Money and the Mechanism of Exchange
The Nature and Varieties of Promissory Notes
Before attempting to come to any conclusion as to the best mode of regulating the issue of promissory notes, we must carefully analyse the differences which may exist between one promise and another. What seems at first sight a very slight and subtle distinction, may be found to lead to important results. He who issues a representative or promissory document, engaging to give a certain quantity of a defined commodity in return for the document when presented, may really make any one of three distinct engagements.
1. He may promise to keep a certain identical article in his possession until it is called for.
Specific Deposit Warrant.
The most satisfactory kind of promissory document is the first, which is represented by bills of lading, pawn-tickets, dock-warrants, or certificates which establish ownership to a definite object. A bill of lading entitles the legal holder of it to certain cases or packages of goods, described by marks, numbers, dimensions, or otherwise. The ship-master signing such a bill is obliged to retain the identical cases committed to his care, until he delivers them up in return for the bill of lading at the close of his voyage. Dock-warrants are of the same character, being receipts for packages of goods deposited in the London or other dock warehouses. The holder of a dock-warrant has a prima facie claim to the pipes of wine, bales of wool, hogsheads of sugar, or other packages named thereon. Transfer of the warrant by endorsement or otherwise, as required by law and custom, is accounted a transfer of the ownership of the goods. The important point concerning such promissory notes is, that they cannot possibly be issued in excess of the goods actually deposited, unless by distinct fraud. The issuer ought to act purely as a warehouse-keeper, and as possession may be claimed at any time, he can never legally allow any object deposited to go out of his safe keeping until it is delivered back in exchange for the promissory note.
General Deposit Warrant.
We pass to the case in which the issuer of a promissory document engages to keep on hand goods exactly equivalent in quantity and quality to what are specified thereon, without taking note of individual parcels. In many cases commodities are so homogeneous that there seems to be no need to distinguish parcel from parcel, or to restore the identical portion deposited. Thus the keeper of a pig-iron store in Glasgow receives large quantities of pig iron, of several brands, and issues corresponding warrants representing ownership therein. As no difference, however, is known to exist between different portions of iron of the same brand, it was the practice in former years not to allot one heap of pigs to each warrant, but simply to retain a stock of each brand equal in weight to the aggregate amount due on outstanding warrants. More recently a better system has been introduced, and each specific lot of iron has been marked and set aside to meet some particular warrant. The difference seems to be slight, but it is really very important, as opening the way to a lax fulfilment of the contract. Misunderstandings occasionally arise upon this point in other trades. For instance, a cotton merchant in Liverpool, a few years since, obtained a loan of money upon the security of cotton in his possession, and a court of law was subsequently called upon to decide whether he had mortgaged certain individual bales of cotton, and undertaken to retain them until the loan was repaid, or whether he had merely engaged to have in his hands an equal quantity of cotton of the same quality. I have heard that carrying and warehousing companies are sometimes careless about distinction of parcel and parcel. If they are continually conveying or holding portions of exactly the same goods, flour from the same miller, coal from the same seam, they will sometimes deliver out the required quantity of the same sort of goods, irrespective of its being the identical portion delivered to them for conveyance or safe custody.
Difference between a Special and a General Promise.
The great importance of the distinctions pointed out in the last section will be easily apparent. He who has made a special promise to give definite parcels of goods in return for particular individual papers, cannot issue any such promissory papers without holding corresponding goods. If he does so, he will be continually liable to be convicted of fraud or default by the presentation of a particular document. If the promises made by him, however, are only general ones, any promissory document can be met by any portion of commodity of the proper quality, and it will be necessary to present most or all of the documents in order to disclose default. The way is thus opened for the speculative issue of promissory notes. The receiver of deposits, finding that a large portion of the deposited commodity always remains on hand, may proceed to use it in trade, only keeping so much as may meet current demands. So long as he does fulfil promises no harm seems to be done; but experience proves that there will always be a certain proportion of persons who, in such circumstances, will not act so discreetly as to be in a position to redeem all their engagements.
Moreover, it now becomes possible to create a fictitious supply of a commodity, that is, to make people believe that a supply exists which does not exist. The possessor of a promissory note or warrant regards the document as equivalent to the commodity named thereon. It is only necessary then to print off, fill up, and sign an additional number of such notes in order to have a corresponding supply of commodity to sell. It is true that the issue of promises involves their fulfilment at a future day; but the future is unknown, and the issuer may believe that before the fulfilment is likely to be demanded the price of the commodity will have fallen. Thus, if pig-iron warrants could be issued in unlimited quantities (irrespective of the stocks actually in the stores at Glasgow), an unscrupulous band of speculators might perhaps make large profits by selling great quantities of iron for future delivery. After suddenly and excessively depressing the price of pig-iron they might succeed in gradually buying up enough at lower prices to meet the warrants when presented. This kind of "bear" operations has certainly been successful in other markets.
About ten years ago it became the practice to rig the market as regards the shares of particular joint-stock banking companies. A party would be formed, perhaps owning none of the shares of the selected company, and they would proceed to sell considerable quantities of the shares, hoping so to damage the reputation of the company and lower the value of the stock as to be able to buy up enough before delivery would be required. This noxious kind of speculation was checked by an Act of Parliament (30 Victoria, c. 29, 1867), which now requires the seller of bank shares to specify the numbers or the registered proprietors of the shares which he is selling for future delivery.
It might be urged, indeed, that there is a natural right belonging to all persons to make promises, if they can thereby benefit themselves. Any one can accept a bill, thereby promising to deliver money at a future day. It is quite common to make contracts involving the delivery of government stock, or of cotton or corn expected to arrive by sea, before delivery becomes due. But we must remember that all laws and all social relations are devised to secure the greatest good of the greatest number. If a right to make all promises be recognized by law, it must be because the right is beneficial to society, and it is the recognition by law which makes it a right. If, on the contrary, it be found by experience that freedom of making and selling promises in a particular way gives scope to illegitimate speculation, or otherwise injures society more than it produces benefit, the law ought certainly to restrict this freedom and regulate the matter for the good of the community. The whole matter, in short, is one of expediency. It used to be held as a general rule of law, that any present grant or assignment of goods not in existence is without operation. Though the rule seems to be generally disregarded, there are many cases in which it might be advantageously enforced.
Pecuniary Promissory Notes.
Applying these considerations to the special matter of money, we find that pecuniary promises are nearly always of a general kind. He who undertakes to pay a sum of money on a future day, rarely specifies the individual coins which will be paid. In fact the Coinage Act, in defining legal tender, makes any sovereigns, shillings, and pence, duly coined and of proper weight, a discharge for a corresponding sum named in a contract. It is true that just as pipes of wine are warehoused in the London docks, cases of gold and silver bullion or, it may be, of foreign or English coin, are warehoused in the vaults of the Bank of England. In fact, imports of gold and silver, at whatever port in the kingdom they may arrive, are almost always sent up for delivery at the bullion office of the bank, which acts precisely as if it were a dock warehouse, and delivers the packages on production of the bills of lading. These bills of lading are specific promises, and may yet be passed by endorsement from one person to another. Such consignments of bullion, however, do not enter into banking accounts.
A Bank of England note is neither more nor less binding upon the bank authorities than a bill of lading, but it does not specify the bag or box of money to be employed in paying it. Almost all other pecuniary engagements are in the same way general engagements. No banker could make any profit if he were obliged to put away the sovereigns deposited by a customer until that customer presented a checque for them, nor would there usually be sufficient motive for desiring such a special pledge. The idea never enters into our heads in mercantile matters. Disputes, however, have occasionally arisen upon this point. Some people have a peculiar fancy for collecting particular coins, and an old lady, having formed a hoard of fourpenny pieces, died after bequeathing them to a relative. Although wishing to keep them out of respect to the old lady, this relative was in want of ready cash, and desired to realize their value; he thought to achieve both objects by pledging them with a pawnbroker. The broker readily received them, but after a time thoughtlessly used the groats as change. When the pawn-ticket was presented he considered that the tender of the equivalent sum in sovereigns and shillings was a sufficient discharge. Here, however, the pledge should have been held as a special one.
Now, if pecuniary promises were always of a special character there could be no possible harm in allowing perfect freedom in the issue of promissory notes. The issuer would merely constitute himself a warehouse-keeper, and would be bound to hold each special lot of coin ready to pay each corresponding note. But this is not the case, and much harm may arise from the excessive issue of promises to pay gold on demand. The gold market may be rigged as well as the iron or any other special market. One difference is that the gold market is the most extensive of all markets, so that a great many individuals or companies, each acting under the separate impulse of self-interest, must over-issue notes in order to produce any appreciable effect. A further difference is that gold, being itself the measure of value, the rise or fall in its price cannot be apparent except in the average fall or rise in the price of many commodities. This subject must be pursued in Chapter XXIV.
Principles of the Circulation of Representative Money.
In the last two sections of Chapter VIII. (pp. 80-85), we found that by analysing the motives of individuals in receiving, holding, or paying away metallic money, we could arrive at certain laws of circulation, which were amply confirmed by experience. It was also pointed out that the same laws might be extended mutatis mutandis, to the mixed circulation of metallic and paper money. Habit is almost as powerful in supporting the use of representative money as of real metallic coins. Persons who have long been accustomed to pay away certain pieces of paper without loss, will continue to regard them as good currency until some rude shock is given to their confidence. This may go so far that a dirty bit of paper, containing a promise to pay a sovereign, will be actually preferred to the beautiful gold coils which it promises. The currency of Scotland is a standing proof of this assertion; and the same may be said of Norway, where, until 1874, no gold at all was in circulation, and notes for one, five, or ten dollars formed the principal part of the currency.
There is one all-important point in which representative differs from metallic money; it will not circulate beyond the boundaries of the district or country where it is legally current or habitually employed. No doubt Bank of England notes are frequently carried abroad by travellers, and are in most places readily exchanged for the money of the locality; but they never circulate, and are treated as bills upon London, forming a convenient mode of remittance. They do not satisfy a debt from this to another country, but rather create it, an English bank-note, in the hands of a Paris banker, representing a claim which he has upon the Bank of England. The only money which can really be exported in payment of debts due to foreign merchants is standard metallic money. Hence paper money has exactly the same capacity for driving out standard money that light or depreciated coins possess.
In the case of inconvertible notes this has always been most obvious. As the quantity of such notes issued progressively increases, as almost always happens, coin must be exported, otherwise the currency would become excessive. But when most of the coin is gone, need of it begins to be felt for making foreign payments, and then the value of the paper falls below that of the coin which it is supposed to correspond to. Many persons begin to hoard the coins for the sake of anticipated profit, and nothing but paper is soon to be found in circulation. This effect of paper in driving coin out of use has been manifested over and over again, as in the time of the assignats of the French Revolution, the suspension of specie payments at the Bank of England between 1797 and 1819, and the late American war. One of the most recent and striking instances is to be found in Italy, where large quantities of beautiful gold and silver coins had been struck in the years 1862 to 1865, but all disappeared very rapidly from circulation as soon as the cours forcé of paper money was proclaimed.
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