellers in the market, who are acting under the spur of self-interest. There is no other way in which true prices can be made. If the quotations so made are not precisely the truth in every case, they are the nearest approach to it that mankind has yet discovered.

"The making of bank loans to stock brokers is bottomed primarily on the confidence which the banker has in the broker as a person, and secondarily on the goodness of the securities offered. The modus operandi is substantially this: The broker, knowing from the clearing sheet of yesterday what payments he has to meet today, obtains from his bank in the morning authority to draw for this aggregate amount at an agreed rate of

interest. As his checks come in during the day the bank certifies them and the banker sends to the broker the bank securities whose market value is greater by a certain margin than the amount borrowed.

"These loans are usually payable on call. As National Banks are forbidden by law to certify checks for a sum greater than the drawer of the checks has on deposit, the practice in such cases is for the broker to execute a promissory note, which note the banker discounts, putting the proceeds to the credit of the broker, and attaching the security to it as it comes in during the day. While this method exposes the banker to some danger of loss in the interval between the certification of checks and the receipts of the securities, such losses seldom occur. There is an unwritten rule of the stock exchange that the bank must be protected at all hazards, both as a matter of personal honor and because the stock brokerage business cannot be carried on otherwise."

Abuses of the Stock Exchange.-The distinction between legitimate speculation in "futures" and gambling on prices is not generally understood and, therefore, to many people both are equally objectionable.

The difference between gambling and selling "short"— the limit of legitimate speculation in futures-is thus clearly pointed out by Mr. T. Henry Dewey, of the New York bar, in a booklet he has recently published.

"Selling Produce 'Short' is selling it for future delivery when the seller does not own the property at the time of the sale, but hopes to be able to buy it at a less price when or before the time for delivery arrives, thus making a profit from a fall in price. The short seller is therefore a speculator.

"In a 'short sale' of stock the contract for future delivery employed is a contract of borrowing. The seller does not, at the time of the sale, own any of the stock sold, but he borrows the same amount of stock from one who does own it and delivers the borrowed stock to the purchaser. The seller must return the stock to the lender and for this purpose he must buy it at some future time. He hopes to be able to buy it at less price than