333. E. Cannan to Harrod , 10 December 1933 [a]

[Follows on from 330 , answered by 334 ]

11 Chadlington rd Oxford

10 December 1933

Dear Harrod,

Since I wrote to you on Nov. 20 I have got Cole's pernicious [b] book and the first thing I saw when I opened it was Radice's perversion of the early history of banking in this country. [1] He makes the first notes appear as loans from the goldsmith to B, [2] whereas in fact the first were the receipts handed by him to A in acknowledgement of the rather nasty coins handed to him by A (the goldsmith). As soon as it was understood that the receipts were for a sum of money and not for the actual identical coins handed over by A, the goldsmith ceased to be running a safe-deposit business and became a banker, as he could and did lend out again what A had lent to him (vulgo, owing to the safe-deposit tradition, "deposited with him"). He might, of course, have given up giving receipts and getting them back when his customer wanted money, and taken to giving his customers pass-books in which his accounts with them were kept, and he might have acquiesced in these customers drawing bills on him which we call cheques; then he would have straightway become a modern non-issuing banker. But in fact the receipts went on long enough for people to get into the habit of transferring them and the goldsmith into the habit of recognising the transfers, and after a bit he altered the form of his acknowledgement; instead of saying "I have received £100 from Mr Smith", and being content to pay the sum of £100 when demanded by Smith or Jones when the receipt was given up, he said "I promise to pay Mr Smith or Bearer £100 on demand", and after about a century I think, he left out "Mr [c] Smith". Well, no doubt Radice doesn't know the history; it is only scattered about in magazine articles by Richards and others. [3] But why did he imagine it wrongly? Because, I should say, inculcation of the idea that borrowing and lending is necessary for the issue of paper currency (banknotes and greenbacks) though admittedly not for the issue of coins, whether standard or token, is a first step in the creation of the confusion of mind which is necessary for the belief that orders to pay which are immediately obeyed are much the same thing as promises to pay which the public holds for centuries without demanding redemption of the promise and even as bits of paper stamped "£1" without any promise at all which the public holds forever with no hope of redemption.

The law does not forbid you or me to issue promises to pay £1 on demand because it knows that the public won't use our "notes" as currency, but if we call ourselves a Bank, we mayn't do it, because there is some chance then that the public may accept and circulate our notes. But we might still be happy if only the confounded tradesmen whom we pay with cheques would pass them on, and they remained out instead of being rushed to our banks.

I see you say token coinage is fully understood. [4] I'm not so sure about that though I've tried to explain it ever since the rupee was first made into a token. But if so why not apply the theory to papertokens as well as to metallic tokens? [5]

Yours ever,

Edwin Cannan

P. S. How much is outstanding in cheques compared with the annual 400 million or more outstanding in currency? Are any cheques hoarded?

  1. 1. E. A. Radice, "Commercial Banks and Credit", in What Everybody Wants to Know about Money, edited by G. D. H. Cole, London: Gollancz, 1933, pp. 162-225.

    2. Radice, "Commercial Banks and Credit", p. 164. In Radice's account the history of banking began about 300 years earlier, with goldsmiths storing valuables in their adequate strong rooms for some people, and successively lending them to other people.

    3. See for instance R. D. Richards, "The Pioneers of Banking in England", Economic History 1, January 1929; "Early English Banking Schemes", Journal of Economic and Business History 1:1, November 1928, pp. 36-76; The Early History of Banking in England, London: King & Sons, 1929.

    4. Harrod, "Currency and Central Banking" ( 1933:13 ), p. 116.

    5. See also letter 330 , [jump to page] .

    1. a. TLS with autograph additions and corrections, two pages on one leaf, in HP IV-186-188/2. Envelope addressed to Christ Church, but forwarded to Campden Hill Square. CC in CP 1033/207. The autograph additions (the last sentence before the signature and the postscript) are worded slightly differently in the two versions.

      b. Ts: «perniciou».

      c. Ts: «mr».

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