CHAPTER IV.

Circumstances which led to the Introduction and Use of Money—Qualities which a Commodity used as Money should possess—Coinage—Variations in the Value of Money—Introduction and Use of Paper Money and Bills of Exchange.

When the division of labour was first introduced, commodities were directly bartered for each other. Those, for example, who had a surplus of corn, and were in want of wine, endeavoured to find out those who were in the opposite circumstances, or who had a surplus of wine and wanted corn, and then exchanged the one for the other. It is obvious, however, that the power of exchanging, and, consequently, of dividing employments, must have been subjected to perpetual interruptions, so long as it was restricted to mere barter. A carries produce to market, and B is desirous to purchase it; but the produce belonging to B is not suitable for A. C, again, would like to buy B’s produce, but B is already fully supplied with the equivalent C has to offer. In such cases, and they must be of constant occurrence wherever money is not introduced, no direct exchange could take place between the parties; and it might be very difficult to bring it about indirectly.

The inconvenience of such situations must have speedily attracted general attention. Efforts would, in consequence, be made to avoid them; and eventually it appeared that the best, or rather the only way in which this could be effected, was to exchange either the whole or a part of one’s surplus produce for some commodity of known value, and which, being also in general demand, most persons would be inclined to accept as an equivalent for whatever they had to dispose of. Edition: current; Page: [78] After a commodity of this sort had begun to be employed as a means of exchanging other commodities, individuals would be willing to purchase more of it than was required to pay for the articles they were desirous of immediately obtaining, knowing that should they, at a future period, want a further supply of these or other articles, they would be readily procured in exchange for this universally desirable commodity. Though at first circulating slowly and with difficulty, it would, as the advantages arising from its use were better appreciated, begin to pass freely from hand to hand. Its value, as compared with other things, would thus come to be generally known; and it would at last be used as the common equivalent for other things, and as a standard by which to measure their value.

Now this commodity, whatever it may be, is money.

An infinite variety of commodities have been used as money in different countries and periods. But none can be advantageously used as such, unless it possess several peculiar qualities. The slightest reflection on the purposes to which it is applied must suffice to show that, if not indispensable, it is at least exceedingly desirable, that the commodity selected to serve as money should (1.) be divisible into the smallest portions; (2.) that it should not deteriorate by being kept for an indefinite period; (3.) that it should, by possessing great value in small bulk, admit of being easily transported from place to place; (4.) that one piece of money of a certain weight, should always be equal, in magnitude and quality, to every other piece of money of the same weight; and (5.) that its value should be comparatively steady, or little subject to variation. Without the first of these qualities, or the capacity of being divided into portions of every different magnitude and value, money, it is evident, would be of almost no use, and could only be exchanged for the few commodities that might happen to be of the same value as its indivisible portions, or as whole multiples of them: without the second, or the capacity of being kept or hoarded without deteriorating, no one would choose to exchange commodities for money, except only when Edition: current; Page: [79] he expected to be able speedily to re-exchange that money for something else: without the third, or facility of transportation, money could not be conveniently used in transactions between places at any considerable distance: without the fourth, or perfect sameness, it would be extremely difficult to appreciate the value of different pieces of money: and without the fifth quality, or comparative steadiness of value, money could not serve as a standard by which to measure the value of other commodities: and none would be disposed to exchange valuable products for an article that might shortly decline considerably in its power of purchasing.

The union of the different qualities of comparative steadiness of value, divisibility, durability, facility of transportation, and perfect sameness, in the precious metals, has doubtless made every civilized community employ them as money. The value of gold and silver, though not invariable, changes only by slow degrees: they are divisible into any number of parts, and have the singular property of being easily re-united, by means of fusion, without loss; they do not deteriorate by being kept; their firm and compact texture makes them difficult to wear; their cost of production, especially that of gold, is so considerable, that they possess great value in small bulk, and can, of course, be transported with comparative facility; and an ounce of pure gold or silver taken from the mines of Mexico or Australia, is precisely equal, in point of quality, to an ounce dug from the mines in any other part of the world. No wonder, therefore, when the principal qualities necessary to constitute money are possessed in so eminent a degree by the precious metals, that they have been used as such in civilized societies, from a very remote æra. “They became universal money,” as Turgot has observed, “not in consequence of any arbitrary agreement among men, or of the intervention of any law, but by the nature and force of things.”

When first used as money, the precious metals were in an unfashioned state, in bars or ingots. The parties having agreed Edition: current; Page: [80] about the quantity of metal to be given for a commodity, that quantity was then weighed off. But this would plainly be a tedious and troublesome process. Undoubtedly, however, the difficulty of determining the degree of their purity with sufficient precision, must have formed, in early ages, the greatest-obstacle to the use of gold and silver as money; and the discovery of means by which their weight and fineness might be readily and correctly ascertained, would be felt to be indispensable to their extensive use as media of exchange. Fortunately, these means were not long in being discovered. The fabrication of coins, or the practice of impressing pieces of the precious metals with a public stamp indicating their weight and purity, belongs to the remotest antiquity.1 And it may safely be affirmed, that there have been few inventions of greater utility, or that have done more to promote improvement.

It is material, however, to observe, that the introduction and use of coins does not affect the principle on which exchanges were previously conducted. The coinage saves the trouble of weighing and assaying gold and silver, but it does nothing more. It declares the weight and purity of the metal in a coin; but the value of that metal or coin depends, in all cases, on the same principles that determine the value of other things; and would be as little affected by being recoined with a new denomination, as the burden of a ship by a change of her name.

Inaccurate notions with respect to the influence of coinage seem to have given rise to the opinion, so long entertained, that coins were merely the signs of values. But they have really no more claim to this designation than bars of iron or copper, sacks of wheat, or any other commodity. They exchange for other things, because they are desirable articles, and are possessed of real intrinsic value. A draft, check, or Edition: current; Page: [81] bill, may not improperly, perhaps, be regarded as the sign of the money to be given for it. But that money is itself a commodity; it is not a sign, it is the thing signified.1

Money, however, is not merely the universal equivalent, or marchandise bannale, used by the society: it is also the standard used to compare the values of all sorts of products; and the stipulations in the great bulk of contracts and deeds, as to the delivery and disposal of property, have all reference to, and are commonly expressed in quantities of money. It is, therefore, of the utmost importance that its value should be as invariable as possible. Owing, however, to improvements in the arts, and the exhaustion of old and the discovery of new mines, the value of the precious metals is necessarily inconstant; though, if we except the effects produced in the sixteenth century by the discovery of the American mines, it does not appear to have varied so much at other times as might have been anticipated.2 Great mischief has, however, been repeatedly occasioned by the changes that have been made in most countries in the weight, and sometimes also in the purity of coins; and since the impolicy of these changes has been recognised, similar, and still more extensive, disorders have sprung up from the improper use of substitutes for coins. It is, indeed, quite obvious, that no change can take place in the value of money, without proportionally affecting the pecuniary conditions in all contracts and agreements. Much, however, of the influence of a change depends on its direction. An increase in the value of money is, for reasons that will afterwards be stated, uniformly more prejudicial in a public point of view than its diminution: the latter, though injurious to individuals, may sometimes be productive of Edition: current; Page: [82] national advantage; but such can never be the case with the former.1

But notwithstanding the precious metals are in many respects admirably fitted to serve as a medium of exchange, they have two very serious drawbacks—their cost, and the expense of carrying them from place to place. If the currency of Great Britain consisted of gold only, it would amount to at least eighty millions of sovereigns; and the expense attending such a currency, including the wear and tear and loss of coins, could not be reckoned at less than 6 per cent., or £4,800,000 a-year. It is obvious, too, were there nothing but coins in circulation, that the conveyance of large sums from one place to another to discharge accounts, would be a laborious process, and that even small sums could not be conveyed to great distances without considerable difficulty: and hence it is that most civilized nations have endeavoured to fabricate a portion of their money of less costly materials, and have resorted to various devices for economizing the use of coin. Of the substitutes for the latter hitherto suggested, paper is by far the most generally used, and is in all respects the least objectionable. Instead of discharging their debts by a payment of the precious metals, individuals, on whose solvency the public may rely, pay them by giving a bill or draft for the sum, payable in coin at sight, or at so many days after date; and as this bill or draft passes currently from hand to hand as cash, it performs all the functions of coin, while it saves its expense to the public. A sense of the advantages that might be derived from the circulation of such bills or drafts led to the institution of banks for their regular issue. A banker, on being applied to for a loan, does not make the advance in gold or silver, but in his own notes; and while these serve equally well as cash to the borrower, the issuer derives the Edition: current; Page: [83] same rate of interest from them that he would have derived from an advance of cash; his profits consisting of the excess of interest derived from the notes he has issued, over the interest of the cash or unproductive stock he is obliged to keep in his coffers to meet the demands of the public for payment of his notes, and the expenses of his establishment. Besides this sort of banks, there are also banks of deposit, or banks for keeping the money of individuals. A merchant using a bank of this sort makes all his considerable payments by drafts upon his bankers and sends all the bills due to him to them to be presented, and noted if not duly paid. By this means he saves the expense of keeping money at home, while he, also, avoids the risk of receiving coins or notes that are not genuine, and of making mistakes with respect to the presentation of due bills; and in consequence of the saving that is thus effected, a much less quantity of money serves for the demand of the public.

But the great advantage of banks, in a commercial point of view, consists in the facility they afford for making payments at distant places, and for the negotiation of bills of exchange. Many of the banking companies, established in different districts, have a direct intercourse with each other; and they all have correspondents in London. Hence, an individual residing in any part of the country, who may wish to make a payment in any other part, however distant, may effect his object by applying to the bank nearest to him. Thus, suppose A of Penzance, has a payment to make to B of Inverness. To send the money by post would be hazardous; and if there were fractional parts of a pound in the sum, it would hardly be practicable to make use of the post. How then will A manage? He will pay the sum to a banker in Penzance, and his creditor in Inverness will receive it from a banker there. The transaction is very simple: the Penzance banker orders his correspondent in London to pay to the correspondent of the Inverness banker the sum in question on account of B; and the Inverness banker, being advised in course of post of Edition: current; Page: [84] what has been done, pays B. A small commission, charged by the Penzance banker, and the postages, constitute the whole expense. There is no risk whatever; and the affair is transacted in the most commodious and cheapest manner.

Bills of exchange are most commonly used in the settlement of transactions between merchants residing in different countries; but they are also frequently used among merchants of the same country. They are merely orders addressed by a creditor to a debtor, directing the latter to pay his debt to some specified party in his vicinity. It is generally found, that the debts mutually due by cities or countries trading together, approach, for the most part, near an equality. There are at all times, for example, a considerable number of persons in London indebted to Hamburg; but, speaking generally, there are about an equal number of persons in London to whom Hamburg is indebted; and hence, when A of London has a payment to make to B of Hamburg, he does not remit an equivalent sum of money to the latter; but goes into the market and buys a bill on Hamburg for an equal amount,—that is, he buys an order from C of London, addressed to his debtor D of Hamburg, directing him to pay the amount to A or his order. A having endorsed this bill or order, sends it to B, who receives payment from his neighbour D. The convenience of all parties is consulted by a transaction of this sort. The debts due by A to B, and by D to C, are extinguished without the intervention of any money. A of London pays C of do., and D of Hamburg pays B of do. The debtor in one place is substituted for the debtor in the other; and a postage or two, and the stamp for the bill or order, are the only expenses.1

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