CHAPTER 14.

Of Money as a Medium of Exchange

166. In the earlier stages of societies the interchange of
the few commodities required was conducted by barter, but as soon
as their wants became more varied and extensive, the necessity of
having some common measure of the value of all commodities--
itself capable of subdivision--became apparent: thus money was
introduced. In some countries shells have been employed for this
purpose; but civilized nations have, by common consent, adopted
the precious metals.(1*) The sovereign power has, in most
countries, assumed the right of coining; or, in other words, the
right of stamping with distinguishing marks, pieces of metal
having certain forms and weights and a certain degree of
fineness: the marks becoming a guarantee, to the people amongst
whom the money circulates, that each piece is of the required
weight and quality.

The expense of manufacturing gold into coin, and that of the
loss arising from wear, as well as of interest on the capital
invested in it, must either be defrayed by the State, or be
compensated by a small reduction in its weight, and is a far less
cost to the nation than the loss of time and inconvenience which
would arise from a system of exchange or barter.

167. These coins are liable to two inconveniences: they may
be manufactured privately by individuals, of the same quality,
and similarly stamped; or imitations may be made of inferior
metal, or of diminished weight. The first of these inconveniences
would be easily remedied by making the current value of the coin
nearly equal to that of the same weight of the metal; and the
second would be obviated by the caution of individuals in
examining the external characters of each coin, and partly by the
punishment inflicted by the State on the perpetrators of such
frauds.

168. The subdivisions of money vary in different countries,
and much time may be lost by an inconvenient system of division.
The effect is felt in keeping extensive accounts, and
particularly in calculating the interest on loans, or the
discount upon bills of exchange. The decimal system is the best
adapted to facilitate all such calculations; and it becomes an
interesting question to consider whether our own currency might
not be converted into one decimally divided. The great step, that
of abolishing the guinea, has already been taken without any
inconvenience, and but little is now required to render the
change complete.

169. If, whenever it becomes necessary to call in the
half-crowns, a new coin of the value of two shillings were
issued, which should be called by some name implying a unit (a
prince, for instance), we should have the tenth part of a
sovereign. A few years after, when the public were familiar with
this coin, it might be divided into one hundred instead of
ninety-six farthings; and it would then consist of twenty-five
pence, each of which would be four per cent. less in value than
the former penny. The shillings and six-pences being then
withdrawn from circulation, their place might be supplied with
silver coins each worth five of the new pence, and by others of
ten-pence, and of twopence halfpenny; the latter coin, having a
distinct name, would be the tenth part of a prince.

170. The various manufactured commodities, and the various
property possessed by the inhabitants of a country, all become
measured by the standard thus introduced. But it must be observed
that the value of gold is itself variable; and that, like all
other commodities, its price depends on the extent of the demand
compared with that of the supply.

171. As transactions multiply, and the sums to be paid become
large, the actual transfer of the precious metals from one
individual to another is attended with inconvenience and
difficulty, and it is found more convenient to substitute written
promises to pay on demand specified quantities of gold. These
promises are called bank-notes; and when the person or body
issuing them is known to be able to fulfil the pledge, the note
will circulate for a long time before it gets into the hands of
any person who may wish to make use of the gold it represents.
These paper representatives supply the place of a certain
quantity of gold; and, being much cheaper, a large portion of the
expense of a metallic circulation is saved by their employment.

172. As commercial transactions increase, the transfer of
bank-notes is, to a considerable extent, superseded by shorter
processes. Banks are established, into which all monies are paid,
and out of which all payments are made, through written orders
called checks, drawn by those who keep accounts with them. In a
large capital, each bank receives, through its numerous
customers, checks payable by every other; and if clerks were sent
round to receive the amount in banknotes due from each, it would
occupy much time, and be attended with some risk and
inconvenience.

173. Clearing house. In London this is avoided, by making all
checks paid in to bankers pass through what is technically called
The Clearing House. In a large room in Lombard Street, about
thirty clerks from the several London bankers take their
stations, in alphabetical order, at desks placed round the room;
each having a small open box by his side, and the name of the
firm to which he belongs in large characters on the wall above
his head. From time to time other clerks from every house enter
the room, and, passing along, drop into the box the checks due by
that firm to the house from which this distributor is sent. The
clerk at the table enters the amount of the several checks in a
book previously prepared, under the name of the bank to which
they are respectively due.

Four o'clock in the afternoon is the latest hour to which the
boxes are open to receive checks; and at a few minutes before
that time, some signs of increased activity begin to appear in
this previously quiet and business-like scene. Numerous clerks
then arrive, anxious to distribute, up to the latest possible
moment, the checks which have been paid into the houses of their
employers.

At four o'clock all the boxes are removed, and each clerk
adds up the amount of the checks put into his box and payable by
his own to other houses. He also receives another book from his
own house, containing the amounts of the checks which their
distributing clerk has put into the box of every other banker.
Having compared these, he writes out the balances due to or from
his own house, opposite the name of each of the other banks; and
having verified this statement by a comparison with the similar
list made by the clerks of those houses, he sends to his own bank
the general balance resulting from this sheet, the amount of
which, if it is due from that to other houses, is sent back in
bank-notes.

At five o'clock the Inspector takes his seat; when each
clerk, who has upon the result of all the transactions a balance
to pay to various other houses, pays it to the inspector, who
gives a ticket for the amount. The clerks of those houses to whom
money is due, then receive the several sums from the inspector,
who takes from them a ticket for the amount. Thus the whole of
these payments are made by a double system of balance, a very
small amount of bank-notes passing from hand to hand, and
scarcely any coin.

174. It is difficult to form a satisfactory estimate of the
sums which daily pass through this operation: they fluctuate from
two millions to perhaps fifteen. About two millions and a half
may possibly be considered as something like an average,
requiring for its adjustment, perhaps, L200,000 in bank notes and
L20 in specie. By an agreement between the different bankers, all
checks which have the name of any firm written across them must
pass through the clearing house: consequently, if any such check
should be lost, the firm on which it is drawn would refuse to pay
it at the counter; a circumstance which adds greatly to the
convenience of commerce.

The advantage of this system is such, that two meetings a day
have been recently established--one at twelve, the other at
three o'clock; but the payment of balances takes place once only,
at five o'clock.

If all the private banks kept accounts with the Bank of
England, it would be possible to carry on the whole of these
transactions with a still smaller quantity of circulating medium.

175. In reflecting on the facility with which these vast
transactions are accomplished--supposing, for the sake of
argument, that they form only the fourth part of the daily
transactions of the whole community--it is impossible not to be
struck with the importance of interfering as little as possible
with their natural adjustment. Each payment indicates a transfer
of property made for the benefit of both parties; and if it were
possible, which it is not, to place, by legal or other means,
some impediment in the way which only amounted to one-eighth per
cent, such a species of friction would produce a useless
expenditure of nearly four millions annually: a circumstance
which is deserving the attention of those who doubt the good
policy of the expense incurred by using the precious metals for
one portion of the currency of the country.

176. One of the most obvious differences between a metallic
and a paper circulation is, that the coin can never, by any panic
or national danger, be reduced below the value of bullion in
other civilized countries; whilst a paper currency may, from the
action of such causes, totally lose its value. Both metallic and
paper money, it is true, may be depreciated, but with very
different effects.

1. Depreciation of coin. The state may issue coin of the same
nominal value, but containing only half the original quantity of
gold, mixed with some cheap alloy; but every piece so issued
bears about with it internal evidence of the amount of the
depreciation: it is not necessary that every successive
proprietor should analyse the new coin; but a few having done so,
its intrinsic worth becomes publicly known. Of course the coin
previously in circulation is now more valuable as bullion, and
quickly disappears. All future purchases adjust themselves to the
new standard, and prices are quickly doubled; but all past
contracts also are vitiated, and all persons to whom money is
owing, if compelled to receive payment in the new coin, are
robbed of one-half of their debt, which is confiscated for the
benefit of the debtor.

2. Depreciation of paper. The depreciation of paper money
follows a different course. If, by any act of the Government
paper is ordained to be a legal tender for debts, and, at the
same time, ceases to be exchangeable for coin, those who have
occasion to purchase of foreigners, who are not compelled to take
the notes, will make some of their payments in gold; and if the
issue of paper, unchecked by the power of demanding the gold it
represents, be continued, the whole of the coin will soon
disappear. But the public, who are obliged to take the notes, are
unable, by any internal evidence, to detect the extent of their
depreciation; it varies with the amount in circulation, and may
go on till the notes shall be worth little more than the paper on
which they are printed. During the whole of this time every
creditor is suffering to an extent which he cannot measure; and
every bargain is rendered uncertain in its advantage, by the
continually changing value of the medium through which it is
conducted. This calamitous course has actually been run in
several countries: in France, it reached nearly its extreme limit
during the existence of assignats. We have ourselves experienced
some portion of the misery it creates; but by a return to sounder
principles, have happily escaped the destruction and ruin which
always attends the completion of that career.

177. Every person in a civilized country requires, according
to his station in life, the use of a certain quantity of money,
to make the ordinary purchases of the articles which he consumes.
The same individual pieces of coin, it is true, circulate again
and again, in the same district: the identical piece of silver,
received by the workman on Saturday night, passing through the
hands of the butcher, the baker, and the small tradesman, is,
perhaps, given by the latter to the manufacturer in exchange for
his check, and is again paid into the hands of the workman at the
end of the succeeding week. Any deficiency in this supply of
money is attended with considerable inconvenience to all parties.
If it be only in the smaller coins, the first effect is a
difficulty in procuring small change; then a disposition in the
shopkeepers to refuse change unless a purchase to a certain
amount be made; and, finally, a premium in money will be given
for changing the larger denominations of coin.

Thus money itself varies in price, when measured by other
money in larger masses: and this effect takes place whether the
circulating medium is metallic or of paper. These effects have
constantly occurred, and particularly during the late war; and,
in order to relieve it, silver tokens for various sums were
issued by the Bank of England.

The inconvenience and loss arising from a deficiency of small
money fall with greatest weight on the classes whose means are
least; for the wealthier buyers can readily procure credit for
their small purchases, until their bill amounts to one of the
larger coins.

178. As money, when kept in a drawer, produces nothing, few
people, in any situation of life, will keep, either in coin or in
notes, more than is immediately necessary for their use; when,
therefore, there are no profitable modes of employing money, a
superabundance of paper will return to the source from whence it
issued, and an excess of coin will be converted into bullion and
exported.

179. Since the worth of all property is measured by money, it
is obviously conducive to the general welfare of the community,
that fluctuations in its value should be rendered as small and as
gradual as possible.

The evils which result from sudden changes in the value of
money will perhaps become more sensible, if we trace their
effects in particular instances. Assuming, as we are quite at
liberty to do, an extreme case, let us suppose three persons,
each possessing a hundred pounds: one of these, a widow advanced
in years, and who, by the advice of her friends, purchases with
that sum an annuity of twenty pounds a year during her life: and
let the two others be workmen, who, by industry and economy, have
each saved a hundred pounds out of their wages; both these latter
persons proposing to procure machines for calendering, and to
commence that business. One of these invests his money in a
savings' bank; intending to make his own calendering machine, and
calculating that he shall expend twenty pounds in materials, and
the remaining eighty in supporting himself and in paying the
workmen who assist him in constructing it. The other workman,
meeting with a machine which he can buy for two hundred pounds,
agrees to pay for it a hundred pounds immediately, and the
remainder at the end of a twelvemonth. Let us now imagine some
alteration to take place in the currency, by which it is
depreciated one-half: prices soon adjust themselves to the new
circumstances, and the annuity of the widow, though nominally of
the same amount, will, in reality, purchase only half the
quantity of the necessaries of life which it did before. The
workman who had placed his money in the savings' bank, having
perhaps purchased ten pounds' worth of materials, and expended
ten pounds in labour applied to them, now finds himself, by this
alteration in the currency, possessed nominally of eighty pounds,
but in reality of a sum which will purchase only half the labour
and materials required to finish his machine; and he can neither
complete it, from want of capital, nor dispose of what he has
already done in its unfinished state for the price it has cost
him. In the meantime, the other workman, who had incurred a debt
of a hundred pounds in order to complete the purchase of his
calendering machine, finds that the payments he receives for
calendering, have, like all other prices, doubled, in consequence
of the depreciation of the currency; and he has therefore, in
fact, obtained his machine for one hundred and fifty pounds.
Thus, without any fault or imprudence, and owing to circumstances
over which they have no control, the widow is reduced almost to
starve; one workman is obliged to renounce, for several years,
his hope of becoming a master; and another, without any superior
industry or skill, but in fact, from having made, with reference
to his circumstances, rather an imprudent bargain, finds himself
unexpectedly relieved from half his debt, and the possessor of a
valuable source of profit; whilst the former owner of the
machine, if he also has invested the money arising from its sale
in the savings' bank, finds his property suddenly reduced
one-half.

180. These evils, to a greater or less extent, attend every
change in the value of the currency; and the importance of
preserving it as far as possible unaltered in value, cannot be
too strongly impressed upon all classes of the community.

NOTES:

1. In Russia platinum has been employed for coin; and it
possesses a peculiarity which deserves notice. Platinum cannot be
melted in our furnaces, and is chiefly valuable in commerce when
in the shape of ingots, from which it may be forged into useful
forms. But when a piece of platinum is cut into two parts, it
cannot easily be reunited except by means of a chemical process,
in which both parts are dissolved in an acid. Hence, when
platinum coin is too abundant, it cannot, like gold, be reduced
into masses by melting, but must pass through an expensive
process to render it useful.