|An inquiry Into The Currency Principle|
BILLS OF EXCHANGE.
That transactions to a very large amount are adjusted by bills of exchange has long been known and admitted in general terms; but the vastness of the amount was not brought distinctly under the notice of the public till the appearance of a pamphlet by the late Mr. Leatham, an eminent banker at Wakefield. According to a computation, which he seems to have made with great care, founded upon official returns of bill stamps issued, the following are the results
RETURN OF BILL STAMPS, FOR 1832 TO 1839 INCLUSIVE
|Bills created in Great Britain and Ireland, founded on returns of Stamps issued from the Stamp Office.||Bill Average amount in cir- culation, at one time in each year.|
Mr. Leatham gives the process by which, upon the data furnished by the returns of stamps, he arrives at these results; and I am disposed to think that they are as near an approximation to the truth as the nature of the materials admits of arriving at. And some corroboration of the vastness of the amounts is afforded by a reference to the adjustments at the clearing house in London, which in the year 1839 amounted to 954,401,600 l., making an average amount of payments of upwards of 3,000,000 l. of bills of exchange and cheques daily effected through the medium of little more than 200,000 l. of bank notes.
As illustrative of the position for which Mr. Leatham contends, and conclusively, as I think, that bills of exchange perform the functions of money, he observes,
"For a great number of years, it had been the custom of merchants to pay the clothiers in small bills of 10 l., 15 l., 20 l., and so up to 1001., drawn at two months after date on London bankers. I have always considered this the best part of our paper currency, ranking next to gold; the bills existing only for limited periods, and acquiring increased security as they pass from hand to hand by endorsement. From the unreasonably high stamp laid on small bills in 1815, the merchants have ceased to pay in bills, but pay notes instead, requiring 2d. in the pound for cash from the receiver; and I find the revenue has much decreased in consequence in this class of stamps."pp. 44, 45.
Mr. Lewis Loyd, when examined by the House of Lords' Committee on the Resumption of Cash Payments in 1819, gave the following evidence
Qu. 9. At the time when you began business in Manchester, in 1792, were there any country banks which issued notes in that town, or in any other part of Lancashire?
None, I believe.
10. Have there never been, at any time, country banks issuing notes in Lancashire?
None within my recollection. I began to reside in Manchester in 1789. There had been, before that period, notes issued there about the year 1787 or 1788; I think by a bank which failed. I believe that was the only attempt ever made in Lancashire till lately, except that there was lately, and is now, an attempt made to issue them at Blackburn.
11. How has the circulation of Lancashire been carried on since the period to which you refer?
Wholly in Bank of England notes and bills of exchange.
12. Is the proportion of Bank of England notes very considerable as compared with bills of exchange?
About one-tenth, I think, in Bank of England notes, and nine-tenths, at least, in bills of exchange. These bills of exchange circulate from band to hand, till they are covered with endorsements.
13. Is any inconvenience felt from this mode of circulation by bills of exchange?
14. Has the circulation of Bank of England notes in- creased or decreased of late years in proportion to bills of exchange?
I think the proportion of bank notes has increased.
15. To what do you attribute that increase?
Partly to the great increase of the stamp duties. It is within my knowledge, from the transactions of my own house, that the supplies of provisions, which are drawn from the neighbouring counties, used to be paid for in small bills of exchange, mostly of 10 l. or lower; but now the persons going to the neighbouring localities for supplies of provisions take with them bank notes and bank post bills, stating that the stamp is too serious an object to them to be paid on such small sums. There is scarcely a day when I do not send 2000 l. in bank post bills for that purpose to Manchester, which we hardly ever used to do before the last addition to the stamp duty.
16. Were these bills of exchange drawn for specific loans previous to their employment, or were they bills resulting from antecedent transactions?
Those who purchased provisions used to go to fairs and markets with bills ready drawn in their favour, very often for specific sums, as for the round sum of 10 l., just as they now take 10 l. in Bank of England notes and bank post bills. There was this peculiar circumstance attending them, that the bills were usually drawn at two months' date, and were considered as cash payment; they were bills drawn on London by country bankers, and remitted to London as suited the convenience of the parties who received them. Now, in consequence of having bank post bills and Bank of England notes, the persons who receive the bills make an allowance to those who pay them of two months' interest. My answer applies to the supply of the town with provi- sions. Nearly all the other transactions of Manchester, except the payment of labourers, are still carried on in bills of exchange, and the payment of labourers is mostly made in 1 l. Bank of England notes.
If by an alteration in an opposite direction, the stamp duty on bills of exchange were reduced or abolished, while that on promissory notes on demand remained the same, and still more, if it were raised, there would be a considerable change in practice, by making the smaller payments among dealers in bills of exchange as a substitute for bank notes.
In a work by the late Mr. Henry Thornton, which attracted considerable attention at the time, and which formed the subject of an article by Mr. Homer, in the first Number of the Edinburgh Review in 1802, there is a distinct and full description of the manner in which bills of exchange performed in his time the function of money; a description which is strictly applicable at the present day. He observes with reference to bills of exchange,
"They not only spare the use of ready money, they also occupy its place in many cases. Let us imagine a farmer in the country to discharge a debt of 101. to his neighbouring grocer, by giving to him a bill for that sum, drawn on his corn-factor in London, for grain sold in the metropolis; and the grocer to transmit the bill, he having previously endorsed it to a neighbouring sugar baker, in the discharge of a like debt, and the sugar baker to send it, when again endorsed, to a West India merchant in an out-port, and the West India merchant to deliver it to his country banker, who also endorses it, and sends it into further circulation. The bill, in this case, will have effected five payments, exactly as if it were a 10 l. note payable to bearer on demand. It will, however, have circulated in consequence chiefly of the confidence placed by each receiver of it in the last endorser, his own correspondent in trade; whereas the circulation of a bank note is rather owing to the circumstance of the name of the issuer being so well known as to give to it an universal credit. A multitude of bills pass between trader and trader in the country in the manner which has been described; and they evidently form, in the strictest sense, a part of the circulating medium of the kingdom.
"Bills, since they circulate chiefly among the trading world, come little under the observation of the public. The amount of bills in existence may yet, perhaps, be at all times greater than the amount of all the bank notes of every kind, and of all the circulating guineas. Liverpool and Manchester effect the whole of their larger mercantile payments, not by country bank notes, of which none are issued by the banks of those places, but by bills at one or two months' date, drawn on London. The bills annually drawn by the banks of each of those towns amount to many millions."
The late Sir Francis Baring, writing at a still earlier period (1797), and of a state of things within his immediate experience, refers, in the following passage, to the practice prevalent among country bankers, of issuing notes payable after date or after sight,
"In the beginning of the year 1793, and of the present year, 1797, the banks of Newcastle stopped payment, while those of Exeter and of the West of England stood their ground. The partners in the banks at Newcastle were far more opulent, but their private fortunes being invested could not be realised in time to answer a run on their banks. Their notes allowed interest to commence some months after date, and were then payable on demand; by which means they had not an hour to prepare for their discharge. The banks of Exeter issued notes payable twenty days after sight with interest, to commence from the date of the note, and to cease on the day of acceptance. There can be no doubt that the practice of the banks at Newcastle is more lucrative, whilst it must for ever, be more liable to a return of what has happened. The twenty days received at Exeter furnishes ample time to communicate with London, and receive every degree of assistance which may be required."
If, according to the currency theory, the circum- stance that written promises to pay being after date or sight, and to order, and therefore requiring an endorsement, are disqualified from being considered as performing the functions of money, on what ground is it that bank post bills, which are after sight and to order, have been always included in the returns of the circulation of the Bank of England? They are by their form strictly bills of exchange, being not only after sight and to order, but commonly used for transmission by post; and if these are considered to be part of the circulation, on what ground are the bills of the Bank of Ireland, and of the chartered Banks of Scotland, and of such banks throughout the United Kingdom as are of undoubted credit, not included in the return of the country circulation? This applies indeed only to short-dated bills of the most unquestioned credit; longer-dated bills, of more doubtful security, seem to have been alone in the view of those persons who assert the exclusive title of bank notes to be considered as money. Bills of this description, that is long-dated bills, are sometimes not used for purposes of circulation, they are simply written evidence of a debt which is discharged at maturity, without passing into third hands. I will not stop now to enter into the distinction between long and short-dated bills in the comparison with bank notes, and between bills drawn by bankers, and bills by merchants or dealers on dealers. It is a sufficient negative of the main proposition on which the currency theory rests, to have shown that short-dated bills of exchange are substitutes not only for coin, but for bank notes.
If, as a last resort in the argument, it be said that bills of exchange require the intervention of bank notes for the ultimate payment, the answer is, that this is a mere fiction, for that in fact the adjustment takes place by settlement, and that a small amount of bank notes for the balance effects the liquidation, which might equally be effected by drafts on the Bank of England; or, as is done in Scotland, by exchequer bills. An alteration in the stamp duties has, as stated by Mr. Lewis Loyd and Mr. Leatham, operated against the employment of the smaller bills of exchange instead of bank notes. If the case were reversed, the stamps lowered on bills and raised on notes, we should see an immense increase in the former, and a great diminution in the latter, in other words, bank notes would be withdrawn, and bills of exchange supply their place.
It is hardly perhaps necessary to advert to the latter part of the proposition quoted at page 20, viz., that the abolition of any or of all the contrivances for dispensing with the use of money, will not necessitate the introduction in their place of an equal amount of coin or bank notes. There surely can be little doubt but that the abolition of such contrivances would necessitate the substitute of an equal amount of bank notes or coin.
Sufficient grounds have, as I venture to think, been stated for establishing the claim in behalf of cheques on bankers, and of bills of exchange, to be considered as performing, concurrently with bank notes, the functions of money for the purposes for which they are respectively used.
If the propounders of the currency theory would confine their distinction in favour of bank notes to the lowest denominations, namely, the 1 l. notes wholly, and the 5 l. and 10 l. notes partially, it might, as I have already observed, be conceded; but then what becomes of the dogma or the axiom of Mr. Norman and Mr. Loyd, on which the currency theory is made to rest? and what becomes of the inferences which they have drawn as to the management of banks, from a view exclusively to the whole of the circulation, large notes as well as small? In truth, their tests of good and bad management, and their views of the purposes and properties of the whole of the circulating medium and of its component parts, are essentially defective and erroneous. They draw distinctions which are not real or substantial, as, for instance, of the higher denomination of bank notes compared with bills of exchange and cheques; while they totally overlook and confound the distinctive character of the instruments of interchange which are used in the distribution and expenditure of in- comes, as compared with that of the instruments which are used in the distribution and employment of capital.