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There is much doubt as to the exact time and place of the origin of commercial paper. This much seems quite certain: that bills of exchange were used to some extent by the merchants of Italy as early as the thirteenth century and, not a great while thereafter, found their way into England, where they were first used by the English merchants in their dealings with the merchants on the continent of Europe. Thus the foreign bill of exchange was the first mercantile specialty to become known to the English law.

The inland bill of exchange and promissory note followed rapidly in the wake of the foreign bill of exchange. And by the first of the seventeenth century all three of these instruments were well known to the merchants of England, and were coming to be made the subjects of litigation. It was about this time also, it is said, that the custom of making such instruments payable to order or bearer, and thus negotiable in form, took its rise. Down to the time of Lord Mansfield, in 1756, however, the rules that governed in the controversies which arose over bills and notes were in a more or less chaotic condition. He it was-since termed the "father of the Law Merchant"-who voiced and molded into the form of definite rules of law the numerous customs of the merchants with reference to such paper and made the Law Merchant a real part and parcel of the great body of the English Law.

15. THE DEVELOPMENT OF CREDIT INSTRUMENTS IN THE UNITED STATES'

BY JOSEPH J. KLEIN

The use of commercial drafts played a very important rôle in the history of the American colonies. The draft was used when the drawer had a balance to his credit with some merchant, residing either in England or the colonies. There is no evidence, however, to show that the promissory note was used during the colonial period. Bank checks appear to have been unknown in colonial times, and there is no evidence to show that the few banks of the time did any discounting of bills of exchange. Checks were unknown to the colonists until the time of the Revolution.

In the period between 1789 and the Civil War we find the development of an extensive use of both drafts and promissory notes in mer

Adapted from an unpublished thesis on The Development of Mercantile Instruments of Credit in the United States.

cantile transactions. During this period also banking became well developed and differentiated into banks of discount and banks of circulation. The use of the check became quite generally known in the cities, although it was not until after the Civil War that deposit currency came to be the most important instrument of exchange that we possess.

16. THE USE OF CHECKS IN THE UNITED STATES'

BY DAVID KINLEY

1. The volume of business that can be done by credit paper depends on several circumstances. Obviously, in the first place, it depends upon the banking facilities of the country. If the banks are widely distributed, if they are willing to deal in transactions small enough to be within the reach of large numbers of people, many more transactions will be settled through them than would otherwise be the case. This fact undoubtedly explains in large measure the development of what may be called the "banking habit" among the people of the United States. Undoubtedly our people pay by check much more commonly and much more largely than people of any other country.

In the next place, the density of population is, of course, an important factor in the growth of credit exchanges. A larger volume of business is settled by bank paper in a commercial center than in an agricultural community, even though the proportion of total business thus settled may not be larger.

Finally, the general education and intelligence of the mass of the people is an important factor. Men do not use banks unless they have confidence in them, and they have come to be regarded as a settled part of the ordinary commercial mechanism of the community.

2. It is very clear that a large proportion of the business of the country, even in the retail trade, is done by means of credit instruments. We are justified in concluding that 50 or 60 per cent of the retail trade of the country is settled in this way. Over 90 per cent of the wholesale trade of the country is done with checks and other credit documents. We may therefore safely accept an average of 80 to 85 per cent as the probable percentage of business of this country transacted by check.

Adapted from The Use of Credit Instruments in the United States. (National Monetary Commission, 1910.)

3. Such evidence as there is seems to indicate that payment by check has shown an increase during the past few years:

a) In the first place, the returns of our reports show a larger percentage in retail trade.

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DIAGRAM OF THE PERCENTAGE OF CHECES IN AGGREGATE DEPOSITS BY CLASSES OF BANKS.
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b) The prosperity of the farmers in the Central West has enabled many to carry bank accounts who fifteen years ago could not carry balances.

c) The third evidence is found in the growth of the number of small banks, especially in the country districts. Since national banks have been permitted to establish themselves with a capital of $25,000 their number has increased from 3,617 to 6,926.

d) The appearance of a considerable portion of checks in the deposits of mutual savings banks is also, to some degree, significant.

Of course the credit documents received in the deposits of these banks may be to a considerable extent money orders. Nevertheless their deposits show a certain use of credit paper by the patrons of the banks.

We cannot expect any social movement to continue steadily in one direction for an indefinite time. Such evidence as inquiries of this character furnish seems to show that there is a certain ebb and flow in the proportion of checks used in business payments.

The volume of credit transactions very likely tends to increase as population and business grow. It does not increase uniformly, however, but by periodic movements. That is to say, the rate of increase of credit transactions, as compared with the whole volume of business, grows, as it were, by jerks and at a decreasing rate.

One point needs to be carefully borne in mind: However great the volume of credit exchanges, however extensive the use of credit may become in a community, they can never fully displace sales for direct money payment.

4. The amount of money released by our credit transactions is not equal in amount to the volume of credit instruments, for there must always be enough to settle the uncanceled balances called for in money from day to day. The amount of money displaced is the difference between the amount that would be needed in a purely money régime and the amount needed to pay the uncanceled balances of the credit transactions. It is important to note that an increase in the volume of credit transactions does not necessarily mean that we must get a proportionate increase in our reserve of money. Every refinement of the credit mechanism makes it possible to do a larger volume of business on the same reserve.

No one can say, therefore, with definiteness what is the amount of money released if 75 or 80 per cent of our business transactions are settled by means of credit paper. This is a matter in which the long experience of practical bankers is the only safe guide, because the amount in question is changing from day to day as the conditions change. No simple rule about it can be laid down. Certainly, however, it is not 75 per cent of the money which would be necessary if all transactions were settled with money. It is an amount varying from one-third to one-fifth of uncanceled credit balances, according to the perfection of the banking machinery, the state of credit, prosperity, and public confidence.

17. THE LAW OF NEGOTIABLE INSTRUMENTS1

BY D. CURTIS GANO

Definition. A negotiable instrument may be defined as a written instrument or evidence of the debt which may be transferred from one person to another by indorsement or delivery so that the legal title becomes vested in the transferee.

Principal characteristic. The principal characteristic of a negotiable instrument, and that which makes it pass freely as a substitute for money, is that in the hands of a third party who purchases it in good faith and for value before it is due, it is enforceable, while the original holder, perhaps, could not enforce it for the reason that the party who made the instrument has a good defense or counterclaim. As soon, however, as an innocent purchaser comes into possession of it for value, he cannot be prevented from collecting because of any defenses existing between the original parties. In other contracts the purchaser acquires only the right of the party from whom he buys, but in the case of negotiable paper he may acquire a better title than the original holder.

Essential conditions. The question arises as to what conditions are essential to constitute a contract a negotiable instrument. In general we find that no exact form need be followed, although custom has prescribed forms that are very generally used, but it is required that a negotiable instrument must be: (1) in writing, (2) properly signed, (3) negotiable in form, (4) payable in money only, (5) the amount must be certain, (6) must be payable absolutely, (7) to a designated payee, (8) at a time that is certain. A few words of elaboration on each of these points is necessary.

I. No oral contract could be negotiable. By a written contract we mean one in either writing or printing, and the writing may be executed with any substance, as ink or pencil. The whole instrument must be written. No essential part, as the names of the parties, the amount, or the date, can be omitted from the writing.

2. It is usual that the signature be made by writing the name of the signer, but it is not necessary, as he may affix his mark or any other character intended to be a signature. It is usual to place the signature at the close of the instrument, but if it is shown that it is meant for a signature, it may be placed on any other part.

Adapted from Gano's Commercial Law, pp. 116-53. (Copyright 1904, 1913. By permission of American Book Co., publishers.)

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