Money and Commercial Banking, 1789-1861
ANY ECONOMIC SOCIETY that has developed beyond the most rudimentary stages has need for a money and credit system that will perform certain functions, the most important of which are to provide a medium of exchange, to supply a measure of value, and to arrange a standard of deferred payments. These requirements arise out of the fundamental nature of exchange and of production spread over time. Unless goods and services are bartered directly for one another, some way must be found to measure the values of the various items that are exchanged. Furthermore, each transaction will give rise to a debit and a credit; thus, the seller will have a claim against the buyer, while conversely the buyer will owe a debt to the seller. It becomes necessary to provide a method whereby these debts can be legally paid off, either at once or at some future time. These functions may be performed by the use of a money substance, for example, by gold or silver. Values may then be expressed in terms of a money unit containing a fixed metallic content. By payment of the appropriate number of such units immediately upon the receipt of goods or services, debts can be extinguished at once, or money can be used as the basis for settlement in the future.
There are, however, alternative ways of accomplishing the same results. As most buyers of goods and services later become sellers, and as sellers in turn become buyers, it is possible to arrange a system whereby debits and credits are offset against each other. In this way exchanges can take place with little or no use of money. It is still necessary, of course, to provide some way of measuring values. If a money substance is in use, a fixed quantity of that substance can be employed to supply the unit for such measurement, although it is possible to provide a unit of value by the adoption of some conventional or arbitrary unit called money of account, which may not circulate, but which can nevertheless be used to measure prices, debts, and credits.
Cancellation of debts may be arranged by a periodic meeting together of the parties concerned. If, however, more than a few persons are involved, or if they are scattered geographically, this method may be impractical. More commonly the job is assumed by some person (or