Money and the Mechanism of Exchange

William Stanley Jevons
Jevons, William Stanley
(1835-1882)
CEE
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First Pub. Date
1875
Publisher/Edition
New York: D. Appleton and Co.
Pub. Date
1876
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Chapter XV

The Mechanism of Exchange

XV.1

Having now sufficiently discussed the subject of metallic money, we pass on to consider the devices which naturally develop themselves in a highly organized commercial nation, for the purpose of economizing the precious metals, or even avoiding the use of coins altogether. No sooner have a people fully experienced the usefulness of a good system of money, than they begin to discover that they can dispense with it as a medium of exchange, and return to a method of traffic closely resembling barter. With barter they begin and with barter they end; but the second form of barter, as we shall see, is very different from the first. Purchases and sales continue to be made in terms of gold and silver coin, but equivalent quantities of goods thus estimated are made to pay for each other. If ownership in gold or silver intervenes at all, it is in the shape of warrants or representative documents with which gold can be procured, if desired, but which are seldom used to procure it.

XV.2

At the outset we found that money performed at least two, and probably four distinct functions (Chapter III.); and, in a simple state of industry, it is convenient that the same metallic substance should fulfil all these functions concurrently. But it does not follow that this union of functions is the best possible arrangement under all conditions. We shall find that gold or silver always continues to be the common denominator of value, but that these metals cease to a great extent to be the actual medium of exchange which is passed about between buyer and seller. In a later part of the book (Chapter XXV.) I shall further show that money may with great advantage be replaced in its function as a standard of value for long periods of time by a Tabular Standard.

Progressive Development of the Methods of Exchange.

XV.3

Beginning with the primitive method of barter, a series of steps have been made towards a perfect and world-wide system of interchange of commodities, with the least possible use of the precious metals. We may classify the devices employed for avoiding the use of metallic money under five different heads, as follows:—

1. Replacement of standard money by representative money.
2. Intervention of book credit.
3. The cheque and clearing system.
4. Use of foreign bills of exchange.
5. International clearing system.

Representative Money.

XV.4

Metallic money, as we have seen, immensely facilitates and, so to speak, lubricates the operation of exchange. But nations employing gold and silver money have usually discovered, in the course of time, that tokens of small metallic value, or even pieces of leather and paper of nominal value, might be passed from hand to hand as signs of the ownership of coins. That which replaces gold, or silver, or copper money, is at first of a purely representative character. But, when a community has become thoroughly habituated to the circulation of a currency of this character, it is often found possible to remove the basis of valuable metal, which it is supposed to represent, and yet to maintain the valueless bits of leather or paper in circulation as before. Thus arises the abnormal phenomenon known as an inconvertible paper money. Such a currency is, however, never accepted beyond the frontiers of the state recognizing it.

XV.5

Merchants conducting large international transactions soon found out that great loss of interest and risk of loss of the whole money would arise, if they were to trade with actual specie. Hence they introduced the use, many centuries since, of bills of exchange, which are signs or certificates of debt, passed from hand to hand almost like representative money, and often accomplishing many acts of exchange by a single transfer of specie.

Cheque and Clearing System.

XV.6

There is yet a more potent way of avoiding the actual use of a medium of exchange, without encountering any of the inconveniences of barter. Those who frequently traded with each other, both buying and selling, found that it was absurd to pay a sum of money for what was bought, and then receive it back for what was sold. It was sufficient to estimate in terms of money the values of the articles exchanged, and then pay the difference, if any, in actual cash. The practice having grown up of depositing the metallic money not immediately wanted with goldsmiths or bankers, for safe custody, it was gradually discovered that an order to pay money would serve instead of the money; and that, if two persons trade with the same banker, they need not in their mutual transactions handle the money at all. A transfer in the books of their common bankers will effect the payment of any balance of debt. Bankers can in like manner arrange their mutual accounts, and in this way there has been gradually developed in this country and in America a vast system, which I propose to denominate the Cheque and Clearing System, whereby all the larger internal transactions of the people are arranged by a mere settlement of accounts.

XV.7

In this system London naturally becomes the monetary centre of the United Kingdom; but there is a further tendency to make London the banking of the world as regards all large and international transactions. It is found to be advantageous to deposit money in London, or to obtain credit and make bills payable there, rather than elsewhere. By such a concentration of banking operations, London tends to become the seat of a world-wide Clearing House. Such are the principal steps in the development of the mechanism of exchange, and we proceed to consider them In detail.

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