But a Government may employ indirect agency and demand a share in the profit of a function which no one can distinctly claim as his own, and which naturally falls to the State as supreme over all public actions. Banks are the only institutions with whom it can negotiate for the performance of this service; for banks alone can deal with the funds received in exchange for the bank-notes and employ them. By such an arrangement the nation obtains the full benefit of the difference of cost between the two tools, gold and paper. The wealth saved by using the paper tool of exchange, by means of a bank, is retained in the country as capital, reproducing itself incessantly in the products it creates. Here we discover how and within what limit the issues of convertible bank-notes can benefit trade, and find means for merchants wherewith to carry out their operations. The fund which paper issues supply for this purpose is the payment made by the public when it purchases these notes. I say purchases, for bank-notes are as much bought and paid for by the public as sugar or corn, or as the gold which, but for the notes, would have been purchased from the miners. An issuing bank, unless it is faithless to the law of its business, advances these funds to customers on loan, or - far more commonly and usefully - on the discount of commercial bills. With the supply of purchasing power thus obtained on discount the merchant can buy, and those who sell are benefited. This, in very truth, is to employ the property which would have gone to purchase gold currency, but which is saved to the nation by the substitution of paper, as capital in the true economical sense of the term. It is wealth employed in producing other wealth. But this advantage has a limit: it cannot extend beyond the fund which the public by buying the bank-notes places at the disposal of the issuing bankers. Those amongst the public who use bank-notes paid to the bankers as much as they would have paid to the miners; the notes and the coin are both bought alike; but the property given for the notes, through the agency of the bankers, is placed in hands which apply it to industry as capital, and thus supports and enriches the nation, in addition to the currency service rendered by the paper substitutes. The question now arises, Is a bank entitled to issue bank-notes without control under the sole liability of paying them on demand, or is the State summoned to require security that the means of redemption shall be forthcoming when demanded? In the case of a bill or any other debt the State does not interfere with perfect freedom of contract. It does not say to a debtor that when he borrows he must pledge some definite property which will render the creditor safe. Is not the liability of the banker's fortune to its utmost extent sufficient also for his bank-note? It was not long ago the universal practice in England to emit bank-notes on this responsibility alone. The circulation of English country bank-notes, as well as those of Scotland and Ireland, rests on no other foundation. No one is bound to take the country banker's or the Scotchman's bank-notes; but if he does, the law gives him no other help than what it affords to every other debt. It will compel the debtor to pay with his property; but it takes no care that he shall have any property at all. Upon what principle, then, should an exception be made for bank-notes? Why should it provide for them property which is certain to pay them? On a principle upon which State intervention is constantly exercised and justified. It is this: that when the public is practically incompetent to protect itself, the State is warranted in coming to its aid with special legislation. Thus, in the manufacture of gun-barrels, in the moving and storing of gun-powder, in the management of passenger vessels, the minting of coin, the loading of ships, and other like matters, the law steps in with restrictions, sometimes with total prohibitions, and no one contests the propriety of its action. The issuing of bank-notes falls under this principle: the public is incompetent to enforce the safety which is necessary for the general good. The law gives no such help to a man who deposits his means with a banker, or accepts a bill or a cheque in payment. These are voluntary acts; the receiver or depositor knows perfectly well that he is bound to consider the honesty and the security of the man whom he trusts. It is otherwise with a shopkeeper who is offered the bank-notes which circulate all over the town, and still more so, with the person to whom a small bank-note is paid. He is under a semi-compulsion to take them. If the shopkeeper gives trouble by declining to take the ordinary currency, he runs the risk of losing his customer, who turns away to another shop or store. Bank-notes circulate largely among the poor and uneducated, and when the bank breaks, the loss is severe and distressing. These facts supply ample warrant to the State to require of issuing bankers, not only that they shall pay their debts to the utmost extent of their fortunes, as any other person, but further that they shall lodge such security as shall always provide for the payment of the debt acknowledged on the note.
A guarantee for the solvency of the notes may be obtained in various ways, but none seems so natural and so simple as a deposit of Government securities with some office of the State. It combines two advantages - safety, and a natural and fitting profit for the banker from the interest accruing on the bonds or stock. The old Exchequer Bill of the English Government was an excellent specimen of this kind of security. It could always be paid in for taxes, bore a daily interest, and was thoroughly trusted, and with reason, by the whole community. England has dealt with the problem on the principle here laid down in the Bank Charter Act of 1844; but as this statute will require special discussion, it is best not to break ground upon it in this place.