greatness. Such an undertaking as a railway, however, requires an amount of capital for its construction too large to be supplied by one individual. Such works, therefore, are carried out by a company, who collect the requisite amount of capital from a great number of individuals. These individuals would not entrust their capital to the company, unless they could place confidence in it, or, in other words, unless its credit was good. Moreover, not only must the personal credit of the directors of the company inspire confidence, but it is also necessary that the credit of the country in which the works are carried out should stand high; because great risk will be incurred by sinking large sums of money in works which would be easily destroyed if the government was in a state of anarchy, and property consequently insecure. BOOK III. CH. XI. credit creates Enough has now been said to show, that credit as Thus powerfully as any other agent contributes to the production and accumulation of wealth. Although credit is capital. not capital, yet a great portion of the capital of each country is undoubtedly due to the existence of credit. The higher the credit of a community is, the more completely can every particle of wealth which is saved be economised. Credit, in fact, enables the wealth which is saved to be immediately applied to the most productive purposes. Having in this chapter described the influence exerted by credit on the production of wealth, we shall in the next chapter discuss the manner in which the prices of commodities are affected by credit. CHAPTER XI. THE INFLUENCE OF CREDIT ON PRICES. BOOK III. Different forms of credit. Bills of exchange. They are a conve HEN an individual, B, uses his credit in borrowing from A a certain sum of money, it is natural to suppose that A will require some written acknowledgment of B's liability to him. The written acknowledgment of such indebtedness may be given in many different forms, and these various forms may be regarded as the tangible evidence of the fact, that credit has been given and taken. It will be well to describe some of these forms in detail. We will commence with a bill of exchange; some remarks have already been made upon this instrument of credit. It is well known that the wholesale transactions of commerce are seldom carried on by ready money. If A sells B a cargo of coal for 10007., A receives an acknowledgment of the debt due to him in the form of a bill; this bill is a written promise', that B will pay a certain sum to A on a particular day, and in the bill it is stated what consideration has been given for the debt which has been incurred. The time which has to elapse before the bill falls due is a matter of previous arrangement between A and B, but upon this point different customs prevail in various trades, which are very uniformly observed. When, for instance, a draper purchases goods of a warehouseman, a bill for three months is almost always given; but in the book trade it is customary to give a bill for six months. A bill of exchange affords a convenient instrument for facilitating credit. If in the above transaction B, who is of credit." supposed to purchase the coals, should be a stranger to A, it is probable that A may require some additional security The promise is almost invariably given in the form of a written order to a banker, who becomes the medium of payment. besides the written promise of B to discharge the debt. Some bank with which B does business may have perfect confidence in him. B will go to this bank and say, A is not satisfied with my promise to pay, but he no doubt would be if a public institution like yours would give him some testimony as to my solvency. The bank grants this request by placing its name upon the back of the bill, which is technically called endorsing the bill. This endorsement makes the bank liable to pay the bill in the event of B refusing to do so; A then accepts the bill, being satisfied with this additional security. Now A may perhaps be in want of ready money, and does not wish to wait until the bill falls due. He therefore gets this bill discounted; discounting the bill means selling the bill for ready money. If the person who discounts this bill for A is satisfied with the security which is provided by the two endorsements which are already on the bill, he accepts the bill without any further endorsement; but if he is not satisfied, he may also require the endorsement of A, the person from whom he purchases the bill. A bill of exchange may be thus bought and sold any number of times before it falls due, and perhaps each time it is so bought and sold it receives an additional endorsement. Thus it not unfrequently happens that before a bill is finally presented for payment it is almost completely covered with endorsements. BOOK III. CH. XI. and When credit is given by banks, it usually assumes the Banknotes form either of bank notes or cheques. The distinction between a bank note and a bill of exchange is this: a bank cheques note is a written promise to pay a certain sum whenever it may be demanded; whereas a bill of exchange is a written promise to pay a sum at a certain date, which is stated on the bill. Moreover, in almost every country certain privileges are given to bank notes which are not possessed by any other instrument of credit. Almost as issued every country has a State bank, the bank notes from by State which are generally made a legal tender. In this country, any debt can be discharged by paying the sum in Bank of England notes; and, similarly, in France a debt can be discharged by paying the amount in notes issued by the Bank of France. But the notes which are issued by private banks are not a legal tender. State banks are banks BOOK III. or private banks. subject to certain restrictions, which vary in different But Besides the notes which are issued by the Bank of England, private banking firms are allowed to issue notes under certain conditions. A moment's consideration will show, that a bank note, whether issued by a State establishment or by a private firm, is simply a convenient form for bringing into practical use the credit which may be possessed by the bank. All those who place perfect confidence in the solvency of a particular banker will be willing to accept his notes. A banker, therefore, whose credit is good, can circulate a great number of his notes in his own neighbourhood, his notes being willingly accepted by those to whom he is known. Such notes, however, are not convenient for payments which have to be made at a distance, to those to whom the banker is a stranger. The notes of private bankers are never made a legal tender, and if the notes are presented for payment at the bank from which they are issued, it is compulsory that either coin, or Bank of England notes, should be given in exchange for them. It is, however, manifestly to the advantage of a banker to issue notes; for suppose 60,000l. of these notes are kept in circulation, it is ascertained, by experience, that an amount of legal tender equivalent in value to one third of the notes issued will be sufficient, if kept as a reserve, to meet all the notes. which are presented for payment. A banker, therefore, whose notes circulate to the extent of 60,000l., has 40,000l. at his free disposal, to place in some profitable investment. BOOK III. CH. II. It is hardly necessary to describe a cheque. Individuals deposit money with bankers for purposes of convenience or safety, and of course they can withdraw any portion of Use of this money when they have a payment to make. But if cheques. A wants to pay B 1000l., A does not first withdraw 10007. from his bank and pay the amount to B, who would then probably deposit the amount received, in the bank with which he might happen to do business. A much more convenient course is adopted: A, instead of paying the money to B, gives him a cheque, which is simply an instruction to A's banker that the amount stated in the cheque should be paid to B when he demands it. A is thus saved the trouble of withdrawing money from his bank; B is also saved the trouble of sending so much money to his bank, for now he has only to transmit the cheque to his banker, who will place the amount to his account, B's banker taking the trouble of getting the cheque paid by A's bauker. The trouble of doing this, however, is very small, for cheques will be drawn upon B's banker, and in this manner the cheques drawn upon one bank are exchanged for those drawn upon another. This exchange is daily carried on in London, at an establishment called the Clearing House. It has been calculated that more than 2,000,000,000l. of cheques are annually exchanged in this manner. No gold whatever is required in settling the accounts between the various banks. When a balance remains in favour of, or against, a particular bank, the amount is placed to the credit or debit of this bank in the books of the Bank of England. The chief forms which credit assumes have now been described. It will be perceived that bills of exchange, bank notes, and cheques perform many of the functions of money. Credit, therefore, considered in this aspect, may be regarded in a certain degree as a substitute for money. We are thus led to the main subject of inquiry in this chapter, which proposes to investigate the influence produced by credit on prices. We will commence this investigation by explaining the manner in which bills of exchange, bank notes, and cheques respectively perform the functions of money. Credit is to some extent a substitute for money. Although, in the wholesale transactions of commerce, The func commodities are almost invariably sold for money, yet it tions of F. M. EE |