CORNELL UNIVERSITY LIBRARV 1924 092 558 The date shows when this volume was taken. To renew this book copy the call No. and give to the librarian. HOME USE RULES cr-. All Books subject to recall All borrcwers must regis- ter in the library to borrow books for home use. All hooks ijiust be re- turned at 'end of colleRc year for inspection and repair^. Limited books must be ■ returned within the four week limit and not renewed. Students'must return all books before leaving town. Officers should arrange for the return of books wanted during their absence from town. Volumes of periodicals and of pamphlets are held in the library as much as possible. For special pur- poses they are given out for a limited time. Borrowers should not use their library privileges for the benefit of other persons. Books of special value and gift books, when the giver wishes it. are not allowed to circulate. Readers ari; asked port all cases of marked or mutilated. to re- books Do not deface books by nurks and writing. HG c> THEORY OF CREDIT d St TOVTO dyvoiis OTt IIifrTt? 'Afjiopfj-rj twv Tracrdiv ea-ri, fieyia-Tr) irpo^ XprjIJ'a.TKTjJ.ov, irav av ayi/orjcretas If you were ignorant of this that Credit is the greatest Capital of all to\yards the acquisition of Wealth, you would be utterly ignorant Demosthenes Credit has done more, a thousand times, to enrich nations than all the mines of all the world DANiEii Webster THE THEORY OF CREDIT BY HENRY DUNNING MACLEOD, M.A. OF TEINITY COLLEGE, C.UIBHIDGE, AND THE INNER TEMPLE, BARRISTER-AT-LAW" SELECTED BY THE ROYAL COMjnSSIONEES FOR THE DIGEST OF THE LAW TO PREPARE THE DIGEST OF THE LAW OF BILLS, NOTES, ETC. HOXORAEY IIEMBEH OP THE JURIDICAL SOCIETY OF PALERMO, AND OF THE SICILIAN SOCIETY OF POLITICAL ECONOMY; <;ORRESPONDING MEMBER OF THE SOCIETE D'ECONOMIE POLITIQUE OF PARIS, ANB OF THE ROYAL ACADEMY OF JURISPRUDENCE AND LEGISLATION OF MADRID IN TWO VOLUMES VOLUME I LONDON LONGMANS, GREEN AND CO. AND NEW YOEK : 15, BAST 16th STBEET 1889 All Rights Reserved. WOEKS IN ECONOMICS By the AUTHOE Elements of Political Economy. 1858 A Dictionary of Political Economy. Vol i. 1862 The Principles of Economical Philosophy. Two Voia. 1872-75 Lectures on Credit and Banking. 1882 *ti* The above Worlcs are out of Print. The Theory and Practice of Banking. Two Vols. Fourth Edition. 1883-86. Vol. 1. Price 12/- Vol. n. Price 14/- The Elements of Economics. 2 Vols. 1881-86. Price 7/6 each Vol. The Elements of Banking, l Vol. Ninth Edition. Price 5/- Economics for Beginners. 1 Vol. Third Edjition. Price 2/6 PREFACE It is somewhat surprising that in this great Mercantile country there is not a single treatise in the English Language which contains an exposition of the Juridical and Mathematical principles of the colossal system of Credit, together with their application in practical commerce The Romans invented the business which, in modern language, is termed Banking. The Eoman bankers invented Cheques and Bills of Exchange : and the great Eoman Jurists of the second and third centuries worked out .the complete juridical principles of Credit : which were incorporated in the Pandects of Justinian, which were the great Code of the Western Empire : and in the Basilica, which were the great Code of the Eastern Empire : which have been the Mercantile Law of Europe for 1,600 years: and are fully exhibited in every Continental Treatise on Juris- prudence But they have not hitherto found their way into any treatise on Political Economy, or, as it is now becoming more usually termed. Economics, in any language, except mine It is quite easy lo foresee that the next great subject for Economical Inquiry in this country will be the anomalous Systems of Banking and Currency whicli prevail in the United Kingdom : and this work is intended as a complete Manual on the subject. uruv:

ttat is, when and 'where they are Wanted and Demanded Thus we see that though fome persons might be puzzled at tlic meaning of the word Wealth, there is no possibility of mistake when we j-elcr to the Greek, hecM^c xHf^a, which is one of the most usual words in (Jreck for W^ealih, cpmes fi'om vp^-oaaL to want or demand. Consequently the word xPVf^a, Wealth, means simply anything whatever which is wanteft and demanded : no matter what its nature or its form may be LABOR IS WKALTlFI 9 It is, then, human Wants and Desires which alone constitutes anything Wealth. Anything whatever which persons want and demand, and are wiUing to pay for • everything therefore which can be bought and sold is Wealth, whatever its nature or its form may be : and anything which no one wants or demands is not Wealth Socrates then showed that gold and silver are only Wealth in so far as they enable us to obtain, or purchase, what we waat and demand. And that if anything else will ienable us to purchase what we want and demand in the same way 'that money does, it is Wealth for the very same reason that gold'and silver are Socrates then instanced persons who gained their living by giving instruction in the various sciences. He said that persons were able to purchase what they wanted by giving this instruction, just as they were able to do so with gold and silver. Consequently he said that the Sciences are Wealth — at' tTrtfTTij/iat ^rffi^ara ova-ab : and that those who are masters of such sciences are so much the wealthier — TrXovo-Lwr^poC eio-i Now, in instancing the Sciences as Wealth, that is, of course, a general term for Labor, because Labor in Economics is any exertion of human ability or Thought, which is wanted, demanded, and paid for. Thus the author of this dialogue showed that Labor is Wealth Socrates shows that the Mind has wants and demands as well as the body, and that the things which are*wanted and demanded for the mind, and are paid for, are equally Wealth, as those things which satisfy the wants and demands of tlie body, and are paid for Thus each of the great professions, Law, Physic, Surgery, Engineering, &c., are great Estates, which produce Utilities, which are as much wealth as the Utilities which satisfy the wants of the body Now, Ijabor cannot be seen or handled : it cannot be trans- ferred by manual delivery : but ils Value can be measured in Money, and therefore it satisfies Aristotle's definition of Wealth. If any person wants another to do any labor or Service for him, and pays him for it, its Value is measured in Money as exactly as if it were a material chattel. Suppose that a 10 THKORY (IF CJiKDIT person gives fifty guineas for a watch or a horse, and also fifty guineas for the opinion of an eminent advocate, tlie value of the opinion is measured in money as exactly ,as that of the horse, or the watch : and therefore tliey are all equally Wealth So if a person earns an income of some thousands a year as the :Manager of a great Mercantile Company, Banking, Insuran-e, Railway, or any other, his services are as mucli wealth to him as corn or cattle to a farmer, or goods to an/ other trader Hence the author of this dialogue showed that Personal Qualities in the form of Labor are Weal.th Modern EconomisU indude Personal Qualities under the term Wealth 7. It has been seen that the Ecoubmists expressly excluded Pcrsunal Qualities from the term Wealth But we have shown in the Introduction that Adam Smith extended the Science of Economics by including Personal Quali- ties as Wealth, in accordance with the doctrine of the author of the Eri/.n'tis ; and in cmitradiction to his friends the Economists Under the terms Fixed Capital Smith enumeratesi — "The acquired and useful Abilities of all the inhabitants or members of the society. The acquisition of such Talents, by the maintenance of the acquirer during his edncation, study, or apprenticeship always costs a real Gvpeuse, which is a Capital fixed and realised, as it were, in his pcrsdu. The Talents, -as they make part of his Fortune, so do they likewise that of the Society to which he belongs" So he says — " The Property which every man has in his own Labor, as it is the original foundation of all other Property, so it is the most sacred and inviolable. The Patrimony of a poor man lies in the strength and dexterity of his hands " J. B. Say dwelt with emphatic forcfe on the doctrine that Personal Qualities are Wealth. Among many other passages he says^ ; — " He who has acquired a Talent at the price of an annual 1 We.aUh of yntioiix, B. II., ch. 1 - Cours, Voiisidi'ratioiis Cqiicralca PERSONAL QUALITIES AKE WEALTH 11 sacrifice, eujoys an accumulated Capital, aud this Wealth, though Immiterial, is, nevertheless, so little tictitioug, that he daily exchanges the exercise of liis art for gold and silver " " Since it has been proved thit Immaterial Property, such as Talents, and acquired Personal Abilities, form an integral part of Social Wealth " '■ You sec that Utility, under whatever form it presents itself, is the source of the value of things : and what may surprise you is that this Utility can be created, can ha'^o value, and become the subject of an Exchange, without bein*g incorporated in any material object. A manufacturer of glass places value in sand : a manufacturer of cloth places it in wool: but a physician sells us a UtiUty without beiug incorporated in any matter. This Utility is truly the fruit of his studies, his Babor, aud his Capital. AVe buy it in buying his opinion. It *is a real product but Immaterial " Say calls all species of Labor and Services Immaterial Wealth, because they are vendible products or 'commodities, but not embodied in any matter. This is an excellent name, and we shall adopt it to distinguish this order of Economic Quantities from material things and abstract Rights Senior has along and eloquent passage to the same purpose^ — " If the question whether Personal Qualities are articles of Wealth had been proposed in classical times, it would have appeared too clear for discussion. [We have already seen that the question was discussed in classical times]. In Athens, everyone would have replied that they, in fact, constituted the whole value of an i^tf/vxov opyavov. The only differences in this resiiect betvreen a freeman and a slave are, first, that the freeman sells himself, and only for a period, and, to a certain extent : the slave may be sold by others, aud absolutely : and, secondly, that the Personal Qualities of tlie slave are a portion of the Wealth of his master : those of the freeman, so far as they can be made the subject of Exchange, are part of his own Wealth. They perish, indeed, by his death, and may be impaired or destroyed by disease ; or rendered valueless by any change in the custom of the country, which shall destroy the demand for his services : but, subject to these contingencies, 1 Political Economy, p. 10 12 TIIEOKY OF CltEDltr they are Wealth, and Wealth of the most valuable kind. The amouafc of revenue derived from their exercise in England, far exceeds the rental of all the lands in Great-Britain " g^ also — " Even in our present state of (jiviiisation, which high as it appears by comparison, is far short of what may be easily conceived, or even of what may be confidently expected, the Intellectual and Moral Capital of Great ^Britain far exceeds all the Material Capital, not only in importance, but in productiveness. The families that receive mere wages probably do not form a fourth part of the community: and the comparatively larger amount of the wage^, even of these, is principally owing to the Capital and Skill, with which their efforts afe assisted and directed by the more educated members of the society. These who receive mere runt, even using that word in its largest sense, are still fewer : and the amount of rent, like that of wages, principally depends ou the knowleilge by which the gifts of natnre are directed and employed. The bulk of the national revenue is Profit : and of that profit the portion wliich is merely interest on ]\lateiial Capital probably does not amount to one third. The rest is the result of. Personal Capital, or, in other words, of Education " It is not in the accidents of the soil, in the climate, in the existing accnmnlatiun of the instruments of production, but in the quantity and diffusion of this Immatfirial Capital, that the Wealth of a country depends. The climate, the soil, and the situation of Ireland lia\e been described as superior, and certainly not much inferior to our own. Her poverty has been attributed to the want of ilaterial Capital : but were Ireland now to exchange her native population for seven millions of our English north CDunti'vmen, they would quickly create the Capital that is wanted. And weie Kngland north of the Trent, to be peopled exclusively by a million of families from the west of Ireland, Lancashire and Yorkshire would still more rapidly resemble Connaught. Ireland is physically poor, because she is morally and intellectually poor. And while she continues uneducated, while the ignorance and the violence of her population render persous and property insecure, and prrvent the accumulation and proliibit the introduction of Capital, legislative measures, intended solely and directly to relieve her poverty, may not indeed be ineffectual, for they may aggravate PKRSOXAL CREDIT IS WEALTH 13 the disease, the symptoms of which they are meant to palliate, but undoubtedly will be productive of mo permanent benefit. Knowledge has been called potver — it hfav'tnore cerlcdnhj Wealth. Asia Alinor, Syria, Egypt, and the northern coast of Africa, were once among the richest, and are now among the most miserable countries in the world, simply because they have fallen into the hands of a people without a sufficiency of the Immaterial sources of "Wealth to keep up the Material ones " So Mill says^ — "The skill and the energy and the perseverance of the artisans of a country are reckoned part of its Wealth no less than its tools and machinery," and why not the skill and energy and perseverance of other classes as well as of artisans ? He also says — "Acquired capacities, which exist: only as a means, and have been called into existence by Labor,'fall exactly as it seems to me, within that designation" So Madam Campan inscribed over the Hall of Study in her establishment at St. Germain — " Talents are the ornaments of the rich and the wealth of the poor " "We have, then, already found two distinct kinds of things which can be bought and sold : or whose Value ran be mea>~iired in Money : (1) Material Things which can be seen and handled, such as money, cattle, corn, &c. : and (2) Things which can neither be seen nor handled, but which can be bought and sold . and though these two kinds of things have nothing in common except the capability of being bought and sold,; they are each, for that reason, comprehended under the term Wealth Demosthenes shews that Personal Credit is Wealth 8. But Personal Qualities may be used as Purchasing Power in another method besides that of Labor If a merchant enjoys good " Credit," as it is termed, he may go into the market and buy goods, not with Money, but by giving 1 Principles of Political Economy, p. I, ch. 3, § 3 14 THEORY OF CKKDIT his Pi-omise to pay money at a future time for them— that is, he creates a Right of Action against himsef. Tlie goods become his property exactly as if he had paid for them in Money. It is a Sale, or an Exchange. The Eight of actiCn is the price he pays for them : and the Right of action is termed a Credit— in French, a Creance— hecause it is not a Right to any specific sum of money, but only a general Right against the perslDn of the merchant, to demand a sum of money at a future time Hence a merchant's Credit is Purchasing Power, exactly as Money is. AVIien a merchant purchases goods with his Credit, instead of with iMoncy, his Credit is valnrll in money, because the seller of the goods accepts his credit a? equal in value to money : liis credit is valued in money exactly as his Labor may be. Hence by Aristotle's definition of "Wealth, whfcfh is now universally accepted, the merchant's Personal Credit is Wealth So Demosthenes says— Against Leptines, 484, 20 " Suoti' dyaOolv ovToiv tt-Xovtov re Koi tov Trpos airavTas -TTia-TCuecrBaL, /xel^ov iUTi to T-ijs ttio-tews wnpy(ov rjfuv There hfiinj two kinds of " Property," or " Goods and Chattels " — Money and General Credit — our greatest Property is Credit, which we have H(i also, For Pliormion, 958 "el &e Tnvro dyvour oTi, TTt'orts Afj^opjirj tiuv TrafTiSr etrri fjLfytcrT-i] Trpd? XPW'''''''M<"'> '"'^^ "•' ayyorjauas " If i/iin ivere hjiwrant of thin that Credit is the greatest Capital of all toivards the acquiailion of Wealth, yo 'i ivouhl he. utterly ignorant Thus Demosthenes shows that Personal Credit is dyadd, or "G-oods and Chattels,'' or " Property"; an,d d(f>op/jLr'i, or Capital Thus, though Credit, like Labor, call neither be seen nor handled nor touched : yet it can be bought>g,ud sold, or exchanged — its Value can be measured in Money— it is Purchasing Power — and, therefore, it is Wealth And as we have seen that Adam Smith declares that a man's Labor is his most sacred possession, of which no person has the Right to despoil him ; so, to all Bankers, Merchants, and Traders, their Credit is their most sacred possession, of which no one has the right, falsely, to despoil them TEKSUNAL CllEniT IS ffEALTTI 15 Hence the Personal Credit of all Baakers, Merchants, and Traders is an integral and colossal portion of the National Wealth — just as the industrial faculties of working men are So, also, the Credit of the State, by whicli it can purchase Money or other things, by giving persons the Eight to demand a series of future payniants from it, is National Wealth Modern Economists include Personal Credit under the term Wealth 9. It has been shown that the Economists steadfastly refused to admit that Personal Credit is Wealth : because they alleged that to allow that, would be to maintain that Wealth can be created out of Xothing But contemporary general, and mercantile, writers, were entirely against tliem on that point The first writer in modern times, that we are aware of, who perceived the truth of the doctrine of Demosthenes that Personal Credit is Wealth, was that acute metaphysician, Bishop Berkeley, who has many searching questions on Economics in his Querist He asks, Qiies. ?>'), '' Whether Power tO: command the industry of others [/.e., Credit] be not real Wealth So Melon says^ — "To the calculation of Values on Jfoney there must be added the current Credit of the merchant, and his Possible Credit So Dutot says^ — " Since there has been a regular commerce among men, those who have need of money have made Bills, or Promises to pay Money. The first use of :Oredit, therefore, is to represent Money by paper. The usage is fle'ry old : the first want gave rise to it. It multiplies specie considerably ; it supplies it where it is wanting : and which would never be sufficient without the Credit ; because there is not sufficient Gold and Silver to circulate all the products of nature and art. So there is in commerce a much larger amount in Bills than there is in specie in the possession of the merchants 1 Eisai Politique sur le Commerce^ oh. xxiv. ''Reflexions sur le Commerce et les Finances, Ch. 1, Art. 10. IG THEORY OF OKKDIT " A well-managed credit amounts to teafold the funds of a merchant : and he gains as much by his Credit as if he had ten times as much Money. This maxim is generally received among all merchants " Credit is, therefore, the greatest Wealth to eyery one ivho carries on commerce " So Smith says^— " Trade can be extended as Stock increases : and the Credit of a frugal and thriving man increases much faster than his stock. His trade is extended in proportion to the amount of both [i.e., his Stock and his Credit], and the sum, or amount, of his profits is in proportion to the extent of his trade : and his annual accumulation in proportion to his Profits " So Junius says'—" Private Credit is Wealth " Franklin says^ — " Credit is Money " Smith expressly includes " natural arid acquired abilities " under the term fixed Capital. Now Mwcantile Character, or Personal Credit, evidently comes under the designation of " natural and acquired abilities." Hence Personal Credit is comprised under Smith's term Capital No person has more explicitly declared that Personal Credit is Wealth than Mill In his preliminary remarks, he says— "Everything, therefore, forms a part of Wealth, which has a Power of Purchasing " He then says, Bk. III., ch. xi., s. S— " For Credit, though it is not Productive Power ; is Purchasing- Power " " The Credit, which we are now called upon to consider, as a distinct Purchasing Power " So also, Bk. III., ch. xii., s. 3—" The amount of Purchasing Power which a person can exercise is composed of all the money in his possession or due to him {i.e., the Bank Notes, Bills, and Credits he has), and of all his Credit " 1 Wealth of Nations, Bk. 1, c.lO ■'Letters, Vol. II., p. 230. Edit. 1812 'Works, Vol. II., p. 250. Edit, 1810 ABSTRACT KIGIITS ARE WEALTH 17 Do. s. 4. — " Credit, in short, lias exactly the same Purchasing Power with Money " And many other passages to the same effect Now if Jlill lays down as the fundamental definition of Wealth— "Everything that is Purchasing Power is Wealth " And, if he says — "Credit is Purchasing Power," Then the necessary inference is that — " Credit is Wealth " That is a syllogism in which Mill is safely padlocked, and from which there is no escape Hosts of passages from otlier writers might he cited if necessary ; but that would he wholly superfluous : because an argument is to be judged of by its own ihtrinsic force ; and not by the number of persons who assert it The simple statement of the case is this — ancient writers unanimously held, and modern ecouomists have, at last, come to agree with them, that the only true definition of wealth is — Any- thing that can be bought or sold — Anytlfing ^hose value can be measured in money— Anything which has Purchasing Power. Now, as Personal Credit can beValiied in Money : and is Purchasing Power : it necessarily follows that Personal Credit is Wealth On Abstract Eights a& Wealth 10. But there is yet another, or a Third, order of Quantities, which can be bought and sold, or exchanged, and whose Yahie can hemeasmid in Money ; and these are Abstract Plights of various kinds — Eights and Eights of action Suppose that a customer pays in a sum of money to his account at his banker's— what becomes of that Money ? It becomes the absolute Property of the banker. The customer cedes the absolute Property in the Money to the banker, but he does not make him a present of it. He gets something in exchange for it — and what is that something ? In exchange for the Money the banker gives his customer a Credit in his books, which is a Right of action to demand back an equi\alent sum of Money whenever C IS THEORY or CREDI'T he pleases. The transaction is a Sale 6i' an Exchange ; the Banker buys the Money from his customer by issuing in exchange for it a Kight of action : and the customer buys this Eight of action with gold Furthermore, the banker agrees that his customer may transfer this Right of action to any one else he pleases, by means of a Cheque or Bank Note So this Eight of action may pass through any number of hands, and effect any number of exchanges, until the holder of it demands payment of it, aud it is extinguished When the holder of the Cheque demands payment of it from the banker, the hanker buys up the Right'of action against iim- gelf with gold : and the holder of the Cheque sells his Right of action for gold The transaction is, therefore, a Sale or: an Exchange, and an act of commerce Hence the whole series of tliese transactions are Sales or Exchanges. "When the customer pays in ;money to his account, it is au Exchange ; when he pays away his Cheque in commerce it is an Exchange ; and every time the Cheque is transferred it is au Exchange ; and when finally, payment; of it is demanded from the banker, it is an Exchange ; they are all acts of commerce This Eight of action is termed a Credit, because any one who chooses to take it iu exchange for goods or services, knows that it is not a title to any specific sum of money in the banker's posses- sion, but it is only an abstract Eight of action against the banker himself, to demand a sum of money from lii,m, and the person who takes it only does so because he has the Belief or Confidence that the banker can pay it when required It will be convenient to state here that this Right of action is also called a Debt, and that both in Law and common usage the words Credit and Debt are used perfectly indiscriminately to mean a Creditor's Right of action against his Debtor. The reason of this will he explained in a subsequent secPion Similarly, when a merchant sells goods "on Credit," as it is termed, to a trader, he cedes the Property of the goods to the ABSTRACT BIGHTS ARE WEALTH 19 trader, exactly as if he had sold them for Money. And in exchange for the goods the trader gives the mercliaut his promise to pay : or a Right of action to demand the Money* at a future time — say three months — after date. Tliis Eight of action is also termed a Credit or a Debt. It is the Price the trader pa'is for the goods. And if it be recorded on paper in tlie form" of a Liill of Exchange, it may be exchanged against other goods," and circulate in. com- merce, exactly like an equal sum of money, nntil it is paid off and extinguished Again, suppose that the State wants to borrow a sum of money for some public purpose — such as a war, or for some great public work. It buys money from those who are williug to sell it, and gives them in exchange for the money the Rig'ht to demand a series of payments from tlie State, either for ever, or for a certain limited term. The Rig^ht to demand a series of future payments, termed an Annuity, and is the Price the State pays for the Money. In popular laugnage they are termed the Funds. And the owners of these Eights may sell them again to any one else they please. They are saleable Commodities Suppose, again, that a person subscribes to the Capital of a Joint Stock Company of any sort — Bankiog, Insurance, Eailway, Canal, Dock or any other. He pays the money to the Company, which is a distinct Person, and receives in exchange for it the Right to share in the future profits of the Company. These Rights are termed Shares, and they are also saleable com- modities : which may be bought and spld like any material chattels So, when a trader has established a sucicessful business, he has the Right to receive the future profits to be made by the business. This Right to receive the future Profits, is a Property quite distinct and separate from and additional to the house or the shop, and the actual goods in them. It is the product of labor, thought and care, as much as any material chattels, and is a part of the trader's assets. It is termed the Goodwill of the business, and is a Saleable commodity C2 20 TIIEOKY OF CREDit Thrale, the great ln-cwer, appointed Johnson one of his executors.' In that capacity it became his duty to sell the business. When the sule was going on+-'- Johnson appeared bustling about, with an inkhorn and pen io his button-hole, like an exciseman, and on being asked ^\hat he really considered to be the Value of the Property which was to be disposed of, answered— ' We are not here to sell a parcel of boilers and rats, but the Potentiality of growing rich beyond the dreams of avarice.' " This latter phrase was merely Johnsonese for the Goodwill of the business The price realised was, we are told elsewhere, £135,000 AVhen the banking house of Jones, Loyd, & Co. sold their business to the London and Westminster Bank, it was said in the papers that the price paid was £500,000 Thus the Croodwill of any business is aJ saleable commodity So, when an author has published a successful work, the Eight to the profits to be made by multiplying copies of it is a valuable Eight, which may be bought and sold like any material chattel, quite separate from the printed copjes of the work. This Kight is termed Copyright : and is a saleable commodity So, when a Professional man has established a successful business, the Right of receiving the future Profits of the business is a vahiable Property, which may be bought and sold. This Property is termed a Practice : it is a saleable commodity So there are many other kinds of Property which consist exclusively in Abstract Rights, — such as Patents, Tithes, Tolls, Shootings, &c., which we need not enumerate at greater length, because our object is to describe a particular Order of Quantities and not to enumerate them all Now these Abstract Rights cannot be -seen, nor handled, nor touched: but they can be bought and sold, or exchanged. Their Value can be mcanured in Money : they can be transferred from one person to another as easily as any Inaterial chattels ; and therefore they satisfy Aristotle's definition of AVealth. They all possess that Quality of Exchangeability, which ancient writers unanimously, and modern writers now at last agree, is the sole ABSTRACT RIGHTS ARE WEALTH 21 essence and principle of Wealth : and, tlierefore, by the fiiuda- meutal laws of Natural Philosophy, tlidfee Abstract Rights are all Wealth Generid Rule of Roman. Law Ihnl Rights are Wealth 11. Now in the Pandects of Justinia,n,, which are the great Code or Digest of Eomau Law, it is laid down as a fundamental Genend Eule — " Pecuniae nomine non solum numerata pecunia, sed omnes res, tam soli quam mobiles, et taui corpora quam Jura cuntiuentur" " Under Ihe term Wealth not only readij Money, hut all things, loth immovaUe and movable, both corporeal things, and Rights are induded " So the eminent Roman Jurist Ulpiau says — " Nomina eorum qui sub couditione vel rn diem debent.et emcrc et vendere solemus. Ea enim Res est, quaj'cmi et veniro potest " " We are acrmtomed to buy and sell Debts payable at a certain event, and on a certain day. For that is Wealth which can be bought and sold" So also it is said: — " iEque Bonis ai^umerabitur si quid est in Actionibus " " Rights of action are fjroperhj reckoned as Goods " Also—" Eei appellatione et Causae et Jura continentnr " " Under the term Property both Rights and Rights of action are included " So Sir Patriclc Colquhoun in his Summary of Roman Law " The first requisite of the consensual 'contract of ernpllo et vendilio is a Merx ; or object to be transferred from the buyer to the seller : and the first requirement is that it should be in coinmercio : that is capable of being freely bought and sold. Supposing such to be the case, it matters not whether it is an immovable or a movable : corporeal or incorporeal : existent or non-existent : certain or uncertain : the property of the vendor or another ; thus a horse or a Right of action : servitude, or thing to be acquired : or the acquisitioH whereof depends ou chance 22 THEORY OF CREDIT "A purchaser may buy of a farmer "the future crop of a certain fiold. Wine which may grow the next year on a certain vineyard, may be bought at so much a pipe : or a certain price may be paid irrespective of quantity or quality : and the price would be due though nothing grew, or fdr whatever did grow. In the second case the bargain is termed ' mpi'/o ^^jin : and in the first and last empUo rei gpiralce : which all such bargains are presumed to be in cases of doubt "The cession of a Right of action heinfe legal in the Roman Law : the Right of A to receive a Debt due by B may be sold to C " Thus it is clearly seen that Abstract Rights of various sorts, including Rights of action, which in iLaw, Commerce and Economics are termed Credits or Debts, are expressly included in the terms Pecunia (Wealth) : Res (Property) : Bona (Goods) : and Merx (Merchandise) : in Roman Law General Rule of Greek Laiv that Rights are Wealth 13. For nearly 5iMi years after Constantine removed the seat of Government from Rome to Constantinople, the language of the Court was Latin, but the people were 'Greek. Consequently, as the official language was Latin, it was unintelhgible to the mass of the people The great Code of Roman Law, termed the Pandects, was published in 530 a.d. : but all the pleadings in the Courts were carried on in Greek. The Latin Pandects soon fell into desuetude : they were superseded by Greek treatises, translations and compilations. The Latin Listitutes of Juslinian did not hold theii- place in the curriculum of leg^l education for more than ten years. They were superseded by the paraphrase of Theophilus, one of the Professors of Law, who were charged with the compilation of the Institutes : and this paraphrase became the text book for the education of law students throughout the Eastern Empire At last, in the ninth and tenth centuries, under the Basilian Dynasty, all the Pandects, Institutes, and Legislation of Justinian were set aside as obsolete. A reformed .Digest or Code, was ABSTRACT RIGHTS ARE WEALTH 23 published in Greek, which was called the Basilica, and this, henceforth became the Law of the Eastern Empire : and has remained to the present time as the Common Law of all the Greek population in the East : and is the Common Law of the modern Kingdom of Hellas And tlie Roman definition of Wealth is adopted and confirmed — l>asil., IL, '2, l!14 — " TtS ovofiari, Twv ■)(pifjiJ,aT "r Wealth . , , . Rights are included" Also, Basil., II., 2, i\ — "''jj ^o*^ Trpdy/iaTO's ■7rpoa~ijyopia kcu AiTiat (cai Tot AtKata Treptep^erat " Under the term irpdy/jLara, Chattels, Eights, and Eights of Action are included Thus it is seen that hj express enactruent in Greek Law, the words xPVl^°-'''0' Eind Trpa'y/xara include Eights and Eights of action of all sorts These Eights are also included under the terms dyaOd (Goods) : Trapiova-ia (Estate) : dtjiopfirf (Capital) : otras (Wealth) : they are termed ova-La dtpdvTj's, Invisible Wealth, and these words include all the three orders of Economic Quantities General Rule of English Law that Rights are Wealth 13. It is exactly the same in English L*aw, Abstract Rights, or Property, are included under the terms '! Goods," " Goods and Chattels," "Chattels," " IMeroliandise," Vendible Commodities," "Incorporeal Chattels," and "Incorporeal Wealth," in English Law A Chattel means any Property of any sOrt which is not freehold Thus, Sheppard says'^^" All kinds of Emblements, sown and growing, grass cut : all money, plate, jewels, utensils, household stuffs, Debts, wood cut, wares in a shop, tools and instruments for work, wares, merchandise, carts, ploughs, coaches, saddlers, and the like : all kinds of cattle, as horses, oxen, kine, bullocks, goats, sheep, pigs : and all tame fowl, swans, turkeys, geese, capons, -hens, ducks, poultry, and the Hke : are accounted as Chattels ' Grand Abridg/^ment, Parti., s. v., Chattels; also Touchstone, Vol. II., p. 468 24 THEORY OF CREDIT "All Obligations, Bills, Statutes, Eecagnizances, Judgments, shall be as a Chattel in the executor " All Right of action to a Personal Chattel is a Chattel " So, in the case of Ford, 12 Co. 1, it was resolved by Popham, Chief Justice of England, and the Court, that — " Personal actions are as well included within the word "Goods" in an Act of Parliament as goods in possession " So, in Ryall v. Rowleii, 1 Ves., S48, Lord Chancellor Hardwicke, said—" The Chattels are . . the Debts {i.e., Ptights of action) due and to be due . . and Debts come within the words and meaning of the Act, and would pass in a will thereby" Burnet, J., said — " A Bond Debt ife certainly a Chattel . . the conclusive case is Ford's case, 1:^ Co. 1, that personal actions are iuchuled in the word Goods in an Act of Parhament as goods in possession " Parker, L. C. B., said — "But Goods and Chattels include Debts (Rights of action) . . Goods and Chattels comprehend things-in-action, in the construction of any Act of Parliament " Lee, C. J., said — '• Tiie inquiry is whether choses-in-action are not included under Goods and Chattels ? And I agree, choses- in-action will be included therein " So Blackstone says^ — " For it is to be ijndei'stood that, in our Law. Chattels, or Goods and Chattels, is a term used to express any Property, which, having regard either to subject matter, or quantity of interest therein, is not freehold " " Property, or Chattels Personal, may tie either in possession or in action . . Property in action is where a man has not the enjoyment (either active or constructive) of the thing in question, but merely a Eight to receive it by a suit or action at law " So Mr. J. Wilhams says^— "Personal Estate is divided in English Law into Cliattels real and Ghatteh Personal: the latter are again divided into Gho^eif in Possession jind Ghoses-in-aclion " L Bk. Il.,Pt. I.,o.5. 2 Ency. Brit., vol. xviii., Art. Personal Estate ABSTRACT RIGHTS ARE WEALTH 25 This work deals exclusively wifcli Rights of action, and, there- fore, we shall henceforth confine our attention to them Eights of action, then, bt-ing now shown to be Goods and Chattels, it is absolutely necessary to observe that it is the abstract Eight of action itself which is the Goods and Chattels, and not any material ou which it may be written down Eights of action may be bought and sold with perfect facility, even in the abstract state. But it is \ery common to write them down on paper in the form of Bank Notes, Cheques, Bills of Exchange, and other instruments. By doing this they become capable of manual delivery, and are transferable from hand to hand like money, or any other material chattel Abstract Eights of action are Incor]iorcal Chattels : but when written down on paper they become strictl;f Corporeal Chattels, or Material commodities, exactly like money Hence the reader must observe that writing a Eight of action down on paper in no way alters its nature. Doing so is merely a convenient form of rendering it capable of being transferred in commerce. But it is exactly of the same nature and effect whether written down on paper or not Modern Economists include Rights of action : i.e., Credits or Debts : under the term Circulating Capital 14. It has been shown that the Economists steadfastly refused to admit Credits, i.e., Eights of action, to be Wealth But it has been shown in the Introduction that Smith expressly classes Bank Notes and Bills of Exchange under the terms Circulating Capital : hence Smith expressly recognises the existence of the three orders of Exchangeable Quantities Thus Smith exj^ressly includes Money under the term Circulating Capital : and under the terpi Money he includes Bank Notes, Bills of Exchange, &c., Which he calls Paper Money — which term is not quite cori'ect — "because, though Bank Notes and Bills of Exchange may be, under certain circumstances, Money, as will be seen fuiftlier ou — still they are not absolutely ]Mouey. But they are all included under the term Paper Currency 26 THEORY OF CREDIT Among several passages, ifc will be sufficient to quote one here* — " Suppose tliat different banks and bankers issue Promissory Notes payable to bearer on demand to the extent of one million, reserving in their different coffers £200,000 for answering occasional demands. There would remain, therefore, in circulation £800,000 in gold and silver, and £1,000,000 in Bank Xotes : or £1,800,000 of Paper aud Money together.'' He also observes that Credits in the Bank of Amsterdam are called Bant Money. Thus we see that Smith in this and numerous other passages places Paper Credit exactly on the same footing as independent property, aud of the same value, as gold and silver So J. B. Say says^ — " The exclusive possession which in the midst of society clearly distinguishes the Property of one pereon from that of another in common usage is that to which the title of Wealth is given. . . . Under this title are included not only tilings which are directly capable of satisfying the wants of man, either natural or social, but the things which can satisfy them only indirectly, such as Money, Instruments of Credit (titres de creauce), the Public Funds " Thus Say expressly includes Instruments of Credit, and the Funds, which are mere Rig'hts of action, under the term Wealth: and he also includes Bills of Exchange, Bank JS'otes and Bank Credits under the term Capital Thus he says that if a Bank can mai.ntain in circulation a greater quantity of Notes than it retains specie in reserve, it augments by so much the Capital of the country So he also says-''— " We juust include under Capital many objects which have a value, although they jre not material. The Practice of an advocate or notary : the Custom of a shop : the represeutation of a sign board . the title of .a periodical work, are undoubtedly property {biens) : they may be bought and sold, and be the subject of a contract : and they are -also Capital, because they are the fruit of accumulated labor " • Wealth of Nations, B. II., c. 2 2 Traite iVEconomie Politique, p. 1. 8 Cows cV Economic Politique, Part IV., c. 5 ABSTRACT RIGHTS ARE WEALTH 27 So Mill says^ — " An order or note of hand, or Bill payable at sight for an ounce of gold [wliich is Credit)] while the credit of the giver is unimpaired, is worth neither more nor less than the gold itself " So, also — " "We have now found that there are other things, such as Bank Notes, Bills of Exchange, aud Cheques [which are Credit] which circulate as Money, and perform all the functions of it " He also designates Bank Notes as Productive Capital Whately is the only English Economist, that we are aware of, who has called special attention to Incorporeal Property. He says^ — " The only difficulty I can foresee as attendant on the language I have now been using, is one which (i.e., defining Political Economy as the Science of Exchanges), vanishes so readily on a moment's reflection as to be hardly worth mentioning In many cases, where an exchange really takes place, the fact is liable (till the attention is called to it) to be overlooked, in consequence of our not seeing any actual transfer from hand to hand of a material object. For instance, when the copyright of a book is sold to a publisher, the article transferred is not the mere paper covered with writing, but the exclusive Privilege of printing and publishing. It is plain, however, on a moment's thought, that the transaction is as real an exchange as that which takes place between the bookseller and his customers, who buy copies of the work. The payment of Pientfor land is a transaction of a similar kind, for, though the land itself is a material object, it is not this that is parted with to the ten'ant, but the Eight to till it, or to make use of it in some other specified manner. Sometimes, for instance, rent is paid for a Right of way through another's field, or for liberty to erect a booth during a fair, or to race or exercise horses " And Whately says in a note to this passage — " This instance, by the way, evinces the impropriety of limiting the term Wealth to material objects " 1 Princ. of Pol. Econ., B. HI., c.'l2., sec. 1 2 Lectures on Political Economy, p. 6 2S THEORY OF CREDIT Thns in this passage is found the first *dim perception that all Exchanges consist in the exchange of Righ'ts against Rights ; as will be shown further oti We need not multiply quotations: in fact, those we have already given are chiefly for the benefit of lay readers ; because it is one of the most elementary principles of Mercantile Law, clearly explained and enforced by every Jurist in the world, that a simple abstract Right of action, or Credit, or Debt, (and other abstract Eights with which we are not concerned in this work) is included under the terms Pecunia, Res, Bona, Merxt xP'7/^"' "-pay/ta, oIko:;, ova-ia, dya$d, &c. Goods, Chattels, Yendible commodities, Incorporeal Chattels, Incorporeal Wealth : and that a Eight of action can be bought and sold or exchanged : its Value can be measured in Money : in every respect like iany material chattel There is no such Thing as Absolute Wealth 15, The preceding considerations show that there is no such thing as Absolute Wealth — that is, there is nothing which is in its own nature, and in all circumstances, in all times, and in all places — Wealth. The sole essence and, principle of Wealth is Exchangeability. For anything to be exchangeable it is necessary that some one else should Demand it. ,It is, therefore, solely human wants and desires, and the capacity to give something to obtain it, that constitutes anything Wealth. Things are only Wealth in those places and in those times where and when they are wanted, demanded and paid for ; and consequently, they cease to be Wealth when they cease to be wanted and demanded. Therefore the very same things may be Wealth in some places and not in others : and at some times and not at others : and become Wealth more or less, as the Demand for them increases or decreases. Hence the amount of Wealth in any country at any given time is simply the mass of Exchangeable Quantities in it Economics or Commerce consists of Six didiiict kinds 0/ Exchange 16. It has now been shown that for 1,300 years ancient writers unanimously hold that Exchangeability is the sole essence ECONOMICS CONSISTS OF six EXCHANGKS 29 and principle of Wealth. That anything whatever which possesses the principle, or quality, of Exchanueability : everything what- ever which can be bought and sold, or exchanged — or whose Value can be measured in Money^is Wealth ; nQ matter what its form or its nature may be The ancients aho showed that there are Three distinct orders of Quantities whicii possess the Qurility of Exchangeability : or whose Value can be measured in Muney : namely (1) JIaterial Things : {2) Personal Qualities, both in the form of Labor and Credit : (3) Abstract Rights And reflection will show that there is nothing which can be bought or sold which is not of one of these three forms : either it is a material thing : or it is a personal service or quality : or it is an abstract Right Hence, as it is positively known that there is notliing which possesses the Quality of Exchaligeability, or whose Value can be measured in Money, beyond these three orders of Quantities, the Science is now complete Kow, if all material things be symbolised by the word Money : and if all personal services be symbolised by the word Labor : and if all abstract Rights be symbolised by the word Credit ; these three distinct orders of Economic Quantities maybe symbo- lised by the words Money, Labor, and Credit And all commerce in its widest extent, 0,ndin all its forms and varieties : that is the Science of Pure Economics, consists in the Exchanges of these three orders of Quantities There being, then, Three, and only Three, distinct orders of Exchangeable Quantities, it is evident that they maybe combined two and two in Six different ways These six different kinds of Exchange are — 1. A Material thing for a Material thing As when gold money is exchanged for lands, houses, corn, jewelry, timber, cattle, &c. 2. A Material thing for Labor As when gold money is paid as wages, fees, or salary for any service done 3. A Material thing for a Right 30 THEORY OF CREDIT As when gold money is given to purchase Bills of Exehange, the funds, copyrights, patents, shares in commercial companies, or any other valuable right i. Labor for Labor As when persons agree to perform 'reciprocal services for each other 5. Labor for a Rig'ht As when wages, fees, salaries, or any service done is paid for in bank notes, cheques, bills of exchange, :&c. 6. A Right for a Right As when a banker buys one Right of action such as a Bill of Exchange, and gives in exchange for it a Credit in his books : which is another Right of action The Economists only admitted material jproducts to be "Wealth : and only treated of one species of Exchange, that of products for products Beccaria admitted that services are Wealth ; and said that all exchanges consisted of the exchanges of products for products : products for services : and services for services : thereby admitting three kinds of Exchange But, as a matter of fact. Exchangeable or Economic Quantities, consist of three orders of Quantities ; and hence, there are six distinct kinds of Exchange But, the present work only deals with the commerce in Rights of action : i.e., Credits or Debts On the Meaning of the word Property 17. It has now been shown that there are Three distinct Orders of Economic Quantities : i.e.. Quantities which possess the QnaHty of Exchangeability— and, by the Laws of Natural Philosophy, and the unanimous doctrine of ancient writers, and of modern Economists, these are all included under the term Wealth, namely (1) Material Things : (2) Personal Qualities, both in the form of Labor and Credit : and (3) Abstract Rights The next thing to be done is to find^a General Term which will include them all. And that general term will be found in MEANING OF PROPKRTY 31 the word Property. And when we understand the true and original meaning of thn word Property, it will throw a blaze of light over the whole Science of Economics : and clear up all difficulties which the word Wealth has given rise to. In fact, the meaning of the word Property is the key to the whole sciences of Jurisprudence and Economics Most persons, when they hear the word Property, think of some material things, such aa lands, houses, cattle, money, carriages, jewelry, &c. But that is not the true and original meaning of the word Property Property, in its true and original meaning is not a Material thing ; but the Ownership of, or the Absolute Right, to some- thing Savages, probably, have very feeble notions of abstract Rights. Their ideas of Wealth are something which they can lay hold of : perhaps only acquire by violence, and can only be retained by bodily force. They have no idea of abstract Rights separated from anything material So in archaic jurisprudence property is'described as anything material which can only be retained by manual force In early Roman jurisprudence a person's possessions were called Mancipium : because they were su[)pc5sed to be acquired by the strong baud : and if not retained with a very firm grasp, would probably be lost But as civilisation and firm government succeed, men's ideas are transferred from the actual material -things to the personal Eights in them Thus in course of time the word Mancipium, which originally meant the material things which were held by the hand, came to mean the absolute Right to them : and in early Roman Law Mancipium came to mean Absolute Ownership Thus Lucretius says, III., 971 — " Vitaque Mancipio nulli datur, omnibus usu " "And Life is given in Absolute Ownership to none, bid only as a Loan fo alV In process of time the word Property came to be denoted by a term which meant a pure Abstract Right 32 THEORY or CREDIT All the possessions of the family' {Doinus) belonged to the family as a whole. Btifc the head of the house (Dominus, SecnroTT;?) alone exercised all Eights over them. Hetalone had the absolute ownership of his familla, or household; including his wife, children, slaves, and all its possessions. Ilanoe this Eight was termed Dominium, Sca-irorda, and Dominium was always used in Eoman Law to denote Absolute Ownership So long as the Pairia Potestas subsisted in its pristine rigor, no member of the family could have any individual Rights to things. But in the times of the early Emperors the extreme rii:(ir of the Pairia Potestas began to be rela.xed. In some cases individual members of the family were allowed to have Rights to possessions independently of the head of the house and its other members : and this Eight was termed Proprietas The Pairia Potestas was further relaxed when the Dominus granted the exclusive Rights to certain things to his sons and slaves. This right was termed Pcculiinn The Emperois Augustus, Nero and Trajan, enacted that the sons of th-e family might possess in their Qwn Right, and dispose of by will, as if they were Domini, what they acquired in war. This was termed Castrense Peculium Tlii.s Right of holding possessions independently of the other members of the family was considerably extended by subsequent Emperors, and was always called Proprietas Proprit'tas, therefore, in lloman Law meant the absolute and exclusive Eight which a person had to anything independently of anyone else: and was synonymous with Dominium. Neratius, a jurist of the time of Hadrian, says — "Proprietas id est Dominium." " Property that is Ownership " Thus Gaius says — "Non solum a utem Proprietas nee eos quos in potestate habemns adquiritur nobis " Not only, therefore, do ivc acquire absolute Property by means of those, &c. So, also, Justinian . . " Transfert Proprietatem mercium " " Transfers the Properly in the Goods " and in other instances too numerous to mention Thus the word Proprietas in Roman Law never meant a material thing : but the Absolute Right to it : the thing itself was Materia MEANING 0>' PUOPKRTT 33 Meaning of the icord Property in English 18. So also ill early English the word Property invariably meant a Right and not a Thing Thus, grand old Wycliife says — " They will have Property of ghostly goods where no Property may be : and have no Property in worldly goods, where (Christian men may have Property " So Bacon invariably uses the word Property to mean a Right, and never a Thing, He says, one of the uses of the Law " is to dispose of the Property of their goods and chattels." He explains the various methods by which Property in goods and chattels may be acquired. So he speaks of " Property or Interest in a timber tree " In Oomyii's great Digest of the Law there is not a single instance of the word Property being applied to material things. He uses it invariably to mean absolute ownership Thus up to the middle of the last century. Property was invariably used to mean Absolute Ownership : and was never applied, at least in any work of authority, to material substances Every Jurist knows that the true meaning of the word Property is a Right, and not a Thing. Thus Erskine says — " The sovereign or real Right is that of Property, which is the Right of using and disposing a subject as our own, except so far as we are restrained by law or paction " This meaning of Property has been understood by Economists as well as by Jurists. Thus Merciere de la Riviere, one of the most eminent of the French Economists, says^ — " Property is nothing but the Riglit to enjoy. . . . It is seen that there is but oue Right of Property : that is a Right in a person : but which changes its name according to the nature of the object to which it is applied " Thus Landed Property means Rights to lands or houses : Real Property means Rights to realty : Personal Property means Rights to personal chattels Kor is the word Property in any way restricted to the Rights to material substances : Imt it is also applied to Abstract Rights ' VOrdre Naturel des Sociitcs Folitiqtles, ch. XVIII D 34 THEORY OF CREDIT Thus Funded Property is the Eight to demand payments from the State : Literary Property is the Eight to the profits from works of hterature and art : Newspaper Property means the Eight to pubhsh certain newspaf)ers : and so there are many other kinds of Incorporeal Property, such as Shares in Commercial Companies of all kinds : the Goodwill of a business : a professional Practice: Patents: Tithes: Advowsons : Shooting Eights: Market Eights : and many other kinds of Valuable Eights So, when a person has sold goods on " Credit," and has acquired a Eight of action as their Price in exchange for them, termed a Credit or a Debt, he has the Property in this Eight of action : and can sell this simple Eight of action like any material chattel So in the Law of Scotland, what is termed Eeal Property in England is termed Heritable Eights, because the Eights to them pass to the heir. And what is termed .Personal Property in Enghsh Law is termed Movable Eights in Scotland : and under the term Movable Eights, Debts, or Eights of action are included Hence Abstract Eights are the subjects of Property in exactly the same way as Material Chattels AVhen the Socialists and Communists wiah to destroy Property, as being Eobbery, it is not the Material Things they wish to destroy, but the exclusive Eight which private persons have in them In the course of this work we shall find that many words which like Mann)) mm, in early times, and in classical Latin, meant material things, have in the progress of civilisation and Jurisprudence come to mean Abstract Eights : and, most unfortu- nately, many words which in reahty mean Eights, have been perverted to mean Material Things— to the great confusion of Jurisprudence and Economics The word Property means Absolute, Entire, and Exclusive Ownership: it is the Absolute Eight to;deal with the things Material, Immaterial or Incorporeal, in any way the owner pleases, except in so far as he may be restrjfined by Law ALGEBRAICAL SIGNS APPLIED ItO PROPERTY 35 Property compi-ehends the Jus Possidiendi, or the Right of possession : the Jus TJtendi, or the Eight of using : the Jus Fruendi, or the Right of appropriating any fruits or profit from the object : the Jus Abutendi, or the Riglit of destroying or alienating it : and the Jus Vindicandi, on the Right of recovering it when found in the wrongful possession of any one else Property, or Dominion, then, does not mean a single Right : but au aggregate or bundle of Rights : it comprehends the Totality of Rights which can be exercised over everything On the Right of Property and Rig'ht of Possession 19, But though all Property is a Right, it must be observed that all Rights are not Property There is au essential distinction between.the Right of Property and the mere Right of Possession Thus, where one person lends his horse, or a book, or other chattel, to another : or dehvers goods tohijn as a common carrier by sea or land, to be carried from one place to another : or deposits goods, or valuables \\\t\i him as a warehouseman, for the mere purpose of being safely kept : or by way of pledge, hypothec, or lien : or hires a house, a horse, or land : or finds valuable goods : in these and other cases the person has the mere Right of Possession of the various things : and l\e can bring an action against any one who deprives him of their possession. But he has no right to use the goods except in the way, and for the specific pui'pose, for which they are delivered to him. He has, therefore, only a specific right to them : and not the absolute ownership in them, to deal with them in any way he pleases Some of the most subtle and important doctrines in Economics are based entirely on the distiuction between Right of Property and Right of Possession Application of the Positive and Negative Signs to Property SO. Economic Quantities, or Economic Rights, are, then, of three distinct orders : — (1) Rights or Property, in some material thing which has Men already acquired 36 THEORY OF CREDIT (2) Rights or Property, in Libor or Service (:i) Rights or Property, iu somethiDg which is only to le acrpiired at some future time Now it is one of the innumerable applications of the Alge- hraical Signs + and -. that if any. point in Time be taken as 0, tlien Time before this epoch, and Time after this epoch, are denoted by the opposite signs + and - ; which sign is used to denote either Time, being a matter of pure. convention Let us denote Time present by 0: Time past as Positive; and Time future as Negative : it will then'be represented thus — &c. + U, + 4, + S, + 2, + 1, 0, - 1, - 2, - ?., - 4, - r.. &c. and it is evident that the TotaHty of Time from any year preced- ing the given era, 0, to any year subsequent to the given era, will Ire the sum of the Positive and the Negative years Hence the Products which have already been produced in the Past, or Positive, years may be termed Positive Products : and the Products which arc to be produced in the Future, or Negative, years may be termed Negative Products Now we observe that the first and the third of the Economic Quantities, or Rights, enumerated above, aire inverse or opposite to each other. Property, like Janus, has two faces placed back to back. It regards the Past and the Futtye. TVe may buy and sell a Right to a thing which has already been acquired : and we may also buy and sell a Right to a thing which is only to lie acquired at f^ome future time Now in all mathematical and physical sciences it is invariably the custom to denote similar Quantities, but of opposite Quahties, by opposite signs Hence, as a matter of simple convenience, and following the invariable custom in mathematical and physical science, if we denote one of these kinds of Property by the Positive Sign, we may, as a mark of distinction, denote the fither by tlie Negative Sign Now Property in a thing which has already come into posses- sion in Time past is Corporeal Property: aiM as we have assumed above Time pad as Positive, Corporeal Property may be termed a Positive Economic Quantity : and as Property in a thing to ie THEORY OF THK VALUE 'OF LAND 37 acquired at sorae futuro time is Incorporeal : and, as we have above denoted Time future as Negative, Incorporeal Property may be aptly designated as a Negative Economic Quantity And as in all mathematical and physteal sciences, the whole science comprehends both Positive Quantities and Negative Quantities : so the whole science of Economics comprehends both Positive Kcononiic Quantities and Negative Economic Quantities, both Corporeal Property and Incorporeal Property By this means we double the iield of .Economics as usually treated : and we do in Economics what -those have done in mathematical and physical science, who introduced Negative Quantities into them By this means we are enabled to ol)tain the solution of problems which have hitherto baffled all Economists : and it is by this means only, that the Theory of Credit can be explained On the Theory of the Vaiue of Land 21. We shall now show the great practical importance of applying the Positive and Negative Signs to Property : and of denoting the Eight or Property, in things which have already come into possession as Positive, and the Eight, or Propeity, to things which will only come into possession at a future time as Negative. Because many species of Property are of a mixed nature : that is, the entire Property in them consists partly of Corporeal Property, and partly of Incorporeal Property Property in Land is the highest Property of all ; and to understand the nature of Property in Land is the grammar of Property in general Suppose that we saw a piece of Land on which there were actually existing products of the value of £3,000. Suppose that we wished to purchase that piece of Land. Would the owner of it be willing to sell it for £3,000 ? Most assuredly not. He would say that though there were only products of the value of £3,000 on the Land in actual existence at the present time, yet that the Land would produce a similar amount of products year by year, to the end of time. He would say that we must pur- chase, not only the Right to the existing iproducts of the land, ?)H THEORY OF CREDIT but also the Right to the annual products of the land for ever— that is an infinite series of future products, which will only come into existence year by year Thus Property in Laud consists of two perfectly distinct parts, the Right to the products which kave alreadtj come into existence, and tlie Right to the products -'which tvill only come into existence m future This Property in land may be conveniently denoted thus : — Existing products of the land (+ £3,000): together with (- £3,000, - £8,000, - £3,000 . . . . for ever) Where the Positive Sign denotes the products which have already come into existence : and the Negative Sign denotes the products which will only come into existence year by year for ever But though the yearly products of the land will only come into existence at future intervals of time, 'the Right or Property to them, when they do come into existence, is Present; and it may be bought and sold like any material Chattel, such as a table or a chair. That is to say, each of these annual products for ever has a Present Value : and the purchase money of the land is simply the sum of the Present Values of this serie^s of future p-oducts fur ever Again, although this series of future products is infinite, a simple Algebraical formula shows that it has a finite limit : and that finite limit depends chiefly on the usual average Rate of Interest. When the usual average Rate of Interest is 3 per cent,, the theoretical value of land would be abdut 33 times its annual value. Consequently of the total value of land, one part in 33 only is Corporeal, the remaining 32 parts are Incorporeal Now, when a purchaser has bought an^estate in laud, it may be said without any very great metaphor, that it Owes him a series of annual payments for ever. Because he only bought it in the belief or expectation, that it would yield these profits. Hence we may call the Right to receive the future products of the land, the Credit of the land. And by the notation we have adopted, it is a Negative Economic Quantity Thus the purchase of an estate in laud is simply the purchase of a perpetual Annuity MONEY EQUAL TO A SERIES OF PAYMENTS 39 Every Sum of Money is Equivalent to the Sum of the Present Values of an Infinite Series of Future Payments 22. The investio^ation of the Theory of the Value of Laud demonstrates a proposition of great importance in Economics It is seen that the £luO,000 given to purchase the Estate in Land, expected to produce £;i,000 a year for ever, is in Eeality the Sum of the Rights to its future products for ever. Each annual product has a Present Value, and the Value of the Land is simply the sum of this infinite seiies of Present Values Bat the same is evidently true of every sum of mouey. Hence every sum of iloney is not only equal in Value to a quantity of goods, or ser\-ices, but also to a perpetual Annuity An Annuity is the Right to receive a series of payments. The lowest form of an Annuity is the Right to receive a single payment, hke a Bank Note, a Cheque, or a Bill of Exchange. The highest form is the right to receive an infinite series of future payments, like the Land, or the Fands. And, of course, there may be the Right to receive a limited number of future payments, intermediate between the other two Hence an Annuity, or the Right to receive a series of payments, is an Economic Quantity, which may be bought and sold : or whose Value may be measured in money : hke any material chattel As when a sum of Money is paid to purchase Land, or the Funds or Municipal and other Obligations, such as Railway Debentures So an Annuity may be paid to receive a certain sum of money at a given time, or on a given contingency, such as a life or fire insurance It is thus seen that Economics consists of three great depart- ments : (1) Material things ; (2) Personal Qualities ; (3) Annuities Modern Economists have paid considerable attention to the first two of these departments. But they have almost entirely ignored, or neglected, the third : and yet at the present day it is the most important of any : because it comprehends the whole Theory of the Value of Land : the Funds : Mercantile Credit : Banking : the Foreign Exchanges ; Shares in Commercial Com- panies : and all other Incorporeal Wealth 40 THEORY OF CKEDIT Personal Credit — A successful Trader is an Economic Quantitij analogous to Land 23. Now, a person exercising any =iirofitable business or profession, is an Economic Quantity analogous to Land He may have accumulated a quantity of money as the fruits of his skill, industry, and ability in time past. But, over and above his accumulated money, he has the same skill, industry, and ability to earn profits in the future. His Capacity to earn profits in the future is exactly the same as his capacity to have earned profits in the past. And, of course, he has the Right, or Property, in his expected profits in the future And he may trade in two ways : he may trade with the Money he has already acquired, the profits of the past : or he may trade by purchasing goods by giving in exchange for them the Eight, or Property, to demand payment at a future time out of the profits which he expects to earn in the future Personal Character, used to trade in this way, as Purchasing Power, is termed Credit. And, as we have seen that Anything which has Purchasing Power is Wealth : it follows that Money and Credit are equally Wealth But it is evident that Money and Credit are inverse and opposite to each other. Hence, if Money is a Positive Economic Quantity, Credit is a Negative Economic Quantity All Annuities are Negative Economic Quantities 24. Hence it is seen that all Annuities, or the Rights to a series of future payments : whether the Right be to a single future payment : or to a limited number of them : are Negative Economic Quantities These Negative Economic Quantities comprehend all Mercan- tile and Banking Credit, such as Bank Notes, Bills of Exchange, Cheques, Exchequer Bills, Navy Bills, Dividend Warrants, &c. : also the Land : the Funds : terminable Annuities : Shares in Commercial Companies : the Goodwill of a business: a professional Practice: Patents: Copyrights: Tolls: Ferries: Market Rights : Advowsons: Benefices: Shootings: Leaseholds: Policies of Insur. ancc of different kinds : and other Rights CORRLTTION OF LAXGUAGE 41 Corrvplion of Juridical Language in Modern Times 25. It lias been shown that raauy ^vords which, iu Archaic Jurisprudence, and classical Latin, mean Material Things, in Juridical Iiatin, mean Rights Thus, it is pointed out in Eoman Law, that the words Iter Actus, and Via, which are usually supposed to mean the roadway or pathway, do not mean the material pathway or roadway, but the Right of way So, Aqumdvclus does not mean the material channel in which the water flows ; but, the Right of drawing water over another person's grounds, to which the material channel is appurtenant So, Aquce/iaustus is the Right of drawing water in another pei'son's grounds But, by a reverse process, many words which originally meant Rights, have been corrupted, in popular usage, to mean Thiugs Thus, the word Possession in reality means a Right to things; but, in popular usage, it is applied to the Things themselves So, Dominium originally meant Absolute Ownership: but, in popular usage, it is applied to mean the space of country over which this Dominion is exercised So, Provincia means, properly, certain 'powers of administra- tion entrusted to an official : but, in popular usage, it is applied to the extent of country over which this jurisdiction is exercised This corruption of language has extensively jirevailed in English, and a number of words which in Juridical language mean Rights, are, in common parlance, used to mean Things Thus, when a nobleman or gentleman, has a large Estate : it is popularly supposed that he has the Propel'ty in a large quantity of Land : and the Land is popularly supposed to be his Estate This, however, is a complete error. In the first place, as Williams says :— " The first thing the student has to do is to get rid of the idea of absolute ownership. Such an idea is quite unknown to English Law. No man is, in law, the absolute owner of lands. He can only hold an Estate in them " Absolute property in land is termed allodial. In the Roman Eoapire the owners of land held it in absolute Property, or Bominion, without any superior. And, before the Conquest, this 42 TIIEOFvY OF CREDIT was tbe case in England, and other countries. Wherever the Roman Law prevailed the land was equally divided among a man's children at his death, the same as his movable goods. This was the origin of the small properties in France, which so many believe was the conseqnence of the Frencli Revolution : whereas, the fact is that this law was inherited frorn the Roman Empire, and it applied to all roturkr land. But all feudal land was taken out of its operation, and subjected to the law of primogeniture. What the French Revolution did was to -re-establish the law of equal partition in regard to feudal land. The law of equal division also prevailed in England : and it is supposed that the multitudinous hedgerows which, in many, parts of the country, used to divide the land into so many minute patches, but which have greatly disappeared before the improvements in agriculture, were the consequences of this law Feudal tenure had, to a certain extent, been introduced into England before the Conquest. But, at a great Council held at Sarum in lo^!C, the whole lands of England were surrendered in absolute property to the Crown, except Church lands, and the County of Kent. William I. made a conrposition with the men of Kent to maintain their ancient customs^: so that, in Kent, the land remains as formerly divisible equally among the sons. This is called the custom or law of Gavelkind : but most of the land in Kent has been disgaveled by various Acts of Parliament The Conqueror, then, being the sole absolute proprietor of the land in England, except as above, granted out to his followers certain Rights of use and enjoyment in certain lands : and these Rights were termed Estates But the persons to whom these Rights were granted were bound to render certain services in return ; and, they were never called Owners, or Proprietors, but only Tenants. They were only permitted to enjoy the use and profits of these lands on the express condition of rendering those services to the Crown, which, if they failed to do, they were as strictly liable to forfeiture as a modem tenant, or farmer, for the non-payment of rent. And, at first, these estates were neither alienable no.r transmissible by will, but were strictly life tenancies, which reverted to the Crown at the death of the tenant COREUPTION OF LANGUAGE 43 Thus Littleton speaks of tenants in fee simple : Tenants for life : Tenants at will : Tenants by copy ■ Tenants for terms of years : joint Tenants : Tenants in common : Tenants by grand serjeanty. And the Index, or Tabula, says :— " The first book is of Estates which men have in lands and tenements :'' and, in page 1, hesays ;— " For these words (his heirs) make the Estate of inheritance." So, in Book III., c. *2. :— " Of Estates upon condition," he says, "estates which m*en have in lands and tenements upon condition are of two sorts." And so on, in many other passages. Littleton would never have dreamt of applying the word Estate to the land itself So Bacon says : — " Property of lands by conveyance is first distributed into Estates, for years, for life, in tail, and fee simple. These Estates are created by word, by writing, or by record " An Estate is, therefore, always a RigKt of an order inferior to Property : it, in reality, means a Lease : as Bacon says : — " For Estates for years which are commonly called Leases for years. Such interests, or Estates, in land were always given as the fee or reward for services rendered to the Ciown." So, Bacon also says : — " The last and greatest Estate in lands is fee simple, and beyond this there is none of the former for lives, years, or entails, but beyond them is fee simple. For it is the greatest, last, and uttermost degree of Estates in land" The true meaning of Estate is, therefore, a Lease or Right to use a thing derived from a higher power, for which some service is given : which is /«M(^«Z property : and: an Estate in fee simple means a perpetual lease of lands or tenements, and is, in strictness, only applicable to land The true meaning of the word Estate is also shown in the Tempest, where Iris says : — "A contract of true love, to celebrate, And some donation freely to Estate On the blessed lovers " So, ^geus in Midstimmer Night's Dr.eam, says :— " And all my E,ight of her I do Estate unto Demetrius " So, in As You Like It, Oliver says :— "All the revenue that was old Sir Oliver's will I Estate upon you" 44 thk(h;y of ciiEDi'^r So, n person's Estate is anytliing whatever to wbicli lie has a Right, or Interest : whether it be lands, houses, jewelry, money, cattle, debts, the funds, shares, copyrights, patents, or any other property whatever Farm : another example is the word Farm, ilost persons are accustomed to consider that a Farm is a piece of laud : and that a good Farmer is a good agricnltnrist : and that to farm well means to till the land well. All this, however, is an error. The ^vord Farm, bke Estate, means a Lease. It is called Farm from FifDiux, fi.xed. Whenever a person takes a Lease of anything capable of yielding profits, and upon agreeing to pay a fixed sum, he is allowed to appropriate all the remaining profiles to himself, it is termed a Farm. Thus, in many countries, it used to be the custom to farm the taxes. The words Farm and Estate, therefore, simply meaii Leases : and are, iu reality Rig^hts Tithes : so Tithes are not the produce of the laud, or flocks, or personal industries to which the parson h'as the liight : but the Right itself to demand the produce Eent : so the word Eent does not mean the money, or the produce itself, paid for the use of lands, houses, and other things. Eent, or reditus, is the Right which the owner of such things has to demand compensation for their use frJra the person to whom their use is granted. It is a mere Annuity, a Eight, to demand a series of payments for the continuous use of these things. Formerly the Eiglit to receive interest for money lent was also called Eent. So on the Continent the Funds are still called Rentes Annuity : so the word Annuity does ,'hot mean the sums of money periodically paid : but the Right to. demand them : and is a property quite separate from the money actually paid Funds : This is a popular name for the Rights which persons have to receive annual payments for money they have advanced to the state. This, however, is a mere popular name : the legal name is Bank Annuities WEALTH IS AX EXCHANGEABLE KIGHT 45 Credit ov Debt; so a Credit or Debf/is the Right wliich a person has to demand a sum of money *sfrom auotlier person : and not the Money itself which is due Shares in ('ommerciul Companies are tlie Rights which the persons who have subscribed to the Capital liave to participate in the profits earned by the company So, a Fishery, Shootings, Turbary, Tolls, Ferries, &c., are not Rights to actual fish, game, tnrves, moneys : but the Rights to receive them Wealth ill Economics is an Exchangeable Right 26. It follows from the preceding considerations that the true definition of Wealth in Economics is : an Exchangeable Right Now, there are Three kinds of Rights, or Property, which can be bought and sold : or exchanged : or whose Value can be measured in JMoney 1. Corporeal, or Material Property, or Rights. There may be tiie Riglit, or Property, in some specific material substance wiiich has already come into existence : and has come into the actual possession of the owner. 'J'liis species of Property in Roman and English Law is termed Corporeal Property : because it is the Right to some specific corpus. It'is also called Material Property : because it is the Right to certain specifio Matter. Hence, we term this species of Property Corporeal or Material Wealth 2. Immaterial Property. The Property which a man has in his own mental and intellectual Qualities : in his own Labor : or in his capacity to render any sort of Service. As Smith says — "The Property which every man has in his own Labor, as it is the original foundation of all other Property, so it is the most sacred and inviolable " Now a person may sell the Right to demand some Labor or Service from him. As all these services, though they require some bodily instrument to give effect to them, are, in reality, operations of the mind, we may call them Immaterial Property : or Imma- terial Wealth : as J. B. Say, the French Economist does 46 THEORY OF CREDIT 8. Incorporeal Property. There is, lastly, a third kind of Property, or Eight, wholly separated and severed from any specific corpus, or matter in possession. It may either be in the possession of some one else at the present time : and may only come into our possession at some future time : or it may be even not in existence at the present time Thus, we may have the Eight, or Property, to demand a sum of money from some pei'son at a future time. That sura of money may, no doubt, be in existence at the present time : but it is not in our possession : it may not even be in the present possession of the person bound to pay it. It may pass through any number of hands before it is paid to us. But yet onr Eight to demand it at the proper time is present and existing • and we may sell, or transfer, that Right to any one else for moijiey AYe may also have the Eight to something which is not yet even in existence : but will only come intq existence at a future time Thus, those who possess lands, cattle, fruit trees, &c., have the Eight, or Property, in their future produce. This produce is not in existence at the present time : it will only come into existence at a future time ; but the Right, or Property, to it when it does come into existence is present and existing;: and may be bought and sold like the Eight to any material product. This species of Property is called, in Eoman Law and English Law, Incorporeal Property : because it is a Eight, but sepaj-ated from any specific corpus. Hence it is called Incorporeal Wealth But all these three different kinds of Eights possess the Quality of Exchangeability : they can all be equally bought and sold, or exchanged : their value can all be measured in money : they are all equally merchandise, or articles of commerce. They are therefore Pecunia, Res, Bona, Mcrx : xp^fj^ara, trpdyfx.aTa, oTkos, ayadd, ovcrio. : goods, goods and chattels, vendible commodities, in the Jurisprudence of all nations And as it is the Quality of Exchangeability which alone constitutes anything "\Tealth : and is tlje sole quality which Economics regards : it follows that all these Three kinds of Eights are equally Wealth in Economics : stnd all the fundamental concepts or definitions, and all the Laws of Economics must be OVERTIIKOW OF LUCRETIUS 47 enlarged and generalised so as to comprehend indiiferently the exchanges of these three Orders of Eights Reply to the Dogma of the Economists that Immaterial and Incorporeal Quantities are not to be admitted to t)e Wealth 27. 1- We have shown that the Economists steadfastly refused to admit that Labor and Credit are Wealth ; because they alleged that to term them Wealth, would be to maintain that Wealth can be created out of Nothing But we have also shown that ancient writers unanimously held that Labor and Credit are Wealth — and that modern writers now also unanimously hold that Labor and Credit are Wealth — in total defiance of the dogma that Nothing can cdme out of Nothing It has also been shown that according to the Laws of Natural Philosophy, the Economists were in error in excluding Labor and Credit from the title of Wealth : and that ancient and modern writers are right Nevertheless there are still some people who feel a difficulty on the subject, and are somewhat startled at the idea that Wealth can be created out of Nothing. We shall see what a facile answer can be given to the dogma of the Economists, by the considerations we have presented The real difficulty which impedes the true apprehension of the subject, is very similar to that which for a long time obstructed the reception of the Newtonian Theory of Gravitation on the Continent It had long been laid down as an incontrovertible dogma, that a body cannot act where it is not When, therefore, the Newtonian doctrine of central forces was published, showing that the motions of the planets may all be accounted for by certain forces emanating from the sun and themselves, the opponents of the system maintained that it violated the fundamental dogma that a body cannot act where it is not. And several of the most eminent continental philosophers, Leibniz, Hnyghens, the Bernouillis, and the French Mathematicians, who were all followers of the Cartesian vortices,Jong refused to receive the Newtonian Theory of Gravitation on that account 48 THEORY OF CREDIT A similar difficulty is at the root of tlje diflficnlty which tlie Economists, and some modem writers, feel in admittiug Labor and Credit to be Wealth Many thousands of years ago a materialistic philosophy sprang lip on the banks of the G-tmges. Kapila is said to have been the author of the Sankhya Philosophy, and to have invented the dogma Nothing can come out of Nothing. This Philosophy migrated from the banks of the Ganges lo those of the Ilissns and the Tiber ; and is familiar to us under the names of Leucippus, Anaxagoras, Uemocritus, Epicurus, Lucretius and scores of others The fundamental dogma of Lucretius, the hierophant of the materialistic philosophy, is, that No Thing can come out of Nothing -De Rer. Nat., L, IT)! : 20;'). "Nullam Rem e Nihilo gigni divinitus unquam" " 77ie Deity never yet made Any Thin^ out of Nothing" " Nil igitnr fieri de Nilo posse fatendutnst " " // must therefore be allowed that Nothing can he created out of Nothing" Jforeover, that No Thing can go lack inJo Nothing, I., 21G, &c. " Hue accedit uti quceqiie in sua Corpora rursum Dissolvat Natura, neque ad Nihilum interimat Ees" " Hence, it follows that Nature resolves all things into their own elements ; and does not destroy Things into Nothing" " Nullius exitium patitur Natura videri " Nature does not suffer the annihilationof anything to he seen " Immortali sunt natura prcedita certo Haud igitur possunt ad Nihim qusequereverti " They are, therefore, endowed mth an immortal nature. There- fore, things cannot revert into notliing " Haud igitur redit ad Nihilum Res ulla, sed omnes Diseidio redeunt in corpora raateriai " Therefore, Any Thing cannot go hack into Nothing, hut all, tvlien destroyed, return into the elements of matter "Haud igitur penitus pereunt quaecun^ue videntiir Quando alid ex alio reficit natura, nee uUam Rem gigni patitur, nisi morte adjutum alieua " IMMATERIAL QUANTITIES AS EES 49 Therefore, visible things do not altogether perish when nature remakes one thing out of another, nor does she suffer any Thing to be produced unless aided by the destruction of another And this is the constant refrain of the'ljucretian philosophy : that^Vo Thing can he created out of Nolhimj : and that No Thing can go back into Nothing " Xunc age Res quoniam docui non posse cveari De Nihilo, neque item genitas ad Nil revocari" Noii', come, since I have taught that Things cannot be created out of 2\othing : no more than when once produced can theij be reduced into Kothing "At qnoniam siipera docui Nil posse Qrcari De Nihilo, neqne quod genitumst ad Nil revocari, Esse immortali Primordia corpora debent " *' But, since I have taught above that Nothing can be created out 0/ Nothing : and, that what is once ^jroduced cannot be called back into Nothing, the elements must be endowed with immortal bodies " And this is the very doctrine that physicists maintain to the present day. Chemists dehght to expatiate to their audiences on. the indestructibility of all things. How seeming destruction is merely the dissolution of atoms under their present combinations, to re-appear in new forms and new combinations in perpetual succession The fallacy upon which the whole Lucretian philosophy makes shipwreck, so far as regards Economics, is that he throughout assumes that Nulla Ees is the same as Niltil We have shown that the word Res in Roman Law includes Immaterial and Incorporeal Quantities of 411 kinds : because Res means any Thing whatever which can be ;the object of a Right, and, therefore, necessarily includes Labor and Credit On Immaterial Quantities as Res, or Wealth 27. 2. But, Economics and Law confound the best settled doctrines of the sages of Eld. Jurists of all nations unanimously class Immaterial and Incorporeal Quantities under the terms 50 THEORY OF CREDIT Res, Pecimia, Bona, Merx : )(p?;/xaTa, Trpay^ara, oTkos, ova-ia, ova-ta ddv7) T/aay/xara, -n-XoVTO^, ova-ta, oTkovTa ''Ky(a.ioi, aAXot p.iv ^aA.^w, aXXoL S'atOuivl (TtSv^po), aXXoi Se pivots, dkXoi 8 avrrjat jSoeCTcnv, oA.A.01 8 avSpawoSeaai ' " Prom Lemnos' isle a numerous fleet had come Freighted with wine All the other Greeks Hastened to purchase, some with brass and some With gleaming iroa : some with hides, Cattle and slaves " This exchange of products against products is termed Barter : and the inconveniences of this mode of trading are obvious. What haggling and bargaining it would require to determine how much leather should be given for how much wine ! how many oxen, or how many slaves ! ON THE XECESSITY FOR MONEY 65 In the Homeric poems there is not the faintest allusion to anything of the nature of Money. But c^i;n in those days some ingenious person had discovered that it would greatly facilitate commerce if the products to be exchanged were referred to some common measure of Value There are seA'eral passages in the Iliad which show that while traffic had not advanced beyond Barter, such a standard of reference was used. "We find that various things were frequently estimated as being worth so many oxen. Thus in Iliad, ii., 448, Pallas's shield, the ^gis, had one hundred tassels, each of the value of one hundred oxen. In Iliad vi., -231, Homer laughs at the folly of Glaucus, who exchanged his golden armour, worth one hundred oxen, for the bronze armour of Diomede, worth nine oxen. In Iliad xxiii., 703, Achilles offers as a prize to the winner in the funeral games in honor of Patroclus, a large tripod, which the Greeks valued among themselves at twelve oxen : and to the loser, a female slave, which they valued at four oxen But it must be observed that these oxen did not pass from hand to hand like Money. The state of Barter continued : just as at the present day it is quite common to exchange goods according to their value in Money, without any actual Money being used On the Necessity for Money 34. 2. The necessity for Money arises from a different cause. So long as the products exchanged were equal in value there would be no need for Money. If it could always happen that the exchanges of products or services were exactly equal there would be an end of the transaction But it would often happen that when one person required some product or service from another person, that other person would not require an equal product or service from him in return : or even perhaps none at all If, then, such a transaction took place between persons with such an Unequal result, there would rfemain over a certain amount of product or service due from the one to the other 6G THEORY OF CREDIT And this would constitute a Debt ; that is to say, a Eight or Property would be created in the person 'who had received the less amount of product or service to demand the balance due at some future time. And at the same time a corresponding Duty would be created in the person of the other, who had received the greater amount of product or service, to pay or render the balance due when required Now, among all nations and persons who exchange or traffic with each other this result must inevitably, happen : persons want some product or service from others, while those others want either not so much, or even perhaps nothing at all from them. And it is easy to imagine the inconveniences which would arise if persons could never get anything they wanted, unless the persons who could supply these wants, wanted something equal in value in return at the same time In process of time all nations hit upon this plan : they fixed upon a material substance which they agreed to make always exchangeable among themselves to represent the amount of Debt That is, if an unequal exchange took place between persons, so leaving a balance due from one to the other : the person who had received the greater amount of product or service gave a quantity of this universally exchangeable merchandise to make up the balance : so that the person who had received the lesser amount of product or service might obtain an equivalent from some one else Suppose that a winedealer wants bread from a baker : but the baker wants not so much wine, or no wine from the winedealer. The winedealer buys the bread from the baker, and gives him in exchange as much wiae as he wants, and makes up the balance by giving him an amount of this universally exchangeable merchandise equivalent to the deficiency : and if the baker wants no wine at all, he gives him the full equivalent of the bread in this merchandise The baker wants, perhaps, meat or shoes, but not wine. Having received this universally exchangeable merchandise from the winedealer, he goes to the butcher or the shoemaker, and obtains from them the equi\'alent of the bread he has sold to the wine dealer. Hence, the satisfaction which was due to him from the wine dealer is paid by the butcher or the shoemaker TRUE NATURE OF MONEY 67 This universally exchangeable merchandise is termed Money : and these circumstances show its fandamental nature. Its function is to represent the Debts which arise from unequal exchanges among men : and to enable persons who have rendered any sort of services to others, and have received no equivalent from them, to preserve a record of these services, and of their Rights to obtain an equivalent satisfaction froju some one else, when they require it ArhMle, Bishop Bprhnhij, the Economists, Adam Smith, Thornton, Bastiat, Mill, and Jurists have seen the trite nature of Money 34. 3. The true nature of Money is now apparent. It is simply a Right or Title to demand some Product or Service from some one else Now, when a person accepts Money in exchange for products or services rendered lie can neither eat it, nor drink it, nor clothe himself with it : nor is it any species of Economic satisfaction for the service he has done. He only agrees to accept it in exchange for the services he has rendered, because he believes, or has confidence, that he can purchase some satisfaction which he does require, at any time he pleases. Monefy is therefore wliat is termed Credit A whole series of writers from the earliest times have perceived that the true nature of Money is merely a Right or Title to acquire some satisfaction from ;some one else, i.e., a Credit Thus Aristotle says, Nicomach, Ethics, B.V. : " vVep Se Tijs y,iWov;T);s ecTTiv i^fuv. oa yap TOVTO €povTt elvac Xafielv " But ivith regard to a future exchange (if ice want nothing at present that it may take place vhen we do ivant something) Money is, as it tvere, our Security. For it is necessaiij that he who brings il, should he able to get whcd. he wants " f2 68 THEORY OF CREDIT So a London merchant, P. Cradocke, in the time of the Commonwealth, says — " Having now pointed out the incon- venience of these metals (Gold and Silver) in which the medium of commerce, or Universal Credit, hath formerly been placed . . "Now that Credit is as good as Money will appear, it is to be observed that Money itself is nothing but a kind of Security, which men receive upon parting with their commodities, as a ground of Hope or Assurance, that they shall be repaid in some other commodity : since no man would either sell or part with any for the best Money, but in hopes thereby to procure some other commodities or necessary " So an old pamphleteer in 1710, saw the same truth. He says* — " Trade found itself unsufferably straightened and perplexed for want of a general specie of a complete intrinsic worth as the medium to supply the defect of exchanging, and to make good the balance, where a nation or a market, or a ^merchant demands of another a greater quantity of goods than either the buyer hath goods to answer, or the seller hath occasion to take back" So the great metaphysician, Bishop Berkeley says in his Querist — 21. Whether the other things being given, as climate, soil, &c., the wealth be not proportioned to industry, and this to the circulation of Credit, be the Credit circulated by what Tokens or Marks whatever ? 24. Whether the true idea of Money, aSi such, be not altogether that of a Ticket, or Counter ? 25. Whether the terms crown, livre, pound sterling are not to be considered as exponents or denominations : and whether Gold, Silver, and Paper, are not Tickets or Counters, for reckonino-, recording and transferring such denominations ? 35. Whether Power to command the Industry of others be not real Wealth ? And whether Meney be not in truth Tickets or Tokens, for recording and coiweying such Power : and whether it be of consequence what material the Tickets are made of ' An Essay on Puhlie Credit, p, 25 TRUE NATURE OF MONEY 69 426. Whether all circulation be not alike a circulation of Credit, whatsoever Medium — Metal or Paper — is employed : and whether Gold be any more than Credit for so much Power ? See also Queries 441, 449, 450, 459, 475, and many others It is one of the special merits of the Economists that they clearly saw the true nature of Money. Among many others Baudeau, one of the most eminent among them, says^ — " This coined Money in circulation, is nothing, as I have said elsewhere, but effective Titles on the general mass of useful and agreeable enjoyments, which cause tlie well being and propagation of the human race " " It is a kind of Bill of Exchange or Order, payable at the will of the bearer " " Instead of taking his share in kind of all matters of subsis- tence, and all raw produce annually growing, the sovereign demands it in Money, the effective Titles, the Order, the Bill of Exchange, &c." So Edmund Burke speaks of Gold and Silver as^ — " The two great recognised species that represent the lasting Credit of mankind " So Smith says' — "A guinea may be considered as a Bill for a certain quantity of necessaries and conveniences upon all the tradesmen in the neighbourhood " So Henry Thornton, the eminent banker, one of the authors of the Bullion Keport, says*—" Money of every kind is an Order for goods. It is so considered by the laborer when he receives it, and it is almost instantly turned into money's worth. It is merely the Instrument by which the purchasable stock of the country is distributed with convenience and advantage among the several members of the community " ' Introduction A la Philosophie JSconomigue ^ Mefiectiona on the French Mevolution ^Wealth of Nations, B. II., c. 2 * An Enquiry into the Nature and Ejects of the Paper Credit of Great Britain, p. 260 70 THEORY OF CRKDIT This great fundamental truth was also very clearly seen by Bastiat. He says ^ — " You have a crown piece. "What does it mean in your hands ? It is, as it were, the witness and the proof, that you have at some time done some work, which, instead of profiting by, you have allo^-ed society to enjoy, in the person of yonr clients This crown piece witnesses that you have rendered a service to society, and, moreover, it states the Value— of it. It witnesses, besides, that you have not received back from society a real equivalent service, as was your Eight. To*pat it into your power to exercise this Eight when and how yon please, society, by the hands of your client, has given you an Acknoioledgment or Title, an Order of the State, a Token, a crown .piece, in short, which does not differ from Titles of Credit, except that it curries its Value in itself (?), and, if you can read with the eyes of the mind, the inscription it bears, you can see distinctly these words — ' Pay to the bearer a service equivalent to that ivhicli he has rendered to society, value received and stated, proved and measured by that which is on me ' " After that you cede your crown piece to me. Either it is a present, or it is in exchange for something else, if you give it to me as the price of a service. Sec what follows : your account as regards tiie real satisfaction with society is satisfied, balanced, closed. You rendered it a service in exchange for a crown piece, you now restore it the crown piece in exchange for a service : so far as regards you the account is settled. But I am now jnst in the position you were in before. It is I now who have done a service to society in your person. It is I who have become its creditor for the value of the work which Ivhave done for you, and which I could devote to myself. It is into my hands, therefore, that this Title of Credit should pass, the witness and the proof of this social Debt. You cannot say that 1 afn richer, because if I have to receive something, it is because I have given something " So again he says^ — " It is enough for a man to have rendered services, and so to have the right to draw upon society by the means of exchange for equivalent services. That which I call the Means of Exchange, is Money, Bills of Exchange, Bank Notes, ' Ociwres, Vol. II., ilaudit Argent, p. 80 'Harmonies Ecoiwmiques, Capital, p. 209 TEUE NATURE OF MONEY 71 and also Bankers. Whoever has rendered a service, and has not received an equal satisfaction, is the Bearer of a warrant, either possessed of value like Money, or of Credit, like Bank Notes, which gives him the Right to draw from society, when he hkes, and under what form he will, an equivalent service " So again he says* — "I take the case of a private student. What is he doing at Paris ? How does he live there ? It cannot be denied that society places at his disposalfood, clothing, lodging, amusements, books, means of instruction, a multitude of things, in short, of which the production would demand a long time to be explained, and still more to be effected. And, in return for all these things, which have • required so much labor, toil, fatigue, physical and intellectual efforts, so many transports, inventions, commercial operations, what services has the student rendered to society. None : he is only preparing to render some. Why then have these millions of men who have performed actual services, effectual and productive, abandoned to him their fruits ? " This is the explanation : — The father of this student who was an advocate, a physician, or a merchant, had formerly rendered services — it may be to the people of China — and had received, not direct services, but, Rights to demand services, at the time, in the place, and under the form which might suit him the best. It is for these distant and anterior services that society is paying to-day : and wonderful it is ! If we follow in thought the infinite course of operations which must have taken place to attain this result, we shall see that everyone must have been remunerated for his pains : and that these Rights have passed from hand to hand, sometimes in small portions, sometimes combined, until, in the consumption of this student, the whole has been balanced. Is not this a strange phenomenon ? " We should shut our eyes to the light if we refused' to acknowledge that society cannot present such complicated trans- actions, in which the civil aud penal laws have so little part, without obeying a wonderfully ingenious mechanism. Tliis mechanism is the object of Political Economy" ' Harmonies Economiques, OrganvMtion S'aturdla, p, 25 72 TIIEDHY OF CHEDI-T So Mill says'^ — " The Pounds or Shillings which a person receives, weekly or yearly, are not what coustitute his income : they are a sort of Ticket or Order, which he can present for payment at any shop he pleases, and which entitles him to receive a certain Value of any commodity that he inakes choice of. The farmer pays his laborers and his landlord in these Tickets, as the most convenient plan for himself and them " It is so clearly understood that Money is, in reality, nothing more than the Right or Title to demand something to be paid or done, that many Jurists expressly class it under the Title of Incorporeal Property Thus Vulteius says — " Nummus in quo non Materia ipsa, sed Valor attenditur " "Money m which not the Material but the Value is regarded" That is, we desire or demand other jthings for the direct satisfaction they give us : but we only desire Money as the Means of purchasing other things Gold and Silver Money may, therefore, be justly termed Metallic Credit Thus, it is seen that writers of all classes, Philosophers, Merchants, Bankers, Economists, and Juj-ists, are all perfectly agreed upon the nature of Money. It represents Indebtedness : or services due to the owner of it : and it represents the Bight or Title, which its holders have to demand some product or Bsrvice in recompense for some service they have done to some one else On Credit 34. 4. So long as nations continue in a low state of civilisation, all the Money, or Credit, is made of some material substance. But when they advance in civilisation they make use of Credit of another form 'Fiiiicijpki of PoUtkal Economy, B. III., c, 4 ON CREDIT 73 To revert tx) the case from which we shcfwed that the necessity for Money arose out of unequal exchanges among men : suppose that, if, instead of the general merchandise called Money, by which the Creditor can obtain a satisfaction from some one else, the Debtor simply gives a Promise that he himself will render the balance due when required. Then the Creditor has also the Eight to demand an equivalent at a future time, but only from his own Debtor Suppose that a person holds a tea merchant's Promise to deliver a chest of tea when required : and the tea merchant is able to deliver the tea, it is evident that that Promise is exactly equivalent to so much Money in that particular case Now that Promise is ouly the Right to demand a particular commodity from a particular person. And that person may die, or become bankrupt : and be unable to fulfil his promise. Hence, the Promise is both particular and precarious. But, so long as the tea merchant is able to deliver the tea when required, the tea is the Value of the Promise : and, to any one who wants tea, the Promise is of the same Value as Money in that particular case This Order, or Promise, or Right, is what is usually termed Credit, and, though it is of a lower and inferior form, it is clearly seen that it is of the same general nature as Money Moreover, this Right may be bought and sold, or exchanged, exactly like Money Suppose that a second person had performed services to a wine merchant, and, as before, had received a Promise from him to deliver a certain quantity of wine : then, of course, the Promise to pay the wine would be of the value of the wine Suppose, then, that the person who held the Promise to pay the tea, did not happen to want tea : but did happen to want wine. And suppose that the person who held the Promise to pay the wine, did not happen to want the wine ; but did happen to want tea. If those two persons met, and declared their respective wants to each other, they might agree to exchange their respective orders, according to the respective Value of the tea and of the wine. Hence, each person would obtain the satisfaction he required 74 THEORY OF CREDIJ The same also is true with respect to every other Promise to pay any other product. An order for a shiUing's wortli of milk, or bread is exactly of the value of a shilling in these particular cases : and so on in regard to every other product in succession. The .only difference is that each Order has only one particular Value : while with a shilling he can get any of the products he may require. Thus, while each Order has only one Value, a shilling has a general Value, and can purchase any one of them But these Orders arc simply so many Circulating Credits, or Debts : and they may be interchanged among their respective holders, in any way they please. So that a person who holds several Orders for one thing only, may exchange them against Orders for as many other things as he may;require Now, as in Economics, we are in no way concerned with the materials of things ; but only with their capacity of being exchiinged, or bought and sold : and, as these Orders may be bought and sold or exchanged, exactly like any material chattels : they are termed Pecunia, Res, Bona, Mers, in Roman Law : ■XpriixaTa, ayaOd, Trpd.yfj.aTa, -irXovTO?, ovtria; plkos, &C., in Greek Law : and Goods, Goods and Chattels, Vendible Commodities, Incorporeal Chattels, and Incorporeal Wealth in English Law ; and, therefore, Wealth in Economics From this it is seen that it is perfectly possible to carry on the exchanges of society without material Money. During the great civil war in America, gold and silver Money entirely disappeared from circulation : and private Tickets, or Orders, of the nature described above, took its place. Instead of iletallic Money people had their pockets filled with bread tickets, railroad tickets, and many others. If a man had his hair cut and tendered a dollar in payment, he could not get change in Money : but the hairdresser gave him so many tickets promising to cut his hair so many times. We saw one case in an American paper in which payment was made in tickets, or bills, promising to pay in straw- berries when the season came on SUBSTANCES USED AS JtONEY 75 In this country it is so usual to have Credits payable in Money only, that it is sometimes supposed that Credits can only be payable in Money. But, in the south of Europe, it is quite common to make Bills payable in the products of the earth, such as oil, currants, &c. This seemed so novel a doctrine that we shall find hereafter that Lord Cranworth, when Chancellor, asserted that a Bill promising to pay in iron was not legal On Substances used as Money 35. The necessity for Money has arisen among all nations, the most barbarous as well as the most civilised. As soon as the members of any community, however barbarous, begin to exchange among themselves, unequal exchanges must necessarily arise : and therefore Indebtedness is created. And some substance is hit upon to represent these services due : and the Eights, which its holders have, to demand some product or service in satisfaction of the services they have done to some one else A great many different substances have been used by dift'erent nations to represent this universal want. The Hebrews, we know, used silver. No money was used in the times of the Homeric poems : but some time after them, though we cannot say when, copper bars or skewers were used as money throughout Greece, which Pheidon of Argos, in the eighth century, B.C., superseded by silver coins. The jiEthiopians used carved pebbles : the Carthaginians used leather discs, with some mysterious substance senn up in them. Throughout the ilands of the Eastern ocean, and in many parts of Afiica, shells are still used. In Tln'bet, and some parts of China, little blocks of compressed tea are used as money. In the last century dried cod was used as money in Kewfoundland : sugar in the West Indies : tobacco in Virginia. Smith says, that in his day nails were used as money in a village in Scotland. In some of the American colonies powder and shot : in Campeachy, logwood : and among the North American Indians belts of wampum were used as money. We read of another people who used cowries as small change, and the skulls of their enemies for large sums. It is said that in Yirgiuia, in 1867, the 76 THEORY OF CREDIT proprietors were reduced to such straits, aS to use dried squirrel skins as mouey. And many other thingis have been used in various countries for the same purpose But, when we consider the purposes for which Money is required, it is easily seen that no substapfce possesses so many advantages as a Metal. The use of Money being to preserve the record of services due to its possessor for any future time, it is clear that Money should not alter by time. A Money of dried cod would not keep very long, nor would it be easily divisible. Kot many bankers would like to keep their accounts in dried cod, tobacco, sugar, or in dead men's skulls One of the first requisites of Money is that it should be easily divisible into very small fragments : so that its owner should be able to get any amount of service he pleases at any time. Taking these requisites into consideration it is evident that there is no substance which combines them so well jas a Metal. Metal is uniform in its texture : it can be divided into any number of fragments, each of which shall be equal in value to any other fragment of the same weight : and, if required, these fragments can always be re-nnited and form a whole again of the value of all its parts : which can be said of no other substance All civilized nations, therefore, have adopted a Metal as Money : and of Metals, Gold, Silver, and Copper, have been chiefly preferred The Chinese invented Paper Money 86. "We have now to treat of a material used as Money, which, in latter times at least, has had incomparably more influence in the world than all the gold and silver : namely Paper The Eomans invented the business which, in modern language, is termed Banking. The Roman bankers invented Cheques and Bills of Exchange, but they did not invent iBank Notes. The use of Cheques and Bills of Exchange by the jlomans was extremely narrow, restricted to the immediate parties ; and they never, as far as we are aware, got into general circulation so as to serve the purposes of Money THE CHINESE INVENTED PA-PER MONEY 77 The invention of Paper to be used as circulating Money is due to the Chinese In the beginning of the reign of Hiantsong, of the Dynasty of Thang, about the year 807 a.d. there was great scarcity in the country. The Emperor ordered all the merchants and rich persons to bring all their money into the public treasury, and, in exchange for it, gave them Notes, called fey-thsian, or flying money. In three years, however, this money was suppressed in the capital, and was only current in the provinces. In 960 A D., Thai-tsu, the founder of the Soung Dynasty, revived this practice. Merchants were allowed to deposit their cash in the public treasuries, and received in return Notes, called pian-thsian, or current money. The convenience of this was so great that the custom quickly spread, and in 997 there was paper in circulation to the amount of 1,700,000 ounces of silver, and in 1021 it had increased to 2,830,000 ounces. At this period a company of sixteen of the richest merchants were permitted to issue Notes payable in three years. But at the end of that term the company was bankrupt, which gave rise to much public distress and litigation. The Emperor abolished the Notes of this company and forbade any more joint stock banks to be formed. Henceforth the power of issuing Notes was kept in the hands of the Govern- ment. These notes were also called kiao-tsu, and were of the value of an ounce of silver. In 1032 there were Jciao-tsu to the value of 1,256,840 ounces in circulation. Subsequently banks of this nature were set up in each province, and the Notes issued by one provincial bank had no currency in any other. These were the first bank notes on record — that is to say, notes issued in exchange for money, or convertible into money : and not paper money, or paper created without any previous deposit of specie. Besides these bank notes, the Chinese manufactured Paper Money to a vast extent^ It would be too long here to give a complete history of the Paper Currency of China : but we have given some full notices of it elsewhere. 2 But it may interest our readers to know the process of its manufacture ' Klaproih, Journal Asiatique, Vol, I., p. 256 ' Dkiionmij of Folitkal Ecommy, Art. Cunency, p, GGG. 78 THEORY OF CREDIT About 1288 Marco Polo traveled in China, and discovered the existence of this Paper Money. In Book II., c. 18, he gives an account of its manufacture. He says that it was made in Kanbalu. The inner rind of the mulberry tree was steeped and pounded in a mortar, and then made into paper, resemibling that made from cotton, but quite black. It was then cut into pieces nearly square, but of different sizes. The smallest were of the value of a denier tournois : the next for a Venetian groat : others for two, five, or ten groats : others one to ten gold besants. Several officers had to subscribe their names, and pjace their seals on each note, which were then stamped with the royal seal dipped in Vermillion. Counterfeiting was a capital offence. It had then a forced currency, and no one dared to refijse it on pain of death. Caravans of merchants arrived with their goods, which they laid before the king : who selected what he pleased, and paid them in Jhis money. When any one wished to exchange old money for new, it was done at the Mint, at a charge of three per cent. If any one wanted gold or silver for manufacture, they could obtain bulhon at the Mint in exchange for tlie paper. Marco Polo mentions many cities where he observed this money in circulation In the next century Sir John Mandeville traveled in China, and speaks of this paper money ' — " This Emperonr may dispendea als moche as he wile, with outeu estymaciouri. For he despendethe not, he makethe no Money, but of Lether emprented, or of Papyre. And of that Moneje, is som of gretter Prys, and som of lasse prys, aftre the dyversitie of his Statutes. And whan that Money hathe runne so longe, that it begynnethe to waste, than men beren it to the Emperoure's Tresorye : and than thei taken newe Money for the olde. And that Money gothe thorghe out alle his Provynces. For there and bezonde them, thei make no Money nouther of Gold nor of Sylver. And therfore he may despende y now, and outrageously " Credit and Paper, either payable in specie or inconvertible, now forms the great circulating medium or teurrency of the world, and, as we shall show hereafter, amounts to at least fifty times the quantity of specie in this country ' The Voiagc and Trarnik, p. i?,%. ;Edit, 1839 CREDITS PAYABLE IN SERVICES 79 Credits payable in Services 37. In every Obligation or Contract the party wlio has the Eight to enforce the performance of the Dnty is the Creditor, aud the party whose duty it is to perform it is the Debtor The words of the Digest are generah A Credit is the Right to compel a person to Pay or Do something. Hence large amounts of Credit are payable, not in any material substance. Money or any other : but in Personal Services Thus, in feudal times Rents were payable not only in Money, or in products of the earth, termed Rents in kind : but also in Personal Services : and such Rents were -termed Rent Services. And the person who has the Right to demand a service is as much a Creditor as the person who has the right to demand the payment of a material substance : and the person who is bound to render a service is as much a Debtor as the person who is bound to pay some material substance A jaded legislator has taken shootings in the Highlands. On the 10th of August he goes to the office of the railway and pays five guineas for a ticket to Inverness. That ticket is a Credit : it is a Bill of Exchange payable in a railway journey to Inverness Or, a person wishes to see Irving in Hamlet. He has, perhaps, to buy a ticket for a box a fortnight in advance. That ticket is a Credit or Right of action,or a Bill payable in seeing Irvingin Hamlet A College engages one of its members at a quarterly salary to give lectures to its students. The lecturer gives his lectures, and thus acquires a right to demand his salary from the College. This Eight of Action is the Credit or Debt A member of the University gives lessens to private students. The fee is paid either in advance or after the lessons given. If the fees are paid in advance, the student acquires a Right of action, a Credit or a Debt, against his tutor to demaild so much instruction. If the lessons are given first, the tutor acquires a Right of action, a Credit or a Debt, to demand payment for his lessons The master of a household engages servants and agrees to pay them wages monthly, or quarterly, as the case may be. When the servants have performed these terms of service, they have a Eight of action against their master for their wages. The Right of action is a Credit or Debt 80 THEORY or CREDIT So there are innumerable other cases where persons contract to perform professional services. These 'contracts to perform services are as much Obligations as Contracts to pay material substances Hence Credit can purchase services exactly in the same way as Money : is is a Purchasing Power which can effect any result that Money can The Function of Credit is to bring info Commerce the Present Values of Future Profits 38. The true function of Credit is now apparent It is a very common idea that Credit is the goods which are "lent'": or the transfer of theQi Such ideas are utterly erroneous. We have shown that a Credit is the Present Right to a Future Payment And the true function of Credit is to bring into commerce the Present Values of Future Profits When an estate in land is sold the Present Value of all its Pnture Profits is expressed and brought into circulation, or commerce, by the Money paid for it The total amount of the Shares in any commercial company, banking, railway, insurance, canal, or any otTier, denotes the value of the existing property of the company, together with the total Present Value of their Future Profits The money paid for the Goodwill of a business, a copyright, a patent, a professional practice, &c., is ;the Present Value of their Future Profits So, when a merchant or trader trades on " Credit " he brings into commerce the Present Value of a Future Profit. He buys the goods or the labor, and gives as their Price the right to demand a sum to be paid out of the expected profits So when the State contracts a loan, it buys the money, and gives as its price, the Rigl;t to demand a sum of money out of the future income of the people FUXDAJfENTAL CONCEPT OP MONEY 81 So when municipal corporations and other public bodies contract loans, they buy money, by giving'as its price the Eight to demand payments out of the future revenues of their constituents So Credit in all its forms, and to whatever purpose it is applied, simply brings into commerce the Preseiit Value of a Future Payment The Fundamental Concept of Monetary Science 39. The preceding considerations no\t enable us to perceive the Fundamental Concept of Monetary Science "We have seen that writers of all classes are agreed as to the fundamental nature of Money. It represents Debts which are due to persons who have done services to others, and liave received no equivalent services in return. It merely represents the Right to demand these equivalent services when they please : and its special function is to measure, record, and preserve these Rights for future use : and to transfer these claims to any one else If all the services exchanged in society exactly balanced, there would be no need for Money Supposing,, then, that there was nothing but Metalhc Money in use, the following axiom is evident — " The Quantity of Money in any Gauntry represents the Quantity of Debt that there would he, if there ivere no Money " But, as we have seen, that in civilised pountries these Debts, or Rights, are recorded in the simple fqrm of Rights against particular persons, as well as in Metallic Coin, which are Rights against the general community, the term Currency, includes these Debts or Eights in both forms Hence, it is clear that the Currency represents nothing but Transferable Debt : and that whatever represents Transferable Debt is Currency, whatever its nature or form may be, either Metal, or Paper, or anything "else Consequently, this proposition necessarily follows — ■ " Wlirre there is no Debt tlte^-e am be no Currency " G 82 THKORY OF CI^EniT All (.■I'l'oiieons tlicorics of Ciirrenoy have been founded on not perceiving the fiindamentnl nature of Currency : and the greatest monetary disasters the world has ever seeujhave been produced by violating this fundamental axiom On the Distinction between Money and Credit 40. It has now been shown that Money and Credit are essentially of the same nature : Money being only the highest and nuist general form of Credit. They are each a Right or Title to demand something to be paid or done by some one else JS'n one can compel any one else to sell him anything for Money or Creilit. AVhen, therefore, any person .has voluntarily taken Money ill exchange for anything it is in reality only Credit : because he only takes it in the belief that he can exchange it away again But suppose that a sale has taken place, and that a Debt has been incurred thereby : public pohcy requires that the Debtor should lie able to compel the Creditor to accept something in discharge of his Debt. It would cause infinite misery if Creditors could arbitrarily refuse the offer of p£(yment of their Debts. Hence in all countries the Law declares that if a Debt has been incurred, the Debtor can compel the Creditor to accept some si)ecific thing in payment of it Whate\er that Something is which a Debtor can compel a Creditor to accept in payment of a Debt, is termed Money or Legal Tender From this it follows that some things may be Money in some cases, and not in others Gold Coin is Money, or Legal Tender, i.n all cases and to any amount Silver is only Money to the amount pf 40s. If a creditor chooses to accept it in payment to a larger amount than 40s., it is entirely of his own free will In England, as between the public and the Bank of England Bank Notes are nothing but Credit. The Bank cannot compel any one to receive its Notes : and any h6lder of its Notes can compel the Bank to cash them on demand WHY PAPER CAN SUPERSEDE MONEY 83 Between private persons a Bank Note for £5 is not Legal Tender, or Mouey, for that exact amount tof Debt. But in all Debts above £5, Bank Notes are Money or Legal Tender. But even this is only so long as the Bank pays its Notes in cash on Demand. If the Bank were to stop payment, its notes would cease to be Legal Tender in any case In Scotland and Ireland Bank of England Notes are not Legal Tender in any case If two persons are mutually indebted in equal amounts and payable at the same time, each may compel the other to accept the Debt he owes in payment of the Debt' which is due to him. Each Debt is therefore Money, or Legal Tender, in respect of the other This is a principle of supreme importance in modern commerce, as will be shown more fully hereafter Reason ivhij Paper can sttpersede Money 41. The reason why Paper can sujjersede Money is now apparent An order to receive a coat could never serve as a substitute for a coat : because it cannot serve the same purpose as a coat. An order to receive bread or wine cannot supersede bread or wine, because it cannot serve the same purpose as bread or wine : and so on, regarding orders for other material chattels. An order for such things can never serve as a substitute for the things themselves, because they are heterogeneous quantities ; and cannot serve the same purpose as the things themselves But an order to pay money can serve as a substitute for money, because they are homogeneous quantities. A piece of Money is of no more direct use for eating, drinking, or clothing, than a piece of paper Consequently the exchange of Paper for Money is nothing more than the exchange of a particular Eight for a general Eight As Daniel Webster, the eminent American jurist, said — " Credit is to Money what money is to goods." That is. Credit is an order for Money, and Money is an order for goods g2 84 THEOin- OK CREDIT To be useful Money must be exchauged:a\vay, juf3t as Paper is. Hence, if paper can be'exehanged for exactly llie same things that Gold can, Paper has the same Value as Gold. As the Italians say— "Ohe oro vale, oro e." " That which is of the-Yalue of Gold, is Gold" The same Quantity may require to he ref/arSed in different aspects in different Sciences 42. It is very efseutial to observe tli^t the same Quantities may be common to two sciences, and maytrequire to be regarded in different aspects in each Thus Jurisprudence and Economics are inseparably allied: and Jloney and Bauk Notes, Bills of Exchange and Abstract Jlights are both Juridical and Economical Quantities: but they differ in some respects according as they are regarded in a Juridical and in an Economical aspect Tims iu Jurisprudence, Money is the absolute payment and satisfaction for a Debt ; and a closing of the transaction : and Bills of Exchange are not the closing of'the transaction, unless they are accepted as such Also in Jurisprudence Money is Corporeal Property: abstract Rights and Eights of action are Incorporeal Property : but if these Uisilits and Eights of action are recorded on a Material such as Paper, Parchment, or any other, they become Corporeal or Material Property But in Economics a payment in Money is not the closing of the transaction. A complete exchange is the obtaining a satisfac- tion lor a satisfaction. In Economics iloney is only an abstract Hight, preserved and recorded in gold to obtain a satisfaction. ]\[oney is, therefore, in Economics, a Bill of Exchange in Gold. So, in Economics, Eiglits, whether purely abstract or recorded on paper, are absolutely the same. A piece tof Money is no more an Economic satisfaction than a piece of paper Hence, in Economics, Money and Eights of action, whether abstract, or recorded on paper, are all of the same nature. Tliey are all simply Eights to demand something iu future : hence iu Economics they are all equally Incorporeal Property or Credit MONKY AND COMMODITIES No But as Uiey all equally possess the quality of Exoliaoguability tbey iiie all Wealth There is no Necessary Relation between the Quantity of Money in anij Countnj and the Quantity of Commodities, or their Price 43. AVe have now to demonstrate a proposition of the greatest importance in Economics, and qiI which errors of the most serious nature are very pre\'alent Many writers ou Economics have supposed that the quantity of JIuuey iu a country bears some necessary relation to (he quantity of commodities in it : and many more tliiuk that the prices of commodities are determined by the ratio which the quantity of metallic money bears to the quantity of commodities. That this is a very grievous error may very easily be shown Suppose that A and B are mutually indebted : that A owes B £10 : and B owes A £!;->. Then it is quite clear that their debts may be settled in three different ways — 1. Each may send a clerk to demand payment of his debt in money : this method would require £23 to discharge the two debts i. A may send £10 to B to discharge his debt : and B may send back to A the same £10, with £3 additional, to discharge his debt : this method would require £1S to discharge the two debts 3. They may meet and set off their mutual debts, and pay only the difference in coin : by this mean§ the two debts would be discharged by the use only of £3 Now it is quite clear that a very different quantity of money would be required to carry on any given amount of business, according as either of these methods of settling debts was adopted. Between the first and the third methods there is a difference of £'M -. but there would be no difference in the price of commodities. These twenty pounds would not influence prices, but would only be required to settle debts in a clumsy way. So that it is clear that by a simple change iu the method of doing business, £2(j may be withdrawn .from its employment, and applied to new transactions 80 THEORY OF CREDIT Prom these considerations it appears that there may be large quantities of money in a country which may exercise no influence on prices : and the ratio between money*aud commodities mny vary greatly, according as one or other of these methods of doing business is adopted Now if a country which habitually used the first method were to change its custom, and adopt the third naethod, it is very clear that a very large quantity of money might be disengaged from its usual employment, and applied to promote new operations : and therefore for all practical purposes it wpuld be an addition to the previously existing quantity of money Hence the various methods of economising the use of money are to be considered as an increase of the resources of the nation. It is one of the great functions of a bank to promote such a change in the method of doing business, and to bring people together to balance their mutual debts without the intervention of money. And it will be shown in subsequent chapters how immensely the skilful development of the method of modern banking economises and developes the national resources On Barter : Sale or Circulation : and Exchange On Barter 44. When material products are ekchanged directly for products the transaction is termed Barter On Sale or Circulation The Economists only admitted an Exchange to be where a product was exchanged for a product, i.e., a Barter : that is where each side obtained a Satisfaction But, in modern times, such exchanges are comparatively rare. Persons usually want to obtain things from others, while those others want nothing from them. To obviate the inconvenience that would arise if no one could get what he wanted, unless he could supply the other party at the same time with what he wanted, people hit upon the jjlan of adopting some particular commodity which should be universally exchangeable. The buyer, SALE OR CIRCULATION 87 therefore, gave the seller in exohange furliis pi-oJucfc uii equivalent of this uuiversaliy exohangeahle merchandise, so that he could get any satisfaction lie pleased from any one else who could render it This nuiversally exchangeable merchandise is termed Money: and the exchange of a product for Money is termed a Sale. The person who has got the Money has not got a Satisfaction : his desire is not consummated, or completed. In order to obtain a Satisfaction, he must exchange away the Money for some product he does desire. Hence the Economists termed a Sale a Demi-exchange Le Trosne says' — " There is this difference between an Exchange and a Sale, that, in an Exchange everything is consummated, or completed {consomme) for each party. They possess the thing which they desired to procure, and they have only to enjoy it. In the Sale on the contrary, it is only the purchaser who has attained his object, because it is only he who is in a position to enjoy. But everything is not ended for the seller " And again — " Exchange arrives directly at its object, which is completion (consommafion) : it has only two terms, and is ended in one contract. But a contract in which JMoney intervenes is not completed {consomme) : but it is necessary that the seller should become a buyer, either himself or "by the interposition of the person to whom he transfers the Money. There are, therefore, in order to arrive at completion {consonpnation) which is the ultimate object, at least four terms and three contractants, of whom one intervenes twice " When, however, the person who had sold his product for Money, and, therefore, furnished a satisfaction to the other party had himself exchanged away the Money and obtained a product for it, he, too, had acquired a Satisfaction which he could enjoy, and the Exchange was completed {consomme) For this reason Money was called the Medium of Exchange This Sale the Economists called Circulation. Sale, or Circula- tion, therefore, the Economists defined to mean the Exchange of a Product for Money ' /)e V luteret Sociale, p. 905,' 916 88 THEORY OV CREDIT But Credit is used in all respects in the same way as Money to purchase, or Circulate, commodities. Hence, Sale or Circulation always denotes an exchange in which one or both of the Quantities exchanged is Money or Credit The sum total of these Sales is properly termed the Circulation. Hence any sum of Money may add considerably to the Circulation : because every time it is transferred it is a.Sale, and, therefore, it augments the Circulation As the use of Money and Credit is to set industry in motion : and inasmuch as they have no use unless they do that : their beneficial effects are not to be measured by their actual amount, but by the industry which they generate. Money lying locked up in a box, or Credit unused, only represents latent power, and not actual power. They may be called Power or Wealth in the latent state : they resemble the steam engine of a mill which is not going : and which is of no use until it is set in motion And as the produce of the mill is measured by the Quantity of the Jlotion of the engine : so the useful effect of Money and Credit is measured by their Quantity of Motion ; which is called the Circulation. The Circulation, which is the sole test of their useful effect, is, therefore, the product of their amount multiplied into the velocity of their Circulation. The Quantity of Slotion of the engine is called its Duty: hence the "Circulation of Money and Credit may be termed its Duty It is so essential to have a clear conception of the useful effect produced by any amount of Money and Credit, that we may add another illustration. The effect produced by any body in motion is measured by its weight or mass mnltiplied into its velocity : which is termed its Momentum. If the mass be diminished, yet by increasing the velocity, tfhe effect or Momentum may still be the same. If a body weighing 100 lbs. move with a velocity 1, its momentum will be loO : but if Ave diminish the weight to 50 lbs., and can double its Vfilocity, the effect, or Momentum, will still be the same EXCHANGE 89 The effects of lEoney, or Credit, are exactly analogous. Their useful effect is the result of their combined amount and velocity of Circulation : which is termed the Circulation. If we can make £50 circulate with twice the velocity of £100, the useful effect, or Circulation, will be the same. Hence, it may be said that the Circulation is the Momentum of Money and Credit On Exchange An Exchange is the interchange of things of a like nature : either products for products ; or Money or Credit for Money or Credit Thus we speak of the Foreign Exchanges, or the value of the money of one country iu terms of the money of another. Or we ask for the change {i.e., the 'change or exchange) of a £5 note or a sovereign : a Bill of Exchange is a Right of action to be exchanged at the proper time for Money : so we exchange one book for another : or a picture for a statue So in Lear, when Albany throws (fown his glove to the traitor Edmund, the latter, throwing down his own, says — " There's my exchange ": and a little fm'ther on Edgar says to Edmund — "Let's exchange charity" So in Hamlet, Laertes says — "Exchange forgiveness with me, noble Hamlet " AVhen the interchange is between products and Money or Credit, the one who gives the Money, or Credit, is said to Buy tlie product : and the one who gives the product is said to Sell it When the exchange is between Money bi' Credit for Money or Credit, each side is said to Buy and to Sell : and each quantity of Money or Credit exchanged for the other is termed the price of the other Thus we buy a horse or a house or land, or cattle, or a Bill of Exchange with Mouey or Credit. An oflficer formerly houyht a commission in the army : but he exchanged from one rcgimeut into another 90 THEORY OF CREDIT On the Meaning of Circulating Medium 45. We have now to consider two terms, Circulating; Medium and Currency, which are both of coniparati\ely modern origin, which have in recent times jgiven rise to many controversies, but which are admitted to be synonymous, and consequently if we can positively determine the meaniug of one of them, that will also necessarily determine the meaning of the other The term Circulating Medium seems to have come into use in the last decade of the last century. It does not occur in Adam Smith. The first occasion on which we ;have met it is in the debate on the Bank Eestriction Act of 1797, in which Fox said,^ " He wislied that gentlemen, instead of amusing tliemselves with new terms of ' Circulating ]\fedium ' and the lilie," &c., which shows that it must then have been of very- recent origin Pitt, in his reply, said,' "As so much had been said on the nature of a Circulating Medium, he thought it necessary to notice that he did not for his own part take it to be of that empirical kind which had been generally described. It appeared to him to consist in anything that answered the great purposes of trade and commerce, whether in specie, paper, or any otlier term which might be used." It is quite evidejit, therefore, tliat Pitt included under the term Circulating Medium, Money and Credit in all its forms The verb to Circulate, hke many others in English, has both an active and a neuter meaning 1. It means that which Circulates conimodities ; i.e., which causes products to circulate : where it is an active verb ■I. That which Circidates itself : where, it is a neuter verb Smith nses the word Circulate in bdth senses in different places. Thus, speaking of Gold and Silver, he says, " Their use consists in Circulating commodities " " The great wheel of Circulation is altogether different from the goods circulated by it. The revenue pf the society consists altogether in these goods, and not in the wheel that Circulates them " ; where Circulates is active ' Parliamentary Histonj of England, Vol. xxxm., p. 3iO MEANING OF CURRENCY 91 A little farther on lie speaks of the different sorts of paper money : but he says that the Circulating notes of banks and bankers are best known ; where Circulates is neuter In the following sentence both senses occur : "Let us suppose for example that the whole Circulating money of some particular country amounted at a particular time to one million sterling, that sum being then sufficient for Circulating the whole annual products of their land and labor " The ordinary meaning of words in scientific language leaves no possible doubt as to which is the true meaning of Circulate in the expression Circulating Medium. A medium, in scientific laiiguage, means some middle thing by which something else is effected. Thus Money is termed the Medium of Exchange, because exchanges are effected by it. Hence the Circulating Medium is tlie medium by which the Circulation of commodities is effected Now it has just been shown that the Economists defined Circulation to mean Sales. And how ai:e sales effected ? By the means or medium of Money and Credit. Buying with Money effects the Circulation of products : but buying with Credit equally effects the Circulation of products, in whatever form the Credit may be, either written or unwritten Hence the total amount of the Circulating Medium must necessarily mean the total amount of Money and Credit in all its forms On the Meaning of Currency 46. The meaning of the word Currency, which all writers admit to be synonymous with Circulating Medium, has given rise to protracted controversies in modern times, which however we shall not notice at present. We shall in this section explain the true meaning of the word The word Currency is in fact a technical term in Mercantile and Constitutional Law : and the following is the true meaning of "Current" and "Currency" in English Law It is a general rule of law that a person cannot transmit to another any better title to a thing than he has himself 0'2 THEORY OF CUEDJT It is also a general rule of law that if a person loses a thing- or has it stolen from him, he does not lose the Property in it. Consequently he can not only recover it from the thief or finder, but also from any one else in whose possession he may find it, even though that person may have bought it or taken it in pledge, and given full value for it, and not knowing that it was not the lawful property of the seller or pledger. This Itight of recovery is called the jus viiidicaniU in Roman law But to this rule of law Money was always, from the necessity of the case, an exception. If the true owner of the money finds it in the possession of the thief or finder, he can reclaim it. But if the thief or finder has once purchased goods in a shop with it, and the shopkeeper takes ic honestly in the way of business, and ■without knowing that it has been stolen : he can retain it against the true owner, even though he should be able to identify it. That is, the person who acquires j\Ioney honestly in business has a good title to it, even though the transferor had not. Thus it is said in Law that the Propertij in Money passes by Delivery. Thus after the Money has once been passed away in commerce to an innocent receiver, the true owner has lost \\\^jus vimhvandi It is this peculiarity whicli affects the Property in money which passes by delivery, which is denoted by.the Avords " Current " and " Currency " in English Law. And, wheu an Act of Pni-liamcnt declares that any instrument shall be " Current," it means that the Property in it shall pass by delivery to the innocent purchaser This attribute of Currency is also termqd Negotiability And when the representatives of Money, such as Bank Notes, Cheques, Bills of Exchange ttc.,came into use, the Law Slercliant applied the same principle of Currency to them. They are like money in so far as this, that the Property in them passes like the Property in Money. Thus, if they are lost or stolen, the true owner may recover them if he can find them in the hands of the thief or finder ; but, if the finder or thief 'manages to pass them away for value, in the ordinary course of business, to an innocent purchaser, that innocent purchaser acquires the Property in them : and may retain them against the true owner, and enforce payment , of them from all the parties liable MEANING OF CURRENCY 93 This doctrine has been aiTirmed in a whole series of cases in the Courts of Law which we shall notice shortly It follows from this that in strict la-n', this principle of Currency can only be applied to those Rights of action which are recorded on some material. An abstract Right cannot be lost, mislaid, or stolen : or passed away in commerce. For a Right to be Currency in strict law it must be recorded on some material, so as to be capable of being carried in the hand : or in the pocket : or put away in a drawer : or**dropped in the street : or stolen from the drawer or the pocket : and carried off by the finder or thief : and transferred in commerce So far, then, as regards Mercantile La* there is no difficulty. The meaning of the word is perfectly clear. But if the word Currency is used to denote a certain class of Economic Quantities, synonymous with Circulating Medium, a difficulty arises ; because there is an immense mass of Credit which has produced exchanges, and has circulated commodities, and is, therefore, Circulating Medium, which is not recorded on any material at all, in sucli a way that it can be lost or stolen, and cariried off and transferred in commerce by manual delivery Thus, the gigantic mass of Banking Credits, and the Book Debts of Traders, have all effected a Sale or Circulation : and, therefore, they are all Circulating Medium : but they have not the attribute of Currency in a legal sense : because they cannot be mislaid : lost : or stolen : and picked up and passed away in commerce by manual delivery. So also private debts between persons termed Verbal Credits : they only arise out of the transfer of goods or money : and they exist equally whether they are recorded on paper or not. They are equally Circulating Medium. Private debts among traders affect prices exactly like so much Money. Consequently, though they are not Currency in strict law, yet if that word is still to be: retained in a scientific sense as denoting a certain class of Economic Quantities, synonymous with Circulating Medium, they must all be included under that term : because they ean all bg recorded on paper at pleasure : and their nature and effects iare exactly the same whether they are recorded on paper or not 94: THEORY OF CREDIT In the great discussions in Parliament which arose out of the suspension of cash payments by the Bank qf Euglaud, no attempt was made to define the term Currency. But all the speakers assumed that it comprehended Money and Credit in all its forms Tliis truth was well expressed by Lord Titchfield in the House of Commons. Speaking of the various forms of Credit used as substitutes for Money he said—" When it ^-as considered to how great an extent these contrivances had been practised in the yarious modes of Verbal, Book, and Circulating Credits, it was easy to see that the country had received a great addition to its Currency. This addition to the Currency would have the same effect as if gold had been increased from the mines " Decisions of the Courts of Law regarding the meaning of Currency 47. The meaning of the word Currency has acquired so much practical importance in consequence of the Bank Charter Act of 1S4-1: being based upon a peculiar definition of it, which will have to be examined hereafter, that it will be more satisfactory to our readers to place before them a resume of the* decisions of the Courts of Law as to the meaning of the term Bank Notes. In Milter v. Ram (1 Burr., 452), confirming Anonymous (1 Lord Raymond, 738), the Court of Queen's Bench decided that Bank Notes have the Credit and Currency of i\Ioney to all intents and purposes. " An action would lie against the finder: that no one disputes: but not after the Note had been paid away in Currency. An action would not lie against the defendant, because he took it in the course of Currency : and, therefore, it could not be followod into his hands. It never shall be followed into the hands of a person who lonafide took it in the course of Currency. A bank note is constantly and universally, both at home and abroad, treated as Money, as cash: and it is necessary, for the purposes of commerce, that their currency should be established and maintained " DECISION!^ AS TO CURRENCY 95 Cheques. In Grant v. Yaiigluin (3 Burr., 1516), the Court unanimously held that Cheques possess the attribute of Currency, exactly like Bank Notes Bills of Exchange. In Peacock v. Rhodes (2 Douglas, 633), the Court decided that Bills of Exchange possess the attribute of Currency, exactly the same as Bank Notes. Lord Mansfield said : " The holder of a Bill of Exchange or Promissory Note is not to he considered in the light of an assignee of the payee. An assignee. must take the thing assigned, subject to all the equity to which the original party was subject. If this rule applied to Bills and Promissory Notes it would stop their 'Currency. The law is settled, that a holder, coming fairly by a note or bill, has nothing to do with the transaction between the original parties. I see no difference between a note indorsed blank, and one payable to bearer. They both go by delivery, and possession proves property in both cases " In Collins y. Martin (B. & P., 6-1-8), the same doctrine of Currency was applied to pledging bills equally as to selling thera. Eyre, C. J., said, "For the purpose of rendering Bills of Exchange negotiable, the Eight of Property in them passes with the bills. Every holder with the bills takes the Property, and his title is stamped upon the bills themselves. The Property and the possession are inseparable. This was necessary to make them negotiable : in this respect they differ essentially from goods, of which the property and the possession are in different persons " Foreign Bonds. In Gorgier v. Mieville (3 B. & C), Foreign Bonds, payable to the holder, were decided to possess the attribute of Currency, exactly as Bank Notes and Bills indorsed in blank Exchequer Bills. In Wooloey v. Pole (4 B & Aid. 1), Exche- quer Bills payable to blank or order were also decided to possess the attribute of Currency. The question was whether Exchequer Bills followed the law of goods in which there is the Jus vindicandi: or the law of money, in which there is no Jus vindicandi. The Court decided that Exchequer Bills follow the Law of Money. Holroyd, J., said — " It has long been fully settled that Bank Notes or Bills, drafts on bankers, bills of exchange, or promissory notes, either payable to order and indorsed in blank, or payable to bearer, when taken lona fide, 96 THEORr OF CREDJT aud for a valuable consideration pass by delivery, and vest a right thereto in the transferee, without regurd to the title, or ■want of title, in the jjerson transfei'ring them ...... These authorities show that not only money itself may pass, and the right to it may arise by Cnrreucy alone ; but further, that these mercantile instruments, which entitleihe bearer of them to money, may also pass, and the right to them arise io the like manner, by Currency or Delivery We next consider the nature and effect of the instrument, both as to the property which it concerns, and as to its Negotiability, or Currency, by law The instrument is created by the Statute 48, Geo. III., c. 1, and is hereby made Negotiable and Current The case therefore stands thus : this Exchequer Bill was a Current and Negotiable instrument for the payment of money. Now money passes from one person to another by reason of its Currency, and for that reason only, and not because it has no earmark, it cannot be reco^ei-ed from the person to whom it has been passed. The exchequer bill, there- fore, seems to me, upon the same principle; to follow the nature of the money for which it is a security " In Ingham v. Primrose (7 C.B.N.S., p. 8), Williams, J., says — •' It is, we think, settled law, that if the defendant had drawn a cheque, and if, before he had issued it, he had lost it, or it had been stolen from him, and it had afterwards found its way into the hands of a holder for value without notice, who had sued the defendant upon it, he would have had no answer to the action. So if he had indorsed a bill in blank, or a bill payable to his order, and if it had been lost or stolen before he had delivered it to any one as indorsee. The reason is that such Negotiable Instruments have by the law merchant become part of the Mercantile Currency of the country : and in order that this may not be impeded, it is requisite that innocent holders for value should have a right to enforce pa;fment of them against those who, by making them, have caused them to be part of such Currency " In WMstUr v. Forster (14 C.B.N.S., 248) Willes, J., siiid— " The general rule of law is undoubted, that no one can transfer a better title than he himself possesses : Nemo dal qvod von hahct. FORMS OF CURREXrt 97 To this there are some exceptions : one of wliich arises out of the rule of the law merchant as to Negotiable Instruments. These being part of the Currency, are subject to the same rule as money" In Shiite V. Bobiiis (1 i\r. & M., l3n), Lbrd Tenterden spoke of banker's paper as being part of the Circulating^ Medium of the country In Lanri v. Smyth (7 Bing., l'.s4), Tindall, C, J., said : "The first question was. whether the instrumentstin dispute had acquired from the course of dealing pursued in the City the character of Bank Notes, Bills of Exchange, Dividend Warrants, &(■.. Cheques, Bills, or other Instruments which form part of the Currency of the country In Goodwin v. Roharh (4 K., 10 Excheq., 877). Scrip entitling the bearer to demand bonds from a foreign Government were also decided to possess the attribute of f'urreiicy These extracts autlioritatively decide the true meaning of tlie ■word Currency. It means that the property to which the attribute is attached is an exception to the general ;«« vindicandi, which attaches to goods It means that when once this class of property has been acquired honestly in business by a purchaser, the property in it passes by delivery. And this is the sole meaning of the word Currency Thtse cases also decide that money, and all wiitten securities for money, made transferable by the pafties to them, are all included under the term Currency The different Forms of Currency 48. Adopting, then, the terms Currency and Circulating: Medium as absolutely identical and synonymous, and designating a certain class of Economic Quantities, its different forms are : — 1. Coined Money • Gold, Silver and Copper 2. The Paper Currency: Bank Notes, Cheques, Bills of Exchange, Exclicqner Bills, *<■. 9S TTIKOT?Y OF CKEDfr S. Simple Debts of all Eort8 : not recorded as Circulating Paper: such as Credits in Bankers' books termed Deposits; Book Debts of traders : and private Debts betwegn persons : because all these Debts may be recorded on jiaper at the Tvill of the parties ; which in no way alters their nature. All these denote that a transaction has taken pkce : and are Titles to future payment. Prom these considerations it follows that the Currency, or Circu- lating Medium, of any country is the snm total of all the Debts due to every individual in it : that is all the Money and Credit in it Postage stamps must also be included under the term CuiTency. They are a most usual form of remittance : they pass in small payments : and since the Post Office is bound to cash them, they are in fact penny Notes. Though the poiijt has not been decided at law, there can be no doubt that if any one were to steal postage stamps, if they were taken honestly in payment, it would be held that they possess the attribute of Currency : hence they are strictly Currency On the Channel of Circulation 49. The quantity of the Circulation, or the amount of Money and Credit, representing the Indebtedness, or the balances which arise from the unequal exchanges of products and services, is frequently termed by Adam Smith and other writers the Channel of Circulation This Channel of Circulation is filled with some Material : and Prices are estimated by the quantity of this mateiial, which is given in exchange for any Economic Quantities Let us suppose that Gold alone was used at any time to represent Debt, and fill the Channel of Circulation. This Gold metal is divided into certain pieces of fixed weight and quality, termed coins ; and prices are estimated in Jhese Coins But suppose that at any time, Gold was discontinued, and Silver substituted as the representative of Debt : and suppose that Coins were struck of Silver of exactly the same weight as the Gold ones THE CHANNEL QF CIRCtXATION 99 Then as Silver is at present about eighteen times less valuable as Gold, it would require eighteen times as many silver coins to represent any amount of Debt, as it would Gold coins. And prices would rise eighteen fold : but other products would slill preserve the same relations among themselves. Hence, though prices would rise, yet the values of products with respect to each other would remain exactly the same Again, suppose that Silver was taken away as the rerpreseutative of Debt, and Copper substituted : and Copper coins struck of the same weight as the previous Gold and Silver ones, and called by the same name. Then prices would be estimated in Copper coins : and as Copper is about 900 times less valuable than Gold, prices estimated in Copper would rise to about 900 times their amount in Gold. But the relative values of all other quantities would remain the same Now, as the value of Gold as representing Debt, depends upon the quantity of Gold which represents aliy amount of Debt, it would manifestly follow that if the quantity of Gold which represented any amount of Debt were greatly increased, the value of Gold would greatly diminish. If Gold became as plentiful as Silver, Gold would have no more value than' Silver. Consequently, even while the weight and the quality of the coins remained the same. Gold would fall to the eighteenth part of its former value as a Purchasing power So, if Gold became as plentiful as Copper, it would be of no more purchasing power than Copper : that is, it would fall to about the 900tli part of its former value Thus, in a general way "if any quantity of Stuff of any sort is used to represent any quantity of Debt at any time : and if the quantity of Stuff is greatly increased, while •the quantity of Debt remains the same, it necessarily produces a great diminution in the value of the Stuff, and a general rise of Pripes But the quantity of Stuff which represents Debt and fills the Channel of Circulation, need not be all of the same material. It may be partly Gold, partly Silver, and partly Copper : and jprices will be estimated by the whole qpantity of Stuff which fills the Channel of Circulation, and not by any particular portion of it h2 100 TTTEOIIY OF CREDIT In modem times, a new kind of Stuff is employed to a gigantic extent to fill the Channel of Circalation : and that is Credit: or Eights of action in \ nvious forms With respect to Credit, there in a most important observation to be made : Credits in some countries are 'made payable in Gold : and in some countries in Silver Now, Credits payable in Gold are exactly of the same value as Gold : and Credits payable in Silver are of; exactly the same value as Silver Hence the Value of Gold throughout the world is determined not only by the actual quantity of Gold, but by the aggregate quautily of Gold and all Credits payable in Gold So tlie Value of Silver throughout the world is determined not only by the actual Quantity of Silver itself, but by the aggregate quantity of Silver, and all Credits payable in Silver And, furthermore, the Value of Gold with respect to Silver, is determined not only by the relative quantities of Gold and Silver themselves : but by the ratio of Gold, and all Credits payable in Gold, compared with the aggregate of Silver and all Credits payable -in Silver It is the enormous Creation of Credit in modern times in the form of Banking Credits and Mercantile Credits which has so prodigiously raised the prices of products, aiTd diminished the Eate of interest in the last two centuries in this and many other countries, as we shall show more fully hereafter It will be shown hereafter that the Quantity of Credit which is used and is in circulation in this country, is at least fifty times the amount of Metallic coin Furthermore, there are in some countries, like Eussia, vast quantities of inconvertible Paper Money, which are at a heavy discount as compared with specie : but are at the same time of their value in specie Hence the thorough comprehension of the principles and mechanism of the colossal system of Credit is the very foundation of modern Economics It is the quantity of Credit in modem times which chiefly determines the Price of products : and variations in the quantity of Credit produce more changes in the value of products than any ox PUICE 101 variiitions iu fclie quantity of Gold and Silver : and it is the abuses of Credit which produce those terrible calamities termed Coiuraercial Crises and Monetary Pauius, ^\hich we shall have to investigate afterwards On Price 50. "When any Economic Quantity is exchanged for any other Economic Quantity, each is termed Tlie Value of the other. But when one or both of the Quantities exchanged is Money or Credic, it receives a special name — it is termed Price. Price, therefore, is always Value expressed iu Money or Credit Xow the Value of Money is any other Economic Quantity which can be obtained in exchange for it, either a material chattel : or a service : or a Eight, such as a Debt If Money be taken as the fixed Quantity, the more of the other Quantity which can be obtained for it, tlie Greater is tiie Value of !JIoney. The less of the other Quantity which can be obtained for it, the Less is the Value of Money Or if tbe other Quantity be taken as the fixed Quantity, the Less the Money given for it, the Greater is the Value of Money: the Jfore the Money given for the fixed Quantity, the Less is the VaUie of Money Hence it is seen ih&t— The Value of Money varies Inversely as Price But Credits, or Debts, are Commodities, or Merchandise, which are brought into commerce, and bought and sold, or exchanged, like any other merchandise Now when any Commodities, or Merchandise, are brought into commerce, they are always divided ;into certain Units for the convenience of sale. Coals are sold by the ton : corn by the quarter : tea and sugar by the pound ; cloth by the yard : wine and other liquids by the quart, or the pint, ic. So, for the convenience of commerce, BuUion is divided into certain Units called Coins In a similar way, when the Commodity or Merchandise, termed Credit, or Debt, is brought into commerce, it must, for the convenience of sale, be divided into Units 10^ THEORY OF CKKUIT The Unit of Credit or Debt is the Right to demand £100 io be paid one yea?' hence Tlie sum of Moaey given to purchase the Unit of Debt is also termed its Price : and as in all other sales, the less the quantity of Money given for any fixed amount of Debt, the greater is the Value of Money : and the greater tlie quantity of Money given to purchase any fixed amount of Debt, the less is the Value of Money And the less the amount of Debt a fixed quantity of Money will purchase, the less is the Value ot Money : and the greater the amount of Debt a fixed quantity of Money will purchase, the greater is the Value of Money Hence the Value of Money with respect to Debts varies exactly in the same way as it does with, respect to any other merchandise But in the commerce of Debts it is not usual to estimate the Value of Jloney by the quantity of Debt it will purchase. As money naturally produces a profit, it is clear that the Value, or Price, of a Debt to be paid only one year hence must be less than the actual amount of the Debt. The difference between the Present Value, or the Price of the Debt, and the amount of the Debt i.s the profit made by buying it This difference, or profit, is termed Discount In the commerce of Debts it is universally the custom to estimate the Value of Money by the Discount or Profit it yields ; and not by the Price of the Debt Now as the Price of the Debt decreases or increases, it is evident that the Discount increases or decreases ; and the Value of iloney measured in this way increases or decreases Hence in the commerce of Debts, the Value of Money varies Directly as the Discount This rule embraces both branches of commerce — The Value of Money mn'es Inversely ch Price : and Directly as Discount ON INTEREST AND DISCOUNT 103 To Discount a Debt is to pay down tlie Present Value of its amount payable at a future time Hence it must be observed that the term Value of Money has two distinct meanings in commerce. There are three great branches of commerce : the commerce in material commodities : the com- merce in services : and the commerce in Debts. And the expression, " Value of Money," has two distinct meanings, according as it is applied to these three branches of commerce : in the commerce of material commodities or of services, it means the quantity of the commodity or service which Money can purchase : in the commerce of Debts it means the Discount, or Profit made by buying the Debt On Interest and Discount 51. Profits made by trading in Debts ai*e made in two ways — (1) When the person who buys the: Debt agrees to defer receiving the Profit until the end of the time agreed on In this case the Profit is termed Interest Thus, when a person buys a Debt of £100 payable one year heuce at £5 per cent, interest, he pays the £100, and receives in exchange for it the Eight to demand £105 at the end of the year The Debt is the Price of the Money: -and the Money is the Price of the Debt "When the debtor pays the Debt he brings £106 in Money to his Creditor, and buys up the Eight of action against himself to that amount Both these transactions are Sales or Exchanges : and acts of commerce : and, therefore, enter into the Science of Economics (i') Where the diflierencc, or Profit, is retained at the time of the purchase from the Price'of the Debt In this case the Profit is termed Discoi^nt But Discount itself is of two kinds — (a) In the ordinary books of Algebra It is said that Discount is where the Profit is retained at the time of the purchase : and the sum paid for the Debt is such a sum as, improved at the given Kate of Interest, should be equal to the fjiU sum of the Debt, at the end of the period of jidvance 104 THEORY OF CKKOIT It is, blierefore, the I'lcseiit Value of the sum agreed upon, at the agreed upon Rate of Profit. This may be called algebraical Discount, It is used by Insurance Companies in deternaining the Present Value of Future Payments : and in some other cases (b) But this kind of Discount is never used by Bankers and dealers in Money. In banking it is inVariably the custom to retain the full amount of the Profit agreed upon at the time of purchasing the Debt Tlius, if a Banker discounts a Bill for £100 for a year at 5 per cent., he deducts and retains the full £')■ and gives his customer a Credit for £d:,. That is, he creates a Right of action for £95, to purchase the Right to £10U at the end of the year As this method of Discount is the one invariably used in Banking, and iloney lending, it may be tercned Banking Discount Ttie Rate of Interest, or Discount, is the ratio of the profit to the amount of the Debt, made in some given time, as the year The Profits made by Interest and Algebraical Discount are exactly equal. But Banking Discount is the more profitable : because, iu the example given, in the former case, a profit of £5 is made on the advance of £100 : in the latter case on the advance of £'J.3 So long as the Rate of Discount is Ipw, there is not much -difference in the Profits made by way of Interest and Banking Discount. But, as the Rate increases, the Profit increases at a very rapid ratio, as may be easily seeu If a person lends £100 at 20 per cent, interest : he advances £100, and at the end of the year receives £120 : which is a profit of 20 per cent. If be Discounts a Bill for £100 at 20 per cent., he advances only £80 . and, at the end of the year, receives £100 : which is a profit of 25 per cent. If he lends £100 at 50 per cent, interest, he advances £100 : and, at the end of the year receives £150 ; which is a Profit of 50 per cent. ON PliODL'CTIOX 105 If he Discounts a Bill of £100 at .'lO per cent., he advances ouly £50 : and, at the end of the year, receSves £100 : which is a Profit of 100 per cout. So, Discounting a Bill at (10 per cent, is a profit of 150 percent If a person lends £100 at 100 per cent, interest : at the end of the year he receives £200 : which is a Profit of 100 per cent. If he Discounted a Bill for £100 at loo per cent, he would advance Xothing, and, at the end of the year, he would receive £100 : or his Profit would be Infinite It would be out of place to investigate here the whole Theory of Banking Discount : but we have given a full exposition of the subject in our Theonj and Practice of Banking and Elements of Economics On Production 52. The word Production, as a technical term in Economics, comts from the Latin, producere, which means to lead, or bring forth : or, to expose for sale Thus, Thais, on the Eunuchua of Terence, says (Act I., sc. 2, 1. 55)— " Pretium sperans,'illico Producit : vendidit " " Hoping for a good price, offers her thefe for sale: sells her'''' So, Menedeiiuis, in the Hectuton, 2'imorumenos, says (A.ct I., sc. 1., 1.90)— ■' Ancillas, servos . . . Omnes Produxi, ac vendidi " All the slaves, male and female, he offered for sale, and sold" So, also, Suetonius, De illas. gram., c. 4, says — " Quum familia alicujus produceretur '' " When any one's household slaves ivere offered for sale " The original sense of produce in English is exactly the same. It is to draw forth, to cause to come near. Thusin Isaiah xU., 21, it is said, "Produce your cause, saith the Lord : bring forth your strong reasons, saith the King of Jacob." And the marginal note savs, "Produce — cause to come near" 106 THEORY OF CREDIT So, Antony, Julius Cmsar (Act III., sc. 1) — • " That's all'l seek, And am moreover suitor, tliat I may Produce his body in the market place " So, Albany says in Lear (Act V., sc. 3)* — Produce their bodies, be they alive or dead " So, when Mr. Montague Tigg gives Mr. Jonas Chnzzlewit and party a dinner — "It a as as good a one as Money (or Credit, no matter which,) conld Produce " To Produce, is simply to bring forward something, and place it where it is wanted. If a witness is toM to Produce a deed or document in Court, it means that he is to bring it into Court, and place it there. A party to a cause Produces his witnesses in Coui't. A gaiiler is ordered to Produce the body of his prisoner in Court : i.e., to place liim there In the universal language of commerce the Producer is the person who brings anything into the market and offers it for sale. AVhen the tui'n of the market is for or against the Producer, it is for or against the Sfller. Hence the true and original meaning of Production in Econo- mics is to place anything in the market, and offer it for sale. A thing may be produced in nature, but until it is offered for sale, it is not Produced in Economics A great poet maj produce a great poem : a great artist may produce a great picture : a great sculptor may produce a great statue : we may estimate their merits most highly : they may be among the highest products of human genius : but how are we to estimate their Market Value ? For that is the sole way in which they enter into Economics. Hence, though the poem, the picture, or the statue may be produced in nature, or called into existence : they are not Produced in Economics until they are brought into the market and offered for sale So, in French, the original and primary meaning of 2'rodiiire, as Littre says, is pousser en aviint : and uf production it is action ck produirc, de mettrc e/i avaiit ON I'KODUCTION 107 A Product, in Economics, is anything whatever which is brought into the market and offered for sale: whether ilaterial, Immaterial, or Incorporeal It has been too much the custom in Economics to think of the word Production as meaning bringing something into existence only. But when it is seen that Production means placing some- thing in the market and offering it for sale, it is evident that the product must not onl)' be called into existence, but transported from one place to another Hence, modern Economists expressly class Transport or Circu- lation as one form of Production Thus, Destutt de Tracy ,i under Production, includes changes of form and i^lace J. B. Say enumerates Transport under the term Production. Michel Chevalier does the same. Will, who gives the first book of his ^vork to production, in the sense of obtaining things from the earth, in a subsequent chapter, says,'' " Irnprovements in produc- tion, understanding this last expression in its widest sense to include i\\& process of procuring commodities from a Distance, as well as that of producing them " Hence Foreign Importers, Merchants, and Traders of all sorts, wholesale and retail, are Producers : because they transport com- modities from one place to another, and otfe'r them for sale in the places where they are wanted Now Money is used to effect all these operations. Hence Money used in any one of them is used as .Productive Capital But Credit is also used exactly in the .same way as Money to effect all these operations : hence Credit may be used in all respects like J\foney, as Productive Capital As far as regards the Customer, the tradesman in whose shop he buys it is the Producer. A\hat difference can it make whether that tradesman paid wages to workmen iuihis direct employment, and carried tlic ai tide from his workshop to his counter, or whether ' Trailc if Jiconomtc I'ulilii/iir. y. B2 "X'rmui^lcio/l'ol, l^i-un.. Uk. IV., ■:■ :■■,§! 108 THKOKY OK CKEUfT lie pnvcliases it from an independent manufacturer in a town 300 miles off, and transports it from that place to his shop ? So far as regards the customer for whom the goods were made, the shop- keeper is the producer All production is summed up in placing an article in the place where it is wanted : and as Transport, Commerce, and Circulation is indispensable for that object, Circulation is one form of Production Three Classes of Economic Producers 63. Now, in general, there are three distinct kinds of opera- tions necessary before a Commodity is placed in the market and offered for sale to the final purchaser, who purchases the finished product, and takes it out of commerce *for personal use and enjoyment (1). Agricultural Producers. One class of persons obtains the rude produce from the earth ; this class includes agriculturists, miners, hunters, fishermen, breeders of cattle, herds, &c., bring them into commerce, and offer them for sale (2). Manufacturing Producers. But when this raw produce is first brought into the market, it is seldomjfitted for final purchase and human use, without undergoing several processes of manu- facturing and fashioning Manufacturers of all sorts pnichase the raw produce from its first or agricultural producers, aud fashion ,and transform it by an infinity of processes, so as to render it fit for human use (3.) Commercial Producers. But after the raw produce of the earth has by the various processes of manufacture been rendered fit for human use, it has still to be transported from one country to another, and from ime place to anethej, in the same country, before it is placed in the market, and finally offered for sale to the consumer, who takes it out of commerce for his own use and enjoyment Now Money is used to effect all these operations : hence Money employed in any one of them is used as Productive Capital But Credit is also eiiually used in e.'iactly the same way as Money, to effect any of these operations. Hence Credit may be used in all respects like Money as Productiye Capital TAYMEXT AXn SATISFACTION 109 On Payment and Satisfaction 54. The words Payment and Satisfaotion are often snpposed to be synonymous, but they are not so The word Payment means anything wtiatever which is taken in exchansx' for anything else It comes origiually from the Sanskrit Pa<;, which is the same word as tlie Greek irqya, Doric Trdyo), TrriyvvfuL In old Latin this was jja^o, or ^wco ; the same &5 2Mciscor ; and aho pan f/o, per/ h, ov panxL panctum, to covenant, agree for, or come to terms with Thus it is said in the Laws of the xii Tables — " Rem ubi pagunt, orato "' " If they come to terms, let it he settled as agreed tipon " " Xi pagunt in comitio aut in foro*ante meridiem causam conjicito " '■ I/tfieij do not come to terms, bring on Jlie cause before midday eitlier in the comititvm or t lie forum " Hence pacare is to come to terms with :*to appease : hence the Italian ^wf/are and ouv pay "When one person has delivered anythjug to another person, or done him a servi<'e, he is entitled to receive from him some equivalent; unless it was meant a§'a donation. Bnt at the same time he has the right to consider anything he pleases as equivalent Tims, where two persons agree to exchange any material products, each in payment of the other : because each i^atisfies and appeases the claim the other has for an equivalent. When goods are paid for in Money, it is sometimes supposed it is only the Money which is Payment for the goods. But the goods are equally payment for the i\loney. Beoauise each person has got what he agreed to take in exchange for his product So, when Money is paid as Wages for work done, the Money is Payment lor the AV'-wk ; but the Work is equally Payment for the Money 110 TIIKOKY OF CREDIT So, when peraons agree to excbange different kinds of work : each is Payment for the other So, when a merchant ao'rees to take a trader's Bill at three months in exchange for goods : the Bill is Payment for the goods. It appeases the claim of tlie merchant : because he has agreed to take a Right of action in exchange for the goods. And the goods are equally Payment for the Eight of action. When the Bill becomes due the trader lias to pay his Bill : that is, he has to appease the claim which the owner of the Bill has for the Money. And when he pays the Bill, he buys np theRight of action against himself The iloney is the Payment for the Eight of action : and the Eight of action is Payment for the Money Hence, to Pay means simply to appease : wlien a man pays a Debt, he appeases the Eight, or Claim, which his Creditor has to demand a sum of money from him. When he pays his Eent he appeases the Eight which the owner of the house, land, &c., has against him for compensation for its vise But it does not follow that a Payment is the final closing of the transaction. The only legal word which denotes the final closing of the transaction is Satisfaction. If a Bill is taken in exchauge for goods, it is Payment : but it is not Satisfaction (unless it is expressly received as such) until the Bill itself is paid If, however, the owner of the Bill neglects to follow up his legal remedy, the Bill tecomes not only Payment but Satisfaction : by doing so, the owner of it makes it Money And Economists go further : they say that Money itself is only a higher order of Bill : that, though, when a person has received Money it is Payment, but it is not Satisfaction, until he has exchanged away the Money for some object he desires Thus, though a shoemaker is paid when he has got Money for his shoes : yet he has not got a Satisfaction until he has got bread or meat, or clothing, or something else he desires in exchange for Money ON CAl'ITAL 111 On Capital 55. Adam Smith's use of the wotd Capital strikingly exemplifies the defect of his definitions. He emimerates as Capital (1) Material Things: (2) Personal Qualities : (3) Bank Xotes, Bills of Exchange, &c., which are ab'stract Eights, or Credit Now, when we are told that these things are Capital, we have no more idea what Capital is than if we were told that they are Abracadabra We do not want an. enumeration of what things are Capital, but we want a Definition of what Caphal is The word Capital is derived from the Lntiu Caput, which means the source of a spring, or the root of a plant — namely, the source from which any increase flows Thus Plautus says — " scelerum Caput." — " source or fountain of crimes " " Perjurii Caput." — " fountain of perjuries" Stephen, in his Thesaurus, thns defines ^Ihe word : " Kfi^a'Aatov — Caput unde fructus et reditus mauat :" " Capital — the Source from winch &Xi.y Profit or Bevenm floim " So Senior says — " Economists are agreed that Whatever gives a Profit is properly termed Capital " And de Fontenay says — " Wherever there is a Revenue you perceive Capital " This is a good general Definition : and the " Whatever gives a Profit " must be interpreted in as wide and general a sense as the "Anything whose Value can be measured in Money "is in definition of Wealth The definition of Capital is, therefore, this — " Capital in any Economic Quantity used for the purpose of Profit " Any Economic Quantity whatever may le used as Capital 56. Now any Economic Quantity whatever may be used in two different ways — lll> T)lKOKy OF CRKDIT (1) The proprietor may use it For his ow'n pevsonnl enjoyment (2) He may trade with it ; i.e., he mayiine it 8o as to produce a Profit When any Economic Quantity wliaterer is used so as to produce a profit — it is termed Capital Economic Quantities, it has been sliown, are of three difstinct orders: (1) Material Tilings: (i) Personal Qualities, both in the form of Labor and Ci'edit : Abstract Eights And each of these Quantities may be used in either of the above ways 1. Material Things. Suppose that a person has a sum of Money. If he expends it on his own personal gratification or household expenses, such Jloney is not nse/1 as Capital ; because he makes no profit by it But if he lends it out at interest : or if he buys goods with it for the purpose of seUing them again at a profit : or if he buys into the Funds ; or the fShares of any commercial company : then he uses his Money as Capital : and the goods are also Capital, because he intends to sell them at a profit : and the Funds and the Sliares are also his Capital, because they produce him an annual revenue So if the owner of land lives on it himself, and uses it for his own personal enjoyment : he does not use the Land as Capital But if he lets it oiil to farmers: or to builders to build houses upon : and receives a Rent for so doing : then he n^es the Land as Capital Some great noblemen possess large tracts of Land upon which part of London is built : that Laud yields them an enormous Revenue . and, therefore, it is Capital to them And so any material thing whatever may be used as Capital So if a person spends money merely on*a general education of which he makes no profitable use: that ^longy is not used as Capital But, if he spends his Money in acquiring a professional education, such as that of an advocate, or a physician, or surgeon, or an engineer, or any profession by which Jie intends to earn an income : then ho uses the Money as Capital ON CAPITAL - 115 (2) Personal Qualities. — Personal Qualities may also be fl sgU in both ways. But Personal Qualities are pf two forms — they art! of the form (a) of Labor, and (6) of Credit («) Personal Qualities as Labor. — If a man digs in his own garden for his amusement, or if he sings, acts, or gives lectures for the delectation of his friends — such Labor is not used as Capital But if he sells his Labor in any way for Money, then he uses his Labor as Capital Thus, Huskisson said — "He had always maintained that Labor is tlie poor man's Capital " So, Mr. Card well, speaking to his constituents, said — "Labor is the poor man's Capital " " So, a writer in a daily paper, speaking of the Irish peasants, said — " The only Capital they possess is their Labor, which they must bring into the market to supply their daily wants " And speaking of them the -ffco/iowis^said—" They have no Capital but their Labor " So Froude says in Oceana — " And the land would be within the reach of poor men who have no Capital except their Labor " So Cardinal Manning says — " I claim for Labor the rights of Capital. It is Capital in the truest sense. . . . The Capital of Money and the Capital of strength and skill must be united together" So, his knowledge, skill, and abilities, are Capital to any one who earns an income as an advocate, physician, singer, engineer, or as manager of a great commercial company, or in any other profession. His services are wanted, dernanded, by his clients, and paid for : and thus their Value is measured in money— hence they are x/»?V'i'"a, or Wealth : and as he makes an income by them, they arc Capital This income is measurable and taxable just in the same way as if he made an income by selling corn, cattle, or any otlier material chattels 11-1 TIIKOKY OF nKEDlT All modern writers admit that Labor is a commodity which nan be bought and sold like any material cha;ttel : and, consequently, it is Wealth ; and as it can be sold for a profit it may be nsed as Capital (//) Personal Qualities as Credit.— So; Personal Credit may be used in two ways. If a person buys goods for his household use, or for personal enjoyment, such Credit is not used as Capital But a merchant may use his Personal Credit for the purpose of Profit : and therefore as Capital He may use it for the purpose of purchasing goods, materials : or in employing Labor, by giving a Promise to pay at a future time, insti'ad of actual money. He sells the goods and makes a profit liy so doing, just as if he had paid for them in Money Or lie may employ Laboi'ers by means of his Credit, and sell the products for more than tliey cost : and so make a Profit : in this way he uses iiis Personal Credit as Capital AViien Personal Qualities, either in the shape of Labor or Crc^lit, are used in this way to produce a Profit, they are termed Personal Capital (3) Rights. — "When Personal Credit ;is used as Purchasing Power, a Plight of action, or an Economic Quantity of the third kind is created. And as this Kight of action may be bought and sold, or exchanged like any material chattel, it is termed Fecunii, Res, Bona, Merx in Roman Law : xP^l^'^' irpayixa, &c., in Greek Law • Goods and Chattels, &c., in English Law, The traiiic in these Rights of action is the most colossal branch of modern com- merce ; and is the subject matter of this .work ; so wc shall say nothing more of them here But any other Right may be used as Capital. If a man buys the Pund^ or Shares in a Commercial Company : or municipal and other obligations, such as Railway Debenture Stock : all these and many other classes of Rights produce him a Profit : hence they are Capital to him So, the Copyright of a successful work is Capital to the author : and if he sells it to a publisher it becomes his fixed Capital CAPITAL MAY INCREASE IX XWO WAYS 115 There is a class of traders whose business it is to buy and sell Rights exclusively : such as Shares in (Jominercial Companies aud Public Securities of this nature : and thej' keep a stock of this kind of Property on hand, just as other traders keep a stock of material goods Capital may Increase in two dhtind irai/s 57. Capital increases in two fundamentally distinct ways (1.) By actual increase of Quantity: as cattle, (locks and herds, and all the fruits of the earth increase by adding to their number or Quantity (2.) By Commeree or Exchange; that is, by exchanging away something which has a lower value in a place, and obtaining something in exchange for it of a higher v A bag of sovereig'ns has great Value in London : but take them among the Eskimos and where would their Value be? A professor of Greek, Latin or Mathematics, may find his acquirements of great Value in the Universities, where there is a demand for instvnction : but of what Value would they be to him among the Patagonians ? A great Lawyer finds his knowledge and his .skill of great Value in the Royal Courts of Justice, but of what Value would they be among the Hottentots ? Even in Loudon itself, if a man labors very hard to acquire professional knowledge, and no one employs him, where is the Value of his Labor ? If a man had all the medical knowledge in the world, from Hippocrates and Galen to Copland, and no one was ill, what Value would it be of to him ? If an author were to publish the most learned and laborious works in the world, and no one would buy them, what Value would they be of to him ? To say that Labor is the Cause of Value, is to say that an isolated thing can have Value : whereas Value is always relative, and can only atise in society. But if a man labors ever so hard and no one will buy his products, he is no better off in London than in the ?ahara If any one were to set up a manufactory of watches, or reclaim land, and grow fine fields of wheat in the centre of Australia, where there is no demand for the watches or the corn, where would their Value be ? Moreover, if Labor be the sole Cause pf Value, if a thing is once produced its Value could never vary.; which is Ricardo's express doctrine. But this is contrru-y to all experience. Because after thiugs have been produced, and all Labor upon them has been ended, they constantly vary in their yf^lue from day to day : from month to month : and from year to year Thus, pictures by one master constantly.rise in Value : and pic- tures by another master diminish in Value : long after the hand which has produced them lies cold in the grave. The pictures themselves remain the same : it is the taste of the public which varies 174 THEORY OF CREDIT Ricardo maintains that the same Labor in manufactures alwa^'s produces the same Value In the reign of George III. there was a very widespread fashion to wear steel shoe buckles : this manufacture employed a very large number of persons. All of a sudden these steel buckles went out of fashion : the demand totally ceased : and the people employed in making them were thrown into the greatest distress. But according to Ricardo, the buckles wei'e of exactly the same Value when there was a demand for them, and when there was no demand for them ! Some years ago the fashion of ladies wearing straw bonnets suddenly went out ; and the manufacturers of them at Luton, Dunstable, &c., were thrown into great distress. But according to Ricardo, the Value of the straw bonnets was exactly the same, whether there was a demand for them or not According to Ricardo, if the warehouses of Manchester were groaning with goods, the produce of Labor, they would be of exactly the same Value, whether there was a demand for them or not. We doubt whether the manufacturerg of Manchester would acquiesce in this doctrine Now with respect to the second order of Economic Quantities, namely, Immaterial Property, which compi'ehends all species of Labor, one simple question will suffice — If Labor h the sole Cause of Value, what is the Cause of the Value of Labor 1 Laborers of all kinds know only too feelingly the bitter mockery of the doctrine that Labor is the Cause of Value, when often and often it happens that thousands and thousands of them are only too willing to sell their Labor, and there is no one to buy it "With respect to the third species of Economic Quantities, namely Incorporeal Property, or abstract Rights, there are some kinds which are associated with Labor : such as Copyrights, Patents, and the Goodwill of a business But the same remark applies to them as to material objects with which Labor is associated ; that Labor cannot be the Cause of their Value LABOR AND VALUE 175 If a pei'son bestows an enormous quantity of Labor in publishing a work, the Law of course may give him the Copy- right : but if no one will buy the work, where is its Value ? So also of Patents : an inventor may Bestow enormous Labor in perfecting the machine : but if no one will buy the machines made, where is the Value of the patent ? No persons know more feelingly than authors and inventors that Labor is in no way necessarily the Cause of Value But there are vast amounts of Incorporeal Property which have Value which are not associated with Labor at all Thus a person who held a large amount of the Funds would be a wealthy man : and the Funds have Value. But where is the Labor bestowed on them ? Mill himself allows that a promise to pay by a solvent merchant or banker is of exactly the same value as the gold itself : which of course it is, because the gold is the Value of the promise. But how is the Value of the promise due to Labor ? and the whole mass of circulating Credits or Debts are of exactly the same Value as an equal quantity of gold. How is the Value of this mass of circulating Credit due to Labor ? The quantity of this mass of Credit in this country is colossal : it far exceeds any other kind of single property in the country except the land Thus we see the utter fallacy of the doctrine that Labor is necessary to Valne : and that all wealth id the produce of laud, labor, and capital Results of the Preceding Inqtiiry IS. We may now summarise the results of the preceding investigation. These are — 1. That there are vast quantities of pi'operty, both Corporeal and Incorporeal, which have Value, upon which no Labor was ever bestowed 2. That quantities produced by Labot, both Corporeal and Incorporeal, may have no Value 3. That the same quantity of Labor may pL-oduce products, some of which have Value, and others no Value 176 TRKORT OF CREDIT 4. That quantities produced by varying quantities of Labor may have the same Value 5. That things produced by Labor may have Value in some places and not iu otiiers : and at some tintes and not at others 6. That things produced by less Labor may have greater Value than things produced by more LaboV From these indisputable propositions, 'the result of practical experience, the undeniable inference is that Labor is not in any way whatever the Cause or Form of Val'ue : or oven necessary to Value : and in fact in tliis great commercial country the enormously greater amount of Valuable Property is not the result of Labor at all Now by the Laws of Inductive Philosophy if we could find a single case of Value which was not the, result of Labor, that single instance would alone be sufficient to overthrow the doctrine that Labor is the sole Cause of Value. But instead of one instance there are multitudes. In fact tjie enormously greater portion of Valuable Property is not associated with Labor at all In short there never was any doctrine in science which has received sucli a crushing and overwhelming overthrow as that Labor is the Cause of Value : and hence that system of Economics which founds its idea of Wealth and Value on Labor is utterly fallacious The pertinacity with which some writers still maintain that Labor is the Cause of all Value contrary ^o the evidence of the most glaring facts is a strong and striliin'g instance of Bacon's Aphorism ^ "The human understanding when it has once adopted an opinion (either as being the received opiuioji or as being agreeable to itself) draws all things else to support and agree with it. And though there be a greater number and weight of instances to be found on the otiier side, yet these it cither neglects or despises, or else by some distinction sets aside and rej(;cts : in order that by this great and jiernicious pre-determinatio'n the authority of its former conclusions may remain inviolate . . . ' Nnr. Orff. Bk. I.. Aijli. iH DEMAND THE CAUSE OF VALUE 177 "But with far more subtlety does this mischief insinuate itself into philosophy and the sciences': in which the first couclusion colors and brings into conformity with itself all that come after, though far sounder audbetter. Besides, independently of that delight and vanity which I have described, it is the peculiar and perpetual error of the human intellect to be more moved and excited by affirmations than by negatives : whereas it ought properly to hold itself indifiPerently disposed towards both alike. Indeed, in the estabhshment of any true axiom the Negative instance is the more forcible of the two " Demand is the Sole Cause df Value 13. It has now been shown that Materiality and Durability are in no way necessary to Value ; but are only in some cases the accidents of Value : it has also been shown that Labor is not the Cause of Value ; but is only in some cases the accident of Value But each of the Quantities in the Table of Instances may be bought and sold, or their Value may be measured in Money : each of them possesses the attribute of Exohaugeabihty : and that is the sole attribute which is common to all cliissesof the Quantities, and to each separate Quantity in each class. Hence as the ancients unanimously held for 1,300 years. Exchangeability is the sole essence and principle of Wealth Tims by strictly following the precepts of Bacon, by strictly rejecting and excluding all accidental and intrusive ideas we have obtained an affirmative issue Xow what is necessary in order that any Quantity may be Exchangeable ? Evidently that some one else should Demand it. If I offer something for sale, what is necessary that it should be sold ? Simply that some one else should Desire or Demand it. It is therefore manifest that Demand is the-sole Cause of Value The author of the Eryxias over and over 'again points out that Demand is the sole cause which constitutes anytliing Wealth ; •that anything, whatever its nature may be, is Wealth, so long as it is Wanted and Demanded : and no longer. He pointed out N 178 TIIEOrvY OF CREDIT that the looal money of different states is only "Wealth where it has power of purchasing; and is not Wealth where it has no power of purchasing It lias been shown that the Greek word xPVf^"'- which is one of the most nsnal words for Wealth, is derived from ^pa'ojuai, to Want or Demand : and that XPVI^°- simply means anything that is " Wanted and Demanded " : and that things are only xPW'^'^"' where they are xPW'-l^'^t oi" wanted and demanded : and that they are not xpwaTa where they are not xPWi-f-"- The very same doctrine is laid down !in Roman Law : it is said that Wealth is anything which can he bought and sold. And for that reason they class mere abstract Rights which are not associated with any material substance as Pecwiia, Rps, Bona, MIer.r, because they can all be bought and sold : and the same doctrine holds in every system of Jurisprudence Here it is quite clear that we have obtained the true Origin, Cause, or Form of Value : it is Demand pure and simple. Value is not a Quality of an object : nor is it the Quantity of Labor expended on obtaining it : it is an affection of the Mind. When there is a Demand for things they have Value : when the Demand increases (the Supply remaining the same) the Value increases : when the Demand decreases, the Value decreases : and when Demand altogether ceases. Value is altogether gone The ancients unanimously held that XP"'') Demand, is the sole cause of Value : Aristotle says that it is XP^'") oi' demand for each other services which binds society together Boisguillebert, the morning star of Economics, saw this most clearly He says' " GonsommaUon (Consumption or Demand) is the principle of all Wealth." "All the revenues or rather all the riches of the world consist in Goiisommafion (Demand) : all the most exquisite fruits of the earth, and tiie most precious products would be nothing but rubbish, if they were not Consommes (Demanded) " The Italian Economists were very clear and consistent in showing that Human Wants and Desires are the sole cause of all Value 1 Factum th la France, eh. 5 DTC.MAND THE CAUSE OF VALUE 179 Genovesi clearly points out' that the words prezzo, stima, valuta, valore, are words of relation ; and not absolute : and that they are not applied to Intrinsic Qualities. That though Money is the proximate measure, the ultimate measure, to which not only things, but their price is referred, is Man liimself. Nothing has Yahie wliere there are no men : and the very things which have a less Value where men are few, have a very high Value where there are many people : which is the reason why things and services have a much higher Value in the Capital than in the Provinces '■ Men, however, do not give Value *to things and services unles? ther want them. Hence our wants are the first source of the Value of all things : and Price is the power to satisfy our wants "' Genovesi says that nothing has Value except in relation to these Wants and Demands. He shows how prices are always determined by Supply and Demand ; and he says : " Valne is the child of Demand " So, Beccaria says'^ " Value is a substance which measures the estimation in which men hold things" Verri' shows that it is the wants of men which give rise to commerce ; and as their wants increase so does commerce increase. Nations which increase their wants, increase their power and their happiness. Desire or Demand incites men to commerce. Commerce requires Demand and abundance. Desire for the merchandise sought, and abundance to give in exchange for it. And as a nation progresses from the few and simple wants of the savage state to new wants and necessities, it must 'proportionally increase its annual production, so that it may have enough beyond its annual consumption to purchase foreign goods They then require something to ascertain the equality betw-een what they give and what they receive. "'Value is a word which denotes the estimation which men make of a thing." Verri also shows that all variations in price proceed from variations in Supply and Demand ' Lezicmi di Economia Cirile^'^^Ytii.-, ch. i ^ })el disordine e de' remedj delle nwiiete ndlo stato di MiUvio ^ }[rih'ta7.v}ni ^iilla A'rfmomia FiMitica Hi 180 THEORY OF CREDIT The Economists made all Value proceed from Demand : fchey showed thnt things which remain without Demand {Consommatioit) are without Value Coudillaci is very clear and explicit on the subject. He begins by investigating the foundation of the Value of things : and shows that it originates entirely from the Want and Desires of men. Things which satisfy some want have utility : and this AYant or Estimation is called Value " As people feel new wants they learn to make use of things which they did not before : they give, therefore, Value at one time to things to which, at another time, they did not" Hence, all Value resides in the Mind: and he says — "This esteem is what is called Value : " and he shows that all variations in Value proceed from variations in Supply *and Demand We have now shown that all ideas that Labor is the cause of Value are erroneous and to be rejected ; and that Demand, is the Sole Cause of Value On the Error of the Expression Intrinsic Value 14. We have now to say something about an expression which has been the cause of enormous confusion in Economics : which has been one of the chief stumbling bloeks in the apprehen- sion of the subject of Credit : and which 'must be cleared away All ancient writers, without exception, clearly understood that the value of anything is some other thing external to itself : and there is not to be found in any of them the slightest trace of such confusion of ideas as the term Intrinsic Value It is not easy to determine when the unfortanate expression Intrinsic Value came into use. But it se'ems to have arisen in this way : when unreflecting people thought about Value they thouglit of the Quality of the thing which made it desirable : and they called that its Value. They, therefore, gradually began to speak of Intrinsic Value So long ago as 1696 an able writer, Barbon, pointed out the confusion which had arisen from mistaking the Absolute Qualities of an object for the quantity of things it would exchange for ' Le Coinnirrrt' et h Gonrcrneme^t^ ch. i. EREOR OF INTRINSIC VALUE 181 He says' — " There is nothing wliich trouhles this controversy more thaa for want of distinguishing between Virtue and Value " Value is only the Price of things : and that can never be certain : because it must be there at all times and in all places of the same Value : therefore nothing can have, an Intrinsic Value " But things have an Intrinsic Virtue in themselves, which in all things have the same Virtue : the loadstone to attract iron : and the several Qualities that belong to herbs and drugs ; some purgative, some diuretical, &c. But these, though they have great Virtue, may be of small Value or no Price, according to the place where they are plenty or scarce : as the red nettle, though it be of excellent Virtue to stop bleeding, yet it is a weed of no Value from its plenty. And so are spices and drugs iu their native soil of no Value but as common shrubs and weeds : but with us of great Value : and yet in both places of the same excellent Intrinsic Virtue . . . " For these have no Value in themselves : it is opinion and fashion brings them into use and gives them a Value " Barbon thus puts his finger on the very phrase which is the bane of Ec- nomics at the present day — the expression Intrinsic Value— which is to confound an Intrinsic Quality with an External Relation The following passage from Senior shows how easily even able men are beguiled into this error. He says^ — " "Wc have already stated that we use the word Value in its popular (?) acceptation as signifying that Quality in anything which fits it to be given and received in exchange : or, in other words, to be lent or sold, hired or purchased " So defined Value denotes a Eelation reciprocally existing between two objects " Now, the Quality of a melon which fits it to be sold is its agreeable flavor : its flavor, therefore, according to Senior, is its Value (!) : and so defined, he says it means that it costs 5s. ! That is, be defines the Quality of the thing to be its Price ! 'A Discourse amcermncj coining the New M^ney lighter, p. 6 ^Political Economy, p. 13 IHl' THEORY OF CHEDIT This is exactly the confusion which the Economists carefully pro- vided against. The Quality which makes a thing desirable is its Value in use, or its Utility: and the Economists repeatedly explained and declared that Economics has nothing to do with Value in use, or Utility: but only with Vahie in exchange, or Market Price Smith, however, is the author who is chiefly responsible for the confusion of the subject in modern times. He begins by defining the Value of a thing to be any other Quantity it can purchase — to be something external to itself ; and, therefore, that its Value increases or decreases, according as it can purchase, more or less, of that external thing He then suddenly changes his idea of Value, and defines it to be the Quantity of Labor expended in obtaining:the object itself. Thus Quantity of Labor expended upon obtaining the object itself, came to be held to be its Value : and then Value came to be called Litrinsio This unhappy phrase, Intrinsic Value, meets us at every turn in modern Economics : and yet the slightest reflection will show that to define Value to be something external to a Quantity : and then to be constantly speaking of Intrinsic Value are inconsistent and self- contradictory ideas Thus over and over again it is said that Money has Intrinsic Value, but that a Bank Note or Bill of Exchange are only the representatives of Value Money, no doubt, is the produce of Labbr : but Smith himself says that if Money would exchange for nothing it would have no Value : so he admits that Exchangeability is the real essence of Value How then can the Value of Money be IntJrinsic ? How can any- thing luive Intrinsic Value unless it has the thing it will exchange for inside itself ? Money will exchange for anything — lands, houses, corn, books, wine, jewelry, &c. : and each of these is a Value of Money : but which of these is its Intrinsic Value ? Money remains exactly the same in itself wherever it may be placed : a hogshead full of sovereigns has immense Value in the middle of London : but if a man had it by itself in a deserted ship in the middle of the ocean : or in a barren Hand, where would its Value be ? Yet if it has Intrinsic Value in one place, it must have it equally in any other place KKROJi OF INTJMNSIO VALUE l^ii A Bank Note payable on demand is of the Value of Money : and why is it so ? Simply because it is exchangeable foi" J\Ioney. Hence a Bank Note has Value for exactly the same reason that Money has : namely, because it is exchangeable for something else. Credit is the Right to demand Jloney : arnd Money is the Right to demand something else. Socrates, in the Eryxias, shows that it is only when and where that Money can be exchanged that it has Value : when and where it cannot be exchanged it has no Valne. So, where a Bank Note or a Bill of Exchange can bo exchanged, it has Value : when it cannot be exchanged it has no Valne Hence, the Value of Money and Credits of all sorts is essen- tially of the same natni-e: though there may be diflferenfc degrees of it. A Credit, by the unanimous consent of all Jurists, Economists and Merchants, is an article of merchandise, and an exchangeable commodity, just hke Money, or any other material chattel: and this, whether it exists only in the abstract form of a mere Right, or whether it be recorded on paper The expression Intrinsic Value is so common that persons are apt to overlook its incongruity of idea. It is, however, a plain contradiction in terms : and if we use words of a similar import, but whose meaning has not been so corrupted in popular usuage, its absurdity will be apparent at once Thus who ever heard of Intrinsic Distance ? or of an Intrinsic Ratio ? The absurdity of these expressions is apparent at once : but they are in no way more absurd than Intrinsic Value. If we speak of the Intrinsic Value of Money, we may just as well speak of the Intrinsic Distance of St. Paul's : 5r the Intrinsic Ratio of five To sav that Money has Intrinsic Value because it is material and the produce of Labor : and that a Bank Nute is a Bill of Exchange is only the Representative of Value : is just as absurd as to say that a wooden yard measure is Intrinsic Distance : and that, the distance between two points one yard apart is only the Representative of Distance 18-i THEORY OF CREDIT A Standard of Value is. Impossible 15. That unfortunate confusion of ideas betvyeen Value being the Quantityof «wo//;«r commodity which any Quantity will purchase, and the Quantity of Labor embodied as it were in the commodity itself, which is chiefly due to Smith and Eicardo, has not only led to that mischievous expression Intrinsic Value, the source of endless confusion in Economics, but also to the search for something which very slight reflection would have shown to be impossible in the very nature of things, namely, an Invariable Standard of Value It is as well to explain what these Economists mean who are searching for an Invariable Standard of Value If we had a British yard and any foreign measures of length before us we could at once perceive the difference between them : and if we were told the measurement of any foreign buildings, however remote in age and country, we could, by a very simple calculation, reduce them to the standard of British measurement: and compare them with the size of our owp buildings Those Economists who want an Invariable Standard of Value want to discover and fix upon some single cornmodity by w-hich they can compare the Value of other things in all countries and ages But the least reflection will show that such a Standard is absolutely impossible by the very nature of things Money is, indeed, termed the Measure of Value : and so it is in exchanges which are effected at the same time and place. If we are told that a quarter of corn is worth -iO*., and that a sheep is wortli 40s. at a certain time and place ; w'e should say tliat they are then and there of equal Value But such matters are not the result of sfmple perception by the senses, as the different measures of length and capacity. If a (juantity of gold were placed beside a number of other things, no human sense could discern what their value would be. And the most violent changes in their several Values might take place in the market, without there being any visible sign of such a thing. Value is a Mental Aifection : and Values : are not perceptible by ocular demonstration, but they must be declared by the communi- cation o.f Minds STANDARD OF VALUE IMPOSSIBLE 185 Moreover, it is not possible to ascertain the diifercnt Values of diiferent Quantities of Gold obtained in different ages and countries. If a Quantity of gold coin minted in the age of Augustus ; an equal quantity minted in the reign of Elizabeth ; and an equal quantity minted in China, were placed side by side what human sense could discern the difference in Yalue between them ? And yet, that is what those Economists require who want an Invariable Standard of Value. They want something by which they can at once decide whether Gold is of more Value in A.d. 30 : in A.D. 1588 : or in a.d. 1888 : in England or in China : without reference to anything else But the only test of Value is an Exchange : and unless we can effect an Exchange, there can be no Value. How can we exchange an ounce of gold in the year a.d. 188 with one in the year a.d. 1588 : or with one in the year a.d. 1888 ? Bailey well says ^ — "Value is the i-elafcion between contemporary commodities, because such only admit of being exchanged with each other: and if we compare the Value of a commodity at one time with its Value at another, it is only a comparison of the relation in which it stood at these diffcrelit times to some other commodity. It is not a comparison of some intrinsic independent quality at one period, with the same QuaUtyat another period, but a Comparison of Ratios ; or a comparison of the relative Quan- tities in which commodities exchanged for each other at two different epochs. If a commodity A in the year 100 was worth 2 B, and in 1800 was worth 4 B, we should say that A had doubled its value to B. But this, which is the only comparison we could institute, would not give ns any relation between A in 100 and A in 1800 : it would simply be a comparison between A and B in each of these years "It is impossible for a direct ratio of Value to exist between A in 100 and A in 1800 : just as it is impossible for the relation of distance to exist between the sun at thd former period and the sun at the latter period " 'On Vfdvr, p. 72 186 THEORY OF CREDIT The fact is, that all this search after the impossible arose from Smith's unfortunate idea that the Value of a thing is the Quantity of Labor bestowed on obtaining it : which* was, as we have shown in the Introduction, adopted by Ricardo From this idea, it followed that if any qpmmodity could always be obtained with an invariable quantity of labor, it would be an Invariable Standard of Value. Eicardo admitted that there was no commodity which is always obtained by an invariable quantity of Labor: and, therefore, for that reason alone, he admitted that an Invariable Standard of Value is unattainable An Invariable Standard of Value, however, is not only unattain- able for the reason given by Eicardo, but it is in itself absolutely impossible by the very nature of things. Because, Value is a Eatio : and a single Quantity cannot be the Measure of a Ratio A measure of length or capacity is a single Quantity : and can measure other single quantities, such as different lengths or bodies of capacity. But Value is a Eatio : and it is impossible, in the nature of things, that a Single Quantity can measure a Eatio It is impossible to say that, a : h : :x It is manifestly absurd to say that i is to 5 as 8 : without saying as 8 is to what : just as it is absurd to say that a horse gallops at the Rate of 20 miles : without saying in what time But there mci/j be a Measure of Value 16. But though a Standard of Value is impossible by the very nature of things, there may be a Measure of Value Value being the Desire or Demand of a person to acquire some- thing else, the Quantity of Money he is willing to give to actpiire it is the Measure of his Desire to obtain it : and, theiefore, the Measure of his Value for it But Credit is also evidently a Measure of Value as well as Money. Neither a merchant nor any one else will give more in Credit, which he is bound to redeem in Money, to acquire any commodity, than he would give in Money itself. But if he wants anything, he will give just as much in Credit as he would in Jloney. Hence Credit is equally a Measure ol Value or Desire, with Money VALUE ONLY EXISTS IN THE MIND lS7 Hence Money and Credit are the Measure of Value : and as it is universally admitted by all Economists that purchases with Credit affect prices in all respects equally with Money, it follows that the aggregate of Money and Credit is the medium in which Prices are measured : and that the aggregate of Money and Credit constitutes the Circulating Medium or Currency : the medium in which Prices are expressed Value only exids in the Human Mind 17. Value, then, like Color, Sound, and Odor, only exists in the Human Mind. There is neither Color nor Sound nor Odor in external nature. They exict only in the Human Mind According to the unanimous doctrine of ancient writers, and all foieign Economists, Demand is the sole bvigin, cause, or Form of Value. It is Demand or Consumption, and not Labor which gives Value to a product. It is not the Labor which gives Value to the product, but the Demand for the product which gives Value to Labor Hence it is not Labor which is the cause of Value : but Value which is the inducement to Labor. It is not the Labor of the Producer which constitutes a thing Wealtj:i, but the Demand of the Consumer We conclude, then, that it is not Labor, but Consumption, Exchange, or Demand which constitutes a thing Wealth : and we trace the progress of a nation in wealth according as their wants and desires increase and multiply. First, the demand for the sustenance recpired by the body gives Value to the material products of the earth, food, clothing, shelter, fuel. Then as their tastes become cultivated and refined arises the Demand for works of literature, art, and science : for painting, for sculpture, for architecture, for the drama, for music. A,nd those who minister to these wants of the mind become wealthy, just as those who minister to the wants of the body do. It fs the Demand of the public alone which makes these things Wealth. Hence iu order to be wealthy a people must be inspired with strong and various 188 THEORY OF CREDIT desires : and to be willing to labor to gratify these desires : and this shows the great importance, in an EcQuomical point of view, of national education. Heavy taxes can only be borne by an industrious and wealthy people : and the multiplication of wants and desires multiplies industry, multiplies Capital, multiplies incomes, multiplies the persons able to bear the burden of taxation : aud renders the nation capable of great achievements : and of taking a leading position in the councils of the world GENKRAL EQUATION OF ECONOMICS 189 Section III On the General Law of Value : or the- ' General Equation of Economics 18. The last branch of our inquiry is to discover the General Law of Value : or the General Equation of Economics. That is, to discover a Single General Law which governs the changes in the Exchangeable Eelations of all Quantities whatever their nature may be, at all times and in all places The acknowledged principles of Natural Philosophy show that there can be only one General Law of Value : or a Single General Equation of Economics We have shown that there are three distinct species of Economic Quantities : and we have generalised all the Funda- mental Concepts of Economics, so as to gmsp all these Quantities These three orders of Quantities can be exchanged in Six diflTerent ways. Our present inquiry is to investigate a single General Equation which shall govern all these six species of exchanges indifferently Suppose that we make £ the general symbol of an Economic Quantity : i.e., of anything whatever which can be bought and sold, or exchanged : or whose Value can be measured in Money : or which has purchasing power — and representing these various Quantities under the general symbol, £,, we may say that there are in any country Quantities of this sort — £459,6:^1,340 £27S,2ii,rM0 £82(5,342,784 &c. A'c. iV'C. 190 THEORY OF CREDIT Now, we affirm, by virtue of the great principle of the Continuity of Science, and of the great Algebraical doctrine of the Permanence of Equivalent Forms, that whatever can be proved to be true Economically of any one of this series of Quantities must be true of them all Now, looking at the series of Quantities placed above, who could tell of what species they are ? Some may be land : some houses : some corn : some timber : some cattle : some jewelry : some money : some labor of all different sorts : some Credit or Debts : some the Funds : or other public obligations : some copy- rights: some Patents: some Shares in Commercial Companies, &c. Now, as we have shown that Materiality, Permanence, and Labor, are only accidentally associated in some cases with Economic Quantities, and not with all : and that Exchangeability is the only Quality which is common to all Economic Quantities : it follows that Materiality, Permanence and Labor must be excluded from any General Concept of an Economic Quantity : and Exchangeability retained as its sole general Quality Having thus obtained these Independent Economic Quantities, the whole purpose and object of the science is to discover the single General Law which governs the variations of their Exchangeable Eelations. It is clear that, by the principle of the Gonfinuitij of Science, and the analogy of all Physical Sciences, however varied and complicated the different phenomena of Value may be, there can, by no possibility, be more than one General Law of Value : or a single General Equation of Economics : whatever it may be Fundamental Conditions of the General Equation of Economics 19, Now, let A and B be any two Quantities whatever supposed perfectly general : it is quite clear that their Exchange- able Eelations are contained in the following limits — CO A = B &c. = &c. 2 A = B A = B A = 2 B &c. = &c. A = x> GENET! AL EQUATION OF ECONOMICS 191 The meaning of which is simply this^Let the Exchangeable Relation between A and B gradually and continuously change from where the greatest possible Quantity of A will exchange for the least possible Quantity of B, to where the least possible Quantity of A will exchange for the greatest possible Quantity of B Now the Law of Oontinnity says that a Quantity cannot pass from one amount to another by any change of conditions, without passing through all intermediate degrees of magnitude according to the intermediate conditions Hence we may aiBrm by virtue of the Law of Continuity — 1 . That if it can be induhitabhj provM that Any partuular Law is true at any One point in the range of Prices, that same Law must necessarily be true at All points throughout the ivhole range of Prices 2. That as the symbols A and B are perfectly general-, if any Laiv luhatever can be proved to be true in the Variations of the Exchangeable Relation of Any Two Quantities tvhatever, that Law must necessarily be true in the Exchangeable Relation of All Quantities whatevm' Thus by the Laiv of Continuity we are enabled to affirm that— If any Laiv ivhaiever can be proved to be true at any one point in the range of Prices, between Any Twp Quantities whatever, that same Law must necessarily be true atAW points in the range of Prices, and between All Quantilies whatever And, as a necessary corollary from the preceding, we may affirm that — If any Law can be proved Not to be true with regard to the Relation of Any Ttvo Quantities whatever, that Law cannot be a General Laiv of Economics Furthermore, as it is a universally acknowledged principle of Natural Philosophy that that Law only is the true one which explains All the phenomena, it may be laid flown as an unquestion- able truth in Economics that — 192 THEORY OF CREDIT If tivo or more Forms of Expression loill explain or account for any phenomena regarding Price, or the. change of Price, that Form of Expression only is to be adopted as the true one ivhich explains all the phenomena in the science, and not that individual case, or class of cases, only ISTow as wc have sLown in the Introduction that the Eicardo- Mill Theory of Value violates every one of these fundamental pi-inciples of Natural Philosophy — and as Mill himself says that the Laws of Economics are to be formed by consciously and deliberately followinj? the methods adopted in Physical Science — it follows that the Ricardo-MiU Theory of Value is to be utterly rejected : and we have now to investigate the true Law of Value : or the (general Equation of Economics Economics is a Physical Science becaiuse it is a pure science of causes and eflPects. There being Three orders of Exchangeable Quantities, and, therefore, Six different kinds of Exchange, the object of the Science is to determine the La'ws of the Phenomena of these Exchanges — that is to determine the Laws which govern the changes in their numerical Eelations of Exchange. Hence, we have a new order of Variable Quantities : and the Laws which govern this new order of Variable Quantities must be in strict harmony with the Laws which govern the Relations of Variable Quantities in general. The same general principles of reasoning ■which govern the relations of the stars in their courses, must govern the varying relations of Economic Quantities The fact is, that Astronomy is the physical science which is the type of Economics. The fundamental problem of Economics is identically the same as the fundamental problem of Astronomy. The Astronomer sees a number of Quantities — the heavenly bodies — moving in all sorts of directions— sometimes advancing, sometimes apparently stationary, sometimes retrograding — aud his object is to discover a single General Law which accounts for and governs all these varying relations. So the Economist sees a vast multitude of Quantities constantly changing their numericnl relations to each other, and his object i^ to discover a single General Law which governs all these varying relations. Economics, like Astronomy, is a pure Science of llatios Lauderdale's law of value 193 Lord Lauderdale's Law of Value 20. Now, how is the great General Law of Astronomy determined ? In this way. Let the heavenly bodies at any given instant be in any position. They then change their positions : tlie problem is to discover the Law which governs these changes of relation We must proceed in exactly the same way in Economics Let any number of Economic Quantities at any given time have any given relation to each other. They then change tlieir relations to each other : then the problem is to discover the single General Law which accounts for and governs these changes of relation Lord Lauderdale states the case in this way — Take any two Quantities, A and B : -which may vary with respect to ench other : First let A remain eoustaut while B varies Then the relation of B to A will change from Four Causes It would Increase in Value 1. From a Diminution of Quantity 2. From an Increase of Demand It would Diminish in Value 1. From an Increase of Quantity 2. From a Diminution in Value Now, as the Variation of A with respect to B will be governed by exactly the same Four Causes : it is quite clear that the Variation of both Quantities will be governed by Eight Indepen- dent Causes : and if these be connected in the form of an Equation, that will manifestly be the true General Law of Value: or the true General Equation of Economics Thus, Lord Lauderdale has the credit of having established the true General Equation of Economics. This comprehends the whole science of Pure, or Analytical Economics, exactly as the great Law of Newton's governs the relations of the heavenly bodies And as it is in the form of a fi-action containing no less than Eig'ht Independent Variables, it at once shows the supremely complicated nature of the Science 194 THEORY OF CREPIT This complicated Equation is the full expression of what is popularly known as the Law of Supply and Demand. All Economists admit that it is true when the prices of things are very low : they also admit that it is true when ithe prices of things are very high : they therefore admit that it is true at the extremes of prices : and, therefore, as it is true at the extremes of prices : the I^aw of Continuity affirms that it is necessarily true at all points in the range of prices between the extremes : that is, that it is universally true : and, therefore, that it is the true General Law of Value : or the true General Equation of Economics Remarks on the General Equation of Economies 21. The General Equation of Economics is, therefore, a Compound Ratio of a complicated nature : and to apply it in particular cases requires a profound knowledge of the circum- stances of the case : but yet, it is demonstrably true : and the whole Science must be constructed taking that Equation as the basis In obtaining this General Equation, \ve have followed the method invariably used in all Physical Science. We have obtained the Independent Variables and connected them in a General Law or Formula. This insures Certainty to the Science : but it is on the last point that the real difficulty arises : namely, in giving Precision, or Numerical amounts to the Coefficients. It is abso- lutely impossible to say what numerical variations in Supply and Demand produce definite variations in Value. This has been attempted in some cases, as in that of corn : but it is manifestly impossible to obtain exact numerical data, ': and, in fact, though the same General Law is true in all cases, it -is perfectly well known that it varies in every particular case : and the same absolute variations in the Supply and Demand in various quantities will produce great differences in the variations of their numerical Values It is this impossibihty of giving exact numerical Value to the coefficients that makes many persons suppose that it is impossible to make Economics an exact science. It is sometimes supposed that for a science to be an exact one, it is necessary that its Laws should be capable of exact Quantitative statement. This, how- ever, is an error which has been specially pointed out by Comte, GENERAL EQUATION OF EflONOMICS 195 who well shows the diflFerence between Certainty and Precision in science. To constitute an exact Science, it is not necessary that its laws can be ascertained with numerical Precision : but only that the Reasoning^ be Exact or Certain. He says that a dangerous prejudice has sprung up : that because the Precision of different sciences is very unequal, their Certainty is too. This tends to discourage the study of the most difficult : Precision and Certainty are perfectly distinct. An absurd proposition may be very precise : as that the angles of a triangle are equal to three right angles. On the other hand, a Certain proposition may not be Precise : as that a man will die. Hence, though the different sciences may vary in Precision, that will not affect their Certainty This observation applies most forcibly to Economics. Some persons are apt to despise it because it does not bring out its results with the same precision as Mathematics. This, however, is a grievous mistake. In Economics, the Causes of Phenomena can be ascertained with absolute certainty ; and if we want to produce any given effect, the method of producing it can be pointed out with absolute certainty. This is all that is necessary to constitute Economics an Exact science. Because the method of producing a required result being pointed out with absolute certainty : it has only to be put in force until the result is produced In considering the General Equation of Economics, we see the apphcation of Bacon's aphorism^ — " That which in Theory is the Cause in Practice is the Rule " No other Quantities but Demand and Supply appear on the face of the Equation : it is, therefore, efertain that no other Causes influence Value or changes of Value, except Intensity of Demand and Limitation of Supply. It is certain that neither Labor nor cost of Production have any direct influence on Value : it can only be by affecting the Demand or the Supply : and that no change of Labor or of Cost of Production can have any influence on Value, unless they produce a change in the relation of Supply and Demand 1 mv. Org., B. I., Aph. 3 02 196 THEORY OF CREDIT By this means we are enabled to cretile a rigorously exact Theory of Economics ; and by reverently ;followiug the precepts of the mighty prophet of Inductive Philosophy, and the examples of the immortal creators of the various Ipductive Sciences, it is seen that Economics, as a moral Science, Js fitted to take rank with Mechanics and Optics as a great Positive Inductive Physico- Moral Science : and it is the only Moral Science capable of being raised to the rank of an Exact Science In interpreting, however, the General Equation of Economics, it is necessary to make one observation. It is sometimes supposed that Value is only affected by the actually existing quantity of produce which is brought into the market. This, however, is not so. The expected quantity which may be brought into the market has a most important influence oil the Value of the existing quantity. If there was a general failure of the coming crops, that would exert a most potent influence on the present Value of the existing stock of corn. Or, if prices *had been very high in consequence of great scarcity of supplies and the coming harvest promised to be very abundant, that would exercise a very potent influence in diminishing the Value of the present stock. Hence the word Quantity, in the general Equation, must denote the Quantity, actual or expected Similarly, the word Demand must denote the Demand, actual or expected THEORY OF CREDIT 197 CHAPTER III THE THEORY OP CREDIT Origin of the System of Credit in Europe 1. If it were asked how that wonderful people, the Romans, commencing with a petty village, gradually extended their Empire over so large a portion of the World, it would probably be said it was due to their hardihood and their discipline. Bat, probably, a cause which has been entirely overlooljed, contributed in no slight degree to the result — and that is their wonderful and methodical habits of business The Romans were, as far as we are aware, the creators of the great system of Credit in all its branches When the practice of writing became common at Rome, it was established as a custom or law that every Dominns, or head of a house, should keep a family Ledger, as strict and exact as those of a modern banker. In this he was obliged to enter all sums of money borrowed and lent : all trade profits and losses : and these family ledgers wei'e the only legal evidence of Debt among Roman citizens receivable in the Courts of Justice. And it was from these family Ledgers that the whole of the modern system of bookkeeping and Credit has been developed It seems that every occurrence was noted down day by day in a waste book, termed Adversaria : and at the end of the month the various items were arranged under their proper heads in the Ledger, which was termed I'abulm, or Oodex accepti et expensi: which was intended to be preserved as an hfeirloom in the family. Every five years the Do-minus was obliged to swear to the truth of the Codex before the Censors : and it was regarded almost with a species of sanctity 198 THEORY OF CUEDIT A great difference was made between the Adversaria and the Gndnx. Cicero says^ — " He acknowledges that he has not the sum entered in his Ledger {Codex) : but he insists that it is entered in his day-book {Adversaria). Arfe you then so fond of yourself, and have such an exalted opinioA of yourself, as to sue for money, not on the evidence of the Ledger, but of your Day- book ? It is arrogant to bring forward your Ledger, instead of witnesses ; but is it not madness to bring forward your own scraps of writing and notes ? If these notes have the same force and weight and authority as the Ledger, what is the use of making a Ledger ? to make entries in it ? or to keep it in regular order ? or to make a permanent record of old writings ? But if we have an established custom to make a Ledger because wc put no trust in notes : is that to be considered of weight, and approved before a judge, which we ourselves consider weak, and unreliable ? "Why is it that we write notes without much care, and we write the Ledger with great care ? Because the one is to last a month, and the other is to last for ever. The former are soon erased : and the others are preserved with religious care : the former preserve the memory for a short time, the latter pledge the good faith and honesty of a man for ever. Notes are thrown away : the Ledger is kept in order. Therefore, nobody produces notes in evidence in a cause, but they do produce the Ledger and read the entries " This family Ledger was kept in or near the area, the chest or safe in the Talliniim, or apartment opposite the door of the Atrium, or central hall of the Koman house, where all the records and archives were kept The System of Credit 2. The great System of Credit compr.ehends — (1) The Creation of Obligations {■>.) The Transfer of Credits or Debts (3) The Extinction of Obligations which will be fully discussed in the following sections ^Pw Jioscio Comoedo THE SYSTEM OF CREDIT 199 _ The Eoman Jurists completely worked out the Juridical priuciples of Credit : aud these are snffidient for all practical purposes. But they are not sufficient for the full scientific theory of the subject. For they regarded the subject chiefly from the Creditor's point of view : and only slightly from the Debtor's But every Obligation has two sides : the Creditor's and the Debtor's : the Active and the Passive : or the Positive aud the Negative Accordingly, for the last 1.50 years, from the days of Maclaurin, Mathematicians have been in the habit of terming Debts Negative Quantities. But very few have given any explanation of what they mean by terming a Debt a Negative "Quantity : aud those who have done so, from a want of knowledge of the principles of Mercantile Law and the facts of Commerce, have entirely failed in giving an explanation which can be received as suitable for Economic science If the subject had been handled by mathematicians who were trained in Mercantile Law and practical business, there never would have been the slightest difficulty. But, unfortunately, it has been treated by literary and mathematical writers who were entirely deficient in the necessary knowledge : and they have fallen into a series of errors which are fully provided for in the Digest, and in every Continental treatise on Jurisprudence It is well known that although mathematicians have been in the habit of using the Algebraical Signs, or their equivalents, for 1,600 years, and have given the empirical rules for their com- bination : it is only within the present century that their scientific principles have been thoroughly understood. We must, therefore, explain the modern Theory of Algebraical Signs, and their appli- cation in mathematics and physical scierfce : and then give an exposition of the principles of Mercantile Law and the facts of Commerce : and then discover the interpretation of these Signs which is suitable for the particular circumstances of Economics The doctrines of the Roman Jurists are, of course, expressed in words. But we shall find that Jurists working separately : algebraists working separately : and the practice of Mercantile 200 THEORY OF CREDIT men acting separately and independently from their own instincts ; are all in perfect harmony with each oth*. And when we fuse these three together — an exposition of the facts of Commerce — aa exposition of the Jnridical Theory of Oi'edit— and show the application of the Tlieory of Algebraical ?^igns to these facts of Commerce and the juridical principles of iCredit— we shall find a most l)cautirul exemplification of the use of these Signs, strictly in accordance with their use in mathematics and physical science It is too often the custom to consider the system of Credit as pure hapha7>ard empiricism. The following'sections will show that this is an entire error : and that the wholeSystem may be reduced to the strictest scientific demonstration : we shall be able to carry the Theory of Credit to a greater state of perfection than it was left in by the Roman jurists, by removing an obscurity which has puzzled jurists and divines for centuries : and we shall be able for the first time to bring Economic Theory to the level of Mercantile Practice On the Method 0/ Contracting a Loan amoni/ the Romans 3. For many centuries the Romans* divided Property into two classes according to the manner hy which it might be alienated, sold or transferred. That species of property wliich they first possessed, and were first accustomed to consider as the patrimony of the house, or Bomus, they termed Rsn Manripi: and this could only be transferred by certain very strict formalities. Other property which they held in less esteem at first, or which they acquired afterwards, might be transfelTcd by simple delivery. This kind of pi'operty was termed Res nee Mmicipi The list of property classed as Res Mancipi was formed in the earliest ages of the Republic : and was nevgr extended beyond its first limits. All new species of property was classed under Res nee Mamipi Thus, the money of the early Romans was copper : and accordingly copper money was included under Res Mancipi: but Cold and .Silver iMojiey were of much later introduction, and they were classed under Res ncc Mancipi LOANS AMONG THE EOMANS 201 Rural servitudes in Italy were classed as Res Manryi/n : but the Rights of Obligations, as well as all other Incorporeal Pro- perty, were classed as Res nee Mancipi The sale or alienation of a Res Mancipi could only be eflfected by certain very strict formalities, which were necessary to insure a good title, in an age when written conveyances were unknown. This form of sale was termed Mancipium or Mancipatio. Gaius says that it was effected in the presence of five witnesses, Roman citizens of full age, and also in the presence of another citizen, who held the pair of bronze scales, and hence called libripens. The purchaser, holding a bvonze ingot, said thus — " I say that this man is mine by the Common Law of the Romans, and that he is bought by me with this bronze ingot and bronze scales." He then struck the scales with the ingot, and gave it to the seller as representing the price As has been shown, every Loan of Money is a Sale, in which the property in the Money is ceded to the borrower. The Money thus ceded was called a Alutuvm; because i± was given in exchange for the Right to demand an equal sum at a future time. As aes was a Res Mancipi, every Loan of Money required to be made by the Mancipium, or the sale^Mr ens et Lihrani. But the Right of the Obligation was a Res nee Mancipi, and, therefore, it might be transferred in other ways The Bond of Law created between the two parties by the Sale or Loan of the Mutmim by the formality of the aes et libra, was termed a Nexus, us: and Nexus was the only term used in the time of the XII Tables (451 B.C.) to denote a Contract or Obligation'^ In course of time the cumbrous form of the weight and scales were dispensed with, and a Contract, or Obligation, could be created by simpler methods. These were the Ohligatio re: the Obligation which was created by the Loan or advance of the 1 It has long been the hahit of Jurists to use the term Nexus and Nexum, indiscri- minately to mean a Contract, or Obligation: but; Professor H. Nettleship, of Oxford, has shown that Nexvs means the abstraojt Incorporeal Contract, and Nexum, the material object to which it refers 202 THKOKY OF CKEUIT thing itself : the Ohligalio verbis, or the Verbal Contract, termed Stipulatw : the Obiigatio Litteris, or the written Contract, created by entries in the family Ledger : and finally the Obiigatio tonsenisu, or the Obligation created by mutual consent, without any formalities On the Stipulatio: or Verbal Contract 4. The Stipulatio, or Verbal Contract, was made by solemn question and answer in the presence of witnesses. It was the most extensive form of making a Contract in Roman Law : and all other Contracts might be transformed fnto a Stipulation Supposing that the Slipukilio was employed to create an Obligation, or Contract of Debt, the lender delivered the sum lent to the borrower, and asked him a question of this sort — " Do you promise to deliver to me such a sum at such a date ? " The borrower answered, " I do " : and thus the Contract, or Obligation was created It is said in the Institutes that Slijiulatio is derived from stipulus an old word for firm, certain, ascertained : which perhaps may come from slips The person who asked the question was termed Stipulator, or Reus stipuUndi The person who answered was termed Promittor, or Reus promittendi The Stipulatio, or Contract by question land answer, could only form a Unilateral Contract ; or one in which only one party is bound. If a Bilateral, or Synallagmatic, Contract was to he created, it was necessary to perform two Stipulations Several examples of Stipulatio occur in Plautus : as in Asina- ria, ii., 4, 48 ; Fseudolus, i., 112 ; iv., 6, 15 ; Curculio, v., 2, 68 ; 3,81,33; Bacch., iv., 8, 41 ; Trinummus, v., 2, 34, 39 ; Rudens, v., 2, 47 The Marriage Service of the Church of .England is an example of a Bilateral Contract effected by two Stipulations The priest says to the man — " Wilt thou have this woman to thy wedded wife 1 " The man answers — " I will." THE OBLIGATIO LITTERIS 203 The priest says to tlie woman — " Wilt thou have this man to thy wedded husband ? " The woman says^" I will " And by these two Stipulations the Bilateral Contract of marriage is created On Arcaria Nomina 6. It was the duty of every Roman Dominus, or head of a house to make an entry of every sum borrowed or lent in his Ledger, or Codex accepti et expensi If, therefore, he had lent a sum of money by any of the methods of making a Loan, the Creditor would duly enter it in his Ledger at the end of the month. When he had made this entry it was termed Arcarium Nomen : and the Debtor, of course, was bound to make a correlative entry in his Ledger But such an entry as this in the Creditor's Ledger was not the Contract : it was only evidence of the Contract. The Contract was created by the actual advance of the money. It was, of course, absurd to suppose that any person could create another person his Debtor, by simply making an entry against him in his Ledger Cicero says that it is equally base for a man to make a false entry of money lent in his ledger as not to make an entry of money borrowed On the Obligatio Litteris : or Written Contract 6. But an actual Contract or Obligation, might be made by an entry in the Ledger The borrower came to the lender, and in the presence of witnesses, the lender advancing the Money, said to the borrower something of this sort — " Centum aureos expenses tibi tuli ?" " Have I iveighed out and given you 100 aurei f The borrower said — " Expenses mihi tulisti" " You have tveighed them out and given them to me " The Creditor, then, with the consent of the Debtor made a formal entry of the Loan in his Ledger : which was termed Expeusilatio 204 THEORY OF CREDIT The corresponding entry in the Debtor's Ledger acknowledging the receipt of the money was termed Acceptilatio An entry of money lent made in the Creditor's ledger with the consent of the debtor was absolutely conclusive, and could not be questioned. It formed a valid Contract, whether the money had actually been advanced or not. And if an action was brought for the money, the judge could make no inquiry into the actual facts. A solemn entry made with the consent of the Debtor was equivalent to a SUpulatio The Creditor made an entry of pecunia expensa lata, or money advanced, in his ledger : the Debtor made a correlative entry of pecunia accepta relata, or money received, in his ledger: and thus the Obltgatw Utteris : or Written Contract was constituted The Obligatio Consensu : or Consensual Contract 7. In the year 469 A.n., the Emperor Leo abolished the strict formalities of the Stipulation : and enacted that a consent given in any form should be valid, if the parties agreed about it. There was no necessity for any writing or witnesses As an example of a Consensual Contract, we may give the Customs of Trade. "When any persons enter into a trade, or have dealings with traders, there are certain well known and recognised customs of trade, which, though they may be unwritten, are legally valid. And the persons of that trade, and all those who deal with them, give a consent to be bound by them CREATION OF OBLIGATIONS 205 Section I On the Creation of Obligations 8. Personal Credit, or Mercantile Character, is Purchasing Power : and, as first pointed out by Demosthenes, and now universally acknowledged, is "Wealth. But Personal Credit does not enter into Economics until the merchant actually exercises his Credit, and makes a purchase with it When a merchant purchases goods " on Credit " it is an absolute sale, just as much as if it had been effected with money. He acquires the actual property in the goods as fully and effectually as if he had paid for them with money. In exchange for the goods he gives a Promise to pay their price at a future date. That is, he creates a Right of action against himself. This Eight of action is a Credit or Greance, or Debt, and is the price of the goods, and is the property of the seller Thus, at the very instant that the Property in the goods is transferred to the buyer, a Contract or Obligation is created between the two parties which consists of two parts — 1. The Right to demand payment in the person of the seller or Creditor 2, The Duty to pay in the person of the buyer or Debtor These two Quantities constitute the Contract, Obligation, or Bond of Law between the two parties This Obligation consists of two equal and opposite Quantities : and may be denoted by this symbol j ^ (jiiiq [ where the (+ £100) denotes the Creditor's Right to demand payment: and the ( — £100) denotes the Debtor's Duty to pay Also, if either of these Quantities be destroyed, the other is also destroyed with it 206 THEORY OF CRKDIT Hence as these two equal and opposite Quantities come into existence together : can only exist together; and vanish together : they are analogous to Polar Forces Division of Opinion among Jurists as to the iJosition of a Debtor in an Obligation 9. We have now come to the most abstruse and subtle point in Economics, which will demand the closest attention ; because it is the great Serbonian bog in which multitudes of writers, hterary and mathematical, have been swallowed up from a waut of knowledge of the most elementary pBinoiples of Mercantile Law, and practical business : and its recti ficatiou and elucidation will open up a completely new branch of inquiry of the greatest novelty and interest AVhen an Obligation has been created between two parties by ^the sale of Honey or Goods on Credit, the. case of the Creditor is clear : in exchange for the Money or Goods he has received a Right of action. This is his property, which he can sell or dispose of in any way he pleases, for other Goods qr for Money But a strong division of opinion exists finiong jurists as to the position of the Debtor in the Obligation AVhen a merchant has bought goods and given a Bill at three months in exchange for them— Is he in debt at the present time ? Roman Jurists and English Jurists hold different doctrines on this point The Roman Jurists held that when a person has contracted a Debt payable at a future time, the Debt is created at the time of the Obligation : but that the Remedy is suspended until the time for payment comes. Debitimi in preseiifi, solvendicm infuturo, is the maxim of Roman Law. When the contract was created it was said dies cedit : when the time for payment had come it was said dies venit But English Law holds a different view. As the word Debt in English Law means the abstract Personal Duty to pay, it holds that no Debt is created until the Duty to pay comes into existence, i.e., until the day of payment has come CASE OF A DEBTOR 207 It is a maxim of English Law that Credit unexpired may be pleaded under the General Issue : which means that if an action is brought against a person who has contracted an Obligation payable at a future time, before the time for payment has come, he may reply that he is not in Debt at all Thus Pitt Taylor says^ — " In addition to these examples it may be observed that whenever the Defendant can show that in fact, no Debt ever existed before action brought, he may do so under the plea of never indebted Thus, for instance, if the action be for goods sold and delivered, he may defend himself under the plea by proving that they were sold on Credit which was unexpired when the action was commenced " A few examples will show the correctness of this view Suppose that a tenant takes a house or 'apartment, and agrees to pay the rent quarterly. Suppose that the day after he had entered into possession the landlord came and demanded his rent. What would the tenant say ? He would say — " My good friend, Mr. Landlord, I owe you nothing. The bargain is that I am to have the use and enjoyment of this house for three months before the rent becomes due and payable. My Debt, or Duty to pay, does not come into existence till then : good morning to you " So, wlien a farmer takes a farm on a lease of 19 years, and becomes bound to pay the rent half-yearly, the agreement is that he is to have the use and enjoyment of the larm for intervals of six months before each instalment of rent becomes due. The successive rents are intended and expected to be paid out of the successive profits made out of the farm. And it is obviously absurd to say that the farmer is indebted, at the present time, for rent which only becomes due 19 years hence ; and is intended and expected to be paid out of profits which will only come into existence 19 years hence The case is obviously the same with a merchant who has bought goods and given in exchange for them his promise to pay the money for them three months hence. He is not in Debt at the present time. No Debt, or Duty to pay, comes into existence until the Bill becomes due and payable : and the amount of the Bill is not to be subtracted from his present property * Ziaw of Evidence. Vol. I. 208 THEORY OF CREDIT The importance of the consideration consists in this. It is commonly supposed that when a person is bound to mate a payment at a future time, the sum- due is to be suUrarAed from his present property : and that it is a diminution of it. It is usual to denote Debts by the Negative s4gii — ; and according to this view, if a person j)ossessed £100,' and was bound to pay £80 three months hence : and therefore his property would be represented by £100 — £30 : that his ptoperty would only be £70. But this view is entirely erroneous. In this case the sign — does not mean subtraction : what it does really mean will be shown further on The Debtor has the full property in his £100, to do with exactly as he pleases. His Duty to pay has no present existence : it is no subtraction from his present property. The expression is not to be read as if he had only £70. The Debt is a mere abstract Personal Duty : and a Personal Duty cannot be suhtracfed from a material sum of hard money. The expression is to be read this way. He possesses £100 in money, "but coupled with the Duty to pay £30 at some future given timb. Hence the sign — does not mean .nibtraction in this case : it is a mere Memorandum that he has to make an exchange at some fpture time Advantage of adopting the Conception of Economics as the Science of Exchanges, or of Commerce 10. We now see the advantage of adopting and firmly grasping the conception of Economics as the Science of Com- merce or Exchanges. Because all the mechanism and phenomena of the great system of Credit, which are a hopeless puzzle and perplexity as long as Economics is treated as the " Production, Distribution, and Consumption of Wealth," become perfectly clear and simple when it is understood to be the Science of Commerce or Exchanges Every case of a "Loan" of Money or a Sale of goods "on Credit " is an exchange ; or an act of commerce. In exchange for the Money or the Goods a Eight of action is created, and is the Price of the goods. This Right of action is a Saleable Commodity : which may be bought and ^old like any material ERRORS or MATHEMATICIANS 209 chattel : and it has value because it will be paid in money. This Right of action may circulate in commerce exactly like a piece of money : and effect any number of exchanges exactly like a piece of money, until it is paid off and extinguished : and then it ceases to exist The Debt was created by one exchange : it then may effect any number of exchanges : and when it is due the holder of it brings it to the Debtor who gives the money in exchange for the Eight of action. Thus the Debt is created by one exchange, and is extinguished or annihilated by another : and, thus the whole system and operations on Credit are merely a series of Exchanges On the Errors made ly some Mathemafimans in terming Debts Negative Quantities 11. The juridical Theory of Credit woj-ked out by the Roman jurists was suficient for all practical purposes. They explained how Credits, Rights of action, or Debts are created ; how they may be transferred ; and how they are extinguished. But this is not sufficient for the full scientific Theory of the subject : because they treated these Credits almost entirely from the Creditor's side But in every Obligation there are two parties : the Creditor and the Debtor Now when two persons are bound together by an Obligation such as that of Debt, it is usual to term the Creditor the Active or Positive Agent : and the Debtor the Passive or Negative Agent Hence to complete the full scientific Theory of Credit it is necessary to develope it from the Debtor's or Negative side, as well as from the Creditor's or Positive side Accordingly for the last 150 years, from the days of Maclaurin at least, mathematicians have been in the habit of giving Debts as examples of Negative Quantities. But they have entirely failed in giving an explanation of the term Negativeas applied to Debts which is suitable for Economic Science The explanation usually given is this — A man's property may be considered as Positive : and his Debts as Negative : subtract his Debts from his property : and the remainder, if any, is his substance or capital 210 THEORY OF CREDTT And as the national capital is the aggregate capital of all the individuals in it, according to this doctrine, in order to find the quantity of capital in the country, all tire floating Debts in it would have to be subtracted from all the property in it, and the remainder would be the national Capital So Peacock, the distinguished Algebraist, says — " If property possessed, or due, could be denoted by a nrlmber or symbol with a Positive Sign, a Debt would be indicated by a number or symbol with a Negative Sign : or conversely. Such aifections of Property are correctly symbolised by the signs + and — : since they possess the inverse relations to each other which these signs require. For if to a person A there be given a certain property or sum of money with, or added to, a Debt of equal amount; his Wealth, or Property, remains the same as before" Now, in a certain sense, these modes of statement have some semblance to truth : if a person were going to retire from business he would call in and discharge his debts or liabilities, and the remainder, if any, would be his fortune But such a mode of statement is quite unsuitable for Economics. Economics is purely the science of Exchanges : and it has only to do with Quantities while they exist ; and all Exchangeable Quantities are Economic Quantities, and are the subject of Commerce. Debts, or Credits, are a species of property of the most colossal magnitude : and are the subject of the most gigantic commerce of modern times. They are a species of property far exceeding any other kind df property except the land itself. And w-hat are they to be subtracted from ? The explanation given above by Peacock is entirely inapplicable to the business of banking, as will be shown in a future chapter The fact is that mathematicians have completely mistaken the application of the signs + and — in this instance, from a want of knowledge of Mercantile Law Mathematicians are accustomed to treat of Quantities and Operations, and as these may each be of opposite or inverse qualities they apply the signs + and — to fhem But in Economics the signs + and — ,do not aifect Property, but Persons ERROR OF EULER 211 As will be shown hereafter, Persons niay stand in Inverse or Opposite relations to each other as well as Quantities or Opera- tions : and Persons who stand in these opposite or Inverse relations may be designated by the signs + and — , as well as Quantities and Operations. Every student of Mercantile Law will at once perceive Peacock's error in the above extract : because Credits or Debts are not Jura in re : they are Jura in Personam : and the passive or Negative Debt is not Money owed by the Debtor, but the abstract Personal Duty to pay money Two Algebraists of the highest eminence, Euler and Peacock, have attempted to explain the meaning of the Negative Sign as applied to Debts : but they have both failed from a want of knowledge of the principles of Mercantile Law Error of Euler in terming Debts Negative Quantities IS. Euler says^ — "The manner in which we calculate a person's property is an apt illustration of what has just been said. "We denote what a man. really possesses by Positive numbers, using or understanding the sign + : whereas his Debts are represented by negative numbers, or by using the sigu — . Thus, when it is said of anyone that he has 100 erovvns, but owes 50 ; this means that his real possessions amount 100 — 50 : that is to say 60 crowns " As Negative numbers may be considered as Debts : because Positive numbers represent real possessions : we may say that Negative numbers are less than nothing. Thus when a man has nothing in the world and owes 50 crowns, it is certain that he has 50 crowns less than nothing : for if any one were to make him a present of 50 crowns to pay his Debts, he would still be at the point 0, though really richer than before " It will be seen that the statement in the first paragraph commits exactly the error which we have recently pointed out at length '21-2 THEORY OF CREDIT Suppose that the person has 100 crowns : and is bound t()'pay 50 crowns at tlie end of a year. Then -his property would be correctly stated as 100 crowns — 50 crowns. But it would be quite inaccurate to say that his property was only 50 crowns. Because he has the 100 crowns which are his absolute property to dispose of, or trade with, exactly as he pleases in the meantime : and he is only bound to have 50 crowns at' the end of the year, to discharge his Debt Moreover, as we have shown, the Debt is the abstract Personal Duty to pay : and it does not come into existence until the time for payment has come. Consequently the person is not in Debt at all until the end of the year': and consequently the Debt, which docs not exist, cannot be subtracted from his property But the owner of the Debt may put it into circulation : audit may be sold, transferred, or exchanged, and produce ail the effects of money, any number of times, until it is paid off and extinguished. So that there may be the 100 crowns and the Eight to demand the 50 crowns circulating simultaneously in commerce Moreover, as the 100 crowns are solid money : and the Debt pf 50 crowns is only the Personal Duty to pay money : it is quite evident that an abstract Personal Duty Cannot be substracted from a solid sum of hard cash Jloreover, by the Law of Contimdhj, if *e diminish the period of payment gradually and continuously until it reaches : aud the Debt becomes payable on demand : that in no way alters the general principles of the subject: a Duty to pay, though inime- diafely due on demand, cannot be substracted from a material sum of money. The debtor's money remains absolutely intact until he voluntarily buys up the Riglit of action against himself by voluntarily giving 50 crowns in eschangjc for it The fact is that the expression is to be read in this way : he possesses 100 crowns : but coupled with the Duty to pay 50 crowns at some given time In the second paragraph when the Debtor possesses crowns, and owes 50 crowns, he is said to have 50 crowns less than nothing. This clearly means that he is under the duty to pay 50 crowns : and has crowns to pay them with EHKOR OF PKACOCK 213 Now suppose that being iu such a position, as Euler says, some one makes him a present of 60 crowns to pay his debt witli. He pays the Debt ; he is 50 crowns richer than he was before : but still his Property is now 0. This is an example that + x + ^ + Thus Euler is right so fiir as he goes : but he has stated only one-half of the case. Because there is another combination of Algebraical symbols which gives + : namely — X — : and there is another method in commerce of arriving at the same practical result As any person whatever may give the debtor 50 crowns to pay his debt with, suppose that the Creditor does so. Then having received the 50 crowns in a present from the Creditor, the Debtor hands them back to the Creditor in payment of the Debt : which is then extinguished. The debtor is now, as in the former case, richer by 50 crowns than he was before : and his property is now The same result may be attained in another way. Suppose that the Creditor simply Releases the Debtor from hia Debt : then, as iu the former case, his property would be : and he would be 50 crouns richer than he was Now, if crowns are +, and to give is also + : then a Debt is — , and to Cancel or take away is also — ; consequently to give money is + x + : and to Release or Cancel a Debt is — x — ; and the position of the debtor will be exactly the same after each operation This shows that the Release of a Debt is, in all circumstances, equivalent to a Payment in Money So it is shown that in Gommcrcia,l, as in all Algebra, -f X += — X— : an example of the Permanence of Equivahnt Forms : and a principle of the most momentous importance in modern commerce Error of Feacocic in terming Debts Negative Quantities 13. Peacock, Dean of Ely, who published the most philoso- phical treatise on Algebra in his day, and who was the first to introduce the Theory of Signs into a standard treatise, endeavoured to apply the Theory of Signs to the Theory of Credit or Debt, But he has fallen into the error so carefully provided against in the Digest, and by all Jurists since 214 THEORY OF CREDJT He says' — " A merchant possesses a pouiids and owes h pounds : his substance is, therefore, a — b : when a is greater than b But since a and b may possess every relation of value, we may replace 6 by a — c, or « + c ; according as a is greater or less than h : in the first case we get — a — b = a — {a — c) =^ c and in the second — a — b = a — {a + c) = — c If, therefore, c expresses his substance or -property when solvent, — c will express the amount of his Debts when insolvent : and if from the use of + and ^ as signs of affection or quality in this case, we pass to their use as signs of operation, then, inasmuch as a + ( — c) ^ a — c; and a — ( — c)=ffl-fc it follows that the addition of a Debt ( — c) is equivalent to the subtraction of property, c, of an equivalent amount : and the subtraction of a Debt ( — c) is equivalent to the addition of Property, c, of an equal amount : and it consequently appears that the subtraction of Debt, in the language of symbolical Algebra, is not its Obliteration or Remov^J, but the chcwge of its affection or characler from Money or ProiieHy owed to Money or Property possessed " Peacock, as is seen, arrives at the conclusion that the subtrac- tion of a Debt is equivalent to the addition of Property : the conclusion is right, as we ha^e seen above': but his method of arriving at the conclusion is erroneous : as has been so repeatedly pointed ouc by Jurists. The Negative Sign — is not a sign affecting the Money or the Property, but it is a sign affecting the Person of the Debtor If such a distinguished mathematician as Peacock was, had only reflected, he could not have failed to perceive that his inter- pretation of tlie Negative Sign, as applied to Debts, could not be correct. Because the signs + and — a^lways refer to Similar Quantities, but of opposite Qualities. Now the sign + represents the Creditor's Personal Right to demand a sum of Money : and a material sum of Money can, by no possibility, be the Inverse of an Abstract Personal Right. It must be something which is the In\ crse of a Right : and the Inverse of a *B,ight is a Duty ^Algebra, 2ud Edit., Vol, II., p. 15 ERROK OF PEACOCK 215 Peacock's mode of stating the question ooiifoiiiuls Dhe distiuc- tioii between a Debtor aud a Trustee: a person who inereiy iiolils a sum of money, to wiiiuh another person has a Ri<;lit, is a Trustee and not a Debtor : a Debtor is a person who is nndar the abstract Personal Dnty to pay a sura of money : but until he vohintarily pays it, the Creditor lias no Iiight or Property in it Jloreover, Peacock's mode of statement sins against the Philosophy of Science : because Economics being the Science of Exchanges, and that only : all questions in Economics must be stated in the form of an Exchange : Economics has nothing to do with addition and subtraction but only with exchange : and all questions of contracting and extinguishing Debts must be stated in the form of exchanges. All Debts are created by one exchange: and they are extinguished by another exchange. And this, as we shall see, gives a complete explanation of the subtleties aud perplexities of the Theory of Credit In this case, therefore, tlie signs + and — , as signs of operation do not mean addition and subtraction. What they do mean will be shown further on The result wliich Peacock arrived at is correct : but it is not produced in the way in which he says it*is; but in the way he says it is not Further Error of Peacock 14. We have shown that Peacock is laistakeu in liis attempt to apply the sign — to debts : but he is also mistaken in his attempt to apply the symbol V^^ to property He says^ — "If a denoted property poss'essed, and — a a debt, aV^, a might denote property neither possessed nor owed, such as a mere deposit might be " He has explained his views at greater length further on- — " There are many cases, however, of quantities which cannot be represented, unless symbolically, by lines, which are susceptible of affections denoted by + and — , which are appropriate to their specific nature : thus, if a represented property possessed, — a may represent the same property owed : under such circumstances what is the meaning which may be attached to as/—! and — a V— i •'' 'Ali/f.hra, 1st tMit., p. 177 Ubid, p. 366, Art. 447 216 THEORY OF CREDIT If we consider the succession of quantities — or, a, a \/ — 1, — a, — a \^^ 1 and if the first represents property possessed, and the third property owed, the second can neither represent property possessed nor owed, under the same circumstances or by the same person, inasmuch as in such a case, it w'ould be symbolically represented by II, or — a : it may represent, however, property deposited, which admits of similar relations when considered as property possessed and property owed by another person : under such circumstances, the affectation of a denoting property possessed by A by the sign ^/—T, would convert it into property possessed by B : and the affectation of as/^^ hjs/^^i would Convert property owed by A into property owed by B : and fourthly, the affectation of — a\/^ by \/-^^l would convert property owed by B into property possessed by A : the repetition of the process of affectation by the sign V^^i would reproduce continually the same succession of transfers of property from A to B, and of conversions of property possessed into debt, and of debt into property possessed, which is required to correspond to the succession of the same symbolical results " In this case the interpretation of the sign \/—i which we have given, satisfies the symbolical conditions, and also coincides with tiie interpretation of the meaning of the signs + and — , which is otherwise established : we cannot give it the additional authority of the coincidence of this interpretation with the interpretation of the meanings of the quantities corresponding to a'^ and — a^, for those quautiticd in the case under consideration admit of no interpretation " It is really impossible to extract any intelligible meaning from this use of the sign \/^ to property The fallacy underlying the whole paragraph is the one which is so common among lay writers — namely, that a Debt is property owed. A Credit is the abstract personal Right residing in the Creditor, and the Debt is the abstract Personal Duty to pay residing in the Debtor : and these opposite personal affections are correctly represented by the symbols + and — : but they have no relation to any specific money or other thing ERROR OF THORNTON 217 Now the symbol n/^ denotes that operation which being twice repeated changes + into — . If we move a line through 90°, it is perpendicular to its former position, and is denoted by the sign n/^I : and if we move it through 90° more, it then forms a straight hne with its former position ; and is that denoted by the sign — But depositing a thing twice with a person does not change property into a debt : nor does it transfer the property. The fact is, that if the signV-^^ had any application at all to Economics, it would mean that operation which being twice repeated changes a Bight io demand into a Duty to pay. But what possible operation could have that efifcct ? Absolutely none whatever. Consequently, it is evident that the sign^^^i can have no application in Economics Economics is a science of one dimension : it acts entirely in single lines between persons. Now the sign,/— i is not applicable to any science of one dimension : it requires a science of at least two dimensions, such as an area De Morgan has expressed similar sentiments inhis article Algebra in the English CyclopEedia— " It is impossible that a perfect Algebra can be founded on ideas of time, loss and gain, or any in which only two directions can be imagined. Space, from the infinity of directions which it admits, is as yet the only perfect medium of explanation. Time before and time after a certain epoch may be represented by the Positive a;qd Negative quantity : but what is there in the idea of time to which the sign^-^i can possibly apply ? Again, show us a commercial operation which performed upon a gain produces a sort of result which can neither be called a gain or loss, but which repeated two or three times upon a gain turns it into a loss — and we, can immediately see a system of Commerpial Algebra, in which^^ shall be intelligible " But no such operation can be imagined The fact is, that Peacock's error consists in interpreting the symbol V— 1 as a Sign of Affection, whereas it is purely a sign of Operation Error of Thornton and CernusoM on Credit 15. We have shown the error of two very distinguished Algebraists in their interpretation of the Negative Sign as applied to Debts : we have now to point out the error of a plausible view held by two distinguished bankers 218 THEORY OF CREOfT It has been asserted that Credit adds nothing to the resources of the world, because it is neutralised by something else Any person practically conversant with pommerce, and, seeing that the enormously greater portion of commercial operations are carried on by Credit, would think it a strange doctrine that Credit adds nothing to the resources of a nation, or of an individual : because it is now universally agreed that the only true definition of Wealth is "Anything "which has Purchasing Power:" the Wealth of a nation or an individual is therefore their Purchasing Power : and their Purchasing Power is • their Money together with their Credit : Credit is, therefore, Purchasing Power over and above, and additional to. Money : and hence it must be a Resource cumulative to Money Some writers, however, have maintained the contrary doctrine in a very plausible way : but which we shah show to be erroneous Henry Thornton, an able man, a banker, and one of the authors of the Bullion Report says — " Paper constitutes, it is true, an article on the Credit side of the books of some men, but it forms an exactly equal item on the Debit side of the books of others. It constitutes, on the whole, neither a Debt nor a Credit" S(i another eminent banker, M. Cernuschi, says — " The ^balance-sheet of every individual contains three accounts : existing goods, Credits and Debts. But if we collected into one all the balance-sheets of every one in the world, the Debts and tiie Credits mutually neutralise each other, and there remains but a single account : existing goods " The totality of goods, therefore, forms the general inventory. There is the first matter of exchange. The. Debts and Credits are subsidiary matters. Debts and Credits are reciprocally trans- mitted as goods are transmitted ; but however great or however small they may be : and through whatever hands they may pass : Credits for some, Debts for others: they add nothing to, and take nothing away from the general inventory " The argument of Thornton and Cernhschi is simply this. Suppose A to have £100 in Money, and also a three months' bill of £50 on B. Suppose B to have £iao on Money : and at ERROR OF THOKNTO'n 219 the same time to have accepted a Bill for £50 at three months' to A. Then A's property would be stated thus : £100 + £50 : B's property would be stated thus, £100 — £50 Now tiie argument of these writers is this — that the + £50 and the — £50 balance and neutralise each other : and the result is : which, according to them, is the same thing as saying that these quantities do not exist at all This view might perhaps seem at first sight somewhat specious ; but a very httle reflection will show that it is erroneous It alleges that if there are two equal and opposite quantities in existence at any instant, which may 'neutralise each other's effects : and tlie result is : that that is the same thing as saying that these two quantities do not exist at all Suppose that two equal and opposite forces act upon a particle at rest : they neutralise each other's effects : the result is : but it would be highly erroneous to say, for that reason, that they do not exist at all Suppose that the Government, on a division, has 345 sup- porters and 300 opponents : the 300 members on each side neutralise each other':^ effects : and the reslilt is that the force of the Government is 45 : but that does not imply that the 600 members do not exist at all Hence, even if it were true that these equal and opposite quantities. Credits and Debts, neutralised each other's effects : it would be erroneous to say that that is the same thing as saying they do not exist at all The error consists, as we have pointed out, in sujiposing that in the case of Obligations not yet due, the Debt is an existing Negative Quantity neutralising the effect of the Credit The Credit, or the Right of action of the Creditor, is an existent Quantity, which may be bought and sold like Money, or any other chattel : the Debt, or Duty to pay, does not come into existence until the Credit has expired, and the day of payment come : and consequently it cannot neutralise the Credit And, even supposing that it is payable on demand like a Banking Credit, it is still an Economic Quantity, until payment is demanded, and it is paid off: and the Debtor's property 220 THEORY OF CREDIT remains entire until he voluntarily gives some of it to buy up this Eight of action. These considerations are of supreme importance as we shall see, in understanding the nature of Banking Personal Credit is a person's Purchasing Power over and above his Money ; hence Credit is Wealth cumulative to Money : and the whole mass of Circulating Credits are Economical Quantities over and above and additional to Money : -and they are in their nature and effects in every respect equivalent to an equal quantity of money On the Application of the Theory of Algebraical Signs to Economics 16. The perplexities of the Theory of Credit, which have baffled all the Economists in the world to explain, can only be unraveled by the great modern doctrine of the separation of the signs of Affection or Distinction and Operation As the introduction of this great doctrine into Economics is perfectly novel, we shall have to treat of it rather fully : especially as there may be students of Economics who' are not very familiar with it in other sciences. And we shall endeavour to make it intelligible to those who have not become acquainted with it already It is a remarkable example of the almost universal truth that practice has always preceded theory, that even the practice of science long preceded the theory of science Sixteen hundred years ago Diophantus said — " Aeti/'ts £7rt Xiltj/LV TToWaTrXacnacrOeicra Troiei virapiiv " " Defect multiplied into defect gives existence '' And it is said in the Basilica — " Svo apvTjcrecs fi-iav Trtnovtriv KaTaOiaw" " Ttco Negatives make an Affirmative " This is simply the Algebraical doctrine that — x — = + : and from the days of Diopliautus this has been perfectly well understood as an empirical rule in Algebra THEOUV OP SIGNS 221 When the great pioneers of Algebra in modern times — Harriot, Fermat, Yieta, Des Cartes, Cardan, Tartaglia and others, trans- lated their reasonings into general symbol.a, they found that they had created a machine whose working they were not able fully to apprehend They found, among other things, that many problems produced Negative answers. Unable at first to apprehend the meaning of Negative answers, they believed that they had no real interpreta- tion : and they called Positive roots true, {verce radices) : and Negative roots false {ficta radices) In the progress of Natural Philosophy the Negative sign was used to a vast variety of quantities : but no general Theory of Signs was devised : and the progress of mathematics was much impeded by the want of this generalisation The rule that — X — = + was universally adopted in practice, because it alone produced right results. Rut Alucbraists were wholly unable to explain it : it was wholly unknown to Newton: and when he tried to explain it the great Euler babbled like a child Even so late as 1813 a distinguished mathematician at Cambridge denied the existence of, and ridiculed the idea of there being, any such things as " Negative" Quantities Many centuries ago, at least about 1100 A.D., the Hindoo Algebraists had made considerable advances in explaining the Theory of Signs : but nothing was done in Europe till nearly the end of the last century. Since then a new spirit of philosophy has been breathed into the old science : and a number of distinguished algebraists, Arbogast, Argand, Buee, Armand, Carnot, Warren, Peacock, Ue Morgan, and others, have completely established the Theory of Signs : and their labors have resulted in what is called the Separation of the Signs of Affection or Distinction and Operation In most of the common books on Algebra the student is told that the sign + means addition, and the sign — means subtraction . It is said that + X -f- gives + : and that — X — also gives + : a doctrine which, without further explanation, is an inscrutable mystery, not to say an absurdity: as appears in Freud's comments on the subject 222 TIIEOUY OF CREDIT Writers who are not versed iu Natural Philosophy have no conception of the signs + and — meaning anything but addition and subtraction. Tt is no doubt perfectly true that in some cases these signs do have that meaning : but that is only one of their meanings. Everyone who has any knowledge of Mathematics and Natural Philosophy, knows perfectly well that in reality these signs have an immense variety of meanings, according the particular circumstances out of which £hey arise : or the body of facts to which they relate : and that it is wholly impossible to determine their meaning until we know the particular circum- stances under which they arise We must now explain the general use of these signs in Mathe- matics and Natural Philosophy, and sho\v how they are to be interpreted in the particular body of facts which constitute the science of Economics All Sciences deal with Quantities and Operations 17. In order to explain the matter in the simplest way possible, it may be said that all Sciences deal with Quantities and Operations Now, throughout all Nature, there is Inverseness, Opposition, or Contrariety — Inverseness, Opposition, or Contrariety of Qua- lity : and Inveraeness, Opposition, or Contrariety of Operation Thus, Similar Quantities may be endowed with Inverse, Opposite, or Contrary Qualities : and when they are so, it is invariably the custom in Mathematics and Natural Philosophy to distinguish them by the signs + and — These Signs, so used in Mathematics and Natural Philosophy, denote the Inverse, Opposite, or Contrary Qualities of Quantities of a similar nature : no matter what the Inverseness, Opposition or Contrariety may consist in : it may be t)f any sort or descrip- tion whatever : they are then usually termed in mathematical works, Signs of Affection : or we may, with equal propriety, term them Signs of Distinction or of Quality TITK AT.GKBHATCAL SIGNS 223 But, also, laverse, Opposite, or Contrary Operations may be performed on these Quantities so affected by Inverse, Opposite, or Contrary Qualities : and these Inverse, Opposite or Contrary Operations are also denoted by the same Sigus + and — . And any Operations of an Inverse, Opposite or Contrary nature are denoted by these signs : no matter what the Inverseness, Opposition, or Contrariety, may consist in : it may be of any sort or description whatever. They are then termed Signs of Operation Now, in every new body of facts which is brought under scientific control : and in every new Science whatever: Inverseness, Opposition, or Contrariety is sure to appear. And, consequently, the Signs + and — receive new applications of meaning in every new science which comes into existence. And it is quite impossible to determine the meaning of these Signs until we know the Nature of the Quantities which they refer to : and the Nature of the Operations they denote As each of the Physical Sciences has been brought under the control of Mathematics these signs have received new meanings, according to the nature of the Quantities and the Operations they denote. Consequently they have already received a vast variety of meanings: and they will continue to receive new meanings according as every new body of facts is brought under mathe- matical control We have now to determine what is their meaning and application in the body of facts which is denominated the Science of Economics, when it is brought under mathematical control It is the Combination of these Signs denoting Quantities affected by Inverse, Opposite, or Contrary Qualities with the. same Signs denoting Inverse, Opposite, or Contrary Operations performed upon them : that is the combination of the Signs of Affection or Distinction with the Signs of Operation, which gives rise to the well-known Algebraical Eules — 224 THEORY OF CREDIT + X + gives + + X — „ — — X + „ — . — X — „ + These Laws from the necessary principles of Natural Philosophy are true in all sciences : and in all cases whatever. They are nniversally true in all departments of Mathematics and Natural Philosophy ; and, therefore, they must be equally true in Econo- mics when brought under the dominion of Mathematics They are alone capable, by giving a due adaptation of their general meaning to the particular facts of Economics of completely solving the Theory of Credit, which has hitherto been the opprobrium of the Science There are in Economics, like as in every other science what- ever, quantities possessing Inverse, Opposite, or Contrary Qualities, or Properties : and, therefore, following tjie strictest analogy of Mathematics and Natural Philosophy, we shall distinguish them by Opposite Signs And also Opposite Operations may be performed upon these Quantities affected by Opposite Qualities ; bringing into play the well-known Algebraical Rules : which will lead to consequences which may surprise some readers ; and enable us to erect Econo- mics into a great Physical Science Examples of the Algebraical Sk/tis apiilied to Quantities 18. We will now give some examples of the signs + and — applied to Quantities of a similar nature but of Opposite Qualities : to furnish us with analogies to guide us to their application in Economics If we take the meridian of Greenwich as 0, degrees of Longi- tude East and West of Greenwich are Opposite to each other : if, then, the ones are called -f, the others may be called — So, if the Equator be denoted as 0, degrees of Latitude North and South of the Equator are Opposite to each other : and if the ones are denoted by -f, the others will be denoted by — SIGNS APPLIED TO QUANTITIES 225 So, in Algebraical Geometry, ia which it is necessary to fix the position of the lines, if any fixed point be taken as 0, lines drawn in opposite directions from it, either to the Right or to the Left : or Upward or Downward from it : are distinguished by the opposite signs + and — So, if a line revolving in one direction be denoted by +, then when it revolves in the opposite direction it is denoted by — If two mechanical forces act in opposite directions they are distinguished by the opposite signs + and — If 1 be mnltiplied by powers of a, the results are termed Positive powers of a : if 1 be divided by powers of a, the results are termed Negative powers of a In modern Kinematics, an accelerating force is one which causes a body to change its Rate of Velocity : if it increases the Rate of Velocity, it is termed Positive : if it diminishes the Rate of Velocity, it is termed Negative In errors of observing phenomena, if the error is greater than the truth, it is termed Positive: if it is less than the truth, it is termed Negative In mercantile papers it is usual to compare the weekly results of the railway traific with the results of the'corresponding weeks of the preceding year : if the results of the present yenr exceed last year's the difference is denoted by + : if they fall short the difference is denoted by — Mr. Ball says^ that there is good reason to believe that the signs + and — which have exerted so potent an influence in mathematics originated in the Grerman warehouses, where it was the custom to mark packages which exceeded a certain weight with a +, and packages which fell short of the proper weight by a — A curious instance of this may be cited from steam navigation. Owing to the resistance of the water, the paddles or the screw of a steamer do not in general propel the vessel through the water so fast as they would do if there were no resistance. This Loss of speed is termed the Slip. But in the case of the screw, by giviug the stern of the vessel a peculiar shape, the paradoxical result may be obtained, that it may be made to go tlirough the water /(/s/fr 'A Short nixtorii nf Miithemnlies^, p. 185 226 TFIROHY OF CREniT than it would do if the screw were working in a solid. In this case, the difference between the theoretical 'and the actual speed is a Gain instead of a Loss : and this Gain is termed the Negative Slip And the instances which might be oited from the various mathematical and physical sciences are innumerable Now, the idea of Opposition is applied to a continuous line : or to motion in a continuous line. If any point be taken as 0, then the part of the line on one side may be denoted by +, and the part on the other side by — Thus, in a thermometer, some fixed poiijt, as the freezing point, is taken as : and degrees above that are termed degrees of Heat and denoted by + : degrees below 0, are termed degrees of Frost, and denoted by — Xow, suppose that the mercury rises from 10° of Frost to 15° of Heat, the degrees passed over on each side of must be added together. That is, the Negative degrees must be added to the Positive degrees: and not subtracted from them In Natural Philosophy, Time is considered as Motion in a continuous line. If, therefore, any point in Time be fixed on, and denoted by 0, then Time on Opposite sides of this point will be denoted by Opposite signs. If Time hefore this epoch be denoted by +, then Time after this epo'ch will be denoted by . — : and the successive intervals of Time, whether years, months, weeks, days, or hours will be denoted thus - — . . . .+C, + 5, + 4, + 3, + 2, + l,0,— 1-2,— .8,-4,— 5,-6, If the birth of Christ be taken as the epoch, or 0, then years lefore Christ will be Positive : and years after Christ will be Negative. To find the total number of years from the foundation of Rome to the present time we must add +'753 years, and — 1889 years together : or 2(U2 years altogether In short, in the most general terms possible, take any Quantity whatever it may be : and then take its Opposite, Inverse, or Contrary : then if one of these be denoted by + , the other will be denoted by — SIGNS ArrLTED TO TKRSONS 227 Thus, Up and Down: Right and Left: Before and Behind: Before and After : Time Past and Time Future : Above and Below : Face to Face : Back to Back : Erect and Inverse : Concave and Convex : Sympathy and Antipathy : Virtues and Vices : Rewards and Punishments : Rights and Duties : Active and Passive : and innumerable other things : are all Inverse, Opposite, or Contrary to each other : and may all be distinguished by the opposite signs + and — The, signs + and — mmj also be applied -fo Persons tvJio sland in Opposite relations to each other 19, Mathematicians arc only accustomed to deal with Quan- tities, mathematical and physical, which are endowed with Inverse, Opposite, or Contrary Qualities : and they universally apply the signs + and — to them But persons may also stand in Inverse-, Opposite, or Contrary relations to each other : and the signs + and — are equally applicable to denote the Inverse and Opposite Relations of Persons, as to denote the Inverse or Opposite Qualities of similar mathematical and physical Quantities Thus, Creditor and Debtor : Master and Servant : Sup- porters and Opponents : Tutor and Pupil ; Examiner and Examinee: Flogger and Floggee : and "in innumerable other cases: Persons stand in Inverse or Opposite relations to each other In all these cases the one party is termed the Active or Positive Agent : and the other party is termed the Passive or Negative Agent And in the Nexus, Contract, or Obligation between such persons, the Right of the Active or Positive agent is termed the Active or Positive Right or Duty, and the Duty of the Passive or Negative agent is termed the Passive or Negative Right or Duty , . Thus, Jurists term the Creditor's Right of action tne Active or Positive Right: and the Debtor's Duty to pay the Passive or Negative Right q2 228 THEORY OF CREDIT Example of the Aiyplication of the Positive and Negative Siffns to Time 20. We shall now give an example of the Application of the Signs + and — to Time, which is of supreme importance in elucidating the Theory of Credit Suppose this question were asked — A father's age is 40, and his soti's 15 : when was the father twice the age of his son ? Let X be the number of years before th« present time when the father was twice the age of his son Then 40 — x = 2 (15 — x) or x= — 10 What does this Negative answer mean ? It means that the father never was twice the age of his son in time "past, which is taken as Positive in the question : the epoch or event of the father being twice the age of his son is to be found in Time opposite to the past : that is to say, in Time future: The father ivas not twice the age of his son ten years ago : but he will be twice as old as his son ten years hence : as is very clear : because ten years hence the father will be 50 and the son 25 Hence, if any event which has happened in Time past is Positive : the same event, if it is to happen in Time future is Negative Thus, if a Product or Profit which has been realised in Time past is distinguished as Positive : then a Product or Profit which is to be produced in Time future is Negative Hence, if any Economic Quantity, or Capital, of any form produces Profits on a continuous series : the Profits which have been produced in Time past may be distinguished as Positive : and the Profits which are to be produced in Time future may be distinguished as Negative SIGNS Ari'LIED TO OPERATIONS 229 And, coiisequeatly, the Right to the Profits already realised iu time past may be distinguished by the sign +, and termed Positive : and the Right to the Profits which are to be produced in Time future may be distinguished by the sign — , and termed Negative And the total Value of the Economic Quantity, or the Capital, comprehends both the Right to the profits already realised in the past: and also the Right to the profits to be produced in the future : or both the Positive Right and the Negative Right These doctrines apply to all Economic Quantities, or Capital, producing a continuous series of profits, i.e., all Economic Quantities of the form of an Annuity : such as the land : personal Credit : Shares in Commercial Companies : the Funds : Copy- rights : Patents : the Goodwill of a business : tolls : ferries, &c. Examples of the Algebraical Signs ap2)lied to Operations SI. The same signs -I- and — are also applied to any Operations whatever of an Inverse, Opposite and Contrary nature : no matter what the Inverseness, Opposition, or Con- trariety may consist in Thus, to Add and to Substract : to Pay and to Receive : to Do and Undo: to Build up and to Pull down : to Admit and to Deny : to Grant and to Refuse : to Expand and to Contract : and the innumerable verbs denoting opposite or contrary opera- tions which every reader can supply for himself: are all distinguished by the contrary or opposite signs + and — And, as in the most general way possible, any Operations whatever which can be conceived of an Inverse, Opposite, or Contrary nature, are distinguished by the signs -I- and — : to Create or to call into existence out of the Absolute Nothing: and to Cancel, Annihilate, or to Decreate into the Absolute Nothing : are operations of an Inverse, Opj)osite, or Contrary nature Hence, if to Create or call into existence out of the Absolute Nothing be denoted by the Positive sign + ; to Cancel, Annihilate, or to Decreate into the Absolute Nothing, will be denoted by the Negative sign — 230 TIIEOKY OF CKEDIT Now, in the purchase of Money, or Groods on Credit, an Obligation is Created out of the Absolute 'i^othing : and on the Payment of the Debt the Obligation is Cancelled, Annihilated, and Decreated into the Absolute Nothing Hence, to Create an Obligation, may be denoted by the symbol , f + £100 I ~ £100 And to Cancel, Annihilate, or Decrea,te an Obligation may be denoted by the symbol + £100 — £100 Now, when an Obligation is Created, the Creditor's Eight of action is Created out of the Absolute Nothing But as has been shown, in erery system of jurisprudence in the world a Eight of action is Pecunia, Res, Bonum, Merx: Xpw'^, Trpay/xa, ovaca, ot/cos, &c. : goods, chattels, merchandise, a vendible commodity : its Value is measured in money : because it will be paid at maturity : it may be bought and sold : and, therefore, it is Wealth Hence it is manifest that Goods, Chattels, Merchandise, Wealth has been Created out of the Absolute Nothing And when the Obligation is paid, satisfied, discharged and extinguished, this Eight of action ceases to exist : it is Cancelled, Anniliilated, and Decreated into the Absolute Nothing Hence Goods, Chattels, Commodities, Merchandise, Wealth, can be created out of the Absolute Nothing ; and again Decreated into the Absolute Nothing from which it came : to the utter confusion of all the materialistic philosophers from Kapila to the present day The superlative importance of these considerations will appear when we come to exhibit the mechanism and practical effects of the great system of Banking Jurists also use the terms Positive and Negative io denote Opposition 33. Jurists, also, as well as mathematicians, very commonly use the terms Positive and Negative to denote Opposition DEBTS AS NKGATIVE QUANTITIES 231 Thus, Ortolan uses the terms Positive Efghts to deuote Rights to Acts, and Negative Rights to denote Rights to Forbearances Jurists class Servitudes as Positive and Negative : or, those wliich consist in the Right to use the given subject in a given way : and those which consist in tlie Duty of the owner of a given subject to allow it to be used in a given way Ortolan calls the Omission or Refusal on the part of a person to act or do something a Negative fact So Anstin speaks of Positive and Negative Wrongs : or Wrongs of Co/w-mission and 0- mission In Parliamentary language, a Bill which is tlirown out is said to pass in the Negative In its relation to Right, a Duty is Negative : but Duties themselves are Positive and Negative : as there is the'Duty to do something, and the Duty to abstain from doing something. Thus, we have, as it were, a Negative sign within a Negative sign : which we shall hereafter find to be the case in Economics So Active and Passive are distingui;shed as Positive and Negative : Rights and Duties are frequently termed Active or Positive Rights, and Passive or Negative Rights Thus, if'the Right to demand £100 be denoted by (+ £100) : the Duty to pay £100 will be denoted by ( — £100): without any reference to any specific £100 in cash But not only Mathematicians and Jurists, but also purely literary writers, constantly adopt the same usage Thus, Bishop Stubbs says of Edward II.—'' His faults are quite as much Negative as Positive : his character is not so much vicious as devoid of virtue " And any reader of attention will observe that such usage is of constant occurrence On the true Meaning of sayinij that Debts are Negative Quantities 23. It has been shown that mathematicians have erred in their application of the term Negative 'to Debts because they interpret the sign — as affecting the Property of the Dubtor 232 THEOUY OF CREDIT But Jurists also term Debts Negative Quantities : but they apply the sign — as aifecting the Person of the Debtor. And theu the meaning of the term becomes perfectly clear An Obligation consists of two parts — ■ 1. The Creditor's Right to Demand 2. The Debtor's Duty to Pay These two Quantities are Inverse, Opposite, or Contrary to each other : the first is Active or Positive : the second is Passive or Negative Hence the Creditor's Personal Right of action is the Positive Quantity : and the Debtor's Personal Duty to pay is the Negative Quantity Hence if a person has £500 at his banker's, and is also bound to pay £50 at some given future time : and therefore his Property may be stated as £500 — £50 : ip is not to be read as if he had only £450 at his banker's : but it is to be read in this way — he possesses £500, but coupled with the Duty to pay £50 at some given time And the same is true even if the Debt be due and payable on demand : because he retains the actual property in the money until the Creditor brings him his Right of action : and he voluntarily agrees to buy up the Right of action against himself, by giving £50 in exchange Hence, in Economics, the symbol ( + £100) always denotes the Right to Money : or the Right to demand money : such as Bank Notes, Bills of Exchange, or other securities : and the symbol ( — £100), always denotes the Personal Duty to pay money We now clearly see the meaning of saying that Money is a Positive Quantity and Debt is a Negative Quantity : because Money denotes a Right and Debt denotes a Duty And this exactly corresponds with the usual Algebraical doctrine that Quantities passing through change their sign. Because, when a pei-son has spent all his money : and therefore his property is : and then runs into Debt", he has exhausted all his Right and has incurrad a Duty MONEY AND CREDIT 233 So, when a man's property is said to be £100 less than nothing, it means that he has no money, and is lyider the Duty to pay £100 It is now seen how necessary it is to observe the double mean- ing of the word Debt in Law and common usage When a Debt is termed "Goods and Chattels," "Merchandise," or " Commodities " or " Wealth," it means the Creditor's Right of action When a Debt is termed a "Negative"; Quantity, it means the Debtor's Duty to pay And, as the Inverse, Opposite, or Contrary Quantities in an Obligation are created together ; can only exist together : and vanish together : they are exactly analogous to Polar Forces If Money le termed Positive Capital, Credit may be termed Negative Capital 24. A merchant's Wealth or Purchasing Power consists of his Money, his Eights to demand money^»'.e., any Bank Notes, Bills of Exchange, or other Securities he may possess : and his Credit— ».e., his Right to the future products of his industry If he buys goods with his Money and sells them with a profit, he first replaces the sum he has expended : and the surplus is his Profit If be buys goods with his Credit, he creates a Debt against himself : when he sells the goods, he first discharges the Debt he has incurred : and the surplus is his Profit In either case, his Profit consists in the excess of his Property at the end of the operation, above what it was at the beginning If he buys with Money, he makes Capital of the realised Profits of the Past : if he buys with Credit, he makes Capital of the expected Profits of the Future In each case he makes a Profit : hence, by the definition, Money and Credit are equally Capital : but they are Inverse or Opposite to each other : hence, if Money be termed Positive Capital, Credit may be termed Negative Capital 234 THEOKY OF CREDIT By a somewhat curious coincidence 'of thouglit, the early Algebraists, not apprehending the meaning of the Negative Roots of Equations, called them fictitious mobs (fictce radices) : while they called the Positive Roots, true roots (verce Tadices), Thus, in the problem we gave of the father's and son's ages, the answer came out Negative : which merely showed that the question should have been stated in the Inverse or Opposite way to what it was done : it should have been asked when the father's age ivould be twice that of his son : instead of when it had been. And, therefore, as the Positive sign in that equation meant j-iast time the Negative sign me'Ant future time. But this root, though Negative, is as real a root as the Positive one The Root of an equation is any Quantity whatever which satisfies the terms of the equation: hence, a Negative Quantity which satisfies the terms of an equation, is as much a Real root as a Positive Quantity So, in a similar way, many writers, seeing clearly the effects of Credit, call Money real Capital, and Credit fictitious Capital But the truth is, that like as the Negatite root of the equation is equally real with the Positive one, Credit which is certain of being paid is exactly of the same value as gold itself : as Mill has expressly pointed out Money is the Property in gold already acquired : and Credit is the Property in gold to be acquired. Therefore, Credit is Inverse or Opposite to Money : by using Money the trader makes Capital of the realised profits of the past : by using his Credit he makes Capital of the expected profits of the futur6 The fact is, that when we adopt Exchangeability as the sole essence and principle of Wealth, the whole difficulty vanishes TRANSFER OF CREDITS 235 Section II On the Transfer of Credits or Debts 25. Rights of action, Credits, or Debts are now clearly shown to be the Name of a certain species of merchandise, goods and chaLtels, or commodities : and they can be bought and sold like any other merchandise or commodities When it is seen that a Bank Note passes from hand to hand like money, it might perhaps be supposed that any Debts might be sold and transferred with equal facihty. This, however, is a great error. There is very considerable su.btlety regarding the sale of Debts : and it was only by very slow and gradual degrees that they have become freely saleable If it were asked what discovery has most deeply affected the fortunes of the human race, it might probably be said with truth — The discovery that Debts are saleable commodities When Daniel Webster said that Credit had done more, a thousand times, to enrich nations than all the mines of all the world : he meant that Debts are saleable 'commodities, or mer- chandise : that they may be used as Money : and that they produce all the effects of Money We must now trace the origin and progress of the power of selling Debts : and place this branch of Mercantile Law on solid foundations On Property held in Contract : or on Jura in Personam 86, It has been shown in the first cKapter that Property or Rights are of two species 236 THEORY OF CREDIT 1. The Property or Eight to a specific chattel: termed in -Koman Law a Jus in rem, or in re; without being related to any one else. This kind of Eight is also called Dominium. When a person has such a sole and exclusive Eight in any chattel, he may sell or transfer it to anyone else at his own good will and pleasure : and without askjng the consent of any one else Money, cattle, timber, corn, &c., are subject to this kind of Property: and hence, the proprietor of such chattels may freely alienate, sell, donate, or transfer them to anyone else he pleases 2. Property or Eights held in Cobtract or Obligation : called in Eoman Law a Jus in Personam: or a Jus ad rem {acguirendam) : where a person has a Eight, not to any specific thing : but only against a Person to compel him to Pay or Do something A simple example of this kind of Property or Eight is the Contract, or Obligation, of Debt : where one person, the Creditor, has the Eight to demand a sum of money from some person, the Debtor: or has the Eight to compel him to Do something. In such a case the Creditor has no right to any specific sum of money or chattel in the Debtor's possession. And the Creditor's Eight against the Debtor exists whether he has any money or not : and equally the .Debtor's Duty to pay exists whether he has any money to pay or not. In fact, the Contract, or Obligation, is a purely abstract relation existing between the two parties, without reference to any specific money or other chattel The former kind of Eights are called Real Rig'hts or Cor- poreal Property : because they are the Eights to certain specific things or chattels. The latter are called Personal Rights, because they are mere abstract Eights against a Person : and as the Person is always specified and definite, they are also called Nominate Eights : but as they are wholly severed from any specific chattels, they are one species of Incorporeal property PROPERTY HELD IN CONTRACT 237 Property or Rights held in Contract, or Olligation, are of Two kinds S7. But Property or Rights held in Contract, or Obligation, are of two kinds — 1. "Where there is a Eight to demand on one side and the Duty to pay or do on the other: such as the relation between Debtor and Creditor ; or landlord and tenant in modern times Such a relation is termed a Unilateral Contract 2. Where each party to the Contract has the Right to demand and also the Duty to perform something : such as the Nexus, or Obligation, between landlord and tenant in feudal law : or that between Master and Servant at the present time Such a relation between two parties is termed a Bilateral, or Synallagmatic, Contract Formerly it was held universally, that when Property was held in Contract of either sort, Unilateral or Bilateral, neither party could snbstitute another person for himself without the consent of the other party to the Contract This rule must evidently hold good in all Bilateral Contracts. When one person agrees to accept another person to perform the Duty, he of course believes that that person can perform the duty. But he cannot be compelled to accept another person to perform that Duty without his own consent : because he cannot be sure that that other person is able to perform the Duty. Neither, if a person has agreed to perform a duty to another, can he be compelled to perform it to some one else, without his own consent Thus, so long as the feudal law retained its pristine rigor, neither the Lord nor the Vassal could substitute any one else for himself, without the consent of the other party. Each of the parties had Duties to perform : the Vassal to render true and loyal service : and the Lord to render due protection and defence. And neither . party could attorn the other^, or turn him over, to any one else without his own consent 'Bracfon, 2, 35, 13. Lift., 551, 567, 568 338 THEORY OF CRElilT As Sir Martin Wright saygi— "As tlje feudatory could not aliene the feud without the consent of the Lord : so neither could the Lord aliene, or sell, or transfer, his seig-norj or superiority to another without the consent of the feudaitory. For the obhga- tions of the superior and inferior were mutual and reciprocal: the feudatory was really as much interested in the conduct and ability of the Lord, as the Lord was in the qualifications and ability of his feudatory. And, as the Lord could inot ahene, so neither could he excliange, mortgage, or otherwise .dispose of his seignory without the consent of his Vassal. Again, as the Vassal or feuda- tory could not aliene, so neither could he devise or dispose of the fend by will, or by any means (when the feuds were become hereditary) prevent or vary the feudal conrse of succession " So, in the case of master and servant at the present day. A master cannot attorn or transfer his household to another master without their own consent, as if they were cattle or slaves. Neither can a servant substitute any one else for himself, without his master's consent So, if a person contracts to do any work for another, he cannot substitute another person for himself, withoiit the consent of the other party to the contract The same principle formerly held good when the Contract was Unilateral : as in the case of Creditor and Debtor. The Creditor could not transfer his Right of action against the Debtor to any one else, without his consent : because the Debtor never agreed to pay any one except his own Creditor. And the Creditor had no power to stipulate that the Debtor should pay any Transferee of the Debt It is a rule of law, as well as of common sense, that no person can be made a party to a contract without his own consent : and no one can stipulate for another without his authority Thus the Digest says — " Alteri stipulari nemo potest " " No one can stijiulate for another " Unless, therefore, the Debtor had given authority to his Creditor to transfer his Right, the Creditor had no power to guarantee his Transferee that the I>ebtor should pay him 'On TeiiHyes,j)., 30 rROPEIiTY HELD TX rONTT?ACT 239 Accordiiift-ly, both in Roman and Eiio-lish Law, for a long period, tlie Creditor could not transfer his Right of action against liis Debtor without his consent, so as to enable the Transferee to sue the Debtor in his own narae But both in Roman and English Law the Creditor might transfer his Right with the consent of the Debtor. If the Debtor consented, the Creditor, the Debtor, and the Transferee, might meet together : and the Creditor might transfer his Right to the Transferee : the Debtor might agree to pay the Transferee.^ In such a case the Transferee acquired a Right of action against the Debtor. The release of his duty to pay his own Creditor was the consideration for his promise to pay- the Transferee. The Debtor was released from his Debt to his own Creditor : and the Creditor was released from his Debt to itlie Transferee This transaction may be regarded in t^'o lights : either as the mere transfer of the Creditor's Right to the Transferee : or as the creation of a new contract which cancelled, discharged and extinguished the former one. In the latter view it was what is called in Roman Law a Xovatio But, nevertheless, though it may be* true in theory that a Creditor cannot transfer his Right of action without the consent of the Debtor, yet, in the progress of civilisation and mercantile ideas, the Creditor soon begins to insist upon the power of trans- fering his Right of action, like any other property. And there is very good reason for this : because in the Contract or Obliga- tion of Debt there is manifestly a strong distinction between the two parties, the Creditor and the Debtor Tiie Debtor cannot substitute a new Debtor for himself, because the Creditor may not have the means of knowing the solvency of the substituted Debtor : as, for instance, no Debtor can compel his Creditor to accept payment of a Debt in the notes of a country banker : or in another person's cheque Therefore, by the very nature of things, the consent of the Creditor is necessary to the snbstitntion of a new Debtor ' Gains, ii, 38 240 THKORY OF CREDIT But the case of the Debtor is different. If a person really owes a debt and has the means of paying jit, it cannot make the slightest difference to him whether he pars it to A or to B : so long as he can get a discharge for it : and is not liable to pay it twice over Hence it is evident that while it might serionsly prejudice a Creditor to have a new Debtor assigned to him, of whom he might know nothing : the assignment of a new Creditor can be no real prejudice to the Debtor Both in Eome and England Creditors insisted upon selling their Rights : and certain legal devices were adopted to enable the Transferee to obtain payment from the Debtor, even although he had not consented to the transfer. Till at last Creditors in both countries established their right to do so without the consent of the Debtor Thus, at last, after centuries of conflict. Credits or Debts have come to be as freely transferable as Money itself : and, in fact, they are for all practical purposes, in all respects equivalent to an equal increase of Money. And thus they have become both Jura in Personam and Jura in re. And it is this absolute freedom in the saleability of Debts, which has been the principal cause of the stupendous progress and magnitude of ihodem commerce On the Transfer of Credits or Debts in Roman Law 28. It has just been shown that originally, in the Unilateral Contract between Creditor and Debtor, the Creditor could not sell or transfer his Debt, or Right of action, to any one else, so as to enable the Transferee to sue the Debtor without his owii consent The Trfl.nsferee could not sue the Debtor, because he never made any promise that he would pay the Transferee : and thus there was no privity of contract between them : and the Transferee could make no engagement that the Debtor, should pay the Trans- feree : because no person can stipulate, or 'make a contract for another person, without his consent If, however, the Debtor agreed that his Creditor might transfer his Right of action, it might be done. The Debt, being a mere abstract Right, was not capable of being transferred by manual delivery-: but it could be transferred by oral consent TRANSFER OF DEBTS IN ROMAN LAW 241 The Creditor, the Debtor, and the Transferee met together^ : and the Creditor, with the consent of the Debtor, transferred his debt to the Transferee by word of mouth. Tjje Debtor agreed by word of month to pay the Transferee : the Creditor then, by word of mouth, released the Debtor from his debt to him: and the Transferee by word of mouth, released the Creditor from his debt to him A new contract was created, which cancelled and extinguished tlie two preceding ones : and was therefore called Novatio : and the assignment of the Debtor to the Transferee was termed Delegatio. When this solemn stipulation was completed, the Transferee might sue the Debtor in his own name : because there was now a privity of contract between them As the commercial spirit, however, increased at Rome, Creditors began to perceive that Debts, or Rights of action, might be used in commerce like money : and they soon began to devise means of transferring them, even without the consent of their Debtor. Accordingly, though they could not devest themselves of the legal estate in their debts so as to enable the Transferee to sue the Debtor in his own name, in course of time certain legal devices were adopted, so as to enable the Transferee in an indirect way to recover the debt from the Debtoi", even thoHgh he had not given his consent to the transfer of his debt "We have now to trace the steps in Roman Law by which a Creditor came at last to have the absolute legal Right to sell or transfer his debt, without the consent or the knowledge, or even against the consent, of the Debtor : and the Tran.sferee acquired the right to sue the Debtor in his own name The early simplicity of the Code of the XII. Tables knew nothing of Trustees or Attornies. Every man was either the absolute proprietor of a thing, or he was not.^ He who possessed the legal estate was termed Dominus ex jure Quiritium, or the pro- prietor by the common law of the Romans. It knew nothing of double or subordinate rights. The Code of the XII, Tables allowed no man to sue in the name of another in private cases.^ '(?aiVsII.,38 ^ Gains IV., 82 ; Dir/est, 4, 17, 12.S r nasil. II. 3, 123 K 242 THEORY OF CREDIT He alone who Avas Dominus ex jure Quiritium, might sue, and that in person. And as no man could sue another unless there was some bond, relation, or nexus between them : the Transferee of the debt could not sue the Debtor, because -there was no privity of contract between them The Code of the XII. Tables was maintained in all its strict- ness for about 277 years. During this period the forms of writs of action were defined with the greatest ^strictness. They were called Legis Actiones, or, as we might say, Common Law writs: and as long as these lasted no one could sue on behalf of another, or in the name of another. Consequently, so far as we can under- stand, the Transferee of a debt could not in any way, direct or indirect, maintain an action against the Debtor But, in the progress of time, new rights, new interests, new wants and new ideas, grew up : and a great equitable jurisdiction came into existence to meet the new requirements. The supreme judicial magistrates, the City and the Foreign Prsetors were clothed with the power Adjuvandi vel suppUndi: vel corrigendi: juris civilis yrdlii'i, p/ajjler iitilitatem puhlicam. The Romans had so deep a reverence for their Code, which Cicero declares to contain in one chapter more utility than all the libraries of the philosophers,' that the Prtetors were not allowed actually to abolish any of its laws ; but only to supply their defects, and to extend their meaning. But new rights and new interests had grown up which were not capable of being protected directly bylaw, unless by the actual repeal of some of the provisions of the Civil Code Among these new rights were Equitable Interests. One person might be possessed of the legal estate in certain things, but permit another to enjoy their use and profit: without undergoing the fornral solemnity of the l>rangfer by mancijmtion or the cessio in jure. The original owner, therefore, possessed tlie nudum jus Quiritium, or the mere legal estate, while the grantee possessed the profitable, equitably;, or as the mediaeval jurists termed it, the bonilarian use. Buf, the Code of the XII. Tables gave no right of action to the equitable owner I De Oratore, I., i TRANSFER OF DEBTS IX ROMAX LAW 243 Thus, if a Creditor transferred his debt, or right of action, without the consent of the debtor, he alone possessed the nudum jus Quirifium, or the legal estate in it : but the Transferee possessed the equitable right to it, but he liad no right of action by the Code of the XII. Tables In order to protect these Equitable Interests, which had greatly increased and multiplied in the course of time, without directly contravening the fundamental laws of the XII. Tables, tlie Praetors gradually created the great system of Legal Fief ions .- and these fictions were soon applied to. protect the Equitable Rights of the Transferees of debts About the year 577 a.u.c, or 176 B.C., the Lex JEbutia abolished the old Legis actiones, which •\\ere not part of the XII. Tables, but only a series of writs framed by the magis- trates so as to be adapted to them. New forms of writs were prepared under the authority of the Prajtors, called Formulce: and these were adopted and extended by two Leges Juliai^ By these new formuM parties M-ere allowed to be represented by Cognitores or Procuratores : that is by Attornies : who were allowed to sue on behalf of their clients. The Transferee of the debt was then allowed to sue as the Cognitor or Procurator of the Transferor.2 Gains gives the formula in such a case' The Prsetor could only grant an actio directa or vulgaris to the original Creditor : but he could grant an actio utilis or flctitki to the Transferee of the debt* When a Creditor sold his Right of action, he was said cedere or mandare actionem^ The Transferee was called Procurator in rem sicam" : he was acknowledged as the real principal : si in rein suam daius sit procurator, loco domini hahetur: his mandate could not be revoked : and he owed no account to his principal^ ' Qamis, ix., 30 ' Gains, ii., 39 ^ Qaius, iv., 8G * Gains, iii., 32, 81 : iv., 34. Diijest, u., 14 : 16. Cod, iv., 10 : 2, xxix., 5 : 7, 8 'Z>ijes(, XV., 33 : 5. xvi., 3:2. xvii., 1. xix., 1:31. xliv., 7 : 7. xlvi., 3:7G ^Piffest, iii., 30. xvii., 1 : 8, 10. xliv., 4 : 4, 18, 24 ' Cod., iv, 10: 1 R 2 244 THEORY OF CREDIT Such was the state of the law regarding the sale or transfer of debts in the time of Gaius, who is generally supposed to have written his institutes in the time of the Aatonines. They were the text book of Eoman Law throughout the whole empire when the Eomans abandoned Britain : and many high authorities hold that they were one of the sources and origins of the Common Law of England. And the Common Law of Efigland with regard to the sale or transfer of Debts is exactly that stated by Gaius Soon after the time of Gaius, the Emperor Alexander Sevcrus, acting probably on the advice of Ulpian, in the year 224, A.D., published a Constitution by which the absolute freedom of the sale of Debts without the knowledge or consent of the Debtor was recognised and allowed : and this was repeated and confirmed in the Basilica Digest, xviii., i: 17 — "Nomina eorum qui sub conditione vel in diem debent et emere et vendere solemus. Ea enim res est quee cmi et venire potest " " We are accustomed to huij and sell debts payable on a certmn event and on a certain day. For that m Wealth which can be botight and .lold" So, also, " Omnium rerum quas quis habere vel possidere, vel persequi potest venditio recte fit " "All things ivhich one inaij have or possess, or has the right to me for, mag he lawfully sold So, also, " Xomina quoque in diem vel sub conditione contracta veneunt " " Debts contracted to bejiaid on a certain day, or on a certain condition mag be sold " Cod., iv., 89 : 3— "Nominis venditio etiam ignorantevel invito eo adversus quem actiones mandantur, contrahi solet " " It is usual to sell a Debt without the , knowledge of, and even against the consent of the Debtor " It was declared to be lawful to sell all actions real as well as personal Cod., iv., 39 : 9—" Certi et indebitati juris est, ad similitu- dinem ejus qui personalem redomerit actionem, et utiliter eam movere suo nomine conceditur, etiam eum qui in rem actiones comparaverit,, eadem uti posse facultate " TRANSFER OF DEBTS IN ROMAN LAW 245 "It is char and undoubted laiv, that just as he who has bought a 2)ersonal action may sue out a ivrit in his own name : so he ivho has bought a real action has the same^jower " In the time of Gains, the Transferee of a debt could only sue as the Attorney of the Transferor : as he was obliged to allege the legal estate, or jus Quirilium, of the Transferor : but Justinian took away the necessity for this, and abolished the nudum jus Quiritium, as an antiquated relic of old Koman law, which was only an enigma which puzzled law students-': and then the Transferee could sue in his own name Cod., iv., 39 : 7 — " Ordinarium visum est post nominis vendi- tionem uti emptori (sicut responsum est) vel ipsi creditor! postulanti dandae actiones " " It is seen that it is usual, after the sale of a debt, to grant a tvrit either on the demand of the buyer {as has been decided), or of the Creditor himself" Thus, at length, Debts were completely emancipated from the general rules affecting property held in contract : they were made as freely saleable as any material chattels: and they were thus removed from the category of Property held in Contract to that of Property held in Dominion : and thus Debts became both Jura in j)erso7iam and Jura in re These laws regarding the sale or transfer of debts were con- firmed in the Basilica " Basil., xix., 4, 16 — " koI otl to, vVd -qfiipav, Ktti ra. uVo aipiuiv )(pea 7mrpd(TK0VTai" "Debts payable on a certain day and on a certain event may be sold" Basil., X\X., 4, 68 — " koI on t6 Trovpov XP^os "'""O alpeaiv Trnrpa.- CTKcrai, Kai vtto aipicriv Trovpos " A simple debt may be bought conditionally, and a conditional debt sim2}ly " Basil., xix., 4, 27 — " 17 rov ypa.iJ,jJi,a.Tiiov vrpao-is Kal dyioovvTOi Kol /xj} (SovXo/jLevov e/cetVov, KaO' ov iKx^povvrai ai ayuyat, BvvaTai (TvviaTaa6ai " 'CW,, vii., 25 246 TIIKOKY or CUEDIT " A dell may he sold ivlthout the knowledge and even against ihe consent of the Delior " Thus, the interests of commerce effected the perfect freedom of the sale of Debts. Both by the Digest which was the Code of the Western Empire, and the Basilica which was the Code of the Eastern Empire, Debts were declared to be as freely saleable and transferable as Money or any other chattel Thus, Azo, one of the legal luminaries on the revival of juridical studies in the West says — "De Actionibus autem venditis sciendum est quod omnes actiones vendi possunt, sive sunt purse, give conditionales, sive reales, sive Personales " " But tvith respect to ihe sale of actions^ it must be understood that all Rights of action, whether simple or conditional, whether real or Personal, mag he sold " Nevertheless, although it was the general law of the empire that all debts might be freely sold, it was found to work so much hardship, that many cities in the Middle A-ges passed local laws prohibiting the sale of Debts within their jurisdiction This investigation clears up a difficulty which has puzzled some modern writers. The earliest Bills of Exchange extant, which are preserved in the archives of Venice, contain no words of negotiability, and yet we know as a fact that they were negotiated. Several writers have endeavoured to discover when Bills of Exchange were made negotiable. Some have attributed it to Cardinal Richelieu. But all doubts have now been cleared up. Bills of Exchange required no words of j negotiability to make them saleable: they were so by the general mercantile law of Europe This also explains a fundamental distinction between the Common Law of England and the Common Law of Scotland, with respect to Bills of Exchange. By the Common Law of England, unless a Bill of Exchange is drawn payable to " order'' TRANSFER OF DEBTS IN ENGLISH LAW 247 or to " bearer : " that is, it is made transferable by the consent of the Debtor expressed on its face ; it cannot be transferred so as to enable the Transferee to sue the acceptor in his own name. But by the Common Law of Scotland a Bill of Exchange requires no words of negotiability to make it transferable by the lex loci conft'o-p/ws ; a Scotch Bill is negotiable in England without any words of negotiability. Moreover, by the law of Scotland, a Debtor is bound to accept a bill drawn upoji him by his Creditor, and is liable to an action for non-acceptance. This, however, is not the case in England : a Debtor in England is not bound to accept a bill drawn upon him by liis Creditor. And this distinc- tion has been preserved and confirmed by the Bills of Exchange Act of 1882. And the reason of this difference is that tlie Law of the Pandects and the Basilica is the Common Law of Scotland: while the Common Law of England is the Law of Gaius Equity, however, always adopted the 'Law of the Pandects, which allowed the free sale of debts : and consequently, though the Transferee of a Bill of Exchange which contained no words of negotiability could not maintain an action at Law against the acceptor, he could always sue him in Equity, in case of need. But the Supreme Court of Judicature Act'of I87;i enacts that in all cases in which the rules of Equity conflict with those of Common Law the rules of Equity shall pie vail : consequently, Bills of Exchange are now transferable by their very nature, without any words of negotiability On the Rules of Eng^lish Equity and Common Law as to ihe Transfer of Credits or Debts 29. English Equity from its first institution adopted the entire doctrine of the Pandects and the Basilica relating to the transfer of Debts. A Creditor had always the right to transfer his Debt; without the knowledge or consent of his Debtor, and the Transferee had always the right to sue him in Equity, if need be But at the time the Romans left Britain in the beginning of the fifth century Gaius was the text-book of law throughout the Empire, and the Common Law of England with respect to the transfer of Debts was exactly as set forth by Gaius 24(S THEOKY OF CHKIJIT If the Debt was in a mere abstract form and uot recorded oa any material, the Creditor, the Debtor, and the Transferee might meet together: with the consent of thd Debtor the Creditor might transfer his Debt to the Transferee, and then the Trans- feree might sue the Debtor, because there was now a privity of contract between them* But in accordance with the early law of Rome a Creditor could not transfer his Debt to a Transferee without the consent of the Debtor so as to enable the Transferee to sue the Debtor, because there was no privity of contract between them : and the Creditor had no power to stipulate that the Debtor should pay him But as at Rome, in the progress of civilisation Creditors began to claim the right of selling their debts without the consent of their debtor, and devised a legal fiction to* enable them to do so, so the very same thing took place in England At Eome the Transferee Vi'as allowed t|) sue as the attorney of the Transferor, and to retain the proceeds for his own use : in England as early as Henry VI. the Transferee was allowed to sue in the name of the Transferoi' : or the Transferor sued as the Trustee for the Transferee And this continued to be the Common :Law of England with regard to the Transfer of Debts to which the Debtor had not assented, up to the passing of the Supreme Court of Judicature Act in ISTo • wliich swept away all the 'doctrines of Common Law which conflicted with those of Equity Thus the rule of Common Law that a Debt cannot be trans- ferred without the consent of the Debtor was reduced to a fiction. And some eminent Judges reared up under the supremacy of Lord Mansfield maintained that the Courts of Common Law might sweep away this absurd fiction and adopt the full doctrines of Equity Thus, in 1787, Ashhurst, J., said^ — "It is true that formerly the Courts of Law did not take notice of an Equity or a Trust; ^Tatlochv. Harris ifi T.E., 180). i^ajrHe v. DcWra (8 B.C., 395). Ifilllamsv, £»c!-«ff (14 East, 582). Hodgson v. ^nrferam (3 .B. and C, 482). Lilly -7. i/u,vs (5 A, and E., 518). Walker v. Boshon C^U. and W.,411). Hamilton 1. Sjiottiswoode; (4 Exch., 200). Griffin v. Wratherhj (L.R., 3 Q.B., 753) ' Winch V. Kedij (T.E„ 619) TRANSFER OF DEBTS IN ENGLISH LAW 249 for Trusts are within the original jurisdiction of a Court of Equity : but of late years it has been found productive of great expense to send the parties to the other side of the Hall. Where- ever this Court have seen the justice of the case has been clearly with the Plaintiff, they have not turned him round upon this objection. Then, if this Court will take -notice of a Trust, why not of an Equity ? " In another well-known case, Buller, J., Avho may be considered as the adJalus of Lord Mansfield, said' — " It is laid down in our old books that for avoiding maintenance, a chose-in-action cannot be assigned, or granted over to another (Co- Litt., 214, a ; 266, a ; 2 EoU., 45 : ], 40). The good sense of that rule seems to me to be very questionable : and, in early as well as in modern times, it has been so explained away, that it remains at most only an objection to the form of action in any case. In 2 Roll., Abr.,45 and 46, it is admitted that an Obligation or other deed may be granted, so that the writing passes : but it is said that the grantee cannot sue for it in his own name. If a third person be permitted to acquire the interest in a Thing, whether he is to bring the action in his own name or in the name of the grantor, does not seem so me to alTect the question of maintenance. Courts of Equity from the earliest times thought the doctrine too absurd for them to adopt, and therefore they always acted in contradiction to it : and we shall soon see that Courts of Law also altered their language on the subject very much. In 12 Mod., 554, the Court speaks of the assignment of an appren- tice, or an assignment of a bond as things which are good between the parties, and to which they must give their sanction and act upon. So the assignment of a chose-in-action has always been held a good consideration for a promise After these cases we may venture to say that the maxim was a bad one : and that it proceeded on a foundation which fails. But still it must be admitted that though the Courts of Law have gone the length of taldng notice of assignments of ehoses-in-action, and of acting on them, yet in many cases they have adhered to the formal objection that the action shall be brought in the name of the assignor, and not in the name of the assignee. I see no use I Master V. Miller. (4 T.E., a'20) 250 THEORY OF CREDIT in preserving the shadow when the substance is gone : and that it is merely a shadow is apparent from the later cases in which the Courts have taken care that it shall never work injustice. . . But admitting that on account of this quaint maxim an action cannot be maintained by an assignee of a chose-ia-action in his own name, it remains to be considered whether that objection ever did hold, or ever can hold, in the case of a mercantile instru- ment or transaction. The Law merchant is a system of Equity founded on the rules of equity, and governed in all its parts by plain justice and good faith. ... I can find no instance in which the objection has prevailed in a mercantile case : and in the two instances most universally in use it undoubtedly does not hold : that is, in the case of Bills of Exchange and Policies of Insurance, till the late Act was made requiring that the name ot the person interested should be inserted in the Policy, the constant course was to make the Policy in the name of the broker : and yet the owner of the goods maintained an action upon it. Circu- lation and the Transfer of property are the life and soul of trade, and must not be checked in any instance," and he then cited the case of Fenmr v. 31eares In another case' the same Judge said — " During the fifteen years that I have sat on this bench, I have never known any case which estabUshed a distinction between Courts of Equity and Law on subjects of this kind. I have always thought it highly injurious to the public that different rules should prevail in the different courts on the same mercantile case. My ojiiuion has been uniform on that subject. It sometimes indeed happens that in questions of real property, Courts of Law find themselves fettered with rules from which they cannot depart, because they are fixed and established rules : though equity may interpose, not to contradict, but to correct, the strict rfnd rigid rules of law. But in mercantile questions no distinction ought to prevail. The Mercantile Law of this counti'y is founded on principles of Equity : and when once a rule is ' established in that Court as a rule of property, it ought to be adopted in a Court of Law " These are indeed — " Aurea dicta Aurea perpetua semper dignissima vita " ' Tooke V. Hollingworlh (a T.E., 215) TRANSFER OF DEBTS IN ENGLISH LAAV 251 Though these eminent Judges gave it as their opinion that the Courts of Law had it in their power and ought to adopt the rules of Equity with regard to the Transfer of Debts, they never had the courage to do so. And judges after judges complained of the great scandal that in this mercantile country there were two conflicting systems of jurisdiction in which the same mercantile case would be decided in contrary ways. And it was over 80 years before this scandal was abolished by Law But when an Obligation was created transferable by the Obligor himself, the Courts of Law for 550 years unanimously held that it might be transferred, and that the Assignee or Transferee might sue the Obligor in his own name Thus Bracton, the prince of English Jurists, writing about 1250, adopts the division of property into Corporeal, and In- corporeal, and afterwards considers Obligations He says^ — "We must consider in the first place what an Obligation is, and how it is contracted : and through what words and through what persons an Obligation is acquired : and in what way it is dissolved and got rid of : and in what way after it has been dissolved it may be renewed : and how it may be Trans- ferred to another party : and how one Obligation may be changed into another" And in describing the various methods by which an Obligation is extinguished, he says^ — ''Likewise by Novation: as if the Obligation has been transferred from one person to another who has taken the Obligation upon himself. For by the intervention of a new Person, a new Obligation arises, and the first is extinguished by agreement : as when a person has taken upon himself the Obligation of another " It may be useful here to inform the lay reader, that in technical English Law a " writing " means a Deed under seal, or a Specialty : and that a mere modern simple writing is classed under parol evidence." Also that'tn early English Law only writings or deeds under seal were admissible in the Courts of Common Law. Mere verbal contracts could only be sued upon in the Ecclesiastical Courts, such as the Court of Chancery I De leg. Aug., i., 12, 3 'De leg. Aug., iii., 2, 13 252 THEORY OF CREDIT Hence, when the word Obhgation occurs in early English Law, it invariably means a Deed under Seal or a Specialty And from li'OS to 1800, there is an unbroken series of decisions in the Courts of Common Law, that the Transferee of an Obliga- tion created transferable by the Obligor himself might sue the Obligor upon it In 1292 the Assignee of a Charter was allowed to have an action In 13C!^ (Y.B., 41, Edw. III., p. 27) three priests, Assignees of John Bishop, of Hereford, brought aa action against the Abbot of T., for arrears of annuity which he had granted to the grantee and his assigns. It was pleaded at the bar that Cho-^ex- An-nrtion were not assignable at Common Law. But the Court unanimously held that the Assignee might sue In two cases, in Edward IV. (Y.B.i, 5, Edw. IV., long quinto : p. 42., and Y.B., 21, Edw. IV., p. 20., c. 28.), it was held that the (rrantee of an annuity had the right to grant it over In Baker t. Brook (Benloes, c. 55. Dyer 68, 1.) Brook, the parson of Bosworth, granted an annuity tp the Grantee and his assigns during his lifetime. The grantee assigned it : and the Assignee brought an action against the G-rantor for arrears. It was argued that it was against the very nature of an annuity to be assignable over : and that it was a matter of common learning that a chose-in-action could not bo granted over by a private person. But Montague, Chief Justice, said that thie Court were unanimously of opinion the count was good, and the assignee might sue the grantor And referring to this case Coke says^ — :" A writ of annuity is a writ for the recovery of an annuity. An annuity is a yearly payment of a sum of money granted to another in fee, for life, or for years, charging the person of the grantor only. But, not only the grantee, but his heir and his and their grantee also, shall have a writ of annuity " Thus, Coke expressly acknowledges that an Obligation made transferable by the Obligor might be transferred: and this doctrine was again affirmed in a case in his own reports ' Co : Liu : 144c. TRANSFER OF DEBTS IN EN.GLISH LAW 25?> In Maund v. Gregory, (7 Co. Rep., 28, 1) in 1602, Gregory had by deed granted a rent-charge for his life to one and his assigns. The grantee assigned it over, and the assignee distrained for arrears. It was resolved by the Court that a rent-charge, or chose-in-adion, granted to one and his assigns may he assigned over by the express words of the grantor who granted it to him and his assigns, for modus et conventio vincnnt legem" This doctrine was again affirmed in the Common Pleas in Gerrard v. Baden, in 1628, {Hetleg, 80). Boden had granted an annuity to a person and his assignees ; Gerrard the a'signee sued him. It was argued that it was merely contrary to the nature of an annuity to be assigned over to another : and that it was common learning that a thing-in-action cannot be assigned over: unless it be the grant of the king. But Hutton, J., said — "We are agreed that the annuity may be granted over" Thus, after it had been alleged at the bar for some hundreds of years that choses-in-action could not be made assignable at Common Law, and on every occasion the Court had decided against it, this dogma disappeared for a time, and was never heard of again till 1800, as we shall see Xot only obligations in the form of personal annuities which are most usually recognised as choses-in-action were thus, by an unbroken series of decisions, held to be transferable when made so by tlie Obligor himself : but also all other kinds of Obligations, which were not so generally recognised as choses-in-action were also made alienable and transferable A strict military feud was by its very essence and nature inalienable, and such only are called proper feuds by feudal writers. But gradually this rigor was relaxed, and feuds were created alienable and saleable Sir Martin Wright says ^ — " All feuds therefore that are sold or bartered for any immediate or contracted equivalent : or are gi-anted free of all services : or in consideration of one or more certain services (whether military or non-military), or upon a cens : or rent : in lieu of services : and all such feuds as are by express words in their creation or constitution, alienable, are ' On Tenures, p. 33 254 THEORY OF CREDIT improper fends : and are severally treated of by the feudists under the head of feuda emtitia, franca, censualia, emptitoria, alienabilia, &c." Thus, though a feud was not originally alienable, yet wherever the grantor made and created it alienable by granting it to his grantee and assigns, it was assignable, and 'the assignee might sue la 2Mlory v. Syynoiid (Y. B., 9, Edw. II., p. 292, 443), the assignee of a charter was found to have an action against the grantor who granted it to the grantee and his assigns It also became common for a lessor to grant leases to the lessee and his assigns, and such leases were.assignable The original contract between Lord and Vassal was bilateral : because it involved Eights and Duties on" both sides : and con- sequently the Lord could not aUenate his seignory without the consent of his vassal : he could not attorn or turn over the homage or service of his vassal to another person against his will ; and if the tenant refused to attorn the grant was void. Just as a Creditor could not attorn his Debtor to another person without his own consent. But if the vassal agreed to the transfer of the seignory, he was said to attorn to the new seignor But when internal peace and security were established, the relation between Lord and Vassal gradually changed from a bilateral to a unilateral contract. The vassal came to look to the general law of the land for protection to his person and property, instead of to his immediate Lord : and all the various services of the vassal were reduced to the simple payment of Rent Consequently, the relation between Lord and Vassal was re- duced to the simple one between Creditor and Debtor : or that of Landlord or Tenant at the present day AVhen the relation between Landlord and Tenant was reduced to a simple unilateral contract, the same .principle began to be applied to it as had already been applied in Roman law to the law of Creditor and Debtor. It was no sreal prejudice to the Debtor to whom he paid his Debt : so long as he was not called upon to pay it twice over. So it was no real prejudice to a tenant to whom he paid his rent : so long as he was not called upon to pay it twice over. The doctrine of attornment came to be felt to TRAXSFKR OF DEBTS IN ENGLISH LAW 255 be a burdensome restraint on the alienation of land : and several methods were adopted to evade it. lu all cases where the Statutes of Wills and Uses applied, attornment was declared to be imne- eessary. And many other cases are given in Comyn's Digest. Attoi-nment L Between the time of Littleton and Cake a farther step was made : for in several cases if the tenant refused he might be compelled to attorn^ At last the doctrine of attornment as regards grants and conveyances was entirely swept away, and abolished by the Act, Statute of Anne, 1705, c. 16, ss. 9, 10 : which was drawn by the great Lord Somers : and estates in land were made freely trans- ferable without the consent of the tenant This Act of Anne is exactly parallel to the Statute or Consti- tution of Alexander Severus, already mentioned, declaring that a Creditor might freely sell his debt without' the knowledge or even against the consent of his Debtor By these means, in the course of many centuries, a complete revolution was effected in the law relating to estates or contracts relating to land. Whereas they were origirially inalienable unless specially created so : at the present day all estates in land are freely alienable unless granted with an express stipulation to the contrary : and even in many cases such a stipulation is void- Bills Obligatory or personal Obligations were hke all writings at that period Deeds under seal, or specialties : and were no doubt at first made only to the Creditor himself. But the same principle began to be applied to them as were applied to all other Obhgations. Though, as far as we are aware, no evidence exists to show when the practice began. Obligations to pay both in the form of what in modem language are termed Bills of Exchange and Promissory Notes, were drawn as Deeds under seal, or spe- cialties, and made transferable to attorney or to assignees or to bearer Obligations in both these forms were in 'current use in the City of London in the reigns of Edward lY. and Henry YIL, and specimens of them arc given in a following chapter. As they 'Co. Lilt, Sloh, 316a ^Slfjilifn's niachsf, i., 469 256 THEORY OF CREDIT are given as common forms in these reigns, it follows that they must have been long in use. It is somewhat remarkable that there is no instance of any of these Obligations having come before a Court of Law The last instance of a Bill of Exchange drawn as a Deed under seal that occurs in the reports is in 1680. During this century it appears that merchants began to use simply written Bills of Exchange in the modern form : and that Bills under seal and signed Bills circulated concurrently in commerce : though it is stated in the edition of "■ Les Termes de la Lei" for 1707, that merchants were only then establishing thgir rights to maintain tJie same action upon signed bills as upon sealed bills. x\fter that the custom of sealing bills entirely died out AVith the establishment of banking, bankers adopted the custom of issuing their signed Promissory notes. These were treated as Bills of Exchange, and in several cases bankers' notes payable to bearer on demand were held to be perfectly legal and valid instruments' But soon a strange conflict of decisions arose : aud in a series of cases it was held that the " bearer " had no action against the acceptor of a bill or the maker of note drawn payable to " bearer " : that Promissory Notes were not within the custom of merchants : and could not be declared upon as Bills of Exchange : that they were illegal at Common Law : and that they could not be sued upon in any form as instruments : though they might he offered as evidence of a debt In several cases it was held by the Iving's Bench, presided over by Lord Holt, that a Pi'omissory Ebte payable to bearer could not be sued upon by the bearer^ ^SheltJen v. Bentlei/, 1681 (2 Show., 1601). Hinton's Case, 1681 (-2 Show., 235). Williams v. Williams, 1693 (Carth., 269). Lambert v. Oakes, 1699 (1 Lord Kiiym., 443). Bromidch v. Loyd (2 Lutw., 1593) » Hodges v. Stewart, 1691 (1 Salk., 125). Barton v. Cogtjs, 1691 (3 Lev., 299). Nicholson V. Sedgtvich, 1698 (1 Lord Rajm., 18), Cnrjg's Case, 1699 (Comber, 406). Carter v. Palmer, 1701 (Comber, 40&). Jordan .. Barloe, 1701 (3 Salk., 67) TRANSFER OF DEBTS IN EN'GLISH LAW 2,M Up to this time the legality of Promissory Notes made payable to order had not been questioned : but by an extraordinary example of judicial finesse it was held that a note payable to bearer gave no authority to the bearer to indorse it. The Courts after allowing that the bearer might sue the maker in some cases, at last reversed this opinion, and held that the bearer had no action against the maker : but they held that the indorsee might sue his indorser : because every indorsement is a new drawing Moreover, up to this time Promissory Notes had been usually declared upon as Bills of Exchange : and in the legal phraseology of the times, what in modern language is termed making a Note was termed drawing a Bill : and the maker of the note was termed the drawer But in Clarke v. Martin, 1703 (2 Ld. Raym., 787), Lord Holt held that Promissory Notes in any, form were illegal. In this case a Promissory Note drawn payable to A. B. or order was declared upon as a Bill of Exchange, as was then the usual prac- tice : aud had been admitted by Holt himself in several cases But now he set his face agaiust Promissory Notes in any form. The report says — "But Holt, C. J., was Mis virihus against the action, and said this Note could not be a Bill of Exchange : that the maintaining these actions upon such Notes were innovations upon the rules of th6 Common Law, and that it amounted to setting a new sort of Specialty, unknown to the Common Law, and invented in Lombard Street, which attempted in these matters to give laws to Westminster Hall: that the continuing to declare upon these Notes ujjou the custom of merchants proceeded from obstinacy and opinionativeness." And the whole Court agreed that Promissory Notes in any form were illegal at Common Law In Ctdtiiig v. Williams, 1703 (7 Mod., 155), the Court unanimously adhered to the decision in CUirlce v. Jfariin. Holt said that he had proposed it to all the judges whether a declara- tion upon a Promissory Note could be supported : and they were all of opinion that a declaration upon a Promissory Note upon the custom of merchants was void, as it made a Note amount to a Specialty s 2r)8 TIIEOKY 01'' CREDIT The last case is Buller v. Crips, 1704 (G 2Io(l 29). The indorsee of a Note drawn payable to A. B., or order, brought an action against the maker, or drawer, and declared upon it as a Bill of Exchange within the custom of merchants. ]3iit Holt had now decidedly put his foot down, and had drawn all the other judges over to his opinion. He said — " The Notes in question are only the invention of the goldsmiths in Lombard Street, who had a mind to make a law to bind all th(5se who did deal with them : and sure to allow such a Note to carry any lien with it, were to turn a piece of paper, which in law is but evidence of a parol contract, into a Specialty : and besides it would empower cue to asfsigii that to another which he could not have himself: for since he to whom this note was made could not have this action how can his Assignee have it ? And these notes are not of the nature of Bills of Exchange: for the reason of the custom of Bills of Exchange is for the expedition at trade and its safety, and likewise it hinders the exportation of money out of the realm " On a subsequent day Lord Holt said that he had desired to speak with two of the most famous merchants in London to be informed of tlie mighty ill conseqirences that it was preteuded would ensue by obstructing this course, aiud that they had told him it was very frequent with them to take such notes: and that they looked upon them as Bills of Exchange: and that they had buen used for a matter of thirty years: and that not only Notes, but Bonds for money were transferred frequently, and indorsed as Bills of Exchange As the decision of Lord Holt and his*Court that Promissory Notes were illegal in any form whatever seemed unalterable, the Ai-t, Statute 1704, c. 9, was passed, which, having recited that it had been held that notes in writing signed by the party who makes the same, whereby such party promises to pay to any other person or his order, any sum of money herein mentioned, are not assignable or indorsable over within the custom of merchants: and that neither the payee himself nor hiS indorsees could main- tain an action on such Notes : such Note's made payable to any person or to order or to bearer, should be placed in all respects on the same footing as Inland Bills of Exchange TRANSFER OF DK15TS IN KXOLISII LAW 239 From this period until the year 18G8 these cases decided by Lord Holt were held to be law, with one solitary excejitiou : and it was thenceforward supposed that it was the Statute of Anne which first legalised Promissory Notss Nevertheless, in Grant v. Vaughan *(•! Black, 485), Lord Mansfield, and the Court of King's Bench, unanimously con- demned them as erroneous. But, surprising as it may appear, this case, decided by the highest mercantile authority of the day, ne\er attracted the slightest atteution, and, it continued to be held as law by all judges, and laid down in all text Ijooks of Mercantile Law, that Promissory Xotes are illegal at Common Law, and that they were only first legalised by the Statute of Anne In Fcnim-v. JImres, 1772 (2 W. Black., 12C9), Mearcs had granted a respondentia bond to Cox, assignable by indorsement. Cox indorsed it to Feuuer : and Fenner sued jMeares. It was tlie first instance of the indorsee of a respondentia bond sueiug the grantor Blackstone, J., said — " The promise made by Meares is sufficient. Whatever would have been due by Cox is by the assignment transferred to Fenner. He ran the same hazard, and is entitled to the same benefit. And I see no reasuu why JMcai-es should be in a better condition merely b.ecause his Creditor is changed" Xares, J. — " I think this is a particular promise to the Assignee, whenever any such should be " De Grey, C. J. — "At the trial I gave an opinion that in point of Law this action was maintainable : and I have seen no reason to change it. It would clog these securities and be pro- ductive of great inconvenience if they were obliged to remain in the hands of the first Obligee. This contract is, therefore, devised to operate upon subsequent assignments : and amounts to a declaration, that upon such assignment, tlxe money which I have so borrowed shall be no longer the money of A., but of B., his substitute. The Plaintiff is certainly entitled to the money in conscience, and, therefore, I think also in law : for the Defendant has promised to pay any person that shall be entitled to tlie money " s2 260 THEORY OF CREDIT Up to the year 1800 this doctrine was never disputed. For a period of 550 years the Courts of Common Law had displayed a liberal and enhghtened spirit. Xot only is it laid down by Bracton in 1250, that all obligations of any form are transferable, if made so by the Obligor himself, but the Courts of Law had uniformly acted upon this doctrine. Every new species of Obli- gation, as it came into existence accord'ing to the increasing wants and necessities of society, was decKred by the Courts of Xaw to be transferable and assignable. The Courts upheld Transferability in every form as essential to the interests of commerce. And that all Obligations whether in the form of Deeds, llunds, or Specialties, or in the for;m of simple writing — with one unfortunate exception — were transferable when made so by the Obligor himself. But in 1800 a disastrous change came over the spirit of the Judges. Some narrow minded lawyers held that Lord jMansfield had introduced too much Equity into Common Law, and he was succeeded by Lord Kenyon, who was said to be an able Common Law lawyer, but was totally wanting in the wide and liberal education of Lord Mansfield, and became a Judge of the narrowest and most bigoted type In Johmoii v. GoUings, 1800 (1 East, 98), Lord Kenyon held that a promise given by a merchant to accept a bill before it was drawn was not a valid acceptance of the bill, contrary to the doctrine of Lord Mansfield in Fillans v. Van Jlicroj) : and when the acceptance of a bill did not require to be in writing He said — " That to allow this would be to say that a Ghose-in- action is assignable, a doctrine to which I will never subscribe. I cannot, as at present advised, and upon a general view of it, agree with the case of Fenner v. Meares Foolish old Grose, J., chimed in — " By the general rule a Ghose-in-action is not assignable, except by the custom of merchants. The assignment of a Ghose-in-action by a Bill of Exchange is founded upon that law : and cannot be carried further than that law will warrant" Lord Kenyon was of a very masterfnl disposition, and bis TRANSFER OF DEBTS IN ENGLISH LAW 261 supposed learning imposed upon his weaker bretliern, just as Lord Ilolt had done just a century before. And this solitary case swept away the doctrines of all the text writers of English Law and tlie uniform decisions of the Courts of Law fol- 550 years ! The doctrines then established were — 1 . That no Obligations can be created Transferable at Common Law 2. That Bills of Exchange in simple writing are by the custom of merchants the sole exception to this rule 3. That Promissory Notes are illegal at Common Law — and only legalised by the Statute of Anne 4. That under no circumstances are Bonds, Deeds, Specialties, or Instruments under seal transferable Those who maintained these doctrines certainly showed great legal acumen : because, if they had any eyes to see, they would have perceived that the very ground upon which Lord Holt held that Promissory Notes, in simple writing, were illegal, was that they were not Deeds or Specialties ! This baleful doctrine was not long in bfefl,ring fruit. In Glyn V. Balm-, 1810 (i;-5 East, 509) the East India Company had issued bonds payable to the payee and his assigns. The Court held that they were not negotiable. This decision raised such a commotion that an Act was immediately passed to make East India Bonds Negotiable like Promissory Notes In 1857 a similar doctrine was laid down by Lord Chancellor Cranworth in the House of Lords A Glasgow merchant had issued instruments promising to deliver 1,000 tons of pig iron free on board to the holder of the document. This instrument was held to be valid and legal by ten of the Scotch Judges against three This instrument was simply a Promissory Note payable in pig iron instead of in money : and though such notes are not in common use in this country, it is quite common in the South of Europe to draw Bills payable in produce How any Scotch Judge could hold such document illegal is beyond us to conceive. Because the mercantile la\T of Scotland is the Law of Justinian: and, by that law, every Action, personal or real, is saleable L'C,^ TIIKOKY OF CliEDIT Nevertheless, this novel portent— a Promissory Note payable in pig- iron and not in money— was too much for the nerves of Lord Oran worth : and he gave it as his opinion that the document was illegal. He said Bovill v. Di.voii (H. L. Cases, 185G)— " The effect of such a document, if valid, is to giye a floating Right of action to any person who may become possessed of it. Xow, I am prepared to say that this cannot be tolerated either by the liaw of Scotland or of England . . . Looking at the matter merely as advising your Tjordships as a Court of Appeal, I have no hesitation in saying that independently of the Law Merchant and of positive Statute, within neither of which classes do these scrip notes range themselves, the Law docs ilot either in Scotland or in England enable any man by a written engagement to give a floating Itight of action at the suit of any one into whose hands 4lie writing may come" ^liist fortunately, this was only the opinion of Lord Cranworth, and was not embodied in the judgment of the House of Ivords, which is tlie only thing which would have made ifc law : and Lord Cranworth's opinion was perfectly open to criticism The opinion expressed by Lord Cranworth undoubtedly repre- sented the doctrine then held by all the judges, and if it had been eeu'cet, it would have declared the whole business of Banking to bo illegal : because, as will be shown in •& future chapter, the whole bnsincss of banking consists in issuing floating Rights of action All assumed consequence of this doctrine led to another long contest between the Courts of Law and the mercantile community Dills of Lading were made transferable by indorsement, like Bills of Hxchange, and it was held that the captain was warranted in delivering the goods to the Lidorsee"; but it was held in a series of cases that the Indorsee had no Right of action against the captain, if he refused to deliver them : as it was supposed to come under the rule that chnneK-in-arliuii wore not transferable Now, terming a Bill of Lading a chose-i/i-aclioii is a vital error. A chosc-lii-arUoii is an abstract Right to compel a person to pay sonunhing wdiich is his own property, and can only be brought against a Debtor. The money a person pays a debt with, is liis own [iropcrty until he voluntarily parts with it TRANSFER OF DEBTS IN ENGLISH LAW 2(i3 Now, the goods which a captain carries in his ship are not his own property : and he is not a debtor for them : lie is a pure Trustee or Bailee. The property in the goo'ds passes directly from the Consignor to the Consignee, and through him to the Indorsees. Hence, the Inst Indorsee holds the actual property in the goods. This was fully acknowledged by the Courts. Nevertheless, the Courts held that the Indorsee could not bring an action to reco\'er his own property from the captain, but rnusfc bring it in the name of the Consignor This dogma having been asserted in several cases, was finally afiirmed in the case of Thompson v. Domini/ (14 M. & W., J-og) In this case the Indorsee of a Bill of Lading sued the owner of the ship in his own name Parke, B. (afterwards Lord Wensleydfile), admitted that the Bill of Lading was transferable from hand .to hand : and it passed the Property in the goods in it ; but he n?ver heard of an action being brought on it, and thought such an action quite untenable. By the Law of England a choKe-in-action is not transferable : by the custom of merchants it is transferable in one instance, a Bill of Exchange, but there is no authority to show that a Bill of Lading is transferable under such a custom, so as to enable the party to bring an action on it .... I never heard it argued that a Contract was transferable, except by the Law Merchant " It is remarkable that this decision was in flat contradiction to a case decided in the very same Court only a few months previously In FranlcUn v. Xeate (13 M. & W., 481) a person had pawned a watch as security for a loan. He then sold the watch to another person, and transferred the pawn ticket to him. The transferee sued the pawnbroker for the watch on paying off the loan and charges. The pawnbroker refused to deMver the watch to any person but the original owner, alleging that a chose-in-adion was not transferable But the Court unanimously held that the transferee had acquired the legal property in the watch : and had the right to sue for it in his own name, as he had acquired the same rights as the oriifinal owner 264 THEORY OF CREDlt It would be impossible to imagine two cases in which the decisions were in more flagrant contradiction than in those of FranMin v. A^eale, and Thompson v. Dominy, decided by the very same Judges within a few months of each other The shipowner and the pawnbroker were exactly in the same posi- tion: they wore the mere Baileesof the goods and not the proprietors. Pawnbrokers' Tickets and Bills of Lading are instruments of exactly the same nature: they are both documents of title, and not choses-iii- action . The Court allowed that in each case the property i u the goods passed directly from theoriginalownertothe'txansferee. laFrankliii V. Neate the Court held that the Transferee had the same rights as the original owner, and might sue the pawnbroker, though he had not undertaken to deliver the watch to any transferee. In Thompson v. Dominy, the same Court held that the Indorsee had exactly the same right as tlie original owner, but could not sue the bailee for his own goods, which the bailee had expressly undertaken to deliver to the indorsee. In the one case the Court held that the legal owner might sue ; in the other case, the same Court held that the legal owner could not sue ! The dogma of the Court, which by their own showing was erroneous, being thus in hopeless conflict with the interests of the mercantile community, had to be remedied by Act of Partiament, as in the former c:ise of Promissory Notes. Tliis was done by the Bills of Lading Amendment Act, statute 1*858, c. 4 The dogma of the modern judges that choses-in-action are not transferable, applied of course to policies , of insurance: and to remedy this the Policies of Insurance Act, 1867, was passed, to l^ermit assignees of Policies of Insurance to' Sue in their own names Mr, Bunion remarks that this Act may be esteemed a first step to making choses-in-aciion assignable at Law. The last step came much sooner, perhaps, than Mr. Bunion ex'pected Apjjointmeni of a Royal Commission to p-epare a Digest of the Laiv of England 30. In 18G7 the Government appointed a Roj'al Commission to prepare a Digest of the Law of England, in anticipation of the contemplated lusion of Law and Equity, which was subsequently enacted by the Supreme Court of Judicature Act of 1873, which came into operation on the 1st November, 1875 DIGEST OF LAW COMMISSION 2G5 Among the Commissioners were Lord Chancellor Cranworth, Lord AYestbury, Lord Cairns, Lord Hatherley, Lord Selborne, and Lord Penzance, to mention only those qf judicial rank. The Commissioners determined to prepare digests of three branches of the Law, as specimens of a Digest of the whole Law. They invited members of the bar to offer themselves to prepare these specimen digests under their superintendence. One of the branches selected was Bills of Exchange, Bank Note's, &c. Tliis digest was not to be a mere register of decisions. It was expressly intended to be a declaration of the Law on all points: and, consequently, it necessarily involved the strict investigation and final settlement of all disputed points, contradictory doctrines, and conflicting cases, as well as the exclusion of all erroneous cases In the early editions of my Theory and Practice of Bankincf I had stated the law regarding the transfer of choses-in-action in accordance with the doctrines then held by all the judges, and laid down in all text-books of mercantile law ; as I naturally presumed that the judges knew their own law But upon entering into this competition, I began to reflect that the current doctrines regarding the transfer of choses-iii-aclioii were contradictory While it was strenuously maintained that choses-in-action were absolutely inalienable at Common Law, so as to enable the Transferee to sue the Debtor in his own name, it was perfectly acknowledged that in some cases it was quite legal to transfer a Debt, and that the transferee might sue the original debtor It was perfectly acknowledged that if the Creditor, the Debtor, and the Transferee met together, the Creditor might, with the Debtor's consent, transfer his Right of action to the Transferee. The Debtor might then agree to pay the Transferee instead of his primary Creditor. When this was done, a valid contract was created between the Debtor and the Transferee, which cancelled and extinguished the two preceding contracts: that between the Debtor and his Creditor : and that between the Creditor and the Transferee: and the Transferee might then sue the Debtor, because there was now a privity of contract between them 266 THP30RY OF CREDfi This is what, as has been shown in the preceding section, is termed a Novation: and this form of Novation was perfectly acknowledged in a whole seiies of cases to be perfectly valid But though it was admitted that a Debt might be sold and alienated orally to a specific individual with whom the debtor personally entered into a contract : it was Strenuously maintained that it was contrary to law to issue a written Obhgation payable to order or to bearer, or to any unspecified and indefinite assignee : and it was alleged that no contract could :be created between tlie original Debtor, or Obligor, and such indefinite bearer or assignee giving the latter an action against the Debtor This, of course, involved the general tjuestion — What is the Common Law of Eughmd respecting the , transfer of Obligations (jral and written ? Or — What is the Common Law of England with respect to the transfer of written Obligations which the Obhgor himself had created transferable ? As the very purpose of the Digest was to declare the Law on this point, it became necessary to trace the doctrine through the whole series of Reports to tlieir earliest sources The result I arrived at is contained ta the preceding para- graphs, and need not be repeated here. 1 proved by a series of cases, beginning about 1250, and ending in 1800 — a period of 550 years, that the dogma held by modern judges that choses-in- adion are inalienable at Common Law, with the sole exception of Bills of Exchange, had no foundation wh(ateicr in fact : that it w&s entirely due to the narrow dogmatism of Lord Keuyou: and that it had no earlier date than 1800 ! Having laid these investigations before the Commissioners, whose Chairman was Lord Oriun\'orth, who had enunciated the doctrine that it was not to be tolerated by the Law either of Scot- land or England that any person should issue floating Eights of action against himself, I was unanimously selected to prepare the Digest of the Law of Bills of Exchange, c^'c. My selection by tlie Commissioners was in effect equivalent to a judgment of the House of Lords in my favor: because the Commissioners included all the Law Lords except oue: and if they approved of my written arguments in tlieir capacity as Gomniis- siouers, tliey must have done the same if I kid liad the opportunity of addressing them in their capacity of Law Lords CKOUCII V. CREDIT FONCIER 2G7 I was invested with the duty of rediieiilg into systematic and scientific order the wliole mass of cases mi the subject, botli at Law and in Equity. I was instructed not to pay any regard to any decision of any court or judge, nor 'to any text-book: but that it was my dnty to declare the law on every point in the subject. This, therefore, involved the duty of examining and approving, confirming, modifying, or reversing the decisions of all the Courts of Law and Equity on this subject I stated the rules of the Common Law relating to the transfer of chose.i-in-aciion in these words : — "At Common Law a Creditor cannot transfer his Debt, or Eight of action to a third person without the consent of the Debtor, so as to enable the Transferee to sue the Debtor in his own name " But wherever the Debtor assents to the transfer of the Debt, either orally or in writing: the assignment'of it by the Creditor is irrevocable : and the transferee may sue the Debtor in his own name" I set aside the whole of Lord Holt's decisions relating to Promissory Notes, which had been accepted as Law for IGO years, with one exception, as erroneous : and appended this note : "The legahty of Promissory Notes is Sometimes supposed to rest solely upon the Statute of Anne : but there can be no doubt whatever that the series of decisions which were the cause of the Act being passed are erroneous: and that the Act was superfluous " In 1870 the Commissioners discontinued the work of Digest : aud, consequently, my digest was never published under their authority ; but I introduced these doctrines, as having the private approval of the Comniissioners, into my Principles of Economical Philosojjh//, published in 1872 The Case of Crouch v. Credit Foncier of England 31. This work had only been published a very short time when a very awkward incident occurred The Credit Foncier of England issued an Obligation which they termed a Debenture, by which they promised to pay the bearer the sum of £100 on the 1st of May, 1«72, or upon any earlier day upon which the bond should be entitled to be paid off, or redeemed, according to certain conditions printed on it 268 THEORY or CKEDIT The Bond further promised to bear interest at 8 per cent., payable half yearly, on the 1st of November and 1st of May in each year, from the 1st JSTovember, 1869, to the 1st May, 1872 : unless it should be drawn for payment before the 1st May, 1872 : in which case interest was to cease from the day it was drawn One Macken bought ten of these debentures. In July, 1869, his house was broken into and they were stolen. The Bond in question was drawn for payment on the" 1st November, 1870. Macken having received substituted bonds, on giving notice of his loss to the Company, and an indemnity, received payment of the Debenture At the end of 1871 the Plaintiff bought the Debenture from a person who afterwards disappeared : and sued the Company for payment of it It was not disputed that he gave value for the bond without notice : and at the trial before Bramwell, B., he gained the verdict The questions before the Court in Banc were — 1. Whether the Debenture was a Negotiable Instrument 2. Whether, if it were so, it was not overdue, and so had lost its attribute of " Currency," or Negotiability The judgment of the Court of Queen's Bench was delivered by Blackburn, J., in the absence of the Chief Justice He began by allowing that such Instruments had been for some time treated as Negotiable He then said (L. E., 8 Q. B., 374)—" The general rule is not disputed, that a chose-in-action cannot be transferred at law at all ... . The first question, therefore, is whether this instrument is a Promissory Note. It is under seal, and therefore is, 2)rimd facie, a Covenant, and not a Promise: and it is quite clear that a Covenant to pay money is not Negotiable by the custom of merchants .... " There is no case in the books where a Bill of Exchange made under seal has been sued upon "The negotiability of Promissory Notes depends, in part at least, upon the Statute 3 and i Anne, c. 9*: and it seems to have been the opiuion of Lord Justice Wood in re General Estates Co., and of Malins, V. C, in re Imjierial Land Co. of Marseilles, that CROUCH V. CREDIT FOJSTCIER 269 inasmuch as that Act enacts that Promissory Notes inwritiiie;, . . . . it follows that a Corporation fixing its seal to a written promise to pay must be considered as signing the promise, not as covenanting under seal to fulfil it : and so that Statute says by impli- cation that, what would at Common Law be their Covenant to pay, is their Promise to pay. But although intimating their opinion, neither of the learned persons referred to gave any decision on the point, as it was not necessary for the purpose of the cases before them. Neither is it necessary for us to decide the point, as for reasons which will presently be given, the Instru- ment in question, even if under hand, could not be a Promissory Note: but we wish to point out that in Glyii v. BaJcer the form of the East India Bond was that the East India Company acknowledged to have received of W. G. Sibley £100, which the Company promised to pay to Sibley, his executors, or assigns, by indorsement. It was therefore in form a Promissory Note, for value received, payable to order, and had it been signed as such by an agent of the East India Company, would have been nego- tiable. But it was a bond under the seal of the East India Company, and le Blanc, J., says — ' It is clear that no action could have been brought on this bond but by Sibley, the Obligee, or in his name: or, if he died, in the name of his executors' "The alarm occasioned by this decision was so great that within a month afterwards an Act, 51 Geo. III., c. 64, was passed to make East India Bonds negotiable like Promissory Notes. It seems not to have occurred to ainy one that it could be said that this was already done by virtue of the Statute of Anne, the promise in writing being signed by the East India Company's seal " This seems a strong authority for saying that instruments under the seal of a body corporate are not exceptions from the general rule laid down in Byles on Bills that ' at Common Law Bills of Exchange and Promissory Notes, being simple contracts, cannot be under seal, at least, so as to retain their negotiable quahties ' " But it is not necessary to decide in the present case whether an instrument under the seal of a Corporation can be a Pro- missory Note : for the contract of the Credit Foncier is not 270 TKEOIiY OF CREDIT merely to pay the money, but also to cause a portion of the bonds to be drawn in the stipulated manner : and any one entitled to sue on the contract contained in the instrument would be entitled to sue for damages if the company did not fairly give him his chance of having his bond drawn according to the stipulated conditions. And it is obvious that such a contract as that cannot be a Promissory Note .... " He is also obliged to contend that they could give a Right of action in his own name to any holder, though the general law would give uo such Eight of action to the holders. There is no decision or authority that it is competent to a party to create by his own act a transferable Eight of action on a contract. It is enough to refer to Dixon v. Bovill and Thompson v. Dominy, as authorities, that he cannot irrespective of custom so create it . . . " We have already intimated an opinion that it is beyond the competency of the parties to a contract to confer on the assignee of that contract a Right to sue in his own name " The Court then made the rule absolute to enter the verdict for the Defendants : but gave the right to appeal. No appeal, how- ever, was made : and if it had not been for a subsequent case, this case might have done boundless mischief in perpetuating error It Avill be seen by referring to the preceding section that every one of the statements in this decision, both of law and fact, are perfectly ei'roneons : and are in direct contradiction to the principles which I had established in my cjigest with the approval of the Law Digest Commissioners On the, Case of Goodwin v. Robarta 32. At length this great quarrel was brought to a final settlement and determination in the case of Goodwin v. Roharfs (L. R,, 10 Exch., 837), beyond all comparison the most important Mercantile case in modern times: or indeed of any time The Russian Government being abmit to raise a loan on Bonds, appointed Messrs. Rothschild their agents G00r)WIX V. ROBARTS 271 Messrs. Rotlischild issued Scrip for these £100 Bonds, as a receipt for £20 paid on account of tlie Bonds : and as payment of the successive instalments at the times specified, the "Bearer" was to receive tlie definitive bonds In Fel)ruary, 1874, the plaintiff purchased £200 of the Eussian scrip, on which the instalments were fully paid up in advance : and left it in the hands of his broker : who improperly and contrary to good faith, pledged it wCth tlie defendants as security for a loau The broker became bankrupt, and the defendants sold the scrip in the usual way of business, and in ignorance of the plaintiff's title It was ]'jroved that such Scrip for loans to foreign governments, entithng the bearers thereof to bonds, had been well known to, and largely dealt in by bankers, money dealers, and members of the Stock Exchanges, English and Foreign; for above fifty years : and such persons had, during that period, bought and sold such Scrip, and lent money on it : and dealt with it iu every way as a Negotiable Instnimeut, transferable by delivery The question was whether such Scrip was in point of law Negotiable : so that the defendants, the innocent holders for value, might retain the proceeds from the true owners of it This case, it will be observed, extended the question of Negotiable Instruments : because all Instruments hitherto found to be Negotiable, had been actual Obligations to pay money : but this was only a Promise to deliver an Obligation to pay money The Court of Exchequer unhesitatingly gave judgment for the defendants The case was then taken by appeal to the Court of Exchequer Chamber, and the unanimous judgment of the Court was given by Lord Chief Justice Cockbum on the last day of its existence, July 7, lS7u In the course of the argument before the Court, Lord Holt's cases, so often alluded to, and which I had set aside in my digest, had been cited, and the Lord Chief Justice spoke of them in terms of the strongest condemnation, and said that they were a blot upon our judicial history 272 THEORY OF CREDIT The Lord Chief Justice having reviewed all the arguments against the negotiability of the Scrip, especially the doctrines expressed in the preceding case of Crouch v. The Credit Fancier of England, that it is not competent for any one to create floating Eights of action against himself, said — " Having given the fullest consideration to this argument, we are of opinion that it cannot prevail. It is founded on the view that tlie Law Merchant thus referred to is fixed and stereotyped and incapable of being expanded and enlarged so as to meet the wants and requirements of trade in the varying circumstances of commerce. It is true that the Law Merchant is sometimes spoken of as a fixed body of law, forming part of the Common Law, and, as it were, coeval with it. But as a matter of legal history, this view is altogether incorrect " The Lord Chief Justice then proceeded to speak of Bills of Exchange and Promissory Notes, and said that the common notion that Promissory Notes were not used in England till the end of the seventeenth century was a mistake. " Mr. Macleod shows that Promissory Notes payable to bearer, or to a man and his assigns, were known in the time of Edward IV." After referring to several of the cases before recited, he said — "Thus far the practice of merchants, traders, and others of treating Promissory Notes, whether payable to order or to bearer, on the same footing as Bills of Exchange, had received the sanc- tion of the Courts, but Holt having become Chief Justice, a somewhat unseemly conflict arose between him and the merchants as to the Negotiability of Promissory Notes, whether payable to order or to bearer : the Chief Justice taking what must now be admitted to have been a narrow minded view of the matter, setting his face strongly against the negotiability of these instru- ments, contrary as we are told by authority, to the opinion of Westminster Hall : and in a series of successive cases persisting in holding them not to be negotiable by in'dorsement or delivery. The inconvenience of trade arising therefrom led to the passing of the Statute of 3 and 4 Anne, c. 9, whereby Promissory Notes were made capable of being assigned by indorsement, or made payable to bearer, and such assignment was thus rendered valid, beyond dispute or difficulty GOODWIN V. ROBARTS 273 " It is obvious from the preamble of the statute, which recites that ' it had been held that such Notes were not within the custom of merchants,' that these decisions were not acceptable to the profession or to the country. Nor can there be much doubt that by the usage prevalent among merchants these Notes had been treated as securities negotiable by the icustomary method of assignment, as much as Bills of Exchange properly so called. The Statute of Anne may indeed practically speaking be looked upon as a Declaratory Statute, confirming the decisions prior to the titne of Lord Holt " The Lord Chief Justice then, having reviewed several other cases, came to the case of Crouch y. The Credit Fonder of Evgland, in his own Court, but decided in his absence. He expressed dis- approval of the reasons given for the judgment, that it was not competent for the Company to make instruments negotiable which were not negotiable at Common La\v : though he said the judg- ment might be supported on the ground that the usage was not proved to be general " We cannot concur in thinking that if proof of general usage had been established, it would have been a sufficient ground for refusing to give effect to it, that it did not form part of what is called the ancient Law Merchant " If we could see our way to the conclusion that in holding- the scrip in question to pass by deUvery, and to be available to bearer, we were giving effect to a usage incompatible either with the Common Law, or with the Law Merchant, as incorporated ^ into and embodied in it, our decision would be a very different one from that which we are about to pronounce. But, so far from this being the case, we are, on the contrary, in our opinion, only acting on the established principle of that law in giving legal effect to a usage now become universal, to treat this form of security, being, on the face of it, expressly made transferable to bearer, as the representative of money, and, as such, being made to bearer, as assignable by delivery" The Court then affirmed the judgment of the Court of Exchequer : and thus all the Courts of Common Law held that the Scrip was a Negotiable Instrument. This judgment was afterwards affirmed by the House of Lords T 274 THEORY OF CREDIT The Lord Chief Justice had the Paper I prepared for the Law Digest competition before him, and, in the course of the judgment, he did me the very high honor to refer to it as follows — " We find it stated in a Law Tract, by Mr. Macleod, entitled ' Specimen of a Digest of the Law of Bills* of Exchange,' printed, we believe, as a Eeport to the Government ; but which, from its research and ability, deserves to be produced in a form calculated to ensure a wider circulation," &c. I had already published the results arrived at in my Principles of Economical Philosophy in 1872 : this judgment confirmed them in every particular : and they are repeated in my Theory and Practice of Banking, and in this work *: so that I have done whatever has been in my power to fulfil the suggestion of the Lord Chief Justice Choses-in-action made Transferable by Statute, luithout the consent of the Debtor 33. The Courts of Law never adopted the bold suggestion of Ashhurst and Buller that they should drop the formality of requiring the Transferee of a Debt to sue in the name of the Transferor. But this has at length been 'done by the Supreme Court of Judicature Act, ] 873. By sect. 25, § 6, of that Act, it is enacted — " Any absolute assignment by writing, under the hand of the assignor (not purporting to be by way of charge only) of any Debt or other legal Chose-ln-action, of which express notice in writing shall have been given to the Debtor, Trustee, or other person from whom the assignor would have been entitled to receive or claim, such Debt, or chose-in-action, shall be, and be deemed to have been effectual in law (subject to all equities which would have been entitled to priority over the right of the assignee, if this Act had not passed) to pass and trans'fer the legal right to such debt, or chose-in-action, from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the consent of the assignor : provided always, that if the Debtor, Trustee, or other person liable in respect of such Debt, or chose-in-action, shall have TRANSFER OF DEBTS 275 had notice that such assignment is disputed by the assignor, or any one claiming under him, or if any other opposing or conflicting ■claims to suchDebt, or cAos«-wj-«(5i;«on, lie shall be entitled if liethink fit, to call upon the several persons making claim thereto to inter- plead concerning the same, or he may, if he think fit, pay the same into the High Court of Justice, under and in conformity with, the provisions of the Acts for the relief of Trustees" It will be seen that this clause confers the Right upon Cieditors to transfer their Debts, or choses-in-aciioii, 'Without the consent of the Debtor : and, consequently, if the holder of an obligation not made transferable by the express will of the obligor, gives notice to the Debtor in terms of this clause, he can maintain an action on it But it still leaves untouched the case of an Obligation created transferable with the express consent of the Obligor, which is transferred without a written notice to the Obligor, and in such cases, which form the vast majority, the rules of the Common Law still apply If there should be any doubt on such cases, which we have established there never was, is is providedfor in § 11 of the same section, which says — " Generally, in all matters not hereinbefore particularly men- tioned, in which there is any conflict or variance between the Enles of Equity and the Rules of the Common Law with rel'erence to the same matter, the Rules of Equity shall prevail " Thus the Mercantile Law of England is now assimilated to that of Europe Tl' 276 THEORY OF CREDIT Section III On the Extinction of Obligations On the Limits of Credit 34. We have now to consider the various methods by which Obligations are extinguished. Crecjit being the Right to- demand some person to pay or do something : and Debt being the Duty of some person to pay or do something : of course when the Debtor lias paid or done the thing he is bound to do he has tulfilled and discharged his duty : and therefore the Eight of the Creditor is satisfied and extinguished : and*thus the Obligation is- annihilated and extinguished It has been shown over and o^'er again that Credit is the name of a species of property, commodity, or merchandise, of the same nature as, but inferior in degree to, money : that it fulfils exactly the same function as money as a medium of Exchange and Circulation. It is a property, commodity, er merchandise cumu- lative to money : and is in all its effects on prices and production exactly equivalent to an equal sum of monej Credit is in fact to money what steam is to water : and, like that power, while its use within proper limits is one of the most beuehcial inventions ever devised by the ingenuity of man, its misuse by unskilful and unscrupulous persons has produced the must fearful calamities. Credit, like steam, has its limits ; and we have now to investigate the proper limits of Credit : and to explain the various methods by which it is extinguished Credit, no doubt, is of the same nature as money : being the Right or Title to a future payment. But tfhere is this difference between them, that there is no time limited in which the holder of money shall demand a satisfaction for it; : nor is it limited to any particular satisfaction. He may keep it as long as he pleases, himself ; or he may transmit it to his descpndauts, and they may exchange it for a satisfaction at any time they please EXTINCTION OF OBLIGATIONS 277 But Credit is always created with the express intention of ■being, or of being capable of being, extinguished at a certain short definite time. It is unextinguished Credit which produces these terrible monetary cataclysms which scatter ruin and misery among nations. It is chiefly by the creation of excessive Credit that over-production is brought about : which causes those catastrophes called Commercial Crises : and it is the inability of Credit shops to extinguish the Credit they have created — ■commonly called the failure of banks — which is the cause of the most frightful social calamities of modern times The true limits of Credit may be seen by the etymology of the word. Because all Credit is the promise to pay or do something in future : and that something, whatever it is, is the Value of the promise or Credit. That something need not necessarily be money : it may be anything else : it may be any other chattel : or it may be a promise to do something The Credits, however, which are the subject of this work are always promises to pay money : and it is just on this point that literary Economists are utterly at fault. Because a Bill or Xote is an Obligation to pay money, many uninformed writers suppose that they must always be paid in Money or Bank Notes : and therefore that the issues of Credit have always a fixed relation to the quantity of money in a country : or in mathematical language are a definite function of it Thus Colonel Torrens, who was one of the influential sect who procured the enactment of the Bank Charter Act of 1844 says' — " A bill of exchange may also pass from purchasers to vendors many times a day : but no one of the successive transactions of ■which it is the medium can be finally .closed until the last recipient has received in Coin or Bank Notes the amount it represents " Now no doubt 300 years ago, as far as we are aware, it is true that bills were paid in money : but that has long ceased to be the case. At the present day probably not one bill in 10,000 is ever paid in money or banknotes : but by other methods which we have now to describe ^The Principles and Practical Operation of Sir .Robert Peels Act of 1844 explained and defended, p. 79 278 THEORY OF CKEDIT Those who imagiue that Bills and XoteS at the present day- are always paid in money have as much idea of the present organisation of the system of Credit as those who know nothing of the steam engine beyond the first rude attempts of "Watt, have of the last new triple expansion engines of the Etruria or the Vittiria . or as those who know nothing of a locomotive beyond George Stephenson's Kocket, have of the last new locomotive on the London and North-Western Kailway The only real difficulty in the case, as has been frequently observed, is for lay readers and writers to understand that a Eight of action, or Promise to pay, is itself independent exchangeable property, merchandise, or a chattel, quite distinct from the money promised itself, and that it circulates iij commerce by itself, exactly like money But of course the Value of the promiseitor Right of action is the thing itself : and consequently if the tiling itself is not forth- coming, the Right of action has lost its Value. This considera- tion at once shows the Limit of Credit. Assuming the Credit to be, what is its best known form in this icountry, the Right to demand Money, it is quite clear that as lon'g as a person has in his possession sufficient money, or ivliat is held to be Equivalent to Money, to discharge his Debt when it becomes due, the Credit has not been excessive In this section we shall consider only solid Credit ; by which we mean Credit which is redeemed at maturity ; reserving the abuses of excessive Credit and its consequences and remedies to a future chapter The futile nature of the speculations of lay writers on this subject consists in the fact that by the highly organised system of modern Credit, it is only an infinitesimal portion of Bills that are ever paid in money at all : but they are paid in the Equivalents to money The institution of banks and bankers who create Currency by means of their Credit, either in the form of Notes or Deposits, has enlarged the Limits of Credit at least a thousand fold : but 'yet the principle of the limit remains the sanie. Credit always has to be redeemed : and if this can be dofle the Credit has been sound. Hence Credit is never excessive, whatever its absolute amount may be, as long as it always returns into itself ON ACCEPXILATION 279 On the Extinction of Obligations 35. We have now to consider the various methods by which Obligations are extinguished. Credit being the Right to demand something to be paid or done : and the Debt being the Duty to pay or do that something : the Payment or the Performance of the thing promised fulfils, discharges, and extinguishes the Duty : as well as the Eight. And thus the Obligation is absolutely annihilated and extinguished Commercial Credit in this country is always expressed to be payable in Money: and it is often supposed that Bills of Exchange are always paid in Money or Bank Kotes. But as has been shown in the preceding paragraph that is a vital error There are other methods besides payment in Money, by which Obligations are extinguished. And in this country the amount of Bills which are paid in Money is infinitesimal compared to those which are paid in other ways There are four diiferent methods by which Obhgations may be extinguished : these are — 1. By Acceptilation : or Eelcase 2. By Payment in Money 3. By Novation : Eenewal or Transfer 4. By Compensation : or Set-off On Acceptilation : a^toouo-ts : aKKcu-TtXaTuui/ ; or Release 36. We have already described how the Ohligatio verbis, and litteris: or the oral or written Obligations were created When the Debtor came to repay the loans the proceedings were reversed. He brought the money tg his Creditor, and said something of this sort to him — " Quod ego tibi promisi, habesne acceptum ?" " Eave you received what I promised you 1 " " Habeo, acceptumque tuli " " / have, and have entered it as received" In this case the Debtor made an entry of money paid in his ledger, termed Expensilatio : and the Creditor made a correlative entry of money received in his ledger, termed Acceptilatio 280 THEORY OF CEEDIT These entries of Expensilatio and Acceptilatio, when once formally made in their respective ledgers of the parties were final and conclusive, and could not be questioned All Contracts or Obligations created by the mutual consent of parties may be extinguished, cancelled, dissolved, or annihilated by the same mutual consent of the parties by which they were created Consequently, if for any reason whatever, the Creditor chose to release the Debtor from his Debt without the actual payment of money, it was done by the solemn form of Acceptilatio The Debtor went through the legal form of question : and the Ci-editor went through the legal form of answer: and then made the formal entry of Acceptilatio in his ledger. It was then a valid and final Release : and it could not be questioned or disputed So, at present, if a Creditor gives a Debtor a formal written receipt for money due : it is a valid and final release of the Debt "We shall hereafter give some examples of Acceptilation which may surprise some of our readers For Acceptilation, see Gains, III., 169-175 ; Institut. Justin., III., 29, 1 ; Theophilus, III, 29 ; Digest XLVI., i ; Basihca, XXVI., 9 The Release of a Debt is in all cases equivalent to a Gift or Payment in Money 37. Euler, as we have seen above, says that if a person has nothing, and owes 50 crowns, his property ;is 50 crowns less than nothing. His property is (— 50) crowns : i.e., he is under the Duty to pay 50 crowns, and has nothing to'pay them with He then says that if any person made the Debtor a present of 50 crowns to pay his Debt with, he would be 50 crowns richer than he was before : though his property would then be Eulcr is right so far as he goes : but he has only stated one side of the case. Because the same resuli; may be attained in another way RELEASE OF A DEBT 281 As the same result follows, whoever giyes him the 50 crowns, •we may suppose his Creditor makes him a gift of 50 crowns. The Debtor then may give his Creditor back his 50 crowns : and he so discharges his Debt. The Debtor is now 50 crowns richer than he was before : and his property is now Now if Money be Positive, + , the Gift of Money is also + : and therefore the Gift of Money is + x + which equals +. But there is another combination of signs which gives +: and that is — X — ; and tliere is another way of arriving at this result Suppose that instead of the double operation of the Creditor giving his Debtor 50 crowns : and receiving them back in dis- •charge of his Debt : he simply Releases the Debtor from the Debt. Then the Debtor would be 50 crowns richer than before and his property would be Now a Debt is — : and taking away or Releasing is also — : hence Releasing a Debt is — x — . Hence Releasing a Debt is absolutely equivalent to making a Gifi of Money : that is — X — ^ + X +in Economics : as it does in every other branch of science This example shows that the Release of a Debt is in all cases whatever, equivalent to the Gift or Payment of money : a principle ■of immense importance in commerce : and the application of which may surprise some readers So the Digest, 1., 17, 115, says — " Qui Obligatione liberatur videtur cepisse quid" And Basil., II., 3, 115 — "o i\iv9ipov/iivos ivoxv's So/cet rt ■€lXy](f)€vai. " "Be who is Released from an Obligation has gained" So the Digest, L, 17, 150—" Per accept! quoque lationem egens debitor etiam earn pecuniam qua liberatus est, cepisse videtur" "An insolvent debtor being freed by a Release, has gained the Jull amount of what he is released from " So Pothier sayi— " A Release is a Donation " So Ortolan says^— "The Release from a Debt is always classed as a Donation in Roman Law " 'Traite des OUigations '^Explication Historique des Inst. Just., Liv. il, tit. 7. % 543, 557 282 THEOKY OF CREDIT So Von Savignyi — " A simple Contract or the Release of a Debt, may be the subject of a Donation " Also^ — " The increase of Wealth may result from a Credit given to the Debtor, or the Release of a Debt " Every "Release of a Debt enriches the Bettor. The amount, of the Donation is always equal to that of the Debt, even though the debtor is insolvent. Although the Eelease from a Debt destined never to be paid seems a thing of no consequence, the increase of property does not the less exist. In effect not only does property represent a quantity always indeterminate, but its. total Value may also be either Positive or Negative [Negative Property is the Inverse of a Right, i.e., a Debt or Duty.] If then Property is reduced to a Negative Value, the Diminution of Minus is in Law a change identical with the increase of Plus for a Positive Value." (That is — x — ^ + x +) "The Release of a Debt' always constitutes a Gift equal to the ..amount of the Debt, even though the debtor is insolvent " So the Eelease of a Debt to a debtor may be a Legacy Apjjlication of the Principles of Algelra and Mercantile Law to Commerce 38. It has now to be shown how thb Algebraical doctrine that — X — = + X + ; and its Legal equivalent the Release of a Debt is in all cases equivalent to a Payment in money : are applied in Commerce Suppose that I owe £100 to a banker : in how many ways can I pay him ? 1. I may pay him £100 in actual money : that is + x + 2. If I happen to possess £100 in his Notes : I may tender him his own Notes : or if I have an account with him : I may give him a cheque on my account : that is, in either case I Release him from his Debt to me : that is — x — That is, Releasing the banker from his Debt to me is Paying my Debt to him ' Traite de droit Homain, Liv. il., ch. 3, § 142 'rUd, § 155 ^ Traits de droit Bomain, Liv. ii., ch. 3, § 166 RELEASE OF A DEBT 283 3. I may pay him £50 in Money : and £50 in his own Notes : or by Cheque on my account Paying him in money is + x + : tendering him his own notes : or giving him a cheque on my account : is — x — : and the combined effect of tlie two is to discharge and extinguish my Debt of £100 Thus I may pay a Debt to my banker entirely in money : entirely in his own notes, or by cheque : or partly in money, and partly by notes or cheque : and the effect Of these several modes of payment is absolutely identical Thus it is seen that the doctrine that taking away a Negative Quantity is absolutely equivalent to adding a Positive Quantity is universally true in all branches of science That is in all sciences whatever — x — = + x + : and in Mercantile Algebra it is to be thus intei'preted — " The Eelease of a Debt is in all cases equivalent to a Payment in Money " The Release of a Debt map be held to extinguish an Obligation in Three different ivays 39. There are three different methods in which the Eelease of a Debt may be considered to extinguish ^n Obligation 1. First Method. — As the Obligation was created by the mutual consent of the parties : so it may be cancelled and extinguished by the same mutual conseiit which called it into existence Now as we have seen that, by the general principles of the Theory of Signs, to create an 'Obligation is denoted by + -Pino I = so t'O cancel, extinguish, or annihilate an Obligation is denoted by — \ £i aq f Now let us observe the effect of the Negative Sign on each of the parties to the Obligation 284 THEORY OF CREDIT The Creditor's property becomes — (+ £100) : But — (+ £100) = — £100 That is, the Creditor has lost £100 The Debtor's Property becomes — (— £100) : But — (— £100) = + £100 That is, the Debtor has gained £100 Which shows that to Cancel or Release a Debt is exactly equivalent to making a Gift of Money Second Method. — As the Creditor's Right of action is simply a piece of merchandise: goods and chattels: or a commodity: it may be the subject of a donation or gift : exactly like any other chattel or commodity The Creditor may present Ids Right of action as a donation or gift to the Debtor himself Then the Debtor will have the Right to demand (+ £100) from himself : and also the Duty to pay ( — £100j to himself Then his property will be + £100 — £100 These two Quantities cancel and extinguish each other, like + a, and — a, on the same side of an equation. They vanish together: the Right is not in abeyance: it is abso- lutely extinguished. The (+ £100) cejases to exist as well as the ( — £100) ; and thus, the Obligation is absolutely extinguished The Creditor has lost £100 : and the DelDtor has gained £100 Thus, if a person makes another a gift of £100 in actual money : and also Releases him from a Debt of £100 : the donee has received a gift of £200 "When Sir Joshua Reynolds died he held a bond of Burke's for £2,000. By his will he Released Burke from his bond of £2,000: and, besides that, he bequeathed him £2,0D0 in money. Conse- quently Reynolds bequeathed £4,000 to Burke 3. Third Method. — There is still a third method by which it can be explained When a Debtor is presented with a Right of action against himself he fulfills two persoice, or characters ; he is Creditor to himself : and he is also Debtor to himself WHEN (+£100) CANCELS (—£100) 285- 111 his persona of Creditor, he presents his Right of action to> himself ia his persona of Debtor, In his persona of Debtor he pays the Right of action to himself in his persona of Creditor. Hence, the Duty is fulfilled and discharged, just as much as if he had paid it to anotber individual And thus the Obligation is not in abeyance: it is cancelled and extinguished WJien + £100 Cancels and Extinguishes — £100 ; and ivhen i( does not 40. It must, however, be carefully observed that (+ £100} and ( — £100) in the same person do not always, and in all cases,, cancel and extinguish each other in Economics A person's property may be represented by ( + £100)( — £100): and, therefore, for practical purposes, be equal to : yet these two quantities will not cancel and extinguish each other in Economics It is only when the person has the Right to demand from ]i,im,seJf: and the Duty to pay to himself: that both quantities vanish : and the Contract or Obligation is extinguished Suppose that a person has £100 in a banker's Notes : and at the same time owes some oiher person £100 Then his property will be ( + £1 00) ( — £100) : and his property will in substance = But, in this case, the ( + £100) and the( — £100) do not cancel and extinguish each other : the (+ £100) is not extinguished as. an Economic Quantity Because the Debtor may pay away the £100 in Notes in commerce: and leave his Debt unpaid Suppose that two bankers each hold £100 of the other's Notes. Then the property of each banker is (+ £100) (— £100) : and in substance = The reason of this is obvious: because,'if a person has a Right of action against A . that is no fulfilment of his Duty to pay B But, in this case, the (+ £100) andthe*(— £100) do not cancel and extinguish each other : because each banker may pay away the Notes of the other in commerce : and, therefore, there are £200 of Economic Quantities in existence 286 THEORY OF CREDIT If, however, they exchange Notes, each banker will then have the Right to demand £100 from himself: and the Duty to pay £100 to Mmsalf Then each of the Obligations is simultaneously extinguished : because each banker has performed his Duty of paying the other by releasing him from his Debt Thus the £200 Economic Quantities vanish out of existence Hence, it is only when the Right and tie Duty emanate from the same person : and are again re-vested in the same person from whom they emanated, that (+ £100.) and (— £100) cancel each other : aud the Obligation is extinguished On Payment in Money 41. The preceding considerations will explain how a Payment in Money extinguishes an Obligation : which very few persons have ever thought of Suppose that a person possesses £100 and owes a Debt of £30 ; then his property will be £100 — £30 ; that is he possesses £100 ; but coupled with the Duty to pay £30 at some given time His Creditor's Right to demand is + £80 When the Creditor demands payment of his Debt, he brings his Right of action to the Debtor who gives him £30 in money in exchange for it : that is, the Debtor buys up the Right of action against himself The Debtor's property is then £70 + £30— £30 ; that is £70 in money : together with the Right to demand £30 from himself, and the duty to pay £30 to himself The + £30 and the — £80 cancel anji extinguish each other by either the second or the third methods described above : the 'Obligation is extinguished : and the Debtor's property is now £70 The transaction is therefore seen to be a Sale or Exchange Thus the Obligation or Contract was originally created by the Sale or Loan of the Muluwm : and it is extinguished by the sale or exchange of Payment Thus an Obligation is created by one exchange, and is extin- guished by another ON CONFUSIO 287 On Confusio: /xi^i's 43. When a Right of actioa against a persoa comes in any way into his own possession, so that he has both the Right to demand from himself and the duty to pay to himself, it is termed Confusio or concursus Debiti et Orediti in Roman Law : and yuifts in Greek Law It was universally agreed that the Confusio : /xi|ts : or concursus debi/i et credili of a simple Debt extinguished the Obligation : but how it does so has given rise to much subtle speculation : and for centuries puzzled Jurists and Divines. The Divines alleged that a Right once created cannot be destroyed : and the Jurists said that the Right being transferred to the Debtor he cannot sue himself: and, therefore, that the Obligation is extinguished This explanation, however, is not satisfactory: because in many cases a man can sue himself : he may fulfil two characters or personce, and as one character, ov persona, he may sue himself as another character or persona Moreover, this would only show that the right is suspended, or in abeyance : and not that it is extinguished : and many eminent Jurists seem to take this view' Moreover, in several cases a confusio, or concursus debili et crediti, occurs, in which the Right and the Duty unite in the same person and are not extinguished : but may afterwards be separated^ The considerations, however, which we have presented will give a complete solution of the case When one party is a Creditor and another party is a Debtor, they are two characters, or persona If, then, the Right of action comes into the possession of the Debtor, he now fulfils two characters or persona. The two personce, exist, though now united in one party, just the same as they did when in separate parties. And these two ^je/sowce may deal with each other in exactly the same way as when they were separate parties. And the ObUgation is extingushed by either of the three methods described in § 39. The Obligation then is not suspended: or in abeyance : it is absolutely extinguished ' Stair's InstUntes 'BeU, Dictionary of the Law of Scotland, Art., Confusion 288 THEORY OF CREDIT On Novation : ixirddia-i's : Renewal or Transfer 43. A Contract, or ObligatioD, may also be extinguished by substituting a new Obligation for it. The new Obligation pays, discharges, and extinguishes the preceding one : and the extinction of the preceding Obligation is the consideration for the new one This is termed Kovatio in Roman Law : fierdOeati in Greek Law : and Renetual or Transfer by us This Novatio may take place iu two ways — 1. The Debtor may give the Creditor a new Obligation of bis own in payment of the old one, which the Creditor accepts in lieu and substitution of the former one The New Obligation is the Price or Payment of the former one which is thus extinguished As, for example, when a banker agrees to renew a Promissory Note for a customer : the new Note is payment of and extinguishes the former one, and no Debt or Duty to pay arises until the new Note is due Or, when a Creditor has a Debt due to him payable on demand ; and he agrees to take a Promissory Note from his Debtor payable in three months. Tiic Note pays and extinguishes the Debt payable on demand : the extinction of the debt payable on demand is the consideration for the Note. And no Debt or Duty to pay arises until the Note becomes due This form of Nuvatio is called Eenewal by us 2. The Debtor may, in payment of his own Debt, transfer to his Creditor a Debt due to him from: some one else. If the Creditor agrees to receive this Debt due to his Debtor in payment of the Debt due from his Debtor, the new Obligation due from the Debtor's Debtor pays and extinguishes the Obligation due from the Debtor himself But the Creditor may retain his own debtor as surety, in case of the new debtor's failure to pay A familiar instance of this is where a Debtor pays his Creditor in Bank Notes. If the Creditor agrees to atcept these in payment, of the debt, the debtor is discharged : and the Creditor agrees to take the banker as his new debtor CO^rPENSATION 289 So when a Debtor gives Ills Creditor a Bill of Exchange upon another person in payment of his own debt So, if a Creditor and Debtor are customers of the same bank^ the Debtor may give his Creditor a Cheque on his account in payment of a Debt. If the Creditor accepts this Cheque he pays it into his own account: the banker transfers tlie Credit Ironi the Debtor's account to the Creditor's : the debt of the banker to the Transferor is extinguished : he becomes debtor to the Transferee. The Transferor is released from his debt to the Transferee who accepts the banker as his new debtor This form of Novatio is termed Transfer This Novatio : or /iera^to-ts : is equivalent to a Payment in Money Digest, 1., 16, 187. " Verbum exactse pecunife non solum ad Solutionem referendnm est sed etiam ad Delegationem " Basil., XXV., 5,56. '''' piijxa twv aTrairijO^VTuiv )^prjfJi.aT(ov ov iwvov eis KaTapoXrjv dva(j}€pea9ai, Set, dXXa Kol es eKTa^iv " 27ie ivord Payment includes vot only payment in Money, hut also the Transfer of a Credit " Digest, xlvi., 3, 56. " Solvit et qui ream Delegat" "He pays who transfers another debtor" Digest, xlvi., 2, 27. " Delegare est vice sua alium reum dare Creditori, vel cui jusserit" " To Delegate is to give another Debtor instead of one's self to the Creditor, or to his order" On Compensation : ai/TefeVao-ts : aVreXAoyos or avTeXoyio-/xos : or Set Off 44. If two persons arc mutually indebted at the same time, each may claim that the Debt which he has*against the other shall be taken in payment of the Debt he owes This is termed Compensation. — Gains, iv., 61-68. Institut. Just., iv., tit. vi., § 38, 39. Digest, xvi., 2;, 1— "Oompensatio est Debiti et Crediti inter se contributio " Basilica, xxiv., 10, 1 — " ai/Te^erao-ts etmv -xpiovs koI Savet- tryu-aros avriXkoyn^ " " Compensation is the mutual Set Off of Debts and Credits " U 290 THEORY OF CREDIT If the mutual Debts are equal each is payment in full for the other: they are weighed and Set Off against each other If one Debt is greater than the other, equal amounts compen- sate each other : and the balance only is due in Money Simple as this may appear, it took a long time, both in Eoman and English Law to arrive at it In early Roman Law Compensation *as not allowed as a matter of right : each Creditor had a Eight of action against the other Afterwards, in the time of Gains, compensation was not held to be payment : but the PrsBtor or Equity Judge allowed a counter debt to be pleaded as a defence in an action of Debt Marcus Aurelius allowed it as a mattgr of right : and thus, mutual Debts became Money, or Legal Tender, with respect to each other Digest, xvi., 2, 21 — " Oompensationes debitorum ipso jure fient " Basil., xxiv., 10, 21 — "oi rav ^tw years before. lu a letter addressed to the Abbe de Gic^i he used an expression which has been the keynote of a fallacy, which^ developed by Say and Mill, has been sedulously propagated by numerous writers, and has done boundless mischief to the subject He says — " In a word, all Credit is h Loan : and has an essential relation to its repayment " Here we see the gross confusion of ideas on the subject of Credit which is so prevalent at the present day. In this passage we see that Turgot considers Credit to be an Operation. We have shown that Credit is the Present Eight to a Future Payment : and how can the Right to a future payment be an Operation ? It would be just as rational to say that a guinea or a bill of exchange is a loan. Turgot aays that every Credit implies a future payment : and for that reason it has Value : and it may be bought and sold like any material chattel, such as- money : but that does not make a Right a Transfer Turgot's remark, therefore, that every Credit implies a future payment, had nothing to do with the question of Law's paper money. As long as Law confined himself to Credit, his Bank was magnificently successful, as we have shown elsewhere.^ It- was not his system of Credit which produced the catastrophe : but his system of Paper Money : which was not redeemable in money : hence Turgot's remark had no application to the- question ^(Euvres de Turgot, i., p. *S3 ^Dictionary of Political Economy SAY ON WEALTH 299 On the Self-Contradiction of Say on the subject of Credit 3. 1. J. B. Say, following up the erroneous notiou of Turgot on the nature of Credit, invented the phrase which so many unthinking writers have echoed from that day to this — that those who consider Credit to be Capital, maintain that the same thing can he in two places at once ! ! "We shall show that all this confusion has arisen from Say never having thought out carefully the fundamental concepts of the science : and from his self-contradiction on almost every one of them. Say's name formerly stood so high in the subject, and his sneers have been chorussed by such a multitude of writers in France and England : and the matter is in itself of such trans- cendent importance, that we are compelled *to give some space to a thorough investigation of his views. We must, therefore, inquire into his notions of Wealth, Value, Capital, and Credit On Say's Definition of Wealth 2. It is very commonly supposed that Say was the first writer to introduce immaterial products into Economics. This, however, we have shown is an error, as Smith expressly enumerates " the acquired and useful abilities of the inhabitants " as part of the Wealth of the society. We have also shown that Smith includes Paper Credit under the term circulating Capital. Thus, recognising the existence of the Three species of Wealth, Say does exactly the same ; and also enumerates several other kinds of Incorporeal Property Say defines Wealth thus^— " The exclusive possession which, in the midst of a numerous society, clearly distinguishes the property of each person, causes this sort of thing to be the only one to which, in common language, the naqie of Wealth is given From this circumstance not only these things which are capable of satisfying directly the wants of man such as nature and society have made him, but the things which can only satisfy them indirectly, by furnishing the means of procuring that which serves directly as ilouey, Instruments of Credit (THres de Creance) the Funds, &c." ^Guurs,, Pt., i, ch. 1 300 THEORY OF CREDIT Again, after speaking of thiDgs of Value, such as the earth, metals, money, oorn, stuffs, &c., he says^ — " If one gives also the name of wealth to the Funds, Commercial Paper {Effets de Commerce,) it is clear, &c." Again he says- — " You see that Wealth does not depend on the kind of things, nor upon their physical nature, but on a lloral Quality which each one calls their Value. Value alone transforms a thing into Wealth, in the sense in which this word is synonymous with liens or property. The Wealth which resides in anything, whether it be land, ,a horse, or a Bill of Excliange, is proportional to its Value. When we speak of things being Wealth, we do not speak of other qualities which they can have : we only speak of their Value " Thus, we have shown most conclusively that Say makes the ]irinciple of Wealth to reside exclusively in Exchangeahihtij : in accordance with the unanimous doctrine of ancient writers for 1,300 years : and he expressly enumerates Titres de Criance, and Effets de Commerce, that is Negotiable Paper, or Credit, as Wealth On Say's Definition of Value ?>. We shall find exactly the same inconsistencies in Say's notion of value as has been the ruin of so much modern Economics. He over and over again says that Value is something external to an object, for which it can be exchanged ; and then he repeatedly speaks of Intrinsic Value, without the least idea that these are contradictory conceptions To show this we can only quote a few passages out of many. Tims he says^ — " The second circumstance to be remarked relating to the Value of things is the impossibility to appreciate its absolute magnitude. It is never anything but comparative. When I say that a house which I point out is worth 50 thousand francs, I aflBrm nothing but that the Value of this house is equal to the sum of 50 thousand francs : but what is the Value of this sum ? It is not a Value existing by itself, and withont, a comparison. T'he Value of a franc, of 50 thousand francs, is composed of all the things which one can buy for these different sums. If one ' Traite, Bk. i., oh. 1 »Cowrs, Pt. i., oil. 1 ^ Corns, Pt. i., oh. 1. SAY ON VALUE 301 can, in giving them in exchange, have a greater quantity of corn,, sugar, &c., they have a greater Vahre relatively to these other- things : if one can have less, they have less Value : because the Value of a sura of money, like all other Values, is measured by the quantity of things which .one can get ih exchange " The idea of Value resembles the idea of distance. We cannot speak of the distance of an object, without making mention of another object from which the first finds itself at a certain distance. In the same way the idea of the Value of an object^ always supposes a relation with the Value of something else." That is to say, it is manifestly just as absurd to speak of Intrinsic Distance as of Intrinsic Value Again he says, in the same chapter — " These same principles- show that gold, silver, and money are not sought for themselves, and are only of the Value of what they can buy " We need not overload our pages with niore quotations. These are sufficient to show that Say fully admits that the Value of a thing is wiiat it will exchange for : if it will exchange for more it has greater Value : if it will exchange for less it will have less Value : and if it will exchange for nothing it will have no Value Moreover, Say repeatedly acknowledges that Value is a quality of the Mind : and that it is the Mind of man only which confers Value. Thus, he says^ — '' Nevertheless, Value is purely a Moral Quality : and which appears to depend upon the fugitive and changeable will of men " So also—" In order that a Value may he Wealth, this Value must be recognised not by the possessor oijly, but by every other person " Here Say admits that Value does not depend upon a single mind, but upon more than one. He goes too far in saying that it must be recognised by every one else. Two minds are necessary and sufficient to constitute Value So also, he says^— " The Value which men give to things . . It is always true that if men attach Value to a thing "' ' C'ours, Considerations Gaurules ^Traite,^. 67 302 THEORY OF CREDIT Now, we have sliowa in these passages, and we might have cited multitudes of others, if it had been necessary, that Say clearly admits that Value is not an absolute quality of a thing: that it is external to itself : that the Value of a thing is anything else for which it can be exchanged : that Value originates in the Mind of man Now, after these admissions, what can be more contradictory or absurd, than for Say repeatedly to speak of Intrinsic Value ? On Say's Definition of Capital 4. We have now to lay before our readers the extraordinary self-contradictions of Say on Capital Saij asserts that Immaterial and Incorporeal Quantities form No jMrt of National Wealth He says^ — "The nature of Capitals, the nature of their functions show us very important truths. One of them is, that Productive Capitals do not consist in fictitious and conventional values (?) but only in real and intrinsic (!) values, which their possessors judge convenient to devote to production. In fact, one cannot buy productive services except "with material objects havinj;; an inlriiisic (!) value. We cannot amass as Capital, and transmit to another person anything but values incorporated in material objects" Again^ — " From the nature of immaterial products, it follows that we cannot accumulate them, and that they do not serve to augment the national capital. A nation in which there is found a crowd of musicians, of priests, of employes, may be a nation very much amused, well taught, and admirably well administered : but that is all. Its capital does not receive from the labors of these working men any direct increase, because their products are consumed immediately they ai-e created " Again^— " All transmissible Capital is composed of JIaterial Products, for nothing can pass from hand to hand but visible matter " 1 Cours, Pt. i., ch. 10 ^Ti-ait6, Bk. i., oil. 13 ^Definitions at the end of the Traits SAY ON CAPITAL 303 Say maintains that Immaterial and Incorporeal Capital is ^art of the National Wealth He saysi — " Since it has been proved that Immaterial Property, that talents, and acquired personal qualtties, form an integral portion of social wealth " Again, he says^— "We must include among Capitals many bieyis which have a Value although they ni'e not material. The Practice of a lawyer or a notary : the Goodwill of a shop : the Eeputation of a sign : the Title of a periodical work : are incon- testably wealth : we may sell them and buy them, and make them the subject of a contract: and they are Capitals; because they are the frnits of accumulated labor. Xlawyer, by the wisdom of his advice, by his assiduity: and other qualities, has made the pubhc conceive a good opinion of his chambers : this good opinion gives him the right to larger fees : this increase of profit is the revenue of a Capital called reputation: and this Cnpital is the fruit of the labor and care which the lawyer has taken during many years " He also says in a note — " There are Capitals which are not incor- . porated in material things, as the practice of a notary or a commercial enterprise : but this portion of Capital is a very real Value " Again — " The only immaterial Capitals which I know of are the Practice, the Goodwill of a shop : a Profession, of a news- paper: one can alienate, one can sell, a Capital of this species" So againi — " Witiiout a classificatiori of things possessed embraces them all in making a valuation of the wealth of a nation, we are never certain of making them complete "Our property comprising our Wealth, whatever it is, com- prises our Natural Qualities, as well as our-social riches " And, after going through several descriptions of personal talents, he says—" What I have said is sufficient, I think, to •convince you that Industrial faculties are Property of the same kind as all others : and, it is only in regarding them as equal to all others that we obtain all the social advantages attached to the Eight of Property. For the same reason this kind ^ Corns, Considerations Ginirales ''Cours, Pt. iv., ch. 5 304 THEORY OF CREDIT of Property, although it is difficult to be expressed in figui-es^ forms, nevertheless, part of the general Wealth of a nation. A nation where industrial capacities are more numerous and more- eminent than elsewhere is a more wealthy nation " These extracts require no comment Say admits that Instruments of Credit are Capital 5. We shall now show that Say explicitly declares that Credit- is Capital He saysi — " This is why from the moment that this Value resides in objects employed in a productive operation I name it Capital, whatever be the objects in which it resides " Again^ — " These Capital Values may consist of the Public Funds, Commercial Paper, coffee-berries, or any other merchandise which will sell " Again^ — "The form under which Capital Value presents itself makes no difference " He then enters into the subject more m'inutely^ — " A Bill on demand, or a bill of exchange are obligations contracted to pay, or cause to be paid, a sum either at another time or at another place" The Right attached to this order (although its Value is not demandable at the time or the place where one is) gives it, never- theless, a Present Value, more or less great. Thus a bill for 100 francs, payable at Paris, in two months, may be negociatcd or sold for the price of 99 francs : a bill for a similar sum payable at ]\Iarseilles at the same time, will be worth at Paris perhaps 98 francs " Hence, a bill of exchange, by virtue of its future value, has. a Present Value : it can be employed instead of money in every species of purchase, so that the greater part of the great com- mercial transactions are effected by bills of exchange " Again, he says'* — " There is, nevertheless, an important observa- tion to make relating to the representative signs of money. It is that they are capable of rendering a service exactly similar to the 1 Cours, Pt. iv., p. 131 ^Gours, Pt. i., ch. 5 ^Cours, Pt. i., p. 135 ^TraiU, Bk. i., ch. 30 ^Cmirs, Pt. iii., div. 3, ch. 27 SAY ON NEGOTIABLE PAPER 305 money they represent. If any one sig'ns an Obligation by which he binds himself to deliver, at affixed period, a cloak, made in such a fashion, this promise, although it is in some sort a sign, or pledge, of the possession of the cloak, cannot take its place: because a sheet of paper does not protect from cold, like a cloak : whilst the signs which represent money, can replace it completely, and render all the services which it can. In fact, the qaahties which make a bag- of money serve us in exchanges can be found in a bill. Thfese qualities, you will remember, are — " First, in the Value which it has. One can give a bill exactly the same Value as to a sum of money : in 'giving the bearer the right to receive the sum, so as to take away from him all doubt as to the payment : it is that a bank note can circulate ten years- in preserving a value of a thousand francs without being paid, only because one believes that he will be the moment he pleases " We have thus laid before our readers the explicit admission of Say that an Instrument of Credit may be of the Value of money, and perform all the functions of money He further says^ — " Every private person can sign an ordinary bill, and give it in payment of merchandise, provided that thft seller consents to receive it as if it were money. This seller in his turn, if he is the buyer of other merchandise, can give the same bill in payment. The second acquirer can pass it to a third with the same object. There is an Obliga,tion which circulates : it serves him who wishes to sell : it serves Jiim who wishes to buy : it fills the ofBce of a sum of money " The Value of a sign depends on the value of the thing signi- fied : but, in order that this value may be exactly as great as that of the thing of which it is the pledge, the payment of the bill must not only be certain, but demandable on the instant . . . " If bills of Credit could replace completely metallic money, it is evident that a Bank of circulation veritably augments the sum of National "Wealth : because, in this case, the metallic Wealth becoming superfluous as an agent of circulation, and, nevertheless, preserving its own value, becomes disposable and can serve other • Cours, Pt. iii., cli. 18 W 306 THEOKY OF CREDIT purposes. But how does this substitution take place ? What are its limits ? What classes of society make their profit of the interest of the New Funds added to the Capital of the nation ? " According as a bank issues its notes, and the public consents to receive them on the same footing as metallic money, the number of monetary units increases " We must not, however, think that the value withdrawn from the sum of money, and added tcr the sum of Capital merchandise, equals the sum of notes issued. These only represent money when they can always be paid on demand : and for that the bank is obliged to keep in its coffers, and conse- quently to withdraw from circulation, a certain sum of money. If, suppose, it issues 100 millions of notes, it will withdraw, perhaps, 40 millions in specie, which it will put in reserve to meet the payments which may be demanded of it. Therefore if it adds to the quantity of money in circulation 100 millions, and if it withdraws 40 millions from circulation, it is as if it added only 60 " We now wish to learn what class of society enjoys the use of this New Capital ? " Say then goes on to explain how this New Capital is employed, and who reaps the profit of it Now, we have shown our readers, by the most unimpeachable evidence, that is by extracts from himself, that Say maintains that Credit is Capital: and yet, perhaps, they will be surprised to hear that Say was the writer who originated the sneer that those who say that Credit may be used as Capital maintain that the same thing may be in two places at once ! ! Say maintains that those ivho say that Credit is Capital affirm that the same thing may be in two places at once 6. We shall now place before our readers the passages in which Say maintains that those who say that Credit is Capital are such puzzle-headed dolts as to affirm that the same thing may be in two places at once SAY ON CREDIT 307 He says^ — " It is sometimes thought that Credit multiplies Capital. This error, which is found frequently reproduced in a crowd of works, of which some are written professedly on Political Economy [Say's own work for example] supposes an absolute ignorance of the nature and functions of Capitals (!) A Capital is always a very real Value fixed in a matter. [Say has himself given several examples of Capital which are not fixed in a matter] : because immaterial 2)roducts are not stcscpptible of accumulation (!) : and a material product cannot he in two places at once, and serve two persons at the same time. [Who said it could ?] The con- structions, the machines, the provisions, the merchandise which ■comprise my Capital, may be the amount of the Values I have borrowed : in this case, I carry on my industry with a Capital which does not belong to me (!) and which I hire : but certainly the Capital which I employ is not employefl by another. He who lends it to me is debarred from the power of working it elsewhere. A hundred persons can merit the same confidence as I : but this Credit, this confidence merited does not multiply the sum of disposable Capitals : it only causes less Capital to be kept without use " He also says^ — " The manufacturer who buys on Credit raw materials, borrows from the seller the value of this merchandise for the time of the Credit which he gives him : and this Value which he lends him is furnished in merchandise, which are material values " Hence if one can only borrow and lend Capital in material objects what becomes of the maxim that Credit multiphes Capitals ? My Credit can cause me to dispose of a material value which a capitalist has placed in reserve : but if he lends it to me, he remains deprived of it : he cannot lend it to another person at the same time : the manufacturer who uses this value, who consumes it, to accomplish a productive operation, pre- vents another manufacturer employing it in his own " The reader has only to compare thes'e extracts drawn from Say himself to be amazed at their" contradictions ' Traiti, Bk. ii., ci. 8 ^Cours, Pt. i., ch. 9 W 2 308 THEORY OF CREDIT In the first set Say himself admits Instruments of Credit are "Wealth : and he admits that if a Bank can maintain in circulation a greater amount of notes than it keeps gold in reserve, it augments by so much the Capital of the country In the second set he considers the Credit to be the material goods lent, and then he asks, with a triumphant sneer, how cam the same material goods be in two places at, once ! ! We need not say a word more On the Self-contradiction of Mill on Credit 4. 1. Turgot was the writer who, as we have shown above,, started the erroneous notion that Credit is the Transfer of some- thing J. B. Say further extended the error by, supposing that Credit is the Goods which are "lent :" and then he ridiculed the doctrine that "Credit is Capital" by sneeringiy reniarking that the same thing cannot be in two places at once ! These two sentences have been repeated by a multitude of unthinking writers in France and England from that day to this The number of writers who have reiterated these absurdities- is so great that we have no room to notice them : especially as we have shown the misconceptions and self-contradictions of Turgot and Say who are the sources of the errors AVe have now to examine the doctrines of Mill, who has joined in the sneer, and see whether he is more consistent with himself than Say Mill admits that Personal Credit is Wealth 2. We have first to show that Mill admits that Personal Credit is Wealth In accordance with the unanimous doctrine of ancient writers for 1,;jOO years, Mill says^ " Everything, therefore, forms a part of Wealth which has Purchasing Power" ^Preliminary Bemarhs, p. 4 MILL ON CREDIT 309 Then, he says^ — " For Credit though it is not ' Productive Power is Purchas- ing Power . . . .' " " The Credit which we are now called upon to consider as a Purchasing Power . . . ." Again'' — "The amount of Purchasing Power which a person can exercise is composed of all the Money in his possession and due to him [i.e., of all the Bank Notes, Bank Credits, Bills of Exchange, &c., belonging to him] and of all his Credit" " The^ inclination of the mercantile public to increase their demand for commodities by making use of all or much of their Credit as Purchasing Power " " Credit,* in short, has exactly the same Purchasimj Power as Money " Now if Mill lays down the doctrine that — " Everything which has Purchasing Power is Wealth " And if he says that — " Personal Credit is Purchasing Power " Then the necessary inference is that- Personal Credit is Wealth That is a Syllogism from which there is no escape Mill admits thai Giedit -t'.s an Independent and Transferable Quantitij. 3. The heading of one of Mill's chapters' is—" Of Credit as a Substitute for Money." Now, if one quantity can be a substitute for another, it must be of the same general nature. If a person wants wine and cannot get it, he may put up with beer as a substitute : but a pair of shoes could never be a substitute for a glass of wine Now, if Credit can be substitute for Money, Credit must be of the same general nature as Money. But Money is an Independent Exchangeable Quantity : hence Credit must also be an independent Exchangeable Quantity ^Bh. iu., ch. xi., § 3 -'Bk. iii., Ch. xii., §2 Hiid., § 3 ^liid-^ § 3 '■Bh. iii., ci. xi. 310 THEORY OF CREDIT Accordingly, Mill speaks' of — " Credititransferable from hand to liaud" He also says^ — " But we have now found that there are other things, such as Bank Notes, Bills of Exchange and Cheques^ [which Mill admits are Credit] which Circulate as Money : and perform all the functions of it " Hence we see that Mill admits that Credit is an Independent Quantity and Circulates exactly like Money. 3IiU admits that Eights are Wealth 4. Having shown that Mill admits that Personal Credit i& Wealth, we have now to show that he admits.that Eights are Wealth He says' — " An Order, or Note of hand, or Bill of Exchange, payable at sight for an ounce of gold while the Credit of the giver is unimpaired, is worth neither more nor less than the gold itself " That is, as the Italian proverb says — " Che oro vale, oro e " — ■ " That which is of the value of gold is gold " That is. Mill admits that an abstract Eight which is sure of being paid in gold, whether recorded on paper or not, is of exactly the same value as gold These Eights include Banking Credits, Bank Notes, Cheques,- Bills of Exchange : Book debts of traders : and private or personal debts Now, these Eights are all included under the title of Credit. Hence Mill admits that Credit in all its forms, which is sure of being paid in gold, is of the same value as Gold : and, therefore, is Wealth equally with Gold All these Eights, or Credit, are payable in a definite sum in Gold : and, therefore, they liave a fixed value of gold But there are a vast variety of other kinds of Eights, which, though not payable in a definite sum of gold, are yet saleable for gold. These are Shares in commercial companies : Copyrights : Patents : the Goodwill of a business, &c. These are all saleable commodities : and, therefore, they are of the value of the Money they will sell for 'Bk. iii., oil. xii., | 5 'BJc. iii., ah. xii., § 1 ^Bk. iii., cli. xii., ^ 1 MILL ON CREDIT 311 Mill also^ speaks of Credit in the form of Bank Notes, Cheques, Promissory Notes, Bills of Exchange, &c. Now, all these documents are Eights to a future payment : therefore Mill admits that a Credit is the Present Right to a Future Payment Mill admits that Credit may le used as Capital 5. We have shown that Mill admits that Credit circulates as Money, and performs all the functions of it Now, one of the functions of Money is to be used as Capital : and therefore, if Credit performs all the functions of Money, it may be used as Capital as well as Money Further on^ he is still more explicit^" The value saved to the community by thus dispensing with metallic money is a clear gain to those who provide the substitute. They have the use of twenty millions of circulating medium whibh have cost them only the expense of an engraver's plate. If Ihiy employ this accession to their fortunes as Productive Capital, the produce of the country is increased, and the community benefited as much as by any other Capital of equal amount When paper currency is supplied, as in our own country, by Bankers and Banking com- panies, the amount is almost wholly turned into Productive Capital A Banker's professionibeing that of a money- lender, his issue of notes is a simple extension of his ordinary occupation. He lends the amount to farmers, manufacturers, or dealers, who employ it in their several businesses. So employed it yields like any other Capital, wages of labor and profits of stock The Capital itself in the long run becomes entirely wages, and when replaced by the sale of the produce becomes wages again : thus affording a perpetual fund of the value of twenty millions for the maintenance of productive labor " And he also says^ — " Now, an eilect of this latter character naturally attends some extensions of Credit, expecially when taking place in the form of Bank Notes or other instruments of exchange. The additional Bank Notes are in ordinary course first issued to producers or dealers to be employed as Capital . . . . and there is a real increase of Capital " 'J5/;. iii., ch. xi., § 5 '-Bi. iii., ch. xxii., ^ 2 'Bh. iii,, oh. li., § 1, note 312 THEORY OF CREDIT Mill admits that Credit may be used as Productive Capital 6. Now, if Mill admits that anything which has Purchasing Power is Wealth And if he says that Credit is Purchasing Power And if he admits that Bank Notes, Cheques, Bills of Exchange, &c., are forms of Credit And if he says that Bank Notes, Cheques, Bills of Exchange, &c., Circulate as Money, and perform all the functions of Money And if he admits that Bank Notes, &c., may be used as Pro- ductive Capital Then Credit may be used as Productive Capital That is a Sorites from wiiich there is no escape Mill denies t/iat Credit is Productive Power 7. And yet the very same Mill says^^" For Credit, though it is not Productive Power, is Purchasing Power" " It is not a Productive Power in itself " " Although, therefore, the Productive funds of the country are not increased by Credit" And several other passages to the same effect Mill sneers at tltose ivibo say that Credit is Capital 8. Having thus shown that Mill admits that Credit is an independent Quantity— that it is the Present Eight to a future payment — that it is embodied in the form of Bank Notes, Cheques, Bills of Exchange, &c. — that they are transferable from hand to hand — and circulate like Money and perform all the functions of Money— and that they may be used as Productive Capital — it may surprise some readers who are not used to Mill, to hear that Mill not only denies that Credit is Capital, but sneers at the imbecility of those who say so In tlie chapter headed — " Of Credit as a substitute for Money" he says-— ''The functions of Credit have been a subject of as much misunderstanding and as much confusion of ideas as any single topic in Political Economy .... ^Bk. iii., eh. xi., ^ 3 'iJi. iii., ch. xi., ^ 1 MILL ON CREDIT 313 " As a specimen of the confused notions entertained respecting the nature of Credit, we may advert to the exaggerated language •BO often used respecting its national importance. Credit has a great, but not as so many people seem to suppose, a magical power : it cannot make something out of nothing. [Who said it could ?] Hoiv often is an extension of Credit tallce^ of as equivalent to a ■creation of Capital, or as if Credit actually were Capital ! I [Wliy ! who has said more distinctly than Mill himself that ■Credit may be used as Capital ? The very object of the preceding extracts is to show that Credit may be used as •Capital exactly in the ^same way that Money is.] It seems strange that there should be any need to point out that Credit, being only permission to use the Capital of another person, .the means of production cannot be increased by it, but only ■transferred. If the borrower's means of production and of employ- ing labor are increased by the Credit given him, the lender's are as much diminished. The same sum cannot be used as Capital both by the owner and also by the person to whom it is lent. [Who said it could?] It cannot supply its entire value in wages, tools and materials to two sets of laborers at once. [Who said it could ?] It is true that the Capital which A has borrowed from B, and makes use of in his business, still forms part of the wealth of B for other :purposes, he can enter into arrangements in reliance on it, and can borrow when needful an equivalent sum on the security of it : so that to a superficial eye, it might seem as if both B and A had the use of it at once. But the smallest consideration will show that when B has parted with his Capital to A, the use of it as Capital rests with A alone, and that B has no other service from it than in so far as his ultimate claim upon it serves him to obtain the use of another Capital from a third person C. All Capital (not his own) of which any person has really the use, is, and must be, so much subtracted irom the Capital of some one else" " But though Credit is but a transfer 0/ Capital from hand to hand" And several other passages to the same effect 314 THEOEY OF CREDIT Confusion of Hill on Credit 9. The reader cannot fail to see the astounding confusion of Mill's ideas in the preceding extracts In the first set he says that Credit is the Right to a future payment — that it is an independent Quantity which is bought and sold like Money — and, therefore, may be used as Capital like- Money In the second set he makes Credit to be the Transfer of Capital : or an Operation That is Mill cannot perceive the difference between aa Independent Quantity and an Operation ! ! Now we ask — is a Bank Note the Transfer of a commodity ? Is a Guinea the Sale of a Book ? Is a Table the Transfer of a chair ? Is a piece of Independent Property the Transfer of something else ? Is an Independent Quantity of any sort an Operation ? Mill says that Credit is the Transfer of -Capital : and then he speaks of Credit transferable from hand to hand Now, how is it possible to Transfer the Transfer of Capital ? To Transfer Capital is an Operation : also when Credit is trans- ferred from hand to hand it is an Operation. But how is it possible to Operate upon an Operation ? Mill informs us that Credit cannot make something out of nothing. Who said it could ? Can a guinea make something out of nothing ? It is not Credit which makes something out of nothing — but the Credit itself — the Present Right to the future payment — which Mill himself admits is of the Value of the gold promised — which is created out of nothing by the mutual consent of the parties to the contract— which Right by the reiterated admission of Say and Mill is capable of circulating like Money and per- forming all the functions of Money ; and therefore it may be used as Capital exactly like Money Money is used as Capital by being exchanged away for other things, goods, or labor : or by circulating other things : and Credit may be used to purchase goods or ;labor precisely in the same way FALSE CONCEPTS ON CREDIT 315 Moreover we see how completely Mill is in error when he says that Credit is never anything more than the Transfer of Capital. Credit is used to an enormous extent to purchase labor, just as Money is : and Credit is also used to an enormous extent to purchase other Credits : as will be shown more fully when we exhibit the mechanism of Banking After this exposition our readers will perhaps think that Mill is not exactly the person to sneer at others for their confused notions about Credit : though his own work is a striking example of the misunderstanding and confusion which he says prevail upon the subject. And many may wonder-at a logician who is unable to perceive the difference between an Independent Quantity and an Operation Contrast Miveen the Idola, or False Concepts o/Debt and Credit, and the True Ones 5. There is no method so effective for exterminating false concepts, or Idola, of things as to bring them into sharp and close contrast with the true ones. We shall, therefore, place in array, for summary execution, the false notions of Debt and Credit which have so bewildered and misled uninformed writers. The reader must, therefore, observe that — A Debt is not Money owed by the Debtor A Debt is not a subtraction from the Property of the Debtor A Debt is not Money in the possession of the Debtor to which the Creditor has a Right A Debt is the Abstract Personal Duty of the Debtor to Pay or Do something A Credit is not the thing lent A Credit is not the Transfer of anything A Credit is not a Title to any specific Money or Goods Credit, in popular language, is personal reputation which a person has, in consequence of which he can buy Money, or Goods, or Labor, by giving in exchange for them a Promise to pay at a future time A Credit in Law, Commerce and Economics, is the Right which one Person, the Creditor, has to compel another Person, the Debtor, to Pay or Do something 316 THEOEY OF CREDiT And the Creditor can sell this Right of action to any one he ■pleases. And it has Value because it will fee paid, or exchanged for the thing promised at the fixed time It is, therefore, a saleable commodity : and it has Value for exactly the same reason that anything else has Value And because these Credits, Debts, or Eights of action can be bought and sold, or exchanged, like any material chattels, they are termed Res, Bona, Pecunia, Merx, in Roman Law : ^(prifjLaTa, -jrpay/xara, oTkos, ouVi'a, in Greek Law : Goods, Chattels, Com- modities, Merchandise, in English Law : and Wealth and Capital in Economics Sir Charles Lyell says that when a strange proposition is published the world screams out that it is false : then that those who maintain it are atheists : and then, lastly, that every one knew it already When years ago we said, in a former work, that Credit is Capital, there was a shout of derision from many writers in England and Prance : Whately thought it necessary to enter into a long argument to prove to the Dons at Oxford that an Economist is not necessarily an atheist : and now we have shown clearly that every one knew already that Credit may be used as Capital ON INSTRUMENTS OF 6«EDIT 317' CHAPTEE V UPON mSTEUMENTS OP CREDIT Meaning of Instrument 1. Credits, Debts, Rights of action are, then. Goods Chattels, Commodities, Merchandise, and though in the abstract state in which they are Incorporeal Property or Incorporeal Chattels, they can neither be seen nor handled, and therefore cannot be transferred by manual delivery, they may nevertheless be bought and sold, or exchanged as freely and easily as any material chattels But if they are written down on some material, such as paper,, parchment, or any other, they become Material or Corporeal Chattels, and they may be transferred by manual delivery like Money or any other material chattel "ftljen the Credit or Debt is recorded on paper or other material, it is termed an Instrument of Credit or of Deht ; and when used in this sense it has a technical meaning which is often overlooked The word Instrument has two distinct meanings — 1. Sometimes it means a tool or implement, by means of which some purpose is effected. Thus Edgar says in Lear " The Gods are just, and of our pleasant vices Make Instruments to plague us " So Smith speaks of Money as "the great Instrument of Exchange" and " Instrument of Commerce " : i.e., as the means, or medium by which Exchanges or Commerce is carried on : as- we have seen, it is termed the Medium of Exchange 318 THEORY OF CREDIT But when Bills and Notes are termed Instruments of Credit or of Debt, the word has quite a different meaning from what it has in the phrase Instrument of Exchange The term Instrument of Exchange denotes the means by ■which Exchanges are effected : the term Instrument of Credit means the Record or Document or written evidence of the Debt In Eoman Law Instrumentum means any evidence, whether personal or written, by which a Court or Judge was informed of a fact : or of the merits of the case Thus Suetonius speaks of the Inslrunienta Imperii, or the ■written records of the Empire : Quinctiliau speaks of the Instrumenta litis, or the documents relating to a case : Tertullian, Erasmus, and the reformers call the Ohristiaa Scriptures the Novum Instrumentum This meaning is very common in English. Thus out of innumerable instances, Hallam says — " Is abundantly manifest by the Instruments of both the kings by Instru- ments executed at Calais " : so Brougham speaking of the ■declaration of American independence says^" As the clock struck the hour when that mighty Instrument was signed " In these and similar instances the word Instrument means a written Record or Document In English Law the word Instrument is restricted to written records : and thus is equivalent to Document : which is any writing which informs the Court of a fact : it means simply a written record Hence an Instrument of Credit or Debt means any written •evidence of a Debt. In Courts of Law and legal treatises these documents are invariably termed Instruments Instruments of Credit or Debt are usually said to be of three forms — 1. Orders to pay money 2. Promises to pay money 3. Mere acknowledgments of debt, such as an I U 4. But besides these, there is a fourth form which, though it is not usually classed under that term, must for scientific reasons be so : these are Credits or Debts recorded in the books of bankers, termed in banking language Deposits. All these are written records or evidences of Debt BILLS OF EXCHANGE 319 Great Extension of the System of Bills of Exchange 2. For a considerable time the origin of Bills of Exchange •was involved in great obscurity. Many writers attributed them to the Jews, who were severely persecuted and expelled from France in 1181 by Philip Augustus. Multitudes of writers have asserted that the Jews invented Bills of Exchange at this period in order to transmit their effects to foreign countries. But such an idea could only have arisen from an entire misconception of the nature of Bills of Exchange and of an 'Exchange However, the mystery is now quite cleared up. They were invented by the Roman bankers, and their use was quite common in the days of Cicero : and probably for a considerable time before : as Cicero uses the technical terms respecting them which shows that their usage must have been well established. There is no evidence to show that they were used in commerce or were made transferable An Austrian friend of ours has informed us that in a Sclavonic •chronicle of the fifth century he found a provision that if Eussian merchants died at Constantinople the value of their property should be remitted to Eussia by Bills The terrible cataclysm of the fall of the Eoman Empire probably greatly restricted the system of dealing in Credit between distant towns. But in the eleventh century Europe had again begun to assume a more settled 'state. The cities of Lombardy especially devoted themselves to commerce : and Gallenga says that a treaty between the city of Asti and Humbert II. of Savoy in 1095 shows that the cities of Asti and Chieri had already begun to introduce the system of Bills of Exchange and Banking into France and England The only word in classical Latin tliat we are aware of for drawing Bills is permidare. But about the end of the first ■century a provincial Latin word Oambio {-ire or -iare) which appears as campsare in Ennius and Cicero, and meant to double a promontory, was used to mean to exchange by Columella and Siculus Flaccus: it gradually came into common use, and was •employed by Apuleius and Charisius. Priscian, A.D. 500, pro- 320 THEORY OF CREDIT tested agaiust using campyare as synoaymous with permutare. Nevertheless this meaning prevailed, and in the middle ages Cambire or Cambiare, or Gampaare ioompletely superseded 'permulnre. Cambilor, C'ambiator, and C'ampsator superseded Argmtarius, Mensarius, and NummuJarins as meaning a money changer • hence our word Cambist. In the middle ages Bills of Exchange were called Lilterce Gamhitorim : and when Bancherius was used for a banker they were called Liikra, Baiuales, bankers'" drafts Weber says that Bills of Exchange were in common use in Venice in 1171. A charter granted to the City of Hamburg in 1189 authorised them to deal in Bills. In 1243 a statute of Avignon relates to litorm camlii : one of Venice in 1272 . and many other cities passed similar statutes About this period the system of Bills of Exchange received an immense extension. In the times of the Crusades the Popes claimed the right to tax all Christendom for their support. Tiiey had their own Cambiatores, or money dealers, who kept tables in the cathedrals to exchange the money of foreigners who came to worship. These persons sent their own agents into different countries to collect the Papal tribute. As soon as they collected a certain sum they sent the Pope bills upon their principals. These were called litterm camhitoricB . In the twelfth century Florence became very celebrated for this ": banking" business, as- it was called. Tjucca, Siena, Milan, Placentia, and numerous other towns in the north of Italy were also famous for it. Cahors- in France also became a great Monetary, or Banking, centre ; and the name of Caorsini became synonymous with usurers : Dante places the Caorsini in company with the Cities of the Plain in the Inferno for this imaginary crime In 1229 these persons were first introduced into England. The Pope sent his chaplain Stephen and a nuncio to demand a tenth part of all the movable goods of all persons, lay and clerical, in England, Ireland, and Wales, to support his war against Frederick Barbarossa. The feeble king agreed to this extraordinary demand : but in a Parliament held to consider it, the lay lords indignantly refused to subject their lands to the Pope. The unfortunate ecclesiastics had no resource but to yield. The Pope FORM OF BILLS AND NOTES 321 drew bills upon all the Bishops and Abbots, which they were obhged to honor under threat of excommunication. A detach- ment of Caorsini came over with the nuncio to London, and settled there, in order to lend money at heavy interest to the Bishops to enable them to meet the Pope's .drafts Eanke saysi — " As it has been observed that the business of exchange, or banking, in the middle ages, received its chief extension from the nature of the Papal revenues, which falling due throughout the world, had to be remitted from all quai-ters to the Curia On the Form of Bills ani Notes 3. 1. We have no notice as to when the use of Bills of Exchange by merchants became general The oldest Bill of Exchange known to exist is dated 1381 in the following terms — A I name di Dio, Amen. A primo di Felruario, MCGCLXXXI. , fagate per questa prima lettera ad icsansa, da voi medesimo lihre 43 de'gros.ti, sono per camiio de" ducati 4-10, che questi chi hone recevuto da Sejo el Compagni attramenle le pagate Another is quoted by Capmany, an eminent Spanish writer, which was drawn in 1404 by a Lucchese merchant of Bruges on his correspondent at Barcelona, negotiated at Bruges, but dis- honored at Barcelona. It is in these terms — Al name di Dio, Amen. A die Aprile, XXVIII, 1404. Pagate per questa prima di camb. a usanza a Pietro Giherte e Pidro Olivo, scuti mile a sold. X. Barcelo?iesi per scuto .- e quali scuti mille sono per camiio che con Oiovdnni Colomlo a Qressi, XXII de gresso pen scuto, et Pon. a nostro conto : et Ghristo vi guardi. Antonio quart. Sab. di Brugis. From the terms on which these bills "are drawn it is quite evident that they must have been long in Ase 'History of the Pojpes 322 THEORY OF CREDIT In the Archives of Venice there are a Considerable number of Bills of Exchange of the 15th century, drawn by Venetian mer- chants on their correspondents in London, but sent back protested for non-payment In none of these bills are there any words of negotiability : just as there need not be in Scotch bills at the present day. Many writers have been puzzled to know when Bills of Exchange were made transferable. But the investigation in the preceding chapter has cleared away all mystery on the subject. They were negotiable by the general mercantile Law of the Empire : which enacted that any Creditor had the right to transfer his Debts, or Rights of action, as freely as any other chattel 2. Obligations by the Common Law of England, to which the legislation of Justinian never extended, were not payable to anyone but the payee without the consent of the Obligor. Accordingly at a very early period it was usual to make Obliga- tions payable to the payee or his attorney, equivalent to the modern " or order." Matthew Paris quotes an Obligation of the Prior and convent of N., dated 1235, and made payable to certain Milanese merchants in London, aut uni eorum vel eorwn cnrto nuncio The Statute of Merchants, 11 Edward I. (1283), is the first Law noticing mercantile Obligations. It enacts, that if their debtors did not pay at the agreed upon time, the merchants might bring them before the proper authorities, and the clerk should draw up an " escrit de Obligation," or a " lettre de Obhgation," which the official translation renders Bill Obligatory, to which the debtor was to affix his seal : binding him to pay on a certain day In the 31st year of his reign, Edward f. granted a Statute to the City of London for the protection of foreign merchants, which enacted that they might pay the customs duties on their exports by Bills on their principals or partners These Bills Obligatory were Deeds in the form of promises to pay : and, therefore, they belong to the category of instruments classed in modem times as Promissory Nolies. It was supposed in recent times that Promissory Notes were unknown to the Common Law, and were invented by the Uoldsmith bankers. This idea, however, is entirely erroneous FORM OF BILLS AND iSfOTES 323 In process of time, but at what period we cannot say, merchants made their Obligations in both forms of Promises to pay and orders to pay, under seal transferable In Arnold's Chronicle first published in 1502, but supposed to have been founded on an earlier work, containing many of the customs of the City of London in the reign of Edward VI. and Henry Yll., several forms of Obligation are given as being in common use : of which the following are some examples — Byll of Payment " Be it knowen to all men, me A. B. de civitat. L. in countee of M., marchaunt, to be bounde be thes present obligacion to P. G. of C. in ye counte of K. i. xii. li. lawful money of England, to be paid to ye said F. G. or to his certeyne alturnai, his eiers or executurs, at the fest of Sanct. ;M. tarchaungel next comyng aft' ye date of this present without further delai, to the which paiment wel and truli to be made, I bynde my eiers and myn executurs be theis presents sealed with my seale, yeven ye furst day of ye monethe of M. ye yere of "vft regne of K. H. ye YII. after ye conquest ye fust " Another is made payable to Assignes — Byll of Payment " Memerand' this byll made the iiij day of Julij in ye xix. yere of the reigne of Kyng Edward the iiij beryth wytnesse yt we Eic. Shirlee of London grocer and Thomas Shirlee of London haburd' owen unto "W. Warboys and John Benson of London haburd, xxxviij s. ij d. stg. to be payd to the said W. and J. or to ether ■of them, or to their eyers ther executors, or la their Assignes, ye furst day of Julij next coming, wythout ony delay, to the whiche payment wel and truly to be made we *binde us, our eyer?' executors and our assignes, and eche of us in the hoole. In wytness wherof we set to oure seales the day and tyme afore rehersed " A form also is given of a Bill of Exchange payable to bearer— x2 324 THEORY OF CREDir Lettre of Exohaunge Be it knowen to alle men yt I. R. A. citezen and habd' of London have ressd by exchaunge of N". A. mercer of the same cite XX. li. stg. whiohe twenty ponds stg. to be paid to the said N. or to the, bringer of this byll in synxten marte next comyng for vi. s. viij. d. stg. ix. s. iiij. g. fllg. money currant in the said mart, and yf ony defaut of payment be at the day in alle or ony part yerof, that I prorayse to make good all costis and scathes- that may grow thcrby for defaut of payment, as well as the principal some, bee this my furst and second lettur of payment :■ and herto I bynde me myn executors and alle my goodis wherso- ever they may be fouude. In wytnesse wherof I have written and sealyd this byll, the x day of Marche Ao. Dni. MCCCC. Ixxxvij " These common forms establish the fact that in the time of Edward IV. it was usual to draw Bills of Exchange in the form of Promissory Notes, and to make them payable to bearer : and also that Promissory Notes payable to " order " and to " assigns '' were in common use : and as a matter of course these were all. deeds under seal As they were given as common forms at that period, they must have originated long before : but how long we have no- knowledge of any evidence to show There is no instance, however, of such documents being brought before a Court of Law, which may show that our ancestors were more punctual in their payments, or less litigious than their descendants. If one of these documents had come before a Court of Law, wo may be certain that they would have recognised its validity, just as they recognised the validity of every Obligation made transferable by the Obligor Mr. Lawson gives a copy of a Bill of Exchange also drawn in the form of a Promissory Note in the reign of Elizabeth — " Witiicsseth this present bill of exchange that I, Eobert Anderson, merchant, of the City of Bristowe, doe owe unto Thomas Mun, merchant of the said city, the sum of 100 ducats : I say FORM OF BILLS AND NOTES 325 an hundred duckets of current monie of Spain, accompting after 11 rials of plate to the ducket : to be paid unto the said Thomas Mun, or his Assignes, witliin ten daies next, and yemediately after the safe arrivall of the good ship called the G-ahriel of Bristowe to the port of S. Lucai in Andalbusia in Spaine, or any port of the discharge. And for the true paiment thereof, I, the above named Eobert Anderson, do bind me, my goods, my heirs, executors and assigns, firmly by these presents. In witness of the truth, I have caused two of these bills to be made (the which the one being paied, the other to be voide), and have put my firme and seale into them : and delivered them as my deed in Bristowe, the 15th day of September, 1589, and in the 31 yeere of our Sovereign Queen EUzabeth her Majesties reigne " In Vanheath v. Turner (Winch. 24) in 1621, Yanheath brought an action against Turner, and declared upon the custom of merchants, that if any merchant over sea deliver money to a factor, and make a Bill of Exchange under Jits Seal, &c. In Shelden v. Henileij (2 Show. 160) in 1680, the declaration was on a Note under seal Jones, J.,—" At the time of the seahng whose deed was it?" The Court said— "The person seems sufficiently described at the time it was made a Deed " . In the edition of "les Termes de les day " of 1708, it is said that merchants were claiming the same right to bring actions on signed bills as on sealed bills The Court in Lord Holt's cases unanimously admitted that Bills and Xotes under seal were legal : their objection to signed notes was that it was making a mere piece of paper equal to a specialty At this time is was perfectly indiflferent whether OWigations were drawn in the form of Orders to pay or Promises to pay : they were equally valid at Common Law : non ,figura lUterarum, sed oratione quam exprimvnt, obligamur." " We are not bound by the form of the writing, but by the intention which it expresses," is equally Eoman and English Law and common sense. A Bill of Exchange in former times meant an Obligation in any form to pay the value of a certain amount of the Money of one country in the Money of another at a certain rate of exchange. 326 THEORY OF CREDIT When the Obligation originated with the Creditor it naturally was in the form of an Order addressed tp the Debtor to pay : when it originated with the Debtor it was naturally in the form of a Promise to pay. An Obligation payable within the country itself was called an Inland bill The word Bill meant any writing whatever, whether under seal or not, and therefore included Deeds or Specialties In Marlowe's Faustus, when Faustus is selling his soul to Mephistopheles, he tells Faustus that he — " Must write it down In manner of a Deed of gift." Faustus, seeing his blood stop flowing, says — " Is it unwilling I should write this Bill ? " And then — " Conswnmatum est: this Bill is ended " Then says Mephistopheles — " Speak, Faustus ; do you deliver this as your Deed " The word Note had exactly the same ineaning : so that the words Billa and Nota meant any writing, whatever its form might be, and whether under seal or not Instruments of the form of Promises to pay payable within the country were called " Bills of Payment," " Bills of Debt," " Bills of Credit," "Bills of Obligation." Banknotes were called Bank Bills. In the Act establishing the Bank of England its Notes were termed " Bills of Credit" and" Bills Obligatory." In one case a Note for the payment of money was termed an inland bill by the Court. In another case two Goldsmiths' or Bankers' Notes were declared upon as Bills of Exchange, and were called so throughout the case. In another case it is said — " If a mer- chant's apprentice draws a Bill (as I do promise to pay such a sum for my master) to charge the master with the Mote." So in several cases Bank Notes are called Bills. In many parts of the country at the present day Bank Notes are still called Bank Bills : and very usually so in America DEFINITION OF A BILL OF EXCHANGE 327 Since, however, the decisions in the cases by Lord Holt, and the Statute of Anne described in the preceding chapter, the term Bills of Exchange has been restricted to orders to pay : and Promissory Notes to Promises to pay One great establishment still keeps up the old hybrid form of obligation in a species of paper it issues. The following is the form of a Bank of England Post Hill No. London, 18 At seven days sight I promise to pay this, my sola Bill of Exchange, to or order One Hundred sterling. Value received of For the Governor and Company of £ One hundred The Bank of England. Entd. Definition of a Bill of Exchange 3. A written Order i'rom one person to another who Owes, or appears to owe, him Money as a Debtor, directing hina to pay absolutely and at all events : (1) a certain sum of money : (2) to a certain person : (3) at a certain event : ife in modern language termed a Bill of Exchange : or shortly a Bill The following is the usual form of a Bill of Exchange— £250 10 6 London, May 4, 1889 Three months after date pay to A. B.,or to myself, or order, the sum of Tivo hundred and fifty pounds, ten sJiilUnys, and six pence, for value received William Smith To Mr. John Cox, Strand, London. The person who addresses the letter is termed the Drawer : the person to whom it is addressed is te»med the Drawee : the person to whom it is to be paid is termed the Payee 328 THEOKY OF CREDIT If the Drawee has not already agreed to pay the bill when it comes into the hands of the Payee, he should take it at once to the Drawee and request him to engage to pay it. If he agrees to do 80 he must write his name, usually, but not necessarily, across the face of the bill, with the word " Accepted ": he is then termed the Acceptor In England an ordinary Debtor was never compellable to accept a bill drawn upon him by his Creditor But in Scotland, which adopts the Law of Justinian and the Basilica, that a Creditor has the absolute right to sell his Debt even without the consent of the Debtor : a Debtor is bound to accept a bill drawn upon him by his Creditor : and is liable to an action for non-acceptance This distinction is maintained by the Bills of Exchange Act of 1882 By the Common Law of England even if a Debtor has accepted a bill payable to the payee only, and without the words " or order " : the Creditor could not transfer it to any one else so as to enable the Transferee to sue the acceptor And any Transferee could acquire no better title to it than that of the Transferor : consequently the bill does not possess the attribute of Currency or Negotiability But in Scotland bills are transferable and negotiable without any such words as " or order." And a bill drawn in Scotland payable only to the payee, peing current and negotiable by the lex loci contractus is current and negotiable in England Since the Supreme Court of Judicature Act bills drawn without the words " or order " are also current and negotiable in England : and the presentation of the bill to the Acceptor by the Transferee is sufficient notice of the Transfer of the Debt : even if the drawee refuses to accept the bill But in this case the right of the Transferee would be dependent on the state of accounts between the drawer and the drawee Defiiiilion of a Draft 4. A written order from one person to another who Holds a sum of money as a Depositum, as the Trustee, Bailee, or Agent, or Servant of the Drawer, is termed a Dyaft or Order for the Payment of Money DEFINITION OF A DRAFT 329 Bills of Exchange and Drafts are of exactly the same form and external appearance. The essential distinction between them arises from the difference in the relation between the parties to the instrument In a Bill of Exchange the drawee is simply the debtor of the drawer : the property in the money drawn for resides in the drawee : the drawer is his Creditor : and he has only a Eight of action to compel the drawee to pay a sum of money : but he has no right to any specific money in the drawee's possession In a draft the property in the money resides in the drawer : the drawee merely holds it in his possession as a Depositum ; he has possession of it merely as the Trustee, Bailee, Agent, or Servant of the drawer : and if he appropriated it to his own purposes it would be an embezzlement Hence in such a case when the drawer draws a draft or order for the payment of money and delivers it to another person, he is not transferring a Debt or Right of action due to him : he is directing his own servant to deliver to a certain person a portion of his own money : which is in the custody of his servant Also, the holder of the fund is not personally liable on such Drafts or Orders : he is only bound to pay them if he has any money of the owner's in his custody : consequently such a Draft or Order is not a Credit or Personal Obligation : it is a Title to an undefined portion of some specific money Such an Order is not a Bill of Exchange : it is contrary to the fundamental nature of a Bill of Exchange So, if a bank has several branches, the order granted by the branches on the Head Office, or vice versa, are not Bills of Exchange, but Drafts Thus, the definition of Bill of Exchange usually given in law works, and in the Bills of Exchange Act of 1882, is essentially defective " A Bill of Exchange is an unconditional Order, in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a certain sum in money, or to the order of, a specified person, or to bearer" 330 THEORY OF CREDIT Now, it is true that every Bill of Exchange is an Order to pay money : but every Order to pay money is not a Bill : the word Order to pay money includes both Bills and Drafts Definition of a Promissory Note 5. An unconditional written Promise made by a person to pay, absolutely and at all events : (1) a certain sum of Money: (2) to a certain Person : (3) at a certain Event : is in modern language termed a Promissory Note : or sBortly a Note The following is the usual form of a Promissory Note — £125 6 8 London, May 4, 1889 Three months after date I promise to pay John Jones, or order, the sum of one hundred and twenty-five p)ounds six shiltings and eight pence William Johnson William Johnson is termed the Maker of the Note : and John Jones the Payee Rules relating to Bills and Notes 4. Where the Bill or Note is made payable to the Payee, " or order," the Payee must, when he transfers the Instrument to any one else, write his name on the back of it ; hence it is termed an Indorsement ; the Payee is termed the Indorser : and the Trans- feree is termed the Indorsee If the Indorser simply signs his own name, and then delivers the Instrument to the Indorsee : it is termed a General Indorse- ment or an Indorsement in Blank. The Instrument is then transferable by mere delivery, without any further Indorsement, exactly like a Bank Note, or like Money : and the Instrument is payable to bearer like a Bank Note The Indorser may make the Instrument payable to some specific Indorsee only : if he does so it is termed a Special Indorsement : and the instrument can only be paid to the special Indorsee RULES RELATING TO BILLS AND NOTES 331 Formerly, Indorsement was necessary in all cases to transfer the Property in a Bill or Note; but that has long ceased to be the case in English law. It became the custom of merchants which has long acquired the force of law, that any Instrument of Credit indorsed in blank may be transferred by simple delivery, without any further indorsement It is, however, the general custom for the Transferee to require the indorsement of the transferor : not for the purpose of transferring the title or the Property in the instrument after the first indorsement : but to retain the Transferor as a security or guarantee for the payment of the Bill The effect of the Indorsement is that, if the Acceptor of the Bill, or the Maker of the Note, does not pay it at maturity: and the Indorsee gives immediate notice to the Indorsers, he can enforce payment from them But the demand for payment must be made without delay : in almost all cases within twenty-four hours after the fact of non- payment. If the holder of the dishonored Instrument delays giving notice, he loses his remedy, and the Indorsers are discharged In modern practice then the Indorsement is merely a limited warranty of soundness. The difference between buying goods or money with a Bill, with or without Indorsement, is just the same as buying a hoi'se, a watch, or a carriage, with or without a limited warranty. In all cases of the sale ;of a horse, or a watch, without a warranty : or of goods or money with a Bill without an Indorsement of the Transferor, it is an absolute and final sale When the Transferor indorses the instrument he says, in effect — " I warrant the soundness of this Debt for twenty-four hours and no longer " The general rule of English law now is," that if any Instrument of Credit be taken without Indorsement in exchange for goods or money : or if the period allowed for making the claim in the case of an indorsed and unpaid bill be allowed to elapse without making the claim : it is a final closing of the transaction. The payment is in fact as valid and final as if it were money Except only in the case of fraud : if the Transferor knew at the time of the transfer that the principal debtor was insolvent If, however, the Transferor was bankrupt at the time of the 332 THEORY OF CEEDlj transfer, the loss falls upon the Transferee : because he might have preserved his remedy by taking the Transferor's indorsement : and if neglects to do so he must suffer for his own laches At the time when the Bank of England was founded, the Court of King's Bench had decided that Promissory Notes were illegal at Common Law : consequently in the Act' Statute 1694, c. 20, s. 29, founding the Bank, its Notes were declared to be transferable by indorsement : and the Act of 1704, c. 8, it was declared that all Promissory Notes might be transferred by indorsement like Bills of Exchange In the case, however, of Bank Notes, 'as their payment was quite secure, the practice of indorsement soon fell into disuse. In the case of private bankers of good credit the indorsement was often omitted. But, though the indorsement was often omitted, that in no way altered the character of the instrument : and the receiver of the Note took it entirely at his own peril : and ran exactly the same risk as if he took any other Instrument without indorsement It is usual in English Bills and Notes to insert the words " for value received : " but it is not necessary. In a recent case it was said that they mean nothing more than " your obedient servant " at the end of a letter. In fact Bills of Exchange are in their origin deeds which require no consideration : and formerly no consideration was ever stated : it was only when it was supposed that Bills of Exchange are simple contracts that these words were first introduced. But there is no necessity for them : and they are often omitted On Banking Instruments of Credit 5. The Instruments of Credit which we have described above may be called Commercial Instruments of Credit ; because they arise out of the transactions of merchants. The introduction of Banking into England gave rise to two new forms of paper, which may be called Banking Instruments qf Credit The essential nature of "Banking" is to create Credit in exchange for money and commercial debts. These Credits are first of all entered in the banker's ledger. Rut though the banker BANKING INSTRUMENTS OF CREDIT 333 has issued a Credit, or Right of action, to his customer by making the entry in his ledger, the customer cannot transfer his Credit, or Right of action, to any one else by manual delivery, like money In order to do this the Credit, or Right of action, must be written down on some material like paper, and then it can be transferred by manual delivery exactly like money This might be done in two forms — 1. If the customer wished it, the Banker gave him his own Promissory note, promising to pay the sum s'pecified in it, either to the customer himself, or to his order, or to bearer. This instrument was termed a Goldsmith's or a Banker's note 2. The customer might write a note to the banker directing him to pay a specified sura, either to some specified person, or to his order, or to bearer. These instruments were formerly termed Cash Notes : but in modern language they are termed Cheques At first Goldsmiths' or Bankers' Notes were simply written on paper like ordinary bills of exchange The following is a specimen of an early banker's Note — Nov. 28, 1684 / jn-omise to pay unto the Rt. honhle. ye Lord North and Grey, or hearer, ninety pounds at demand For Mr. Francis Ghitd and myself, Jno. Ro&ers In July, 1729, Messrs. Child & Co. were. the first bankers to adopt printed forms for their notes. But they were not printed for definite sums like Bank of England Notes : they were partly printed : and the name of the payee and the sum payable were filled in in writing— like modern Cheques. Sometimes they were payable to order, and sometimes to bearer : thus— Picture of ) No. 921 London, Oct. 20, 172 'J Temple Bar.)' I joromise to pay to Mr. Fdchard Bannister, or order, on demand, twenty pounds For Fras. Child, Esq., Sam. Child 334 THEORY OP CREDIT Picture of i No. 1792 London, 8 Decemb., 1729 Temple Bar.) I promise to pay to Mr. Ghr. Diggs, or hearer, on demand, thirty pounds For Fras. Child, self, & Co., Sam. Child There has been considerable doubt as to when Ijondon bankers discontinued the issue of Notes. The latest specimen preserved is dated April 12, 1793 For a long time considerable uncertainty prevailed as to when Cash Notes or Cheques were first introduced. It was a very common opinion that they were first invented about 1772. But when the Eoyal Courts of Justice were built at Temple Bar, the excavations made for their foundations endangered the stability of the Bar, and it had to be removed. Messrs. Child & Co., rented the room in the Bar, in which the records of the firm had been kept, and, on the removal of the Bar, these had to be cleared out, and then documents came to light which entirely set the question at rest, and showed that Cash Notes or Cheques were co-eval with the institution of Banking These Cash Notes or Cheques were of various forms : some- times payable to order or to bearer 16th Nov., 1689 Mr. Jackson, — Pray pay to the hearer hereof, Mr. Daniel Croker, five pounds, and place it to the accompt of Your loving friend. To Mr. Roger Jackson, John Wynyakde At Sir Francis Child's, Goldsmith, just within Temple Barr Sometimes they were simply payable to bearer — ■ Mr. Childe, — Pray pay unto the hearer the sum of twenty pounds and place it to the account of London, Aug. 29, 1682 E. Pollexfbn BANKING INSTRUMENTS OP CREDIT 835 Sometimes they were payable at sight — Bolton; 4th March, 1864 At sight hereof pray pay unto Charles Buncombe, Esq., or order, the sum of four hundred pounds, and place it to the accompt of Your assured friend. To Captain Francis Child, "Winchester near Temple Barre Sometimes they were payable to payee, or bearer — To Mr. Child and Mr. Rogers July 20th, 1688. Pray pay unto the honorable Dudley North, or bearer, the sum of one thousand pounds, and be pleased to place it to the account of Tour friend, and servant, Yarmouth Sometimes they were payable to order — 3d June, 1683 Pray pay unto the Bearer hereof, Mr- Thomas Dickenson, or order, the sum of thirty pounds, and place it to the accompi Yojj,r lo : friend, PAUti Whichcott In some cases they were sealed — Pray, Mr, Child, pay to Mr. Harrison the sum of a hundred pounds (Seal) D. TynwHiTT Sir, — / piray pay unto Mrs. Ann Richards, or her order, the sum of £15, for your lo -. frisnd. To Mr. Child, or Mr. Eogers, Thos. Meres Goldsmiths, near Temple Barr, 2 Sept., '89 (Seal) 336 THEORY OF CREDOT The last sealed Cheque which we have seen was this — Pray pay to my servant, Thos. B:, the sum of seventeen pounds, Mid for so doing this shall be your order under my hand and seal, this nth day of October, 1737 Ancastbe, G. C. (Seal) These documents are not merely mercantile curiosities : they possess great legal and historical interest. They prove the truth of the statement made some time ago that in the course of the 17th century sealed and signed Instruments of Credit were in concurrent use, and held equally valid : and entirely dispose of the fantastic crochets of modern judges and text-books that sealed instruments of Credit are not negotiable Moreover, the fact of there being ttvo forms of documents for transferring Banking Credits instead of one has had the most momentous efiect in the history of Banking in England. In those early days Bankers' Notes were vastly more usual than Cheques : and in framing the monopoly clauses of the Bank Charter Act, Bankers' Notes were only regarded : and the sole monopoly of Banking conferred upon thfe Bank was that of issuing Notes : and no person at that date conceived that the business of banking could be carried on without issuing Notes. But as will be shown in a future chapter, some 25 years after London bankers had discontinued issuing Notes of their own accord, some lynx-eyed Economists discovered that a Joint Stock Bank carrying on business in the then manner of the London Bankers without issuing Notes was no infringement of the Bank's Charter : and the system of Joint Stock Banking in London was founded A. r. Blundell, Tatlou & Co., Printers, &c.,177, tJpper Thames Street, E.C.