10. A "banker" then having purchased either money or Securities from his customers by creating or issuing Eights of action, or Deposits, we have now to consider how the customer may operate upon these Credits. Every banker does business exactly in the same way, and when their respective customers begin to operate by means of Cheques, the following different results may ensue -

1. The actual money may be drawn out.

2. The Credit may be transferred to the account of another customer of the same bank.

3. It may be an order to pay another bank. But in this case if the Bank A is ordered to pay the Bank B so much, the chances are that B will be ordered to pay A very much the same amount. If the claims of the two banks on each other are exactly equal, the respective Cheques, or orders, are interchanged, and the Credits readjusted to the different customers' accounts accordingly, without any payment in money. If it should happen that the claims of all banks against each other exactly balanced, any amount of business might be carried on without requiring a single coin. If the mutual claims of the different banks against each other do not exactly balance, it is only necessary to pay the differences in coin.

We have seen that the transfer of a Credit from the account of one customer to that of another in a Bank is exactly equivalent to a payment in money. There is an office for the express purpose of effecting these transfers of Credit from one bank to another. This office is called the Clearing House, and we have given an account of it in a subsequent chapter. By its means all the Banks which make use of it are practically united into one huge Bank for the purpose of transferring Credits from one to another. During the course of the year 1874 upwards of £6,000,000,000 of Credits, or Debts, were interchanged, or transferred from different banks to each other, by means of the Clearing House. And just as Banks are brought into a closer degree of relationship with each other by such means, the less is the quantity of coin required to carry on the business of the country: or rather the more gigantic is the superstructure of Credit which may be reared up on a given basis of specie: and in fact the stupendous amount of Liabilities, or Credit, which the perfection of the present banking system of London has permitted to be erected on a small basis of specie, has already begun to inspire uneasiness among well-informed persons.

From the foregoing considerations we see that a merchant deals with Credit; but a banker is a dealer in Credit. A merchant brings his Debt3 payable some time after date, for sale, and by a flourish of his pen, the banker buys them in exchange for Debts payable instantly, which have precisely the same effect in commerce as so many sovereigns. He reaps exactly the same profit by creating a Credit in favour of his customer, as if he gave him the actual cash. And the Cheques drawn against these Credits so created by the banker circulate commodities exactly in the same way that Bank Notes do, which circulate commodities exactly in the same way that gold coin does. Consequently these Bank Credits, so created by the banker, are exactly equal in their practical effects to the creation of so much gold.

11. As we have seen that the nature of discounting bills of exchange is buying Debts, which are to be considered just like any other articles of commerce, it follows that the same laws govern their exchangeable relations as those of any other quantities. The first duty of a banker is to maintain his own position, which he can only do by maintaining a certain proportion between his cash and his promises to pay, or his liabilities: and that proportion must vary from time to time, according to circumstances. In time of a general failure of Credit, he must maintain a very much larger portion of Cash compared to liabilities than in times of general confidence. Under such circumstances, his duty is to contract his liabilities, which he must do either by refusing to buy Debts altogether, or else by giving a lower price for them i.e. raising the Rate of Discount. And a general rise of the Rate of Discount has a tendency to discourage the offering of Debts for sale, just as a low price of anything else discourages its being offered for sale, except by those who positively require the cash.

On the other hand this lowering of the price of Debts, i.e. this increase of the Value of Money, or the raising of the Rate of Discount, has an inevitable tendency to attract bullion from where it is more abundant, i.e. where the Rate of Discount is lower. Wherever Debts are to be bought cheap thither will bullion fly to buy them; wherever Debts are sold dear, that is wherever Money is to be bought cheap, thither will Debts fly to be sold, and there will competitors be to buy money. Consequently it is an infallible law of nature that whenever the price of Debts differs in two markets by more than sufficient to defray the expenses of sending bullion, it will cause an immediate flow of bullion to that market where Debts are to be bought cheapest, i.e. where the Rate of Discount is highest. That is to say, if the Rate of Discount at Paris is greater than at London by more than sufficient to cover the expense of sending bullion from London to Paris, Debts will fly from Paris to London to buy bullion, and Bullion will fly from London to Paris to buy Debts.

The exchangeable relations of Money and Debts will obey exactly the same Laws as the exchangeable relations of money and wheat. Consequently if left free and uncontrolled the price of Debts has a natural tendency towards equilibrium in different markets.