Secondly, Of contraction. We have seen the forces that raise the currency higher and higher. We have not seen that it is done for the public good, or in obedience to a call of trade. We might suppose that there would be an unending progress in this direction, till any degree of expansion should be reached, inasmuch as the law of value does not govern a product into which the element of labor does not enter. It is not, therefore, the expense of multiplying it, nor is its increase limited by any consideration of utility. If every dollar of credit were called a million dollars, it would effect an exchange just as well. The only difference would be the work of adding six ciphers in accounting. No: the cause that limits the expansion, and finally produces contraction, is the liability of the notes to be presented for payment in money.

The occasion for this cause to operate may be almost any thing,— a political convulsion, an adverse balance of trade, a failure of some large trading or banking company, or an unaccountable mood of the popular mind.

We will take that one which is most common and sensible, — an adverse balance of trade. If it be large, the demand for specie which it occasions will create a profound sensation among the banks. With actual money, there is, under these circumstances, no reason for excitement or alarm: ten million dollars of the currency will discharge that amount of debt abroad, and the currency at home is reduced but so much. A mixed currency has, in itself, no power whatever to satisfy a foreign creditor. If ten million dollars are to be paid abroad, it must be taken from the specie of the banks; the basis of the currency is so much diminished, and the circulation must be curtailed accordingly ; that is, notes must be brought in, and not put out again till the basis is restored. If the proportion of specie, as is the case on an average in this country, is only as one to five of notes, then the export of ten million dollars abroad must cause a contraction to the extent of fifty million dollars at home. The removal of so much currency, and of that very part which circulates most actively, causes stringency; and stringency causes suspicion. Let another ten millions be called for out of the specie basis, and affairs will become very critical. The legitimate effect of the export, so far, would be to contract the currency one hundred million dollars; but another cause is introduced now. Vague apprehensions abound, everybody gets prudent, many are scared. Here is another reason for contraction. With a value currency, the fact that it was especially wanted would be a reason why it should stay. Not so with credit money: it won't bear to be looked in the face.

It is hardly necessary to trace the course of contractions, they are so familiar to the American mind.

The banks know their own position better than any one else. They understand precisely what they must do. They act instantaneously. They curtail their loans. They know that trouble is at hand, and they propose to meet it in the best way for themselves. They know that their notes may now prove their ruin, and they propose to get them out of the way as fast as possible.

There are two classes of banks: —

1st, Those who transact all their business in an honorable manner, and, so far as the nature of the currency they issue will admit, on a secure basis. They are careful not to extend their loans beyond their means, and they keep a respectable amount of specie.

2d, Those who get out, and keep out, all they can, and carry their circulation, deposits, and loans as high as possible, without regard to the specie in their vaults. This class is numerous, especially among those of small capital. They rely on their baseless circulation for extraordinary profits.

In case of a demand for specie, the latter class are obliged to call for assistance from the former, who, willing or unwilling, are equally obliged to give it. The " feeble banks " must be sustained, or the whole system will be suspected. If these be allowed to dishonor their notes, a run will be made at once on all the rest; and, having as we see only one dollar in five to pay with, they must, of course, soon stop paying altogether.

It should be borne in mind that these contractions and expansions are not imaginary, not possible only, not merely occasional, nor at all local, but occur frequently and everywhere within the field of such a currency.

It is commonly said that the banks only increase their issues as demanded by the wants of trade; that they extend their credits, because the public require them as business facilities.

If this were true, it would be of no consequence in the discussion; because, the laws of value having been disturbed in this matter, the demand is no longer normal. We have no longer the assurance that trade will call into use just that amount of currency which it needs.

But it is not true. The movement always commences with the banks. When, by a monetary revulsion, their circulation and deposits have been reduced so low that they feel safe in commencing another expansion, the panic being over, the banks begin to offer extraordinary inducements to their customers to borrow money. They will discount all good paper offered, even if it has a long time to run. It is not uncommon, at such times, to solicit the privilege of making loans.* As soon as this state of things takes place, all business men begin speculative operations; for prices have begun to rise. Speculation will give a still greater rise to prices, and cause a still greater demand for currency. The expansive force is now in full operation, and is sure to increase in power till by revulsion the equilibrium is restored.

But it may be asked, are there not natural tides in business, irrespective of a mixed currency? Certainly; but they are never aggravated or intensified until they end in panic or ruin. They are calculable and healthful. They are tests of business character. They may go to the extent of exposing the emptiness of bad concerns, but never destroy those that are good. When they occur, money will be wanted to pay debts; but, when one debt is paid, there is just as much money as before with which to pay others. The pressure does not annihilate any part of the currency. The party who receives a payment does not put the money away in vaults, not to appear again till the crisis is past. The means of payment can be reduced only by the amount actually sent out of the country. Gold and silver are as little injured by panic as by fire.