Or, lastly, instead of [capital] being afforded by persons not in business, the affording it may itself become a business. A portion of the capital employed in trade may be supplied by a class of professional money-lenders. These money lenders, however, must have more than a mere interest; they must have the ordinary rate of profit on their capital, risk and all other circumstances being allowed for. [For] it can never answer, to any one who borrows for the purposes of his business, to pay a full profit for capital from which he will only derive a full profit: and money-lending, as an employment, for the regular supply of trade, can not, therefore, be carried on except by persons who, in addition to their own capital, can lend their credit, or, in other words, the capital of other people. A bank which lends its notes lends capital which it borrows from the community, and for which it pays no interest.

Of late years, however, banks are generally not permitted to issue notes on their simple credit. That privilege has been so often abused in this country that now, in the national banking system, a separate part of the resources are set aside for the security of the circulating notes (as is also true of the Bank of England since 1844). It is not generally true, then, that banks now create the means to make loans by issuing notes by which they borrow capital from the community without paying interest. They do, however, depend almost entirely on deposits.

A bank of deposit lends capital which it collects from the community in small parcels, sometimes without paying any interest, and, if it does pay interest, it still pays much less than it receives; for the depositors, who in any other way could mostly obtain for such small balances no interest worth taking any trouble for, are glad to receive even a little. Having this subsidiary resource, bankers are enabled to obtain, by lending at interest, the ordinary rate of profit on their own capital. The disposable capital deposited in banks, together with the funds belonging to those who, either from necessity or preference, live upon the interest of their property, constitute the general loan fund of the country; and

the amount of this aggregate fund, when set against the habitual demands of producers and dealers, and those of the Government and of unproductive consumers, determines the permanent or average rate of interest, which must always be such as to adjust these two amounts to one another.' But, while the whole of this mass of lent capital takes effect upon the permanent rate of interest, the fluctuations depend almost entirely upon the portion which is in the hands of bankers; for it is that portion almost exclusively which, being lent for short times only, is continually in the market seeking an investment. The capital of those who live on the interest of their own fortunes has generally sought and found some fixed investment, such as the public funds, mortgages, or the bonds of public companies, which investment, except under peculiar temptations or necessities, is not changed.

§ 3. Fluctuations in the rate of interest arise from variations either in the demand for loans or in the supply. The supply is liable to variation, though less so than the demand. The willingness to lend is greater than usual at the commencement of a period of speculation, and much less than usual during the revulsion which follows. In speculative times, money-lenders as well as other people are inclined to extend their business by stretching their credit; they lend more than usual (just as other classes of dealers and producers employ more than usua!) of capital which does not belong to them. Accordingly, these are the times when the rate of interest is low; though for this too (as we shall immediately see) there are other causes. During the revulsion, on the contrary, interest always rises inordinately, because, while there is a most pressing need on the part of many persons to borrow, there is a general disinclination to lend.'

I do not include in the general loan fund of the country the capitals, large as they sometimes are, which are habitually employed in speculatively buying and selling the public funds and other securities.-MILL.

The rate of interest at such crises in New York has several times risen to 400 or 500 per cent per annum.

Rate of discount

This disinclination, when at its extreme point, is called a panic. It occurs when a succession of unexpected failures has created in the mercantile, and sometimes also in the nonmercantile public, a general distrust in each other's solvency; disposing every one not only to refuse fresh credit, except on very onerous terms, but to call in, if possible, all credit which he has already given. Deposits are withdrawn from banks; notes are returned on the issuers in exchange for specie; bankers raise their rate of discount, and withhold their customary advances; merchants refuse to renew mercantile bills. At such times the most calamitous consequences were formerly experienced from the attempt of the law to prevent more than a certain limited rate of interest from being given or taken. Persons who could not borrow at five per cent had to pay, not six or seven, but ten or fifteen per cent, to compensate the lender for risking the penalties of the law; or had to sell securities or goods for ready money at a still greater sacrifice.

The pernicious and hurtful custom exists in various States in this country of making any interest beyond a certain rate illegal. When it is remembered that legitimate business is often largely done on credit-until the proceeds of goods sold on credit are collected-the rate of interest from day to day is very important to trade. So, when there is a sudden demand for loans, a rate higher than the legal one will certainly be paid, and the law violated, if the getting of a loan is absolutely necessary to save the borrower from commercial ruin. The effect of a legal rate is to stop loans at the very time when loans are most essential to the business public. It would be far better to adopt such a sliding scale as exists at great European banks, which allows the rate of interest to rise with the demand. No one, then, with good security, need want loans if he is willing to pay the high rates; and those not really in need will defer their demand until the sudden emergency is past. Already in New York the legal penalty has been removed for loaning at higher than the legal rates when charged upon call-loans; and it has mitigated the extreme fluctuations of the rate in a market when financial necessity is contending against the law.

Except at such periods, the amount of capital disposable on loan is subject to little other variation than that which arises from the gradual process of accumulation; which process,

however, in the great commercial countries, is sufficiently rapid to account for the almost periodical recurrence of these fits of speculation; since, when a few years have elapsed without a crisis, and no new and tempting channel for investment has been opened in the mean time, there is always found to have occurred in those few years so large an increase of capital seeking investment as to have lowered considerably the rate of interest, whether indicated by the prices of securities or by the rate of discount on bills; and this diminution of interest tempts the possessors to incur hazards in hopes of a more considerable return.

The demand for loans varies much more largely than the supply, and embraces longer cycles of years in its aberrations. A time of war, for example, is a period of unusual draughts on the loan market. The Government, at such times, generally incurs new loans, and, as these usually succeed each other rapidly as long as the war lasts, the general rate of interest is kept higher in war than in peace, without reference to the rate of profit, and productive industry is stinted of its usual supplies.

The United States during the late war found that it could not borrow at even six or seven per cent. By receiving depreciated paper at par for its bonds it really agreed to pay six gold dollars on each loan of one hundred dollars in paper (worth, perhaps, at the worst only forty gold dollars), which was equivalent to fifteen per cent. This high rate was largely due to the weakened credit of the Government; but still it remains true that the rate was higher because the United States was in the market as a competitor for large loans. Now the Government can refund its bonds at three per cent.

Nor does the influence of these loans altogether cease when the Government ceases to contract others; for those already contracted continue to afford an investment for a greatly increased amount of the disposable capital of the country, which, if the national debt were paid off, would be added to the mass of capital seeking investment, and (independently of temporary disturbance) could not but, to some extent, permanently lower the rate of interest.

The rapid payment of the public debt by the United States, $137,823,253 in 1882-1883, and more than $100,000,000 in 18831884, has taken away the former investment for enormous sums of loanable funds, and to the same extent increased the supply in the market. Without doubt this aids in making the present rate of interest a very low one. Whether the rate will remain "permanently lower," however, will depend upon whether the field of investment in the United States is already practically occupied. We believe it is not.

The same effect on interest which is produced by government loans for war expenditure is produced by the sudden opening of any new and generally attractive mode of permanent investment. The only instance of the kind in recent history, on a scale comparable to that of the war loans, is the absorption of capital in the construction of railways. This capital must have been principally drawn from the deposits in banks, or from savings which would have gone into deposit, and which were destined to be ultimately employed in buying securities from persons who would have employed the purchase-money in discounts or other loans at interest: in either case, it was a draft on the general loan fund. It is, in fact, evident that, unless savings were made expressly to be employed in railway adventure, the amount thus employed must have been derived either from the actual capital of persons in business or from capital which would have been lent to persons in business.

§ 4. From the preceding considerations it would be seen, even if it were not otherwise evident, how great an error it is to imagine that the rate of interest bears any necessary relation to the quantity or value of the money in circulation. An increase of the currency has in itself no effect, and is incapable of having any effect, on the rate of interest. A paper currency issued by Government in the payment of its ordinary expenses, in however great excess it may be issued, affects the rate of interest in no manner whatever. diminishes, indeed, the power of money to buy commodities, but not the power of money to buy money. If a hundred dollars will buy a perpetual annuity of four dollars a year, a

It