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.





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