30. If two persons are mutually indebted, each may claim that the Debt he has against the other shall be taken in payment of the Debt he has to pay. If the mutual Debts are equal, each is payment of the other, and the parties are released by Set Off or Compensation. If one Debt is greater than the other, a payment in Money of the balance only is necessary.

"We will now give a few examples of the operation of Compensation in the modern system of Credit.

Suppose that two bankers issue Notes, and each banker gets possession of an equal quantity of the other's Notes. Then of course each has a Eight of Action,+ £100, say, against the other, on the other's Notes, and each has a Duty to pay, - £100, his own Notes. While the Notes of each are in the hands of the other, there are of course £200 of Rights of Action, or Credit, or Debts, or Economic Quantities in existence. But when they meet to adjust the payment, each transfers to the other the Right of Action he has against him, in satisfaction and payment of the Debt due from himself. By this means each has the Right of Action against himself, and the Duty to pay himself. And thus as we have seen already both Contracts, or Obligations, are extinguished; and the £200 cease to exist as Economic Quantities.

So as another example, we may take the case of a banker discounting a merchant's Acceptance, and issuing Notes. Suppose that when the merchant's Acceptance falls due he has got into his possession an equal amount of the banker's Notes. When the banker demands payment of the merchant's Acceptance, the merchant tenders him an equal amount of his own Notes. Each, then, has now got the Right of Action and the Duty to pay himself, vested in himself: and consequently the two Contracts or Obligations are annihilated.

Or suppose that two merchants have given Acceptances to an equal amount, and payable on the same day, and that each Acceptance falls into the hands of the other merchant. Then on the day of payment each tenders to the other his own Acceptance in payment of the Debt due from himself. Each has then the Right to demand from himself and the Duty to pay himself, vested in himself: these two Quantities cancel each other as before, and the two Contracts or Obligations are extinguished.

Or suppose that a banker discounts the Acceptance of one of his customers: on the day it falls due he simply writes off from his customer's account the amount of his Acceptance. Thus these two Debts mutually cancel each other as before.

The earliest instance of which we are aware of the Theory of Compensation being carried out on a great scale is mentioned by Boisguillebert, the morning star of modern Economic science. Pointing out the true nature and use of Money he shews how Credit supplies its place, and describes the fairs at Lyons where the merchants used to balance their Debts. The merchants instead of making their bills payable every three months or so, by which they would have had to keep a large stock of bullion unemployed ready to meet them, made them payable only at the fair of Lyons. The bills circulated throughout the country, and got perhaps covered with indorsements. At a certain period during the fair the merchants met for a general settlement of accounts: and Boisguillebert says that by this means transactions to the amount of 80 millions were settled by simple Compensation, without requiring a sou in money.

Thus we see what a prodigious extension of the system of Credit, the means of extinguishing Credit by other methods than payment in money gives. And having explained how Credit is created, exchanged or sold, and extinguished, we shall in the two following chapters exhibit the mechanism of the great System of Credit.

The System of Credit is divided into two great branches, Commercial Credit and Banking Credit. In the first, merchants buy commodities by means of Credit, payable at a certain time after date. The second is where bankers buy these Commercial Debts, or Credits, by creating Credits of their own payable on demand. Commercial Credit is always created terminable at a fixed time, and is always intended to be extinguished at that time. Banking Credit is usually created payable on demand, and must be capable of being paid, if demanded. But it is not intended to be extinguished: on the contrary it is created with the hope and expectation that it will not be extinguished, but that it will continue in existence and do duty as Money. There is no necessity that it ever should be extinguished. It may be transferred from one account to another in the same bank, and from one bank to another to the end of time. It is perfectly-possible that much of the Banking Credit which exists at the present day, may have been originally created by the very first banks founded in this country, and there is no necessary reason why it should not continue to the end of time. Money is a very expensive machine to purchase and keep up: but Banking Credits cost nothing to create, and they may be absolutely indestructible.