Principles of Political Economy

by Arthur Latham Perry

All the clerks report to the manager the amounts received by each, and as his proof-sheets hold already the amounts brought, if the two columns add up alike, no mistake has been made, and the general clearing is over. Thirty-five minutes are allowed the clerks to enter, report, and prove their work. Fines are imposed for errors discovered after that time. The Clearing-house gives tickets of debit or credit to all the banks, and the debit ones must pay in lawful money before half-past one, and the credit ones will get their due from the manager immediately after. The largest sum ever cleared in New York in one day was $206,034,920.51 on Nov. 17, 1868, and the smallest $8,357,394.82 on Oct. 30 of the panic year, 1857.

h. Crossed Cheques. About twenty years ago there was instituted in London what is called the Cheque-Bank, which is designed to bring the benefits of the credit-system in the form of cheques more easily to all classes of the people. The cheques issued by this institution are so different in character and in course from common bank-cheques, and are in some respects so new in principle, that we must give to them a separate heading and a full explanation.

The Cheque-Bank is a stock company in London under that style, which has entered into relations with nearly all the banks and bankers of the United Kingdom, and with many Colonial and foreign banks also, by which Cheque-Books are furnished for sale by the Cheque-Bank through these associated banks, which also agree to cash the cheques, every cheque in which books indicates by printed and indelible perforated notices upon the forms what the utmost sum is against which that cheque can be drawn; the aggregate of these perforated sums is the price for which each book is sold less 1¹⁄₅ penny for each cheque in it, of which the penny is for the Government stamp required and the one-fifth for the profits of the Cheque-Bank; and all these cheques in books of different sizes and amounts are drawn in form on the Cheque-Bank, and Crossed, that is, only made payable through a banker. It is one security against fraud that each cheque bears on its face the utmost sum for which it can be used, and another is that it can only be taken up by a banker and thus settled ultimately through the clearing-house. The Crossed Cheques Act of Parliament in 1876 makes any obliteration of the crossing or essential alteration of a cheque felony at law.

Cheque-crossing is of two kinds, special and general; when any particular banker's name is written between two transverse lines, in which form alone crossed cheques differ from ordinary ones, that makes that cheque payable by him only; when the words "and Company" or "and Co." are written between these lines, that makes the cheque payable only through some banker, that is, the cheque is crossed generally; and when two parallel transverse lines simply are drawn across the face of a cheque, with or without the words "not negotiable," that cheque is legally deemed to be crossed and crossed generally. When a cheque is uncrossed, the lawful holder may cross it either generally or specially; when it is crossed generally, he may at his option cross it specially; and whether crossed generally or specially he may add the words "not negotiable." All this facilitates greatly the collection of cheques by set-off through the clearing; and has a direct bearing on the fortunes of the Cheque-Bank.

The Cheque-Bank publicly guarantees the payment of all the cheques in all its cheque-books to the maximum amount for which each cheque may be drawn; and it may well do this, for no cheque-book is sold except for money, and the money is ready in the hands of some banker to pay every cheque when presented; any banker or other person will give cash for them, or take them in payment for goods or other services, or if they are drawn for a sum larger than the debt due will give back the charge to the bearer; and if the cheques be actually drawn for less than the maximum perforated on them, the Bank itself will give additional cheques for the balance. The ultimate payment, then, of these cheques is as sure as anything in the future can be; the buyer of a cheque-book knows, that the money is already in deposit to pay them, and that the government-stamps on them have already been paid for, while the receiver of an ordinary cheque cannot know beforehand that the drawer has money in deposit against it. Moreover, the holder of an ordinary cheque must use due diligence in presenting it for payment as soon as possible, or delay it at his own risk, while the holder of these has no motive whatever for haste,—time does not deteriorate them. All money received for cheque-books is left in the hands of the bankers who sell them, or transferred to other bankers in order to meet the cheques presented elsewhere, and accordingly an interest is paid by the bankers to the Cheque-Bank, on the balance of deposits thus held, and this interest, together with the one-fifth of a penny for each cheque, is the only source of profit to the Cheque-Bank. Of course, the longer these cheques remain out before presentation, the more profitable to the Cheque-Bank; and their average length of life has been heretofore not far from ten days.

Since these cheques are crossed generally (not specially) with the words "and Co.," that is to say, since they can ultimately be taken up only by some banker, they have a more generalized character than common bank-cheques, they are safer to carry and keep than so much money would be, there is no difficulty in shopping or paying wages by means of them, they are very much the same in their nature as bank bills are, and might easily in certain circumstances become money just as bank bills in some circumstances are money. Each of the associated banks keeps an account of course with the Cheque-Bank, but is not obliged to keep a separate account with the purchasers of cheque-books, which is a great relief to the banks. In this way the Cheque-Bank extends the use of cheques in the lieu of money to a great multitude of small transactions, and relieves the other banks from what would otherwise be a great deal of troublesome accounting and collection. The ingenuity and the utility of this comparatively new form of Credit cannot be questioned for one moment; the promoters of the Bank intended that their cheques should be received by the people as a substitute for cash and for Post Office orders, and such has been the effect, many railway and other companies having long ago agreed to receive them as cash, and the people generally regard them as cheaper and more convenient than postal orders and even for many purposes than cash.

i. Cash Credits. As the Cheque-Bank in the sense as just explained has been thus far in the history of Credit peculiar to England, so we have now to look to Scotland only for an exemplification of a form of Credit hitherto confined to that country. It is a national characteristic of the Scotch to be "canny," that is, they can, a word from the old Teutonic können, to be able; and, as a consequence, Scotch Banking has long been famous the world over; and the one peculiarity of it, with which we are now concerned, goes back certainly to 1729, as we happen to know from a minute of the Directors of the Bank of Scotland under that date. That bank was chartered by the old Scotch Parliament in 1695, one year after the chartering by the English Parliament of the Bank of England, and under substantially the same title as that, namely, "The Governor and Company of the Bank of Scotland." It began to establish branches in different towns of the realm in 1696, and began to issue bank notes for £1 (a privilege denied to the Bank of England) in 1704; and it began also at a very early period to exhibit the two main peculiarities of Scotch banking, namely, (1) to receive deposits on interest and (2) to grant credit on cash accounts, or, as they have come to be called less properly, Cash Credits.

This second peculiarity, which has proved extremely beneficial to Scotland, is for substance this, to create a drawing account in favor of a deserving customer, who has made as yet no deposits in the bank, but who draws out money and pays it in from time to time just like an ordinary depositor, and instead of receiving interest on the daily balance to his credit (old Scotch fashion), he pays interest on the daily balance to his debit. These accounts are called Cash Credits. They are not intended to be dead loans, but quick accounts; and they are not granted except to persons in business, or to those who are frequently drawing out and paying in money. The individual who has obtained such a credit is enabled to draw the whole sum, or any part of it, when he pleases, replacing it, or portions of it, when he pleases, according as he finds it convenient, interest being charged only upon such part as he draws out.

David Hume in his Essay of the Balance of Trade, published in 1752, makes this nice point in favor of Cash Credits: "If a man borrows £5000 from a private hand, besides that it is not always to be found when required, he pays interest for it whether he be using it or not. On the other hand, his Cash Credit costs him nothing, except during the moment it is of service to him; and this circumstance is of equal advantage as if he had borrowed money at a much lower rate of interest." The Cash Credit is always for a limited sum, seldom under £100, given upon the customer's own security, and that in addition of two or three individuals approved by the bank, who become sureties for its payment. Of course, only those banks can furnish such credits which possess a surplus of credit more than they can sell in the ordinary way, and these credits are safe and useful only in small communities, in which men are well known to each other. Some friends of the parties thus accommodated always guarantee the bank against loss; but the losses have proved to be insignificant, the gains to be marvellous; and this form of credit issued on the basis of no previous transaction in the way of deposits illustrates better than any other the radical principle, that Credit is Capital.

The Report of a Committee of the House of Lords made in 1826 on Scotch and Irish banking describes very clearly and fully the system of Cash Credits: "There is also one part of their system, which is stated by all the witnesses to have had the best effects upon the people of Scotland, and particularly upon the middling and poorer classes of society, in producing and encouraging habits of frugality and industry. The practice referred to is that of Cash Credits. Any person who applies to a bank for a Cash Credit is called upon to produce two or more competent sureties, who are jointly bound; and after a full inquiry into the character of the applicant, the nature of his business, and the sufficiency of his securities, he is allowed to open a credit, and to draw upon the bank for the whole of its amount, or for such part of it as his daily transactions may require. To the credit of the account he pays in such sums as he may not have occasion to use, and interest is charged or credited upon the daily balance, as the case may be. From the facility which these Cash Credits give to all the small transactions of the country, and from the opportunities which they afford to persons who begin business with little or no capital but their character to employ profitably the minutest products of their industry, it cannot be doubted that the most important advantages are derived to the whole community. The advantage to the banks that give these Cash Credits arises from the call which they continually produce for the issue of their paper, and from the opportunity which they afford for the profitable employment of part of their deposits. The banks are indeed so sensible that, in order to make this part of their business advantageous and secure, it is necessary that their Cash Credits should be operated upon, that they refuse to continue them unless this implied condition be fulfilled. The total amount of their Cash Credits is stated by one witness to be £5,000,000, of which the average amount advanced by the banks may be one-third."