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by men out of business, is deemed somewhat discreditable when coming from a merchant. And because such paper, when in the merchant's hand, necessarily imitates the paper which passes on the occasion of a sale of goods, the epithet fictitious has been cast upon it; an epithet which has seemed to countenance the confused and mistaken notion, that there is something altogether false and delusive in the nature of a certain part both of the paper and of the apparent wealth of the country.” A bill of exchange, when merely discounted, and kept in the portfolio of the discounter until it falls due, does not perform the functions or supply the place of money, but is itself bought and sold for money. It is no more currency than the public funds, or any other securities. But when a bill drawn upon one person is paid to another (or even to the same person) in discharge of a debt or a pecuniary claim, it does something for which, if the bill did not exist, money would be required : it performs the functions of currency. This is a use to which bills of exchange are often applied. “They not only,” continues Mr. Thornton,” “spare the use of ready money; they also occupy its place in many cases. Let us imagine a farmer in the country to discharge a debt of 101. to his neighbouring grocer, by giving him a bill for that sum, drawn on his cornfactor in London for grain sold in the metropolis; and the grocer to transmit the bill, he having previously indorsed it, to a neighbouring sugar-baker, in discharge of a like debt; and the sugar-baker to send it, when again indorsed, to a West India merchant in an outport, and the West India merchant to deliver it to his country banker, who also indorses it, and sends it into further circulation. The bill in this case will have effected five payments, exactly as if it were a 10l. note payable to bearer on demand. A multitude of bills pass between trader and trader in the country, in the manner which has been de. scribed; and they evidently form, in the strictest sense, a part of the circulating medium of the kingdom.”
* P. 40.
Many bills, both domestic and foreign, are at last presented for payment quite covered with indorsements, each of which represents either a fresh discounting, or a pecuniary transaction in which the bill has performed the functions of money. Within the present generation, the circulating medium of Lancashire for sums above five pounds, was almost entirely composed of such bills.
§ 5. - - - - ... - loyed as a substitute for currency. i Arulmissory notes. A bill drawn upon Tăny one and accepted by him, and a note of hand by him promising to pay the same sum, are, as far as he is concerned, exactly equivalent, except that the former commonly bears interest and the latter generally does not ; and that the former is commonly payable only after a certain lapse of time, and the latter payable at sight. But it is chiefly in the latter form that it has become, in commercial countries, an express occupation to issue such substitutes for money. Dealers in money (as lenders by profession are improperly called) desire, like other dealers, to stretch their operations beyond what can be carried on by their own means: they wish to lend, not their capital merely, but their credit, and not only such portion of their credit as consists of funds actually deposited with them, but their power of obtaining credit from the public generally, so far as they think they can safely employ it. This is done in a very convenient manner by lending their own promissory notes payable to bearer on demand: the borrower being willing to accept these as so much money, because the credit of the lender makes other people willingly receive them on the same footing, in purchases or other payments. These notes, therefore, perform all the functions of currency, and render an equivalent amount of money which was previously in circulation, unnecessary. As, however, being payable on demand, they may be at any time returned on the issuer, and money demanded for them, he must, on pain of bankruptcy, keep by him as much money as will enable
him to meet any claims of that sort which can be expected to occur within the time necessary for providing himself with more: and prudence also requires that he should not attempt to issue notes beyond the amount which experience shows can remain in circulation without being presented for payment.
The convenience of this mode of (as it were) coining credit, having once been discovered, governments have availed themselves of the same expedient, and have issued their own promissory notes in payment of their expenses; a resource the more useful, because it is the only mode in which they are able to borrow money without paying interest, their promises to pay on demand being, in the estimation of the holders, equivalent to money in hand. The practical differences between such government notes and the issues of private bankers, and the further diversities of which this class of substitutes for money are susceptible, will be considered presently.
§ 6. A fourth mode of making credit answer the purposes of money, by which, when carried far enough, money may be very completely superseded, consists in making payments by cheques. The custom of keeping the spare cash reserved for immediate use or against contingent demands, in the hands of a banker, and making all payments, except small ones, by orders on bankers, is in this country spreading to a continually larger portion of the public. If the person making the payment, and the person receiving it, keep their money with the same banker, the payment takes place without any intervention of money, by the mere transfer of its amount in the banker's books from the credit of the payer to that of the receiver. If all persons in London kept their cash at the same banker's, and made all their payments by means of cheques, no money would be required or used for any transactions beginning and terminating in London. This ideal limit is almost attained in fact, so fal as regards transactions between dealers. It is chiefly in the retail transactions between dealers and consumers, and in the payment of wages, that money or bank notes now pass, and then only when the amounts are small. In London, even shopkeepers of any amount of capital or extent of business have generally an account with a banker; which, besides the safety and convenience of the practice, is to their advantage in another respect, by giving them an understood claim to have their bills discounted in cases when they could not otherwise expect it. As for the merchants and larger dealers, they habitually make all payments in the course of their business by cheques. They do not, however, all deal with the same banker, and when A gives a cheque to B, B usually pays it not into the same but into some other bank. But the convenience of business has given birth to an arrangement which makes all the banking houses of the City of London, for certain purposes, virtually one establishment. A banker does not send the cheques which are paid into his banking house, to the banks on which they are drawn, and demand money for them. There is a building called the Clearing-house, to which every City banker sends, each afternoon, all the cheques on other bankers which he has received during the day, and they are there exchanged for the cheques on him which have come into the hands of other bankers, the balances only being paid in money; or even these not in money, but in cheques on the Bank of England. By this contrivance, all the business transactions of the City of London during that day, amounting often to millions of pounds, and a vast amount besides of country transactions, represented by bills which country bankers have drawn upon their London correspondents, are liquidated by payments not exceeding on the average 200,000l.”
* According to Mr. Tooke (Enquiry into the Currency Principle, p. 27) the adjustments at the clearing house “in the year 1839 amounted to 954,401,600l., making an average amount of payments of upwards of 3,000,000l. of bills of exchange and cheques daily effected through the medium of little more than 200,000l. of bank notes.” At present a very much greater amount of transactions is daily liquidated, without bank notes at all, cheques on the bank of England supplying their place.
By means of the various instruments of credit which have now been explained, the immense business of a country like Great Britain is transacted with an amount of the precious metals surprisingly small; many times smaller, in proportion to the pecuniary value of the commodities bought and sold, than is found necessary in France, or any other country in which, the habit and the disposition to give credit not being so generally diffused, these “economizing expedients,” as they have been called, are not practised to the same extent. What becomes of the money thus superseded in its functions, and by what process it is made to disappear from circulation, are questions the discussion of which must be for a short time postponed.