This however is a complete delusion. These banks never had anything like these sums paid up in money. Of course it is utterly impossible for any one to tell how much was ever paid up in money: but we believe we are safe in saying that not the half of these sums was ever paid up in money. At least half these gigantic sums of so called paid up Capital are nothing more than the Bank's own Credit turned into Capital.

In order to understand how this was done, we must explain how the Capital of the Bank of England was increased in 1697. The first subscription of £1,200,000 was paid up in money, which was all advanced to Government. In 1696 the Bank stopped payment, and its Notes fell to a discount of 20 per cent. In order to restore public Credit, Parliament in 1697 determined to increase the Capital of the Bank. But no part of the increased Capital was paid up in Money. In pursuance of this Act £800,000 were paid in Exchequer tallies, and £200,000 in the Bank's own depreciated notes which were taken at their full value in cash. Thus at the first augmentation of Capital, £200,000 of the Capital consisted of its own Depreciated Notes or Credit. And the Bank was authorised to issue an amount of Notes equal to the amount of this increase of Capital.

Precisely the same thing was done by the Bank of Scotland. In 1727 it increased its Capital. The subscription was paid up partly in the Bank's own notes. An outcry was made against this, but the Directors justly answered - "But the objectors do not at all consider this point, for the payments are many of them made in specie, and bank notes are justly reckoned the same as specie when paid in on a call of stock, because, when paid in, it lessens the Demand on the Bank."

Thus the Directors clearly understood that the Release of a Debt is in all respects equivalent to the Payment of Money. The Bank had issued its Notes. They were obligations, and the Bank was debtor to the holders of them. When the subscription was opened the subscriber might either pay Money, or release the bank from its Debts, and the two operations were absolutely equivalent; and hence we see that at every fresh increase of Capital, a certain quantity of the Bank's own Temporary Credit is turned into permanent Capital.

Thus the Parliament of England and the Directors of the Bank of Scotland from their own practical Commercial instinct, treated the Release of a Debt as equivalent to a Payment in Money : strictly in accordance with the doctrines of Roman Law, and the principles of Algebra.

Such are the methods by which the Capital of a Bank which issues Notes may be increased; but the Capital of a Bank which does not issue Notes may be increased by similar means. The essence of Banking, we have seen, is to make advances by creating Credits, or Deposits. Suppose that the Bank wishes to increase its Capital, and its customers wish to subscribe. They may either pay in Money, or give the Bank a cheque on their account. This is exactly the same thing as paying the Bank in its own Notes. It is the release of a Debt: and that Debt released then becomes increase of Capital. This is the way in which the Capital of all Joint Stock Banks is increased.

Similarly when large public loans are contracted for, a very large portion of them is always created by means of Credit. The customers of a Bank wish to subscribe to a loan: and they bring it a batch of bills to discount. They draw Cheques upon the Credits, or Deposits, created on the discount of these bills. These Cheques may be paid into the Credit of the great contractors at their bankers, and transferred an indefinite number of times, without ever being required to be discharged in money: they may in fact be discharged by being cancelled against other Credits.