Whenthisplanisadopted，itisnaturallythemorecostly
metalwhichislefttobeboughtandsoldasanarticleof
commerce。Butnationswhich，likeEngland，adoptthemorecostly
ofthetwoastheirstandard，resorttoadifferentexpedientfor
retainingthembothincirculation，namely，tomakesilvera
legaltender，butonlyforsmallpayments。InEngland，noonecan
becompelledtoreceivesilverinpaymentforalargeramount
thanfortyshillings。Withthisregulationthereisnecessarily
combinedanother，namely，thatsilvercoinshouldberated，in
comparisonwithgold，somewhataboveitsintrinsicvalue;that
thereshouldnotbe，intwentyshillings，asmuchsilverasis
worthasovereign:foriftherewere，averyslightturnofthe
marketinitsfavourwouldmakeitworthmorethanasovereign，
anditwouldbeprofitabletomeltthesilvercoin。The
over—valuationofthesilvercoincreatesaninducementtobuy
silverandsendittotheMinttobecoined，sinceitisgiven
backatahighervaluethanproperlybelongstoit:this，
however，hasbeenguardedagainst，bylimitingthequantityof
thesilvercoinage，whichisnotleft，likethatofgold，tothe
discretionofindividuals，butisdeterminedbythegovernment，
andrestrictedtotheamountsupposedtoberequiredforsmall
payments。Theonlyprecautionnecessaryis，nottoputsohigha
valuationuponthesilver，astoholdoutastrongtemptationto
privatecoining。
ThePrinciplesofPoliticalEconomy
byJohnStuartMill
Book3:Distribution
Chapter11
OfCredit，asaSubstituteforMoney
1。Thefunctionsofcredithavebeenasubjectofasmuch
misunderstandingandasmuchconfusionofideas，asanysingle
topicinPoliticalEconomy。Thisisnotowingtoanypeculiar
difficultyinthetheoryofthesubject，buttothecomplex
natureofsomeofthemercantilephenomenaarisingfromtheforms
inwhichcreditclothesitself;bywhichattentionisdiverted
fromthepropertiesofcreditingeneral，tothepeculiaritiesof
itsparticularforms。
Asaspecimenoftheconfusednotionsentertainedrespecting
thenatureofcredit，wemayadverttotheexaggeratedlanguage
sooftenusedrespectingitsnationalimportance。Credithasa
great，butnot，asmanypeopleseemtosuppose，amagicalpower;
itcannotmakesomethingoutofnothing。Howoftenisan
extensionofcredittalkedofasequivalenttoacreationof
capital，orasifcreditactuallywerecapital。Itseemsstrange
thatthereshouldbeanyneedtopointout，thatcreditbeing
onlypermissiontousethecapitalofanotherperson，themeans
ofproductioncannotbeincreasedbyit，butonlytransferred。If
theborrower’smeansofproductionandofemployinglabourare
increasedbythecreditgivenhim，thelender’sareasmuch
diminished。Thesamesumcannotbeusedascapitalbothbythe
ownerandalsobythepersontowhomitislent:itcannotsupply
itsentirevalueinwages，tools，andmaterials，totwosetsof
labourersatonce。ItistruethatthecapitalwhichAhas
borrowedfromB，andmakesuseofinhisbusiness，stillforms
partofthewealthofBforotherpurposes:hecanenterinto
arrangementsinrelianceonit，andcanborrow，whenneedful，an
equivalentsumonthesecurityofit;sothattoasuperficial
eyeitmightseemasifbothBandAhadtheuseofitatonce。
ButthesmallestconsiderationwillshowthatwhenBhasparted
withhiscapitaltoA，theuseofitascapitalrestswithA
alone，andthatBhasnootherservicefromitthaninsofaras
hisultimateclaimuponitserveshimtoobtaintheuseof
anothercapitalfromathirdpersonC。Allcapital（nothisown）
ofwhichanypersonhasreallytheuse，is，andmustbe，somuch
subtractedfromthecapitalofsomeoneelse。（1*）
2。Butthoughcreditisbutatransferofcapitalfromhand
tohand，itisgenerally，andnaturally，atransfertohandsmore
competenttoemploythecapitalefficientlyinproduction。If
therewerenosuchthingascredit，orif，fromgeneral
insecurityandwantofconfidence，itwerescantilypractised，
manypersonswhopossessmoreorlessofcapital，butwho，from
theiroccupations，orforwantofthenecessaryskilland
knowledge，cannotpersonallysuperintenditsemployment，would
derivenobenefitfromit:theirfundswouldeitherlieidle，or
wouldbe，perhaps，wastedandannihilatedinunskilfulattempts
tomakethemyieldaprofit。Allthiscapitalisnowlentat
interest，andmadeavailableforproduction。Capitalthus
circumstancedformsalargeportionoftheproductiveresources
ofanycommercialcountry;andisnaturallyattractedtothose
producersortraderswho，beinginthegreatestbusiness，have
themeansofemployingittomostadvantage;becausesuchare
boththemostdesiroustoobtainit，andabletogivethebest
security。Although，therefore，theproductivefundsofthe
countryarenotincreasedbycredit，theyarecalledintoamore
completestateofproductiveactivity。Astheconfidenceonwhich
creditisgroundedextendsitself，meansaredevelopedbywhich
eventhesmallestportionsofcapital，thesumswhicheachperson
keepsbyhimtomeetcontingencies，aremadeavailablefor
productiveuses。Theprincipalinstrumentsforthispurposeare
banksofdeposit。Wherethesedonotexist，aprudentpersonmust
keepasufficientsumunemployedinhisownpossession，tomeet
everydemandwhichhehasevenaslightreasonforthinking
himselfliableto。Whenthepractice，however，hasgrownupof
keepingthisreservenotinhisowncustodybutwithabanker，
manysmallsums，previouslylyingidle，becomeaggregatedinthe
banker’shands;andthebanker，beingtaughtbyexperiencewhat
proportionoftheamountislikelytobewantedinagiventime，
andknowingthatifonedepositorhappenstorequiremorethan
theaverage，anotherwillrequireless，isabletolendthe
remainder，thatis，thefargreaterpart，toproducersand
dealers:therebyaddingtheamount，notindeedtothecapitalin
existence，buttothatinemployment，andmakingacorresponding
additiontotheaggregateproductionofthecommunity。
Whilecreditisthusindispensableforrenderingthewhole
capitalofthecountryproductive，itisalsoameansbywhich
theindustrialtalentofthecountryisturnedtobetteraccount
forpurposesofproduction。Manyapersonwhohaseitherno
capitalofhisown，orverylittle，butwhohasqualifications
forbusinesswhichareknownandappreciatedbysomepossessors
ofcapital，isenabledtoobtaineitheradvancesinmoney，or
morefrequentlygoodsoncredit，bywhichhisindustrial
capacitiesaremadeinstrumentaltotheincreaseofthepublic
wealth;andthisbenefitwillbereapedfarmorelargely，
whenever，throughbetterlawsandbettereducation，thecommunity
shallhavemadesuchprogressinintegrity，thatpersonal
charactercanbeacceptedasasufficientguaranteenotonly
againstdishonestlyappropriating，butagainstdishonestly
risking，whatbelongstoanother。
Suchare，inthemostgeneralpointofview，theusesof
credittotheproductiveresourcesoftheworld。Butthese
considerationsonlyapplytothecreditgiventotheindustrious
classes—toproducersanddealers。Creditgivenbydealersto
unproductiveconsumersisneveranaddition，butalwaysa
detriment，tothesourcesofpublicwealth。Itmakesoverin
temporaryuse，notthecapitaloftheunproductiveclassestothe
productive，butthatoftheproductivetotheunproductive。IfA，
adealer，suppliesgoodstoB，alandownerorannuitant，tobe
paidforattheendoffiveyears，asmuchofthecapitalofAas
isequaltothevalueofthesegoods，remainsforfiveyears
unproductive。Wringsuchaperiod，ifpaymenthadbeenmadeat
once，thesummighthavebeenseveraltimesexpendedand
replaced，andgoodstotheamountmighthavebeenseveraltimes
produced，consumed，andreproduced:consequentlyB’swithholding
100l。forfiveyears，evenifhepaysatlast，hascosttothe
labouringclassesofthecommunityduringthatperiodanabsolute
lossofprobablyseveraltimesthatamount。A，individually，is
compensated，byputtingahigherpriceuponhisgoods，whichis
ultimatelypaidbyB:butthereisnocompensationmadetothe
labouringclasses，thechiefsufferersbyeverydiversionof
capital，whetherpermanentlyortemporarily，tounproductive
uses。Thecountryhashad100l。lessofcapitalduringthosefive
years，BhavingtakenthatamountfromA’scapital，andspentit
unproductively，inanticipationofhisownmeans，andhavingonly
afterfiveyearssetapartasumfromhisincomeandconvertedit
intocapitalforthepurposeofindemnifyingA。
3。ThusfarofthegeneralfunctionsofCreditinproduction。
Itisnotaproductivepowerinitself，though，withoutit，the
productivepowersalreadyexistingcouldnotbebroughtinto
completeemployment。Butamoreintricateportionofthetheory
ofCreditisitsinfluenceonprices;thechiefcauseofmostof
themercantilephenomenawhichperplexobservers。Inastateof
commerceinwhichmuchcreditishabituallygiven，generalprices
atanymomentdependmuchmoreuponthestateofcreditthanupon
thequantityofmoney。Forcredit，thoughitisnotproductive
power，ispurchasingpower;andapersonwho，havingcredit，
availshimselfofitinthepurchaseofgoods，createsjustas
muchdemandforthegoods，andtendsquiteasmuchtoraisetheir
price，asifhemadeanequalamountofpurchaseswithready
money。
Thecreditwhichwearenowcalledupontoconsider，asa
distinctpurchasingpower，independentofmoney，isofcoursenot
creditinitssimplestform，thatofmoneylentbyonepersonto
another，andpaiddirectlyintohishands;forwhentheborrower
expendsthisinpurchases，hemakesthepurchaseswithmoney，not
credit，andexertsnopurchasingpoweroverandabovethat
conferredbythemoney。Theformsofcreditwhichcreate
purchasingpower，arethoseinwhichnomoneypassesatthetime，
andveryoftennonepassesatall，thetransactionbeingincluded
withamassofothertransactionsinanaccount，andnothingpaid
butabalance。Thistakesplaceinavarietyofways，whichwe
shallproceedtoexamine，beginning，asisourcustom，withthe
simplest。
First:SupposeAandBtobetwodealers，whohave
transactionswitheachotherbothasbuyersandassellers。A
buysfromBoncredit。BdoesthelikewithrespecttoA。Atthe
endoftheyear，thesumofA’sdebtstoBissetagainstthesum
ofB’sdebtstoA，anditisascertainedtowhichsideabalance
isdue。Thisbalance，whichmaybelessthantheamountofmany
ofthetransactionssingly，andisnecessarilylessthanthesum
ofthetransactions，isallthatispaidinmoney。andperhaps
eventhisisnotpaid，butcarriedoverinanaccountcurrentto
thenextyear。Asinglepaymentofahundredpoundsmayinthis
mannersufficetoliquidatealongseriesoftransactions，some
ofthemtothevalueofthousands。
Butsecondly。ThedebtsofAtoBmaybepaidwithoutthe
interventionofmoney，eventhoughtherebenoreciprocaldebts
ofBtoA。AmaysatisfyBbymakingovertohimadebtdueto
himselffromathirdperson，C。Thisisconvenientlydoneby
meansofawritteninstrument，calledabillofexchange，which
is，infact，atransferableorderbyacreditoruponhisdebtor，
andwhenacceptedbythedebtor，thatisauthenticatedbyhis
signature，becomesanacknowledgmentofdebt。
4。Billsofexchangewerefirstintroducedtosavethe
expenseandriskoftransportingthepreciousmetalsfromplace
toplace。\"Letitbesupposed，\"saysMrHenryThornton，（2*）\"that
thereareinLondontenmanufacturerswhoselltheirarticleto
tenshopkeepersinYork，bywhomitisretailed;andthatthere
areinYorktenmanufacturersofanothercommodity，whosellit
totenshopkeepersinLondon。Therewouldbenooccasionforthe
tenshopkeepersinLondontosendyearlytoYorkguineasforthe
paymentoftheYorkmanufacturers，andforthetenYork
shopkeeperstosendyearlyasmanyguineastoLondon。Itwould
onlybenecessaryfortheYorkmanufacturerstoreceivefromeach
oftheshopkeepersattheirowndoorthemoneyinquestion，
givinginreturnletterswhichshouldacknowledgethereceiptof
it;andwhichshouldalsodirectthemoney，lyingreadyinthe
handsoftheirdebtorsinLondon，tobepaidtotheLondon
manufacturers，soastocancelthedebtinLondoninthesame
mannerasthatatYork。Theexpenseandtheriskofall
transmissionofmoneywouldthushesaved。Lettersorderingthe
transferofthedebtaretermed，inthelanguageofthepresent
day，billsofexchange。Theyarebillsbywhichthedebtofone
personisexchangedforthedebtofanother;andthedebt，
perhaps，whichisdueinoneplace，forthedebtdueinanother。\"
Billsofexchangehavingbeenfoundconvenientasmeansof
payingdebtsatdistantplaceswithouttheexpenseof
transportingthepreciousmetals，theirusewasafterwards
greatlyextendedfromanothermotive。Itisusualineverytrade
togiveacertainlengthofcreditforgoodsbought:three
months，sixmonths，ayear，eventwoyears，accordingtothe
convenienceorcustomoftheparticulartrade。Adealerwhohas
soldgoods，forwhichheistobepaidinsixmonths，butwho
desirestoreceivepaymentsooner，drawsabillonhisdebtor
payableinsixmonths，andgetsthebilldiscountedbyabanker
orothermoney—lender，thatis，transfersthebilltohim，
receivingtheamount，minusinterestforthetimeithasstillto
run。Ithasbecomeoneofthechieffunctionsofbillsof
exchangetoserveasameansbywhichadebtduefromoneperson
canthusbemadeavailableforobtainingcreditfromanother。The
convenienceoftheexpedienthasledtothefrequentcreationof
billsofexchangenotgroundedonanydebtpreviouslyduetothe
drawerofthebillbythepersononwhomitisdrawn。Theseare
calledaccommodationbills;andsometimes，withatingeof
disapprobation，fictitiousbills。Theirnatureissoclearly
stated，andwithsuchjudiciousremarks，bytheauthorwhomI
havejustquoted，thatIshalltranscribetheentirepassage。（3*）
\"A，beinginwantof100l。，requestsBtoacceptanoteor
billdrawnattwomonths，whichB，therefore，onthefaceofit，
isboundtopay;itisunderstood，however，thatAwilltakecare
eithertodischargethebillhimself，ortofurnishBwiththe
meansofpayingit。Aobtainsreadymoneyforthebillonthe
jointcreditofthetwoparties。Afulfilshispromiseofpaying
itwhendue，andthusconcludesthetransaction。Thisservice
renderedbyBtoAis，however，notunlikelytoberequited，ata
moreorlessdistantperiod，byasimilaracceptanceofabillon
A，drawnanddiscountedforB’sconvenience。
\"Letusnowcomparesuchabillwitharealbill。Letus
considerinwhatpointstheydiffer，orseemtodiffer。andin
whattheyagree。
\"Theyagree，inasmuchaseachisadiscountablearticle;each
hasalsobeencreatedforthepurposeofbeingdiscounted;and
eachis，perhaps，discountedinfact。Each，therefore，serves
equallytosupplymeansofspeculationtothemerchant。Sofar，
moreover，asbillsandnotesconstitutewhatiscalledthe
circulatingmedium，orpapercurrencyofthecountry，andprevent
theuseofguineas，thefictitiousandtherealbillareuponan
equality。andifthepriceofcommoditiesberaisedinproportion
tothequantityofpapercurrency，theonecontributestothat
riseexactlyinthesamemannerastheother。
\"Beforewecometothepointsinwhichtheydiffer，letus
adverttoonepointinwhichtheyarecommonlysupposedtobe
unlike;butinwhichtheycannotbesaidalwaysornecessarilyto
differ。
\"Realnotes（itissometimessaid）representactualproperty。
Thereareactualgoodsinexistence，whicharethecounterpartto
everyrealnote。Noteswhicharenotdrawninconsequenceofa
saleofgoods，areaspeciesoffalsewealth，bywhichanation
isdeceived。Thesesupplyonlyanimaginarycapital;theothers
indicateonethatisreal。
\"Inanswertothisstatementitmaybeobserved，first，that
thenotesgiveninconsequenceofarealsaleofgoodscannotbe
consideredasonthataccountcertainlyrepresentinganyactual
property。SupposethatAsells100l。worthofgoodstoBatsix
months’credit，andtakesabillatsixmonthsforit;andthat
B，withinamonthafter，sellsthesamegoods，atalikecredit，
toC，takingalikebill;andagain，thatC，afteranothermonth，
sellsthemtoD，takingalikebill，andsoon。Theremaythen，
attheendofsixmonths，besixbillsof100l。each，existingat
thesametime;andeveryoneofthesemaypossiblyhavebeen
discounted。Ofallthesebills，then，onlyonerepresentsany
actualproperty。
\"Inordertojustifythesuppositionthatarealbill（asit
iscalled）representsactualproperty，thereoughttobesome
powerinthebill—holdertopreventthepropertywhichthebill
represents，frombeingturnedtootherpurposesthanthatof
payingthebillinquestion。Nosuchpowerexists;neitherthe
manwhoholdstherealbill，northemanwhodiscountsit，has
anypropertyinthespecificgoodsforwhichitwasgiven:heas
muchtruststothegeneralabilitytopayofthegiverofthe
bill，astheholderofanyfictitiousbilldoes。Thefictitious
billmay，inmanycases，beabillgivenbyapersonhavinga
largeandknowncapital，apartofwhichthefictitiousbillmay
besaidinthatcasetorepresent。Thesuppositionthatreal
billsrepresentproperty，andthatfictitiousbillsdonot，
seems，therefore，tobeonebywhichmorethanjusticeisdoneto
oneofthesespeciesofbills，andsomethinglessthanjusticeto
theother。
\"Wecomenexttosomepointinwhichtheydiffer。
\"First，thefictitiousnote，ornoteofaccommodation，is
liabletotheobjectionthatitprofessestobewhatitisnot。
Thisobjection，however，liesonlyagainstthosefictitiousbills
whicharepassedasreal。Inmanycasesitissufficiently
obviouswhattheyare。Secondly，thefictitiousbillis，in
general，lesslikelytobepunctuallypaidthantherealone。
Thereisageneralpresumption，thatthedealerinfictitious
billsisamanwhoisamoreadventurousspeculatorthanhewho
carefullyabstainsfromthem。Itfollows，thirdly，that
fictitiousbills，besidesbeinglesssafe，arelesssubjectto
limitationastotheirquantity。Theextentofaman’sactual
salesformssomelimittotheamountofhisrealnotes;andasit
ishighlydesirableincommercethatcreditshouldbedealtout
toallpersonsinsomesortofregularanddueproportion，the
measureofaman’sactualsales，certifiedbytheappearanceof
hisbillsdrawninvirtueofthosesales，issomeruleinthe
case，thoughaveryimperfectoneinmanyrespects。
\"Afictitiousbill，orbillofaccommodation，isevidentlyin
substancethesameasanycommonpromissorynote;andevenbetter
inthisrespect，thatthereisbutonesecuritytothepromissory
note，whereasinthecaseofthebillofaccommodation，thereare
two。Somuchjealousysubsistslesttradersshouldpushtheir
meansofraisingmoneytoofar，thatpaper，thesameinits
generalnaturewiththatwhichisgiven，beingtheonlypaper
whichcanbegiven，bymenoutofbusiness，isdeemedsomewhat
discreditablewhencomingfromamerchant。Andbecausesuch
paper，wheninthemerchant’shand，necessarilyimitatesthe
paper，whichpassesontheoccasionofasaleofgoods，the
epithetfictitioushasbeencastuponit;anepithetwhichhaS
seemedtocountenancetheconfusedandmistakennotion，that
thereissomethingaltogetherfalseanddelusiveinthenatureof
acertainpartbothofthepaperandoftheapparentwealthof
thecountry。\"
Abillofexchange，whenmerelydiscounted，andkeptinthe
portfolioofthediscounteruntilitfallsdue，doesnotperform
thefunctionsorsupplytheplaceofmoney，butisitselfbought
andsoldformoney。Itisnomorecurrencythanthepublicfunds，
oranyothersecurities。Butwhenabilldrawnupononepersonis
paidtoanother（oreventothesameperson）indischargeofa
debtorapecuniaryclaim，itdoessomethingforwhich，ifthe
billdidnotexist，moneywouldberequired:itperformsthe
functionsofcurrency。Thisisausetowhichbillsofexchange
areoftenapplied。\"Theynotonly，\"continuesMr。Thornton，（4*）
\"sparetheuseofreadymoney;theyalsooccupyitsplaceinmany
cases。Letusimagineafarmerinthecountrytodischargeadebt
of10l。tohisneighbouringgrocer，bygivinghimabillforthat
sum，drawnonhiscorn—factorinLondonforgrainsoldinthe
metropolis;andthegrocertotransitthebill，hehaving
previouslyindorsedittoaneighbouringsugar—baker，in
dischargeofalikedebt;andthesugar—bakertosendit，when
againindorsed，toaWestIndiamerchantinanoutport，andthe
WestIndiamerchanttodeliverittohiscountrybanker，whoalso
indorsesit，andsendsitintofurthercirculation。Thebillin
thiscasewillhaveeffectedfivepayments，exactlyasifitwere
a10l。notepayabletoabearerondemand。Amultitudeofbills
passbetweentraderandtraderinthecountry，inthemanner
whichhasbeendescribed;andtheyevidentlyform，inthe
strictestsense，apartofthecirculatingmediumofthe
kingdom。\"
Manybills，bothdomesticandforeign，areatleastpresented
forpaymentquitecoveredwithindorsements，eachofwhich
representseitherafreshdiscounting，orapecuniarytransaction
inwhichthebillhasperformedthefunctionsofmoney。Within
thepresentgeneration，thecirculatingmediumofLancashirefor
sumsabovefivepounds，wasalmostentirelycomposedofsuch
bills。
5。Athirdforminwhichcreditisemployedasasubstitute
forcurrency，isthatofpromissorynotes。Abilldrawnuponany
oneandacceptedbyhim，andanoteofhandbyhimpromisingto
paythesamesum，are，asfarasheisconcerned，exactly
equivalent，exceptthattheformercommonlybearsinterestand
thelattergenerallydoesnot’。andthattheformeriscommonly
payableonlyafteracertainlapseoftime，andthelatter
payableatsight。Butitischieflyinthelatterformthatit
hasbecomeincommercialcountries，anexpressoccupationto
issuesuchsubstitutesformoney。Dealersinmoney（aslendersby
professionareimproperlycalled）desire，likeotherdealers，to
stretchtheiroperationsbeyondwhatcanbecarriedonbytheir
ownmeans:theywishtolend，nottheircapitalmerely，buttheir
credit，andnotonlysuchportionoftheircreditasconsistsof
fundsactuallydepositedwiththem，buttheirpowerofobtaining
creditfromthepublicgenerally，sofarastheythinktheycan
safelyemployit。Thisisdoneinaveryconvenientmannerby
lendingtheirownpromissorynotespayabletobearerondemand:
theborrowerbeingwillingtoaccepttheseassomuchmoney，
becausethecreditofthelendermakesotherpeoplewillingly
receivethemonthesamefooting，inpurchasesorotherpayments。
Thesenotes，therefore，performallthefunctionsofcurrency，
andrenderanequivalentamountofmoneywhichwaspreviouslyin
circulation，unnecessary。As，however，beingpayableondemand，
theymaybeatanytimereturnedontheissuer，andmoney
demandedforthem，hemust，onpainofbankruptcy，keepbyhimas
muchmoneyaswillenablehimtomeetanyclaimsofthatsort
whichcanbeexpectedtooccurwithinthetimenecessaryfor
providinghimselfwithmore:andprudencealsorequiresthathe
shouldnotattempttoissuenotesbeyondtheamountwhich
experienceshowscanremainincirculationwithoutbeing
presentedforpayment。
Theconvenienceofthismodeof（asitwere）coiningcredit，
havingoncebeendiscovered，governmentshaveavailedthemselves
ofthesameexpedient，andhaveissuedtheirownpromissorynotes
inpaymentoftheirexpenses;aresourcethemoreuseful，because
itistheonlymodeinwhichtheyareabletoborrowmoney
withoutpayinginterest，theirpromisestopayondemandbeing，
intheestimationoftheholders，equivalenttomoneyinhand。
Thepracticaldifferencesbetweensuchgovernmentnotesandthe
issuesofprivatebankers，andthefurtherdiversitiesofwhich
thisclassofsubstitutesformoneyaresusceptible，willbe
consideredpresently。
6。Afourthmodeofmakingcreditanswerthepurposesof
money，bywhich，whencarriedfarenough，moneymaybevery
completelysuperseded，consistsinmakingpaymentsbycheques。
Thecustomofkeepingthesparecashreservedforimmediateuse
oragainstcontingentdemands，inthehandsofabanker，and
makingallpayments，exceptsmallones，byordersonbankers，is
inthiscountryspreadingtoacontinuallylargerportionofthe
public。Ifthepersonmakingthepayment，andtheperson
receivingit，keeptheirmoneywiththesamebanker，thepayment
takesplacewithoutanyinterventionofmoney，bythemere
transferofitsamountinthebanker’sbooksfromthecreditof
thepayertothatofthereceiver。IfallpersonsinLondonkept
theircashatthesamebanker’sandmadealltheirpaymentsby
meansofcheques，nomoneywouldberequiredorusedforany
transactionsbeginningandterminatinginLondon。Thisideal
limitisalmostattainedinfact，sofarasregardstransactions
betweendealers。Itischieflyintheretailtransactionsbetween
dealersandconsumers，andinthepaymentofwages，thatmoneyor
banknotesnowpass，andthenonlywhentheamountsaresmall。In
London，evenshopkeepersofanyamountofcapitalorextentof
businesshavegenerallyanaccountwithabanker;which，besides
thesafetyandconvenienceofthepractice，istotheiradvantage
inanotherrespect，bygivingthemanunderstoodclaimtohave
theirbillsdiscountedincaseswhentheycouldnototherwise
expectit。Asforthemerchantsandlargerdealers，they
habituallymakeallpaymentsinthecourseoftheirbusinessby
cheques。Theydonot，however，alldealwiththesamebanker，and
whenAgivesachequetoB，Busuallypaysitnotintothesame
butintosomeotherbank。Buttheconvenienceofbusinesshas
givenbirthtoanarrangementwhichmakesallthebankinghouses
oftheCityofLondon，forcertainpurposes，virtuallyone
establishment。Abankerdoesnotsendthechequeswhicharepaid
intohisbankinghouse，tothebanksonwhichtheyaredrawn，and
demandmoneyforthem。Thereisabuildingcalledthe
Clearing—house，towhicheveryCitybankersends，eachafternoon，
allthechequesonotherbankerswhichhehasreceivedduringthe
day，andtheyarethereexchangedforthechequesonhimwhich
havecomeintothehandsofotherbankers，thebalancesonly
beingpaidinmoney;oreventhesenotinmoney，butincheques
ontheBankofEngland。Bythiscontrivance，allthebusiness
transactionsoftheCityofLondonduringthatday，amounting
oftentomillionsofpounds，andavastamountbesidesofcountry
transactions，representedbybillswhichcountrybankershave
drawnupontheirLondoncorrespondents，areliquidatedby
paymentsnotexceedingontheaverage200，000l。（5*）
Bymeansofthevariousinstrumentsofcreditwhichhavenow
beenexplained，theimmensebusinessofacountrylikeGreat
Britainistransactedwithanamountofthepreciousmetals
surprisinglysmall;manytimessmaller，inproportiontothe
pecuniaryvalueofthecommoditiesboughtandsold，thanisfound
necessaryinFrance，oranyothercountryinwhich，thehabitand
thedispositiontogivecreditnotbeingsogenerallydiffused，
these\"economizingexpedients，\"astheyhavebeencalled，arenot
practisedtothesameextent。Whatbecomesofthemoneythus
supersededinitsfunctions，andbywhatprocessitismadeto
disappearfromcirculation，arequestionsthediscussionofwhich
mustbeforashorttimepostponed。
NOTES:
1。Tomakethepropositioninthetextstrictlytrue，a
corrective，thoughaveryslightone，requirestobemade。The
circulatingmediumexistinginacountryatagiventime，is
partlyemployedinpurchasesforproductive，andpartlyfor
unproductiveconsumption。Accordingasalargerproportionofit
isemployedintheonewayorintheother，therealcapitalof
thecountryisgreaterorless。If，then，anadditionweremade
tothecirculatingmediuminthehandsofunproductiveconsumers
exclusively，alargerportionoftheexistingstockof
commoditieswouldbeboughtforunproductiveconsumption，anda
smallerforproductive，whichstateofthings，whileitlasted，
wouldbeequivalenttoadiminutionofcapital;andonthe
contrary，iftheadditionmadebetotheportionofthe
circulatingmediumwhichisinthehandsofproducers，and
destinedfortheirbusiness，agreaterportionofthecommodities
inthecountrywillforthepresentbeemployedascapital，anda
lessportionunproductively。Nowaneffectofthislatter
characternaturallyattendssomeextensionsofcredit，especially
whentakingplaceintheformofbanknotes，orotherinstruments
ofexchange。Theadditionalbanknotesare，inordinarycourse，
firstissuedtoproducersordealers，tobeemployedascapital:
andthoughthestockofcommoditiesinthecountryisnogreater
thanbefore，yetasagreatershareofthatstocknowcomesby
purchaseintothehandsofproducersanddealers，tothatextent
whatwouldhavebeenunproductivelyconsumedisappliedto
production，andthereisarealincreaseofcapital。Theeffect
ceases，andacounter—processtakesplace，whentheadditional
creditisstopped，andthenotescalledin。
2。EnquiryintotheNatureandEffectsofthePaperCreditof
GreatBritain，p。24。Thiswork，publishedin1802，isevennow
theclearestexpositionthatIamacquaintedwith，intheEnglish
language，ofthemodesinwhichcreditisgivenandtakenina
mercantilecommunity。
3。Pp。29—33。
4。P。40。
5。AccordingtoMr。Tooke（InquiryintotheCurrencyPrinciple，
p。27）theadjustmentsattheclearing—house\"intheyear1839
amountedto954，401，600l。，makinganaverageamountofpayments
ofupwardsof3，000，000l。ofbillsofexchangeandchequesdaily
effectedthroughthemediumoflittlemorethan200，0001。ofbank
notes。\"Atpresentaverymuchgreateramountoftransactionsis
dailyliquidated，withoutbanknotesatall，chequesontheBank
ofEnglandsupplyingtheirplace。
ThePrinciplesofPoliticalEconomy
byJohnStuartMill
Book3:Distribution
Chapter12
InfluenceofCreditonMoney
1。Havingnowformedageneralideaofthemodesinwhich
creditismadeavailableasasubstituteformoney，wehaveto
considerinwhatmannertheuseofthesesubstitutesaffectsthe
valueofmoney，or，whatisequivalent，thepricesof
commodities。Itishardlynecessarytosaythatthepermanent
valueofmoney——thenaturalandaveragepricesofcommodities
——arenotinquestionhere。Thesearedeterminedbythecostof
producingorofobtainingthepreciousmetals。Anounceofgold
orsilverwillinthelongrunexchangeforasmuchofevery
othercommodity，ascanbeproducedorimportedatthesamecost
withitself。Andanorder，ornoteofhand，orbillpayableat
sight，foranounceofgold，whilethecreditofthegiveris
unimpaired，isworthneithermorenorlessthanthegolditself。
Itisnot，however，withultimateoraverage，butwith
immediateandtemporaryprices，thatwearenowconcerned。These，
aswehaveseen，maydeviateverywidelyfromthestandardof
costofproduction。Amongothercausesoffluctuation，onewe
havefoundtobe，thequantityofmoneyincirculation。Other
thingsbeingthesame，anincreaseofthemoneyincirculation
raisesprices，adiminutionlowersthem。Ifmoremoneyisthrown
intocirculationthanthequantitywhichcancirculateatavalue
conformabletoitscostofproduction，thevalueofmoney，so
longastheexcesslasts，willremainbelowthestandardofcost
ofproduction，andgeneralpriceswillbesustainedabovethe
naturalrate。
Butwehavenowfoundthatthereareotherthings，suchas
banknotes，billsofexchange，andcheques，whichcirculateas
money，andperformallthefunctionsofit:andthequestion
arises，Dothesevarioussubstitutesoperateonpricesinthe
samemannerasmoneyitself？Doesanincreaseinthequantityof
transferablepapertendtoraiseprices，inthesamemannerand
degreeasanincreaseinthequantityofmoney？Therehasbeenno
smallmountofdiscussiononthispointamongwriterson
currency，withoutanyresultsoconclusiveastohaveyet
obtainedgeneralassent。
Iapprehendthatbanknotes，bills，orcheques，assuch，do
notactonpricesatall。WhatdoesactonpricesisCredit，in
whatevershapegiven，andwhetheritgivesrisetoany
transferableinstrumentscapableofpassingintocirculation，or
not。
Iproceedtoexplainandsubstantiatethisopinion。
2。Moneyactsuponpricesinnootherwaythanbybeing
tenderedinexchangeforcommodities。Thedemandwhichinfluences
thepricesofcommoditiesconsistsofthemoneyofferedforthem。
Butthemoneyoffered，isnotthesamethingwiththemoney
possessed。Itissometimesless，sometimesverymuchmore。Inthe
longrunindeed，themoneywhichpeoplelayoutwillbeneither
morenorlessthanthemoneywhichtheyhavetolayout:butthis
isfarfrombeingthecaseatanygiventime。Sometimestheykeep
moneybythemforfearofanemergency，orinexpectationofa
moreadvantageousopportunityforexpendingit。Inthatcasethe
moneyissaidnottobeincirculation:inplainerlanguage，it
isnotoffered，norabouttoheoffered，forcommodities。Money
notincirculationhasnoeffectonprices。Theconverse，
however，isamuchcommonercase;peoplemakepurchaseswith
moneynotintheirpossession。Anarticle，forinstance，whichis
paidforbyachequeonabanker，isboughtwithmoneywhichnot
onlyisnotinthepayer’spossession，butgenerallynotevenin
thebanker’s，havingbeenlentbyhim（allbuttheusualreserve）
tootherpersons。Wejustnowmadetheimaginarysuppositionthat
allpersonsdealtwithabank，andallwiththesamebank，
paymentsbeinguniversallymadebycheques。Inthisidealcase，
therewouldbenomoneyanywhereexceptinthehandsofthe
banker:whomightthensafelypartwithallofit，bysellingit
asbullion，orlendingit，tobesentoutofthecountryin
exchangeforgoodsorforeignsecurities。Butthoughtherewould
thenbenomoneyinpossession，orultimatelyperhapsevenin
existence，moneywouldbeoffered，andcommoditiesboughtwith
it，justasatpresent。Peoplewouldcontinuetoreckontheir
incomesandtheircapitalsinmoney，andtomaketheirusual
purchaseswithordersforthereceiptofathingwhichwouldhave
literallyceasedtoexist。Therewouldbeinallthisnothingto
complainof，solongasthemoney，indisappearing，leftan
equivalentvalueinotherthings，applicablewhenrequiredtothe
reimbursementofthosetowhomthemoneyoriginallybelonged。
Inthecasehoweverofpaymentbycheques，thepurchasesare
atanyratemade，thoughnotwithmoneyinthebuyer’s
possession，yetwithmoneytowhichhehasaright。Buthemay
makepurchaseswithmoneywhichheonlyexpectstohave，oreven
onlypretendstoexpect。Hemayobtaingoodsinreturnforhis
acceptancespayableatafuturetime;oronhisnoteofhand;or
onasimplebookcredit，thatis，onamerepromisetopay。All
thesepurchaseshaveexactlythesameeffectonprice，asifthey
weremadewithreadymoney。Theamountofpurchasingpowerwhich
apersoncanexerciseiscomposedofallthemoneyinhis
possessionorduetohim，andofallhiscredit。Forexercising
thewholeofthispowerhefindsasufficientmotiveonlyunder
peculiarcircumstances;buthealwayspossessesit;andthe
portionofitwhichheatanytimedoesexercise，isthemeasure
oftheeffectwhichheproducesonprice。
Supposethat，intheexpectationthatsomecommoditywill
riseinprice，hedetermines，notonlytoinvestinitallhis
readymoney，buttotakeuponcredit，fromtheproducersor
importers，asmuchofitastheiropinionofhisresourceswill
enablehimtoobtain。Everyonemustseethatbythusactinghe
producesagreatereffectonprice，thanifhelimitedhis
purchasestothemoneyhehasactuallyinhand。Hecreatesa
demandforthearticletothefullamountofhismoneyandcredit
takentogether，andraisesthepriceproportionallytoboth。And
thiseffectisproduced，thoughnoneofthewritteninstruments
calledsubstitutesforcurrencymaybecalledintoexistence;
thoughthetransactionmaygiverisetonobillofexchange，nor
totheissueofasinglebanknote。Thebuyer，insteadoftaking
amerebookcredit，mighthavegivenabillfortheamount;or
mighthavepaidforthegoodswithbanknotesborrowedforthat
purposefromahanker，thusmakingthepurchasenotonhisown
creditwiththeseller，butonthebanker’screditwiththe
seller，andhisownwiththebanker。Hadhedoneso，hewould
haveproducedasgreataneffectonpriceasbyasimplepurchase
tothesameamountonabookcredit，butnogreatereffect。The
credititself，nottheformandmodeinwhichitisgiven，isthe
operatingcause。
3。Theinclinationofthemercantilepublictoincreasetheir
demandforcommoditiesbymakinguseofallormuchoftheir
creditasapurchasingpower，dependsontheirexpectationof
profit。Whenthereisageneralimpressionthatthepriceofsome
commodityislikelytorise，fromanextrademand，ashortcrop，
obstructionstoimportation，oranyothercause，thereisa
dispositionamongdealerstoincreasetheirstocks，inorderto
profitbytheexpectedrise。Thisdispositiontendsinitselfto
producetheeffectwhichitlooksforwardto，ariseofprice:
andiftheriseisconsiderableandprogressive，other
speculatorsareattracted，who，solongasthepricehasnot
beguntofall，arewillingtobelievethatitwillcontinue
rising。These，byfurtherpurchases，produceafurtheradvance:
andthusariseofpriceforwhichtherewereoriginallysome
rationalgrounds，isoftenheightenedbymerelyspeculative
purchases，untilitgreatlyexceedswhattheoriginalgrounds
willjustify。Afteratimethisbeginstobeperceived;theprice
ceasestorise，andtheholders，thinkingittimetorealize
theirgains，areanxioustosell。Thenthepricebeginsto
decline:theholdersrushintothemarkettoavoidastill
greaterloss，and，fewbeingwillingtobuyinafallingmarket，
thepricefallsmuchmoresuddenlythanitrose。Thosewhohave
boughtatahigherpricethanreasonablecalculationjustified，
andwhohavebeenovertakenbytherevulsionbeforetheyhad
realized，arelosersinproportiontothegreatnessofthefall，
andtothequantityofthecommoditywhichtheyhold，orhave
boundthemselvestopayfor。
Nowalltheseeffectsmighttakeplaceinacommunityto
whichcreditwasunknown:thepricesofsomecommoditiesmight
risefromspeculation，toanextravagantheight，andthenfall
rapidlyback。Butiftherewerenosuchthingascredit，this
couldhardlyhappenwithrespecttocommoditiesgenerally。Ifall
purchasesweremadewithreadymoney，thepaymentofincreased
pricesforsomearticleswoulddrawanunusualproportionofthe
moneyofthecommunityintothemarketsforthosearticles，and
mustthereforedrawitawayfromsomeotherclassofcommodities，
andthuslowertheirprices。Thevacuummight，itistrue，be
partlyfilledupbyincreasedrapidityofcirculation;andin
thismannerthemoneyofthecommunityisvirtuallyincreasedin
atimeofspeculativeactivity，becausepeoplekeeplittleofit
bythem，buthastentolayitoutinsometemptingadventureas
soonaspossibleaftertheyreceiveit。Thisresource，however，
islimited:onthewhole，peoplecannot，whilethequantityof
moneyremains。thesame，layoutmuchmoreofitinsomethings，
withoutlayingoutlessinothers。Butwhattheycannotdoby
readymoney，theycandobyanextensionofcredit。Whenpeople
gointothemarketandpurchasewithmoneywhichtheyhopeto
receivehereafter，theyaredrawinguponanunlimited，nota
limitedfund。Speculation，thussupported，maybegoingoninany
numberofcommodities，withoutdisturbingtheregularcourseof
businessinothers。Itmightevenbegoingoninallcommodities
atonce。Wecouldimaginethatinanepidemicfitofthepassion
ofgambling，alldealers，insteadofgivingonlytheiraccustomed
orderstothemanufacturersorgrowersoftheircommodity，
commencedbuyingupallofitwhichtheycouldprocure，asfaras
theircapitalandcreditwouldgo。Allpriceswouldrise
enormously，eveniftherewerenoincreaseofmoney，andnopaper
credit，butamereextensionofpurchasesonbookcredits。After
atimethosewhohadboughtwouldwishtosell，andpriceswould
collapse。
Thisistheidealextremecaseofwhatiscalledacommercial
crisis。Thereissaidtobeacommercialcrisis，whenagreat
numberofmerchantsandtradersatonce，eitherhave，or
apprehendthattheyshallhave，adifficultyinmeetingtheir
engagements。Themostusualcauseofthisgeneralembarrassment，
istherecoilofpricesaftertheyhavebeenraisedbyaspirit
ofspeculation，intenseindegree，andextendingtomany
commodities。Someaccidentwhichexcitesexpectationsofrising
prices，suchastheopeningofanewforeignmarket，or
simultaneousindicationsofashortsupplyofseveralgreat
articlesofcommerce，setsspeculationatworkinseveralleading
departmentsatonce。Thepricesrise，andtheholdersrealize，or
appeartohavethepowerofrealizing，greatgains。Incertain
statesofthepublicmind，suchexamplesofrapidincreaseof
fortunecallforthnumerousimitators，andspeculationnotonly
goesmuchbeyondwhatisjustifiedbytheoriginalgroundsfor
expectingriseofprice，butextendsitselftoarticlesinwhich
thereneverwasanysuchground:these，however，riselikethe
restassoonasspeculationsetsin。Atperiodsofthiskind，a
greatextensionofcredittakesplace。Notonlydoallwhomthe
contagionreaches，employtheircreditmuchmorefreelythan
usual;buttheyreallyhavemorecredit，becausetheyseemtobe
makingunusualgains，andbecauseagenerallyrecklessand
adventurousfeelingprevails，whichdisposespeopletogiveas
wellastakecreditmorelargelythanatothertimes，andgiveit
topersonsnotentitledtoit。Inthismanner，inthecelebrated
speculativeyear1825，andatvariousotherperiodsduringthe
presentcentury，thepricesofmanyoftheprincipalarticlesof
commercerosegreatly，withoutanyfallinothers，sothat
generalpricesmight，withoutincorrectness，besaidtohave
risen。When，aftersucharise，thereactioncomes，andprices
begintofall，thoughatfirstperhapsonlythroughthedesireof
theholderstorealize，speculativepurchasescease:butwere
thisall，priceswouldonlyfalltothelevelfromwhichthey
rose，ortothatwhichisjustifiedbythestateofthe
consumptionandofthesupply。Theyfall，however，muchlower;
foras，whenpriceswererising，andeverybodyapparentlymaking
afortune，itwaseasytoobtainalmostanyamountofcredit，so
now，wheneverybodyseemstobelosing，andmanyfailentirely，
itiswithdifficultythatfirmsofknownsoliditycanobtain
eventhecredittowhichtheyareaccustomed，andwhichitisthe
greatestinconveniencetothemtobewithout;becausealldealers
haveengagementstofulfil，andnobodyfeelingsurethatthe
portionofhismeanswhichhehasentrustedtootherswillbe
availableintime，noonelikestopartwithreadymoney，orto
postponehisclaimtoit。Totheserationalconsiderationsthere
issuperadded，inextremecases，apanicasunreasoningasthe
previousoverconfidence;moneyisborrowedforshortperiodsat
almostanyrateofinterest，andsalesofgoodsforimmediate
paymentaremadeatalmostanysacrifice。Thusgeneralprices，
duringacommercialrevulsion，fallasmuchbelowtheusual
level，asduringthepreviousperiodofspeculationtheyhave
risenaboveit:thefall，aswellastherise，originatingnotin
anythingaffectingmoney，butinthestateofcredit;an
unusuallyextendedemploymentofcreditduringtheearlier
period，followedbyagreatdiminution，neveramountinghowever
toanentirecessationofit，inthelater。
Itisnot，however，universallytruethatthecontractionof
credit，characteristicofacommercialcrisis，musthavebeen
precededbyanextraordinaryandirrationalextensionofit。
Thereareothercauses;andoneofthemorerecentcrises，that
of1847，isaninstance，havingbeenprecededbynoparticular
extensionofcredit，andbynospeculations;exceptthosein
railwayshares，which，thoughinmanycasesextravagantenough，
yetbeingcarriedonmostlywiththatportionofmeanswhichthe
speculatorscouldaffordtolose，werenotcalculatedtoproduce
thewidespreadruinwhicharisesfromvicissitudesofpricein
thecommoditiesinwhichmenhabituallydeal，andinwhichthe
bulkoftheircapitalisinvested。Thecrisisof1847belongedto
anotherclassofmercantilephenomena。Thereoccasionallyhappens
aconcurrenceofcircumstancestendingtowithdrawfromtheloan
marketaconsiderableportionofthecapitalwhichusually
suppliesit。Thesecircumstances，inthepresentcase，weregreat
foreignpayments，（occasionedbyahighpriceofcottonandan
unprecedentedimportationoffood，）togetherwiththecontinual
demandsonthecirculatingcapitalofthecountrybyrailway
callsandtheloantransactionsofrailwaycompanies，forthe
purposeofbeingconvertedintofixedcapitalandmade
unavailableforfuturelending。