Banknotes from private banks

Bankers’ Houses replaced, not without some profit, private promissory notes with banknotes (bank bills) — bills unified by sum (face value), which was convenient and cut down on the costs of circulation (see fig. 12). In contrast with traders’ promissory notes, banknotes were issued only payable to bearer and upon presentation, could be circulated over an unlimited amount of time and were backed by gold.

Such liabilities proved more reliable and became very popular, attracting the maximum demand on the market, giving their bearers an air of respectability.

The Count of Monte-Cristo in Alexandre Dumas’ novel of the same name boasted that he’s carrying around a one-million bill from the Rothschilds, and thus greatly impressed his contemporaries.

Such bank notes — literally, «notes written by banks», used to be a proper noun, but became a common noun as time went by.

«A banknote (bank bill) — is a security unified by sum (author’s comment), which certifies the self-addressed order of the issuing bank to pay its bearer immediately upon presentation the sum of money in coins which currently are in circulation¹¹⁹

"A banknote is nothing else but a banker’s bill, according to which the holder can receive money at any given time and which the banker uses instead of promissory notes".^120"

Even though banknotes had the same «bill nature», they were more stimulating to circulation because of the following properties:

• The broadly known wealth of the issuing banker;
• No fixed term in circulation;
• Bearer-oriented nature;
• Issue of unified sums (face values);
• Backing with gold and other bank’s assets, which were considerably higher than those of traders.

Banknotes, i.e. paper money, don’t have any intrinsic commodity value. Paper money is a symbol, a sign of exchange value. What then caused the permanent disappearance of gold from circulation? There must be objective causes, apart from wars and other troubles, apart from lavish rulers and cunning bankers. Here is the simplest explanation — paper money is convenient in circulation, it’s easy to carry. A phrase by the great Adam Smith comes straight to the point — he said that paper money must be viewed as a cheaper circulation tool.

Consumer value of money impeded circulation, and thus to the front came exchange value, which caused a process later known as demonetization — the withdrawing of gold, which no longer performed the functions of money, from circulation.

Circulation

Consumer value of nearly all cash credit money consisted in the quality of the paper and the engraving, which was important to those with artistic taste, but was worth only about 1 percent of its face value, which embodied the exchange value of the security in case the issuing party’s business went well and the beneficiary was aware of that. If, however, the beneficiary received true or false information that the issuing party’s business was experiencing difficulties, the security’s exchange value would begin to decrease. Lastly, if the beneficiary believed the issuing party to be bankrupt, the security’s exchange value became equal to its commodity value and depended only upon the beneficiary’s artistic taste and his wish to keep this particular product of the printing industry.

A banknote from a private bank is a unified by sum «self-addressed» private bank bearer bill with a non-fixed «upon presentation» term and a blank endorsement.

This derivative security, whilst being an unconditional obligation, similar to commercial bearer bills, during its issue and paying off was subject to the law of obligations, within which it is important to specifically underline the abstract nature of an obligation, caused by the need to simplify court disputes for the benefit of trade turnover. The essence of the obligation relations which were in place during the paying off of a banknote, was the unconditional obligation to hand out a certain amount of precious metal or coins of a certain weight, composition and form.

However, circulation of such banknotes was subject to the more developed and better known at that time law of estate. The person who in the physical sense possessed the bill, undoubtedly became the creditor in this obligation case.

The bearer of a banknote had the property right to the banknote paper bill with an inscription, as well as the unconditional abstract right to demand precious metals or precious metal coins from the banker.

Banknotes were backed by the enormous — by the standards of that time — wealth of bankers. The wealth of the Rothschilds had been legendary for a long time.

It is necessary to mention that the private law nature of private banks’ banknotes as a variety of bills provides their holders only with support in court, in contrast with state-endorsed private law support provided to holders of currency.