William Gouge
An Inquiry

Of Barter, Leger Entries, Bills of Exchange and Promissory Notes.

It is not necessary for carrying on business honestly, to introduce gold or silver money into every transaction.  After we have measured a scantling by a foot rule, we may use that scantling to measure another, and that again to measure a third.  We can, after having measured several scantlings in this way, make a tolerably correct estimate of the length of others by the eye.  In like manner, after the value of given quantities of corn, cloth, and other commodities, has been ascertained by exchanging them for gold or silver, the value of other parcels of the same commodities may be determined without the intervention of money.  In commercial countries in which there is no paper money, little trade is carried on by direct barter, not because it is difficult to make a correct barter estimate, but because purchases and sales can be better regulated in regard to time and quantity by other modes of business.

Hence the practice of leger entries, or running accounts.  The amount of transactions between two traders may be very great, and yet, if, in all their dealings, they have strict reference to the specie price of goods, the commerce may throughout be an interchange of equivalent, though not an ounce of gold or of silver may have passed from one mer chant to the other.

By promissory notes, the use of real money is deferred, and in some cases superseded.  If A gives a promissory note to B, and B gives it to C, in exchange for goods, and C passes it to D, the use of money is in two cases superseded, and in one deferred.  Bills of exchange have, in some respects, a similar effect.  A merchant at Paris sending goods to Alsace, and wishing money for them, would be forced to wait till the goods could be sold, and the money brought from Alsace, if he could not procure a bill of exchange.  In like manner, a manufacturer at Alsace, sending goods to the capital, would be forced to wait for payment till the money could be brought from Paris.  Here would be two sums of money passing in opposite directions.  Supposing the whole trade of France carried on in this way, the amount of money continually on the road would be equal to the whole amount of goods in passage.  The amount of money to be annually transferred from one country to another would be equal to the whole amount of trade between different countries, except when the business of importing and ex porting was carried on by the same merchant.  By the use of bills of exchange, the merchant receives the money for which the manufacturer's goods were sold at Paris, and the manufacturer receives the money for which the merchant's goods were sold at Alsace.  In this way, it becomes necessary to transfer from one part of a country to an other, or from one country to another, such sums only as are equivalent to the balances of trade.

Bills of exchange, where the practice is to pass them from hand to hand, may serve as a local commercial medium, though not a very convenient one, since it is necessary for the nice adjustment of transactions, to calculate the difference of the interest on each transfer. *

Each of these three kinds of mediums has its specific uses; and each is, as an auxiliary of gold and silver money, productive of great benefit.  A clear view of their operations is necessary, for the distinction between the representatives of private credit, and of bank credit, is as important as the distinction between genuine money and spurious.

Leger entries, promissory notes, and bills of exchange, agree with money in being a medium by which valuables are circulated.  They differ from it in being evidences of debt owing by one man to another – which money is not.

In a far more important particular do they differ from money.  They are mere commercial medium.  They are neither standards nor measures of value.  The amounts expressed in them are the estimations made of goods, by reference to the article which law or custom has made the standard of value.  They may be conveniently distinguished as commercial medium, restricting the term circulating medium to money.

An increase of these three kinds of commercial media may have the same effect on prices as an increase of money.  Where the spirit of speculation is excited, men, after having exhausted their cash means, strain their credit.  Cash and credit are then competitors in the market, and raise prices on one another.  In the year 1825, a year of great speculation, the amount of bills of exchange, negotiated in England, was, according to the returns to Parliament, 600 millions sterling.  Supposing one-eighth of these in circulation at the same time, this branch of the commercial medium of England amounted in that year to 75,000,000 pounds.

But the rise of prices produced by these occasional multiplications of the representatives of private credit, is always temporary.  At the end of a given period the balance of the running account is demanded, and payment of the promissory notes, and of the bills of exchange, is required in money.  If they are paid, their effect on prices ceases.  The result is the same, if they are dishonored.  In 1826, the amount of bills of exchange negotiated in England, was 400 millions.  Supposing one-eighth part in circulation at one time, this branch of the commercial medium of England amounted, in this year, to 50 millions, and was one-third less than in the year preceding.

In countries where the money is of a sound character, and the state of credit sound also, leger entries, bills of exchange, and promissory notes, serve rather to keep prices on a level, than to cause them to fluctuate.  In some seasons of the year, as when crops are brought to market, or cargoes arrive from foreign ports, there is naturally more trade than in other seasons.  By the use of private credit payments are divided among the different months more equally than would otherwise be practicable.

Thus, in whatever way trade is carried on, whether by barter, running accounts, promissory notes, or bills of exchange, or money, one principle of valuation is adhered to in countries having a sound money system.  The cash sales regulate the credit sales, and the cash prices regulate the credit prices.

If the money of a country is paper, whether issued by the government, or by a corporation, the expressions of value in the running accounts, promissory notes, and bills of exchange, are according to the new standards and measures of value.

Into the nature of these we shall inquire in other chapters.

* 1841:-- In the new preface to our "History and Inquiry," we have stated that, if we found it necessary to make any corrections of any moment in republishing it, due notice would be given to the reader. We make one correction to day, in the third chapter.
Further inquiries, and conversations with a gentleman who once did an extensive business in Lancashire, England, have convinced us that bills of exchange, are, as a commercial medium, especially in large transactions, much more convenient than we once supposed them to be. Their extensive use in England, especially in the county of Lancashire, including the two populous and bustling towns of Liverpool and Manchester, is of itself sufficient evidence that they must possess many and great conveniences.
So convenient, indeed, were they found, that the private bankers of Luncashire, never issued any notes of their own. The joint stock banks lately established in that county, issue notes, but this is because the issue produces a profit to themselves, --not because the old commercial medium was inconvenient to the merchants and manufacturers.
Some of these bills of exchange having but sixty days to run, have, by the time they come to maturity, as many as one hundred and twenty endorsements --thus proving that they have been used on an average, in more than two commercial transactions on each business day.

Of Banks of Discount.

Let us suppose that all the Banks in the country were destroyed, and that our circulating medium consisted exclusively of gold and silver coin.  In such a state of affairs, every merchant would keep about his person, or in his house, his whole stock of money.

Let us next suppose an Office of Deposit, established in anyone of our large towns.  For the sake of security against fire and robbers, the wealthy would here deposit whatever money they did not require for immediate uses.  All the money employed in the wholesale trade would thus become the deposit of the Bank.  It might be drawn out a few times, but as every large dealer would keep an account at the Bank, the absurdity would soon become evident, of drawing out the money by one man, that it might be deposited in the same place by his neighbor.  The amount would, therefore, be transferred from the credit of one merchant to that of another, and the Bank would become an Office of Transfer as well as of Deposit. The only money that would circulate, would be that employed in retail trade.  All wholesale transactions would be adjusted by checks on the Bank, and transfers on its books.

The Bank having issued no paper, the only demand on it would be for specie to send abroad.  This demand would be limited, for every merchant would make it a rule to retain enough money in Bank for his domestic trade.  It would be only as the trade of the town fluctuated, that the amount of money in the vaults of the Bank would fluctuate.  We may suppose that it rose as high, sometimes, as six millions, and sunk as low, sometimes, as four millions.  In a little time, the Bank would discover the lowest amount to which its permanent deposits would be liable to be reduced: and it might lend nearly the whole of this amount without much risk of discovery.  The money might, indeed, be sent abroad by him to whom it was lent, but he by whom it had been deposited would still have a credit at the Bank, and as all the wholesale transactions of the town would be carried on by checks on the Bank, his credit on the books of that institution would serve him the same purposes as money.  Retaining the sum of 500,000 dollars to meet contingencies, the Bank might safely grant discounts to the amount of 3,500,000, and thus realize a profit of more than 200,000 dollars per annum, without lending a cent of its own capital, and without issuing any paper.

It is worthy of note, that the Bank of Amsterdam acted on this principle.  Millions of money, which the merchants had deposited in its vaults, and for the safe-keeping of which, and the transferring of which from one account to another, they paid a premium, were lent by the Bank to the India Company, and to the Provinces of Holland and West Friesland.  The fact was long kept secret;  but was discovered when the French entered Amsterdam in 1794. **

What was regarded as a shameful breach of confidence in the Bank of Amsterdam, is, with our American Banks, an avowed principle of action.  They all lend the money deposited with them for safe keeping, and it is in this way that the Banks in the large cities make great part of their profits.  All the money required for wholesale transactions is their permanent deposit.  It may go out one day, but it returns the next; and it may be transferred from one Bank to another, but it is never long out of some of the Banks; and for the same sum of money there are frequently two creditors – one in favor of him by whom the money has been deposited, and another in favor of him to whom it has been lent.

These Bank credits have a very different effect from the leger entries of private traders.  Whoever sells on trust, puts on his goods an additional price, equivalent to the interest for the time to which payment is deferred.  Sellers may persuade purchasers to the contrary, and, in some cases, capital may be so plentiful that the amount of interest on a small sum, for a short period, may be scarcely appreciable.  In other cases, the increase of price is greater than the amount of interest; as with fashionable tailors and shoemakers, who are forced to charge insurance on each item, and make the honest pay for themselves and the dishonest also.  Their business would not otherwise yield the common profits of stock and the common wages of labor.

But Bank credits are in all cases equal to cash.  The Bank check goes as far as Bank notes, for Bank notes can be obtained for it on demand.

Increase of Bank credits has the same effect on prices as increase of Bank notes.  He who has deposited money in the Bank, and he to whom it has been loaned, appear as competitors in the market, and raise prices by bidding against one another.  It is the same sum of money with which they are contending, and the seller of goods can get it from one only.  But there are two credits for this money in the Bank, and the credit is equivalent to cash, both to him who has deposited the money, and him to whom it has been lent.

Our American Banks of Discount must be distinguished from Loan Offices, or institutions which lend no more than the amount of their own capital.  As some express it, the business of the American Banks is "to lend credit."

These Banks must also be distinguished from the Bank of Amsterdam, as it once was, and the Bank of Hamburg, as it now is.  Into those cities there was a great influx of foreign coin, of various denominations, and much of it clipped or worn.  To save the trouble of ascertaining the exact value of each parcel, by sorting it on every transaction, it was deposited in Bank, and credit granted to each merchant for the amount he deposited, according to mint valuation, a small sum being deducted for warehouse rent, and a small fee charged on each transfer.  These Banks were mere offices of deposit and transfer – not of discount.  They were very different from our American Banks.

**   In making this statement, we were governed by the common historical authorities.  But it is proper to state what we have lately learned from a highly respectable merchant, whose business has occasionally called him to Holland. He got the confidence of the burgomasters, and they, in referring to these historical statements, mentioned that it would not be politic openly to contradict them, but denied that they were true.  They affirmed that on the approach of the Freach, the money was secretly removed from the Bank, and such entries made in the books as to induce their invaders to believe, that it had been surreptitiously loaned.  They laughed at the success of their stratagem.

Of Banks of Circulation.

Our American Banks are not contented with the profits derived from lending the money of depositors to other people.

As soon as the first instalment of the capital is paid in, the Bank commences issuing notes.  To those who come to borrow, it lends paper or coin.  The paper being exchanged for coin, serves, at least at the place where it is issued, the same purposes as coin.

Every man desires money, because he can therewith procure whatever else he desires.  If paper can procure for him the object of his desire as readily as gold and silver, paper is as desirable to him as gold and silver.  The Bank, therefore, finds borrowers for all the coin it has to lend, and all the paper it deems it safe to issue.  This addition of notes to the amount of metallic money previously in circulation, raises first the price of some articles and then of others.  The borrower from the Bank having more money, either paper or coin, at command, can offer an additional price for the object of his desire, or perhaps procure some desirable object that was before unattainable.  He from whom the borrower has bought, having made a speedier sale, or perhaps received a higher price than would other wise have been possible – he also has it in his power to obtain some object of desire that was not before within his reach.  A third, a fourth, a fifth, a sixth, each in his turn, derives a like advantage from this increase of circulating medium.  The rise of prices is confined for a time to store goods, but it at length reaches real estate, and finally the wages of labor.  Industry is stimulated, and enterprize encouraged.  Speculation is excited, private credit is strained, and the representatives of private credit are multiplied.  Every body is active, and all branches of business appear to be prosperous.

Nothing could be prettier than this, if prices could be kept continually rising.  But it is, unfortunately, only while the amount of Bank issues is actually increasing, or for a short time after they have attained their maximum, that society derives this benefit from paper money.  So far it has the same effect as an increase of real money – as an increase of real wealth.  But in due time it affects all articles in nearly equal proportions: and men then discover that for an object of desire for which they had formerly to give one dollar, they have now to give one dollar twenty-five cents, or one dollar fifty: and that it is not more easy to get the one dollar and fifty cents to make the purchase with, than it was formerly to get one dollar.  The value of land, labor, and commodities, as compared with one another, is the same as it was before.  It is only the money price that is enhanced.  The effect this has on public prosperity, is much the same as that which would be produced by changing accounts from pounds, shillings, and pence, to federal money.  The sum total of dollars would exceed that of pounds, but the articles of the value of which they would be the exponents, would be unaltered in number and in quality.

It would be well if the issues of the Banks had no other effect than that of apparently increasing the wealth of the community, by raising the money valuation of all kinds of property.  But these institutions do not continue their issues long, before they raise the price of some commodities above the price they bear in foreign countries, added to the costs of importation.  In foreign countries the paper of the Banks will not pass current.  The holders of it, therefore, present it for payment.  The Banks finding their paper returned, fear they will be drained of coin, and call upon their debtors to repay what has been advanced to them.  In two ways, then, is the quantity of circulating medium diminished: first, by the specie's being exported: secondly; by the paper's being withdrawn from circulation.  Prices fall as rapidly as they had before risen.  The traders find that the goods in their stores cannot be disposed of, unless at a loss.  The different members of society had entered into obligations proportionate to the amount of circulating medium in the days of Banking prosperity.  The quantity of circulating medium is diminished, and they have not the means of discharging their obligations.  The merchandise, the farms, the houses, for which they contracted debts, may be still in their possession; but the product of the farms will not bring, perhaps, half as much as will pay the interest of the original purchase money; the houses will not rent for as much as will pay the interest on the mortgages; and the store goods must, if sold at all, be sold below prime cost.  Bills of exchange are dishonored, and promisory notes protested.  One man is unable to pay his debts.  His creditor depended on him for the means of paying a third person to whom he is himself indebted.  The circle extends through society.  Multitudes become bankrupt, and a few successful speculators get possession of the earnings and savings of many of their frugal and industrious neighbors.

By the reduction of the amount of Bank medium, the prices of things are lowered, the importation of some kinds of foreign goods is diminished, and specie is brought back.  Then the confidence of the Banks is renewed, and they re-commence their issues of paper.  Prices are raised again, and speculation is excited anew.  But prices soon undergo another fall, and the temporary and artificial prosperity is followed by real and severe adversity.

"Such is the circle which a mixed currency is always describing."