Contents. XXIX Chapter XI. The Influence of Credit on Prices. BillB of exchange, telegraph drafts, bank-notes, and cheques may be regarded as instruments of credit — A bill of exchange is a written promise to pay a certain amount at a fixed date ; a oank-note is a promise to pay a certain amount upon demand — Different bankers exchange their cheques and bills at the Clearing House, and the con- venience of this course is great — Bills of exchange, baiik-notes, and cheques provide substitutes for money — Hence the influence exerted b^ credit on prices — When commodities are bought and sold through bills of exchange, the use of monev is as completely dispensed with as if commodities were exchanged by barter — If bills of exchange were not employed, one of two things would happen; either the money in circulation must be increased, or specie would rise in value — It is credit, and not the particular form m which credit is given, which provides a substitute for money — Book-credits, for instance, althougn not existing in a transferable form, may provide as complete a substitute for money as bills of exchange — Bills of exchange cause the amount of credit which is given in a country to be much greater than it would be, if book credits were alone employed — A bank-note is a more complete substitute for money than bills of exchange, because if bank-notes did not exist, money must be employed in most of the transactions which are carried on by bank-notes — If bank-notes did not exist, either more money must be brought into circulation or general prices would decline— A country requires a smaller amount of money if it employs bank-notes; nence bank-notes economise wealth, because gola and silver are valuable commodities — No effect is exerted on prices by bank-notes, if they simply occupy the place of a corresponding amount of money— General prices are advanced by a bank-note circulation if bank-notes are added to the circulation with- out causing a corresponding amount of money to be withdrawn-- Credit increases the purchasing power of each individual, and in this way exerts a great effect on prices — The effect, though great, is, however, temporary — Credit-purchases may enormously increase the demand for a commodity, and hence raise its price — But this rise in price is only temporary, because the price of commodities, the supply of which can be increased, ultimately approximates to their cost of production— The treat purchasing power which mi^ be exerted by credit illustrated oy the tea speculations in 1839 — The provisions of the B^k Charter Act explained —Speculative purchases which lead to a panic are not in the first instance made by bank-notes ; hence restrictions upon the issue of bank-notes do not prevent commercial panics — In the latter stages of a panic, the demand for bank-notes and other money increases because credit collapses — Hence it has frequently been necessary to suspend the Bank Charter Act after a panic has continued some time — When trade is in its ordinary state, the bank-note circulation would not be increased if the Baink Act were repealed — The impression that the Bank Act will be suspended in a commercial crisis, increases the uncertainty and distrust pre- valent at such a period — Creditors may be defrauded, and general prices may be raised without limit, if inconvertible notes are made a Ufa! tender — These serious consequences do not occur if incon- vertible notes are not made a legal tender pages 445 — 466 Digitized by
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