The Online Library of Liberty

A project of Liberty Fund, Inc.

• A History of Banking In Great Britain;
• Chapter I.: Banking In England.
• Section I.: A Record of Beginnings.
• Section II.: Foundation of the Bank of England.
• Section III.: An Era of National Development.
• Section IV.: State of the Irish Currency.
• Section V.: Failure of Currency Reform—inflation and Reaction.
• Section VI.: The Committee On Banking of 1840.
• Section VII.: On the Bank Acts of 1844 and 1845.
• Section VIII.: Commercial Crises.
• Section IX.: Monetary Panics.
• Section X.: General Conclusion.
• Chapter II.: Banking In Scotland.
• Chapter III.: The Theory and Mechanism of Banking.
• Chapter IV.: Definitions of Economic Terms.
• Chapter V.: The Theory of Value.
• Section I.
• Section II.
• Section III.
• Chapter VI.: The Theory of Credit.
• Section I.
• Section II.
• Banking In Russia.
• Chapter I.: The Early Stages of Money and Credit.
• Section I.: Prefatory.
• Section II.: Introduction of Paper Money.
• Section III.: Financial Reconstruction Under Alexander II. And the Founding of the State Bank.
• Chapter II.: Methods and Operations of the State Bank.
• Chapter III.: Banking Vicissitudes From 1862 to 1875.
• Chapter IV.: The Eastern War Period.
• Chapter V.: Private Banks.
• Chapter VI.: The Bourse.
• Chapter VII.: The Precious Metals.
• Chapter VIII.: Foreign Exchanges.
• Chapter IX.: The Debt and Finances of Russia.
• History of Savings-banks In the United States.
• I.
• II.
• III.
• IV.
• V.

CHAPTER VI.

THE THEORY OF CREDIT.

SECTION I.

WE have now to explain the organization of the great system of credit—that is to say, the creation—the circulation, and the extinction of credits, or debts—the great marvel of modern commerce. What the steam-engine is in machinery, what the differential calculus is in mathematics, that is credit in commerce.

In the following chapters we shall explain the great juridical and scientific principles of the theory of credit, and show how they are applied to the practical business of banking.

I.—

ORIGIN OF THE SYSTEM OF CREDIT IN EUROPE.

If it were asked how that wonderful people, the Romans, commencing with a petty village, gradually extended their empire over so large a portion of the world, it would probably be said that it was due to their hardihood and their discipline. But probably a cause which has been entirely overlooked contributed in no slight degree to the result—and that is their wonderful and methodical habits of business. The Romans were, as far as we are aware, the creators of the great system of credit in all its branches. When the practice of writing became general at Rome, a very strict custom or law grew up. It was established that every dominus, or head of a house, should keep a great family ledger, as strict and exact as those of a modern banker. In this every incident of his life was recorded. In this he was obliged to enter all sums of money borrowed and lent; all trade profits and losses; all his revenues and profits, his outgoings, and expenses of every description.* These family ledgers were the only legal evidence of debt among Roman citizens receivable in courts of justice. And it was from these family ledgers that the whole of the modern system of bookkeeping and credit has been developed. It seems that every occurrence was noted down day by day in a waste-book, termed adversaria; and at the end of the month the various items were arranged under their proper heads in the ledger, which was termed tabulæ, or codex accepti et expensi, which was intended to be preserved as an heirloom in the family. Every five years, the dominus was obliged to swear to the truth of the codex before the censors; and it was regarded as invested almost with a species of sanctity.

A great difference was made between the adversaria and the codex. Cicero says:* “He acknowledges that he has not the sum entered in his ledger (codex), but he insists that it is entered in his day-book (adversaria). Are you, then, so fond of yourself, and have such an exalted opinion of yourself, as to sue for money, not on the evidence of the ledger, but of your day-book? It is arrogant to bring forward your ledger instead of witnesses; but is it not madness to bring forward your own scraps of writing and notes? If these notes have the same force and weight and authority as the ledger, what is the use of making a ledger? to make entries in it? or to keep it in regular order? or to make a permanent record of old writings? But if we have an established custom to make a ledger because we put no trust in notes, is that to be considered of weight, and approved before a judge, which we ourselves consider weak and unreliable? Why is it that we write notes without much care, and we write the ledger with great care? Because the one is to last a month and the other is to last forever. The former are soon erased, and the others are preserved with religious care; the former preserve the memory for a short time, the latter pledge the good faith and honesty of a man forever. Notes are thrown away; the ledger is kept in order. Therefore nobody produces notes in evidence in a cause, but they do produce the ledger, and read the entries.” This family ledger was kept in the arca, the chest or safe in the tablinum, or apartment opposite the door of the atrium, or central hall of the Roman house, where all the records and archives were kept.

II.—

THE SYSTEM OF CREDIT.

The great system of credit comprehends: 1. The creation of obligations; 2. The transfer of credits, or debts; and 3. The extinction of obligations; which will be fully discussed in the following sections.

The following is a short sketch of the history of the theory of credit:

Demosthenes, about 350 bc, first perceived and declared that credit is wealth and capital. But concrete practice has always preceded abstract theory. The Romans invented bookkeeping, and the business which in modern language is technically termed banking; the Roman bankers invented cheques and bills of exchange; and the Roman jurists elaborated the juridical theory of credit. Some of the elementary principles of credit are set forth in the Institutes of Gaius, which was the text-book for students from the age of the Antonines till Justinian. But the jurists Ulpian, Modestinus, Paulus, Javolenus, and Papinian, the greatest jurists the world ever saw, worked out the complete juridical theory of credit—except only on one point. And from the emphatic way in which certain elementary principles are laid down by these writers, it is quite clear that there were silly persons at Rome who chattered about credit, just as there are at the present day. The principles elaborated by these great jurists were incorporated in the Pandects of Justinian and in the Basilica, and have been the mercantile law of Europe ever since. They are contained in every Continental text-book of jurisprudence; but on this subject English text-books are lamentably defective. The doctrines of the Roman jurists were, however, inadequate for the complete theory of credit, as they chiefly regarded the subject from the creditor’s side, and only very slightly from the debtor’s side. But in every obligation there are two sides; the creditor’s, or the active, or positive, side; and the debtor’s, or the passive, or negative, side.

Accordingly, for the last 150 years—from the days of Maclaurin, at least—mathematicians have been in the habit of terming debts negative quantities. But very few have given any explanation of what they mean by terming a debt a negative quantity; and those who have done so, from a want of knowledge of the principles of mercantile law and the facts of commerce, have entirely failed in giving an explanation which can be received as suitable for economic science. If the subject had been handled by mathematicians who were well trained in mercantile law and practical business, there never would have been the slightest difficulty. But, unfortunately, it has been treated by a series of literary and mathematical writers who were entirely deficient in the necessary knowledge, and they have fallen into a mass of errors, which are fully provided for in the Digest, and in every Continental treatise on jurisprudence. It is well known that although mathematicians have been in the habit of using the algebraical signs, or their equivalents, for 1600 years, and have given the empirical rules for their combination, it is only within the present century that their scientific principles have been understood, and only within the last sixty years that they have been explained in popular treatises on algebra. We must therefore explain the modern theory of algebraical signs, and their application in mathematics and physical science, and then give an exposition of the principles of mercantile law and the facts of commerce, and then discover the interpretation of these signs which is suitable for the particular circumstances of economics.

By applying the principles of the great modern theory of algebraical signs, combined with the subtlest and most abstruse principles of mercantile law and practical business, I have demonstrated the theory of credit simultaneously from the creditor’s side and the debtor’s side. One difficulty, however, the Roman jurists were unable to solve, and it had hitherto been regarded as insoluble. In 1888 I at last succeeded in solving this difficulty; and the theory of credit is now absolutely complete. Thus, from the year 350 bc to 1888 ad, it has taken 2238 years to bring the theory of credit to perfection.

The doctrines of the Roman jurists are, of course, expressed in words. But we shall find that jurists working separately, algebraists working separately, and the practice of mercantile men acting separately and independently from their own instincts, are all in perfect harmony with each other. And when we fuse these three together—an exposition of the facts of commerce, an exposition of the juridical theory of credit, and show the application of the theory of algebraical signs to these facts of commerce and juridical principles of credit—we shall find a most beautiful exemplification of the use of these signs strictly in accordance with their use in mathematics and physical science.

III.—

ON THE CREATION OF OBLIGATIONS.

Personal credit, or mercantile character, is purchasing power, and, as first pointed out by Demosthenes, and now universally acknowledged, is wealth. But personal credit does not enter into economics until the merchant actually exercises his credit and makes a purchase with it.

When a merchant purchases goods “on credit” it is an absolute sale, just as much as if it had been effected with money. He acquires the actual property in the goods as fully and effectually as if he had paid for them in money. In exchange for the goods he gives his promise to pay their price at a future time. That is, he creates a right of action against himself. This right of action is a credit, or créance, or debt, and is the price of the goods, and is the property of the seller. Thus, at the very instant that the property in the goods is transferred to the buyer, a contract, or obligation, is created between the two parties, which consists of two parts: 1. The right to demand payment in the person of the seller, or creditor; and 2. The duty to pay in the person of the buyer, or debtor. These two quantities constitute the contract, obligation, or bond of law between the two parties. The obligation consists of two equal and opposite quantities, and may be denoted by this symbol ; where the (+ £100) denotes the creditor’s right to demand payment, and the (− £100) denotes the debtor’s duty to pay. Also, if either of these quantities be destroyed, the other is also destroyed with it. Hence, as these two equal and opposite quantities come into existence together, can only exist together, and vanish together, they are analogous to polar forces.

IV.—

DIVISION OF OPINION AMONG URISTS AS TO THE POSITION OF THE DEBTOR IN AN OBLIGATION.

We have now come to the most subtle and abstruse point in all economics, which will demand the closest attention, because it is the great Serbonian bog in which multitudes of writers, literary and mathematical, have been swallowed up, from a want of knowledge of the most elementary principles of mercantile law and practical business; and its rectification and elucidation will open up a completely new branch of inquiry of the greatest novelty and interest.

When an obligation has been created between two parties by the sale of money or goods “on credit,” the case of the creditor is clear; in exchange for the money or goods he has received a right of action—which is termed a credit or a debt—which is his property, and which he can sell or dispose of in any way he pleases, for other goods, or for money. But a strong division of opinion exists among jurists as to the position of the debtor in the obligation. When a merchant has bought goods “on credit,” and has given a bill at three months for them, is he in debt at the present time? Roman jurists and English jurists hold different doctrines on this point. When an obligation was contracted the Roman jurists said dies cedit; when it became payable they said dies venit. “Cedere*diem significat incipere deberi pecuniam; venire diem significat cum diem venisse quo pecunia peti possit.”—“ ‘Cedit dies’ means the day on which money begins to be owed; ‘venit dies’ means the day on which it may be demanded.” The Roman jurists held that the money was due from the day on which the obligation was contracted, but that the remedy was suspended until the day of payment came. “Id†quod in diem stipulamur, statim quidem debetur; sed peti priusquam dies venerit non potest.”—“That which we agree to pay on a future day is indeed due at once; but it cannot be sued for until the day of payment has come.”

Paulus says:‡“Præsens obligatio est, in diem autem dilata solutio.”—“The obligation is present, but the payment is deferred until the fixed day.” Ulpian says:§ “Ubi in diem (quis stipulatus fuerit) cessit dies, sed nondum venit.”—“Whenever anyone has agreed to pay a sum on a fixed day, the obligation has begun to run, but the day of payment has not come.” So it was a maxim of Roman law, “Debitum in presenti, solvendum in futuro.”—“The money is due at present, but it is only to be paid in future.”

This doctrine throws considerable confusion into the nature of an obligation; and it was probably due to the fact that the jurists had not yet completely emancipated themselves from the idea that debitum meant the money actually due, and was only then beginning to acquire the meaning of the abstract incorporeal contract which it means now. But English jurists hold quite different doctrine. As in English law and common usage the word debt (passive) means simply the abstract personal duty to pay, English jurists hold that no debt is created until the duty to pay comes into existence—i. e., until the day of payment has come. It is a maxim of English law that credit unexpired may be pleaded under the general issue, which means that if an action is brought against a person who has contracted an obligation payable at a future time, before the day of payment has come he may reply that he is not in debt at all. Thus Pitt Taylor says:* “In addition to these examples, it may be observed that whenever the defendant can show that in fact no debt ever existed before action brought, he may do so under the plea of never indebted. Thus, for instance, if the action be for goods sold and delivered, he may defend himself under the plea by proving that they were sold on credit which was unexpired when the action was commenced.”

To understand the following discussions, the reader will find it very useful to fix these principles in his mind: 1. When a person is only bound to pay a sum of money on a future day, he is not in debt at the present time. 2. That if a person has contracted to pay a sum of money at a future day, his creditor has no right to any of his property; he has no jus in rem; it is only a claim against his person, or a jus in personam. A few examples will illustrate these principles.

(a) Suppose that a tenant takes a house or an apartment, and agrees to pay the rent quarterly. Suppose that the day after he had entered into possession the landlord came and demanded his rent. What would the tenant say? He would say: “My good friend, Mr. Landlord, I owe you nothing. The bargain is that I am to have the use and enjoyment of this house for three months before the rent becomes due and payable. My debt, or duty to pay, does not come into existence till then. Good morning to you.”

(b) So when a farmer takes a farm on a lease of nineteen years, and agrees to pay the rent half-yearly, the agreement is that he is to have the use and enjoyment of the farm for intervals of six months before each installment of rent becomes due. The successive rents are intended and expected to be paid out of the successive profits made out of the farm. And it is obviously absurd to say that the farmer is indebted at the present time for rent which only becomes due nineteen years hence, and is intended and expected to be paid out of profits which will only come into existence nineteen years hence.

(c) The same is obviously true in the case of a merchant who has bought goods, and given in exchange for them his promise to pay money for them three months hence. He is not in debt at the present time. The agreement is that he is to have the property in the goods for three months, and to dispose of them in any way he pleases so as to make a profit out of them; and it is expected on both sides that he is to pay his bill out of the profits realized by the goods. No debt, or duty to pay, comes into existence until the bill becomes due and payable; and the amount of the bill is not to be subtracted from his present property.

(d) It is commonly said that this country is “in debt” about £750,000,000. The answer is that this country is not “in debt” one penny. For a person to be “in debt” means that he is liable to pay a sum of money on demand. Does anyone suppose that the creditors of the country can call upon her to pay £750,000,000 on demand? What the country has undertaken to do is to pay an annuity of about £7,000,000 quarterly. And as soon as one quarter’s annuity is paid she is not in debt until next quarter-day comes round. It would be just as absurd to say that the farmer is in debt at the present time for nineteen years’ rent. The sum of £750,000,000 is merely the sum of the present values of the annuity.

(e) This principle strongly applies to a case of conscience. Suppose that a kind-hearted instructor engages to prepare a student for one of the public services—say the Indian Civil Service—and on his success agrees to taken an obligation payable five years after date. On entering the service the candidate is asked if he is in debt. He most properly and conscientiously replies that he is “not in debt,” because he has no sum of money which is payable by him on demand. He is only bound to pay at the end of five years; and it is quite understood on both sides that his obligation to his instructor is to be redeemed out of his annual salary. This case is an example of novation, which will be more fully described in another section. When the candidate has won his appointment in the Indian Civil Service, he is no doubt in debt to his instructors. But if the instructor agrees to take an obligation payable five years after date, that obligation pays, extinguishes, and discharges the debt payable as demand; and no new debt arises until the obligation becomes due. The release of the debt payable on demand is the consideration for the obligation payable five years after date.

The importance of the consideration consists in this: It is commonly supposed that when a person has to make a payment at a future time, the sum due is to be subtracted from his present property, and is a diminution of it. It is usual to denote debts by the negative sign − ; and according to this view, if a person possessed £100, and was bound to pay £30 three months hence, and therefore his property would be represented by £100 − £30, it would mean that his property was only £70. On a larger scale it would mean that all the obligations in the nation were to be subtracted from all the property in the nation. But this view is entirely erroneous. In this case the sign − does not mean subtraction. What it does really mean will be shown further on. The debtor has the full property in his £100, to do with exactly as he pleases. His duty to pay has no present existence; it is no subtraction from his present property. The expression is not to be read as if his property were only £70. The debt is a mere abstract personal duty; and a personal duty cannot be subtracted from a material sum of hard money. The expression is to be read in this way: He possessed £100 in money, but coupled with the duty to pay £30 at some future given time. Hence, the sign − does not mean subtraction in this case; it is a mere memorandum that he has to make an exchange, by buying up a right of action, at some future time.

V.—

ADVANTAGE OF ADOPTING THE CONCEPTION OF ECONOMICS AS THE SCIENCE OF COMMERCE, OR EXCHANGES.

We now see the advantage of adopting and firmly grasping the conception of economics as the science of commerce, or exchanges; because all the mechanism and phenomena of the great system of credit, which are a hopeless puzzle and an inscrutable perplexity so long as economics is treated as the “production, distribution, and consumption of wealth,” become perfectly clear and simple when it is understood to be the science of commerce, or exchanges. Every case of a “loan” of money or a sale of goods “on credit” is an exchange, or an act of commerce. In exchange for the money or the goods a right of action is created, and is the price of the goods. This right of action is a salable commodity, which may be bought and sold like any material chattel, and it has value because it will be paid in money. This right of action may circulate in commerce exactly like a piece of money, and effect exchanges exactly like a piece of money, until it is paid off and extinguished; and then it ceases to exist. The debt was created by one exchange; it then may effect any number of exchanges; and when it is due, the holder of it brings it to the debtor, who gives the money in exchange for the right of action. Thus the debt is created by one exchange, and is annihilated, or extinguished, by another exchange; and thus the whole system and operations on credit are merely a series of exchanges.

VI.—

ON THE THREE AMBIGUITIES IN THE THEORY OF CREDIT, OR DEBT.

We have now to notice three perplexities, or ambiguities, in the theory of credit, or debt, which have been the cause of an immense amount of confusion and misconception, which the reader must carefully observe.

First ambiguity.—

A debt is not the money owed by the debtor, but the abstract personal duty to pay the money.

We have now to explain the meaning of the word debt, about which there is a great misconception. It is one of the examples of words which, in early jurisprudence and classical Latin, meant a material thing, but has come in the progress of civilization and jurisprudence to mean solely a right and a duty. We think it absolutely certain that in classical Latin the word debitum means the material thing, whether money or any other, which is due. And in this we are confirmed by the high authority of Professor H. Nettleship, of Oxford. The idea that the word debt means the money due is very common at the present day, and has greatly impeded the due apprehension of the nature of credit. Many literary and mathematical writers suppose that a debt is the money due; or money in the debtor’s possession to which the creditor has a right. This very common error, of which we shall hereafter produce several examples. is expressly provided for in the Digest. It is said:* “Obligationum substantia non in eo consistit ut aliquod corpus nostrum faciat, sed ut alium nobis ad stringit ad dandum aliquod, vel faciendum, vel prestandum.”—“The essence of obligations does not consist in this that it makes any specific goods our property; but that it binds some person to pay us something, or to do something, or to guarantee something.” Pothier well says:† “The right which the obligation gives the creditor of proceeding to obtain payment of the thing which the debtor is obliged to give him, is not a right in the thing itself (jus in re); it is only a right against the person of the debtor for the purpose of compelling him to give it (jus ad rem acquirendam). The thing which the debtor is obliged to give continues to belong to him; and the creditor cannot become proprietor of it except by the delivery, real or fictitious, which is made to him by the debtor in the performance of the obligation. And till this delivery is made the creditor has nothing more than the right of demanding the thing; and he has only that right against the person of the debtor who has contracted the obligation. Hence it follows that if my debtor, who has contracted the obligation to give a thing to me, transfers it upon a particular title to a third person, whether by sale or donation, I cannot demand it from the party who has so acquired it, but only from my debtor. The reason is, as the obligation does not, according to our principle, give the creditor any right in the thing which is due to me, which I can pursue against the person in whose hands it may be found.”

This doctrine is most true and most important. Suppose a creditor comes to his debtor and demands payment of his debt, and the debtor has the very money wherewith to pay his debt in his hand, he may still, nevertheless, give it away, or spend it under the very eyes of his creditor, and the creditor has no legal right to prevent him. So Gide says:‡ “A debt is not the material object, the money; but the juridical object, the duty to pay.” So Williams says:§ “Every person who borrows money on mortgage or not, incurs a debt or personal obligation to repay it out of whatever means he possesses.”

The distinction is perfectly plain, and of the greatest importance in economics. If the creditor has the right to any specific money in the debtor’s possession, that would be a diminution of the debtor’s property; he would have no right to spend or part with it; and there would be only one economic quantity in existence—the money. But as a matter of fact, the whole of the money remains the debtor’s property, which he can sell, donate, or exchange as he pleases. And also there is the right, or property, in the person of the creditor, which he can sell, or exchange, as he pleases; and which may be sold, or exchanged, any number of times till it is paid off and extinguished. Hence, in this case there are two economic quantities in existence, which may each circulate in commerce at the same time. To consider a debt as a sum of money in the debtor’s possession to which the creditor has a right, is to confound the distinction between a trustee and a debtor. A trustee merely holds money which is in reality the property of the cestui que trust; it is in no sense whatever his property; he has no right to use it for his own purposes; and, therefore, there is only one, and not two, economic quantities in existence. If the creditor’s right were the right to a specific sum of money in the debtor’s possession, it would follow that a debtor could never be insolvent; because if he had no money, his creditor could have no right. But unfortunately this is far from being the case. In too many cases persons are insolvent—i. e., they are under the duty to pay money, and have no money to pay it with; but the creditor’s right to demand exists whether the debtor has any money to pay it with or not. If the creditor’s right were the right to a specific sum of money, it would follow that the quantity of credit could never exceed the quantity of money; but this is entirely contrary to fact; every jurist knows perfectly well that credit is itself a marketable commodity, a merchandise, and the amount of it in existence and circulation in this country is about 100 times the quantity of money. Hence, the reader must carefully observe that a debt is simply the abstract personal duty to pay money, and has no reference to any specific sum of money.

Second ambiguity.—

The word debt means both the creditor’s right of action and the debtor’s duty to pay.

The second ambiguity is this: It has been shown that the word debt means in the first instance the debtor’s personal duty to pay money, and not the money which is due. But it has long been used both in law and common usage to mean the creditor’s right of action as well, and is thus used as synonymous with credit. And a creditor’s right of action is termed perfectly indiscriminately a credit and a debt. As has been said above, the word debitum in classical Latin denotes the material thing, whether money or any other, which is owed. But in the Pandects the word debitum is used as synonymous with obligatio, the bond of law, or contract, between the creditor and the debtor; and therefore it includes both the creditor’s right to demand and the debtor’s duty to pay, In classical Latin, a creditor’s right of action was termed nomen. But in course of time, while obligatio always continued to mean the nexus, or contract, between the two parties, the word debitum split up into two parts, and was used to mean both the creditor’s right of action and the debtor’s duty to pay, quite indiscriminately. In the twelfth century, the word debitum was commonly used to mean a right of action. In 1194, Richard I. issued instructions for a judicial visitation on financial matters in which it was ordered: “Omnia debita Judæorum inbrevientur, terræ, domus, reditus, et possessiones.”—“Let all the debts (i. e., rights of action) of the Jews be scheduled, their lands, houses, rents, and possessions.” “Item quilibet Judæus jurabit super rotulum quod omnia debita sua et vadia, et reditus, et omnes res et possessiones suas inbreviari faciat.”—“Also let every Jew swear that he will make a true return of all his debts (rights of action), pledges, rents, and all his property and possessions.”

In mediæval charters, the word debitale was used in the same sense. Thus in one of 1324 it says: “In omnibus et singulis bonis * * * dominiis, baroniis, censibus, redditualibus, debitalibus, servitutibus, homatgiis.”—“In all and singular goods * * * lordships, baronies, revenues, rents, debts (rights of action), servitudes, homages.” In another, of 1374, it is said: “Acquisiverunt reditus, census annuos, et debitalia in fœdis * * * quorum redditorum, censuum, et debitalium.”—“They have acquired rents, annual revenues, and debts (rights of action) in fee * * * of which rents, revenues, and debts (rights of action).” A statute of the city of Placentia, in 1386, clearly shows that debitum and nomen were synonymous:*“Nullus homo Plac. emat vel aliqualiter acquirat aliquod debitum vel nomen seu revisamentum contra comm. Placentiæ.”

Thus, the words debitum and debitale were already at this period used to mean rights of action, and as synonymous with nomen, in public instruments; and if they were so used in public instruments, it is clear that that must long have been their well understood meaning in common usage. In English law the word debt has long been used to mean a right of action. Thus in the statute of Acton Burnell, 11 Edward I. (1283), commonly called the Statute of Merchants, it is said: “Pur ceo qe merchauntz qi avaunt ces houres unt preste lur aver a diverse genz, sunt cheuz en poverte, pur ceo qe il ni aveit pas si redde ley purvewe, par la quele il poeint lur dettes hastivement recoverir. Le rei par luy par sun conseil ad ordine e establi, qe marchaunt qi veut estre seur de sa dette. E si le meire ne troesse achatur face par renable pris liverer les moebles al creanzur, desque a la summe de la dette en allowance de sa dette.” By which it appears that at that time the word debt had already acquired in English law the meaning of a right of action; a meaning which it has ever since retained, both in law and common usage. So it is said in “Les Termes de la Ley,” first published in 1567: “Dett est un brief que gist lou ascun summe d’argent est due au un par reason d’accompt.”—“Debt is a writ,” etc. So in the Act, 46 Geo. III. (1806), c. 125, s. 3, it is enacted that one debt, or demand, may be set off against another. So, as may be seen in any daily paper, the executors of deceased persons advertise for any persons who have “debts, claims, or demands” against the estate to give in a statement of them.

It is so perfectly well known that in English law the word debt means both the creditor’s right of action and the debtor’s duty to pay, that it is used in both senses in the same Act of Parliament. So in the law of Scotland, debts are included under the title of movable rights. And in a Scotch marriage contract it is usual for the bride to transfer to her intended husband “all goods, gear, debts, sums of money, and other movable estate.” Accordingly, in the digest of the law of bills of exchange which we prepared for the law digest commissioners we began with this fundamental definition: “Credit or debt in legal and commercial [and economical] language, means a right of action against a person for a sum of money.”

We need not further multiply examples. The reader must carefully observe that the word debt is used both in English law and common usage, quite indiscriminately, to mean both the creditor’s right of action and the debtor’s duty to pay; and it requires constant vigilance to perceive in which sense it is used. The word duty also originally meant a right; thus the King’s duties meant his right to levy customs. The word “right” had also this double meaning in English. Thus Lord Shelburne said in the House of Lords: “He would think that America had as good a right to pay taxes as Britain”—i. e., it was as much their duty to do so. The word right is but seldom, if at all, now used in this sense in England at the present day; but it is quite common in Scotland to say, “I have no right to do that”—i. e., it is not my duty to do it. The word χρέος in Greek has also this double meaning; it originally meant the actual thing owed, like debitum in Latin, or the duty to pay it; but the Greek jurists used χρεος to mean the right of action. Thus Demosthenes says: “τὴν οὐϭίαν ἅπαϭαν χρέα κατέλίπε.”—“He left all his property in outstanding debts, i. e., rights of action.” In the Basilica, χρέος is used as synonymous with nomen, créance, a right of action.

So in German the word schuld properly means a debt or liability; accordingly, schuldner properly means a debtor; but Austin says that schuld has also the double meaning, and that in German law schuldner is often used to mean the creditor.

In French, the words droit and dette are also used in the double sense of the right and the duty; but in the creditor’s case it is termed the droit or dette active; in the debtor’s it is termed the droit or dette passive.

Thus the student must carefully observe that all these words which denote a contract, or obligation, between two persons—such as χρέος, debitum, debitale, right, debt, duty, droit, dette, schuld—are used quite indiscriminately with respect to both parties; and it requires constant vigilance to determine in which sense they are used. The explanation of this seeming confusion is this: χρέος comes from χρῆ, it is fit, or ordained; debitum means that which is due; right, from rectum, that which is ordered; and if one person has the right to demand, and another has the duty to pay, a sum of money, it is equally fit, due, ordained, and right that the one person should receive as that the other should pay; hence they are equally χρέα, debts, duties, and rights. On the Continent it is usual to term a person’s rights, simply his actif; and his liabilities his passif; the word droit or dette being understood; thus in the accounts of a bank its liabilities are termed its passif, and its assets its actif.

Third ambiguity.—

On the double meaning of the words “lend,” “loan,” “borrow”; or the distinction between the mutuum, δάνειον or δάνειϭμα, and the commodatum, or τὸ χρηϭάμενον.

The third ambiguity has been the cause of immense misconception in modern times on the subject of credit. When persons hear for the first time such an expression as “credit is capital,” they are apt to be startled; and they think that such a doctrine is as much as to say that if one person lends another his book, or his watch, or his horse, that makes two books, or two watches, or two horses. The whole difficulty arises from a want of knowledge of mercantile law, and from not being aware that unfortunately the English words “lend,” “loan,” and “borrow” are ambiguous, and are used to denote two different operations of an essentially distinct nature.

It has already been shown that there are two kinds of right—the right of property and the mere right of possession, or of use. And there are two distinct kinds of “loan”; the one in which the right of possession only for a limited time is given to the “borrower,” but the right of property remains in the “lender,” and there is no new creation of property, and the identical thing “lent” is returned to the “lender.” The other, in which the “borrower” acquires the actual right of property in the thing “lent,” and the “lender” acquires in exchange for it the right, or property, to demand an equivalent only for the thing “lent,” both in quantity and quality, but not the identical thing “lent.” In this class of “loan” there is always a new creation of property.

1. The commodatum, or τὸ χρησάμενον.

There are some things which can be lent, and the borrower can enjoy their use without acquiring the actual property in them; and after having enjoyed their use, he can restore the identical things “lent” to their owner. Thus, if a person “lends” his horse or a book to his friend, his friend can ride the horse or read the book without acquiring the property in them; and after he has enjoyed their use, he can restore the identical horse or book to its owner. In such a case, the “lender” only grants a certain limited right of “possession” and “use” of the thing lent to the “borrower”; but he does not cede the right of property in it to the “borrower.” He retains in himself the right of property and possession in the thing “lent”; and can reclaim it at any moment he pleases, without any notice to the “borrower.” In such cases, there is no sale, or exchange; and there is no new property created. In such cases, the relation of creditor and debtor does not arise between the parties. And there being no sale, or exchange, there is no economic phenomenon; consequently, such transactions not being acts of commerce, do not enter into the science of economics. Such a “loan” is termed in Roman law a commodatum, and in Greek law τὸ χρησάμενον; because the “use” only of the thing “lent” is granted to the “borrower,” but not the “property” in it.

2. The mutuum, or τὸ δάνειον, or δάνεισμα.

But there is another kind of “loan” in which the things “lent” cannot be enjoyed unless they are consumed, destroyed, or alienated. Thus, if a person “borrows” such things as bread, wine, coals, oil, meat, or other things of a similar nature, he cannot enjoy their use without consuming or destroying them; and they are lent and borrowed with the knowledge and consent of both parties, for the purpose of being consumed and destroyed. Hence, from the very nature of the case, the “borrower” must acquire the right of property in such things when lent; and what he undertakes to do is to return, not the identical things lent, but an equivalent amount of other things of the same nature, equal in quality and quantity to the things “lent.” So when a person “borrows” money, he cannot enjoy its use, unless he is able to exchange it away for other things. Hence, the person who borrows money must, from the very necessity of the case, acquire the property in it. And what he undertakes to do is, not to restore the identical money lent, but an equivalent amount of money, at the stipulated time.

In all cases, therefore, of the “loan” of such things as bread, wine, oil, meat, coals, money, and things of a similar nature, the lender cedes the property in the thing “lent” to the “borrower,” and he acquires in exchange the right to demand, and the “borrower” incurs the personal duty to render, an equivalent amount of things “lent,” but not the identical things. In all such cases a new property is created; a contract, or an obligation, is created between the lender and the borrower; and they stand in the relation of creditor and debtor. All such transactions are sales or exchanges; they are all acts of commerce, or economic phenomena, and they all enter into the science of economics. A “loan” of this nature is termed in Roman law a mutuum, and in Greek law a δάνειον, or δάνεισμα. To contract a loan of this nature is mutuare, or δανείζειν. A loan, therefore, comprehends two transactions of an essentially distinct nature; but the essential feature of a loan is, that it is always the same person who restores the identical thing “lent” or repays an equivalent.

The Roman jurists said that mutuum is derived from quod de meo tuum fit—because from being my property it becomes yours. Modern scholars, however, repudiate this etymology, however plausible it may seem. The Romans and the Greeks knew very little of their own language. Modern scholars say that mutuum is connected with mutare, to exchange; as deciduus is with decido, and dividuus with divido. But though the etymology may be fanciful, as are so many others given by Roman and Greek writers, it exactly expresses the fact. In the loan of the mutuum there is always an exchange of properties. In all cases of the mutuum, or the δάνειον, the property in the thing lent is ceded to the borrower; the relation of creditor and debtor is created between them, and the right which the creditor acquires to demand back an equivalent in exchange for the thing lent is the credit, or debt; or, as Ortolan says, the price of the thing lent. The reader must, therefore, observe that every loan of money whatever, no matter between what parties, public or private, is a mutuum, and is a sale, or an exchange, an act of commerce, and, therefore, an economic phenomenon.

VII.—

THEOPHILUS ON THE MUTUUM, δάνειον OR δάνειϭμα, AND THE COMMODATUM, OR τό χρηϭάμενον.

This distinction is so important that we may cite a passage from the paraphrase of the Institutes of Justinian, by Theophilus, one of the professors of law who were charged with the compilation of the Institutes, because it is more full and distinct than the corresponding passage in the Institutes:

So it is said in Roman law:* “But it is called giving a mutuum, because from being my property it becomes yours (quod de meo tuum fit); and, therefore, if it does not become your property no obligation is created.” But on the contrary with respect to the commodatum:† “We retain the property and the possession of the thing lent (rei commodatæ). * * * No one by lending a thing (commodando) gives the property in it to him who borrows it.”

Thus the whole misconception which is so common among English writers has arisen from the English words “lend,” “loan,” and “borrow” being used to denote two operations of essentially distinct natures. The French language is equally faulty; the words louer, emprunter, and emprunt are equally applied to both kinds of loan. But the distinction is clearly pointed out both in Roman and Greek law; and the Latin and Greek languages have distinct words for each operation. In the Code Napoléon the commodatum is termed prêt à usage,* and the mutuum prêt de consommation.† All commercial loans are mutua, and not commodata; every loan of money is in reality a sale or an exchange, in which a new property is created, which is called a credit, or a debt. And when the loan is repaid it is another exchange, by which the new property is extinguished.

No one who had the simplest knowledge of the elementary principles of Roman and Greek law, or of mercantile law, would ever have committed the mistake of confounding the distinction between the loan of money and the loan of an ordinary chattel, such as a horse, or a book, or a watch. Hence, those things only can be the subject of a mutuum which consist in pondere, numero, et mensurâ; or which can be estimated generically in weight, number, and measure. Such things are termed in Roman law quantitates, because equal quantities of bread, wine, oil, coals, etc., are as good as another equal quantity of the same things of the same quality, or one sum of 100 sovereigns is equal to another sum of 100 sovereigns, or one postage stamp is always equal to another of the same denomination. But, also, the Digest says mutuâ vice funguntur—one quantity serves the same purpose as another quantity. From this expression mediæval jurists termed them res fungibiles, and in modern English law they are termed fungibles. In English law the former kind of loan, or the commodatum, is said to be returnable in specie, because the identical things lent are returned; the latter kind of loan, or the mutuum, is said to be returnable in genere, because only things of the same nature are returned.

It is much to be regretted that the English language has not two separate words to denote these two kinds of loan, like the Latin and the Greek, because the double meaning of lend, loan, and borrow has been the cause of great misconception among uninformed writers as to the nature of credit and banking.

VIII.—

ON THE ERRORS MADE BY SOME MATHEMATICIANS IN TERMING DEBTS NEGATIVE QUANTITIES.

The juridical theory of credit worked out by the Roman jurists is sufficient for all practical purposes. They explained how credits, rights of action, or debts, are created, how they may be transferred, and how they are extinguished. But this is not sufficient for the full scientific theory of the subject; because they treated these credits almost entirely from the creditor’s side. But in every obligation there are two parties—the creditor and the debtor. Now, when two persons are bound together by an obligation, such as that of debt, it is usual to term the creditor the active, or positive, agent, and the debtor the passive, or negative, agent. Hence, to complete the full scientific theory of credit it is necessary to develop it from the debtor’s, or negative, side, as well as from the creditor’s, or positive, side. Accordingly, for the last 150 years—from the days of Maclaurin, at least—mathematicians have been in the habit of giving debts as an example of negative quantities. But they have entirely failed in giving an explanation of the term negative as applied to debts, which can be received as suitable for economic science. The explanation usually given is this: A man’s property may be considered as positive, and his debts as negative. Subtract his debts from his property, and the remainder, if any, is his substance, or capital. And as the national capital is the aggregate capital of all the individuals in it, according to this doctrine, in order to find the quantity of capital in the country all the floating debts in it would have to be subtracted from all the money in it; and the remainder would be the national capital (in money). Now, as we shall show hereafter, it may be conjectured that the floating debts in the country are not less than £6,000,000,000, and no one estimates the specie in the country at more than £120,000,000, it would be rather a difficult matter to perceive how £6,000,000,000 of floating debts are to be subtracted from £120,000,000 of hard money. So Peacock and Tait, two very distinguished mathematicians, say: “If property possessed or due could be denoted by a number or symbol with a positive sign, a debt would be indicated by a number or symbol with a negative sign, or conversely. Such affections of property are correctly symbolized by the signs + and −, since they possess the inverse relations to each other which these signs require; for if to a person there be given a certain property or sum of money with, or added to, a debt of equal amount, his wealth, or property, remains the same as before.”

Now, in a certain sense these modes of statement have some semblance of truth; if a person were going to retire from business he would call in and discharge his debts, or liabilities, and the remainder, if any, would be his substance. But, then, this result could not be attained without an exchange, because his outstanding debts could not be extinguished without being brought to him to be exchanged for money. But such a mode of statement is quite unsuitable for economics. Economics is purely the science of exchanges, and has only to do with quantities while they exist; and all exchangeable quantities are economic quantities while they exist and are the subject of commerce. Debts, or credits, are a species of property of the most gigantic magnitude, and are the subject of the most colossal commerce of modern times. They exceed in magnitude every other species of property, except the land itself. And what are they to be subtracted from? The mode of statement by Peacock and Tait is entirely inapplicable to the business of banking.

The fact is, that mathematicians have completely mistaken the application of the signs + and − in economics, from a want of knowledge of mercantile law and practical business. Mathematicians are accustomed to treat of quantities and operations, and as these may each be of opposite or inverse natures, they apply the signs + and − to them. The error which mathematicians fall into in applying the signs + and − in economics is that they apply them to property, whereas they affect persons. Persons may stand in inverse, or opposite, relations to each other as well as quantities and operations; and persons who stand in these inverse, or opposite, relations may be indicated by the signs + and −, as well as quantities and operations. Every student of mercantile law will at once perceive Peacock’s error in the above extract, which is shared by other mathematicians, because credits, or debts, are not jura in re; they are jura in personam; and the passive, or negative, debt is not money owed by the debtor, but the abstract personal duty to pay money.

IX.—

ERROR OF EULER IN TERMING DEBTS NEGATIVE QUANTITIES.

Euler says:* “The manner in which we calculate a person’s property is an apt illustration of what has just been said. We denote what a man really possesses by positive numbers, using or understanding the sign +; whereas his debts are represented by negative numbers, or by using the sign −. Thus it is said of anyone that he has 100 crowns, but owes fifty; this means that his real possessions amount to 100 − 50; that is to say, fifty crowns. As negative numbers may be considered as debts, because positive numbers represent real possessions, we may say that negative numbers are less than nothing. Thus, when a man has nothing in the world, and owes fifty crowns, it is certain that he has fifty crowns less than nothing; for if anyone were to make him a present of fifty crowns to pay his debts, he would still be at the point 0, though really richer than before.”

It will be seen that the statement in the first part commits exactly the error we have just pointed out. Suppose that the person has 100 crowns, and is bound to pay fifty crowns at the end of the year; then his property would, according to Euler, be stated as 100 crowns − 50 crowns. But it would be quite inaccurate to say that his property was only fifty crowns; because he has the 100 crowns, which are his absolute property, to dispose of, or trade with, exactly as he pleases in the meantime; and he is bound to have only fifty crowns at the end of the year to discharge his debt. Moreover, as we have shown, the debt is the abstract personal duty to pay, and it does not come into existence until the time for payment has come. Consequently, the person is not in debt at all until the end of the year; and, therefore, the debt, which does not exist, cannot be subtracted from his property. But the owner of the debt may put it into circulation, and it may be sold, transferred, or exchanged, and produce all the effects of money, any number of times, until it is paid off and extinguished. So that there may be the 100 crowns, and the right to demand the fifty crowns, circulating simultaneously in commerce. Moreover, as the 100 crowns are solid money, and the debt of fifty crowns is only the personal duty to pay money, it is quite evident that an abstract personal duty cannot be subtracted from a solid sum of hard cash.

Furthermore, by the law of continuity, if we diminish the period of payment gradually and continuously to 0, and the debt becomes payable on demand, that in no way alters the general principles of the subject. A duty to pay, though due on demand, cannot be subtracted from a material sum of money. The debtor’s money remains absolutely intact until he voluntarily buys up the right of action against himself of his own free will, giving fifty crowns in exchange for it. The expression is to be read in this way: He possesses 100 crowns, but coupled with the duty to pay fifty crowns at some given time.

In the other case, when the debtor possesses 0 crowns and owes fifty crowns, he is said to have fifty crowns less than nothing. This clearly means that he is under the duty to pay fifty crowns, and has 0 crowns to pay them with. Now, suppose that being in such a position, as Euler says, someone makes him a present of fifty crowns to pay his debt with. He pays the debt; he is fifty crowns richer than he was before, but his property is now 0. This is an example that + × + = +. Thus Euler is right as far as he goes, but he has stated only one half of the case; because there is another combination of algebraical signs which gives + —namely, − × −; and there is another method in commerce of arriving at the same practical result. As any person whatever may give the debtor fifty crowns to pay his debt with, let us suppose that the creditor does so. Then, having received the fifty crowns in a present from his creditor, the debtor hands them back to his creditor in payment of the debt, which is then extinguished. The debtor is now, as in the former case, richer by fifty crowns than he was before, and his property is now 0. The same result may be attained in another way. Suppose that the creditor simply releases his debtor from his debt; then, as in the former case, he would be fifty crowns richer than he was before; and his property would now be 0. Now, if crowns be +, and to give is also +, then a debt is −, and to cancel, or take away, is also −. Consequently, to give money is + × +; and to release, or cancel, a debt is − × −; and the position of the debtor will be exactly the same after each operation. This shows that the release of a debt is, in all circumstances, equivalent to a payment in money. Thus it is seen that in commerce, as in all algebra, + × + = − + −; an example of the permanence of equivalent forms, and a principle of the most momentous importance in modern commerce.

X.—

ERROR OF THORNTON AND CERNUSCHI ON CREDIT.

We have shown the error of distinguished algebraists in their interpretation of the negative sign as applied to debts; we have now to point out the error of a plausible view held by two distinguished bankers.

It has been asserted that credit adds nothing to the resources of the world, because it is neutralized by something else. Any person practically conversant with commerce, and seeing that the enormously greater portion of commercial operations are carried on by credit, would think it a strange doctrine that credit adds nothing to the resources of a nation, or of an individual. It is now universally agreed that the only true definition of wealth is “anything which has purchasing power.” The wealth of an individual or a nation is their “purchasing power.” And their purchasing power is their money, together with their credit; credit is, therefore, purchasing power over and above, and additional to, money, and hence it must be a resource cumulative to money. Some writers, however, have maintained the contrary doctrine in a very plausible way; which we have now to examine.

Henry Thornton, an able man, a distinguished banker, and one of the authors of the Bullion Report, says:* “Paper constitutes, it is true, an article on the credit side of the books of some men, but it forms an exactly equal item on the debit side of the books of others. It constitutes on the whole neither a debit nor a credit. * * * The use of paper does not, therefore, introduce any principle of delusion into that estimate of property which is made by individuals.” So another eminent banker, M. Cernuschi, says:† “The balance-sheet of every individual contains three accounts—existing goods, credits, and debts. But if we collected into one all the balance-sheets of everyone in the world, the debts and credits mutually neutralize each other; and there remains but a single account, existing goods. The totality of goods, therefore, forms the general inventory. There is the first matter of exchange. The debts and credits are subsidiary matters. Debts and credits are reciprocally transmitted as goods are transmitted; but however great or however small they may be, and through whatever hands they may pass—credits for some, debts for others—they add nothing to, and take nothing away from, the general inventory.”

The argument of Thornton and Cernuschi is simply this: Suppose A to have £100 in money, and also a three months bill of £50 on B. Suppose B to have £100 in money, and at the same time to have accepted a bill for £50 at three months to A. Then A’s property would be stated thus, £100 + £50; B’s property would be stated thus, £100 − £50. Now, the argument of these writers is this: the + £50 and the − £50 balance and neutralize each other, and the result is 0; which, according to them, is the same thing as saying that these quantities do not exist at all. This view might, perhaps, at first sight seem somewhat specious; but a very little reflection will show that it is quite erroneous. It alleges that if there are two equal and opposite quantities in existence at any moment, which may neutralize each other’s effects, and the result is 0, that that is the same thing as saying that these two quantities do not exist at all. Suppose that two equal and opposite forces act upon a particle at rest; they neutralize each other’s effects, and the result is 0; but it would be highly erroneous to say that, for that reason, they do not exist at all. Suppose that, on a division, the Government has 345 supporters and 300 opponents; the 300 members on each side neutralize each others’ effects; and the result is that the practical force of the Government is 45; but that does not imply that the 600 members do not exist at all. Hence, even if it were true that these equal and opposite quantities, credits and debts, neutralized each other’s effects, it would be quite erroneous to say that that is the same thing as saying that they do not exist at all. The error consists, as we have pointed out, in supposing that, in the case of obligations not yet due, the debt is an existing negative quantity neutralizing the effect of the credit. The credit, or the right of action of the creditor, is an existent quantity, which may be bought and sold like money, or any other chattel; the debt, or duty to pay, does not come into existence until the credit has expired and the day of payment has come; and consequently it cannot neutralize the credit. And even supposing that it is payable on demand like a bank credit, it is still an economic quantity until payment is demanded and it is extinguished; and the debtor’s property remains entire until he voluntarily gives some of it up to buy up the right of action against himself. These considerations are of supreme importance, as we shall see, in understanding the nature of banking. Personal credit is a person’s purchasing power over and above his money; hence credit is a resource and wealth cumulative to money; and the whole mass of circulating credits are economical quantities over and above, and additional to, money; and they are in their nature and effects in every respect equivalent to an equal quantity of money.

XI.—

ON THE TRUE MEANING OF SAYING THAT DEBTS ARE NEGATIVE QUANTITIES.

Jurists term debts “negative” quantities; but they interpret the sign − in quite a different way to what mathematicians do, for they apply it to the person of the debtor. And then the meaning of the term becomes perfectly clear. A contract, or obligation, consists of two parts: 1. The creditor’s right to demand; 2. The debtor’s duty to pay. The two quantities are inverse, opposite, or contrary to each other; the first is active, or positive; and the second is passive, or negative. Hence, the creditor’s personal right of action is the positive quantity, and the debtor’s personal duty to pay is the negative quantity. Hence, if a person has £500 at his banker’s, and is also bound to pay £50 at some given future time, or even on demand, and therefore his property may be stated as £500 − £50, it is not to be read as if he had only £450 at his banker’s; but it is to be read in this way: He possesses £500 in absolute property, but coupled with the duty to pay £50 at a given time, or when demanded. And his property can only be reduced to £450 by giving up to him the right of action for £50. Hence, in economics, the symbol (+ £100) always denotes the right to money, or the right to demand money, such as bank notes, cheques, bills of exchange, or other securities; and the symbol (− £100) always denotes the personal duty to pay money. We now clearly see the meaning of saying that money is a positive quantity, and debt a negative quantity, because money denotes a right, and debt denotes a duty.

And this exactly corresponds with the usual, but not universal, algebraical doctrine that quantities passing through o change their sign. Because when a person has spent all his money, and, therefore, his property is o, and then incurs a debt, he has exhausted all his right to demand, and has incurred a duty to pay. So when a man’s property is said to be £100 less than nothing, it means that he is under the duty to pay £100, and has no money to pay them with. It is now seen how necessary it is to observe the double meaning of the word debt both in law and common usage. When a debt is termed “goods,” “chattels,” “merchandise,” “wealth,” it means the creditor’s right of action. When a debt is termed a “negative” quantity, it means the debtor’s duty to pay. And as the inverse, opposite, or contrary quantities in an obligation are created together, can only exist together, and vanish together, they are exactly analogous to polar forces.

XII.—

IF MONEY BE TERMED POSITIVE CAPITAL, CREDIT MAY BE TERMED NEGATIVE CAPITAL.

A merchant’s wealth, or purchasing power, consists of his money, his rights to demand money (i. e., the bank notes, cheques, bills of exchange, or other securities he may possess), and his credit (i. e., his right to the future products of his industry). If he buys goods with his money and sells them with a profit, he first replaces the sum he has expended, and the surplus is his profit. If he buys goods with his credit, he creates a debt against himself; when he sells the goods, he first discharges the debt he has incurred, and the surplus is his profit. In either case, his profit consists in the excess of his property at the end of the operation above what it was at the beginning. Now, as Senior says: “Economists are agreed that whatever gives a profit is properly termed capital.” If he buys with money he makes capital of the realized profits of the past; if he buys with credit, he makes capital of the expected profits of the future. In each case, he makes a profit; hence, by the definition, money and credit are equally capital; but they are inverse, or opposite to each other; hence, if money be termed positive capital, credit may be termed negative capital.

Money is the property in gold already acquired, and credit is the property in gold which is to be acquired. Therefore, credit is inverse, or opposite, to money; but credit is in every way as real a value as gold. By using money the trader makes capital of the realized profits of the past; by using his credit he makes capital of the expected profits of the future; but money and credit are equally salable and valuable commodities. The fact is, that when we adopt exchangeability as the sole essence and principle of wealth, the whole difficulty vanishes; for money and credit are equally exchangeable quantities.

XIII.—

ON THE TRANSFER OF CREDITS, OR DEBTS.

Rights of action, credits, or debts, are now clearly shown to be the name of a certain species of merchandise, goods, chattels, or commodities; and they can be bought and sold exactly like any other merchandise, or commodities.

When it is seen that a bank note passes from hand to hand like money, it might perhaps be supposed that any other debts might be sold and transferred with equal facility. This, however, is a very great error. There is very considerable subtlety about the sale of debts; and it was only by very slow and gradual degrees that debts became freely salable. If it were asked what discovery has most deeply affected the fortunes of the human race, it might probably be said with truth, the discovery that debts are salable commodities. When Daniel Webster said that credit had done more, a thousand times, to enrich nations, than all the mines of all the world, he meant the discovery that debts are salable commodities, or merchandise; that they may be used as money; and that they produce all the effects of money.

SECTION II.

XIV.—

ON THE EXTINCTION OF OBLIGATIONS.—ON THE LIMITS OF CREDIT.

WE have now to consider the various methods by which obligations are extinguished. Credit being the right to demand some person to pay or do something, and debt the duty of that person to pay or do something, of course when the debtor has paid or done the thing he is bound to do he has fulfilled and discharged his duty; and therefore the right of the creditor is satisfied and extinguished, and thus the obligation is annihilated and extinguished.

It has been shown over and over again that credit is the name of a species of property, commodity, or merchandise, of the same nature as, but inferior in degree to, money; that it fulfills exactly the same function as money as a medium of exchange and circulation. It is a property, commodity, or merchandise cumulative to money, and is in all its effects on prices and production exactly equivalent to an equal sum of money. Credit is, in fact, to money what steam is to water; and like that power, while its use within proper limits is one of the most beneficial inventions ever devised by the ingenuity of man, its misuse by unskillful and unscrupulous persons has produced the most fearful calamities. Credit, like steam, has its limits; and we have now to investigate the proper limits of credit, and to explain the various methods by which it is extinguished.

Credit, no doubt, is of the same nature as money, being the right or title to a future payment. But there is this difference between them, that there is no time limited in which the holder of money shall demand a satisfaction for it; nor is it limited to any particular satisfaction. He may keep it as long as he pleases himself; or he may transmit it to his descendants; and they may receive a satisfaction at any time they please for the services done by their ancestor. But credit is always created with the express intention of being, or of being capable of being, extinguished at a certain short definite time; at least mercantile credit is, of which alone we are treating here. It is unextinguished credit which produces those terrible monetary cataclysms which scatter ruin and misery among nations. It is chiefly by the creation of excessive credit that over-production is brought about; which causes those catastrophes called commercial crises; and it is the inability of credit shops to extinguish the credit they have created—commonly called the failure of banks—which is the cause of the most frightful social calamities of modern times.

The true limits of credit may be seen by the meaning of the word; because all credit is the promise to pay or do something in future, and that something, whatever it is, is the value of the promise or credit. That something need not necessarily be money; it may be anything else; it may be any other chattel; or it may be a promise to do something. The credits, however, which are the subject of this work are always promises to pay money; and it is just on this point that literary economists are utterly at fault. Because a bill, or note, is an obligation to pay money, many uninformed writers suppose that they must always be paid in money or bank notes, and therefore that the issues of credit must always have a fixed and definite relation to the quantity of money in a country; or, in mathematical language, are a definite function of it. Now, it is true that credit must always bear a relation to the money in the country; but it is not a fixed relation; it depends to a very great extent indeed on the organization of the system of credit; hence, as the quantity of credit to money varies according to the different methods in which credit is organized, we may say, if we may coin the term, that credit is a contingent function of money.

To show how extremely ignorant writers are of the actual organization of the modern system of credit, we may quote a sentence from Colonel Torrens, who was one of the influential sect who procured the enactment of the Bank Charter Act of 1844. He says:* “A bill of exchange may also pass from purchasers to vendors many times a day; but no one of the successive transactions of which it is the medium can be finally closed until the last recipient has received in coin or bank notes the amount it represents.” This statement also appears in Mill. No doubt, 200 years ago, as far as we are aware, the vast majority of bills were paid in money or bank notes; but that has long ceased to be the case. At the present day, probably not one bill in 100,000 is ever paid in money or bank notes; but by other methods, which we have now to describe.

Those who imagine that bills and notes at the present day are always paid in money or bank notes have as much idea of the truth as those who know nothing of steam navigation beyond the little Comet of four horse-power which paddled down the Clyde in 1812 have of the triple expansion engines of the Campania; or as those who know nothing of a locomotive beyond Stephenson’s Rocket have of the last new locomotive on the London and Northwestern Railway. The organization and expansion of the system of credit has developed pari passu with that of the steam-engine. The only real difficulty in the case, as has been frequently observed, is for lay readers and writers to understand that a right of action, a promise to pay, which is a credit, or a debt, is itself independent exchangeable property or merchandise, or a chattel, quite distinct from the money promised itself, and that it circulates in commerce by itself, exactly like money. But of course the value of the promise or right of action is the thing itself; and consequently if the thing itself is not forthcoming, the right of action has lost its value. This consideration at once shows the limit of credit. Assuming the credit to be, what is its best-known form in this country, the right to demand money, it is quite clear that as long as a person has in his possession sufficient money, or what is held to be equivalent to money, to discharge his debt when it becomes due, the credit has not been excessive. The futile nature of the speculations of lay writers on this subject consists in the fact that by the highly organized system of modern credit, it is only an infinitesimal portion of bills that are ever paid in money at all; but they are paid in the equivalents to money. The institution of banks and bankers who create currency by means of their credit, either in the form of deposits or notes, has enlarged the limits of credit at least a thousand-fold; but yet the principle of the limit remains the same. Credit always has to be redeemed; and if this can be done the credit has been sound. Hence, credit is never excessive, whatever its absolute amount may be, as long as it always returns into itself.

XV.—

ON THE EXTINCTION OF OBLIGATIONS.

We have now to consider the various methods by which obligations are extinguished. Credit being the right to demand something to be paid or done, and the debt being the duty to pay or do that something, the payment, or the performance of the thing, fulfills, discharges, and extinguishes the duty as well as the right. And thus the obligation is absolutely annihilated and extinguished.

Commercial credit in this country is always expressed to be payable in money; and it is often supposed that bills of exchange are always paid in money, or bank notes. But as has been shown in the preceding paragraph, that is a vital error. There are other methods besides payment in money by which obligations are extinguished. And in this country the amount of bills which are paid in money is absolutely infinitesimal compared with those which are paid in other ways. There are four different methods by which obligations may be extinguished. These are: 1. By acceptilation, or release; 2. By payment in money; 3. By novation, renewal, or transfer; and 4. By compensation, or set-off.

XVI.—

ON ACCEPTILATION, ἀθώωϭις, ἀκκεπτιλατίων, OR RELEASE.

We have already described how the obligatio verbis and litteris, or the oral and written obligations, were created. When the debtor came to repay the loan, the proceedings were reversed. He brought the money to his creditor, and said something of this sort to him: “Quod ego tibi promisi, habesne acceptum?”—“Have you received what I promised you?” To which the creditor replied: “Habes, acceptumque tuli.”—“I have, and have entered it as received.”

In this case the debtor made an entry of money paid in his ledger, termed expensilatio; and the creditor made a correlative entry of money received in his ledger, termed acceptilatio. These entries of expensilatio and acceptilatio, when once formally made in their respective ledgers by the parties, were final and conclusive, and could not be questioned. All contracts or obligations created by the mutual consent of the parties may be extinguished, canceled, dissolved, or annihilated by the same mutual consent of the parties by which they were created.

As Gaius says:* “Omnia quæ jure contrahuntur contrario jure pereunt.”—“All formal contracts are destroyed by a reverse process.” Consequently, if for any reason whatever the creditor chose to release the debtor from his debt without the actual payment of money, it was done by the solemn form of acceptilatio. The debtor went through the legal form of question, and the creditor went through the legal form of answer, and then made the formal entry of acceptilatio in his ledger; it was then a valid and final release, and it could not be questioned or disputed. So, at present, if a creditor gives his debtor a formal written receipt for money due, it is a valid and final release of the debt. We shall hereafter give some examples of acceptilation which may surprise some of our readers.

For “acceptilation,” see Gaius, III., 169-175; Instit. Just., III., 29; Theophilus, III., 29; Digest, XLVI., 4; Basilica, XXVI., 9.

XVII.—

THE RELEASE OF A DEBT IS IN ALL CASES EQUIVALENT TO A GIFT OR PAYMENT IN MONEY.

Euler, as we have seen above, says that if a person has nothing, and owes fifty crowns, his property is fifty crowns less than nothing. His property is (− 50) crowns—i. e., he is under the duty to pay fifty crowns, and has nothing to pay them with. He then says that, if any person made the debtor a present of fifty crowns to pay his debt with, he would be fifty crowns richer than he was before, though his property would then be 0. Euler is right so far as he goes; but he has stated only one half of the case, because the same result may be attained in another way. As the same result follows whoever gives him the fifty crowns, we may suppose that his creditor makes him a gift of fifty crowns. The debtor then may give his creditor back his fifty crowns, and so he discharges his debt. The debtor is now fifty crowns richer than he was before, and his property is now 0. Now, if money be positive, +, the gift of money is + × +, which equals +. But there is another combination of signs which gives +, and that is − × −; and there is another way of arriving at this result. Suppose that instead of the double operation of the creditor giving his debtor fifty crowns, and then receiving them back in discharge of his debt, he simply releases the debtor from the debt. Then the debtor would be fifty crowns richer than before, and his property would be 0. Now, a debt is −, and taking away, or releasing, is also −; hence, releasing a debt is − × −; hence releasing a debt is absolutely equivalent to making a gift of money—that is, − × − = + × + in economics, as it does in every other branch of science, mathematical and physical. This example shows that the release of a debt is in all cases whatever, equivalent to the gift or payment of money—a principle of immense importance in commerce, and the application of which may surprise some readers. So Paulus says:* “Si quis obligatione liberatus est, potest videri cepisse.” And Basil., II., 3, 115: “ὁ ἐλευθερούμενος ἐνοχῆς δοκεῖ τι εἰληφέναι.”—“He who is released from an obligation has gained.” So also: “Per accepti quoque lationem egens debitor etiam eam pecuniam quâ liberatus est, cepisse videtur.”—“Even an insolvent debtor being freed by a release has gained the amount of what he is released from.” So Pothier:† “A release is a donation.” So Ortolan says:‡ “The release from a debt is always classed as a donation in Roman law.” So Von Savigny:§ “A simple contract, or the release of a debt, may be the subject of a donation.” Also:∥ “The increase of wealth may result from * * * a credit given to the debtor, or the release of a debt.” “Every release of a debt enriches the debtor. The amount of the donation is always equal to that of the debt, even though the debtor is insolvent. Although the release from a debt destined never to be paid seems a thing of no consequence, the increase of property does not the less exist. In effect not only does property represent a quantity always indeterminate, but its total value may also be either positive or negative. [Negative property is the inverse of a right, i. e., a debt or a duty.] If, then, property is reduced to a negative value, the diminution of minus is in law a change identical with the increase of plus for a positive value” (that is, − × − = + × +). “The release of a debt¶ always constitutes a gift equal to the amount of the debt, even though the debtor is insolvent.” So the release of a debt to a debtor may be a legacy.**

XVIII.—

APPLICATION OF THE PRINCIPLES OF ALGEBRA AND MERCANTILE LAW TO COMMERCE.

It has now to be shown how the algebraical doctrine that − × − = + × +, and its legal equivalent that the release of a debt is in all cases equivalent to a payment in money, are applied in commerce.

Suppose that I owe £100 to a banker, in how many ways can I pay him? 1. I may pay him in actual money—that is, + × +. 2. If I happen to possess £100 in his notes, I may tender him his own notes; or if I have an account with him, I may give him a cheque on my account—that is, in either case I release him from his debt to me; that is, − × −. That is, releasing the banker from his debt to me is paying my debt to him. 3. I may pay him £50 in money, and £50 in his own notes, or by cheque on my account. Paying him in money is + × +; tendering him his own notes, or giving him a cheque on my account, is − × −; and the combined effect of the two is to discharge and extinguish my debt of £100. Thus, I may pay a debt to my banker entirely in money, or entirely in his own notes, or by cheque, or partly in money and partly by notes or cheque, and the effect of these several modes of payment is absolutely identical. Thus it is seen that the doctrine that taking away a negative quantity is absolutely equivalent to adding a positive quantity is absolutely true in all branches of science. That is, in all sciences whatever, − × − = + × +; and in mercantile algebra it is to be interpreted thus: “The release of a debt is in all cases equivalent to a payment in money.”

XIX.—

THE RELEASE OF A DEBT MAY BE HELD TO EXTINGUISH AN OBLIGATION IN THREE DIFFERENT WAYS.

There are three different methods in which the release of a debt may be considered to extinguish an obligation.

First Method.—As the obligation was created by the mutual consent of the parties, so it may be canceled and extinguished by the same mutual consent which called it into existence. Now, as we have seen that, by the general principles of the theory of signs, to create an obligation is denoted by + , so to cancel, extinguish, or annihilate an obligation is denoted by − .

Now let us observe the effect of the negative sign on each of the parties to the obligation. The creditor’s property becomes − (+ £100). But − (+ £100) = − £100. That is, the creditor has lost £100. The debtor’s property becomes − (− £100). But − (− £100) = + £100. That is, the debtor has gained £100. Which shows that to cancel or release a debt is exactly equivalent to making a gift of money.

Second Method.—As the creditor’s right of action is simply a piece of merchandise, goods and chattels, or a commodity, it may be the subject of a donation or gift, exactly like any other commodity. The creditor may present his right of action as a donation or gift to the debtor himself. Then the debtor has the right to demand (+ £100) from himself, and also the duty to pay (− £100) to himself. Then his property will be + £100 − £100. These two quantities cancel and extinguish each other like + a, and −a, on the same side of equation. They vanish together; the right is not in abeyance; it is absolutely extinguished. The (+ £100) ceases to exist as well as the (− £100); and thus the obligation is absolutely extinguished. The creditor has lost £100, and the debtor has gained £100. Thus if a person makes another a gift of £100, and also releases him from a debt of £100, the donee has received a gift of £200. When Sir Joshua Reynolds died he held a bond of Burke’s for £2000. By his will he released Burke from his bond of £2000, and besides that he bequeathed him £2000 in money. Consequently, Reynolds bequeathed £4000 to Burke.

Third Method.—There is still a third method by which it can be explained. When a debtor is presented with a right of action against himself he fulfills two personæ, or characters; he is creditor to himself and also debtor to himself. In his persona of creditor, he presents his right of action to himself in his persona of debtor. In his persona of debtor, he pays the right of action to himself in his persona of creditor. Hence the duty is fulfilled and discharged, just as much as if he had paid it to another individual. Thus the obligation is not in abeyance; it is canceled and extinguished.

XX.—

WHEN + £100 CANCELS AND EXTINGUISHES − £100, AND WHEN IT DOES NOT.

It must, however, be carefully observed that (+ £100) and (− £100), in the same person, do not always and in all cases cancel and extinguish each other in economics. A person’s property may be (+ £100) and (− £100), and therefore for practical purposes, be equal to 0; and yet these two quantities will not cancel and extinguish each other in economics. It is only when the right to demand £100 from himself, and the duty to pay £100 to himself unite, that both quantities vanish, and the contract or the obligation is extinguished. Suppose that a person has £100 in a banker’s notes, and at the same time owes £100 to some other person. Then his property will be (+ £100), and (− £100), and in substance will = 0. But in this case the (+ £100) will not cancel the (− £100), and the (+ £100) is not extinguished as an economic quantity. The reason of this is obvious; because his right of action against A is no fulfillment of his duty to pay B. The debtor may pay away the £100 in notes, and leave his own debt unpaid.

Suppose that two bankers each hold £100 of the other’s notes. Then so far as regards these notes the property of each banker is (+ £100) and (− £100), and in substance = 0. But in this case, the (+ £100) and the (− £100) held by each banker do not cancel each other; because each banker may pay the notes of the other in commerce; and therefore there are £200 of economic quantities in existence. Each banker has the positive absolute right to demand £100 which is actual property; but he is only under the contingent duty to pay £100 if demanded. If, however, they exchange notes, each banker will then have the right to demand £100 from himself, and the duty to pay £100 to himself. Then each of the obligations is simultaneously extinguished; because each banker has performed his duty of paying the other by releasing him from his debt. Thus the £200 of economic quantities vanish out of existence. Hence it is only when the right and the duty emanate from the same person, and are again revested in the same person from whom they emanated, that the (+ £100) and the (− £100) cancel each other; and the obligation is extinguished.

XXI.—

ON PAYMENT IN MONEY.

The preceding considerations will explain how a payment in money extinguishes an obligation; which very few persons have ever thought of. Suppose that a person possesses £100, and owes a debt of £30, then his property will be (+ £100) and (− £30); that is, he possesses £100, but coupled with the duty to pay £30 at some given time. His creditor’s right to demand is (+ £30). When the creditor demands payment of his debt, he brings his right of action to the debtor, who gives him £30 in money in exchange for it; that is, the debtor buys up the right of action against himself. The debtor’s property is then £70, and also (+ £30) and (− £30)—that is, £70 in money; and also the right to demand £30 from himself and the duty to pay £30 to himself. The (+ £30) and the (− £30) cancel and extinguish each other by either of the methods described above, the obligation is extinguished, and the debtor’s property is now £70. This transaction is therefore a sale, or an exchange. Thus the obligation, or contract, was originally created by the sale, or exchange, of the mutuum; and it is extinguished by the sale, or exchange, of payment. Thus an obligation is created by one exchange, and is extinguished by another exchange.

XXII.—

ON CONFUSIO, μῖξις, MERGER.

When a right of action against a person comes in any way into his own possession, so that he has both the right to demand from himself, and the duty to pay to himself, it is termed confusio, or concursus debiti et crediti, in Roman law, μῖξις in Greek law, and merger in ours. It was universally agreed that the confusio, μῖξις, or concursus debiti et crediti of a simple debt extinguished the obligation; but how it does so has given rise to much subtle speculation, and for centuries puzzled jurists and divines. The divines alleged that a right once created could never be destroyed; and the jurists said that the right being transferred to the debtor, he could not sue himself; and, therefore, that the obligation is extinguished. This explanation, however, is not satisfactory, because in many cases a man may sue himself: he may fulfill two characters, or personæ; and as one character, or persona, he may sue himself as another character, or persona. Moreover, this would only show that the right is suspended, or in abeyance, and not that it is extinguished; and many eminent jurists seem to take this view.* Moreover, in several cases, a confusio, or concursus debiti et crediti occurs, in which the right and the duty unite in the same person and are not extinguished, but may afterward be separated.† The considerations, however, which we have presented will give a complete solution of the case. When one party is a creditor and another party is a debtor, they are two characters, or personæ. If, then, the right of action comes into the possession of the debtor, he now fulfills two characters, or personæ. The two personæ exist though they are now united in one individual, just the same as they did when in separate individuals. And these two personæ may deal with each other in exactly the same way as when they were separate parties. They may agree to extinguish the obligation by either of the three methods previously described. The obligation, then, is not suspended, or in abeyance; it is absolutely extinguished and annihilated. Thus this perplexity which was held to be insoluble by jurists for centuries is now removed, and the theory of credit is now complete.

XXIII.—

ON NOVATION, μετάθεϭις, RENEWAL OR TRANSFER.

A contract, or obligation, may also be extinguished by substituting a new obligation for it. The new obligation pays, discharges, and extinguishes the preceding one; and the extinction of the preceding obligation is the consideration for the new one. This is termed novatio in Roman law, μετάθεϭις in Greek law, and renewal or transfer by us. This novatio may take place in two ways: (1) The debtor may give his creditor a new obligation of his own in payment of the former one, which the creditor accepts in lieu and substitution of the former one. The new obligation is the price or payment of the preceding one, and the extinction of the preceding one is the consideration for the new one. As, for example, when a banker agrees to renew a promissory note for a customer, the new note is payment of and extinguishes the former one, and no debt arises until the new note becomes due. Or when a creditor has a debt due to him payable on demand, and he agrees to take a promissory note from his debtor payable in three months, the note pays and extinguishes the debt payable on demand, the extinction of the debt payable on demand is the consideration for the note; and no debt, or duty to pay, arises until the note becomes due. This form of novatio is called “renewal” by us. (2) The debtor may in payment of his own debt, transfer to his creditor a debt due to him by someone else. If the creditor agrees to receive this debt due to his debtor in payment of the debt to himself, the new obligation due from the debtor’s debtor pays and extinguishes the obligation due from the debtor himself. But the creditor may retain his own debtor as surety in case of the new debtor’s failure to pay. A familiar instance of this is where a debtor pays his creditor in bank notes. He transfers to his creditor a debt due from the banker in payment of his own debt. If the creditor agrees to receive the notes in payment of the debt, the debtor is discharged, and the creditor agrees to take the banker as his new debtor. So when a debtor gives his creditor a bill of exchange upon another person in payment of his own debt. So, if a creditor and debtor are customers of the same bank, the debtor may give his creditor a cheque on his account in payment of a debt. If the creditor accepts the cheque, he pays it into his own account; the banker transfers the credit from the debtor’s account to the creditor’s; as soon as this is done the debtor’s debt is paid just the same as if it had been by money; the debt of the banker to the transferer is extinguished; he becomes debtor to the transferee; the transferer is released from his debt to the transferee, who accepts the banker as his new debtor. This form of novatio is termed “transfer.”

This novation, or μετάθεϭις, is equivalent to a payment in money. When the debtor’s debtor agreed to the transfer of the debt he was called delegatus, and the transaction was termed a delegatio. So Ulpian says:* “Verbum exactæ pecuniæ non solum ad solutionem referendum est, sed etiam ad delegationem.” So Basil., 25, 5, 56: “ῥῆμα τῶν ἀπαιτηθέντων χρημάτων οὑ μόνον εἰς καταβολὴν ἁναφέρεσθαι δεῖ, ἁλλα καὶ ἐς ἔκταξιν.”—“The word payment includes not only payment in money, but also the payment of a credit.” So also: “Solvit et qui reum delegat.”—“He pays who transfers another debtor.” And: “Delegare est vice suâ alium dare creditori, vel cui jusserit.”—“To delegate is to give another debtor instead of one’s self to the creditor, or to his order.” This operation, when effected by persons living in different places, is known in commerce as “an exchange.” A person living in one country may be debtor to one person living in another country, and creditor to another. He may pay his creditor by sending him an order on his debtor, and thus the obligation is extinguished. The mass of reciprocal transactions of this nature which take place between different countries is called the foreign exchanges.

For “novation” and “delegation” see Gaius, II., 38, 39; Institut. Just., III., 29, 3; Digest, XLVI., 2; Codex, VIII., 41; Basilica, XXV., 5, 56.

XXIV.—

ON COMPENSATION, ἀντεξέταϭς, ἀντέλλογος OR ἀντελόγιϭμος, SET-OFF.

If two persons are mutually indebted to the same amount at the same time, each may claim that the debt which he has against the other shall be taken in payment of the debt he owes. Each, therefore, is money, or legal tender, with respect to the other. This is termed compensatio. Thus Modestinus says:† “Compensatio est debiti et crediti inter se contributio.” Basilica, 24, 10, 1: “ἀντεζέταϭις ἐϭτιν χρέους καὶ δανείϭματος ἀντέλλογος.”—“Compensation is the mutual set-off of debts and credits.” If the debts are equal, each is payment in full for the other; they are weighed and set off against each other. If the debts are unequal, equal amounts compensate each other, and the balance only is due in money. Simple as this may appear, it took a long time both in Roman and English law to arrive at it. In early Roman law, compensation was not allowed as a matter of right; each creditor had to bring an action against the other. Afterward, in the time of Gaius,* compensation was not held to be payment; but the Prætor, or Equity Judge, allowed the counter-debt to be pleaded as a defence to the action of debt. But the absurdity of this became apparent. Pomponius says:† “Ideo compensatio est necessaria, quia interest nostra potius non solvere quam solutum repetere.”—“Therefore, compensation is necessary, because it is our interest rather not to pay than to recover back what we have paid.” Marcus Aurelius allowed compensation as a matter of right, and thus mutual debts became money, or legal tender, with respect to each other. So it is said:‡ “Si constat pecuniam invicem deberi, ipso jure pro soluto compensationem haberi opertet.”—“If the mutual debts are proved, compensation is to be held as payment as a matter of right.” So also: “Compensationes debitorum ipso jure fient.” Basil., 24, 10, 21: “οἱ τῶυ χρεῶυ ϭυμψηφιϭμοὶ ἰδίῳ δικαίῳ γίνονται.”—“The compensation of debts is a legal right.” Bankers, argentarii, however, were always obliged to allow compensation for counterclaims.

For “compensation,” see Gaius, IV., 61-68; Instit. Just., IV., 6, 30, 39; Digest, 16, 2; Codex, IV., 31, 4; Basilica, 24, 10.

The rule of the common law of England was the same as the early law of Rome. If two persons were equally indebted, each had to bring his action against the other. Equity, however, which adopted the law of the Pandects and the Basilica, always allowed compensation, or set-off. In many cases, the rule of common law worked great injustice. If a person and a bankrupt were mutually indebted, the person was obliged to pay his debt in full, and only received a dividend on his own from the bankrupt’s estate. To remedy this the Act, Statute 4, Anne, c. 17, allowed set-off in cases of bankruptcy; and this was extended by Statutes 2, Geo. II., c. 22, s. 12; and 8, Geo. II., c. 24, s. 4. But now by the Supreme Court of Judicature Act, which enacts that in all cases in which the rules of equity conflict with the rules of law, those of equity shall prevail, compensation is allowed in all cases. Hence, if two persons are mutually indebted, each debt is money, or legal tender, for the other. Both debts, however, must have actually accrued due at the time, to be subjects of compensation. Ulpian says:§ “Quod in diem debetur non compensabitur antequam dies venit.” Basil., 26, 10, 7: “τὸ ὑπὸ ἡμέραν πρὸ τῇς ἡμέρας οὑ ϭυμψηφίζεται.”—“A debt which is not yet due cannot be compensated.” As, for instance, if a banker holds a customer’s acceptance not yet due, he cannot retain a balance on his customer’s account to meet it, because his customer’s debt does not come into existence until the acceptance becomes due. So, if a banker holds a merchant’s acceptance not yet due, and the merchant holds notes of the banker, the banker must pay his notes on demand; he cannot set off the merchant’s acceptance, because the merchant’s debt has not yet come into existence. So, for a similar reason, if two merchants hold each other’s acceptances, one of which is due and the other not yet due, they cannot be compensated. If a debt which was not yet due was set off against a debt which had become due, it was called deductio.*

The following are examples of compensation, or set-off. (1) Suppose that two bankers issue notes, and each has got possession of £100 in the notes of the other. Then each banker is two personæ; he is creditor, and has a right of action (+ £100) against the other; and each is debtor, or has the duty to pay (− £100) his own notes to the other. So long as each banker holds the notes of the other, there are, of course, £200 of rights of action, credits, or debts, in existence. But when they exchange notes each tenders to the other the debt he has against him, in payment of the debt due to him; that is compensation. Each banker still continues to be two personæ; but instead of each being debtor to the other, each is now debtor to himself. It is a case of double confusio. As creditor he demands payment from himself as debtor; and as debtor he pays to himself as creditor the debt he has against himself. Each debtor has now performed his duty of paying his debt; and so each obligation is extinguished, and the £200 cease to exist as economic quantities. (2) Suppose a banker holds a merchant’s acceptance for £100, which has become due; suppose that the merchant holds £100 of the banker’s notes, or has an account with him. When the banker demands payment of his acceptance from the merchant, the merchant tenders him his own notes in payment; or the banker simply writes off the amount of the acceptance from his customer’s account, and as before, both obligations are extinguished. (3) Suppose that two merchants have issued equal acceptances each payable on the same day. Suppose also that the acceptance of each merchant comes into the possession of the other; on the day of payment each merchant tenders to the other his own acceptance in payment of the acceptance due to him, and thus as before, both obligations are extinguished.

This form of compensation was formerly very extensively used on the Continent before bankers discounted mercantile bills. At numerous centers of commerce—Lyons, Antwerp, Nuremberg, Hamburg, and many others—there were held great fairs every three months. The Continental merchants, instead of making their bills payable at their own houses, where they must have kept large amounts of cash to meet them, made them payable only at these fairs. In the meantime, these bills circulated all over the country like money, and got covered with indorsements. On a certain day of the fair, the merchants met together and presented their acceptances to each other; and if their respective claims were equal they were balanced and paid by being exchanged against each other, by compensation. By this means an enormous commerce was carried on and liquidated without any specie at all. Boisguillebert says* that at the fair of Lyons transactions to the amount of 80,000,000 (livres?) were settled without the use of a single coin. We thus see what a prodigious extension of credit and commerce is effected by the modern highly organized system whose juridical principles were elaborated by the Roman jurists. We showed that in the early stages of society the first use of money was to represent the balances which arose from the unequal exchanges of products. But modern commerce is carried on, not by money, but by credit; and except in small retail transactions, money is only used now to pay and discharge unequal balances of debts. We have now developed the complete theory of credit, and explained the great juridical and mathematical principles upon which it is based. And we have now shown that the principles of commerce may be reduced to the strictest scientific demonstration.

XXV.—

ON THE RATIO OF MONEY TO CREDIT.

Credit, then, being clearly understood to be the name of a certain species of commodity, or merchandise, of the same nature as money, but of an inferior order, it is of considerable practical importance to discover the ratio which credit bears to money in this country. The difficulties which prevent private inquiries are very great, and the opportunities which are presented by Parliamentary inquiries into commercial crises are very rarely made use of for any but their immediate purpose. In the report, however, of the committee of the House of Commons on the crisis of 1857 there is given an interesting statement by Mr. Slater, of the great house of Morrison, Dillon & Co., which may furnish us with a clue to answer this question. Having analyzed the operations of his house for 1856, he gave in the following table as showing the proportion in which each million of receipts and payments was made in money and various forms of credit:

Here it is shown that in this great house, which may be reasonably supposed to represent commerce in general, specie did not enter into their transactions for little more than two per cent. A similar investigation, instituted by some bankers, resulted in showing that specie only entered into their operations to the amount of four per thousand, or .0025 per cent. These investigations furnish a clue by which we may obtain a rough estimate of the ratio of credit to money.

It is usually considered that the quantity of coin, gold and silver, in circulation in this country may be estimated at not far from £120,000,000; and if we take as a moderate estimate that the quantity of credit is fifty times the quantity of money, as the above figures indicate, it would appear that the quantity of credits, or debts, of all kinds in the country is about £6,000,000,000. This, of course, is only a rough approximate estimate; but it is sufficient to show the enormous magnitude of this species of property, or merchandise, in this country, and its supreme importance in modern times. This credit produces exactly the same effects, and affects prices exactly as so much gold; prices are estimated by the aggregate of money and credit, which constitutes the circulating medium or currency; and it is through the excessive creation of this species of property that all commercial crises are brought about; and through the mismanagement of these, and bad banking legislation, that commercial crises develop into monetary panics. Moreover, when we grasp the conception that all this mass of credit, or circulating debts, and other securities of a similar nature, is so much exchangeable property, or merchandise, which can be bought and sold, donated, pledged, and exported and imported between country and country exactly like any material commodities, it compels a thorough reinvestigation of all the fundamental concepts of economics, and shows how utterly erroneous is the doctrine that labor and materiality are necessary to value, and that all wealth is the product of land, labor, and capital.

XXVI.—

TWO BRANCHES OF THE SYSTEM OF CREDIT.

The system of credit is divided into two branches—mercantile credit and banking credit.

In mercantile credit, merchants buy or circulate commodities by means of credits, or debts, payable at a certain fixed date; and these credits may circulate in commerce and effect exchanges exactly like money until they are paid off and extinguished; and mercantile debts are always extinguished when they become due.

In banking credit, bankers buy gold and mercantile debts payable at a future time, by creating and issuing credits, or debts, of their own payable on demand. Thus they turn mercantile debts into ready money. Banking credits are created payable on demand; and must be paid if so demanded. But they are not intended or expected to be extinguished. On the contrary, they are created with the hope and expectation that they will not be demanded and extinguished. There is no necessity that banking credits should ever be extinguished; in fact, if banking credits were extinguished as soon as they are created, the business of banking could not exist. Banking can exist only so long as payment of banking credits is demanded only to a very small extent. Banking credit may be transferred from one account to another in the same bank, and from one bank to another, to the end of time. It is quite possible that much of the banking credit which exists at the present day may have been created by the very first banks founded in this country; and there is no necessary reason why it should not continue till the end of time. Money is a very expensive machine to purchase and keep up; but banking credits cost nothing to create, and they may endure forever.

These two departments of credit are perfectly distinct; they are governed by different principles; and they are, in some respects, antagonistic to each other. The same persons should never carry on both branches of business; that is, great bankers should not be merchants, and great merchants should not be bankers, because the duty of bankers is often contrary to the interests of merchants.

A History of Banking

in

THE RUSSIAN EMPIRE.

by

ANTOINE E. HORN,

late editor-in-chief of the “journal de st. petersbourg.”

new york.

1896.

BANKING IN RUSSIA.

[* ] Ortolan, Explication Historique des Instituts, § 1416.

[* ]Pro Roscio Comoedo.

[* ] Digest, 50, 16, 213.

[† ]Instit. Just., III., 15, 2.

[‡ ] Digest, 45, 1, 46.

[§ ] Digest, 50, 17, 213.

[* ] Law of Evidence, Vol. I.

[* ] Digest, 44, 7, 2.

[† ]Traité sur les Obligations.

[‡ ]De la Novation, p. 139.

[§ ] Law of Personal Property, p. 304.

[* ]Papa d’Amico, Titoli di Credito, p. 89.

[* ] Digest, XII., 1, 2, 2.

[† ] Digest, XIII., 6, 8, 9.

[* ]Code Civil., Liv. III., Tit. X., ch. i., sect. i., § 1875.

[† ] Ibid., ch. ii., sect. i., § 1892.

[* ] Algebra, p. 7.

[* ] An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, p. 20.

[† ]Mecanique de l’Echange, p. 1.

[* ] The Principles and Practical Operation of Sir Robert Peel’s Act of 1844 Explained and Defended, p. 79.

[* ] Digest, 50, 17, 100.

[* ] Digest, 50, 17, 115.

[† ]Traité des Obligations.

[‡ ]Explication Historique des Inst. Just., Liv. II., Tit. 7, §543, 557.

[§ ]Traité de Droit Romain, Liv. II., ch. iii., § 142.

[∥ ]Ibid., § 155.

[¶ ]Traité de Droit Romain, Liv. II., ch. iii., § 166.

[** ] Digest, 34, 3, 3.

[* ] Stair’s Institutes of the Law of Scotland.

[† ] Erskine’s Institutes of the Law of Scotland. Bell’s Dictionary of the Law of Scotland, art., Confusion.

[* ] Digest, 50, 16, 187.

[† ] Digest, 16, 2, 1.

[* ] Instit. IV., 61-68.

[† ] Digest, 16, 2, 3.

[‡ ] Codex, 4, 31, 4, 14.

[§ ] Digest, 16, 2, 17.

[* ] Gaius, IV., 57.

[* ]Dissertation sur la Nature des Richesses, ch. ii.