Front Page Titles (by Subject) SECTION II. - A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.)
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SECTION II. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 2 A History of Banking in Great Britain, the Russian Empire, and Savings-Banks in the U.S.
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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.
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.
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.
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.**
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.”
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.
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.
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.
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.
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.
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.
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.
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
THE RUSSIAN EMPIRE.
ANTOINE E. HORN,
late editor-in-chief of the “journal de st. petersbourg.”
BANKING IN RUSSIA.
THE EARLY STAGES OF MONEY AND CREDIT.
[* ] 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.