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THE MEANING OF MONEY

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THE MEANING OF MONEYBy hartley WITHERS,City Representative of The Times.

SOME PRESS OPINIONS.Times. ^'- We have not often met with a treatise on a difficult subject in

which the author has so nearly attained the end he set before himself whenhe began it . .

_.

the result of careful and intelligent 'first-hand' observa-tion by an inquirer enjoying special opportunities for his task."

Financial News.'* There can be no doubt that Mr. Withers's book willsupersede allother introductions to monetary science . . . readers will findit a safe and indispensable guide through the mazes of the money market."

Economist."Mr. Withers* new book . . . shows what may be achievedby a versatile scholar who turns his attention to the exegesis of practicalfinance."

Daily Mail."A book for the average man. Volumes upon volumeshave been written to explain and discuss our monetary system.

_

Now wehave a work worth all the rest put together in clearness of exposition andelegance of diction. A truly great work presented in a setting so pleasant,glittering on occasion even with flashes of wit, that the man in the street isnot only enabled to grasp the intricacies of our complicated monetary system,but will find himself fascinated in the process."

Manchester Guardian (leading article)."No common measure ofliterary accomplishment, a lucid, forceful, and pointed style, and a greatstore of material for apt and often amusing illustration have lent both graceand charm to a work of quite exceptional utility."

Truth."Mr. Withers contrives to make a dry subject thoroughlyinteresting, and explains all essential matters relating to the complicatedbusinessof money, exchange and banking, so clearly that any reader ofaverage intelligence should be able to understand them."

Investors^ Review."A very interesting book, written in an easy,pleasant style, flavoured with dry humour and thoroughly well-informed."

Standard.-'^ Its usefulness is likely to be very considerable ... werecommend confidently to the experienced banker and man of business,as well as to those who are seeking an acquaintance with that science whichthe author defines in his work as ' The meaning of money.' "

Pall Mall Gazette ' The City Editor of the Times manages to impartinto his book a happy touch which will interest the reader. . . . Knowledgewithout tears."

Financial rz;K^f." Mr. Hartley Withers shows a thorough mastery ofhis subject. . . .The best feature of the book is that the writer hassucceeded in making his meaning perfectly clear without boring his readerby unnecessary explanations of elementary propositions."

Westminster Gazette."Mr. Withers has made his intricate subjectunderstandable to the amateur, and an even greater point is that he hasmade it thoroughly interesting."

Daily Chronicle."The book is good reading, thanks to the freshness,the human touch, the observation and the humour with which he writes., . . Mr. Withers' book is entertaining as well as informing."

MiningJournal.--^^^ The book, for all its apparent innocence, is a power-ful attack upon the existing system . . . will be of the highest value tothose who desire to understand the subject."

London: SMITH, ELDER & CO.IS WATERLOO PLACE, S.W.

THE

MEANING OF MONEY

BY

HARTLEY WITHERS

"Grau, theurer Freund, ist alle TheorieUnd griin des Lebens goldner Baum.''

Goethe.

FOURTH IMPRESSION {SECOND EDITION)

LONDONSMITH, ELDER & CO., 15, WATERLOO PLACE

1909

A/i rights reserved

Ic U ^X 7-

PRINTED BY

WILLIAM CLOWES AND SONS, LIMITEDLONDON AND BECCLES

PREFACE TO THE SECOND EDITION

The promptitudevery gratifying to the authorwith which a Second Edition is required, gives

an early opportunity for correcting a slight mis-

representation, contained on pp. 254-255 of the

First Edition, of the attitude of the Bank of Eng-

land with regard to the separation of the bankers'

balances from the rest of the Other Deposits in its

weekly account.

March 2, 1909.

PREFACE TO THE FIRST EDITION

This book is designed to meet the difficultyexperienced by the average reader in understand-

ing that part of a newspaper City article which

deals with the money market. It has been com-

piled with as little reference as possible to other

books, and chiefly expresses views and facts

gathered from practical men at work in the greatmachine which it describes, one of whom haskindly read the proofs and made valuable sugges-

tions. The difficulties of the subject are very real

to its writer, who has consequently aimed earnestlyat clearness, risking platitude and iteration to

achieve it. Its shortcomings will be pardoned, by

considerate readers, on the ground of the limited

leisure in which it was written.

January, 1909.

CONTENTS

CHAPTER IINTRODUCTORY

Different senses in which the word money is used Themoney of daily payments and the money of the moneymarketIn the latter sense, money means the loan ofmoney^The money market is the place where moneyis borrowed : and most of its business consists in givingmoney down for the promise of money some day Italso gives money here for money somewhere else, throughexchange operations

CHAPTER IICOINED CASH

Gold, silver, and bronzeGold the most potent, and why

BarterThe kine currency ; its defects in contrast withthe advantages of the gold piece The comparativesteadiness of the value of gold Its universal accept-

ability in economically civilized communitiesEffect ofvariations in the available amount of goldSilver not

legal tender above ^2 ; bronze, not above one shilling .

CHAPTER IIIPAPER CASH

Gold economized by the circulation of bank-notes, or bankers'

promises to payCurrency based on mutual indebtedness

CONTENTS

between bankers and the public Unfortunate resultsof faulty working of the systemIts regulation by law,in the Bank Act of 1844Regulation evaded by the useof chequesAdvantages of the cheque, and its risks

Not legal tenderIts convertibility, and consequent needfor a gold basis 23

CHAPTER IV

THE BILL OF EXCHANGE

The cheque a species of the genus bill of exchangeThedifference between a cheque and a bill ; time the chiefelement in the billThe antiquity of the bill DonQuixote's bill of ass-coltsAcceptanceA concrete ex-ample of a bill drawn against wheat soldThe beautiesof the genuine billAnticipatory bills Finance bills

House bills 37

CHAPTER VTHE MANUFACTURE OF MONEY

The right to draw a cheque generally created by an advancemade by a bankerA specimen balance-sheetCurrentand deposit accounts Nearly three-quarters of the deposits created by loans and discountsThe processtracedParable of a little local bankBanks and theirpublicThe cash reserveFixed by law in the UnitedStatesBreakdown of American banking in 1907 .

CHAPTER VI

LONDON THE WORLD'S MONETARY CLEARING HOUSE

The world-wide money marketInternational money mustbe immediately and unquestionably convertibleMoneyonly so in LondonLimited convertibiUty in France;

CONTENTS xiTAGE

Germany; New York The draft on London the cashof international commerceLondon's readiness in lend-mgThe elasticity of the English systemLondon'sresponsibility Its foreign customers An AmericanopinionThe crisis of 1907 : its apparent lesson ; quali-fied by a doubtWorld-wide responsibility faced byLondon 85

CHAPTER VIITHE CHEQUE-PAYING BANKS

The banks distinguished and defined The early days ofbanking Their romance and humours Joint-stockbankingGood effects of publicityIts extension desir-ableLord Goschen and monthly statementsA partialreformBanking by branchesIts advantages, and adrawbackThe banks usually regulate the price ofmoneyin London and the market rate of discount ; providecredit for Stock Exchange operations The greatimportance of their functions 107

CHAPTER VIIl

THE BILL-BROKERS AND DISCOUNT HOUSES

Originally mere intermediariesElementary explanations ofdiscount market termsThe brokers' problem: theimmediate outlook ; the future prospect ; chances ofvariation ; Government finance ; speculation ; foreigndemands ; international politics 138

CHAPTER IX

THE ACCEPTING HOUSES AND FOREIGN BANKS

Accepting houses developed out of merchant firmsNot

bankep, in )ihe cheque-paying sense Importance of

xii CONTENTS

their function;partially dependent on the banksThe

banks themselves large acceptorsColonial and foreignbanksForeign trade pushed with the help of EnglishcreditEffect on English trade Foreign credits andLondon's gold .... . . i57

CHAPTER XTHE FOREIGN EXCHANGES

Fluctuations in exchanges due to variations in relative valueof currencies in different centresThese variations dueto balance of trade in its widest sense and the rate of

^^interest rulingLondon and SydneyLondon and ParisForeign exchanges the mechanism for the settle-ment of international indebtednessHow this indebted-ness arisesEngland and the United StatesBalancesettled by gold shipments, modified by finance bills

^

Effect on exchanges of purchase and sale of securities^^Loan issues Italy's purchases of its own debtTherate of discount and the exchangesNeed for regulationof discount rate

. . . .- , . , ^73

CHAPTER XITHE BANK OF ENGLAND

Keeper of the nation's balancePrivilege of note issueThebankers' bankProvides emergency currency, Peel's Acthaving been evaded by the use of cheques, based oncredits in the Bank's booksKeeper of the gold reserveAn expensive responsibilityThe external problem

Foreign demands created by credits given by the otherbanksSummary of the Bank's functionsIts organiza-tionCourt of DirectorsGovernment by rotationThetest of resultsThe Bank of France

. . .-199

CONTENTS xiii

CHAPTER XII

BANK RATE AND MARKET RATEFAGS

What Bank rate meansSeldom effective in normal 'times

Lack ofconnection between Bank rate and market rate-Has to be remedied by the Bank's borrowingA clumsyand artificial process Regulation of market rate attimes essential^Absence of control exemplified by eventsof the summer of 1908Connection between Bank rateand market rate might be established by agreementamong the banks, without sacrifice of elasticity . . 233

CHAPTER XIIITHE BANK RETURN

A specimen of its formThe Issue DepartmentThe fidu-ciary issue The metallic basis; silver in the IssueDepartmentThe Bank's capitalTheRestThePublicand Other depositsThe bankers' balancesSuggestionfor their separate publicationObscurity on the assetssideGovernment and other securitiesThe ReserveConsists chiefly of notes, which are to some extentbased on securities 242

CHAPTER XIVTHE GOLD RESERVE

The alleged inadequacy of the metallic basis on whichEnglish credit and currency are manufacturedThebasis of credit consists, to a considerable extent, of

creditThe bankers' balances at the Bank are repre-sented as to about fifty per cent, by cash, which consistschiefly of notes, about one-third of which is representedby securitiesSuggestions for increasing the gold basisof our credit systemGold to be increased must bebrought in from abroadMost easily and effectively, by

xiv CONTENTSPAGE

higher discount rate, to be arrived at by reduction ofover-extended credits by the banksFor this purpose,publicity, if applied to all and at all times, would probablysuffice 263

CHAPTER XVOTHER RESERVES

The psychological reserve, based on confidence in our bankersRealizability of assetsThe experience of the 1907crisis and its lessonOur free gold market also a reserve,since it makes London's safety the interest of foreignerswho use its facilities Foreign assistance a weak andslow-working support 284

CHAPTER XVISUMMARY AND CONCLUSION 295

INDEX 301

THE MEANING OF MONEY

CHAPTER IINTRODUCTORY

The meaning of Money is not a question ofeconomic theory. The object of this volume is toexplain a matter of plain, positive, practical fact,which is very important, very dull and very littleunderstood ; and to do so as clearly as may be, andwith the least possible use of the alarming appara-tus which generally affrights the casual reader whoopens a book on a monetary subject. No columnsof statistics will be paraded and deployed, the useof diagrams will be sedulously avoided, and as faras possible figures will be ruled out.

The word Money is associated with much con-fusion and difficulty in the minds of those whohave not been obliged to think the matter outbecause of the different senses in which it is used.In one sense it is perfectly simple, without the

least reflection or examination. Everybody under-stands money in the sense of the pounds, shillings,and pence that we pay in the shape of coin, notes or

B

2 THE MEANING OF MONEYcheques for everyday wants. But the other mostcommon use of the word leads to complication,because in its second sense money means notmoney, but the loan of money.

This is the sense in which the word is usedwhen we speak of a money market or a price ofmoney, phrases which are wholly incomprehensibleto those to whom this difference of meaning is notmade clear. Any one who defines money roughlyas a sovereign in his pocket, with which he canbuy whatever he wants up to the extent of itspurchasing power, does so quite naturally, for thisis its most obvious meaning. But having got thismeaning into his head, he is unable, and againquite naturally, to understand strange expressionsin the newspapers which tell him that money ischeap or that the money market is tight. He knowsthat the price of a thing is the number ofsovereigns,or fractions of a sovereign, that it will fetch. Healso knows that no one will give him more than asovereign for the sovereign that he has in hispocket, and he is equally convinced that the mostcunning sophistries of the most skilful dialecticianwould never induce him to part with it for less. Hetherefore proceeds triumphantly to the conclusionthat it is nonsense to talk about a price for money,and his argument is perfectly sound on the premisesfrom which he starts.

His mistake arises from the fact that, as has been

MONEY OF THE MARKET 3stated, money is often used in a quite diflferentsense, namely, the loan of money ; or perhaps thematter can be made still clearer if we express it bysaying that the words " price " and " market " areapplied in a different sense when applied to moneyfrom their meaning in connection with any ordinarycommodity. The price of a hat is the sovereign thatyou pay to become its owner ; the price of moneyis the sovereign or sovereigns that you promise topay some day for the loan or temporary use of it.The market in wool or wheat is the place whereyou can buy these articles from the assembledmerchants or dealers. The money market is theplace in which you can borrow money.

It thus becomes apparent that the phrase whichhas proved a stumblingblock to so many genera-tions of schoolboys and more mature students

that money is a commodity which can be bought andsold like any otheris not true. Money is certainlya commodity, but it cannot be bought and sold likeany other, for that would imply exchanging it foritself, since buying and selling are nothing butthe exchange of commodities for money, as distin-guished from barter, which is exchanging commo-dities for one another. Money can be borrowed orlent, and this is at once a perfectly reasonable andcomprehensible transaction, which would nevercause the least bewilderment in the mind of thepost unmathematical schoolboy. It is perfectly

4 THE MEANING OF MONEY

clear to Jones, minor, that it might be to his advan-

tage, in the lean and hungry days towards the end

of term, to take five shillings in hard cash and to

promise to pay seven-and-six after the holidays,

when everybody's pocket is bursting with metallic

evidences of family affection. And this transaction,allowance being made for local and psychologicalvariations, is a fair specimen of the business done

every day in Lombard Street and in the othermoney markets of the world.

The money market, then, is the place in whichmoney down is exchanged for the promise ofmoneysome day. And as the borrower, the man whowants money down, must obviously offer the lenderan inducement to let him have it, it will always befound that the amount of money promised some dayby the borrower is bigger than the amount ofmoneypaid down by the lender. The difference betweenthe two figures is the rate of interest, which is oftenloosely and confusingly described as the price ofmoney.

This rate of interest, as every one knows, is cal-culated "per cent," so much on each ioo borrowed.Ifyou borrow ;'iooo for a year from your banker,and he charges you 3 per cent., or ;^3 per ;^ioofor the advance, he will give you the right to draw acheque now for ;'iooo, or to withdraw this amount incoin or notes, and at the end of the year you willowe him ;'i030. But this simple statement of the

MONEY SOME DAY 5matter is complicated slightly in usual practice,because the interest is probably payable periodi-cally at the quarter or half-year. This complicationbecomes important in the case of loans for long orindefinite periods, but the broad fact remains thatthe chief operations of the money market consistof giving cash down in return for the promise of alittle more cash some day, or of annual or half-yearly cash payments.

Time is thus the distinctive element in the mostordinary and obvious transactions of the moneymarket, and clears away the difficulty which besetsthose who cannot understand how a money marketcan exist. To exchange money for money wouldbe absurd; to exchange money now for moremoney some day is evidently a quite reasonableconvenience to a borrower who hopes to makea profitable use of the sum borrowed, and to earnmore by its employment than the price that he willhave to pay for it. And space is the other elementwhich accounts for the rest of the market's opera-tions. Besides giving and taking money down inreturn for money some day, it is also engaged ingiving and taking money here for money some-where else. Hence arises the complicated anddifficult mechanism of what is generally called" exchange," which also becomes a comparativelysimple matter when it is clearly expressed andfreed from confusing technicalities. The broad


meaning of it is clear enough, if you reflect thatwhen you buy a postal order you are conductingan exchange transaction. You receive a communi-cation from a tradesman in a town in which you

formerly lived to the effect that his account,

amounting to five shillings, has been long out-

standing, and that he would be glad to have itsettled. The five shillings are ready enough inyour pocket, but the question is, how to get them,for example, from London to Bristol. You can puttwo half-crowns in an envelope, register it, andso send your money at the cost of threepence.But the cheaper and more convenient method is topay some one who has money in Bristol somethingto induce him to pay your debt for you there.That some one is ready in the person of the PostOffice, which sells you an order for five shillings,payable at any office in the United Kingdom, forfive shillings plus a penny. You put the order inan envelope and send the money at a total cost oftwopence, and your tradesman presents it at theBristol post-office and receives cash. Thus youhave carried out an exchange transaction, whichmay be technically expressed by saying that youhave bought a draft on Bristol, and forwardedit to your creditor, and that it has been met onpresentation.

Monetary transactions may thus be divided intothree main divisions :

MONEY HERE AND NOW 7(i) Those in which money is exchanged for any

kind of commodity or service ; ordinary buying orselling operations.

(2) Those in which money down is exchangedfor the promise of money some day ; these includeall kinds of loan operations, from the discounting ofa bill due sixty days hence to an issue of a warloan by the British Government.

(3) Those in which money here is exchanged formoney somewhere else; and these are exchangeoperations, which have been crudely exemplifiedby the purchase of a postal order, but are by farthe most complicated kind of monetary business,including such transactions as turning sovereigns

into Shanghai taels, composed of silver, or intoinconvertible paper notes, issued by some SouthAmerican Republic.

It will be observed that in all three there is

one constant factor, which is money here and now,or cash. In ordinary buying and selling cash isexchanged for goods or services, as when we buy apair of gloves across the counter of a shop, or send

a reluctant cheque to pay a dentist's account or

a lawyer's bill of costs. In loan operations cash is

exchanged for some form of security or promise to

pay. In exchange operations cash is exchanged

for drafts representing a right to money in some

other place. And before we can go any further,it will be necessary to give some explanation of the

8 THE MEANING OF MONEYdifferent forms taken by cash, or money here andnow. Everybody knows that when a payment isto be made it will take the form of coin, Bank ofEngland notes, or, most probably, a cheque drawnon a banker; and the stages by which these formsof payment came into being are a well-worn story,which must be summarized briefly in the interestsof clearness and completeness.

CHAPTER II

COINED CASH

The most obvious of the forms of cash is the coinedcurrency that we carry in our pockets, consisting

of gold, silver, and bronze discs> stamped with theimage and superscription of the king, and milledround the edges to prevent enterprising buUionistsfrom shaving metal off their rims. This pre-caution, it will be observed, is not considerednecessary in the case of the penny.

The most potent of these, in extracting goodsand services from mankind, is gold. Since thepurpose of this volume is an endeavour to makemoney matters, as they are, clear and comprehen-sible, there is no need to enter into a historicaldissertation on the steps which have raised goldinto its position as the most important medium ofexchange, legal tender to any amount, and con-sequently, as we shall see later, the basis of credit,

or of the lender's side of credit. (On the borrower'sside there must be some sort of security as a

basis.) But the more obvious reasons which pro-duced this result may be enumerated. We havealready seen that buying is distinguished from

lo THE MEANING OF MONEY

barter by being an exchange of goods for money

instead of an exchange of goods for goods. Theinconvenience of a state of barter is evident on a

moment's reflection, and it need not be said that

as long as it prevailed commercial progress vi^as

almost impossible. The sad state of the hungryhatter, unable, in the days of barter, to get meat

because the butcher wants not hats but boots, is

a commonplace of the economic text-books, andit is clear at once that a long step forward has

been taken when a community agrees to recognizeone commodity as always acceptable in paymentfor others, so that any capitalist who is possessedof a store of it may always rely on being able toconvert it into whatever he needs that is producedby his fellows. It is also evident that thecommodity selected had to be endowed withcertain qualities, chief among which were that itshould be lasting, easy to pass from hand tohand, and fairly uniform, that is, with not toogreat a difference in size and desirability betweenits various examples. The Old Testament storyshows that in the primitive society depicted by ita man's wealth was gauged by the size of his flocksand herds and the number of his changes ofraiment, and in the Homeric poems fine suits ofarmour are valued by the number of kine that theywould fetch. Other instances of the use of articlesof common consumption as currency include

FROM BARTER TO MONEY iitobacco, hides, shells, bullets and nails. But theprevalence of beasts was sufficient to lead etymolo-gists to consider at one time that the Latin wordfor a beast, pectis, had been enshrined in the namefor money, pecunia, which has come down inEnglish in its negative form, impecunious. Thisderivation is now abandoned, comparative philologyhaving decided t\\aX. pecunia is the same word as theEnglish " fee," and is chiefly memorable for havingprompted a passage, full of vivid fancy and inspira-tion, in Carlyle's " Sartor Resartus." " A simpleinvention it was," says Herr TeufelsdrOckh, " inthe old-world Graziersick of lugging his slow Oxabout the country till he got it bartered for corn oroilto take a piece of Leather, and thereon scratchor stamp the mere Figure of an Ox (or Pecus); putit in his pocket, and call it Pecunia, Money. Yethereby did Barter grow Sale, the Leather Moneyis now Golden and Paper, and all miracles havebeen out-miracled : for there are Rothschilds andEnglish National Debts ; and whoso has sixpence issovereign (to the length of sixpence) over all men

;

commands Cooks to feed him. Philosophers toteach him. Kings to mount guard over himto thelength of sixpence."

The ox was certainly at one time a standard ofvalue, though it may be doubted whether it passedgenerally as currency, even stamped on leather,

for Carlyle's hypothesis really requires a rather


advanced stage of credit organization, with token

money issued by graziers, and apparently accepted

by a trusting and economically civilized public.

But in any case the ox must have been singularly

ill-adapted for currency purposes ; not only was it

not lasting, but it was certain to deteriorate after

a certain age, and finally to perish ; it was very far

from portable, as Carlyle's Grazier found ; and thedifference between one ox and another in size,value, and other respects is so great that the kinecirculation must have been singularly liable to theaction of the great economic principle known asGresham's Law, under which, as we shall see later,bad currency drives out good.

All this has been somewhat laboriously setforth, because in these respects the ox is thevery antithesis of the gold-piece, and having seenwherein the ox failed, we have already grasped theadvantages of the sovereign.

The sovereign is permanent,* portable, and ofuniversal acceptability, either in its own shape ormelted back into its original bullion. As it emergesfrom the Mint, there is no appreciable differencebetween it and its fellows, and its long use as thestandard money of the leading commercial nation

* Comparatively permanent, that is. It is not wholly imperviousto wear and tear, and M. de Launay, in his work on " The World'sGold," estimates that a gold coin would entirely disappear ineight thousand years.

THE SOVEREIGN 13has given it a position which is unrivalled in thepresent and unparallelled in the past. The differentexperiences to which one sovereign and anothermay be subjected make a difference to the length oftime during which they preserve their full weight,but weight rarely becomes a question of practicalimportance to holders of the sovereign consideredas cash, though it occasionally does so to bulliondealers, who regard the sovereign merely as a pieceof gold that may be melted into bars. The coinageis now so well cared for that for purposes of inlandand retail exchange one may be taken to be as goodas another, as long as we are certain that it is areal sovereign, duly stamped and milled. We areapt to take this inestimable convenience as a matterof course, but it is only secured by constant vigi-lance on the part of the responsible authorities, andthroughout the Middle Ages untold loss, inconveni-ence and uncertainty was caused by the chronicallychaotic state of the currency in this and othercountries.

In those good old days, monarchs who did notactually debase their own currencies by decreasingthe amount of true metal in them, and then passingthem to their unsuspecting subjects, were regardedas enlightened and disinterested reformers ; and theimperfect methods of coinage employed even bythe best-intentioned made it easy to sweat and clipthe coins, that is to say, to shave bits off them and


then pass them on. Here came in the opportunity

of the bullion dealer, and the process arose whichwent on undetected for centuries until it was

enounced and denounced by Sir Thomas Gresham,Queen Elizabeth's great monetary adviser, whostated his famous economic law on the subject.The gist of which is, that if two coins are in circu-lation, one better than the other, the good one willbe held back by any one who is wise enough torecognize its merits, and the bad one will be passedon ; so that after a time only the clipped and sweatedcoins will be circulating in the hands of the public,and the full-weighted ones will be either in thevaults of the bullion dealers or melted into bars.To protect themselves against the working of thislaw, our forefathers used sometimes to carry a smallpair of scales, with weights representing a guineaand a half-guinea, fitted into a neat case to be tuckedinto the pocket.

It has been claimed for gold, that one of its greatadvantages, which helped to raise it to its positionof predominance as circulating medium and basisof credit, is its steadiness in value. It is, in fact, acommon delusion that the value of gold is fixed andnever varies. The value of gold appears to be fixedby the law which compels the Mint to take any goldthat is brought to it and coin it into sovereigns atthe rate of ;^3 lys. io\d. per oz., but that is onlyanother way of expressing the fact that a coined

THE ADVANTAGES OF GOLD 15sovereign is equivalent to so much gold ; but becausewe are accustomed to value everything in sovereignsmany of us have been led into the assumption thatgold which can always be made into so manysovereigns per oz. must therefore be unchangeablein value. But if we keep fast hold of the fact thatthe value of a thing is what it will fetch, it will beseen at once that the sovereign, or the gold fromwhich it is coined, has no such charmed prerogative.When wheat is 355. a quarter the buying power ofthe sovereign, in the pocket of the miller who wantsto buy wheat, is different from its value when wheatis 25s. But though the value of gold can be nomore fixed than that of anything else, at the sametime its comparative indestructibility, and the enor-mous amount of it in existence in one shape oranother, make its value depend much less than thatof most other things on the amount of the output

at the moment.Wheat, which is grown to be consumed straight-

way, depends for its price on the prospects of thepresent crop and the amount left over of the last;gold, which is mined in order to be kept in the formof plate, ornaments, coins and ingots, and is rarelyabolished by consumption, is obviously much lessdependent on the chances which may be tendingto increase its amount more or less rapidly than

usual. For whatever its form, it may always bebrought out and melted, and so come into the

l6 THE MEANING OF MONEYmarket in the shape of cash, as was recognized bythe prudent Athenians * when in the days of theirprosperity they overlaid the statue of Athene withgold, giving it a gorgeous appearance for the timebeing and leaving a reserve which could at any timebe stripped off and turned into the sinews of war.Gold thus may be regarded as less likely to fluctuatein value than most other commodities owing to thehuge accumulated supply, which renders the newoutput for the time being a matter of comparativelylittle importance; and this fact, which has some-times been exaggerated into a statement that itsvalue ;is fixed, has certainly contributed, with itsbeauty as decoration and its commanding merits ascurrency, to the universal acceptability of gold, ineconomically civilized countries, in payment forgoods and services.

It is doubtless a mere convention that givesgold its commanding position, and it may be con-tended that it would be much simpler, cheaper andmore civilized to conduct exchanges by means ofpieces of paper secured on national property, asthe French Revolutionists tried to do with theirassignats, or to abolish all need for mediums ofexchange and help ourselves to whatever we want,rendering honest service in exchange by the mereimpulse of our own consciences. But we are notconcerned at present with any theoretical questions

* Thucydides, ii. 13.

THE TEST OF ACCEPTABILITY 17of an ideal currency or absence of currency. Theonly currency that is of practical and everydayimportance is that which is endowed with thevirtue of universal acceptability. If the tradingcommunity will take a certain piece of metal every-where in payment for its goods and services, thatpiece of metal is good currency ; and no mostscientifically evolved substitute will take its placeuntil it has won its way to the possession of thesame virtue. And the fact cannot be gainsaid thatgold is the one commodity which is universally andat all times acceptable in all civilized communities,and that all forms of promise to pay, or papermoney, are acceptable in proportion to the readi-

ness with which they can be turned into gold. Andconsequently we shall find, when we come to dealwith the more interesting problems of the manu-facture of credit, that the convertibility of credit

into gold is a matter that its manufacturers always

have to consider and allow for carefully, and thatconsequently the amount of gold that they maypossess in order to meet credit instruments that

come in for conversion, is necessarily a very im-

portant factor among those which regulate theamount of credit that they can, or ought to, create.

But even when the importance of gold as theuniversally acceptable medium of exchange is ad-mitted, it is often denied, by economic theorists and

other critically-minded observers, that the amount

IS THE MEANING OF MONEY

of available gold is a question of any moment.

In theory it is easy to argue that, if the amount of

gold were suddenly doubled, the world at large

would not be a penny the richer, because thebuying power of the gold would be halved, theprice of everything would be doubled, we shouldhave twice as many sovereigns in our pockets, andshould have to pay twice as much for everythingthat we wanted. But I venture to think that it is

easy even in theory to push this contention toofar; because any such great addition to currencyand credit would have a great effect in stimulatingproduction, and so would lead to a great additionto the number of real goods which humanity desiresand consumes when it can get them. In so far asthis was so, the condition of humanity as a wholewould be materially improved. Trade would bemore active, and the many borrowers who arealmost always in search of credit for the promotionof various productive enterprises would be moreeasily provided. In fact, the extent to which tradeand economic progress have in the past beenquickened by additions to the supply of the preciousmetals has produced a theory, with respectableauthority behind it, which connects the develop-ment of civilization with mining activity. Perhapsthe most stalwart and uncompromising expositionof this theory is given by Sir Archibald Alisonin his "History of Europe." "The two greatest

EFFECT OF VARIATION 19

events," * he says, " which have occurred in thehistory of mankind have been directly broughtabout by a successive contraction and expansion ofthe circulating medium of society." These eventswere the fall of the Roman Empire, which, accord-ing to Sir Archibald, " was in reality brought aboutby a decline in the gold and silver mines of Spainand Greece," and the Renaissance, which he ascribesto the discovery of the mines of Mexico and Peru.

Between these two theoretical extremesone

maintaining that the available volume ofthe preciousmetals is a matter of no importance, the other

regarding it as the cause of the most momentous

events in human developmentit is probably safeto steer a midway course, marked by the buoys ofactual fact. Experience shows that an era of active

gold production may be accompanied by a fall in

the prices of commodities, either because the multi-

plication of commodities may be progressing morerapidly than the output of gold, or because inactivity

of trade, perhaps due to some shock to credit, may

be checking the demand for commodities. But whenthe more normal effect of increased gold supplies

is at work, and the prices of goods are rising, the

producers of the goods are thereby benefited, and

set to work harder than ever to produce them.

The mechanism of transport is extended and

improved, the waste places of the earth are ploughed

' Vol. i. ch. i. 33.


and watered, and the material heritage of mankindis increased and multiplied. So much so that thedemand for credit and capital for the furtherance ofthese extensions is apt to become so keen, that, aswe saw in the recent period of great commercial

expansion, an era of active gold production maycoincide with high rates for money.

It is thus evident that innumerable and incalcu-lable considerations have to be enumerated andcalculated before we can say with certainty eitherthat variations in the amount of gold are of no

importance, or that they will have results whichcan be definitely counted on. But for the purposesof our present inquiry there is no need to wonderwhat might happen if the available gold supplywere doubled ; it may be asserted that, rightly orwrongly, and up to a certain point, if any reasonablypossible addition was made to the Bank of England'sstore of gold, the event would, in normal times, bewelcomed by the commercial community. Theposition of the Bank would be regarded as stronger,the City would be cheerful and optimistic, and therewould be so much more credit available for anyborrower who had an enterprise to finance andcould give good security. If there were no enter-prising borrowers with good security to offer, thenew gold would certainly be useless. But, exceptin times of extreme slackness in trade, this is animprobable contingency ; and it also is improbable

SILVER 21

that extreme slackness in trade would last long, ifit were treated with sufficient doses of this medicine.We are thus wandering far afield from our con-

sideration of sovereigns in the pocket to gold asthe basis of credit. But these monetary questionsare all so inextricably entangled that it is almostimpossible to mark them off logically and deal withthem one by one. It is the universal acceptabilityof gold in civilized communities that gives it bothits popularity in the shape of sovereigns, and itsimportance as a v/heel in the machinery of credit.And this importance is so great that it had to bereferred to on our first meeting with the metal inthe course of this inquiry.

The small change that we carry in our pursesneed not detain us long. It must be noted thatsilver coins are not " legal tender " to the extent of

more than 2; that is to say, if you owe your tailor

;^5, you cannot legally satisfy the debt by handinghim one hundred shillings or any other arrangementin silver. Probably it would not occur to you to doso, and if you did he would probably accept it, andthe restriction is not apparently of much practicalimportance. Actually it is most important, for thedreary record of currency history is a long tale of

the uncertainty and inconvenience which arose inthe days when people tried to keep gold and silvercirculating on equal terms at a fixed ratio, with the

result that the one which happened for the moment


to be less valuable as bullion continually drove out

of circulation the one which was more valuable,

thanks to the operation of Gresham's Law * and

the quick and cunning bullion merchants. Bi-

metallists maintain that the confusion and difficulty

of the two-metal system only arose because it was

not scientifically and universally applied, and Bi-metallism has been endorsed by eminent theoreticalauthority. The simplicity of the single standard,however, has obvious practical advantages, and itmay at least be claimed that England, by makingsilver legal tender only up to sums of 2, andadopting what is called a gold standard, solved aproblem which had puzzled the civilized world forcenturies.

It may also be observed that our silver coinsare mere tokens ; that is to say, they do not pretendto contain as much of the metal as would, if melteddown, fetch as much as the value at which theycirculate. At the present moment t there is roughlyabout fourpennyworth of silver in a shilling, whichthus has a purely conventional and artificial valueas currency.

Bronze coins are legal tender only to the extentof one shilling.

* See p. 14. + December, 1908.

CHAPTER IIIPAPER CASH

The exchange of a hat for a sovereign is a quitecommonplace proceeding, but when we begin toexchange a hat for a piece of paper, which is onlyaccepted because it is believed to be convertibleinto gold, the element of belief, that is to say ofcredit, enters into the transaction, and we havemoved up a step on the ladder of economiccivilization.

The first stage, as we have seen, was frombarter, by which goods were exchanged for goods,to purchase, by which goods were exchanged forone commodity of universal acceptability. And aprocess of painful evolution finally decided that

gold was best fitted to be that commodity. Butan enormous expansion of trade was made possiblewhen it was discovered that gold could beeconomized by the use of paper which representedand multiplied it, and when confidence in a bankerbecame sufficiently established to induce the com-munity to circulate his promises to pay instead ofpieces of metal.


The process of this evolution, also, was painfulenough, and the loss and uncertainty caused by thebad and debased coin currency of the Middle Ageswere rivalled by the ruin and disasters of the early

days of banking, when notes were issued withoutany regard for the assets which were behind them,or the ability of the issuer to meet them on pre-sentation. Nevertheless, the appearance of the

bank-note marks the first step in the developmentof banking as we understand it nowadays, that is,of a machinery for the manufacture of credit.

Before the bank-note won its way into circula-tion, such bankers as existed were chiefly gold-smiths and bullion dealers; they were sometimesloan mongers, collecting coin from one set ofcustomers to lend it to another, or to discount bills

for another, but it was only when they began toinduce those who borrowed from them to take thecash advanced in the form of notes that the economyof metal became possible and the wheel of thecredit machine began to turn to any purpose. Theoriginal goldsmith's note was a receipt for metaldeposited. It took the form of a promise to paymetal, and so passed as currency. Some ingeniousgoldsmith conceived the epoch-making notion ofgiving notes, not only to those who had depositedmetal, but to those who came to borrow it, and sofounded modern banking.

As long as the bankers took care of coin and

THE BANK-NOTE 25ingots for Jones and lent them to Smith, the com-mercial community was given a certain convenience,by knowing where dealers in money were to befound, but the convenience was severely restricted.When the bankers lent Smith not coin but a promiseto pay coin, they soon discovered, since theirpromise to pay did not at once come back to themfor presentation, that in the mean time they mightsafely accommodate Brown, Robinson and Williamswith a similar number of similar promises to pay

;

and so they hit on the great device by whichmodern commerce transacts its business by meansof evidence of mutual indebtedness between it andits bankers.

At first sight there is something whimsical inthe process of stimulating production and expandingtrade by an agreement between two parties to oweone another something ; but this agreement is animportant part of the structure of the modernedifice of credit.

Let us see it at work in the case of the primitivebank which we are now supposing to be emergingfrom the bullion-dealing to the note-issuing stage.

At first, we supposed it engaged in taking care of

metallic money for Smith and lending it to Jones,and its balance-sheet would stand thus, if we leaveout its capital for the sake of simplicity :

Due to Smith . . ;^ 10,000 Loan to Jones . . ^10,000


After it had made the momentous step ofinducing Jones to take its notes instead of metal,

the balance-sheet would show the followingdevelopment :

Due to Smith . ;!f10,000 Cash in hand . ;îo,oooNotes outstanding 10,000 Loan to Jones . 10,000

Total ;^2o,ooo Total ;^20,ooo

You will observe that since Jones has taken hisloan in notes the cash originally deposited bySmith remains in the bank's hands, and the loanto Jones is represented by a liability of the bankto meet the notes which it has passed over to him.These notes, being a promise to pay by the bank,are in effect a loan by Jones to it, and thus Jonesand the bank have become mutually indebted. Thebank has lent ;îo,ooo to Jones, and he, by takingpayment in the bank's promises to pay, is lending it;îo,ooo as long as he refrains from presenting thenotes and demanding cash for them. Jones andthe bank are thus mutually indebted, and by theiragreement to owe one another money the currencyhas been increased by ;îo,ooo, and to that extentJones is enabled to hire and load a ship for foreigntrade, or otherwise to engage in productiveenterprise.

When the bank finds that the notes whichJones borrowed are not quickly presented, but are

MUTUAL INDEBTEDNESS 27accepted by the commercial community for thepayments that he makes in loading his ship, andpassed on from hand to hand and remain out-standing, it proceeds to the next step of makingadvances to Brown, Robinson and Williams, andthe balance-sheet will be amplified as follows :

Due to Smith. ;io,ooo Cash in hand .

;,f10,000Notes outstanding 40,000 Loans to customers 40,000

;^SO,ooo ;5o.ooo

The great principle of currency based on mutualindebtedness has thus been extended ; the bank isliable for ;^40,ooo of its promises to pay on demand,and its customers are indebted to it for ;^4o,ooo.And this ;'40,ooo is in circulation, quickening thewheels of trade, increasing production and profit-able commerce. And the mutual indebtedness ofthe bank and its customers has brought this newcurrency into being.

But it will be observed that the bank now owes;^So,ooo in all, and holds only ;^io,ooo in metalliccash against all these liabilities on demand. Thiswill probably be a safe proportion for it to work onin ordinary circumstances, but if it continued toincrease the amount of its note issue without a pro-portionate increase in the amount of cash heldagainst it, the day would come when some unfore-seen accident brought in an unusual number of notes


for presentation, and its fate would be sealed. In

the early days of banking this sort of disaster was

common enough, and folk found that they had sold

their goods and services in return for notes whichthey had believed to be as good as gold and dis-covered too late to be worth only the paper that

they were printed on. The manufacture of cur-rency out of mutual indebtedness had proved tooeasy and simple a process, and the necessity for aproportionate backing of gold had been ignored.

Disasters of this kind not only reduced thenumber of note-issuing banks in England, butproduced a body of opinion which aimed at makingthe bank-note a mere bullion certificate, only to beissued against a backing of gold to its full value.In London, the Bank of England had, since its veryearly days, possessed the monopoly of note issueas far as joint-stock companies were concerned, andthe private banks had already ceased to issue noteswhen the question of the regulation of the noteissue was taken in hand in 1844.

The body of opinion above referred to then pre-vailed, and it was decided by the Bank Act of 1844that in future any expansion in the Bank ofEngland's note circulation must only be based onmetal. Up to ;'i4,ooo,ooo it might issue notesagainst securities, and it was arranged that if anycountry note issues lapsed, two-thirds of themmight be added to the amount of notes that the

REGULATION OF NOTE ISSUE 29

Bank of England might so issue, and this arrange-ment has since then raised the amount of bank-notesbased on securities to nearly i8i^ millions. By theterms of the Act, the metal held against any notes

that might be issued above this line might be four-fifths gold and one-fifth silver; but the Bank haslong ceased to hold silver against its notes, and anyincrease in their amount can now only be based on

an increase in its gold store.

Such are the conditions under which Bank ofEngland notes are now issued, and since country

issues are in these days a small item in the volume

of currency in England, the only notes that need

here be considered are those of the Bank of Eng-

land, which are, like sovereigns, legal tender to

any amount. The value of a bank-note arises fromthe belief that it can be converted into gold and will

be accepted as payment for goods. It therefore

follows that since the Bank of England note is legal

tender in England, it will be accepted in payment

for goods as long as the British Government is

strong enough to enforce the law of the land ; and it

is obvious that it can be converted into gold as long

as the Bank of England is solvent, that is to say,

keeps sufficient gold in its vaults to meet its notes

on presentation; and it is compelled to keep

the gold equivalent of every note that it issues

above the ;^i8,4So,ooo, which it is allowed to issue

against Government securities. The strength of the


Bank of England note thus depends on the power

of the British Government to enforce the law, and on

the solvency of the Bank of England. It is thus asstrong as any mere promise to pay can be made, and

is, for practical currency purposes, as good as gold.The consideration of the bank-note has thus

already taken us over the wavy and very ill-definedline which separates cash from credit. For a bank-note is both. It is cash in that it is immediatelyconvertible into gold, and it is credit in that it is apromise to pay, and is only acceptable in paymentfor goods because it is believed to be as good asgold. Its use, in economizing gold and multiplyingthe effectiveness of the gold retained in the hands ofthe banker, has already been demonstrated, and ithas also been recorded that the disasters whichfollowed from its abuse, in days when bankers hadnot grasped the necessity for keeping an adequateproportion of gold to meet notes presented, and forkeeping the rest of their assets liquid and realizable,led to a reaction. This reaction prompted thepassing of measures in England which prohibitedthis economy of gold by means of the bank-note, and laid down that any increase in the Bankof England's issue was to be based on an equalamount of gold in its vaults, each s-note beingactually represented by $ in gold.

If the apparent intentions of the Act of 1844had been carried out, the subsequent enormous

THE BANK ACT 31development of English trade, if it had been possibleat all, must have been accompanied by the heapingup of a vast mass of gold in the Bank's vaults.But its intentions were evaded by the commercialcommunity, which had already appreciated theadvantages of a currency based on mutual indebted-ness between itself and the banks. The commercialcommunity ceased to circulate bank-notes underthe new restrictions, developing the use for dailycash transactions of a credit instrument which hadalready acquired some popularity, namely, a draftor bill on its bankers payable on demand, and nowcommonly called a cheque. The drawing of chequeswas not in any way limited by the Act of 1844, andthe cheque was in many ways a more convenientform of currency than the bank-note. For the

strength of the Bank of England note was in itself aninconvenience in one respect; since the nature of the

note is such that any one who holds it can presentit and be paid in gold for it at sight, a roll of themin one's pocket is as valuable a burden as so manysovereigns or gold bars, with the additional merit

of being more easily carried by the owner, and theserious disadvantage of being more easily carried

off by any one else. This danger is avoided orenormously reduced when the community adoptsthe habit, not of carrying or sending bank-notes, but

of drawing a cheque on its bank for every trans-

action that it wishes to complete by payment.


The use of the cheque, however, involves theelement of belief to a much greater extent thanthat of the bank-note. We have seen that thelatter is certain of being taken in payment for

goods or converted into gold as long as the BritishGovernment stands and the Bank of England issolvent, but the exchangeability of the former

depends on the solvency of the drawer of thecheque

probably a private individualand of thebank on which it is drawn. A shopkeeper whotakes a cheque in payment for a pair of boots isliable on presenting it through his banker to haveit returned marked with ominous signs, which areinterpreted to mean that the customer's alleged

bank refuses to meet it, because his account isoverdrawn, or perhaps because he never had anaccount with it at all. Or it is barely possible thathe may be informed that the bank on which thecheque was drawn has put up its shutters, thoughthis possibility is happily one that need not bepractically considered in these days, owing to thestability which centuries of experience and thelight of publicity have given to British banking.

But these two risks, one a practical one and theother theoretically in being, make the extensiveuse of cheques possible only in a community whichhas reached a high stage of economic civilization,and is also blessed with a high level of generalhonesty among its members. And these features

THE CHEQUE 33in the character of a cheque also made it obviouslyimpossible that it could be given the privilege oflegal tender, that is, that any one could be boundby law to accept a cheque in payment for goodsdelivered or services rendered. No one could becompelled to take a piece of paper signed by anunknovi^n person and purporting to be an order ona bank of which perhaps he had never heard. Sothat the cheque has had to fight its way to itspresent supremacy without this advantage, and todrive gold and notes out of circulation, except insmall and special transactions, in spite of the factthat they were legal tender and it was not. Thisit was enabled to do by its safety and convenience,and the power of the drawer, by varying the formin which he makes it out, to hedge it about withsafeguarding restrictions, or to leave it convertible

into cash by any one who presents it. A chequeis merely an order on a bank from one of its cus-tomers to pay some of the money which it holdson his account to a third party, or to himself if he

wants to take out cash. It can be manufacturedwith a piece of notepaper and a penny stamp, butit is much more usual to use one of the well-knownregular forms supplied by banks to their customers.

The convenience of the cheque follows from itssafety ; if bank-notes are being sent, it is necessary

to note all the numbers and register the packet ; acheque, protected by being crossed and marked

D

34 THE MEANING OF MONEY" not negotiable," goes safely in an ordinary enve-

lope. The words "not negotiable" do not make acheque not negotiable, but their effect is, that no

holder of a cheque so marked can pass on a bettertitle to it than he has himself; consequently, if it

is stolen, any one who takes it from the thief cannotclaim on it. Further, the fact that it can be drawnto the exact amount required is a great advantage,

and its return to the drawer through his bank, whenit has done its work and been cancelled, is an addi-tional convenience, and makes the cheque a recordand receipt, as well as a form of payment.

But in considering the qualities of the chequeit must never be forgotten that it also, like theBank of England note, is a certificate immediatelyconvertible into legal tender cash, gold or notes.It need hardly be said that the great majority ofcheques are never presented to be turned into cash

;

they are paid into banks by those who receive them,and crossed off against one another in the Clearing-house, where representatives of all the banks meetand exchange claims against one another; andcheques thus for the most part merely act as in-dicators in the transactions which result in thedaily transfer of an enormous amount of credit fromone hand to another, the whole affair being finallyreduced to a matter of book-keeping exchangesbetween the various bankers and between thevarious accounts in their books. But the fact that

THE CHEQUE 35every cheque gives the holder, or his bank, theright to demand legal tender, gold or notes, fromthe bank on which it is drawn is highly important

;

without it, the cheque could not have won its wayto general acceptability, and could not be treatedas cash, as it is rather heretically treated here, on

the ground that it is, in the vast majority of cases,readily accepted in exchange for goods or servicesin ordinary transactions. And the immediate con-vertibility into gold or notes, which is behind everycheque, means that an adequate supply of gold ornotes to meet them on presentation is as necessaryto bankers who supply their customers with cheque-books as to those who formerly made advances tothem in the shape of notes, or promises to pay. Inthese days when a banker lends money, he lendsthe right to draw a cheque and promises to meetit on demand, so that the principle of mutual in-debtedness as part of the basis of modern com-mercial currency is again evident. And since theright to draw a cheque implies the right to call forgold or notes, the extent to which credit can becreated by bankers will depend, among other things,on the amount of gold or notes that bankers hold

against possible demands. A banker who has10,000 in gold or notes at his command wouldbe running too great a banking risk if he advanced

ten millions to the most unexceptionable customers

against the most unexceptionable securities; for


by doing so he would give them the right to takeout ten millions in gold and notes, and if even a

thousandth part of the right were exercised, the

banker's gold and notes would all be gone. Andsince, as we have seen, notes are mere bullion

certificates, themselves immediately convertible into

gold, we come back to gold as an element of firstimportance in the creation of banking credit. Orwe can express the matter more simply by sayingthat the amount of gold held by the banking com-munity as a whole will be a leading influence amongthose which determine the amount of the chequesthat it can allow the commercial and financial com-munity, as a whole, to draw. All this is perhapsa little premature in a chapter which purports tobe dealing with cash transactions. But the cheque,like the bank-note, is at once cash and credit, andit cannot be too early stated and understood thatevery credit operation implies a possible cashtransaction, and that prudent banking consists inmaking due allowance for cash demands involvedby the creation of credit.

CHAPTER IVTHE BILL OF EXCHANGE

Having reviewed the various forms of cash, ormoney here and now, for which goods and servicesare habitually exchanged, and for which the moneymarket exchanges money some day or moneysomewhere else, we proceed to the bill of exchange,a versatile credit instrument which is often allthese three forms of money in the course of itscareer. The complicated relations between thedifferent kinds of money, and their habit of meltinginto another, are well exemplified when it is statedthat the cheque, with which we are supposed tohave already dealt, is actually nothing else but abill of exchange, with which we now propose todeal.

But there is this difference. A cheque is a billofexchange payable on demand. A bill ofexchange,as we shall see, is an order from A to B to paya sum either to himself. A, or to a third party, C.

When it is payable forthwith it is a cheque andbears a penny stamp ; when it is payable at a futuredate it is a bill of exchange and bears a stamp


ad valorem, varying with the amount of the sumnamed. It is characteristic of monetary nomencla-

ture, which seems to try to confuse matters by apply-ing illogical and confusing names, that the title " billof exchange " should be given both to the genusand to one of the species into which it is divided.Another distinction exists in the eye of the law,from the fact that a cheque, according to its legaldefinition, must be drawn on a bank, whereas a billmay be drawn on a bank but is more often drawnon a merchant or accepting house, or any debtorwho gives his creditor the right to draw on him.The practice of the market-place, however, doesnot always follow the legal definition of the cheque,but applies the word to any bill payable on demand.The element of time is thus the real outstandingquality in the bill of exchange, which separates itfrom the cheque and justifies my reservation of itto a separate chapter apart from the forms of papercash.

Logically, the reasons which included chequesunder the category of cash would perhaps includethe bill of exchange. Goods and services are con-stantly given in exchange for bills, and a good bill,drawn on an English bank or firm, is convertibleinto gold. But it has to go through two importantprocesses before it can be so converted. It has tobe accepted, and it has either to be discounted orto await maturity.

THE EARLY BILL 39The bill of exchange is of immemorial antiquity.

" It is probable," says a great authority on its legalaspects, " that a bill of exchange was in its originalnothing more than a letter of credit from a mer-chant in one country to his debtor, a merchant inanother, requiring him to pay the debt to a thirdperson, who carried the letter, and happened tobe travelling to the place where the debtor resided.... It was found that the original bearer mightoften with advantage transfer it to another, andthe assignee was, perhaps, desirous to know,beforehand, whether the party to whom it wasaddressed, would pay it and sometimes showed itto him for that purpose ; his promise to pay wasthe origin of acceptances." *

It is obvious from this theoretical descriptionof the early bill that it, like its modern descendant,was not immediately payable, since otherwise itsbearer would most obviously and simply havetested the willingness to pay of the merchant on

whom it was drawn, by presenting it for payment.Acceptance is nothing else than the promise of the

party on whom the bill is drawn that he will payit at due date ; and this acceptance he signifies bywriting his name across the face of it. A cheque,in its legal sense, drawn on a bank, does not requireacceptance, because its payment constitutes and

includes its acceptance ; but a cheque, in the sense

* Byles on Bills of Exchange.


of a bill payable on demand, drawn on a firm whichis not a bank, is often accepted.

It is rather astonishing to find the authority

just referred to stating that there is no evidencethat bills of exchange were in use among theancients, though he refers to a passage in Cicero'sletters which appears, to a lay mind, to establishthe fact beyond doubt. Writing to Atticus,*Cicero asks him to consider whether the monetaryrequirements of his son at Athens can be providedby exchange operations, and it is interesting tosee that the Latin phrase is a literal counterpartof the Englishpermufari But although this pas-sage is not sufficient evidence, from a legal pointof view, that such a thing as a bill of exchangewas used, it clearly proves the existence of someform of exchange machinery in Rome and Athens ;and it is safe to assume that the acute and quick-minded Greeks exchanged credits against the goodsthat they bought and sold between their busy cities.

The precise age of the bill of exchange, however,is a question of merely antiquarian interest. Weare now concerned with its meaning and the func-tion that it performs in the monetary machine. Itis legally defined as "an unconditional order inwriting addressed by one person to another, signedby the person giving it, requiring the person towhom it is addressed to pay on demand, or at a

* Cic. ad Att., 12, 24.

TIME AND SPACE 41fixed or determinable future time, a certain sumin money to, or to the order of, a specified person,or to bearer."

Thus says the law. But, as we have alreadyseen, a bill of exchange becomes a cheque, inpractice and in the eye of the tax-gatherer, when itis payable on demand ; and in the eye of the lawlikewise when it is payable on demand and drawnon a bank. So that the distinctive part of itsactual definition consists in its being payable ata future date. Further, though it may be an orderdrawn by one party on another in the same street,nevertheless, since trade consists largely in the

exchange of goods between persons separated bydistance, it is usual to find that bills of exchangeare drawn by the merchants or financiers of onecentre on those of another. In other words, timeis a constant element in the composition of a billof exchange, and space is a very usual one. WhenSancho Panza had his ass stolen by a ruffianwhom his master's chivalry had set free from thegrip of the law, Don Quixote consoled him with apromise of a bill of exchange {cidiila di cambio) forthree asses out of five in his stable. As they werethen wandering in the Sierra Morena, the elementsof time and space were both present. The billwas duly drawn on Don Quixote's niece, and ranas follows :

" Dear niece,At sight of this, my first bill of


ass-colts, give order that three out of the five 1

left at home in your custody be delivered toSancho Panza, my squire; vi^hich three colts Iorder to be delivered and paid for the like numberreceived of him here in tale ; and this, with hisacquittance, shall be your discharge. Done in the

heart of the Sierra Morena, the twenty-second of

August, this present year "

" It is mighty well," said Sancho, " now youhave only to sign it."

" It wants no signing," said Don Quixote ; " Ineed only put my cipher to it, which is the samething, and is sufficient, not only for three, but forthree hundred asses."

The draft was thus in many respects irregular;

apart from the fact, with which the priest consoledSancho when he found that he had lost it, that"one written in a pocket-book would not beaccepted." Nevertheless, this bill drawn in jestby Cervantes on posterity more than three cen-turies ago, is a very fair parody of its moderncounterpart. Its verbiage, of course, has been leftout, the bill of to-day being generally drawn withbusiness-like brevity ; but it is a definite order toDon Quixote's niece, signed by his cipher, topay a stated number of ass-colts, to Sancho,against value received from him at the placewhere the bill is drawn. The fact that this valuereceived is wholly fictitious is not quite without

THE ORIGINAL ESSENCE 43parallel in modern practice. Modern practice, inits insatiable search for means of credit manu-facture, has often found it convenient to createbills of exchange out of nothing, drawing themagainst aspirations or expectations or speculations.And cases have been knovirn in which an attemptwas made to give the "kites," or accommodationpaper, so produced, an air of demure respecta-bility by some reference to goods passing, asimaginary as the three asses which Don Quixotestates that he has received from Sancho.

The original essence of a bill of exchange wasthat it was a claim for the payment of a debt,based on the moving of saleable produce to theplace at which it is expected to find a market.The custom which made it payable at a date subse-quent to its arrival, and the arrival of the goods,was presumably arranged in order to give the mer-chant who received them, and owed the money forthem, time to dispose of them and garner the pro-ceeds. But his acceptance of the bill, or acknow-ledgment that he has to pay the money at its dateof maturity, makes it immediately negotiable, orconvertible into cash, by the process of discount,which will be explained later.

Let us take a concrete example, and simplify itby the elimination of many of the processesthrough which a modern bill actually passes.

Silas P. Watt, farmer, of Dakota, sells his


wheat-crop for ;^20oo to John Smith, of Londoncorn-dealer; John Smith sees no reason why heshould pay for the wheat before it has been shipped,knowing that a month or two must pass before ithas reached him, and been marketed and turned intomoney in his pocket. Silas P. Watt, on the otherhand, sees no reason why, during all this interval,he should have parted with his wheat and shouldhave nothing to show for it ; and his banker ortrust-manager, who has probably made an advanceagainst it, is even more strongly convinced of theimpropriety of such a proceeding. Consequently,thanks to the compromise which commerce hasdevised to meet this difficulty, Watt in Dakotadraws a bill on Smith in London for ;^20oo payableat sixty days' sight, and is able to give this bill tohis bank or trust company to be realized in pay-ment for the loan on his crop. The bank endorsesthe bill by signing its name on the back of it, andsends it to its agent in London, together withdocuments showing that the wheat has beenactually shipped and insured against risks on theway, and on its arrival it is accepted by Smith,who writes his signature across the front of it toshow that he acknowledges the indebtedness at thedue date, and is given possession of the documents.It is thereupon, supposing Smith's name to be goodand in sound credit, a negotiable instrument whichcan be discounted, that is, turned into as much

A SIMPLIFIED EXAMPLE 45ready cash as a promise to pay at a distant date isworth according to the current rate of interest.For example, if the 2000 bill has still a month torun and the current rate of interest is 6 per cent,per annum, its present value will be decided bysimple arithmetic to be ;"i990.

This is a very simple example of the manner inwhich the bill of exchange facilitates trade bycreating a piece of negotiable paper against agenuine trade transaction. Wheat was not wantedin Dakota, and is always wanted in London, andtherefore its transfer from Dakota to London givesit value by putting it into the place in which itwill fetch a price. The interval is bridged bythe bill, which finances the transaction from itsbeginning to its end. When the bill falls due, if,as we may suppose for the sake of clearness, it hasnot been discounted, Watt or his bank (to whomwe suppose him to have passed it on) appliesthrough his London agent for the money, andSmith, having in the meantime disposed of thewheat, has the necessary funds ready at his bankto meet his acceptance ; the agent places the pro-

ceeds to the credit of the bank in London, to beused as it may direct. In actual practice, how-ever, the bank's agent would probably have dis-counted the bill and so turned it into immediate

cash on its arrival, and the bank in Dakota wouldalready have sold drafts on London against it, to


customers in America who had payments to makein England.A bill, such as this one that we have imagined,

drawn against the actual shipment of actual pro-duce, and especially of produce of universal demandand immediate consumption, such as wheat,obviously possesses the great advantage of "pay-ing itself," according to the common phrase inLombard Street. The wheat comes to market andis sold, and cancels the debt created against it.

It thus begins to appear that the bill of exchangeis not only a beautifully simple and efficaciousdevice for financing commerce, but is also an idealform of investment for bankers and others whoare obliged by the nature of their business tokeep their resources liquid, that is, readily con-vertible into cash.

For a genuine bill of the kind described paysitself automatically, as we have seen, at maturity,owing to the necessities of the community, whichmust have wheat or perish, and a banker who investshis funds by discounting good bills has only tolet some of his bills mature without replacing them,in order to replenish his store of cash. Bills drawnagainst wool, cotton, hides, and other raw materialsof the principal industries which are turned intoarticles of universal consumption are, for practicalpurposes, equally good; for the goods behindthe bill, being certain of a market, and likely, if

BEAUTIES OF THE BILL 47anything, to rise in value in time of war or politicalscare, secure the acceptor against the chance ofbeing "locked up," as it is called, with an assetwhich he cannot realize.

It is this quality, inherent in a genuine bill,which gave rise to the saying that banking is theeasiest possible business to conduct, when oncethe banker has grasped the difference between abill of exchange and a mortgage. We have seenthat the genuine bill of exchange is easily negoti-able before maturity, and on maturity is cash bythe sale of the goods on which it is based. Amortgage or loan against real property, housesand land, is by no means readily negotiable, sincethe two expensive processes of survey and exami-nation of title are involved before it can be trans-ferred, and the security behind it is the mostdifficult of all to turn into cash, especially at times

of political or other disturbance. " You may buyland now as cheap as stinking mackerel," says

Falstaff, when he brings news of Hotspur'srebellion.

But, as a matter of practical fact, a very large

number of the bills drawn are not of this genuinecharacter, and the use of this admirable and efficient

instrument of credit has been so extended, that

the distinction between it and a mortgage on real

property is nowadays sometimes in favour of the

latter, which has at any rate something behind it.


We have seen that the original justification of abill of exchange arose from its being drawn againstproduce in the course of being marketed, or being

worked up into a state in which it would be morevaluable, and that the bill bridged the intermediateperiod by providing the buyer and seller with aninstrument that could be immediately realized. Avery short step in advance of this arrangement ledthe dealers in exchange to create bills at a time ofyear when no crops were ready to be drawn against,in order to make profits out of the provision of aform of remittance at these periods, and to coverthemselves later on when the genuine produce billsbegan to come forward. Let us once more take aconcrete case. In July, Silas Watt may want tomake a payment in London for farming machinery

;

he has no crop to draw against as yet, but hisbank will sell him a draft on London, having madearrangements with Smith, who is now grown froma merchant into an "accepting house," to acceptbills drawn by it, for a consideration, againstsecurities instead of produce. When Watt's cropis harvested, and a genuine bill on London iscreated by its sale, it will restore the Americanbank's credits in London, which were reduced bythe draft that it had provided to pay for Watt'smachinery.

When John Smith is described as having grownfrom a merchant into an accepting house, he is

ANTICIPATORY BILLS 49supposed to have passed through a process whichhas been a fairly common experience. Like manyother merchant houses, he has given up the actualhandling and selling of merchandise, though retain-ing the title of merchant, M^hich is highly honouredin the City, and is confining his attention to theprofits which he can more easily earn, if his namebe good enough, by placing his acceptance at thedisposal of borrowers who want to draw on him.The arrangement that he has made with Watt'sbanker, and with many other dealers in bills ofexchange in other parts of the world, enables themto draw on one another at any time, whether therebe produce passing or no, and brings into beingthe instrument known as a financejbill. By thisoperation he and they create credit instrumentswhich can be discounted and turned into cash, onthe security of their names which are on the bills.

This system of creating bills of exchange, aslong as they are created in anticipation of cropmovements and other genuine processes by whichproducts are given value by treatment and move-ment into the place where they are wanted, is quitelegitimate, and tends, as will be explained in a laterchapter, to steady the fluctuations in exchange, and

to check unnecessary shipments of gold backwardsand forwards across the hemispheres.

But having discovered that profitable business

^vas to be done by creating bills in anticipation of


movements of produce or manufactures, the enter-

prising spirits of the financial community werenaturally impelled to go further, and create bills for

the mere purpose of discounting them and so pro-viding themselves with cash. As there was nomoving produce in question, they were createdagainst property that would be difficult of realiza-tion, such as landed estate, or against securities

which might or might not be easy to sell, or merelyagainst the credit of the creators, and all thevarieties of bills so produced differ more or lessessentially from the ideal form of bill of exchange,which, as we saw, paid itself on maturity by beingdrawn against actual movements of produce ofgeneral and rapid consumption. The dangersinvolved by the abuse of the ease with whichbills can be created are increased by the greatdifficulty of detecting from the appearance of a billwhether there be real produce behind it, or someother form of security, or nothing but the credit ofthe parties. Some bills carry on their faces ahistory of the whole transaction involved. Sub-joined is a specimen, faithfully copied, with namesaltered :

'Si

^

t^3

-^

I


More commonly these details are omitted, andthe bill takes a form like this :

^2000. New York, Sept. yd, 1908.At ninety days after sight of this First of Exchange

(Second Unpaid) pay to the order of Messrs. Jones.

Two Thousand Pounds Sterling,Value received, and charge the same to a/c as advised.To John Smith & Co.\

London. / EVANS & PUGH.

Experts in credit, with a mass of collateralevidence at the back of their heads, may be able tohazard a shrewd guess from the appearance of a bill,as to what is behind it. But the phrase "Valuereceived " covers a multitude of mystery, and thedifference between a genuine produce bill and apiece of finance paper is often difficult to detect.

Finance bills being based on securities which areless readily realizable, especially in times ofapprehension and uncertainty, than genuine pro-duce of general demand, are obviously more likelyto land their acceptors in difficulty if they havebeen accepting too many of them. And it is thuseasy to understand why, when there is any strain oncredit, Lombard Street sometimes begins to talkseriously about the number of finance bills thatare passing.

Another class of bill that becomes unpopularwhen the market for credit is in a nervous state isthe " house bill," that is, the bill drawn by a firm or

HOUSE BILLS 53company on itself. If, for example, John Smithestablishes his brother Robert in Oporto to financethe port wine trade, and the Oporto Smith drawsbills extensively on Smith in London, being merelyan oversea branch of the same firm, the bills so drawnwill not be as good as if they were drawn by onefirm on another which is wholly distinct, and socarried behind them the credit and resources of twoestablishments. If this paper became too common,the watch-dogs of the credit organization wouldremark that there was too much Smith on Smithabout, and would describe it, in its picturesquephrase, as mere " pig on pork."

The classical example of pig on pork is theorder on Mrs. Micawber which Mr. Micawber gaveto David Copperfield in the King's Bench prison." Mr. Micawber," so David tells the tale, " was wait-ing for me within the gate, and went up to his room(top story but one) and cried very much. Hesolemnly conjured me, I remember, to take warningby his fate ; and to observe that if a man had twentypounds a year for his income, and spent nineteenpounds nineteen shillings and sixpence, he would behappy, but that if he spent twenty pounds one hewould be miserable. After which he borrowed ashilling of me for porter, gave me a written order

on Mrs. Micawber for the amount, and put awayhis pocket handkerchief and cheered up."

David would have found some difficulty in


inducing anybody to discount that bill, though doubt-less Mrs. Micawber would have accepted it with afine flourish, and with perfect confidence that "some-

thing would turn up" before it was presented.Nevertheless its complete worthlessness has beenparallelled before now in the world of commercialfact, when foreign firms have established branches,consisting of a clerk and an office boy, in England,and drawn bills on them, which have been accepted,of course, by the cleric, who had authority to signfor the firm by procuration, and have then actuallybeen discounted and turned into cash.

Mr. Micawber has thus taken us a step furtherthan Don Quixote. The Don drew a bill on hisniece, whom he knew to be able and ready to meetit, in favour of Sancho, against a fictitious deliveryby Sancho to him of three ass-colts. Micawber, ina debtors' prison, drew in favour of David on hiswife, who was then in process of being sold up.He doubtless believed, nay was certain, that hispaper was as good as gold. So do many otherswho draw on a branch establishment which pos-sesses nothing but an office table; and thisMicawberish optimism is at the back of a good dealof the exuberant energy which makes trade hum intimes of activity. And consequently when tradeslackens, and folk begin to consider scepticallyconcerning the basis of the credit that has beenbuilt up during the humming period, there are

A MERIT AND A DANGER 55sometimes some awkward moments of surprise anddisillusionment.

The importance of the bill of exchange thus liesin a merit and a danger attached to it. / The merit isthe fact that in its genuine form it facilitates trade

by creating credits and so supplying cash againstreal produce not yet marketed, and is also an idealform of investment for those whose investmentsmust be liquid, or certain of easy realization. Thedanger is the ease with which it can be createdagainst securities which may not be readily market-able, or by being drawn on firms by themselves, orby correspondents, in order to provide cash forspeculative enterprise.

CHAPTER VTHE MANUFACTURE OF MONEY

Having reviewed the various forms of cash, ormoney here and now, and the bill of exchange,which, from its ready negotiability and from itsbecoming cash on maturity, may be described asvery nearly cash, we may pause and look backover the ground already traversed.We saw that gold, with auxiliary tokens of silver

and bronze, is still the cash of the pocket for retailtransactions, but that its use in big commercial andfinancial transactions was economized first by theuse of bank-notes, and then, when the law laidrestrictions on the use of bank-notes which pre-vented any increase in their issue except againstan equal amount of gold, by the use of cheques.But we found that the general acceptability ofnotes and cheques arose from their being con-vertible into gold, which is the only form of pay-ment that is universally and always acceptablein the economically civilized world.

The restrictions on the bank-note have practicallyeliminated note issues in England except that of the

THE RIGHT TO DRAW A CHEQUE 57Bank of England note, which being legal tender andbacked by the gold in the bank's vaults is regardedas a bullion certificate just as good as gold, and hasbecome itself part of the basis of credit. That is tosay, a banker who has Bank of England notes inhis till is in a position to make advances to hiscustomers on the strength of them, exactly as ifthey were sovereigns. The money of modernEnglish commerce and finance is the cheque, andthe credit dealt in in the London money market isthe right to draw a cheque. We have next to findout how this right to draw a cheque is created,and we shall find that it is generally created by anadvance made by a banker.

Since the cheque is an order to pay gold ornotes, it is sometimes assumed that all these orderswhich are turned over by the London bankers'Clearing-house, to the extent of some thirty millionsa day, are orders drawn by folk who have acquiredthe right to do so by depositing gold and noteswith the banks. And it is a common popularmistake, when one is told that the

the meaning of money

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