The notion of money as circulating credit is supported by the history of the bill of exchange, which appeared in Europe in the 16th century. These credit notes became the dominant financial instrument, upon which the development of European commerce depended. Bills of exchange, which were accepted and discounted by merchant bankers, circulated as currency and were even denominated in their own unit of account, the écu de marc. At the great fairs, held annually at Lyons and Champagne, the trade in bills of exchange was concluded with cash payments settling the difference. As Mr Martin writes, “coinage may have only been the very tip of the monetary iceberg”.
Bills of exchange, not the pound sterling convertible into gold, were the effective currency of Victorian Britain. This form of monetary credit was superseded by the growth of commercial banking. After bank loans replaced bills, we lost sight of the fact that tradable and liquid credit instruments have the characteristics of money.
Source: Edward Chancellor: It pays to consider the nature of money (2014)
Felix Martin: Money: The Unauthorized Biography (2013)
International bills of exchange were as a rule made out in one form of ghost money or another.
Money of account
[…]A more effective remedy against confusion was the convention of a fictive currency, money of account, or ghost money. 12 These units had their origins either in the Medieval convention of a pound of silver from which to mint 20 shillings, groats or other standard coin, or in a gold or silver standard coin which, having disappeared from circulation, continued as an accounting convention which presumably spread from government administration into society. 13 Thus Flanders had its Flemish pound, Brabant the Brabantine pound, the different local pound weights accounting for their different value. Neither had been minted as a coin and they were really reference units of silver against which all coins in circulation could be properly valued according to their weight and fineness. By contrast, during the fourteenth and fifteenth centuries, the city of Deventer had several fictive units, ghosts remaining from gold coins long gone but, similarly to the pounds of silver, really serving as set weights of bullion against which to value circulating coins (De Meyer and Van den Elzen 1980). The life of these ghosts was perpetuated because the public administration continued to use them as reference values for transactions and for setting exchange rates, thereby providing a practical gauge for commercial transactions as well. Coupled with the gradual penetration of bookkeeping standards and mutual current accounts between merchants, these ghosts facilitated cashless settlements of transactions and equally served as standard gauges to value whatever coin was available if settling in cash. 14 Thus, contrary to Cipolla’s interpretation of ghost money as an odd relic confined to the public administration and the higher reaches of commerce, it was really a widely used convention (Cipolla 1967). International bills of exchange were as a rule made out in one form of ghost money or another. 15 […]
Money of account offered a low-cost solution to the four handicaps of cash: its weight, the profusion of circulating coins, the uncertain values of those, and their fluctuating availability. Coin was a commodity whose price and availability fluctuated, whereas money of account was always available and could perform two monetary functions, standard of value and means of settlement, cheaper than cash, which retained an advantage only in effecting the third one, store of value. Consequently, there is no reason to suppose, as the literature sometimes does, that a shortage of coin generally or particular deficiencies in the circulation of coins hampered economic growth (Cf. Sussman 1998). […]
For our present purpose we only want to underline the common mistake of taking M as cash alone, because of the many ways in which money was created. Bankers, cashiers, and money changers did so by opening book credits and extending formal loans, and the spread of bookkeeping standards enabled more and more merchants to follow suit. Bills of exchange circulated in rising numbers and their use widened to include a growing number of cities and merchants. Assignments, a form of cheques, and bills obligatory already were a central feature of the Antwerp market of the mid-sixteenth century, their use boosted by a system of clearing run by cashiers and by a better negotiability following the introduction of formal rules governing endorsement. 26
The nub of the matter is that the many handicaps of cash discussed above put a premium on using alternatives, with the effect of widening M. Sudden shortages of cash caused by a rush for liquidity did, of course, continue to happen quite regularly, but in normal circumstances the alternatives provided sufficient stretch to remedy currency deficiencies. 27 Having ghost money as a common denominator greatly facilitated this stretch, even more so when coupled with the use of basic administrative skills. Such skills were not vital for adopting ghost money as a gauge of value. At Hondschoote, the leading Flemish cloth production centre from the early fifteenth century, money of account was commonly used long before the habit of formal bookkeeping spread throughout the business community. 28 By 1530, people like the small Mariënweerd tenant mentioned earlier were familiar with the concept. 29 Presumably supply chains functioned as conduits, money of account trickling down from wholesalers, for whom the premium for using it was highest, to the retail trade. Retailers must have kept track of store credit in money of account unless they dealt with a floating customer base. Stallholders at food markets, innkeepers, and the ubiquitous itinerant peddlers must have dealt in coin with their customers, but in early eighteenth-century Holland shopkeepers and professional service providers like barber-surgeons appear to have been paid only once or twice a year, so they and their customers must have reckoned in ghost money. 30 […]
Conclusion
In the early modern Low Countries, paying cash was a chore, so people, and not only merchants (Spufford 2008), avoided it whenever possible. We show that ghost money provided a ready alternative to coin by facilitating cashless payments in a fictive, stable, unit of account. Moreover, in tandem with bilateral current accounts, ghost money facilitated the creation of money in the form of book debts, rendering the volume of M1 in circulation very elastic. The fact that any expansion of M1 in this way was closely tied to the sale of goods and services minimized the danger of inflation, while the system’s social embeddedness limited the potential for abuse. Ghost money thus solves the puzzle posed by Morineau, i.e. the Dutch Republic’s rapid economic growth with a low coin circulation.
Our findings have several implications for the way in which we think about the evolution of money and credit in general. First, the gauge of value function of money was probably far more important than the settlement or store of value functions were. For barter transactions to work, they must revolve around some common standard, or else people will not be able to agree. That means we need to abandon the stage theory of monetization progressing from barter via cash to credit because it simply does not work. Instead, we need to rethink what we mean by commercialization and monetization, because what looks like barter was probably already monetized in the sense of using some form of standard. In other words, deep monetization in the sense of Lucassen (2014) must have been preceded by money as a gauge of value.
Second, we should expect a poor currency system to put a premium on people devising alternative means of settlement, rather than reducing their transactions. Ghost money was only one way of doing this, arguably far more practical than the cigarettes serving as currency in Germany following the collapse of the Nazi regime.
Third, if people always possessed a way to settle transactions, credit relations were shaped by choice, not by the necessity of having to take credit in the absence of means of payment. Of course, credit could still be a sign of social or economic dependency, as it was in Markegem, Flanders, but not necessarily so: stewards and tenants on the Rechteren estate in Salland used cashless payments and credit simply because it was more practical. That is to say, we need to push the arguments of Muldrew, Vickers, and Kuroda further and start appreciating the social dimension of payments. How Van Bell, Kenkhuis, or the New Englanders studied by Vickers settled debts and claims depended heavily on their relationship with the counterparty in question, so examining patterns of settlement tells us more about how their society worked. Even today, similar telling social differences in ways of paying persist, in the composition of what people carry in their wallets, in the various classes of credit cards and loyalty schemes, or in the penetration rate of paying by smartphone.
From this third point it follows that, in most places and most of the time, cash and credit functioned seamlessly together as slightly different forms of obligations to pay or rights to receive, rather than distinct and differently priced economic categories, let alone stage posts in a hypothetical evolution from barter via money to credit. That means we ought to focus more on what makes people separate cash from credit by putting terms and price on payments due. In the Low Countries, for instance, rebates (rabatten) for early payment were common in commercial centres like Antwerp and Amsterdam at least by 1600, if not before. Perhaps cultural attitudes determined their spreading outwards from there, for instance capitalism rendering people more sensitive to the value of money (Howell 2010, Muldrew 1998). Perhaps commercial pressures did, or both working in tandem. For now, all we can say is that the availability of cash money did not matter, since other kinds of money were always readily available.
Enter the ghost: Cashless payments in the early modern Low Countries, 1500–1800 (2015)
wonkmonk's notes 