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.

Country Clearing System.

Only one further step is required to complete the system of connections between each bank in the kingdom and all other banks. Every country bank, as we have seen, has a running account with some city bank, and all the city banks daily settle transactions with each other through the Clearing House. It follows that payment from any part of the country to any other part can be accomplished through London. In the following diagram, let P, Q, R be country banks having the London agent, X, and U, V, W, other country banks having the London agent, Y.

If a, a customer of P, wishes to pay r, a customer of U, he transmits by post a cheque upon his banker, P. The receiver, r, pays it into his account with U, who having no direct communication with P, forwards it to Y, who presents it through the Clearing House on X, who debits it to P, and forwards it by the next post. Nothing can exceed the simplicity and perfection of this arrangement.

It will be readily seen, too, that sums of money passing between London banks, or rather cleared off in the Lombard Street Clearing House, will frequently be the balances of extensive running accounts between country banks and their agents and correspondents. So long as the balance of accounts between any two banks does not assume large proportions, it need not be paid in cash at all, except for special reasons. When a balance has to be paid, and the banks happen to have the same London agent, it is only requisite for the debtor bank to direct their London agent to transfer so much money to the credit of the other country bank. If they have different London agents, and P, in the last diagram, desires to pay a balance to U, it is done by directing X to credit Y, the agent of U. The credit note effecting this payment passes through the Clearing House, amid a mass of other documents representing payments in one direction or the other, and will, in general, become an insignificant item in the general clearing. If it can be said to be paid in cash at all, it is in the form of a final transfer in the books of the Bank of England, as we shall see. Great as are the transactions daily settled in the London Clearing House, they are after all only those which have not been previously cleared off by any more direct communication, and they often represent the balances of multitudinous transactions which never pass through London at all.

Chapter XXI

The Clearing-House System

By means of the London agency system, the banking transactions of the country are, as we have seen, brought to a focus in the city of London. The settlement of the reciprocal claims of the twenty-six principal city banks is therefore a business of the utmost magnitude and importance, representing as it does the completion of the business of no small part of the world. In a room of moderate dimensions, entered from a narrow passage running from the post-office in King William Street across to Lombard Street, debts to the average amount of nearly twenty millions sterling per day are liquidated without the use of a single coin or bank-note. In the classic financial neighbourhood of Lombard Street, and even in this very chamber, the system of paper commerce has been brought nearly to perfection. The early history of the London Clearing House is buried in obscurity, and it is much to be desired that those who are acquainted with the principal incidents in its progress should put them on record before it is too late.

The Clearing House appears to have been first created just a century ago. About the year 1775 a few of the city bankers hired a room where their clerks could meet to exchange notes and bills, and settle their mutual debts. The society was of the nature of a strictly private club, the public knowing nothing about it, and the transactions being conducted in perfect secrecy. Mr. Gilbart tells us that, even in this form, it was regarded as a questionable innovation, and some of the principal bankers refused to have anything to do with it. By degrees, however, the convenience of the arrangement made itself apparent, more bankers were admitted to the society, and a distinct committee and set of rules were formed for its management. Although it remains to the present day a private and voluntary association, unchartered, and in fact unknown to the law, the Clearing House has steadily grown in importance and in the publicity of its proceedings.

Several important extensions of the clearing work have been made in the last twenty-five years. After the rise of the London Joint Stock Banks, subsequent to 1833, they were for a long time refused admittance to the Clearing House; but in June, 1854, they were at last allowed to join the association. The Bank of England long remained entirely outside of the confederation, but more recently it has become a member, so far as regards the presentation of claims upon other banks. The West End banks of London are still beyond its sphere, partly, perhaps, because their distance stands in the way of the working of the system. They are thus in the position of provincial banks, and can clear through city agents like provincial banks.

Before the year 1858 the business of the Clearing House was restricted to the exchange of cheques and bills actually drawn on the clearing bankers. Country bankers receiving cheques drawn upon other distant country banks were in the habit of remitting them direct by post, the paying bank effecting the payment by directing their London banker to pay the amount to the London agent of the receiving bank. In the year 1858, at the suggestion of Mr. William Gillett, but chiefly by the exertions of Sir John Lubbock, the country clearing system was organized. The country banker, instead of posting many cheques every day to all parts of the kingdom, sends them in a single parcel to his London agent, to be presented through the Clearing House on the London agents of the paying banks. This exchange is made, as we shall see, at different hours of the day, but the results are summed up in the general balance of the day's transactions.