Money and the Mechanism of Exchange

Credit Documents

Chapter XIX

Much mystery has been created on the subject of money by those who assert vaguely that credit can replace coins, and that we have only to print sufficient bills and other promissory documents in order to have an abundant circulating medium. Credit has been said to multiply property and to perform all hinds of prodigies. When we analyze its nature, however, credit is found to be nothing but the deferring of a payment. I
take credit when I induce my creditor to consent to my paying a month hence what might be demanded to-day; and I
give credit when I allow my debtor in the same manner to put off the liquidation of his debt. Thus credit involves, as Locke very accurately said, “the expectation of money within some limited time.” The debts, indeed, may consist of a definite quantity of any commodity. I may have to pay corn, pig iron, palm oil, cotton, or any other staple article, but, generally speaking, debts are debts of legal tender money.

Measurement of Credit.

In order to measure and define exactly the amount of credit which is given or received, and to estimate the present value of a debt, we must take into account at least five distinct circumstances, which are as follows:—

1. The amount of money to be received.

2. The probable interval of time elapsing before its receipt.

3. The probability that it will then be paid.

4. The rate of interest likely to prevail in the mean time.

5. The legal liabilities which it creates or involves.

Writers upon currency have been too much accustomed to mass together all kinds of credit documents, taking no account of the important results which may follow from very slight legal or customary differences. No doubt every kind of promise to pay money has a certain value, but the degree in which it may be made available to facilitate exchange varies exceedingly according to circumstances.

Bank-notes.

What we call a bank-note is a promissory note, issued by a banker, and binding him to pay the sum named therein to the bearer immediately upon demand. The note is transferable by delivery, so that the holder is like the holder of a coin, the owner
primâ facie, and as such can claim the fulfilment of the promise at any moment, within reasonable hours, without inquiry. The failure of the banker to pay the note when presented does not create any liability between the persons through whose hands the note had previously passed, so that the note is continually employed, like metallic money, in settling debts and removing liabilities. It is most important to observe that a bank-note being payable on demand bears no interest, and is never bought at a discount, except when the ultimate payment is doubtful. Hence the holder of a note has, like the holder of ordinary coins, no motive in keeping it, except to make future purchases. If a man has more notes than he expects to pay away in the next week or two, he will do best to deposit them in a bank, where they will be safer and at the same time bear interest. There is thus an inherent tendency in notes to circulate like coins, and to be kept down in amount to the lowest quantity consistent with the accomplishment of retail purchases.

Cheques.

A cheque payable to bearer is an order addressed to a banker, requiring him to pay the sum named to the bearer of the cheque on demand. Like a bank-note, it bears no interest, and is transferable from hand to hand without any formality, so that the holder is
primâ facie the owner. If there be no doubt at all as to the credit both of the drawer and of the bank on which the cheque is drawn, it is difficult to see why a cheque should be inferior to a bank-note as representative money, except that it is usually drawn for an odd sum. In some places cheques have been so used, and in Queensland at the present time, in the absence of coins and notes, the settlers pay their men in small bank cheques, which are received at the stores, and thus become the circulating medium of the colony. Obvious objections to this use of cheques may be pointed out.

It is impossible to be acquainted with the cheque forms of all banks, the signatures of those who draw them, and the credit of the drawers. If the public were in the habit of daily receiving and paying cheques without minutely inquiring into their validity, immense facilities would be given to the perpetration of fraud. Forgery would be easy but hardly requisite, since it would be better to obtain possession of a cheque book, and then fill up cheques for amounts exceeding the deposits in the banker’s hands. Every one accepting a cheque thus receives it at the risk of fraud or bankruptcy on the part of the drawer. There is, moreover, the possibility of failure of the bank on which it is drawn; for it is a well-understood point of law, that if the holder of a cheque does not present it in “reasonable time,” that is before the close of business hours on the day following the receipt of the cheque, he loses his claim against the drawer, if the bank on which it is drawn should happen to fail. The reason obviously is that the drawer loses the deposit which he left in the banker’s hands to meet the cheque, and should not suffer from the holder’s want of diligence.

The salutary effect of this law and of other conditions is, that cheques do not circulate in this kingdom in place of money, but are usually presented within one or two days of receipt. Hence they come to serve as mere instruments of transfer of money, and involve no considerable length of credit. Nothing can be gained by holding an ordinary cheque, for there is no interest, and something may be lost. Beyond the mere trouble of presentation, then, there is no motive to prevent a holder from at once getting coin or bank-notes for his cheque which, though paying no interest, are safer. Or still better, he may deposit the sum at his bankers, get a low interest in the mean tune, and draw a new cheque of his own when he wishes to pay the money away again. Experience shows that the latter is the most satisfactory course, the money being usually safer and more available in the hands of a good banker than elsewhere, and usually paying interest all the time. On this foundation is erected the extensive system of payment which will be described in the next chapter, and which may be called
the Cheque and Clearing System.

There are, indeed, many varieties of cheques. Bankers’ cheques are those drawn by one banker upon another, and are used as a means of remittance. If both the bankers concerned are of perfect credit, and the form and signature can be verified, such cheques seem to me to be in no way inferior to bank-notes as representative money. If two perfectly well-known banks were to arrange to draw cheques upon each other for convenient even amounts, and to issue these to their customers, it would effect a successful evasion of the law against the unlimited issue of notes. So great however is the force of habit, or the respect for law, that no such attempt is made, and bankers’ cheques are presented almost as promptly as any others.

Certified cheques, as employed in the New York trade, are a still nearer approach to a bank-note, for they are cheques which have been marked by the bankers on which they are drawn, as sure to be paid on presentation. Either the banker in certifying the cheque has funds belonging to the drawer which he can retain to meet it, or else he pledges his own credit that he will meet the cheque in any case. Such cheques are really promissory notes of the banker, and I can see no reasons why they should not circulate as freely as bank-notes, except that they are drawn for odd sums, and present few safeguards against forgery. The cheques of the Cheque Bank, which will be subsequently considered (Chapter XXII.), are equivalent to certified cheques, as they cannot be issued except against deposits which are retained until the cheque is presented.

Of late years the practice has become very general of making cheques payable to order instead of to bearer, and of crossing them so as to necessitate their presentation through a banker. The order may, indeed, be discharged by an open endorsement, which renders the cheque again payable to bearer, but there remains the possibility of a forged endorsement, concerning which difficult points of law have arisen. A general crossing need not interfere appreciably with the circulation of a cheque, but when crossed specifically for presentation through a particular bank, the cheque becomes practically an order to credit a particular individual, who keeps his account in that bank, with the sum of money named.

Bills of Exchange.

A bill of exchange is an order to a person to pay money to the legal holder of the document on a day indicated therein. If payable at sight, a bill does not apparently differ from a cheque or draft to order, except that it will be usually drawn upon persons of less credit than well-known bankers. If not payable at sight, the length of time intervening between the day named for payment and the day of issue may vary from a day or two upwards, and the money cannot be demanded in the mean time. Hence a bill generally bears interest, or rather is only bought at such a discount as will enable it to be held to maturity without loss. To estimate the liability of loss, some estimate must be formed of the rate of interest likely to prevail in the mean time, and the value of the bill will thus vary according to a multitude of circumstances. Bills of exchange may be made payable to the bearer, but as a general rule they are payable to a specified person, and transferred by endorsement to other specified persons. Thus every party concerned with a bill incurs a certain liability, which is not removed until it is duly paid. In several respects, then, a bill may differ from coined money, which bears no interest, and discharges instead of creating liability when tendered in payment of debts.

Interest-bearing Documents.

It is extraordinary that few writers on currency have remarked the deep difference between commercial documents which bear interest and those which do not. On this point turns the possibility of their forming representative money. For it is an essential characteristic of coin that it yields no profit by keeping it in the pocket or the safe. I may be obliged to keep money ready to pay debts, but in the mean time I lose the interest which I might receive by investing the sum in the funds, in bills, bonds, or even as a bank deposit. Hence money must be considered as a commodity which, as Chevalier says, is
in a constant state of supply and demand. Every one is always trying to part with it in a profitable purchase, and keeps as little in hand as possible. The same is even more true of bank-notes, cheques, circular notes, bills at sight, and a few other kinds of documents, all of which are payable on demand at any moment, so that no amount of interest can be assigned to them. Except so far as the payment may be doubtful, or the possession of the documents may involve the holder in legal difficulties, these documents have the characteristics of coin, and the amount held is kept down to the lowest convenient figure. Interest-bearing documents, on the contrary, are held in as large quantities as possible, because the longer they are held the more interest accrues. It is the principal business of every banker to hold a portfolio full of good bills, which really represent the investment of capital in industry. Government bonds, or bonds issued by public companies and corporations, do not differ from commercial bills except in the fact that they have very long, or even interminable, usance, and that the interest is paid at definite intervals. Such bonds represent the sinking of capital in fixed undertakings, and are therefore held as property by individual investors. They may be bought and sold for money, but are not money themselves. They rather necessitate than replace the use of money, since currency must have been paid at the first investment, and is repaid by degrees at the periodical terms fixed.

A number of schemists have urged from time to time, that, in addition to our ordinary currency, there ought to be an
interest-bearing currency. The first small issue of the French assignats bore interest, and about twelve years ago the United States government tried a similar experiment, which was soon discontinued. Persons have proposed to coin the whole National Debt into money, so that instead of some 160 millions of metallic and paper currency we might have more nearly a thousand millions. Mr. E. Hill has published a form of bank-note entitling the holder to one hundred pounds on demand, and to interest at the rate of 3 1/3 per cent. up to the time when it is presented, the amount of interest being tabularly stated on the form. It is obviously impossible, however, that any government should issue such notes, because whenever the current rate of interest rose above 3 1/3, and the value of the note accordingly fell below par, a profit would be made by presenting the notes for payment. Thus the government issuing such notes would have to keep a large quantity of coin in reserve to meet them, and would at the same time be paying interest on the whole of the notes. Thus there would be a loss of interest upon the whole reserve of coin.

The English government has rendered the National Debt as transferable as possible by authorizing, in terms of the Act of 33 and 34 Victoria, chapter 71, the issue of stock certificates. These certificates resemble the bonds of the United States and other governments. They have coupons for the payment of interest, and when not filled up with a name are transferable by delivery like bank notes. They are issued in exchange for Three Per Cent Annuities for even sums of not less than £50 and not more than £1000; and if the right to an annuity could be passed from one person to another as currency, these certificates would allow of its being done. But it is understood that a comparatively small amount of such certificates has ever been applied for. They are, I believe, used to some extent by bankers and others, who have to hold sums of money invested in the funds for short periods, and can save the cost of transfers by the use of certificates. The public at large are found to prefer the old method of registering their stock in the books of the Bank of England.

Definition of Money.

Much ingenuity has been spent upon attempts to define the term
money, and puzzling questions have arisen as to the precise kinds of credit documents which are to be included under the term. Standard legal tender coin of full weight is undoubtedly money, and as convertible legal tender banknotes are exactly equivalent to the coined money for which they may at any moment be exchanged, it has often been considered that these also may be included. But inconvertible notes are often made legal tender by law, and can discharge in inland trade all the functions of money. Are they not then to be included? The question will next arise whether cheques may not be as good as money.

All such attempts at definition seem to me to involve the logical blunder of supposing that we may, by settling the meaning of a single word, avoid all the complex differences and various conditions of many things, each requiring its own definition. Bullion, standard coin, token coin, convertible and inconvertible notes, legal tender and not legal tender, cheques of several kinds, mercantile bills, exchequer bills, stock certificates, etc., are all things capable of being received in payment of a debt, if the debtor is willing to pay and the creditor to receive them; but they are, nevertheless, different kinds of things. By calling some money and some not, we do not save ourselves from the consideration of their complex legal and economical differences. Bullion is evidently not coin, but can be turned into it at little or no cost, and will make foreign payments almost as well as coin. Token coins are not standard coins, and will not make foreign payments, but are legal tender for small sums, and may be readily exchanged for standard coin at little or no loss. Bank of England notes are not exactly coin, but can be readily turned into coin by those who dwell near the Bank of England, and are received as equivalent to coin by other persons. Cheques are not coin, but orders to receive it on demand, and are valuable in proportion to the probability that the sum will be received. Accepted bills are an engagement to pay coin at a day named; if we overlook the possible failure of the acceptor to pay them, they are, as it were, deferred money. A certificate of consolidated stock entitles the holder to an annuity, that is, to quarterly sums of money.

We get back, in short, to that with which we started. Standard legal tender coin is that in which all commercial transactions and documents are expressed, but according to infinitely various circumstances, the receipt of the money is more or less probable, more or less deferred, more or less involved in legal complexities, and also variable in amount, as interest is or is not to be received in addition. All other commercial property, mortgage deeds, preference shares and bonds, and ordinary shares, resolve themselves into more or less probability of receiving coin at future dates; and thus we pass insensibly from the golden sovereign in hand to the most flimsy chance of receiving gold which is still like the bird in the bush.

The word
cash is used with exactly the same ambiguity as
money. Originally cash meant that which was
encaissé, i.e. put into the chest or till. Strictly speaking, it should consist of actual specie, and the word is used in some English banks to include only coin of the realm. But I find by actual inquiry that bank cashiers use it with every shade of meaning. Some take Bank of England notes to be cash. Good cheques upon a bank paid into that bank are evidently as good as cash. Others go so far as to include cheques upon other banks of the same town, and even country banknotes are sometimes included in cash. The question is evidently one of degree, and cannot be settled except by the general adoption among cashiers of some one arbitrary line of definition.

In ordinary life we use a great many words with a total disregard of logical precision. Who shall decide, for instance, what objects are to be included under the names
building and
house? Let the reader attempt to decide which of the following objects is to be considered a house, and why?—namely, stables, cow-houses, conservatories, sheds, lighthouses, tents, caravans, hulks, sentry-boxes, icehouses, summerhouses, and parish pounds. The difficulty is exactly analogous to that of deciding what is money or cash.