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Clearing-house. To this place the bankers send all the cheques which have been paid in to their banks during the day, and exchange them for cheques of a corresponding value drawn on their own banks. In this way £2,000,000,000 of cheques are annually exchanged, whilst to effect this exchange no specie whatever is required. Formerly after the exchange of cheques all differences were settled by cash payments; but this custom is now discontinued and the differences are settled by a transfer of sums from the account of one bank to that of another at the Bank of England. If, for instance, the London and Westminster Bank holds £ 100,000 of cheques drawn on the London and County Bank, while the London and County holds £110,000 of cheques drawn on the London and Westminster, the difference between them would formerly have been settled by a cash payment of £10,000, by the London and Westminster Bank to the London and County Bank. Now, however, as all banks keep accounts at the Bank of England, the difference is settled in the books of the Bank of England by crediting the London and County Bank with £10,000, and debiting the London and Westminster Bank with a similar sum.

It is evident that by the use of cheques and by the operations of the clearing-house the circulation of the country is virtually increased by £2,000,000,000 ; that is to say, that an amount of buying and selling represented by £2,000,000,000 takes place annually, by means of cheques, without the exchange of a single farthing of money. Hence if the same amount of buying and selling went on, and cheques, or some equivalent form of credit, ceased to be used, the value of money would rise and general prices would decline ; because gold and silver coin would be required in a great number of transactions which are now carried on by means of cheques.


Book Credits. Book credits can be readily explained. Suppose that an ironmonger A. buys £ 50 worth of coals from a coal-merchant B., and that B. buys £50 worth of ironmongery from A. Instead of exchanging bills of exchange or cheques for £50, A. debits B. with £50 in his ledger, and B. does the same to A. Seeing, then, that each owes the other £50, they agree to cancel each other's debt, and the use of money is thus dispensed with.

Credit influences Prices, and not the particular form which Credit assumes. In describing these different forms of credit it should be borne in mind that it is credit which influences prices, and not the particular form credit may

A bank note, a cheque, or a bill of exchange, is not credit, it is simply a declaration of the existence of credit. Every form of credit which dispenses with the use of money produces an effect on prices.

The purchasing power conferred by Credit. But there is another way in which the employment of credit produces temporarily very great influence on prices. Credit very greatly increases the purchasing power of every one who employs it. If all commodities were bought and sold for money, trade would be very seriously contracted. Suppose, for instance, that a cotton-spinner desired to make a large purchase of raw cotton. He might be aware that his supply of ready money was not sufficient to effect the purchase: he therefore gives a bill of exchange to the producer of the cotton, payable at the end of three or six months ; if at the end of that time he is still unable to pay, he will be able, if his credit is good, to renew the bill on paying a certain percentage. It is no doubt true the purchasing power conferred by credit may be abused by people incurring liabilities which it is highly improbable they will ever be able to meet; but without credit, speculation would be nearly impossible, and consequently the number of purchases would be greatly reduced. Since therefore credit enables a great many purchases to be made which never could take place if the payments had to be made with ready money, it is evident that credit produces an increased demand for commodities. It has frequently been proved that any circumstance which increases the demand for commodities tends to increase their price. Hence credit, by increasing the purchasing power of individuals, tends to increase the prices of commodities.

Credit produces the greatest Effect on the Price of those Commodities the Supply of which is limited. It is true that the price of those commodities the supply of which can be increased tends always to approximate to the cost of production ; but speculative purchases are made with the greatest frequency in those commodities the supply of which is, from exceptional circumstances, expected to be curtailed. In such cases the price of the commodity is regulated in the same way as the prices of those commodities the supply of which is absolutely limited. Thus, on the eve of the Russian war in 1854, it was known that during the war the importations from Russia of tallow, hemp, etc. would be stopped. Large speculative purchases of these commodities were therefore made with a view the rise in price which would be occasioned by the reduced supply. Every one of these speculative purchases tended of course to raise the price of Russian goods. In the year 1869 large speculative purchases of corn were made by several cornfactors, because owing to the cold and wet weather in May and June it was thought that there would be a bad harvest, and that consequently corn would be dear. These speculative purchases tended to raise the price of corn; and had the expectation of the speculators been fulfilled they would have realised large fortunes. Let us see, however, what really took place. These factors gave bills of exchange for the corn they purchased, expecting, no doubt, that by the time the bills became due, they

would have sold the corn again at a higher price, or that they would be able to renew the bills in hopes of realising yet larger gains. But although the wheat crop in England was very bad, there was an exceptionally large yield in America; the price of wheat in America was extremely low, and America immediately began exporting large quantities of wheat to England; these circumstances caused the price of corn steadily to decline. Several of the speculators were unable to meet their engagements, and many large failures ensued.

A Commercial Panic. If credit can be easily obtained it is difficult to say how great its influence may be on prices. When, however, in consequence of credit having been given too freely, prices become unduly raised above cost of production, the expectations of speculators are not fulfilled, and a large number of merchants are unable to redeem their bills; a commercial panic takes place, and credit is for a time almost entirely suspended. A crisis of this kind always involves many merchants in ruin, for they are unable, owing to the suspension of credit, to renew their bills. In consequence of the panic, traders will not accept bills of exchange ; bank notes and gold become for a time in great demand; prices therefore rapidly fall, possibly as much below the cost of production as they were previously above it. Hence it is seen that when the purchasing power of credit is abused, and prices are forced up far beyond their natural rate, a commercial panic is very likely to ensue, during which credit will be as difficult to obtain as it was before carelessly granted.

The Bank Charter Act of 1844. In order to prevent the abuse of credit, and, it was thought, to ensure the community against the great loss and inconvenience of commercial panics, the Bank Charter Act of 1844 was passed. The promoters of this Act evidently thought that bank notes were the most important of all the instruments of credit, and that it was by their means that the purchasing power of speculators was increased. The Act accordingly was devised with the view of restricting the circulation of notes. The framers of the Act considered that every bank ought to have an equivalent either in bullion or in property for its issue of notes. Thus the funds, and other property possessed by the bank of England, were estimated to be worth £ 14,000,000. The Act therefore decreed that if the note circulation of the Bank of England exceeded £14,000,000, the Governors of the Bank should be compelled to keep an equivalent to the excess, either in coin or bullion. Thus if the note circulation of the Bank of England is £15,000,000, the Governors of the Bank are obliged to retain in their coffers £1,000,000 of gold. The Bank Charter Act also prevented other banks from increasing their issue of notes, and provided that no bank established after the passing of the · Act should be allowed to issue notes. Now it is a curious fact that for the last fifty years commercial panics have taken place at regular intervals with startling punctuality. They have occurred about every nine years; and though the Bank Charter Act was devised with the express purpose of preventing panics, they have not since the passing of the Act deviated from their regularity. The Act was passed in 1844; and panics have occurred in 1848, 1857, and in 1866. In so far, then, as the Act was intended to prevent commercial panics it must be considered a failure; the causes of which may now be traced. During the time of prosperous trade and good credit the purchasing power of merchants and speculators is in no degree restricted by the operation of the Bank Charter Act. The large speculative purchases which tend so powerfully to raise prices are not made by means of bank notes, but by bills of exchange. Bank notes are as difficult to get as money, because they can at any moment

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