Banking is intimately connected with the trade of this country, and it is important to show that such is the case. If the trade of the country had not progressed, banking would not have attained its present position. The rapid growth of English trade during the present century is shown by the enormous increase in the imports and exports, in the revenue, and also by the great number of ships built to carry produce to and from this country.

The abolition of certain laws enabled the merchant to send his goods to foreign countries without paying excessive duties, and when this country adopted the principles of free trade a remarkable stimulus was given to British industries.

In the year 1820 the London merchants petitioned for free trade. Now, the function of trade is to supply other countries with goods which they require. When the trade of a country is limited, the economy of production is also limited; but when the interchange of commodities between different countries is allowed without any restrictions, then those countries will become prosperous. Each country is dependent upon another for commodities. One will devote its energies to one industry, say the production of corn; and another will manufacture machinery for the use of the corn-growing country. We also get a full division of labour, if countries are not restricted by laws which prevent it.

These are the best arguments in favour of tree trade.

Free banking was also required, and consequently in the year 1826 it was enacted that joint-stock companies might be formed for the purposes of banking. Now, it is important to notice the want of more banking facilities consequent on the rapid growth of English commerce. The amendment of the laws relating to public companies, and known as the Limited Liability Acts, was the cause of the formation of a large number of companies for various purposes, although at the present time it is thought that certain alterations are required. Banking and insurance companies were not allowed to be formed on this principle until the year 1862, when it was enacted that any seven or more persons associated for any lawful purpose by subscribing a memorandum of association might constitute themselves a limited or unlimited company.

The abolition of the usury laws was another gain to banking and commerce. The Act of 1833 repealed the usury laws with regard to bills of exchange of three months and under. In the year 1837 this was extended to bills of twelve months and under, and in 1839 it was lawful to stipulate for any rate of interest upon which the parties might agree as to all personal contracts, but made an exception as to real securities. The usury laws were abolished entirely in the year 1854.

The tax on receipts was reduced to Id. in 1853, and in 1854 the stamp duties on bills of exchange were reduced. The payment of custom duties by cheques, instead of by gold and notes, was of some importance to the bankers, because it lessened their gold requirements. We must always remember that the state of trade in this country is a question of vital importance to the banking institutions. The amount of capital held at the disposal of a banker will vary with the prosperity of the country. He does not create capital, because his resources are obtained from those who deposit their capital with him. We might consider him as a broker between two principals : one deposits capital with him and he lends it to another whose solvency he guarantees. His position is, therefore, an important one, because he selects the borrower, and whether capital is utilised for a good purpose or sunk in unprofitable enterprises is dependent upon his ability to discern between a sound and an unsound borrower. The banker has also to discriminate between the mere speculator and the bond fide business man.

The rapid growth of trade required plenty of capital, and this could only be obtained through the medium of banks, which have become the great store-houses of capital. All the surplus money, say, of the agricultural districts, finds its way through the medium of banks into manufacturing districts where it can be utilised. When an industry is prosperous then bills of exchange representing transactions in that particular trade will be held by banks as security or otherwise. If the trade of any industry suddenly becomes bad, then there will be less bills representing it. Capital which has been utilised in that particular industry will find its way to some other trade in a more prosperous condition. The advantage of this large floating capital stored up in banks cannot be over-estimated, because without it we should not be in such a good position to compete with other nations or be able to carry on the production of commodities so extensively.

One of the chief reasons why our trade is so great is that there exists a great abundance of floating capital, which can be obtained from the bankers at a low rate of interest. We can easily see how the banker is dependent upon the trade of the country for capital to carry on his business. If trade is bad, then there will be little accumulation of money in banks, but if good, then the capital in banks will be increased. Sometimes, however, the banks may have an accumulation of capital, but in consequence of depressed trade their is no demand for it.

Another important point to be noticed in connection with commerce and banking is the mode of carrying on business in the present day. We might say that modern trade is transacted by means of borrowed capital. A man of ability can, as a rule, obtain accommodation from his banker, who will discount his bills. Thus, the capital of a trader may only amount to £2000 or £3000, yet his transactions would be far in excess of that amount.

The trader carries on business in the present day either by obtaining advances on the goods bought or by discounting bills received for goods sold. The difference between cost of production and the interest paid to the banker would constitute his profit. This method of transacting business is, however, quite of recent origin, because years ago it was not deemed prudent to trade by means of borrowed capital.

The connection between the foreign trade of this country and banking has been considered by various committees of the House of Commons at different intervals, from 1800 to 1847.

The results of foreign trade are shown by the foreign exchanges or the settling of accounts between different nations. By this means the difference in value between the imports and exports is paid. There are also other payments to be made for public loans, investments, etc., to foreign countries. The excess or balance either for or against this country must be paid in gold, the only commodity which will settle international indebtedness.