1. By issuing paper as the representative of money to excess.

2. By making undue advances on fixed capital.

3. By making the deposits in bank the basis of too many distinct obligations.

4. By the undue multiplication of bills of exchange and documents representative of money other than banknotes.

5. By the facilities, born of competition, afforded for purchasing all articles offered for sale without the obligation of paying for them immediately in cash.

Production may be increased largely at the same time that the floating capital which is necessary to its production is being rapidly transferred into fixed. In these circumstances production is carried on by the aid mainly of credit, which may be said to have broken its legitimate bounds. Then over-production will obviously result, consumption will largely increase as the consequence of speculative buying in response to a fictitious demand, and a revulsion in due course follows. The disastrous effects will be in proportion to the capability of all interested to bear the strain of the extreme tension which must be experienced in the credit market before a liquidation of all obligations is completed.

Trade being impossible without capital, it is obvious that every trader from the commencement has no sooner completed a few bargains than he perceives the advantages to be derived from getting as much trust or credit as he can from every one. He buys or produces to sell again; and the more he can buy without paying for it the better is his chance of doubling, trebling, or quadrupling his profits. Starting, therefore, with the best of all purchasing powers, hard money, he would no sooner have exhausted the capabilities of that medium in forwarding his views than the development of the intangible or paper medium would suggest itself. His business from that point is to impress everybody with the belief that he is possessed of much capital, or, in other words, that he is rich. If he can persuade other capitalists that he is rich, careful, and clever, which are all in their way different sorts of capital, he will obtain credit in proportion.

Discrimination in the giving of credit by professed lenders of money is of all businesses the most difficult, harrowing, and anxious. The position of an individual who offers his name in the money market as security is never known with the accuracy which a discounter would like to know it. When once a person has incurred a variety of liabilities as a consequence of having purchased a number of different commodities, his solvency or otherwise cannot be certainly ascertained until the goods have been sold and the liabilities liquidated. When a person is given credit consequently by a discounter or a bank buying the bills offered for sale with his name upon them, together with the names of acceptors and indorsers, if any, the purchaser of the paper has to take the risk of the possible great depreciation in the value of the commodities which are referred to in the bills as the " value received." The gradual growth, therefore, of the credit system which has enabled a trader with ten thousand pounds to purchase commodities for ten times the amount has, as was certain to be the case from the beginning, resulted in a vast quantity of commodities being nominally bought that could not be sold at a profit, but on the contrary must be sold at a loss. When the trading community has got a certain way out of its depth on paper the collapse ensues. The stage of crisis has been reached.

The establishment of institutions whose sole business is lending would, as a matter of course, be fanning the flame which produces inflation in the credit market. The Scotch banks have made their position and much of their money by selling credit, and the system has been imitated abroad. A trader either commencing business, or in want of more capital, applies to a bank who gives him so much purchasing power on the security of his own and one or two other approved names. The principle upon which banking was first started is thus reversed. Instead of keeping a balance the customer has an overdrawn account. Such a business pays extremely well in ordinary times when, on an average, one repays what another draws out. But, on the other hand, in times of great scarcity and dearness of money the bank must be very careful or serious difficulties may arise from a large number of those having such overdrawn accounts drawing out money simultaneously, while little or none is paid back. The privilege of issuing notes, which is a monopoly with the Scotch banks, enables them to work this cash-credit system more profitably than would otherwise be the case.

Our own legislators have thought it wiser on the whole to restrict the credit which note-issuing banks might otherwise enjoy, while in the case of the Bank of France the only condition imposed is that the notes shall be redeemed in legal-tender metal currency on demand. Whether this latter system be the wiser has been the subject of long and profound debate among the most experienced of English economists and financiers, the result being the existence still of the Act of 1844. The question is no doubt a very difficult one upon which to form a sound opinion because of the different methods of conducting business in England and France. For our own part we think the restriction policy a wrong one, and we maintain that the working of the Act of 1844 proves it to be a failure. The management of the Bank of France is acknowledged on all hands to have been for many years exceedingly efficient, but we should not attribute entirely the success of the system of note issues adopted by that institution, and sanctioned by the Government, to the efficient management. The Bank of France keeps more spare metal cash idle than other European banks in proportion to its liabilities, and French people generally keep more cash in their safes than other nations, and especially more than English individual traders. Money panics arise, as every one knows, from the untimely exhaustion of cash reserves, and panics are consequently less likely to occur in France than elsewhere; and further, the question of restrictive measures as regards note issues in respect of the national bank of that country need never arise. We should not, however, be disposed to support a nonrestrictive policy in any country having a plurality of issuers, whose individual responsibility leaves the smallest room for doubt. In France the national bank is the only issuer, and being properly managed restriction is unnecessary.