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ject. If their credit had not been believed to be good the companies could never have been started.

From these illustrations it is perceived that the capital of the country is practically augmented by the means of credit, because it offers great facility for the productive employment of wealth. But besides those just described there are forms of credit performing other functions, which very materially facilitate the exchange of wealth, and which produce a very great influence on the prices of commodities. The forms of credit to which we refer are bills of exchange, bank notes, cheques, and book credits.

Bulls of Exchange. It was said in the preceding chapter that foreign commerce did not involve a constant exchange of gold and silver money between the two countries trading with each other. It is evident that if the English merchants who purchase French goods had to send the price of these goods in money to France, great inconvenience and risk would be incurred. The necessity of the constant transit of gold and silver money is obviated in the following way. Let it be supposed that an English merchant A. sells £ 1000 worth of coal to the French merchant B., and that a French merchant C. sells £ 1000 worth of wheat to the English merchant D. If there were no such things as bills of exchange, the result of these transactions would be a transit of £1000 in money from B. (in France) to A. (in England), and also a similar transit of £ 1000 in money from D. (in England) to C. (in France). Now it is evident that the same result could be attained without any transit of money at all, if A., the English seller, received £ 1000 from D., the English buyer, and C., the French seller, received £1000 from B., the French buyer. This result is effected in the following way. B., the French merchant, sends to A. a written promise to pay him the £ 1000, and D., the English

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merchant, sends a similar promise to pay £1000 to C. These written promises are called bills of exchange. A. has a bill for £1000 drawn on France, and C. has a bill for £ 1000 drawn on England. If they exchange these bills both debts will be discharged.

Bul discounting. Merchants do not usually effect these exchanges themselves ; they are generally undertaken by a third class of individuals, called bill brokers or bill discounters. These persons undertake to buy the bills drawn on different countries. In the case just described, A. and C. would not exchange their bills; A. would sell his to a bill discounter in London, paying him a small sum as commission; and C. would sell his to a bill discounter in Paris. Thus a London bill discounter might collect £ 1,000,000 worth of bills drawn on France, whilst a French bill discounter might collect £1,000,000 worth of bills drawn on England. They would then proceed to exchange the bills. The transit of money is as entirely dispensed with as if barter were the recognised medium of exchange between the two countries.

Bulls of Exchange perform many of the functions of Money, and they therefore produce an effect on General Prices, Bills of exchange are very largely used in domestic as well as in foreign commerce. It is very unusual for one merchant to pay another in money ; the debt is usually discharged by means of a bill of exchange ; that is, a written promise to pay at the end of a certain time. A three months' bill is a promise to pay at the end of three months, and so on. Now this bill, up to the time when it falls due, performs many of the functions of money. The person who receives it perhaps wants to make a purchase himself: we will suppose that the bill is for £1000, and that its present owner, A., has received it from B. A. now wants to purchase £ 1000 worth of goods of D.; he obtains the goods and gives to D. the same bill for

£1000 which A. had received from B.; at the same time A. endorses the bill (that is, he writes his name on the back of it) as a token that he will himself pay D. should B. fail to do so. In a similar way the bill may be used to make any number of purchases up to the time it falls due. Every time it changes hands it receives a fresh endorsement; so that at the time when it falls due the back of a bill is sometimes completely covered with endorsements. It is evident that in such a case as this a bill performs for a time the functions of money. Up to the time that it falls due it has the purchasing power of gold and silver coin. Now it has previously been explained that any circumstance which increases the amount of money circulating in a country will, if other things remain unchanged, increase the prices of commodities. The value (or exchange power) of any commodity is determined by an equalisation of supply and demand. If the supply is increased, the value declines in such a degree as to equalise the demand with the augmented supply. This is true of money as of other commodities; therefore when the supply of money in a country is increased, if other things remain the same, the value of money will decline, its exchange power will diminish, and prices will rise. It is now easy to trace the influence of bills of exchange on prices. It has just been explained that a bill of exchange is, up to the time when it falls due, a substitute for money; the employment of bills of exchange, therefore, produces the same effect upon prices as if a corresponding addition had been made to the gold and silver currency. If all the business now transacted by means of bills of exchange had to be carried on with cash payments, one of two things must happen.

Either a corresponding amount of money must be added to the currency, or general prices would decline. The use of bills of exchange has therefore either caused an increase


in general prices, or it has prevented general prices from declining.

Bank Notes. The same effect is produced on prices by other forms of credit beside bills of exchange. An issue of bank notes produces the same effect upon prices as an increase in the quantity of gold and silver coin. A bank note is simply a promise to pay; and the chief difference between a bank note and a bill of exchange is that the former is payable at any time on demand, whilst the latter is payable at some particular time specified on the bill. It is well known how useful a substitute for money bank notes provide; their form and portability render them particularly convenient instruments of credit. A Bank of England note is a legal tender, and is in this kingdom accepted as readily as gold. The notes of provincial and private banks are not legal tender, but they are accepted with the greatest confidence by those who repose trust in the credit of the bankers who issue the notes. A Bank of England note has the same purchasing power as gold because the Bank of England is compelled by law to give gold in exchange for its notes whenever such an exchange is demanded ; and every one

. has perfect confidence in the solvency of the bank. All other banks are compelled by law to give either gold or Bank of England notes in exchange for their own notes. But this regulation does not compel even the most prudently managed banks to keep an equivalent in coin for all the notes they issue. It has been found that no bank need keep in cash more than a sum equal to onethird of its issue of notes. For instance, the bank-note. circulation of Great Britain is about £30,000,000. It may be estimated that the various banks retain in specie £10,000,000, the remaining £20,000,000 is therefore permanently added to the currency. If these £30,000,000 of notes were withdrawn, either general prices would fall


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or £20,000,000 in gold would have to be added to the currency. It is evident that no effect is produced on prices by an issue of bank notes if a corresponding amount of specie is at the same time withdrawn from cir-* culation ; because by such a transaction the currency is neither increased nor diminished. If, however, the issue of bank notes is increased without a corresponding with, drawal of specie, general prices will either rise or be prevented from falling.

Cheques. A cheque is a written order to a banker to pay a certain person a sum of money. If all cheques were immediately cashed by the person to whom they are payable they would produce no effect on prices. But in nearly all cases the cheque is not cashed, but is paid in by the person who receives it to his own bankers. Now let us trace the effect of this on the prices of commodities. Mr A. banks with the London and Westminster Bank, he gives a cheque for £100 to Mr B., who banks with the Imperial Bank. This cheque is a written order to the directors of the London and Westminster Bank to pay £100 to Mr B. Mr B. does not take this cheque to the London and Westminster Bank to get it cashed, but he pays it in to his account at the Imperial Bank. In the course of the same day Mr C., who banks with the Imperial Bank, gives a cheque for £100 to Mr D., who banks with the London and Westminster Bank, and Mr D. pays in the cheque to his account. At the end of the day the Imperial Bank has a cheque for £100 drawn on the London and Westminster Bank, and the London and Westminster Bank has a cheque for £100 drawn on the Imperial Bank. These banks therefore exchange the cheques, and the transit of specie from one bank to another is entirely dispensed with.

The Clearing-house. An exchange of cheques drawn on the different banks takes place daily in London at the

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