The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface
• Chapter I: Barter
• Want of Coincidence In Barter.
• Want of a Measure of Value.
• Want of Means of Subdivision.
• Chapter II: Exchange
• Utility and Value Are Not Intrinsic.
• Value Expresses Patio of Exchange.
• Chapter III: The Functions of Money
• A Standard of Value.
• A Store of Value.
• Separation of Functions.
• Chapter IV: Early History of Money
• Currency In the Hunting State.
• Currency In the Pastoral State.
• Articles of Ornament As Currency.
• Currency In the Agricultural State.
• Manufactured and Miscellaneous Articles As Currency.
• Chapter V: Qualities of the Material of Money
• 1. Utility and Value.
• 2. Portability.
• 3. Indestructibility.
• 4. Homogeneity.
• 5. Divisibility.
• 6. Stability of Value.
• 7. Cognizability.
• Chapter VI: The Metals As Money
• Iron.
• Lead.
• Tin.
• Copper.
• Silver.
• Gold.
• Platinum.
• Nickel.
• Other Metals.
• Alloys of Metals.
• Chapter VII: Coins
• The Invention of Coining.
• What Is a Coin?
• Various Forms of Coins.
• The Best Form For Coins.
• Coins As Works of Art.
• Historical Coins.
• The Royal Attribute of Coining.
• Chapter VIII: The Principles of Circulation
• The Standard Unit of Value.
• Coin, Money of Account, and Unit of Value.
• Standard and Token Money.
• Metallic and Nominal Values of Coins.
• Legal Tender.
• The Force of Habit In the Circulation of Money.
• Gresham's Law.
• Extension of Gresham's Law.
• Chapter IX: Systems of Metallic Money
• Currency By Weight.
• Unrestricted Currency By Tale.
• Single Legal Tender System.
• Multiple Legal Tender System.
• Composite Legal Tender.
• Chapter X: The English System of Metallic Currency
• English Gold Coin.
• English Silver Coin.
• English Bronze Coinage.
• Deficiency of Weight of the English Gold Coin.
• Withdrawal of Light Gold Coin.
• Supply of Gold Coin.
• Supply of Silver Coin.
• The Royal Mint.
• Chapter XI: Fractional Currency
• Billon Coin.
• Composite Coin.
• Bronze Coin.
• English Bronze Coin.
• Weight of the Currency.
• Nickel, Manganese, Aluminium, and Other Metals and Alloys.
• Chapter XII: The Battle of the Standards
• The Double Standard.
• Compensatory Action.
• The Demonetization of Silver.
• Disadvantages of the Double Standard.
• The Monetary Systems of the World.
• Chapter XIII: Technical Matters Relating to Coinage
• The Alloys In Coin.
• The Size of Coins.
• The Wear of Coin.
• Methods of Counting Coins.
• Cost of the Metallic Currency.
• Chapter XIV: International Money
• Advantages of International Money.
• Disadvantages of International Money.
• Conflict of Monetary Systems.
• International Monetary Negotiations.
• Decimalization of English Money.
• The Future American Dollar.
• German Monetary Reform.
• Systems of Fractional Money.
• Final Selection of the Unit of International Money.
• Chapter XV: The Mechanism of Exchange
• Progressive Development of the Methods of Exchange.
• Representative Money.
• Cheque and Clearing System.
• Chapter XVI: Representative Money
• Early History of Representative Money.
• Reasons For the Use of Representative Money.
• Inconvenience of Metallic Money.
• The Weight of Currency.
• Saving of Interest.
• Chapter XVII: The Nature and Varieties of Promissory Notes
• Specific Deposit Warrant.
• General Deposit Warrant.
• Difference Between a Special and a General Promise.
• Pecuniary Promissory Notes.
• Principles of the Circulation of Representative Money.
• Chapter XVIII: Methods of Regulating a Paper Currency
• 1. Simple Deposit.
• 2. Partial Deposit.
• 3. Minimum Reserve.
• 4. Proportional Reserve.
• 5. Maximum Issue.
• 6. Elastic Limit.
• 7. Documentary Reserve.
• 8. Real Property Reserve.
• 9. Regulation By the Foreign Exchanges.
• 10. Free Issue System.
• 11. The Gold Par Method.
• 12. Convertibility By Revenue Payments.
• 13. Deferred Convertibility.
• 14. Inconvertible Paper Money.
• Over Issue of Paper Money.
• Want of Elasticity of Paper Money.
• Chapter XIX: Credit Documents
• Measurement of Credit.
• Bank-notes.
• Cheques.
• Bills of Exchange.
• Interest-bearing Documents.
• Definition of Money.
• Chapter XX: Book Credit and the Banking System
• Single Bank System.
• System of Two Banks.
• Complex Bank System.
• Branch Bank System.
• Bank Agency System.
• London Agency System.
• Country Clearing System.
• Chapter XXI: The Clearing-house System
• Transaction of Business At the London Clearing House.
• Manchester Clearing House.
• New York Clearing House.
• Extension of the Clearing System.
• Advantages of the Cheque and Clearing System.
• Proportion of Cash Payments.
• Cases to Which the Clearing System Is Inapplicable.
• Chapter XXII: The Cheque Bank
• Relation of the Cheque Bank to Other Banks.
• The Cheque Bank As a Monetary Agent.
• Payment of Wages By Cheques.
• The Cheque Bank As a Savings Bank.
• Results of the Cheque Bank System.
• Chapter XXIII: Foreign Bills of Exchange
• Origin and Nature of Bills of Exchange.
• Trade In Foreign Bills.
• The World's Clearing House.
• Centralization of Financial Transactions In London.
• Representation of Foreign Bankers In London.
• Chapter XXIV: The Bank of England and the Money Market
• Expansion of Trade.
• Competition of Bankers.
• The Bank Charter Act of 1844.
• The Free-banking School.
• Possibility of Over-issue.
• The Right of Coining Bank Notes.
• Scotch and English Banking.
• Cash Reserves of Bankers.
• Remedy For the Sensitiveness of the Money Market.
• Chapter XXV: A Tabular Standard of Value
• Corn Rents.
• A Multiple Legal Tender.
• Lowe's Proposed Table of Reference.
• Poulett Scrope's Tabular Standard of Value.
• Difficulties of the Scheme.
• Chapter XXVI: The Quantity of Money Needed By a Nation
• Quantity of Work to Be Done By Money.
• Efficiency of the Currency.
• Effects of the Cheque and Clearing System.
• Conclusion.

Definition of Money.

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

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

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

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

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

Chapter XX

Book Credit and the Banking System

Considerable economy of the precious metals arises, as we have seen, from passing about pieces of paper representing gold coin, instead of the coin itself. But a far more potent source of economy is what we may call the Cheque and Clearing System, whereby debts are, not so much paid, as balanced off against each other. The germ of the method is to be found in the ordinary practice of book credit. If two firms have frequent transactions with each other, alternately buying and selling, it would be an absurd waste of money to settle each debt immediately it arose, when, in a few days, a corresponding debt might arise in the opposite direction. Accordingly, it is the common practice for firms having reciprocal transactions, to debit and credit each other in their books with the debt arising out of each transaction, and only to make a cash payment when the balance happens to become inconveniently great. An insurance broker is one who acts as a middleman between the owners of ships and the underwriters who insure them in shares. He has therefore to make many small payments to underwriters, for the premiums on policies, and at intervals has to receive back the indemnity for any insured vessel which has been lost. It is the common practice to avoid cash payments; the broker credits the underwriters with the premiums and debits him with losses, and only pays or receives the balance when large.

To represent the highly complex system of book credit which is organized by the bankers of a large kingdom, we shall have to employ a method of diagramatic notation. I will therefore remark that the simplest case or type of book-credit is represented by the formula

P —— Q.

Each of the letters, P and Q, indicates a person or a firm, and the line indicates the existence of transactions between them. Only in special cases, however, will this direct balancing of accounts render the use of cash or of a more complex system unnecessary. Generally speaking, there will be a tendency for a surplus of goods to pass in one direction, so that money must pass in the opposite direction. The manufacturer sells to the wholesale dealer, the hatter sells to the retailer, and the retails retailer to the consumer. By the intervention of the banker, however, the transactions of many different individuals, or even of many branches of trade, are brought to a focus, and a large proportion of payments can be balanced off against each other.