A Short History of Paper Money and Banking
Chapter III. Of Barter, Leger Entries, Bills of Exchange and Promissory Notes
It is not necessary for carrying on business honestly, to introduce gold or silver money into every transaction. After we have measured a scantling by a foot rule, we may use that scantling to measure another, and that again to measure a third. We can, after having measured several scantlings in this way, make a tolerably correct estimate of the length of others by the eye. In like manner, after the value of given quantities of corn, cloth, and other commodities, has been ascertained by exchanging them for gold or silver, the value of other parcels of the same commodities may be determined without the intervention of money. In commercial countries in which there is no paper money, little trade is carried on by direct barter, not because it is difficult to make a correct barter estimate, but because purchases and sales can be better regulated in regard to time and quantity by other modes of business.
Hence the practice of leger entries, or running accounts. The amount of transactions between two traders may be very great, and yet, if, in all their dealings, they have strict reference to the specie price of goods, the commerce may throughout be an interchange of equivalent, though not an ounce of gold or of silver may have passed from one merchant to the other.
By promissory notes, the use of real money is deferred, and in some cases superseded. If A gives a promissory note to B, and B gives it to C, in exchange for goods, and C passes it to D, the use of money is in two cases superseded, and in one deferred.
Bills of exchange have, in some respects, a similar effect. A merchant at Paris sending goods to Alsace, and wishing money for them, would be forced to wait till the goods could be sold, and the money brought from Alsace, if he could not procure a bill of exchange. In like manner, a manufacturer at Alsace, sending goods to the capital, would be forced to wait for payment till the money could be brought from Paris. Here would be two sums of money passing in opposite directions. Supposing the whole trade of France carried on in this way, the amount of money continually on the road would be equal to the whole amount of goods in passage. The amount of money to be annually transferred from one country to another would be equal to the whole amount of trade between different countries, except when the business of importing and exporting was carried on by the same merchant. By the use of bills of exchange, the merchant receives the money for which the manufacturer’s goods were sold at Paris, and the manufacturer receives the money for which the merchant’s goods were sold at Alsace. In this way, it becomes necessary to transfer from one part of a country to another, or from one country to another, such sums only as are equivalent to the balances of trade.
Bills of exchange, where the practice is to pass them from hand to hand, may serve as a local commercial medium, though not a very convenient one, since it is necessary for the nice adjustment of transactions, to calculate the difference of the interest on each transfer.
Each of these three kinds of mediums has its specific uses; and each is, as an auxiliary of gold and silver money, productive of great benefit. A clear view of their operations is necessary, for the distinction between the representatives of private credit, and of bank credit, is as important as the distinction between genuine money and spurious.
Leger entries, promissory notes, and bills of exchange, agree with money in being a medium by which valuables are circulated. They differ from it in being evidences of debt owing by one man to another—which money is not.
In a far more important particular do they differ from money. They are mere commercial medium. They are neither standards nor measures of value. The amounts expressed in them are the estimations made of goods, by reference to the article which law or custom has made the standard of value. They may be conveniently distinguished as commercial medium, restricting the term circulating medium to money.
An increase of these three kinds of commercial medium may have the same effect on prices as an increase of money. Where the spirit of speculation is excited, men, after having exhausted their cash means, strain their credit. Cash and credit are then competitors in the market, and raise prices on one another. In the year 1825, a year of great speculation, the amount of bills of exchange, negotiated in England, was, according to the returns to Parliament, 600 millions sterling. Supposing one-eighth of these in circulation at the same time, this branch of the commercial medium of England amounted in that year to 75,000,000 pounds.
But the rise of prices produced by these occasional multiplications of the representatives of private credit, is always temporary. At the end of a given period the balance of the running account is demanded, and payment of the promissory notes, and of the bills of exchange, is required in money. If they are paid, their effect on prices ceases. The result is the same, if they are dishonored. In 1826, the amount of bills of exchange negotiated in England, was 400 millions. Supposing one-eighth part in circulation at one time, this branch of the commercial medium of England amounted, in this year, to 50 millions, and was one-third less than in the year preceding.
In countries where the money is of a sound character, and the state of credit sound also, leger entries, bills of exchange, and promissory notes, serve rather to keep prices on a level, than to cause them to fluctuate. In some seasons of the year, as when crops are brought to market, or cargoes arrive from foreign ports, there is naturally more trade than in other seasons. By the use of private credit payments are divided among the different months more equally than would otherwise be practicable.
Thus, in whatever way trade is carried on, whether by barter, running accounts, promissory notes, or bills of exchange, or money, one principle of valuation is adhered to in countries having a sound money system. The cash sales regulate the credit sales, and the cash prices regulate the credit prices.
If the money of a country is paper, whether issued by the government, or by a corporation, the expressions of value in the running accounts, promissory notes, and bills of exchange, are according to the new standards and measures of value.
Into the nature of these we shall inquire in other chapters.
