Almost all men in commerce are under Obligations: that is they accept Bills of Exchange which must be paid at a fixed time, under the penalty of commercial ruin. To meet these Obligations due by them, they have property of two sorts-Debts or Obligations due to them; and secondly Commodities. To meet their own Obligations, they must sell one or other of these kinds of Property. They must either sell their Debts to their banker, or they must sell their Commodities in the market. While Credit is good - that is while bankers buy Debts freely - they can retain their Commodities from the market, and watch their own opportunity of selling at a favourable moment. As their own Obligation falls due, they sell to their bankers some of the Debts due to them. Thus if Credit was always good, they might go on for ever, without the necessity of ever having a single piece of money paid into their account, or having any money at all beyond what is necessary for their daily petty transactions. But if Credit receives a check, and the banker refuses to buy their Debts, they must still meet their own Obligations under penalty of ruin. They are consequently obliged to throw their Commodities on the market, and sell them at all hazards: the supply of them becomes excessive and inevitably depresses the price. Traders who have Capital enough of their own to meet their engagements without discounting, are able to keep their Commodities back from the market until, the extra supply being exhausted, prices rise again, from the natural operation of the demand. Bankers, we have shewn, always buy the Debts of traders by creating Debts of their own, which are called their "Issues," and when bankers refuse to buy the Debts of traders they are said to "contract their Issues. "Consequently a contraction of "Issues," or of discounts, is generally followed by a fall of prices. And this fall in prices happening coincidentally with a contraction of Issues, is frequently supposed to be caused directly by the diminished amount of Currency compared to Commodities, which is to a great extent erroneous, because it is in reality caused by the extra quantity of Commodities, which a refusal to discount Debts causes to be thrown upon the market.

9. We see then how utterly impossible it is to ascertain the precise effect of the contraction of Issues of banks upon prices, because the change is principally produced by the quantity of produce which traders are compelled to sell to meet their engagements, when the negotiability of their Debts receives a check; and, of course, similar circumstances not only compel traders to sell, but prevent others from buying. Consequently the supply is greatly increased, and the demand greatly diminished. If however the holders of one commodity are possessed of much independent capital, and are not compelled to realise to meet their engagements, a contraction of issues would not affect them much. On the other hand, if the holders of another commodity were in general men who depended chiefly on Credit, and were compelled to sell at a sacrifice to meet their engagements, a sudden refusal to discount for them would cause an extraordinary quantity of their produce to be thrown on the market, and cause a ruinous depression of price.

It is the sudden failure of confidence and extinction of Credit which produces what is called in commercial language a "pressure on the money market," and which causes money to be "tight." When money is said to be scarce, it does not mean that, there is a smaller quantity of money actually in existence than before: there may be more, or there may be less in the country: no one can tell what the amount of money in existence is: but a great amount of Credit which serves as a substitute, and was an equivalent for Money, is either destroyed altogether, or is suddenly struck with paralysis, as it were, and deprived of its negotiable power, and, therefore, practically useless. A vast amount of Property is expelled from circulation, and Money is suddenly called upon to fill the void. When a new field of commercial adventure is found by sagacious discoverers, or a new market is suddenly thrown open by a change in the commercial policy of foreign nations the first adventurers usually reap enormous profits. As soon as this becomes known a multitude of other speculators rush into the same field, excited by the profits reaped by the first. Numbers of merchants and traders purchase commodities on Credit, that is they incur Obligations which they must discharge at a future day, in the hope that the returns will come in before the day of payment. But the immense quantity of goods poured in usually gluts the market in a short time, and, from the excess of supply prices tumble down often to nothing, so that the goods become unsaleable and either no returns at all come in, or such as are quite inadequate to meet the outlay. When this occurs it is called over-trading, and when this has been extensively practised, it is necessarily and inevitably followed by a great destruction of Credit, and a great demand for Cash. Thus Credit is destroyed faster than operations can be reduced in proportion. Those traders who have not received the returns they counted upon to meet their engagements, must raise money on any terms, and perhaps sell what property they have, at any sacrifice, to save themselves from ruin. The effect of this will be that Money, for which there is an intense demand, will rise greatly in value, that is discount will rise very high. But as a necessary consequence of such a state of things, a great quantity of goods will be thrown on the market, and their price will be enormously depressed. These circumstances will therefore produce a very high rate of discount, and ruinously low prices, which will continue until the excessive supply of goods is exhausted and confidence revives. In such cases as these, traders who have not sufficient Capital of their own to meet their engagements, and hold on their goods until prices rise, will infallibly be ruined. Under these circumstances the Kate of Discount bears no relation to the Rate of Profit. The use of ready money to persons who have over-traded, is of infinitely more consequence than the price they have to pay for it. It may be well worth their while to pay 15, or 20, or even 50 per cent, for the use of money for a temporary emergency, which may save them from ruin, and enable them to maintain their position.