Art. IX.-GOLD AND THE BANKS.

1. Principles of Economics.

By Dr N. G. Pierson. Translated from the Dutch by A. A. Wotzel. Vol. 1. London: Macmillan, 1902.

2. The Country Banker: his Clients, Cares, and Work. By George Rae. 13th Impression. London: Murray, 1903. 3. Bank Rate and the Money Market in England, France, Germany, Holland, and Belgium, 1844-1900. By R. H. Inglis Palgrave, F.R.S. London: Murray, 1903.

4. The Country Banker's Handbook. By J. G. Kiddy. Fourth edition. London: Waterlow, 1903.

5. The Law of Banking. By Sir John R. Paget, Bart. London: Butterworth, 1904.

6. Das Englische Bankwesen. Von Edgar Jaffé. Leipzig: Duncker and Humblot, 1905.

7. International Monetary Conferences. By H. B. Russell. London: Harper, 1898.

8. Report of the Commission on International Exchange. Washington: Government Printing Office, 1903. And other works.

THE circulating medium is not, as a rule, one of the subjects about which many people trouble themselves, except to secure as much as they require for their immediate needs. But, beside the ordinary methods of meeting the casual wants of the moment, there lie the wide questions of the circulating medium' and the standard of value-words which, while they have a real meaning to the learned, are used in a very casual manner by the vast majority of the owners of cheque-books. To discuss these questions without endeavouring to give the reader some notion of the great subjects with which they are interwoven, would be like bidding a traveller find his way through a labyrinth without a clue to its many windings. An attempt will therefore be made here to give an idea of the outlines of these subjects, which, though intricate in appearance, lend themselves readily to explanation. They are matters of real importance, and not only, directly or indirectly, affect the position of all business affairs in this country, but have a far wider extension.

The subject before us divides itself primarily into

two parts, naturally interwoven with each other. These are, first, the circulating medium, and, secondly, the basis on which that medium rests. That basis is the standard of value-in this country, and in most countries of the civilised world, gold.

Let us commence with the consideration of the circulating medium of the United Kingdom. Like many things in use in this country, the circulating medium employed for ordinary purposes is a purely British product. I have said 'the circulating medium for ordinary purposes.' Occasionally, it is true, 'legal tender' is required, that is to say, sovereigns or Bank of England notes. I have known, in my time, solicitors require the production of legal tender before completing some large purchase, for instance, of a valuable landed estate. Nowadays, however, this precaution is usually dispensed with. A cheque marked by the cashier of the local bank is accepted in discharge of payment of very large sums, and thus fulfils absolutely the conditions of 'money.'

England was the first country to establish a circulating medium consisting of unsecured paper-cheques—which are really drafts on demand, signed by tens of thousands of persons, usually little known beyond their immediate surroundings, all the cheques being expressed in terms of gold and drawn upon a small number of banks whose standing and character support the circulation. These cheques are directions to pay so much money in gold. Legally they are Bills of Exchange, and require a penny stamp to authenticate them. Suggestions have sometimes been made to increase the stamp duty; but it is very doubtful whether raising the duty would increase the gain from the tax to the State. Cheques are continually being drawn for smaller amounts than used to be the case; and any hindrance to their general use would be injurious to trade. The cheques are sometimes drawn for amounts less than a shilling; they may run up to hundreds of thousands of pounds. The drawers are men and women of all sorts and conditions. As a rule, the cheques scarcely ever pass from the hands of the persons in whose favour they are drawn into general circulation. They simply meet the requirements of the moment, and then pass out of sight.

The machine is perfect; its movements proceed with

the utmost regularity. The annual circulation is estimated to be at least half as large again as that of the London Clearing House, which means a movement of 15,000,000,000l. No one asks what stock of gold is held by the bank on which the cheques are drawn, or what the Bank of England itself keeps in reserve. The whole is taken in faith on a well-founded trust. It is the most easily worked paper circulation and circulating medium in existence. Like the marvellous tent of the fairy Paribanou, it expands itself to meet every want, and contracts again the moment the strain is passed. Such is its action under ordinary conditions. On times of stress and crisis we need not dwell now.

In France matters are somewhat different. The monetary circulation of that country consists mainly of notes of the Bank of France, which usually holds in reserve an amount of the precious metals, principally gold, at least equal to the circulation. Our neighbours across the Channel take far more pains than we do to investigate the position of their internal resources; and an official enquiry is made from time to time in France into the composition of the circulating medium of the country, to ascertain what proportion of it consists of coin and what proportion of notes of the Bank of France. In the last enquiry of this kind, which took place in 1903, all the public offices of France took part, and besides them the principal banking institutions of the country, such as the Bank of France, the Crédit Foncier of France, the Crédit Industriel et Commercial, the Crédit Lyonnais, the Comptoir National d'Escompte de Paris, and the Société Générale. At all the numerous offices controlled by these powerful institutions, a census was taken of the details of the cash in their safes on the evening of October 15, 1903. The sums examined reached the large figure of 11,052,430. Notes of the Bank of France formed more than 85 per cent. of the whole. Gold coin was no more than 9 per cent.; the remainder was in fivefranc pieces and divisional currency. Similar enquiries have been made at intervals of six or seven years during the last quarter of a century. A comparison of the composition of the amounts shows that the proportion of payments in notes of the Bank of France continually increases, while that of payments in coin diminishes.

There is also a considerable drop in the proportion of the five-franc pieces employed. It is within comparatively recent years, perhaps within the memory of most middle-aged men, that silver in five-franc pieces was the standard of value in France, and the coin in most general circulation. Fortunate was the young traveller who had a rough canvas bag with a good stock of them. Since the suspension of the Latin Union, gold has in France silently and steadily taken the place of silver, which, though not actually demonetised, is practically little more than divisional money now. Within less than twenty years, the proportion of five-franc pieces employed has dropped till it is now less than 4 per cent. of the ordinary circulation. Into the reasons which led to the suspension of the Latin Union I need not enter here; the subject will be referred to later. It is sufficient to say now that the suspension was one of the main causes of the recent fall in the price of silver, and incidentally of the disuse of the larger silver coins in France.

Again, in reference to the specie employed in common life, the departments of France in which the largest proportion of gold is found in circulation are those which are the most backward in economic development; the proportion of gold in circulation is in inverse ratio to the wealth of the departments.

The circulating medium in France is really a gold circulation, worked for convenience through the medium of notes. The English method is more simple, and adjusts itself automatically to all the wants of the day. Some people have said that the gold stored in the issue department of the Bank of England, where the main stock of the gold held in reserve in this country is kept, is of as little use as if it were at the bottom of a mine. But this is not by any means the case. The gold in the mine is out of sight and inaccessible. It could not be used to meet any immediate requirements. The gold reserve in the Bank of England is the pivot on which all our business turns. Scarcely adequate as it is to present requirements, it has been rightly regarded as the most hard-worked money in the country. It is held to meet any sudden demand that may arise, whether for differences between exports and imports or the balance of a foreign loan or any need of the trade of the country. But between England and

France there is, in this respect, a striking contrast. At the Bank of England the gold held in the issue department varies generally between 32,000,000l. and 33,000,000l.; at the Bank of France the gold held now ranges from 100,000,000l. to 110,000,000l. sterling.

The circulating medium in the United States corresponds in character, to a great degree, with that in the United Kingdom; but the former comprises a larger quantity of notes, including both those of the Government and those of the National Banks. To a considerable extent it consists of cheques, which are said to be drawn for even smaller sums than in this country, and certainly are drawn on a far larger number of banks. The banking system in the United States does not follow the same lines as that in the United Kingdom. Here we find a small number of banks with a large number of branches. As years go by, amalgamations among banks in England and Wales are gradually absorbing the smaller banks into larger concerns, exactly as happened many years ago in Ireland and Scotland. In the United States, banks without any branches are the rule; and to this rule there are, at this moment, no exceptions. That arrangement, combined with the enormous area of the United States, has rendered a central clearing house, like that of the London bankers, impossible; but the principle is the same. In this country, all the records kept of the amounts of cheques passed or in circulation show an increasing use of cheques, and an increasingly large number of very small cheques. The same circumstances are believed to be operating in the United States; and naturally so. There is no method of remitting money so economical and so convenient. Wherever introduced, the system is certain, if the conditions are favourable, to expand. The volume of the exchanges of the ninetyeight clearing houses of the United States-for clearing houses are numerous there-amounted in round figures for the year 1904 to over 20,000,000,000l. This is much larger than the amount of the London clearing, the deposits of the banks of the United States being fully twice as large. Owing to the number of clearing houses, and the fact that there is no central bank in the United States, with which, as in England, all the clearing banks could keep accounts, the specie employed in settling