The Theory of Money and Credit

Recognition of the fact, which had been pointed out before the time of Ricardo, that there is no way in which an issuer of fiduciary media can protect itself against the consequences of a panic or avoid succumbing to any serious run, may lead, if one likes, to a demand that the creation of fiduciary media should be prohibited. Many writers have adopted this attitude. Some have demanded the prohibition of the issue of such notes as have no metal backing; others, the prohibition of all clearing transactions except with full metallic cover; others again, and this is the only logical position, have combined both demands.2

Such demands as these have not been fulfilled. The progressive extension of the money economy would have led to an enormous extension in the demand for money if its efficiency had not been extraordinarily increased by the creation of fiduciary media. The issue of fiduciary media has made it possible to avoid the convulsions that would be involved in an increase in the objective exchange value of money, and reduced the cost of the monetary apparatus. Fiduciary media tap a lucrative source of revenue for their issuer; they enrich both the person that issues them and the community that employs them. In the early days of the modern banking system they played a further part still by strengthening the credit-negotiating activities of the banks (which in those times could hardly have proved profitable if carried on for their own sake alone) and so brought the system safely past those obstacles which obstructed its beginnings.

Prohibition of the issue of all notes except those with a full backing and of the lending of the deposits which serve as the basis of the check-and-clearing business would mean almost completely suppressing the note issue and almost strangling the check-and-clearing system. If notes are still to be issued and accounts opened in spite of such a prohibition, then somebody must be found who is prepared to bear unrecompensed the costs involved. Only very rarely will this be the issuer, although occasionally such a thing happens. The United States created silver certificates in order to relieve the business world of the inconveniences of the clumsy silver coinage and to remove one of the obstacles in the way of an extended use of the silver dollar, which it was thought desirable to encourage for reasons of currency policy. Similarly for reasons of currency policy, gold certificates were created, so as to bring gold money into use despite the public preference for paper.3

Sometimes the public may be willing to use notes, checks, or giro transfers for technical reasons, even if it has to make a certain payment to the bank for the facility. There are sometimes objections to the physical use of coins, which are not involved in the transfer of claims to deposited sums of money. The storage of considerable sums of money and their insurance against risk from fire and flood and from robbery and theft are not always a small matter even for the individual merchant, and still less so for the private person. Warrants payable to order and checkbooks whose folios have no significance until they have been signed by an authorized person are less liable to dishonest handling than are coins, whose smooth faces tell no tales of the methods by which they have been acquired. But even banknotes, which retain no relationships to individuals, are yet easier to preserve against destruction and to secure against depredation than are bulky pieces of metal. It is true that the large accumulations of money deposited in the banks constitute all the more profitable and therefore attractive an objective for criminal enterprise; but in their case it is possible to take such precautionary measures as will afford almost complete safety, and it is similarly easier to safeguard such large deposits against the risk of accidental damage by the elements. It has proved a more difficult matter to withdraw the coffers of the banks from the grasp of those in political power; but even this has eventually been achieved, and such coups de main as those of the Stuarts or Davousts have not been repeated in modern times.

A further motive for the introduction of payment through the mediation of the banks has been provided by the difficulty of determining the weight and fineness of coins in the ordinary course of daily business. In this way debasement of the coinage led to the establishment of the famous banks of Amsterdam and Hamburg. The commission of one-fortieth percent which the customers of the Bank of Amsterdam had to pay on each deposit or withdrawal4  was far outweighed by the advantages offered by the trustworthiness of the bank currency. Finally; the saving of costs of transport and the greater handiness are other advantages of banking methods of payment that have similarly entered into consideration, especially in countries with a silver, or even a copper, standard. Thus in Japan as early as the middle of the fourteenth century, certain notes issued by rich merchants were in great demand because they offered a means of avoiding the costs and inconveniences involved in the transport of the heavy copper coinage.5  The premium at which banknotes sometimes stood as against metallic currency before the development of the interlocal check-and-clearing business and the post-office-order service can most easily be explained along these lines.6

It is clear that prohibition of fiduciary media would by no means imply a death sentence for the banking system, as is sometimes asserted. The banks would still retain the business of negotiating credit, of borrowing for the purpose of lending. Not consideration for the banks, but appreciation of the influence of fiduciary media on the objective exchange value of money; is the reason why they have not been suppressed.

• 2See for example, Tellkampf, Die Prinzipien des Geld-und Bankwesens (Berlin, 1867), pp. 181 ff.; Erfordernis voller Metalldeckung der Banknoten (Berlin, 1873), pp. 23 ff.; Geyer, Theorie und Praxis des Zettelbankwesens, 2d ed. (Munich, 1874), p. 227.
• 3See Hepburn, History of Coinage and Currency in the United States (New York, 1903), p. 418.
• 4See Dunbar, Chapters on the Theory and History of Banking, 2d ed. (New York, 1907), p. 99.
• 5See Kiga, Das Bankwesen Japans, Leipziger Inaug. Diss., p. 9.
• 6See Oppenheim, Die Natur des Geldes (Mainz, 1855), pp. 241 f.