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.

Extension of the Clearing System.

Until within the last few years there existed only two bankers' clearing houses, those of Lombard Street and New York, but much progress has recently been made in extending a similar system to other places, and even to other branches of business. The Manchester Clearing House was established in July, 1872, and Newcastle has a similar establishment. On the continent only a single city has yet adopted the method. In Paris about eighteen bankers have formed an association, called a "Chambre des Compensations," which is located in the Place de la Bourse, and balances the reciprocal claims of these firms much in the manner of the English clearing houses. In France, Germany, and other continental countries the use of the banker's cheque is much less developed than in England and America. In Germany a person wishing to remit a hundred pounds will often collect the actual coins, seal them up in a bag with five seals, and register them at the post-office. Thanks to the excellent system of government Postes existing in Germany, this method of remittance is sufficiently safe. But it is evident that where the monetary arrangements of a country are of such a kind there is no need of a clearing house.

The method of balancing claims needs by no means to be restricted to the business of banking. As, indeed, the monetary transactions of any locality come to a focus in the banks, the principal clearing will always be in the hands of bankers. But wherever a set of traders have numerous reciprocal claims, they may find it desirable to set up their own clearing house. As long ago as 1842, it occurred to Robert Stephenson and Mr. K. Morison, that the principle of the City Clearing House might be advantageously applied to settling the very complicated accounts arising between the railway companies, which have through booking arrangements. The work constantly carried on in the great house full of accountants at Euston Square is vastly more complicated and various than that of a bankers' clearing house; but the final result is to ascertain how much each railway company is indebted to each other one. The balance due to or from each company is then paid by a transfer at the bankers.

Within the last twelve months an attempt has been made, unsuccessfully as yet, to introduce the general use of cheques into Liverpool, where great sums of money are constantly passing, especially in the cotton market. For reasons which it would be difficult to trace out satisfactorily, the Liverpool merchants and bankers have never adopted the use of cheques to the same extent and in the same way as in other commercial towns. Many firms in Liverpool still refuse to receive payment by cheques, and only a year or two ago it was a common practice for a Manchester firm to send a clerk to Liverpool by railway with a bundle of bank-notes to make payments. At present, as I am informed, bank bills payable at sight, and forwarded by post, are substituted for Bank of England notes.

A Liverpool stock or cotton broker, wanting to make a payment, draws money out of his bank in notes and gold, and his clerks carry it about the town. Every evening a great number of small cash-boxes, containing large sums of money, are deposited at a well-known silversmith's shop, opposite the Town Hall, for safe custody during the night. A great amount of capital is thus kept lying idle, and it is surprising that the bankers do not secure this sum, as an addition to their deposits, by removing every obstacle. At present the practice is to charge 1/8 or ¼ per cent. commission, whereas the actual cost of the accountants' work by which the bank transfers are accomplished is almost nominal in regard to large transactions.

An important extension of the clearing principle was effected by the establishment, in 1874, of the London Stock Exchange Clearing House, which undertakes to clear, not sums of money, but quantities of stock. As stock brokers settle their transactions only once a fortnight, or in consols once a month, it naturally arises that, in the intervals, the same broker will usually have bought the same kind of stock for one client and sold it for another. The very same stock may leave passed through several different hands, and the same brokers may have had reciprocal dealings with each other. Instead, then, of actually making transfers of stock for each transaction, and paying by cheques which greatly swell the business of the Lombard Street Clearing House on settling days, a plan has been arranged, according to which each member of the Clearing House prepares a statement of the net amount of each stock which he has to receive from or deliver to each other member. The manager of the house, after verifying these accounts, which should balance in the aggregate, directs the debtor members to transfer quantities of stock to the creditor members in such a way as to close all the transactions. It will be noticed that, for pretty obvious reasons, the transfers are made in the stock exchange, directly from broker to broker, and not to the manager of the Clearing House, as in banking transactions. A separate clearing has, of course, to be made in each kind of stock. It is found that the quantities actually transferred do not exceed 10 per cent. of the whole transactions cleared, and the cheques drawn are diminished on settling days as much as ten millions sterling.

Still more recently the Cotton Brokers' Association of Liverpool, although unable to apply the system of clearing as yet to their money transactions, have arranged a clearing system for the settlement of business connected with sales of cotton "to arrive." Under the new arrangement the first seller and the last buyer come into contact, and all intermediate business, which sometimes occasioned much dispute and delay from contracts involving many middle-men, will be, as it were, cancelled by the Clearing House. The business, indeed, is being extended; so that all contracts, declarations, and payments will be effected through the agency of the association.

It may very well admit of question whether we have at all reached the limit of the advantageous application of the clearing principle. From bankers' transactions it has been extended to railways, stock exchange, and cotton brokers' business. It is conceivable that any other body of merchants, brokers, publishers, or others who have frequent pecuniary claims upon each other, might have a clearing meeting once or twice a week. Suggestions to this effect have already been made, and I am told that in the Glasgow iron market, a settlement day for the clearing of mutual transactions has been established.