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By Root 1319 0

we shall observe in them an apparently quite irregular multifariousness. We shall observe that the kind and amount of cover of the money substitutes, especially those issued in note form, are regulated by a series of rules, constructed on quite different lines, partly by mercantile usage and partly by legislation. It is hardly correct to speak of different systems in this connection; that ambitious designation is little suited to empirical rules that have for the most part been founded on erroneous views of the nature of money and fiduciary media. There is, however, one idea that is expressed in all of them; the idea that the issue of fiduciary media needs to be limited by some kind of artificial restriction since it has no natural limits. Thus the question underlying all monetary policy, whether an unlimited increase of fiduciary media with its ineluctable consequence of a diminution in the objective exchange value of money is a thing to be encouraged, is implicitly answered in the negative.

Recognition of the need for an artificial limitation of the circulation of fiduciary media is, both on strictly scientific grounds and also on grounds of practical expediency, a product of economic inquiry during the first half of the nineteenth century. Its triumph over other views ended decades of such lively discussion as our science has seldom known, and at the same time concluded a period of uncertain experiment in the issuing of fiduciary media. During the years that have since elapsed, the grounds on which it was based have been subjected to criticism, sometimes ill founded, sometimes founded upon real objections. But the principle of limiting the issue of uncovered notes has not been abandoned in banking legislation. Nowadays it still constitutes an essential element in the banking policy of civilized nations, even if the circumstance that the limitation only applies to the issue of fiduciary media in the form of notes and not to the constantly growing issue in the form of deposits may make its practical importance less than it was some decades ago.

Limitation of fiduciary media also forms part of the money and credit system in India, the Philippines, and those countries that have imitated them, although in a different garb. No direct numerical proportion has been set up between the redemption fund administered by the government and the quantity of fiduciary media in circulation; any attempt to do this would have met with technical difficulties if only because it was impossible to calculate exactly what the quantity of fiduciary media was at the time of the transition to the new standard. But the further issue of fiduciary media in the form of legal-tender coinage is reserved to the state (it mostly requires special legislation) in a similar fashion to that in which the issue of token coinage and the like is regulated elsewhere.

5 The So-called Banking Type of Cover for Fiduciary Media

The expressions solvency and liquidity are not always used correctly when they are applied to the circumstances of a bank. They are sometimes regarded as synonymous; but orthodox opinion understands them to refer to two different states. (It must be admitted that a clear definition and distinction of the two concepts is usually not attempted.)

A bank may be said to be solvent when its assets are so constituted that a liquidation would necessarily result at least in complete satisfaction of all of its creditors. Liquidity is that condition of the bank's assets which will enable it to meet all its liabilities, not merely in full, but also in time, that is, without being obliged to ask for anything in the nature of a moratorium from its creditors. Liquidity is a particular sort of solvency. Every enterprise—for the same is true of any body that participates in credit transactions—that is liquid is also solvent; but on the other hand not every undertaking that is solvent is also liquid. A person who cannot settle a debt on the day when it falls due has not a liquid status, even if there is no doubt that he will be able in three or six months'