never fades. There is a touchstone which will show its worthlessness in an instant. Is the gold lent? is it put into the hands of borrowers? If it is lent, then the doctrine is sound: it is an article in demand; the larger the supply, the greater the consumption of it; borrowers never fail, and the greater its abundance, the lower the price at which it is lent on hire. Is it lent, then? It is not; and the bubble assertion bursts. The propounders of this doctrine, the whole City, the City articles of the Times, and of all the other newspapers, the organs of the banking community, the Economist, every commercial and financial authority agree in this, in feeling satisfaction-not on the gold being lent, and being out doing its work in the world, not at all-but on its being locked up in the vaults of the Bank of England, and swelling the figures of the weekly reports of the Bank. That this metal placed there does anything more for lending than when it lay in its Californian mine is simply an unintelligible proposition-unintelligible, I am confident, even to its utterers. I ask for an explanation, for a theory on which this operation can be made comprehensible by any understanding. I have never seen one, and I am sure that I never shall. There is a theory of money which is to be found in every work on political economy, perfectly intelligible, perfectly adequate to every fact known. It says that money serves to exchange goods, and every ounce of gold which exchanges goods falls under this theory. But ingots buried in a vault do not exchange goods, nor are they lent, consequently there is no other possible view to be taken of them but that of treasures thrust aside into a lumber-room. As to their having any action on trade and lending, that is simply inconceivable. The

doctrine that it is good to send England's wealth abroad to buy gold, and then to plunge that gold into a cellar, is not a theory: it is destitute of reasoning; it is no intellectual summing up of facts; it is a flat contradiction to the testimony of men's eyes and to common sense, and it is accompanied by no explanation which can render it intelligible. For me, it is an irrational absurdity.

But bankers, it is replied, lend money, and gold is money; does not, therefore, more gold mean more money to lend? No, it does not; the same crushing fact that the gold is not lent, but is buried in a cellar, scatters that argument to the winds. Moreover, this language indicates that those who utter it are profoundly ignorant of the nature of a bank. A bank does not deal in money, as I have shown elsewhere,1 if by money is meant cash, gold and bank-notes. It deals in debts, written on pieces of paper. It collects the value of these debts, and then transfers it on loans to another set of persons. But to effect this, cash is very little needed-only to the extent of three-parts in a hundred of the bank's business. When a bank makes advances to traders, it does not give them in cash; money has nothing to say to it-money, that is, counted out on the counter. When a bank has the 3 hundredths of coin provided, money can do no more for it. The 97 hundredths of its business are accomplished by lines in ledgers and pieces of paper. As fact demonstrates, additional cash brought to it, whether gold or notes, marches forthwith to the vaults or the lockedup drawer.

But is it not certain that a banker feels a vast deal greater confidence in lending when he stands upon an enormous pile of gold than

when a scanty reserve gives keenness to his fears? That may be; but what does it amount to even at the best? It comes to this, that when some people are good enough to leave their gold in his hands, he lends more freely-not additional resources supplied by his augmented reserve-but his other and previously existing means. Upon this view let me ask this question: In the name of common sense, are the people of England to be instructed to hail with satisfaction the departure of their wealth-their capital-to buy a metal, in order solely that their bankers may feel comfortable in having a quantity of other people's gold stored in their cellars? Will anyone call this science? It would be better to educate the banker, and to let him see that this gold is not needed, and that if he carries on his business wisely, and places his means in proper investments, he need never have, till the Germans come over to seize the Bank of England, the slightest misgiving about buying as much gold as he can ever possibly want. If the wealth sent abroad to purchase the gold-a thing which bankers and traders never seem to dream of were repaid, not with the unneeded metal, but with corn and cotton, and wool and silk, the capital of the nation would suffer no diminution by the exchange, and the annual income of the country would be proportionately increased. The bills and cheques of the importers of these commodities would do everything for the banker that the gold might do but never does.

But do not the grand authorities teach the banks that the proper remedy for arresting a drain of gold is to raise the rate of discount, and thus to attract capital into the country? They do but they teach without knowledge. There is no harm whatever in any drain of gold-as a drain. England is

never, at any time, short of a sovereign or an ingot. The cause which creates the drain may undoubtedly raise the rate of discount, but never the departure itself of the gold. Still, the bankers may continue to urge, the rise in the rate of discount may and does determine foreign capitalists to send money to England: it may thus turn the exchanges and cause the outflow to be turned into an inflow of gold into the Bank. It does; but in good sooth what does this operation mean? That instead of calling on their debtors to repay advances or selling securities, the Bank is to derive its supply of gold from abroad; but by an operation which raises the rate of discount to every trader in the land who takes his bill to a discount office. And the traders are asked to be fools enough to rejoice over this supplying of the Bank's wants at their own expense! And the authorities call this gold so bought abroad capital. If there was not enough already in England, and it was really needed to carry on the trading business of the nation, then undoubtedly it would be capital, as truly so as goods purchased from the Continent. But there is always enough: so it becomes a supply in excess of the demand, and instantly ceases to be capital. The misuse of the word capital by writers on money deserves the strongest condemnation. When intellectual writers, like the Economist, speak of the funds at the disposal of bankers, the sums inscribed in the ledgers, as capital, they prevent the understanding of the nature of capital. They render science impossible. A bank pos sesses no capital except the gold existing in its reserve, if it be not in excess.

All its other means are claims, legal rights, written words, evidence at law of debt-nothing else. The debtors of the bank possess all its capital, and that in

the form of goods, which they have bought with the legal claims for money transferred to them from the bank.

But there is one argument more with which all perception of the nature of currency and the action of gold is arrested. It is all very fine, exclaim the authorities; science may say what it pleases; but we see the facts, and we know that a large reserve of gold means low rates of discount, and a low reserve the reverse. Hence we learn to regulate prices, to control loans, and to guide the rates of interest by managing the circulation. The fact, thus insisted on by the practical men, is a fiction; it has no existence. It is not true that loans and rates of discount are governed by the reserves of gold, still less by any regulation of the currency. Currency has nothing to do with loans and discount; it would be a marvel if it had. It is a hopeless task to show that any movement amongst the three-parts of a bank's receipts, which are composed of cash, can exercise a dominant influence over the other ninety-seven -the ninety-seven which are the fund with which bankers make virtually all their loans. To explain such a force would be as hard as to discuss perpetual motion. But this force is as big a myth as the perpetual motion. Want of space prevents me from giving the proof here. I must refer to a paper which was read to the Chamber of Commerce of Liverpool in September of last year, and was published in the final number of the North British Review. I showed from recorded figures that the rate of discount varied in no regular proportion whatever with the rise or diminution of the reserve; that all sorts of rates of interest accompanied all sorts of reserves; that, as in May 1866, a gigantic increase of lending can be made, without any increase of reserve; and finally, that no rela

tion whatever of cause and effect exists between the amount of the Bank's reserve or its rate of discount on commercial bills. The figures demonstrated that an assumption, for which no rational explanation can be devised, finds no warrant in the records of fact.

I had written thus far, when the Times of August 11 reached me. Its City article on that day contains a wonderful illustration of the true nature of currency and of the distressed cry of perplexity which stubborn facts at times extort from the strongest of gold theorists. The assumption that gold is always a good thing to import, that it does good to the money-market, augments reserves, supplies means for lending, and diminishes the rate of discount, has hitherto had no sturdier nor more persistent advocate than this writer in the Times. Now, let us hear what he writes on August 11: 2,357,975l. have been withdrawn from the Bank since July 26.' A stupendous sum to disappear in a fortnight; the writer feels it to be

So.

So

He feels, too, that agitation in the money-market ought to have made its appearance, that loans ought to have become stiffer, the tendency of discount to have pointed to a rise, and merchants to have been uneasy about the terms to be exacted on their bills. he goes on to remark: 'A movement which in ordinary times would exercise an immediate influence on all the markets.' Here is the perplexity: the expected occurrences do not show themselves: what is the explanation? But for many months past the position of the Bank has been one in which the gradual influx or efflux of four or five millions was to be regarded as an unimportant contingency.' Four or five millions taken away unimportant! Why, that is exactly my doctrine, that currency has nothing to do with the money market, and it is called heresy. This

is nothing less than an actual abandonment of the gold-theory. The Economist told us a little earlier that the export of five millions for the French indemnity was to produce strong effects in the moneymarket of England; and here is his brother theorist of the Times, saying that no effects at all have been produced during many months. The conjurors and wise men called for wonders, and the wonders will not come. The practical men are contradicted by facts, and they know that they are so. However, common sense begins to dawn upon their understandings. In the present position of Europe large sums may come and go without conveying the slightest indication of a commercial character.' The writer has made the great transition: he has passed from a law of cause and effect found in the state of the currency to indications furnished by commercial events. The pretension of doctrine and knowledge is given up, and we are brought to mere observation of occurrences, much as the sailor, ignorant of all science, looks at the clouds and guesses what the weather is likely to be. 'Pertur

6

bations,' in the stock of gold, however vast, have demanded little notice, unless they be accompanied by symptoms of an unsound tendency in the general course of our commercial or financial affairs.' The full truth is here stated, though probably the writer will not admit it, when put in other words, nor confess his conversion to the only view which common sense can hold, that ease and difficulty in the money market and rates of discount depend, not on the quantity of coin and ingots stored at the Bank, but on the situation of capital. Unsound trade, unsound financial practices, capital destroyed by expenditure which is not reproductive, deficient harvests, bad cotton crops, and other forces of like nature, may act terribly on the money-market; but never gold, unless it he the buying of too much of it, nor currency, nor bank-notes, nor any other instruments of exchange. These do not belong to the money-markethave nothing to do with it. They transfer goods from one hand to another; but they are not the goods, nor do they make them greater or fewer.

BONAMY PRICE.

DESPATCH ON THE MILITARY ORGANISATION OF PRUSSIA,

FRE

RENCH journals show what astoundingly erroneous notions exist in France of the military organisation of Prussia. The object of my present task is to detail the general features of this organisation. It will be necessary, first, to consider that of 1814, which has lasted, with a few minor changes, for forty-five years; then to point out the important reformations which were executed in 1859 and 1860.

Organisation of 1814.

After our misfortunes in 1814, Prussia had a population of ten millions, with a budget of two hundred and seventy million francs. With such means it was impossible for her to maintain a permanent army equal to that of the neighbouring great Powers. Consequently the officers appointed to organise the military forces of the kingdom strove to compensate for the scarcity of men and money by the application of principles of morality and justice; they ordained obligatory service for every subject.'

Witnesses of the important services rendered by the Landwehr in 1813 and 1814, thanks to its unbounded patriotism, the commissioners carried out a second (evi

VOL. IV.-NO. XXIV. NEW SERIES.

dently erroneous) principle, viz. that men who, during their youth, have served a certain time with the

colours, are capable, when called out for war, of amalgamation with regular troops. Whence the foundation of the Landwehr in 1814. In consequence of this fallacious theory, the army was essentially destined to become during peace the great school of war of the nation. One may say that its object was to create Landwehrmen.' It was decided that each annual contingent should serve a certain time in the standing army. But what should be the duration of service? Three years were considered as ample to give every man a necessary military training. It is difficult to recognise that this was the true belief of the organisers, for the probability is that such a brief term of service was forced upon them by the twofold influence of the annual contingent (40,000 men in 1814) and the small portion of the revenue which Prussia was able to allot for the maintenance of her forces (ninetyfour million francs).

But whatever the reason was, they fixed upon three years as the duration of effective service. After the lapse of these three years, the men served for two years in the Reserve, and then passed on to the Landwehr. The law of September 3, 34.2