Bullion Receipts and Bank Notes. The conception of a currency as a definite measurable purchase power, separate from commodities, and yet received as a full equivalent in exchange for them, is attended with no difficulties. If no form of credit had been superadded, money capital would have been created by laying by not only definite but tangible portions of the currency. Its amount would have been the amount of the hoards. Two men could not possibly seem to possess the same piece of money capital. If any man deposited his gold with another, that other would have it, and not he. But one of the most extraordinary inventions of civilization was that which gave to credit in certain forms-not the power of purchase, for that it must possess wherever man is not so degraded as to have no confidence in his fellows-but the power of effecting payment. One of the simplest forms in which the power arose was that of the ancient banks of deposit, described by Adam Smith in his account of the bank of Amsterdam'. When any one placed gold and silver in the bank, the bank would pay the amount as he ordered. He could thus transfer his right over the bullion to another, and the mere right came to be accepted as equal to the reality. Sometimes bank-receipts were given for the deposits, and the transferable bullion receipt was the parent of the bank-note. It was a mere piece of paper, but it conferred a legal right, which was not exercised, because, while gold awaited it, it served every purpose that the gold could serve, and was more convenient. A pure purchasing and paying power was thus nearly disengaged from the last material fetters, and there remained but one step more to perfect the instrument, by enabling it to circulate and operate with full power over labour and goods after the disappearance of the gold. We may conceive, for the better explanation of the subject, though not historically, that in this case the bankers were struck with finding the same hoard of The order of the facts here is artificial, and chosen only for the purpose of exposition. The historical order is highly complex. treasure remaining year after year in their vaults. Now and then a little was wanted for special purposes; but the bulk of it was invisible, for no eye had penetrated far beneath the surface. At length the thought occurs that, if honesty would permit it, this bullion may as well be made use of, for it never will be asked for; and the next thought is, that it may be allowable to lend some of it out on good security, so that if the owners do demand it, they will have either it or its equivalent. Some of the stock is accordingly lent, but still, by way of additional precaution, it is taken out of the bottom of the hoard, the top remaining visibly unaltered, and then all things go on as before, since no demand will ever dip deep enough to find out the vacuum. The bullion receipt retains all its efficacy. The disengaged Paying Power now rises altogether into the region of spiritual things. It is real-nothing more so, though existing only in the mind, and as a law to which the general will is obedient. It floats over the whole mass of men's hardwon possessions-over their well-stocked warehouses, their goodly ships, their mills and mines, their flocks and herds and golden harvests, their villas and pleasure grounds, their labour itself, from that of the rudest kind to that of him whose genius inspires life into the canvas or the marble-and all own the spell. This new power is no longer a mere representative of wealth. It is an addition to what previously existed, and wants only the open sanction instead of the unconscious submission of the public. That sanction is not withheld. According to common apprehensions the community would be served and not injured by having the use of the dormant hoards. It has now the paper and the gold together; both alike having the force of money, and both alike money capital or money income, according to the design of the holders. Something like this is the present position of the Bank of England. Fourteen millions sterling are, as it were, taken out of the bottom of the hoards and replaced by Government securities; the Bank, indeed, being still liable to pay, as if every note had gold behind it; but the severance of the two to the extent named being complete. The first stratum of credit being thus formed, as a clear addition to the previous aggregate of paying power, other layers are successively superimposed upon it. With the consent of society bankers issue their promissory notes payable on demand, with the expectation that, like the bullion receipts, the greater part will always keep out, continually moving goods and services between one person and another, and leave the equivalent given for the notes at the disposal of the bankers. There is no need to dwell on differences between notes, all giving the legal right to bullion; we may pass up to a still more delicate creation of banking ingenuity, namely, the transferable bank credit. Bank Credits from Deposits. Coin and notes being as yet the only paying power, when a man makes a saving, we must suppose it to be laid by in one or other or both of these forms. By himself, or by some one else, he intends to employ that saving with a view to profit, but does not instantly see in what way. Meanwhile he places it for safe custody with a banker, understanding that at any moment it will be forthcoming at his command. The form by which he makes the claim upon it is a cheque, or draft; and sellers, knowing how the matter stands, take the cheque as a full equivalent; but, as soon as possible afterwards, present it for the gold or notes to which it corresponds. At first it might seem that we have here a new element in the aggregate of paying power; but, as yet, this is not the case. The cheque, during its short currency, is a pure substitute for the notes and gold dormant, and dies, so to speak, the moment they revive. The two, as powers of payment, do not yet co-exist; because we have not yet supposed the banker to be at liberty to do more than give the use of his strong box to the depositor. But now behold a new development. As the gold in the original deposit banks accumulated in hoards, which promised to remain as immovable as the ground on which they stood, so do both gold and notes now gather in the hands of our imaginary banker. What was done by one depositor is done by others, until they become so numerous a body, that a considerable portion of their payments are made to one another'. Such cheques, when presented, are no longer paid. If the separate deposits were kept in separate boxes, we may suppose that the banker takes the sum indicated by the cheque out of the hoard against which it is drawn, and puts it into that of him who should receive it. But his real method is simpler. He deducts the amount drawn from the credit of the drawer, in his own books, and adds it to that of the receiver. Perhaps the drawer of the cheque paid his butcher's bill by the operation. It is complete and final. The beef and mutton absolutely pass, without the passage of gold or notes, merely by an act of bookkeeping. This is evidently a far more important step than the mere use of the cheque when it was always presented for money. The simple book credit is, as it were, a new form of the money power, like the external gold and notes, constantly in movement, but capable of infinitely more delicate manipulation. It pays without weighing or counting, or danger of loss; and when exchanges are carried on upon the most gigantic scale, still with the same facility and rapidity. Bank Credits from Loans. As yet, however, we have not got our third element fully extricated. For this book credit does actually exist as an addition to the mass of gold and notes; and, hitherto, we have only seen it acting as their convenient substitute. The final stage is reached when the banker, in view of his accumulated notes and gold, lends, by placing in his books the name of some one who has made no deposit, with a definite sum to his credit, as if he were a depositor. The new depositor may, like others, take out part in gold and notes, and leave part of his credit See Mr. Pennington's Letter at the end of Mr. Tooke's second volume. to operate by transfer. In any case, there is a new piece of positive capital created, as an addition to the pre-existing stock of absolute paying power. All previous holders of gold and notes and credits could make payments to some definite amount, and now there is yet another person who can pay a definite sum in addition. This new credit may be called a loan-credit, to distinguish it from credits previously corresponding to notes and gold held dormant. The aggregate of loan-credits, therefore, opened by bankers constitutes a clear addition to the previous stock of money. As the gold lent out of the original bullion deposit hoards rendered the corresponding bullion receipts an addition to the previous aggregate of money, so now the loans made out of deposits represented by credits leave a corresponding amount of those credits operating as a real independent power, when its basis is removed. And just as a large portion of the first loans of deposited gold came back again in new deposits, so we must now conceive the loan-credit opened by the banker as being, in effect, a delivery of the amount in notes and gold to the borrower, and an immediate receiving back of the whole, or a part of the same, as a new deposit. We have now a deposit originating in a loan, and if such deposits could always be distinguished from the mass of original deposits, the subject would be simpler; but as soon as the borrower makes a payment, by transfer to a depositor-perhaps in payment of salary, or in exchange for goods-the credit assumes the outward garb of an original deposit, because it is held by a depositor who does not possess it by a loan. But the aggregate of new money, or paying power, created by loan credits, is still always a definite and ascertainable quantity, because it must exactly correspond to the loans made by bankers. These loans correctly measure the addition made to the previous aggregate of money; because each of them, if left as credit, is clearly an addition; if transferred as a credit, is also clearly an addition; and if drawn out in cash, must leave some equal amount of deposit credit unpro - C |