THE great Napoleon said that, in his opinion, the only use of the Bank of France was to lend money at four per cent. And as a matter of fact, both in France and in England (prior to 1844), the rate of interest was generally-as Napoleon held it ought always to be-four per cent. For a century and a half the rate charged by the Bank of England, and all the other banks in this country, never varied more than one per cent averaging about four and a half per cent. Whether or not this is a fair rate of banking profits-a fair return on capital lent upon good and readily convertible securities we need not, from our point of view, stay to inquire. For we hold that the only legitimate test in such a case is, the law of Supply and Demand, acting under natural conditions,-that is to say, free from artificial restrictions of any kind.

We are opposed to fixing the rate of interest, or imposing a maximum upon that rate, by legal enactment. For two reasons: Firstly, because fluctuations occur alike in the supply of loanable capital, and in the demand for that capital; and either of these causes naturally calls for a variation of the rate charged for capital on loan. Also, because the credit of borrowers, or of the securities offered, varies,-so that in some cases a percentage (equivalent to a premium of insurance) has to be added to the ordinary rate of interest. Secondly, we are opposed to any legislative restriction upon the rate of interest, because it is an interference with the freedom of banking; and, in our opinion, the less legislation there is for banking, as for other trades, the better.

To these general principles, we think, no objection will be taken, either by the supporters of the pre

sent monetary laws or by their opponents. But the next question is

and it is the most important practical question in monetary science, Under our present monetary system, is the general level of the rate of interest what it ought to be? And do the variations of the rate arise from natural and necessary causes? We say, No. We shall show, with all fairness, the circumstances in which banks are justified, by their proper interests, in raising their charge for capital on loan. But it is equally important to observe that there are circumstances in which an increased demand for money, or advances, adds to the profits of banks, without in any way imperilling their position, and therefore does not necessitate an increase in the rate of interest. Also, that the rate of interest is raised at times although there is no increased demand for capital at all.

There are two cases, quite distinct, although at present confounded, in which the Bank of England is, or thinks itself, compelled to raise the rate of interest. One of these applies, in a greater or less degree, to the banks of all countries, namely, when there is an unusual demand for the precious metals, whether for home use or (as more frequently happens) for export. The other case applies to the Bank of England almost exclusively,-namely, when there is no increased demand for the precious metals, but simply for money in the form of bank-notes.

I. Let us consider the latter case first. An increased demand for bank-notes or domestic currency arises whenever either of the two following, and very different, causes comes into play-namely, either (1), when a sudden expansion of

trade takes place; or (2), when there is a temporary weakening of credit, whereby payments in money are called for to a considerable extent instead of the payment by bills, by which all our trade in ordinary times is carried on.

An increase of trade, we need hardly observe, does not necessarily occasion a corresponding increase in the export of the precious metals. On the contrary (as notably in the case of France of late years) a great increase of trade may be attended by a great influx of specie. But to make the case perfectly clear, let us suppose that the expansion of business is purely of a domestic kind-say, in the construction of railways, building of factories, improving of land, &c. In such a case, the capital employed is not sent abroad, and bank-notes alone are needed in its transference from hand to hand. Every increase of business is at tended by a larger creation of bills and acceptances, which in due course are taken to the banks to be discounted. In this case, there is an increased demand for capital on loan.* Hence the banks find that they can increase the amount of their loans upon good securities, and every extension of a bank's loans augments to an equal degree the bank's profits, although the rate of interest remain the same. Accordingly, so far as profit is concerned, the banks may, with great advantage to themselves, enlarge the amount of their discounts, or advances to trade upon the usual securities, without exacting an increased profit by raising the rate of interest. On the other hand, it is natural that they should seek to obtain the highest price possible for their loans. When the demand for loanable capital is in

creased, they may justly say-" It is true that an enlargement of discounts is very profitable to us, of itself; but if the demand for loanable capital is so urgent that we can exact higher terms for our advances, by raising the rate of discount, and so obtain a double means of profit, we are entitled to do so."

And so they are. But then there must be free competition, as in other trades. Any farmer who sees it advantageous to offer his grain in the market at 65s. the quarter, while his neighbour stands out for 70s., is at liberty to do so. In like manner, any banks which are willing to enlarge their accommodation to the public upon moderate terms - either contenting themselves with a lesser amount of profits than if they raised their rate of discount, or feeling assured that such a course will be more profitable to them in the end by increasing their amount of business But

ought to be free to do so. legislation steps in to prevent free competition in this matter, and makes the rate of interest to a great extent dependent upon artificial causes. It does so, firstly, by restricting the means by which the banks can lend their capital. The issue of bank-notes is made dependent, not upon the amount of capital and credit of the banks, which it is the sole purpose of bank-notes to represent. On the contrary, the majority of banks have of themselves no means of lending their capital or utilising their credit at all. They are not allowed, upon any terms, to issue notes of their own, however great may be their credit, and however large the amount of capital which they have to lend. For the means of carrying on their business, they

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are entirely dependent upon obtaining a supply of notes from the Bank of England. The Bank of England has a virtual monopoly of the issue of bank-notes. Whether the legislative fetters imposed upon the Bank's issue of notes be right or not-and whether or not the whole currency of the country should be made to fluctuate with the amount of bullion in the Bank of England-we do not now discuss. We simply point out the fact that the Bank of England is possessed of a means of lending its capital, or deposits, which is denied by law to any of the other large banks. These other banks are dependent upon it for the means (notes) by which alone they can carry on their business. Thus they cannot compete with it on fair terms. And thus the rate of interest, the price of money on loan, instead of being regulated as the price of all other commodities is by free competition, is injuriously affected by a legally-established monopoly. Abolish that monopoly, and the rate of interest would follow its natural course. The charge for the use of capital on loan would then be regulated by the natural law of supply and demand and there would be no ground for complaint. We repeat, we are opposed to any legislative interference with the rate of discount let the rate rise to any height, provided that it does so in accordance with natural laws. But this can never be the case so long as the vicious principle of monopoly is adhered to, and free competition is expressly prevented by an Act of Parliament.

The other case in which an increased demand for bank-notes arises, is, when some bank of issue fails, or when a temporary weakening of commercial credit occurs. The latter event may, and often is, occasioned simply by the action of the banks, in refusing their usual accommodation to trade, -which refusal takes place whenever and from whatever cause more

gold than usual has to be sent abroad. In this case the breakdown of credit is owing to causes extraneous to trade-to a hitch in our currency-system. But let us suppose that the dilemma originates with trade itself.

Whenever, and from whatever cause, an embarrasment befalls any important branch of trade, the markets for that trade become depressed. A fall of prices takes place. Any sudden fall of prices weakens the credit, it may be imperils the solvency, of the firms engaged in the embarrassed trade. There are fewer buyers than before,

the whole operations of the trade thus temporarily embarrassed are contracted; and the holders of stocks, while reducing or wholly suspending their usual orders for goods, are placed in a serious dilemma. As the credit of all firms connected with the trade is diminished, these firms find that they cannot carry on their business by means of bills to the same extent as before. Payment by bills falls into disrepute, and payments by cash are proportionately increased. There are only two ways in which cash can be got to meet this increased demand for it. The merchants must either make sales of their goods to an unusual extent, or they must discount the reserve of bills which they usually keep on hand. They are unwilling to take the former course-that is to say, to make forced sales,-because the market is already depressed, and extra sales would depress it still further. Rather than submit to this great loss, they take their reserve of bills to the banks. When they cannot make sales except at a great loss, they seek to meet the emergency by discounting every bill which they have on hand. If they obtain the usual accommodation from the banks, the difficulty is tided over; and in due course the trade recovers from its temporary embarrassment, and things go on as before. But if the banks, instead of assisting this branch of

industry, create embarrassment for all trade alike, by raising the rate of discount, then the evil is seriously augmented. The position of the embarrassed trade is still further deteriorated; and, what is worse, the markets for all kinds of goods are depressed, so that a temporary embarrassment of one branch of trade is not only prolonged, but is also extended to all kinds of trade, so that the whole industry of the country is greatly, as well as needlessly, injured.

There is a great difference between this and the previous case. In the former there was increased trade, and of course an increased demand for capital to carry on that trade. In the latter there is a contraction of trade, and a diminished demand for capital. But this diminished demand to a certain extent assumes a new form. In proportion as commercial credit is weakened, and commercial currency (bills) falls into disrepute, a greater demand arises for the currency supplied by banks,-i. e., bank-notes. Trade, in ordinary times, supplies (by means of bills) the currency required for its wholesale operations; but when the credit of that currency to any extent fails, the deficiency must be supplied by means of bank-notes. These notes are not meant to be cashed: they are simply needed to fill the vacuum created by the temporary disrepute of bills. Therefore they might safely be issued without any increase of the stock of specie held by the banks. Nevertheless the demand for banking loans is increased, and the banks are entitled to consult their own interests in meeting this demand. When trade can no longer supply the currency by which its operations are carried on, it must borrow the currency which represents the capital and credit of banks. And for such loans the banks are entitled to charge the terms which are most advantageous for themselves.

Thus, in this case as in the previous one-however different they are in other respects-the same con

clusion is presented. In the first case there is an increased demand for capital, because trade is prosperous and profits (it may be presumed) are large. In the second case there is a diminished demand for capital, for trade is embarrassed and contracted. In the former case there is certainly an increased demand for loanable capital of all kinds; in the latter, all that can be said is, that the demand upon the banks for loans is increased compared with the total amount of business carried on. But in either case the rate of discount-the charge for banking capital on loan-is a matter which the Banks and Trade ought to be left to settle between themselves by free competition. The banks, as we have already said, may make an increase of profits by simply enlarging their discounts, without raising the rate; or they may make a double profit by at the same time charging more for their advances. And again we say, they are entitled to do so,-provided that the law of supply and demand is allowed to act under natural conditions-i. e., by means of free competition. But here, as in the previous case, we encounter the action of a vicious monopoly. And, although we hold that the rate of interest should be unfettered in its movements, we demand, on the principle of free-trade, that no artificial influences should be interposed,-and that our banks, instead of being dominated by the Bank of England, should all of them equally have the means of lending their capital,-so that free competition, and not monopoly, should regulate the rate of interest.

An increased demand for banknotes likewise occurs when some bank of issue fails. In this case the public are quite willing to take the notes of other banks; but the Bank Acts prevent any increase in the issues of these banks, save under conditions which produce a drain for notes or gold upon the Bank of England, of which we shall speak infra

II. Hitherto we have been considering the position of banks when the demand upon them is not for gold, but simply for an increased supply of domestic currency in the form of notes. Let us now consider the position of banks when an increased demand for gold arises. This may be either an internal demand or an external one-i. e., for export.

(1.) An internal demand for gold. Such a demand only arises when one or more banks lose the confidence of their customers, and when these demand payment of their deposits in gold. In England, such a demand can only be made upon the Bank of England. As the notes of the Bank are a legal tender throughout England (except at the Bank itself), any bank upon which a run is made for deposits can, and does, make payment in Bank of England notes. Thus when any English bank or banks are considered unsafe, and have to sustain a run for deposits, no drain of gold is occasioned, either from them or from the Bank of England. For the Bank of England, upon which alone a demand for payments in gold can be made, never loses the confidence of the public: it has never sustained a run for gold, in payment either of its notes or deposits, owing to any apprehensions as to its solvency, for the last hundred years and more,-never since the Pretender and his Highlanders were at Derby in 1745. Thus, as the credit of the Bank of England is never doubted, and as a run upon any other English banks is met by pay ments in its notes, an internal demand for gold (that is to say, a demand of specie for domestic use, and not for export) never arises in England.

The internal drains of gold which the Bank of England has occasionally to meet, come from Scotland and Ireland. Bank of England notes are not a legal tender in those countries, and accordingly, when a run for deposits is made upon a Scotch or Irish bank, such a run has to be met to

a large extent by payments in gold. The threatened bank may obtain a supply of gold either from its neighbour banks, or from the Bank of England. If its neighbour banks are assured of its solvency, the difficulty is easily surmountable. The gold withdrawn from a bank owing to a distrust of its solvency is never kept in hand by those who withdraw it, but is immediately deposited anew in some of the neighbouring banks. It is seldom a single hour out of bank. Hence if the threatened establishment is known to be solvent by its fellowbanks, all that they have to do is simply to return to it the gold as fast as it is withdrawn and the crisis is quickly at an end, without any drain (worth mention) being made upon the Bank of England. Even if the threatened bank is in bad odour, and consequently is not supported by its neighbours, the drain of gold which it makes, or can make, upon the Bank of England, is inconsiderable. It can only make that drain by selling its reserve of Government stock, and, by means of the notes thus received, withdrawing an equal amount of gold from the Bank of England. But in the case of an ill-conducted or insolvent bank, this reserve of convertible securities is always exceptionally small. So that the bank fails, without having in its power to make any considerable draft upon the stock of gold in the Bank of England. And after its failure, the vacuum produced in the currency by the lapse of its notes (supposing it to be a bank of issue) would naturally be filled by an increased issue on the part of its neighbour banks-whose solvency has been unquestioned, and whose notes would be received by the public as readily as gold.

It is obvious that when a discredited bank has to meet "a run,' the raising of the rate of interest can be of no use to it,—the demand upon it being, not for loans, but for payment of its deposits. In fact, the raising of the Bank-rate in