Money and the Mechanism of Exchange
By William Stanley Jevons
In preparing this volume, I have attempted to write a descriptive essay on the past and present monetary systems of the world, the materials employed to make money, the regulations under which the coins are struck and issued, the natural laws which govern their circulation, the several modes in which they may be replaced by the use of paper documents, and finally, the method in which the use of money is immensely economized by the cheque and clearing system now being extended and perfected.This is not a book upon the currency question, as that question is so often discussed in England. I have only a little to say about the Bank Charter Act, and upon that, and other mysteries of the money market, I refer my readers to the admirable essay of Mr. Bagehot on
“Lombard Street,” to which this book may perhaps serve as an introduction. [From the Preface]
First Pub. Date
New York: D. Appleton and Co.
Westminster (authorized) edition.
The text of this edition is in the public domain. Picture of William Stanley Jevons: Photogravure after a photograph of W. Stanley Jevons, taken by Maull & Co., London., courtesy Liberty Fund, Inc.
- Chapter I. Barter
- Chapter II. Exchange
- Chapter III. The Functions of Money
- Chapter IV. Early History of Money
- Chapter V. Qualities of the Material of Money
- Chapter VI. The Metals as Money
- Chapter VII. Coins
- Chapter VIII. The Principles of Circulation
- Chapter IX. Systems of Metallic Money
- Chapter X. The English System of Metallic Currency
- Chapter XI. Fractional Currency
- Chapter XII. The Battle of the Standards
- Chapter XIII. Technical Matters Relating to Coinage
- Chapter XIV. International Money
- Chapter XV. The Mechanism of Exchange
- Chapter XVI. Representative Money
- Chapter XVII. The Nature and Varieties of Promissory Notes
- Chapter XVIII. Methods of Regulating a Paper Currency
- Chapter XIX. Credit Documents
- Chapter XX. Book Credit and the Banking System
- Chapter XXI. The Clearing-House System
- Chapter XXII. The Cheque Bank
- Chapter XXIII. Foreign Bills of Exchange
- Chapter XXIV. The Bank of England and the Money Market
- Chapter XXV. A Tabular Standard of Value
- Chapter XXVI. The Quantity of Money Needed by a Nation
Although we now distinguish money according as it is metallic or paper money, because paper has in recent times been universally adopted as the material for representative money, yet it is well to remember that various other substances have been used for the purpose. We may pass, in fact, by gradual steps from the perfect standard coins, whose nominal value is coincident with their metallic value, to worthless bits of paper, which are yet allowed to stand for thousands, or even millions of pounds sterling.
Token money, which we considered in Chapter VIII. (p. 67), is in some degree representative money, because it derives its value, not so much from the metal it contains as from the standard coins for which it can be exchanged. There is no need that a promise should be always expressed by ink and paper. It may be still more durably recorded by a die upon a piece of metal. Accordingly, while the monarchs of England down to the end of Elizabeth’s reign refused to debase their currency, as the notion seems to have been, by issuing such a poor metal as copper, the tradesmen supplied the want of pence by issuing tokens. These pieces were in the earlier centuries composed of lead, or latten, a kind of brass, or sometimes, it is believed, of leather. During the last century, again, they were issued in large quantities, chiefly in copper, and often bore an express statement that they served as promissory notes. Thus a well-executed piece, issued at Southampton in 1791, bears the inscription, “Halfpenny Promissory, payable at the Office of W. Taylor, R. V. Moody & Co.” A token struck by the Flint lead works in 1813, states the promise in different terms, thus—”One Penny Token, One Pound Note for 240 Tokens.” The variety of such promissory coins issued at one time or other is very great, and their study forms an important branch of numismatic science, as will be learnt by looking into such a work as Akerman’s “London Tradesmen’s Tokens.” In quite recent years small money was found to be scarce in New South Wales, and some tradesmen issued copper or bronze tokens which circulated until the year 1870, when their further use was prohibited.
The ancients were well acquainted with the difference between a standard and a token currency. The iron money of the Lacedæmonians was probably standard legal tender, for it is described as being heavy and bulky, and yet of small value. The iron money of the Byzantines, on the contrary, was token representative money. We shall find in the following section that pieces of money of the same nature as bank-notes were also employed by several ancient nations.
Early History of Representative Money.
Ancient nations were unacquainted with the use of paper money, simply because they had no paper. But it would be a mistake to suppose that they did not employ representative money exactly on the same principles as we use bank-notes. Some few particulars on the subject have long been known, but a recent article by M. Bernardakis in the
Journal des Economistes (vol. xxxiii. pp. 353-370) has added much to our knowledge, and made it quite clear that the ancients were more acute in matters of currency than we have given them credit for.
One of the very earliest mediums of exchange, as we have seen (p. 20), consisted of the skins of animals. The earliest form of representative money consisted of small pieces of leather, usually marked with an official seal. It is a very reasonable suggestion made by Storch, Bernardakis, and other writers, that when skins and furs began to be found an inconveniently bulky kind of money, small pieces were clipped off, and handed over as tokens of possession. By fitting into the place from which they were cut they would prove ownership, something in the same way that notched sticks, or tallies, were for many centuries used to record loans of money to the English Exchequer. We know by experience in the case of paper money, that if a people had become thoroughly accustomed to the circulation of these small leather tallies, they would in time forget their representative character, and continue to circulate them, when the government, or other holders of the skins themselves, had made away with the actual property. Such is no doubt the history of the leather money which long had currency in Russia.
It is impossible to ascertain what was the character of the leather money which, according to an obscure tradition, was in use at Rome before the time of Numa. There is no doubt that the Carthaginians had a representative leather currency, for Æschines the Socratic tells us that they used small pieces of leather wrapped round cores of unknown material, and then sealed up. Neighbouring nations refused to receive these curious pieces of currency, whence we may safely infer that their value was nominal.
It is however in China that the use of paper money was most fully developed in early times. More than a century before the Christian era, an emperor of China raised funds to prosecute his wars in a way which shows that the use of leather tokens was familiar to the people. The tokens having been made of the skins of white deer, he collected together into a park all deer of this colour which he could find, and prohibited his subjects from possessing any animals of the same kind. Having thus obtained a monopoly of the material, reminding one of the monopoly of the Bank of England in water-marked paper, lie issued pieces of the white leather as money at a high rate.
In the middle of the thirteenth century, Marco Polo found a paper money in circulation in China, composed of the inner bark of a tree beaten up and made into paper, square pieces of which were signed and sealed with great formality. These notes were of various values, and were legal tender, death being the penalty imposed upon those who refused to receive them. Counterfeiters likewise incurred the same penalty. Another traveller, who visited China in the fourteenth century, gives a very similar account of the paper money then circulating, and adds that, when worn or torn, it could be exchanged for new notes without charge. It is needless to follow out the long and doubtful history of the subject in later times, many particulars of which will be found in the article of M. Bernardakis, or that of M. Courcelle-Seneuil on Papier Monnaie in the “Dictionnaire de l’Economie Politique.” It may suffice to say that the history resembles that of most inconvertible currencies. The quantity of paper afloat increased so much under the Mongol dynasty as to cause great evils, and the Ming dynasty, continuing the issues, went so far as to prohibit the use of gold or silver money. The value of the paper fell so low, it is said, that one metallic cash was worth a thousand paper cash, reminding us of the present state of the paper currency in San Domingo. The result was a collapse and reaction in the fifteenth century.
Among other Asiatic nations, the Tartars and the Persians also understood the use of paper money, and Sir John Maundeville, who travelled in Tartary in the fourteenth century, gives the following account of the advantages which the Great Chan enjoyed in consequence. “This Emperour may dispenden als moche as he wile, withouten estymacioun. For he dependethe not, ne makethe no money, but of Lether emprented, or of Papyre. And of that money, is som of gretter prys, and som of lasse prys, aftre the dyversitee of his Statutes. And whan that Money hathe ronne so longe that it begynnethe to waste, than men beren it to the Emperoure’s Tresorye; and than thei taken newe money for the olde. And that Money gothe thorghe out alle the contree, and thorghe out alle his Provynces. For there and beyonde hem, thei make no Money nouther of Gold nor of Sylver. And therefore he may despende ynow, and outrageously.” Not a few great emperors and kings and even republics have imitated the Great Chan, and have spent their paper money, “ynow and outrageously.”
Reasons for the Use of Representative Money.
It is well to analyse and state exactly the reasons which may be given for the introduction of pieces of representative money. Several motives may be detected, and they have been of different weight in different cases. The origin of the European system of bank-notes is to be found in the deposit banks established in Italy from four to seven centuries ago. In those days the circulating medium consisted of a mixture of coins of many denominations, variously clipped or depreciated. In receiving money, the merchant had to weigh and estimate the fineness of each coin, and much trouble, loss of time, and risk of fraud thus arose. It became, therefore, the custom in the mercantile republics of Italy to deposit such money in a bank, where its value was accurately estimated, once for all, and placed to the credit of the depositor.
The banks of Amsterdam and Hamburg were subsequently established on a similar system, and a full account of them will be found in Adam Smith’s “Wealth of Nations,” Book IV., Chapter III., and in Hewitt’s “Treatise upon Money” (p. 121). The money placed to the credit of individuals in these banks was called
bank-money, and commanded an
agio or premium corresponding to the average depreciation of the coins. Payments were made by the merchants attending at the bank at a particular hour, and ordering transfers to be made in the bank books. The money paid was thus always of full value, and all trouble in counting and valuing it was avoided. The regulations of these banks were, however, in many respects complicated, and it is difficult to understand their purpose.
Inconvenience of Metallic Money.
Closely involved with the previous motive for the use of representative money is that of avoiding the trouble and risk of handling large amounts of the precious metals. In order to keep large sums of metallic money in safety a person must have strongholds and watchmen. The origin of banking in England has never been sufficiently investigated, but, so far as we know, it arose for the purpose of safe custody. While public and well-regulated deposit banks had existed for centuries in Italy, the only trace of such an institution in England was found in the mint in the Tower of London, whither merchants were accustomed to send their specie for safe keeping. Unfortunately, in 1640 King Charles I. appropriated as a loan £200,000 thus deposited, and the merchants, no longer trusting the government, and finding it dangerous to keep large sums of money in their own houses during the troubled times which followed, resorted to the practice of depositing their money with goldsmiths, who probably had vaults and guards suitable for the purpose.
As acknowledgments of the possession of such sums of money, the goldsmith gave receipts, and at, first these documents were special promises, like dock warrants. The practice arose of transferring possession by delivery of these receipts, or “goldsmith’s notes,” as they were called. Such notes are frequently referred to in Acts of Parliament, and even as late as 1746 most of the London bankers continued to be members of the Goldsmith’s Company. It is plain from the manner in which these notes were mentioned in some statutes that they had become general and not special promises—mere engagements to deliver a sum of money on demand, without conditions as to keeping a reserve for the purpose.
The Weight of Currency.
Even the weight of metallic money would be a sufficient reason for the use of representative documents in large transactions. In proportion as the legal tender is more bulky and inconvenient to carry about, is this motive more powerful. Thus, when the state of Virginia employed tobacco as the medium of exchange in the eighteenth century, the tobacco was placed in stores, and receipts on paper were handed about. Paper money was issued in Russia under Catherine II. in 1768, on the ground that the copper money, then forming the legal tender, was inconvenient. So much were these
assignats, or notes, preferred, that they at first circulated at a premium of ¼ per cent.
In the present state of commerce, even gold money would be far too heavy to form a convenient medium for making large payments. M. Chevalier states that it would require forty men to carry the gold equal in value to the Regent Diamond. The average daily transactions in the London Bankers’ Clearing House amount to about twenty millions of pounds sterling, which if paid in gold coin would weigh about 157 tons, and would require nearly eighty horses for conveyance. If paid in silver the weight would be increased to more than 2500 tons. For the conveyance and custody of very moderate sums in coin or bullion, individuals, or even large banks, resort to the aid of the Bank of England, whose officials are experienced in the matter, and have all facilities.
I find that a Bank of England note weighs about 20½ grains (1 1/3 grams), whereas a single sovereign weighs about 123 grains, and the note may represent five, ten, fifty, a thousand, or ten thousand such sovereigns with slight differences in the printing. If we were obliged to handle a medium of exchange actually embodying value, it would, ere now, have been necessary to employ precious stones, or some metal much more rare and precious than gold. But the use of representative documents is becoming so general in the most advanced commercial countries, that the portability of metallic money is a question of very minor importance. Gold already acts in England only as change for notes, and the question will arise whether it will long be needed even for that purpose.
Saving of Interest.
A further and very potent motive for employing representative tokens or notes, consists in the saving of interest and capital, which is effected by substituting a comparatively valueless material in place of costly gold and silver. Whenever a nation is in great straits for want of revenue, there is a great temptation to treat the metallic currency as a treasure to be temporarily borrowed for the necessities of the state. The ancient Greeks understood this as well as the modern English, Italians, or Americans. Dionysius, on this ground, obliged the Syracusans to accept tin tokens in place of silver coins, worth four times as much in metallic value. In the book on Economics, attributed to Aristotle, we are told that Timotheus the Athenian persuaded the soldiers and merchants to receive copper money in place of silver, promising to exchange it for silver coins at the close of the war. The Clazomenians made a similar issue of token money avowedly for the sake of the interest thereby saved. Being unable to pay twenty talents due to some mercenary troops, they were under the necessity of paying four talents a year as interest. They fell upon the device of coining iron tokens to the nominal amount of twenty talents, which they obliged the citizens to take in place of silver coin. The silver thus obtained was used for the immediate discharge of the debt, and there was a spare annual revenue of four talents, formerly absorbed in the payment of interest, which now enabled them in a few years to redeem the token money. Closely parallel to this is the case of the Guernsey Market, which was built without apparent cost. Daniel le Broc, the governor of the island, determined to build a market in St. Peters, but not having the necessary funds, issued under the seal of the island four thousand market notes for one pound each, with which he paid the artificers. When the market was finished and the rents came in, the notes were thereby cancelled, and not an ounce of gold was employed in the matter. There is, however, no mystery in this advantage of paper money.
Daniel le Broc, by issuing his market-notes, drove an equivalent amount of gold out of circulation, and thus effected a kind of forced loan out of the metallic currency of the island, without paying any interest for it. A similar gain of interest accrues upon all paper notes so far as their amount exceeds the gold held in readiness to pay them. The private and joint stock banks of issue in England in this way enjoy the interest upon a sum of about six millions and a half sterling, the Scotch banks upon two millions and three quarters, and the Irish banks upon more than six millions. The issue of paper representative money is beneficial to all parties, provided that it be conducted upon a sound method of regulation, a subject upon which the greatest differences of opinion exist.