The Press. SATURDAY, SEPTEMBER 12, 1896. PAYMENT BY PAPER.

Press, Volume LIII, Issue 9520, 12 September 1896, Page 6

The Press. SATURDAY, SEPTEMBER 12, 1896. PAYMENT BY PAPER.

When Disraeli's Reform Bill passed in 1867, Mr. Robert Lowe remarked, "We must now educate our new masters." That is the necessity under which we now find ourselves in New Zealand, and that necessity must be our apology for treating in an elementary fashion the medium aud methods of exchange. Some of our correspondents, and possibly many of our readers, think that because payments between one country and another are, for the most part, made by bills of exchange, a State Bank could, by means of paper and without gold, carry on the whole business of the country. To the initiated, this is like supposing, that because a dealer makes most of his payments by cheque, all he needs is an inexhaustible cheque book. Now, everybody knows that a cheque is an order for gold, and is valueless if the Bank on which it is drawn' will not give gold for it. But everybody does not see that bills of exchange are also certificates for gold, or that all paper money is worth just what can t»e got for it in gold. This is the fact that we propose to explain.

First, then, all exchange was once barter, and all buying and selling are still barter in disguise. It was very troublesome to exchange a horse for cow_, for he who had cows might not waut a horse. But as everybody wanted personal ornaments, the primitive dealer turned his horse into jewellery, and was sure that some one would be glad to give him cows for it. But he was just as rich with the jewellery in his possession as with the horse. He had made an exchange of value for value. When he bought cows he simply exchanged value for value again. Thus buying and selling came to be a double barter. The modern sovereign is simply piece of gold of given value, bearing its own certificate of purity and weight. It does not represent value, it is* value. Filed into dust or melted into a shapeless lump it is worth practically the same. But the trade of the world demanded something lighter and more convenient than gold, besides, coins lost weight by wear and by dishonest means. Hence arose a system of keeping the gold in safe places and issuing certificates for gold. Bank notes, cheques, drafts and bills of exchange are such certificates. Any holder can turn them into gold. They are not substitutes for money. They are orders for money. That is why they maintain their value. The moment a suspicion arises that the paper is to be a substitute for gold and not an order for it the paper falls heavily.

But commerce demanded and invented still further convenience. There is a risk and a cost in conveying gold from one part of the world to another, which the ingenuity of merchants has contrived in part to avoid. Let us suppose that this inconvenience was first felt between England and New Zealand. A Christchurch importer, let us say, wanted to buy £5000 worth of iron in England, and had to send a hundred-weight of gold to pay for it. The ship demanded a special rate for carrying the gold, and there was the risk of two voyages, or heavy insurance both ways. He felt that this was a serious handicap to business. But then he heard of an English merchant who wanted to buy £5000 worth of wool in New Zealand. He at once suggested, " You pay for my iron, and I'll pay for your wool. We will both pay in gold, but neither will ship it." This is the germ idea of international exchange, but. it requires certain machinery to carry it out. The two buyers at first had to consult the two sellers, who demanded a share of the saving for their help. When this was arranged the seller of the wool sent a letter authorising the buyer of it to pay the seller of the iron. The seller of the iron sent a similar letter to his debtor, who paid * the seller of the wool. Either of these letter writers would have been greatly amused had someone suggested that his letter was money, or even a substitute for money. " No," he would have said, "it is only an order for money; and it is no more a substitute for money than it is a substitute for iron or wool." His letter, in fact, was simply the first rude bill of exchange. Trade has now stereotyped the form of the bill and rendered all personal consultations unnecessary. The New Zealand buyer of iron and the English buyer of wool each actually has to provide the gold for their several purchases, but the transaction is completely through a Bank or Banks by aid of a bill of exchange, thus avoiding the necessity of shipping gold from one country to the other. Each buyer, however, as we have shown, has actually to provide gold to pay for his purchase. The Banks make a charge, which is called exchange; but this is always less than the coat of transmitting tbe gold. H the sums sent from each

country were identical in amount, then the bills would cancel each other. But if London has collected more o£ these certificates for gold than Now Zealand has, then New Zealand must either send tho balance in gold ov borrow the gold in London. England buys from France to the extent of £2,000,000 a year mora than Franco buys from England. But Euglish ingenuity has not discovered any escape from remitting the £2,000,000 iv gold to Paris. Thus, if England started a . State Bank with an inconvertible j paper currency, all the laws she might dovise would not onable hor to pay the balance of exchange of £2,009,000 duo to France by any means but gold. Every reader will, therefore, surely see that bills of exchange, like bank notes aud cheques, are not money. They are conveniences and economies in trade —orders to obtain gold iv the most convenient place. What would a New Zealaud trader do if he were compelled to take inconvertible State Bank notes for his goods when he required the proceeds of his sales to pay in England for other good to renew his stock, which goods conld only ba paid for in gold ? The exports of New Zealand amount to, say, £8,000,000. The Banks advance the monoy here upon proof that that the produce has been shipped, and tbey send bills of exchange for £8,000,000. to England. But how can the Banks advance this vast sum? In this way—New Zealand merchants are buying say £0,000,000 worth of goods in Europe and they pay £6,000,000 to the colonial Banks. The other £2,000,000, in round numbers, are furnished by the Government, which lias to provide £2,000,000 in Loudon for interest on loans, and pays it here instead, leaving tbe Banks to

arrange exchange. Thus, broady put, the total exports must cover the cost of our imports, plus the interest on our borrowed money, or the colony must siuk steadily into debt by borrowing to make up deficiencies in exports. Readers of the Bank Enquiry will have noted that the Bank of New Zealand deemed it prudent to maintain largo cash reserves in Australia, so as to be able to purchase bills of exchange there, when the market was favourable for the large remittances of the Government to London. That is, if the Government wished to remit to London half a million, at a time when the Bank of New Zealand was without an equivalent of commercial drafts as a set off, the Bank would buy bills of exchange in Australia, or from some of the other Banks, for the amount required, but such drafts would have to be paid for iv gold; State Bank notes would be absolutely useless. Thus there must be cash at both ends. We do not say that the Banks do not make a profit on this business, or that a State Bank could not do the work and secure the profit if it held sufficient gold, as the existing Banks do. After the experience of the last two or three years in Australia and New Zealand most people will agree that there is a strong, probability of the profits so made being more than swallowed up by the losses in trade. To suppose, however, that there is some magic about a State Bank whioh enables it to do without gold is as absurd as to faucy that a State locomotive can be run without fuel.