PART THREE: MONEY AND BANKING
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CHAPTER 15
The Business of Banking
1 Types of Banking Activity
The business of banking falls into two
distinct branches: the negotiation of credit through the loan of other people's
money and the granting of credit through the issue of fiduciary media, that is,
notes and bank balances that are not covered by money. Both branches of business
have always been closely connected. They have grown up on a common historical
soil, and nowadays are still often carried on together by the same firm. This
connection cannot be ascribed to merely external and accidental factors; it is
founded on the peculiar nature of fiduciary media, and on the historical
development of the business of banking. Nevertheless, the two kinds of activity
must be kept strictly apart in economic theory; for only by considering each of
them separately is it possible to understand their nature and functions. The
unsatisfactory results of previous investigations into the theory of banking are
primarily attributable to inadequate consideration of the fundamental difference
between them.
Modern banks, beside their banking activities proper, carry
on various other more or less closely related branches of business. There is,
for example, the business of exchanging money, on the basis of which the
beginnings of the banking system in the Middle Ages were developed, and to which
the bill of exchange, one of the most important instruments of banking activity,
owes its origin. Banks still carry on this business nowadays, but so do exchange
bureaus, which perform no banking functions; and these also devote themselves to
such business as the purchase and sale of securities.
The banks have also
taken over a number of functions connected with the general management of the
property of their customers. They accept and look after securities as "open"
deposits, detach interest and dividend coupons as they fall due, and receive the
sums concerned. They superintend the allotment of shares, attend to the renewal
of coupon sheets, and see to other similar matters. They carry out stock
exchange dealings for their customers and also the purchase and sale of
securities that are not quoted on the exchange. They let out strong rooms which
are used for the secure disposal of articles of value under the customer's seal.
All of these activities, whatever their bearing in individual cases upon the
profitability of the whole undertaking, and however great their economic
significance for the community as a whole, yet have no inherent connection with
banking proper as we have defined it above.
The connection between banking
proper and the business of speculation and flotation is similarly loose and
superficial. This is the branch of their activities on which the general
economic importance of the banks nowadays depends, and by means of which on the
continent of Europe and in the United States they secured control of production,
no less than of the provision of credit. It would not be easy to overestimate
the influence on the organization of economic life that has been exerted by the
change in the relation of the banks to industry and commerce; perhaps it would
not be an exaggeration to describe it as the most important event in modern
economic history. But in connection with the influence of banking on the
exchange ratio between money and other economic goods, which alone concerns us
here, it has no significance at all.
2 The Banks as Negotiators of Credit
The activity of the banks as negotiators of credit is characterized
by the lending of other people's, that is, of borrowed, money. Banks borrow
money in order to lend it; the difference between the rate of interest that is
paid to them and the rate that they pay, less their working expenses,
constitutes their profit on this kind of transaction. Banking is negotiation
between granters of credit and grantees of credit. Only those who lend the money
of others are bankers; those who merely lend their own capital are capitalists,
but not bankers. [1] Our use of this definition of the Classical School should not
furnish any ground for terminological controversy. The expression banking may be
extended or contracted as one likes, although there seems little reason for
departing from a terminology that has been usual since Smith and Ricardo. But
one thing is essential: that activity of the banks that consists in lending
other people's money must be sharply distinguished from all other branches of
their business and subjected to separate consideration.
For the activity
of the banks as negotiators of credit the golden rule holds, that an organic
connection must be created between the credit transactions and the debit
transactions. The credit that the bank grants must correspond quantitatively and
qualitatively to the credit that it takes up. More exactly expressed, "The date
on which the bank's obligations fall due must not precede the date on which its
corresponding claims can be realized." [2] Only thus can the danger of insolvency
be avoided. It is true that a risk remains. Imprudent granting of credit is
bound to prove just as ruinous to a bank as to any other merchant. That follows
from the legal structure of their business; there is no legal connection between
their credit transactions and their debit transactions, and their obligation to
pay back the money they have borrowed is not affected by the fate of their
investments; the obligation continues even if the investments prove dead losses.
But it is just the existence of this risk which makes it worthwhile for the bank
to play the part of an intermediary between the granter of credit and the
grantee of it. It is from the acceptance of this risk that the bank derives its
profits and incurs its losses.
That is all that needs to be said here
about this branch of the business of banking. For as far as money and monetary
theory are concerned, even the function of the banks as negotiators of credit is
of significance only so far as it is able to influence the issue of fiduciary
media, which alone will be discussed in the rest of the present work.
3 The Banks as Issuers of Fiduciary Media
To comprehend the significance of
fiduciary media, it is necessary to examine the nature of credit
transactions.
Acts of exchange, whether direct or indirect, can be
performed either in such a way that both parties fulfill their parts of the
contract at the same time, or in such a way that they fulfill them at different
times. In the first case we speak of cash transactions; in the second, of credit
transactions. A credit transaction is an exchange of present goods for future
goods.
Credit transactions fall into two groups, the separation of which
must form the starting point for every theory of credit and especially for every
investigation into the connection between money and credit and into the
influence of credit on the money prices of goods. On the one hand are those
credit transactions which are characterized by the fact that they impose a
sacrifice on that party who performs his part of the bargain before the other
does—the forgoing of immediate power of disposal over the exchanged good, or, if
this version is preferred, the forgoing of power of disposal over the
surrendered good until the receipt of that for which it is exchanged. This
sacrifice is balanced by a corresponding gain on the part of the other party to
the contract—the advantage of obtaining earlier disposal over the good acquired
in exchange, or, what is the same thing, of not having to fulfill his part of
the bargain immediately. In their respective valuations both parties take
account of the advantages and disadvantages that arise from the difference
between the times at which they have to fulfill the bargain. The exchange ratio
embodied in the contract contains an expression of the value of time in the
opinions of the individuals concerned.
The second group of credit
transactions is characterized by the fact that in them the gain of the party who
receives before he pays is balanced by no sacrifice on the part of the other
party. Thus the difference in time between fulfillment and counterfulfillment,
which is just as much the essence of this kind of transaction as of the other,
has an influence merely on the valuations of the one party, while the other is
able to treat it as insignificant. This fact at first seems puzzling, even
inexplicable; it constitutes a rock on which many economic theories have come to
grief. Nevertheless, the explanation is not very difficult if we take into
account the peculiarity of the goods involved in the transaction. In the first
kind of credit transactions, what is surrendered consists of money or goods,
disposal over which is a source of satisfaction and renunciation of which a
source of dissatisfaction. In the credit transactions of the second group, the
granter of the credit renounces for the time being the ownership of a sum of
money, but this renunciation (given certain assumptions that in this case are
justifiable) results for him in no reduction of satisfaction. If a creditor is
able to confer a loan by issuing claims which are payable on demand, then the
granting of the credit is bound up with no economic sacrifice for him. He could
confer credit in this form free of charge, if we disregard the technical costs
that may be involved in the issue of notes and the like. Whether he is paid
immediately in money or only receives claims at first, which do not fall due
until later, remains a matter of indifference to him. [3]
It seems desirable
to choose special names for the two groups of credit transactions in order to
avoid any possible confusion of the concepts. For the first group the name
commodity credit (Sachkredit) is suggested, for the second the name circulation
credit (Zirkulationskredit). It must be admitted that these expressions do not
fully indicate the essence of the distinction that they are intended to
characterize. This objection, however, which can in some degree be urged against
all technical terms, is not of very great importance. A sufficient reply to it
is contained in the fact that there are no better and more apt expressions in
use to convey the distinction intended, which, generally speaking, has not
received the consideration it merits. In any case the expression circulation
credit gives occasion for fewer errors than the expression emission credit
(Emissionskredit), which is sometimes used and has been chosen merely with
regard to the issue of notes. Besides, what applies to all such differences of
opinion is also true of this particular terminological controversy—the words
used do not matter; what does matter is what the words are intended to
mean.
Naturally, the peculiarities of circulation credit have not escaped
the attention of economists. It is hardly possible to find a single theorist who
has devoted serious consideration to the fundamental problems of the value of
money and credit without having referred to the peculiar circumstances in which
notes and checks are used. That this recognition of the individuality of certain
kinds of credit transactions has not led to the distinction of commodity credit
and circulation credit is probably to be ascribed to certain accidents in the
history of our science. The criticism of isolated dogmatic and
economico-political errors of the Currency principle that constituted the
essence of most nineteenth-century investigation into the theory of banking and
credit led to an emphasis being placed on all the factors that could be used to
demonstrate the essential similarity of notes and other media of bank credit,
and to the oversight of the important differences that exist between the two
groups of credit characterized above, the discovery of which constitutes one of
the permanent contributions of the Classical School and its successors, the
Currency theorists.
The peculiar attitude of individuals toward
transactions involving circulation credit is explained by the circumstance that
the claims in which it is expressed can be used in every connection instead of
money. He who requires money, in order to lend it, or to buy something, or to
liquidate debts, or to pay taxes, is not first obliged to convert the claims to
money (notes or bank balances) into money; he can also use the claims themselves
directly as means of payment. For everybody they therefore are really money
substitutes; they perform the monetary function in the same way as money; they
are "ready money" to him, that is, present, not future, money. The practice of
the merchant who includes under cash not merely the notes and token coinage
which he possesses but also any bank balances which he has constantly at his
immediate disposal by means of checks or otherwise is just as correct as that of
the legislator who endows these fiduciary media with the legal power of settling
all obligations contracted in terms of money—in doing which he only confirms a
usage that has been established by commerce.
In all of this there is
nothing special or peculiar to money. The objective exchange value of an
indubitably secure and mature claim, which embodies a right to receive a
definite individual thing or a definite quantity of fungible things, does not
differ in the least from the objective exchange value of the thing or quantity
of things to which the claim refers. What is significant for us lies in the fact
that such claims to money, if there is no doubt whatever concerning either their
security or their liquidity, are, simply on account of their equality in
objective exchange value to the sums of money to which they refer, commercially
competent to take the place of money entirely. Anyone who wishes to acquire
bread can achieve his aim by obtaining in the first place a mature and secure
claim to bread. If he only wishes to acquire the bread in order to give it up
again in exchange for something else, he can give this claim up instead and is
not obliged to liquidate it. But if he wishes to consume the bread, then he has
no alternative but to procure it by liquidation of the claim. With the exception
of money, all the economic goods that enter into the process of exchange
necessarily reach an individual who wishes to consume them; all claims which
embody a right to the receipt of such goods will therefore sooner or later have
to be realized. A person who takes upon himself the obligation to deliver on
demand a particular individual good, or a particular quantity of fungible goods
(with the exception of money), must reckon with the fact that he will be held to
its fulfillment, and probably in a very short time. Therefore he dare not
promise more than he can be constantly ready to perform. A person who has a
thousand loaves of bread at his immediate disposal will not dare to issue more
than a thousand tickets each of which gives its holder the right to demand at
any time the delivery of a loaf of bread. It is otherwise with money. Since
nobody wants money except in order to get rid of it again, since it never finds
a consumer except on ceasing to be a common medium of exchange, it is quite
possible for claims to be employed in its stead, embodying a right to the
receipt on demand of a certain sum of money and unimpugnable both as to their
convertibility in general and as to whether they really would be converted on
the demand of the holder; and it is quite possible for these claims to pass from
hand to hand without any attempt being made to enforce the right that they
embody. The obligee can expect that these claims will remain in circulation for
so long as their holders do not lose confidence in their prompt convertibility
or transfer them to persons who have not this confidence. He is therefore in a
position to undertake greater obligations than he would ever be able to fulfill;
it is enough if he takes sufficient precautions to ensure his ability to satisfy
promptly that proportion of the claims that is actually enforced against
him.
The fact that is peculiar to money alone is not that mature and
secure claims to money are as highly valued in commerce as the sums of money to
which they refer, but rather that such claims are complete substitutes for
money, and, as such, are able to fulfill all the functions of money in those
markets in which their essential characteristics of maturity and security are
recognized. It is this circumstance that makes it possible to issue more of this
sort of substitute than the issuer is always in a position to convert. And so
the fiduciary medium comes into being in addition to the money
certificate.
Fiduciary media increase the supply of money in the broader
sense of the word; they are consequently able to influence the objective
exchange value of money. To the investigation of this influence the following
chapters are devoted.
4 Deposits as the Origin of Circulation Credit
Fiduciary media have grown up on the soil of the deposit system;
deposits have been the basis upon which notes have been issued and accounts
opened that could be drawn upon by checks. Independently of this, coins, at
first the smaller and then the mediumsized, have developed into fiduciary media.
It is usual to reckon the acceptance of a deposit which can be drawn upon at any
time by means of notes or checks as a type of credit transaction and
juristically this view is, of course, justified; but economically, the case is
not one of a credit transaction. If credit in the economic sense means the
exchange of a present good or a present service against a future good or a
future service, then it is hardly possible to include the transactions in
question under the conception of credit. A depositor of a sum of money who
acquires in exchange for it a claim convertible into money at any time which
will perform exactly the same service for him as the sum it refers to, has
exchanged no present good for a future good. The claim that he has acquired by
his deposit is also a present good for him. The depositing of the money in no
way means that he has renounced immediate disposal over the utility that it
commands.
Therefore the claim obtained in exchange for the sum of money is
equally valuable to him whether he converts it sooner or later, or even not at
all; and because of this it is possible for him, without damaging his economic
interests, to acquire such claims in return for the surrender of money without
demanding compensation for any difference in value arising from the difference
in time between payment and repayment, such, of course, as does not in fact
exist. That this could be so repeatedly overlooked is to be ascribed to the long
accepted and widely accepted view that the essence of credit consists in the
confidence which the lender reposes in the borrower The fact that anybody hands
money over to a bank in exchange for a claim to repayment on demand certainly
shows that he has confidence in the bank's constant readiness to pay. But this
is not a credit transaction, because the essential element, the exchange of
present goods for future goods, is absent. But another circumstance that has
helped to bring about the mistaken opinion referred to is the fact that the
business performed by banks in exchanging money for claims to money payable on
demand which can be transferred in the place of money, is very closely and
intimately connected with that particular branch of their credit business that
has most influenced the volume of money and entirely transformed the whole
monetary system of the present day, namely, the provision of circulation credit.
It is with this sort of banking business alone, the issue of notes and the
opening of accounts that are not covered by money, that we are concerned. For
this sort of business alone is of significance in connection with the function
and value of money; the volume of money is affected by no other credit
transactions than these.
While all other credit transactions may occur
singly and be per formed on both sides by persons who do not regularly occupy
themselves with such transactions, the provision of credit through the issue of
fiduciary media is only possible on the part of an undertaking which conducts
credit transactions as a matter of regular business. Deposits must be accepted
and loans granted on a fairly considerable scale before the necessary conditions
for the issue of fiduciary media are fulfilled. Notes cannot circulate unless
the person who issues them is known and trustworthy. Moreover, payment by
transfer from one account to another presupposes either a large circle of
customers of the same bank or such a union of several banking undertakings that
the total number of participants in the system is large. Fiduciary media can
therefore be created only by banks and bankers; but this is not the only
business that can be carried on by banks and bankers.
One branch of
banking business deserves particular mention because, although closely related
to that circle of banking activities with which we have to deal, it is quite
without influence on the volume of money. This is that deposit business which
does not serve the bank as a basis for the issue of fiduciary media. The
activity carried on here by the bank is merely that of an intermediary,
concerning which the English definition of a banker as a man who lends other
people's money is perfectly apt. The sums of money handed over to the bank by
its customers in this branch of business are not a part of their reserves, but
investments of money which are not necessary for day-to-day transactions. As a
rule the two groups of deposits are distinguished even by the form they have in
banking technique. The current accounts can be withdrawn on demand, that is to
say, without previous notice. Often no interest at all is paid upon them, but
when interest is paid, it is lower than that on the investment deposits. On the
other hand, the investment deposits always bear interest and are usually
repayable only on notice being given in advance. In the course of time, the
differences in banking technique between the two kinds of deposit have been
largely obliterated. The development of the savings-deposit system has made it
possible for the banks to undertake the obligation to pay out small amounts of
savings deposits at any time without notice. The larger the sums which are
brought to the banks in the investment-deposit business, the greater, according
to the law of large numbers, is the probability that the sums paid in on any
particular day will balance those whose repayment is demanded, and the smaller
is the reserve which will guarantee the bank the possibility of not having to
break any of its promises. Such a reserve is all the easier to maintain inasmuch
as it is combined with the reserve of the current-account business. Small
business people or not very well-to-do private individuals, whose monetary
affairs are too insignificant to be transferred as a whole to a bank, now make
use of this development by trusting part of their reserve to the banks in the
form of savings deposits. On the other hand, the circumstance that competition
among banks has gradually raised the rate of interest on current accounts causes
sums of money that are not needed for current-account purposes, and therefore
might be invested, to be left on current account as a temporary investment.
Nevertheless, these practices do not alter the principle of the matter; it is
not the formal technical aspect of a transaction but its economic character that
determines its significance for us.
From the point of view of the banks
there does exist a connection between the two kinds of deposit business inasmuch
as the possibility of uniting the two reserves permits of their being maintained
at a lower level than their sum would have to be if they were completely
independent. This is extremely important from the point of view of banking
technique, and explains to some degree the advantage of the deposit banks, which
carry on both branches of business, over the savings banks, which only accept
savings deposits (the savings banks being consequently driven to take up
currentaccount business also). For the organization of the banking system this
circumstance is of importance; for the theoretical investigation of its problems
it is negligible.
The essential thing about that branch of banking
business which alone needs to be taken into consideration in connection with the
volume of money is this: the banks that undertake current-account business for
their customers are, for the reasons referred to above, in a position to lend
out part of the deposited sums of money. It is a matter of indifference how they
do this, whether they actually lend out a portion of the deposited money or
issue notes to those who want credit or open a current account for them. The
only circumstance that is of importance here is that the loans are granted out
of a fund that did not exist before the loans were granted. In all other
circumstances, whenever loans are granted they are granted out of existing and
available funds of wealth. A bank which neither possesses the right of note
issue nor carries on current-account business for its customers can never lend
out more money than the sum of its own resources and the resources that other
persons have entrusted to it. It is otherwise with those banks that issue notes
or open current accounts. They have a fund from which to grant loans, over and
above their own resources and those resources of other people that are at their
disposal.
5 The Granting of Circulation Credit
According to the
prevailing opinion, a bank which grants a loan in its own notes plays the part
of a credit negotiator between the borrowers and those in whose hands the notes
happen to be at any time. Thus in the last resort bank credit is not granted by
the banks but by the holders of the notes. The intervention of the banks is said
to have the single object of permitting the substitution of its well-known and
indubitable credit for that of an unknown and perhaps less trustworthy debtor
and so of making it easier for a borrower to get a loan taken up by "the
public." It is asserted, for example, that if bills are discounted by the bank
and the discounted equivalent paid out in notes, these notes only circulate in
place of the bills, which would otherwise be passed directly from hand to hand
in lieu of cash. It is thought that this can also be proved historically by
reference to the fact that before the development of the bank-of-issue system,
especially in England, bills circulated to a greater extent than afterward; that
in Lancashire, for example, until the opening of a branch of the Bank of England
in Manchester, ninetenths of the total payments were made in bills and only
one-tenth in money or banknotes. [4] Now this view by no means describes the
essence of the matter A person who accepts and holds notes, grants no credit; he
exchanges no present good for a future good. The immediately convertible note of
a solvent bank is employable everywhere as a fiduciary medium instead of money
in commercial transactions, and nobody draws a distinction between the money and
the notes which he holds as cash. The note is a present good just as much as the
money.
Notes might be issued by banks in either of two ways. One way is to
exchange them for money. According to accounting principles, the bank here
enters into a debit transaction and a credit transaction; but the transaction is
actually a matter of indifference, since the new liability is balanced by an
exactly corresponding asset. The bank cannot make a profit out of such a
transaction. In fact such a transaction involves it in a loss, since it brings
in nothing to balance the expense of manufacturing the notes and storing the
stocks of money. The issue of fully backed notes can therefore only be carried
on in conjunction with the issue of fiduciary media. This is the second possible
way of issuing notes, to issue them as loans to persons in search of credit.
According to the books, this, like the other, is a case of a credit and a debit
transaction only. [5] It is true that this is not shown by the bank's balance
sheet. On the credit side of the balance sheet are entered the loans granted and
the state of the till, and on the debit side, the notes. We approach a better
understanding of the true nature of the whole process if we go instead to the
profit-and-loss account. In this account there is recorded a profit whose origin
is suggestive—"profit on loans." When the bank lends other people's money as
well as its own resources, part of this profit arises from the difference
between the rates of interest that it pays its depositors and the rates that it
charges its borrowers. The other part arises from the granting of circulation
credit. It is the bank that makes this profit, not the holders of the notes. It
is possible that the bank may retain the whole of it; but sometimes it shares
it, either with the holders of the notes or, more probably, with the depositors.
But in either case there is a profit. [6]
Let us imagine a country whose
monetary circulation consists in 100 million ducats. In this country a
bank-of-issue is established. For the sake of simplicity, let us assume that the
bank's own capital is invested as a reserve outside the banking business, and
that it has to pay the annual interest on this capital to the state in return
for the concession of the right of note issue—an assumption that does correspond
closely with the actual situation of some banks-of-issue. Now let the bank have
fifty million ducats paid into it and issue fifty million ducats' worth of
one-ducat notes against this sum. But we must suppose that the bank does not
allow the whole sum of fifty million ducats to remain in its vaults; it lends
out forty million on interest to foreign businessmen. The interest on these
loans consitutes its gross profit which is reduced only by the cost of
manufacture of the notes, by administrative expenses, and the like. Is it
possible in this case to say that the holders of the notes have granted credit
to the foreign debtors of the bank, or to the bank itself?
Let us alter
our example in a nonessential point. Let the bank lend the forty million not to
foreigners but to persons within the country. One of these, A, is indebted to B
for a certain sum, say the cost of goods which he has bought from him. A has no
money at his disposal, but is ready to cede to B a claim maturing in three
months, which he himself holds against P. Can B agree to this? Obviously only if
he himself does not need for the next three months the sum of money which he
could demand immediately, or if he has a prospect of finding somebody who can do
without a corresponding sum of money for three months and is therefore ready to
take over the claim against P. Or the situation might arise in which B wished to
buy goods immediately from C, who was willing to permit postponement of payment
for three months. In such a case, if C was really in agreement with the
postponement, this could only be for one of the three reasons that might also
cause B to be content with payment after the lapse of three months instead of
immediate payment. All these, in fact, are cases of genuine credit transactions,
of the exchange of present goods for future goods. Now the number and extent of
these transactions is dependent on the quantity of present goods available; the
total of the possible loans is limited by the total quantity of money and other
goods available for this purpose. Loans can be granted only by those who have
disposal over money or other economic goods which they can do without for a
period. Now when the bank enters the arena by offering forty million ducats on
the loan market, the fund available for lending pur poses is increased by
exactly this sum; what immediate influence this must have on the rate of
interest, should not need further explanation. Is it then correct to say that
when the bank discounts bills it does nothing but substitute a convenient note
currency for an inconvenient bill currency? [7] Is the banknote really nothing but
a handier sort of bill of exchange? By no means. The note that embodies the
promise of a solvent bank to pay a sum to the bearer on demand at any time, that
is, immediately if desired, differs in an important point from the bill that
contains the promise to pay a sum of money after the passage of a period of
time. The sight bill, which as is well known) plays no part in the credit
system, is comparable with the note; but not the time bill, which is the form
regularly assumed by the bills that are usual in credit transactions. A person
who pays the price of a purchased commodity in money, in notes, or by the
transfer of any other claim payable on demand, has carried through a cash
transaction; a person who pays the purchase price by the acceptance of a
three-month bill has carried through a credit transaction. [8]
Let us
introduce a further unessential variation into our example, which will perhaps
help to make the matter clearer. Let us assume that the bank has first issued
notes to the value of fifty million ducats and received for them fifty million
ducats in money; and now let us suppose it to place a further forty million
ducats in its own notes on the loan market. This case is in every way identical
with the two considered above.
The activity of note issue cannot in any
way be described as increasing the demand for credit in the same sense as, say,
an increase in the number of bills current. Quite the contrary. The
bank-of-issue does not demand credit; it grants it. When an additional quantity
of bills comes on to the market, this increases the demand for credit, and
therefore raises the rate of interest. The placing of an additional quantity of
notes on the loan market at first has the opposite effect; it constitutes an
increase in the supply of credit and has therefore an immediate tendency to
diminish the rate of interest. [9]
It is one of the most remarkable
phenomena in the history of political economy that this fundamental distinction
between notes and bills could have passed unnoticed. It raises an important
problem for investigators into the history of economic theory. And in solving
this problem it will be their principal task to show how the beginnings of a
recognition of the true state of affairs that are to be found even in the
writings of the Classical School and were further developed by the Currency
School, were destroyed instead of being continued by the work of those who came
after. [10]
6 Fiduciary Media and the Nature of Indirect Exchange
It should be sufficiently clear from what has been said that the traditional way of
looking at the matter is but little in harmony with the peculiarities of
fiduciary media. To regard notes and current accounts, whether they are covered
by money or not, as constituting the same phenomenon, is to bar the way to an
adequate conception of the nature of these peculiarities. To regard noteholders
or owners of current accounts as granters of credit is to fail to recognize the
meaning of a credit transaction. To treat both notes and bills of exchange in
general (that is, not merely sight bills) as "credit instruments" alike is to
renounce all hope of getting to the heart of the matter.
On the other
hand, it is a complete mistake to assert that the nature of an act of exchange
is altered by the employment of fiduciary media. Not only those exchanges that
are carried through by the cession of notes or current-account balances covered
by money, but also those exchanges that are carried through by the employment of
fiduciary media, are indirect exchanges involving the use of money. Although
from the juristic point of view it may be significant whether a liability
incurred in an act of exchange is discharged by physical transference of pieces
of money or by cession of a claim to the immediate delivery of pieces of money,
that is, by cession of a money substitute, this has no bearing upon the economic
nature of the act of exchange. It would be incorrect to assert, for instance,
that when payment is made by check, commodities are really exchanged against
commodities, only without any of the crude clumsiness of primitive barter. [11]
Here, just as in every other indirect exchange made possible by money, and in
contrast to direct exchange, money plays the part of an intermediary between
commodity and commodity. But money is an economic good with its own fluctuations
in value. A person who acquires money or money substitutes will be affected by
all the variations in their objective exchange value. This is just as true of
payment by notes or checks as of the physical transference of pieces of money.
But this is the only point that matters, and not the accidental circumstance
whether money physically "enters into" the transaction as a whole. Anybody who
sells commodities and is paid by means of a check and then immediately uses
either the check itself or the balance that it puts at his disposal to pay for
commodities that he has purchased in another transaction, has by no means
exchanged commodities directly for commodities. He has undertaken two
independent acts of exchange, which are connected no more intimately than any
other two purchases.
It is possible that the terminology proposed is not
the most suitable that could be found. This must be freely admitted. But it may
at least be claimed for it that it opens the way to a better comprehension of
the nature of the phenomena under discussion than those that have been
previously employed. For if it is not quite true to say that inexact and
superficial terminology has been chiefly responsible for the frequently
unsatisfactory nature of the results of investigations into the theory of
banking, still a good deal of the ill success of such investigations is to be
laid to that account.
That economic theory puts questions of law and
banking technique in the background and draws its boundaries differently from
those drawn by jurisprudence or business administration is or should be
self-evident. Reference to discrepancies between the above theory and the legal
or technical nature of particular procedures is therefore no more relevant as an
argument against the theory than economic considerations would be in the
settlement of controversial juristic questions.
[1] See Bagehot, Lombard Street
(London, 1906), p. 21.
[2] Knies, Geld und Kredit,
(Berlin, 1876), vol. 2, Part II, p. 242. See further, Weber, Depositen-und
Spekulationsbanken (Leipzig, 1902), pp. 106 f.; Sayous, Les banques
de depôt, les banques de crédit et les sociétés financières, 2d ed.
(Paris, 1907), pp. 219 ff.; Jaffé, Das englische Bankwesen, 2d ed.
(Leipzig, 1910), p. 203.
[3] See Macleod, The Elements of
Banking (London, 1904), p. 153.
[4] See Fullarton, On the Regulation
of Currencies, 2d ed. (London, 1845), p. 39; Mill, Principles of
Political Economy (London, 1867), p. 314; Jaffé, op. cit., p. 175.
[5] See Jaffé, op. cit., p. 153.
[6] This is the "surplus profit"
(Übergewinn) of the business of banking, referred to by
Hermann (op. cit., pp. 500 f.).
[7] As, for example, even Wicksell does
(Geldzins und Güterpreise [Jena, 1898], p. 57).
[8] See Torrens, The Principles and
Practical Operation of Sir Robert Peel's Act of 1844 Explained and Defended,
2d ed. (London, 1857), pp. 16 ff.
[9] Ibid., p. 18.
[10] Since the appearance of the first
edition of the present work numerous books have been published that still do
not recognize the problem of circulation credit. Among the works that have
grasped the nature of this problem the following should be mentioned:
Schumpeter, Theorie der wirtschaftlichen Entwicklung (Leipzig, 1912), pp.
219 ff.; Schlesinger, Theorie der Geld-und Kreditwirtschaft (Munich and
Leipzig, 1914), pp. 133 ff.; Hahn, Volkswirtschaftliche Theorie des
Bankkredits (Tübingen, 1920), pp. 52 ff.
[11] Thus Lexis, Allegemeine
Volkswirtschaftslehre (Berlin, 1910) (Hinnenberg, Die Kultur der
Gegenwart, section II, vol. 10, Part 1), p. 122; Lexis, Geld und
Preise (Riesser-Festgabe, Berlin, 1913), pp. 83 f. Similarly, with
regard to the clearinghouse business, Schumacher, Weltwirtschaftliche
Studien (Leipzig, 1911), pp. 53 f. and the writings there referred to.
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