Aside from the credit system above mentioned there is a system of using credit temporarily in place of money for present payments. This is by issuing checks. Including these, the larger part of the business of the country is done on credit, and money is, after all, only an auxiliary to it. Enormous transactions take place without the actual transfer of a dollar in cash. Every day the New York clearing house meets to strike the balance among the banks belonging to it. If bank A presents checks which it has received against banks B, C, D, etc., to the amount of $1,125,382, and if all the banks combined present checks which they have received against bank A to the amount of $1,315,460, then bank A owes the clearing house $190,078. If bank B presents checks against banks A, C, D, etc., to the amount of $1,847,625, and they present checks against it to the amount of $1,620,347, then the clearing house owes bank B $227,278. In this way the balances are struck and the clearing house receives the cash from the debtor banks and pays it out to the creditor banks, being at the close of the transaction not a penny richer or poorer. But while there is an average of about $200,000,000 of checks thus passed through the clearing house daily, only about 5 per cent of cash balances is paid in and paid out. Thus 95 per cent of the business is done by a system of check credits.

Even banks themselves sometimes need credit in order to meet their obligations. Upon depositing with the clearing house its bills receivable or other securities, a bank may obtain clearing-house certificates to 75 per cent of the par value of the securities, and these certificates will be received by the clearing house in payment of balances. In times of panic these clearing-house certificates may enable a bank to avoid a suspension of payments. The certificate simply states that Bank has deposited securities, and the certificates, each for $5000, based thereon will be received in payment for balances at the clearing house.

3. Money. Money has two meanings. In the general sense it means whatever has currency as money in payment of debts; this is called currency, or current funds. In a more restricted sense it means whatever is legal tender in the payment of debts, that is, money which a creditor must receive; this is called legal-tender money.

There are ten different kinds of current money in circulation in the United States.

I. Gold coin, now coined in denominations of $2.50, $5, $10, and $20, called respectively quarter eagles, half eagles, eagles, and double eagles. An eagle weighs 258 grains, of which is gold and alloy. The others weigh proportionally. These coins are full legal-tender money to any

amount.

2. Standard silver dollars. A silver dollar weighs 4121 grains, of which is silver and alloy. These are full legal tender to any amount, unless otherwise expressly stipulated in the contract.

3. Subsidiary silver, namely, half dollars (192.9 grains), quarter dollars (96.45 grains), dimes (38.58 grains), all silver and alloy. These are legal tender for amounts not exceeding $10 in any one payment.

4. Nickel coin, namely, the five-cent piece, weighing 77.16 grains, of which is copper and 25 nickel.

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5. Bronze coin, namely, the one-cent piece weighing 48 grains, of which 1 is copper and 18 tin and zinc. These minor coins (nickel and cent) are legal tender for amounts not exceeding 25 cents in any one payment.

6. United States notes ("greenbacks"). These are full legal tender except for duties on imports and interest on the public debt.

7. Treasury notes of Act of 1890. These are full legal tender except when otherwise expressly stipulated in the contract.

8. Gold certificates issued against gold and bullion deposited in the United States Treasury. These are not legal tender, but are receivable for all public dues.

9. Silver certificates issued against silver dollars deposited in the Treasury. These have practically taken the place of the silver dollars for general circulation. They are not legal tender, but are receivable for public dues.

10. National-bank notes, issued by national banks against United States bonds deposited in the United States Treasury. These are not legal tender, but are receivable for all public dues except duties on imports; and one national bank is bound to receive the notes of other national banks.

Of course, gold certificates and silver certificates do not increase the volume of money. They simply represent so much coined money (or gold bullion) which is held for their redemption, and they circulate instead of the less convenient coin. They are a kind of warehouse receipt for money.

4. Exchange. Exchange is a method by which, without the actual sending of money, debts may be paid at distant points. A claim or credit one living in New York has against a debtor in London may be used to pay a debt one owes in London, or it may be sold to another debtor in New York and used by him to pay his creditor in London. A bank in New York may keep a credit with a bank in London and so be able to sell to New York debtors its checks on the London bank with which the New York debtors may pay their London creditors. It is, of course, far cheaper and safer to send to London an order on a London merchant or a London bank, than to send gold coin.

Example. B in New York sells to C in London cotton to the amount of £600, and draws a bill of exchange (order for money) on C payable to B's order sixty days after sight for that amount. (a) B may sell this bill to a banker or bill broker in New York. If D in New York owes E in London £600, D may buy this bill of the broker and send it to E, who presents it in London to C and gets his money. (b) B may discount the bill at his bank in New York. The bank may send it and other like bills to its correspondent bank in London and thus get a credit there. D may purchase of the New York bank its bill of exchange on the London bank and send this to E, who presents it at the London bank and gets his money.

Domestic exchange is that between different parts of the same country. It is sold by banks, express companies, telegraph companies, and even by the government in the form of post-office money orders.

Foreign exchange is between a city in one country and a city in another country. It is of two kinds: (a) bankers' bills, that is, bills of exchange or checks drawn by one bank on another; (b) commercial bills, that is, bills of exchange drawn by one merchant (creditor) upon another merchant (debtor). The latter may be drawn against a shipment of goods and be accompanied by the bill of lading, in which case they are called "documentary"; or they may be without accompanying documents of title, in which case they are called "clean bills."

Foreign exchange must be reckoned in the money of the country on which the bill is drawn. There is a par of exchange fixed. Thus an English pound sterling is equal to $4.8665 American money. There may be, however, a slight premium or a slight discount equal approximately to the actual cost of shipping gold, which is about of 1 per cent on the amount shipped. As this is scarcely 2 cents on $4.8665, the premium or discount will rarely be more than 2 cents.

To the natural rate fixed by the par of exchange, with premium or discount, is added the commercial rate, depending on the abundance or scarcity of commercial bills and the price fixed for accommodating a person in New York with a bill of exchange on London or any other foreign city. If exchange is

1 The United States Treasury will, on application, send an official Table of Values of Foreign Coins.

at par, one in New York could not buy a bill on London for £100 for $486.65, but would have to pay an added percentage. Exchange" is often used in the sense of the added price paid for such a bill.

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5. Payment. Payment is the discharge of a debt in money or its equivalent. It is the duty of the debtor to seek out his creditor and tender payment at the proper time. It is not the duty of the creditor to give a receipt unless the statute so provides, but it is customary to do so. The tender to be legally and technically correct must be of the exact amount in legaltender money. If the creditor refuses a lawful tender, his refusal has the effect of stopping interest upon the debt, and, if the tender be kept good, of preventing costs in case he resorts to legal process to collect the debt.

If the debtor owes the creditor different debts, he may direct that a payment be applied toward the extinguishment of any one of them he may select. If the debtor makes no application, the law will apply the payment in a manner deemed most equitable and just to both parties.

A receipt, when given, is strong but not conclusive evidence that the sum named in it has been paid. It may be impeached for mistake or fraud.

As stated above, the larger part of the payments in the commercial world are now made by the use of checks or bills of exchange, while money, save in the case of small transactions, is used mainly to settle balances at the clearing house or between foreign cities.

82. Interest and usury. Interest is the compensation allowed by law or fixed by the parties for the use or forbearance or detention of money.

Legal interest is the rate of interest allowed by law. Parties may agree for less than this, but not for more unless a higher rate by special agreement is permitted by statute. If they agree for interest with no rate specified, the legal rate will be understood. In many states a legal rate is fixed for cases where there is no specific agreement, and a maximum rate for cases where there is an agreement. These statutes often

provide that an agreement for a rate higher than the legal rate but within the maximum rate shall be in writing.1

Usury is unlawful interest, that is, an agreement for interest greater than that allowed by law. Such a contract is illegal, but the effect of such illegality varies in different jurisdictions. In some the lender cannot recover any interest at all; in some he can recover neither principal nor interest; in some he forfeits only an excess above the specified rate.

In England, Massachusetts, and some other jurisdictions no maximum rate of interest is specified by statute, and parties may contract freely concerning the rate, except that an unconscionable rate might be evidence of oppression or undue influence. In most American states the rate is fixed by statute, ranging from 6% to 12%, and any agreement for interest above that rate would be usurious and illegal; but some of these states allow corporations to contract to pay any rate of interest agreed upon, and some allow banks to make large call loans upon negotiable security at any rate agreed upon. The object of fixing the maximum rate is to avoid oppression of borrowers, and it is thought that corporations and dealers upon stock exchanges (who secure call loans) are not likely to be subject to such oppression and should be left free to contract for any rate they may think the loan worth to them. Special rates, higher than ordinary rates, are also usually allowed to be charged by pawnbrokers.

Up to the time a debt becomes due and payable there is no interest allowed upon it unless the parties have provided for interest.

A sale of goods for $500 upon sixty days' credit would carry no interest during the sixty days unless it was provided that the credit should be "with interest." So a negotiable promissory note carries no interest until maturity unless interest is specified in the note. All debts bear interest after they are due and payable, such interest being regarded as a measure of damages for the wrongful detention of the money.

Compound interest is not favored in the law and will be allowed only when the interest due has by some new agreement 1 See Interest Table at end of this chapter.