Nevertheless, though bank-notes are not money, it is hopeless to try to strip them of that title. When the bank-notes are established in public confidence, it is impossible to maintain the distinction between them and coin in popular language. Mixed together in the same purse, the common heap is regarded as money. They both do the same work, both circulate and purchase with equal ease, both raise no other idea than that they are money to buy with. The radical distinction, however, between them, that coin makes a real payment and notes do not, is of the utmost scientific importance; the difference meets the inquirer at every turn in examining the nature and action of bank-notes.
But it is otherwise with the applications of the word money referred to above. Every man who has the interest of Political Economy at heart, and wishes to guard against the mischievous consequences of an unsound currency, is bound to protest against such an abuse of language. The abbreviations and the slang of the Stock Exchange and of banking incessantly corrupt ideas on currency; confusion of language ever begets confusion of thought.
Let us now examine how it comes to pass that a bank-note is able to act as money. Coin places in the hands of a seller a commodity as valuable as his own. The value of the metal of the coin in the metal market furnishes him with a trustworthy guarantee that he will be able with it to buy in any shop another commodity worth as much as the one he sold. A guarantee is the essence of a tool of exchange: what is the guarantee supplied by a bank-note? The answer rests on a practical fact. (Experience shows that men are willing to sell on credit - that is, on deferred payment; for that is the meaning of credit) They rely on the law which compels debtors to make payment at the due time; if there is no law they can rely upon, as in barbarous countries, they will not sell on credit. Credit next takes a further step as civilisation expands; a seller will give away his goods not only on the credit of the buyer, he will also be willing to accept a debt due to him as payment. This is the essence of the action of a bank-note. Such a note acknowledges that the issuer owes the money stamped on it to the holder of the note. A seller by taking the bank-note makes himself the creditor of the Government or bank, and is willing to part with his property, substantially, on credit to the State or bank? He finds in this debt, now due to him, of the issuer of the bank-note a sufficient guarantee for being able to buy with it other goods. Such a guarantee suffices also for the seller all over the town. The guarantee of a coin is value, not physical qualities; a good debt is regarded universally as possessing equal value; hence it does as well as the coin. Every buyer with a note virtually says: - "I have no money; give me the goods and I will tell a good man who owes me money to pay you for me." That is the action of a bank-note and cheque. This is satisfactory to the seller. He does not want the coin as coin, but as value, and a sound debt is as valuable. The paper money has some special advantages; it is light to carry and far easier to keep in safety than coin, whilst, by the help of the number marked upon it imparts considerable security against robbery.
Thus a bank-note is an excellent tool of exchange, but on one vital condition, that it is as trustworthy as the metal itself of the coin. The instant that the note is unable to procure the gold mentioned on its face, because the debtor is supposed to be insolvent, it sinks into a mere piece of paper. Its holder is now unable to buy with it: he must keep it as a bad debt, for whatever it may prove to yield ultimately.
Paper money has one further superiority of great importance over coin is its comparative cheapness combined with equal efficiency. Twenty shillings' worth of English wealth must have been given to a foreign miner 3 to procure a sovereign; a bank-note costs less than six pence. This gain to England, this saving on the cost of the indispensable tool of exchange, extends to every bank-note in circulation; how vast the capital is thus rescued and kept for the maintenance of English industry, whilst the supply of the fitting tools is complete, is obvious.
We come now to the very important and much-debated inquiry, how these paper machines for exchanging ought to come into existence. (The cheque and the bill possess an individual character; they are created and ended by single transactions; particular goods are purchased with them; the banker pays the cheque, the acceptor the bill, and both cheque and bill disappear. The origin of the bank-note is not so obvious.Assuming, for the present, that it has been issued by a bank, how did the bank manage to get it into circulation ? By paying its debts with it. A bank owes money to its depositors;when they draw it out, they are generally willing, nay prefer, to receive it in the form of bank-notes. It is the same when a Government is the issuer. It owes money - whether to pay interest on a national debt, or on the purchase of supplies and stores for its wants; it pays with notes, which pledge the actual giving of coin at some future time. A Government, however, when it becomes an issuer of notes, invariably enacts a law making them legal tender, whereas banks do not obtain and do not require this privilege to enable their notes to circulate. The reason of the difference is - clear. A bank can be com-pelled by a note-holder to give the money stipulated on pain of bankruptcy; the assurance that a Government will always pay is by no means so certain. There are no means for compelling a Government to pay money, if it chooses to say that it has none, and it would find great difficulty, from the knowledge of this fact, in persuading contractors to take its notes in payment. So it has recourse for help to this privilege of legal tender conferred by law on its notes. A contractor who is assured that his own creditors must take these notes in payment becomes willing to give his goods to the Government in exchange for them; he can pass them on to others, and that is everything.