We have hitherto confined our attention to the metallic portion of the currency, and have treated the standard of value as if it were purely a gold standard. Speaking accurately, this is not quite true. Gold is but the basis of our currency, and forms only a part of the standard of value. Super-imposed upon this basis of gold is an enormous mass of obligations and promises to pay gold, and the standard of value is therefore a mixture of gold and obligations to pay gold. In one sense we are perhaps justified in speaking of our standard of value as a gold one, since the paper portion of the standard is legally payable, either on demand or at some future time, in gold; but we must never forget that the value of money is in part determined by the amount of these obligations. If we could extinguish altogether the paper portion of the currency, the value of the remaining portion would undoubtedly rise enormously, and it is for this reason that we cannot with accuracy speak of our standard of value as a purely gold one, although it has a basis almost entirely of gold.

Mr. G. H. Pownall, in an interesting paper read before the Institute of Bankers on October 19th, 1881, gave the result of his statistical researches into the proportional amounts of the different kinds of money in active circulation. The following table shows the percentage of metallic and paper money received from the customers of country banks in 261 towns of England and Wales:

He further gives a similar table for ten banks in the city of London:

In the country the percentage of gold and silver coin was about 15 per cent, while in London it was less than 1 per cent.

The remainder can be classed together as "instruments of credit."

The word credit is used in many senses, but the meaning here attaching to the term is that of a present right to the future possession of money. Credit is a right, and necessarily implies an obligation, and the various forms of paper money are evidences of, and means of transferring, these rights. Smith gives Brown a promissory note for £100 due in three months. Brown acquires an immediate right to the possession of £100 at the expiration of three months, and Smith incurs a similar obligation to pay the amount. Remember that Brown's right is an immediate one, and if he wishes to realise his right he can do so by selling the paper note which is the evidence of his right. He takes it to his banker, who buys it from him, charging him interest and perhaps a small commission.

Every creation of credit increases the quantity of money which may be put into circulation, and so has an effect on prices. The creation of credit increases the effective power of demanding goods, that is, it increases the power of demanding and paying for goods, and this is equivalent to an increase of the quantity of money.

The various instruments of credit in circulation are not all paid in gold, although they may be legally so payable; the amount of gold in circulation in England is only sufficient to pay a very small percentage of the paper obligations current at any particular time. By far the greater proportion is cancelled by the creation or transfer of other forms of credit. The whole of our monetary system in fact rests upon mutual confidence and forbearance, and when a temporary lapse of such confidence occurs we get a monetary crisis. All debts are legally payable in gold or Bank of England notes, for which gold can be at once demanded; but by implicit agreement, credit instruments or paper money, as we may call them, are almost universally accepted.

We pay with rights to demand gold, which are exchanged against one another, and only a small proportion of which are liquidated in gold.

The amount of credit which may be created on a given basis of gold is not a fixed quantity. But neither is it an unlimited quantity, and one of the greatest of dangers to modern commerce lies in the possibility of erecting too heavy a superstructure of credit upon the metallic base, a proceeding usually ending in temporary disaster, as we shall see in a later chapter. This amount varies according to trade conditions, the state of the public's confidence in each other, and the existence or absence of that vague atmosphere of speculation which plays such an important part in modern business life.

The various documents which are the evidences of the right to demand gold and the means of transferring such rights, instruments of credit as they are usually called, can be conveniently divided into two groups: on the one hand, bank notes and Government notes; on the other hand, cheques, bills, promissory notes, and the various modifications of such documents, as, for instance, postal orders and money orders. There is a broad line of distinction between the two groups; the second one consists of forms of paper money which rarely circulate for long, except for the purposes of collection. The man to whom a cheque is given usually pays it in to the credit of his account with his banker, by whom it is at once presented for payment. Bills of exchange, as we shall see, are circulated during the period in which they are current, but usually only by endorsement and delivery, the effect of which is that every fresh holder obtains a kind of guarantee from the previous holder.

But bank notes are payable to bearer and circulate freely from hand to hand, besides which they are in many cases legal tender. It may be years before they are presented for payment at the bank which issues them.

The consequence of this distinction is that the issue of bank notes requires strict and careful regulation, while the other class of documents can be left to such regulation as is afforded by the business habits of a mercantile community, and such legal protection to the various parties as experience shows to be necessary. The mere fact that bills and cheques are presented for payment, either upon their due date or shortly after they are issued, makes it difficult to issue them in excess, and even if it were thought desirable to place any restrictions upon their issue, it is not easy to see how this could be done, for the imposition of any restraints upon the creation of mercantile credit could not be tolerated for an instant in a country like this. Its regulation is best left to the prudence and business habits which are the growth of long experience in commercial matters.