BLTC Press Titles


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The Diplomatic Background of the War

Charles Seymour


The Picture of Dorian Gray

Oscar Wilde


Novalis Including Hymns to the Night

Novalis, George MacDonald, Thomas Carlyle


The Characters of Theophrastus

Theophrastus


Currency and credit

by Ralph George Hawtrey

Excerpt:

According to the classical theory of money, as we saw, money is a selected commodity. Law or custom decrees that debts may be paid in gold or in silver or perhaps indifferently in either. Gold and silver are the raw materials of certain industries and have a value as such, and in virtue of this value they supply an independent standard for the measurement of debts. A banker's obligation, whether it take the form of a bank credit or a bank note, becomes an obligation to pay money. Such an obligation may be used as a medium of payment; a debtor who has a bank credit may pay his debt by assigning this bank credit to his creditor. But a bank credit, not being the legal means of discharging a debt, must be readily transformable into money if required. The banker's obligation must be to pay money.

If gold is to be the legal medium of payment, it must be put on the market in a form in which its quantity can be easily and quickly and certainly estimated . This is done by coining. The ostensible purpose of coining is to divide the gold up into small portions convenient for handling, and to certify by a stamped inscription that each such portion is of the prescribed weight and fineness. Under a system of free coinage anyone with gold to dispose of can bring it to the Government to be so divided up and certified, and this will be done either free of charge or at a charge nearly negligible in comparison with the value of the gold. If this system is effectively carried out, if all coin that is reduced by wear appreciably below the current weight is promptly withdrawn, if there is no obstacle to melting down coin for use otherwise than as currency, then the value of coin and the value of bullion can never diverge far, for either can be transformed into the other at a trifling expense. Gold as a commodity will then be really the standard of value. Any departure from this system is regarded, under the classical theory, as a perversion. The nature, extent and causes of such departures we shall have to consider later. In the present chapter we shall assume that a system of free coinage is faithfully and efficiently maintained. In the next chapter we shall turn to the consideration of systems in which the orthodox theory of free coinage is avowedly thrown aside.

The most important characteristics of the classical theory are that the value of the monetary unit is determined by the value of the metal for purposes other than coinage,1 and that the supply of money, being dependent upon the supply of the metal, cannot be arbitrarily increased.

If a gold coinage is to be combined with a credit system, we have next to consider where the one will begin and the other end. A payment in coin being a legal discharge of a debt while a payment in credit is not, coin will always be used in preference to credit unless there is some superiority of convenience or other advantage in the use of credit. For large payments the superior convenience of credit is obvious, since it avoids the trouble of counting, handling, and scrutinising the coin, and the cost and risk of transport and storage. Moreover, the privileges of a banker's customer are valuable to the well-to-do man and especially so to the trader. Of course all these advantages presuppose the solvency of the banker, but we may assume that the risk of failure of a large and well-established bank, if not absolutely negligible, is at any rate small compared with the risk of losing money which, instead of being deposited at a bank, is kept at a trader's premises where the risk of loss by theft falls on him.

For small payments the advantages of credit are not so 1 This is only true subject to reservations (see chap. xi.).

considerable. Payments by cheque, though they save trouble for large sums, give additional trouble for small sums. If small payments are to be made in credit at all, they must be made with bank-notes. But bank-notes have very little advantage over coin. Like coin they may be lost; like coin they need to be counted, and change must sometimes be asked for them. And while the small bank-note seems to have no advantage over coin to set against its legal inferiority in discharging a debt, it is subject to a special disadvantage in that it may circulate in the hands of uninformed people who have no means of judging of the credit of the bank which issued it and who may be seized with an unreasonable yet widespread distrust. The mere fact that there are people who are unwilling to accept the notes of a particular bank will be quite a sufficient reason for every one to demand coin in exchange for the notes. Even those who themselves think the bank perfectly solvent do not want to hold their purchasing power in a form which would not be accepted by every one. Small bank-notes (i.e. for amounts smaller than the prevalent weekly wage of the working class) are likely to be an embarrassment rather than a source of profit to the issuing bank, and accordingly they tend to fall out of use, except where there is some special reason to favour them.1

Consequently the dividing line between coin and credit is likely to separate large from small transactions. The weekly wages of the working man or low-paid employee will be paid wholly in coin. The relatively highly-paid employee will be paid in credit. The large transactions between men of business will of course all be carried through with credit, and their profits will accumulate in the form of credit. But even the man who receives his income in the form of credit will use coin for small retail payments, railway fares, etc . It is therefore easy to see what modifications ought to be introduced into the picture given in the preceding chapter of the transaction of a week's business on a credit basis, in order to allow for the introduction of money.


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