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.

Cheque and Clearing System.

There is yet a more potent way of avoiding the actual use of a medium of exchange, without encountering any of the inconveniences of barter. Those who frequently traded with each other, both buying and selling, found that it was absurd to pay a sum of money for what was bought, and then receive it back for what was sold. It was sufficient to estimate in terms of money the values of the articles exchanged, and then pay the difference, if any, in actual cash. The practice having grown up of depositing the metallic money not immediately wanted with goldsmiths or bankers, for safe custody, it was gradually discovered that an order to pay money would serve instead of the money; and that, if two persons trade with the same banker, they need not in their mutual transactions handle the money at all. A transfer in the books of their common bankers will effect the payment of any balance of debt. Bankers can in like manner arrange their mutual accounts, and in this way there has been gradually developed in this country and in America a vast system, which I propose to denominate the Cheque and Clearing System, whereby all the larger internal transactions of the people are arranged by a mere settlement of accounts.

In this system London naturally becomes the monetary centre of the United Kingdom; but there is a further tendency to make London the banking of the world as regards all large and international transactions. It is found to be advantageous to deposit money in London, or to obtain credit and make bills payable there, rather than elsewhere. By such a concentration of banking operations, London tends to become the seat of a world-wide Clearing House. Such are the principal steps in the development of the mechanism of exchange, and we proceed to consider them In detail.

Chapter XVI

Representative Money

Although we now distinguish money according as it is metallic or paper money, because paper has in recent times been universally adopted as the material for representative money, yet it is well to remember that various other substances have been used for the purpose. We may pass, in fact, by gradual steps from the perfect standard coins, whose nominal value is coincident with their metallic value, to worthless bits of paper, which are yet allowed to stand for thousands, or even millions of pounds sterling.

Token money, which we considered in Chapter VIII. (p. 67), is in some degree representative money, because it derives its value, not so much from the metal it contains as from the standard coins for which it can be exchanged. There is no need that a promise should be always expressed by ink and paper. It may be still more durably recorded by a die upon a piece of metal. Accordingly, while the monarchs of England down to the end of Elizabeth's reign refused to debase their currency, as the notion seems to have been, by issuing such a poor metal as copper, the tradesmen supplied the want of pence by issuing tokens. These pieces were in the earlier centuries composed of lead, or latten, a kind of brass, or sometimes, it is believed, of leather. During the last century, again, they were issued in large quantities, chiefly in copper, and often bore an express statement that they served as promissory notes. Thus a well-executed piece, issued at Southampton in 1791, bears the inscription, "Halfpenny Promissory, payable at the Office of W. Taylor, R. V. Moody 8 Co." A token struck by the Flint lead works in 1813, states the promise in different terms, thus—"One Penny Token, One Pound Note for 240 Tokens." The variety of such promissory coins issued at one time or other is very great, and their study forms an important branch of numismatic science, as will be learnt by looking into such a work as Akerman's "London Tradesmen's Tokens." In quite recent years small money was found to be scarce in New South Wales, and some tradesmen issued copper or bronze tokens which circulated until the year 1870, when their further use was prohibited.

The ancients were well acquainted with the difference between a standard and a token currency. The iron money of the Lacedæmonians was probably standard legal tender, for it is described as being heavy and bulky, and yet of small value. The iron money of the Byzantines, on the contrary, was token representative money. We shall find in the following section that pieces of money of the same nature as bank-notes were also employed by several ancient nations.