Commercial bills

The first commercial bills of exchange presently known were notes written on stone tablets for safekeeping of valuables, in use in Babylon in 3000 BC (see next page). «Gold and valuables were kept on shelves in bankers’ depositories or immured into the walls (an early form of modern banking safes). For this service, Babylonian banks took 1/60th of the value of the goods deposited. Once they had received money or valuables, the bankers wrote out receipts — pieces of stone with cuneiform signs on them, corresponding to the value of the goods deposited. Thus, the valuables could be taken out by anyone upon presentation of the receipt and proving his right to ownership of that receipt (for example, with a signature or the impression of a stamp from the person who deposited the money and in whose name the receipt had been made out).

The experience of the Babylonians was then imitated in Ancient Greece.» ¹¹³

Another interesting example is the Tabularium, the most ancient and secure building in Ancient Rome. Even today, it is partially preserved at the base of the Capitoline hill. There lay clay tablets (tabulas) on which certified statements for citizens’ tax debts were preserved. Because there is written evidence that in Ancient Rome one could be put into slavery for not paying one’s taxes within a set period, it is clear that these tabulas could be sold by the State to slave owners. There is more than one case described in which the ‘mob’ revolted, usually ending up pillaging the Tabularium and breaking the tabulas in half..

The ancient Chinese have been credited with inventing paper money. In the 10th century China merchants stopped using the heavy iron coins issued by the Chinese government for small purchases, and used receipts instead. Receipts started to be used not only for depositing coins but also for goods, for paying taxes and to issue credit. The use of these lowered the cost of currency distribution and considerably broadened trading opportunities.

The development of trade relations and wholesale trading was hampered by coinage being used for major trade. When wholesale trading developed into deals with silk convoys and ships carrying spice, sacks and chests full of gold coins were already being used. These were not very convenient, first of all, because of their large volume, and secondly, because of the need for reliable storage during shipping. At a time where there were whole tribes⁸⁹ of robbers making a living from attacking trade routes, things became extremely dangerous.

In addition to their light weight, commercial bills of sale had one other advantage: they kept the merchant from being robbed (payment for bills of sale could only be issued to the actual person named on the endorsement).

Another important quality of the bill of sale was the cheapness and simplicity of its production — it was not necessary to buy the expensive metal kept at the mint and the assay office, it was enough just to write out the paper and endorse it.

These bills of sale were civil documents and represented the abstract obligation of the merchant or trader to pay the person indicated within a specified period the amount of the specified precious metals.

Promissory notes gave rise to a new form of currency: credit. The producer selling goods on credit received a bill of exchange (a promissory note) and could use it instead of money to pay for goods purchased from a third party.

The rise of this type of currency as a social phenomenon only came about because capitalism established close ties between those involved in public production, much closer than those between traders"¹¹⁴

"The main types of credit currency were bills of exchange, called «trading» currency by Marx, especially transfer notes, although these could seldom be used as payment as they could not be endorsed. When this became legal (around the 17th century), they became more widely used as payment. In other words, promissory notes used as bills of exchange became recognised as methods of payment when it started being used as such. However, commercial bills of sale had several limitations on their use in domestic exchange, relating to the territory, the times, those who took part in the exchange, the nominal value (denomination) of the paper, and warranties. As a result, they could not be universally accepted. However, if we look at a range of international payments, a significant number of these were accomplished with bills of exchange: at the turn of the 20th century, these accounted for 80% of all payments. The fact that they were performing the function of world money is evident."¹¹⁵.

The bill of exchange could be issued by anyone for any sum, any amount of coins or any weight of gold.

These two characteristics — the unlimited number of issuers and the unrestricted amount of the bill of exchange — significantly limited the acceptance of the bills, because hardly any beneficiary had reliable information about the solvency of the issuer and the amounts of the deals hardly ever matched the amounts the bills were made out to.

Gradually, the number of authorised issuers decreased and only banking establishments that dealt with promissory notes, receiving and supplying currency as part of their work were recognised, thus getting rid of the problem of unreliable issuers about whom nothing was known.

 

Circulation

Certified bills of exchange, as already noted, came into being for convenient circulation in major wholesale trade, and to improve and make more reliable the deposition of valuables, as well as making production cheaper and simpler. The backing for these bills was the merchant’s property, either personal property, that given in exchange, or the merchant’s success in trading, their caution or ability to earn money. However, improving the reliability of the depositing and keeping of valuables made circulation more difficult, as the issuers challenged endorsements which were not made out in the proper way. Every endorsement was challenged in local courts and it was possible for only the merchant who had made the endorsement to be present. Promissory regulations were therefore drawn up so that any endorser could seek damages in case an issuer refused payment. This action implied, more or less, the following: «I trusted you and accepted a bill of exchange from you for this merchant. But this merchant doesn’t believe me and won’t pay. Take your bill of exchange and work it out with the merchant». The circulation regulations deterred traders when there was no reliable or quick long-distance communication. Only when such communication was made possible did the promissory notes gain power as a type of money.

Merchants — known for their prudence — devised the blank endorsement, which led to the circulation of blank promissory notes for bearers and greatly simplified circulation. In this way, anyone bearing a blank promissory note became a legally bound creditor without question.

The bearers’ promissory notes started a new circulation phenomenon: as derivatives, or derived securities, they allowed the bearer to make concrete transactions and this gave the bearer far more rights in relation to the issuer. Although the issue and redemption of these promissory notes complied with the law (abstract requirements for settlement), the circulation of these notes began to tie in more with the current development of property rights.

The holder of a promissory note to bearer had the right of ownership on the bill slip with an inscription, and the blank form gave an unconditional abstract right to request precious metals or coins from the debtor.

The problems with these derived secure documents and their dualist and legal nature are described in more detail in part 2.

It should be noted that the civil nature of the promissory notes only gives their holder judicial backing as opposed to State support when used as currency.

In the last decade of the 20th century, promissory notes from the Russian joint stock companies EES Russia, Gazprom and Energoatom were used to settle existing wholesale accounts, mostly because of the mistrust of the banking system which had arisen after the two system level bank crises (in 1995 and 1998).

M.P. Berezina believes in the 1990s the number of payments made without using bank funds came to 70 — 80% of all cash free payments¹¹⁷