THE NATURAL PAYMENT SYSTEM

In this essay, an overview of the Indian subcontinents bill-based payment system will be
conducted. This essay follows on from 'The Gold Price Extinction' (to be released for public
consumption at a later date.)

Historical perspective on the bill of exchange
The concept of liquidity expanded
The destruction of the current system of payments


Historical perspective on the bill of exchange

The bill of exchange system would be a natural extension of the free circulation of that/those
substances with constant marginal utility should that/they be allowed to circulate freely. There
is no contrived network needed for its establishment beyond the network arising from our
natural social interaction born from our will to survive. An understanding of the billing
mechanism is a sine qua non for understanding the origin and future of true currency.

Fekete has recounted instances of the bill of exchange spontaneously being employed; in
Europe, with the great city fairs, to the cotton and clothing industries in C19th northern England
1
(first mentioned by Mises but not taken further in concept
2
.) To these can be added the early
Indian system of bills of exchange known (in Urdu) as hundi system. Strictly, the hundi system
encompasses remittance instruments, credit instruments and trade instruments (which would
include the Smithean real bill.) The hundi system, employed across the whole Indian
subcontinent was in practice from at least the early C10th
3
.

This system arose without specific planning from the needed coordination of countless
farmers, distributors, produce middlemen and retailers across the Indian subcontinent. The
hundi/bill of exchange system was a natural development and arose in a parallel fashion to the
money exchange system; separating them is like trying to separate the concept of reading from
words. How did such hundi originate in general social interaction? Imagine the following
situation: a Bombay grain distributor sends grain for sale on consignment to a Delhi merchant.
The Delhi merchant acknowledges receipt of the grain and signs a hundi for payment in 30 days.
The Bombay grain distributor requires payment in Bengal, whereas the silver rupees from the
sale of the grain are with the Delhi merchant at Delhi. This problem would be solved by any
Delhi merchants receiving payment in Bombay but requiring payment in Delhi.

A system of dealers who dealt in the various hundi between those in the various cities arose.
Naturally, there were different types of hundi; a sahyog (meaning cooperation) hundi was a bill
drawn by one merchant on another for goods delivered now or after a specified period of time.
Therefore, this class of hundi would include (but not be limited to) the standard Smithean real
bill. A darshani hundi was a specially drawn bill payable on sight and a muddati hundi was a bill
payable after a specified period of time. These different names for the various classes of bills
were a way for the holder to know the type of exchange behind them, thus giving them their
value.

Our problem of finalising payment between the Delhi merchant and Bombay distributor would
be solved by a muddati type hundi on top of the original sahyog type hundi held by the Bombay
grain distributor (and drawn on the Delhi
merchant.)

An example of a sahyog hundi written on 29
th

December 1905 is given to the left. In this
hundi, we are informed that a particular
Bombay merchant has sold 25 tonnes of
linseed to another merchant for delivery in
May 1906, with 90% upfront payment. No
doubt, some will have noticed that this sahyog
hundi resembles a futures contract; the linseed
was to be delivered 123 days after the bill of
sale was written, with the price agreed (7
rupees, 11 annas and 6 pices where 192 pices
makes 16 annas which makes 1 rupee) at the time of writing. If the hundi were to represent the
sale of linseed delivered prompt, with payment after 123 days (a minor alteration), then it would be
analogous to a Smithean real bill as opposed to a futures contract (Rs. 7/11/6 per cwt
corresponds to Rs. 152/15/1 per tonne, which is c.53 ounces of silver per tonne. As a
comparison, North American linseed currently exchanges for around $14 per bushel, which
corresponds to c.28 ounces of silver per tonne.) A more recent example of a muddati (time bill of
exchange) hundi from 1951 is given next to the sahyog hundi on the previous page. Of course, in
1951, rupee didnt mean the same as it did in 1905.

Anyone who required a money payment in a city apart from their own would approach one of
their brokers to peruse through their portfolio of bills and negotiate an exchange versus bills held
by them, or for cash. Bills held could have cash advances drawn on them by another group. This
group would have been analogous to modern day bill discounters. Hundi circulated amongst the
farmers, distributors and product middlemen which was, and is, the larger part of Indian
society. Naturally, as with any exchange, some were honest and some were not. Consequentially,
some hundi were honest and some were not - but such a sophisticated system was only equalled
in terms of coordination by the London bill markets in the late C19th and early C20th. A larger
part of the typical merchant or farmer's monetary holdings would consist of silver (or gold) coin
and hundi - which matured into silver coin. This would be analogous to the demand deposit and
commercial time deposit under an unadulterated gold standard.

As one might imagine, with an established network of hundi dealers within one region (say
Punjab) it would be comparatively trivial to integrate this network with another region's hundi
dealers (say Gujarat.) All it would take is a meeting between hundi discounters in Punjab and
Gujarat; and an arrangement could follow suit for the clearing of hundi between the Gujarati
dealer's clients in Gujarat and the Punjabi dealer's clients in Punjab (should the Punjabi and
Gujarati dealers mutually find each other of honour and integrity.)

The hundi system arose because there was a need for it. With the people having chosen their
communal unit of exchange in prehistory a defined mass of silver which was (re-) named
'rupiah' by Sher Shah Suri in the late C15th the system of hundi brokers and discounters
naturally arose with the need for coordination amongst the people in their business dealings and
life more broadly. What came of the hundi system? It certainly was not dismantled and remains
enshrined in the (still active) Negotiable Instruments Act of 1881. There is nothing to prevent a
merchant writing a hundi in India currently, but with fiat loans available comparatively cheaply
and the people currently accepting state fiat credit (i.e. the modern fiat rupee) in India - this need
is merely sleeping. As long as humanity wishes to survive, there'll always be a need to eat and a
need to be clothed. As such, roles coordinating such activity with that in end will always be
precipitated to help in that procedure.

From the European city fairs to the C18th cotton farmers of northern England, we can add the
whole Indian subcontinent from (at least) C10th. What evolved into the global bill market at
London was already in practice in smaller form across the whole Indian subcontinent. A
completely centralised system of clearing for hundi/bill of exchange didnt exist in India. If
anything, this shows that the hundi/bill of exchange has an origin outside of an ex-ante centralised
system. Some might argue that a centralised system of bill of exchange clearing would be an
ideal. Others might argue that a centralised system opens the door to state abuse.

How would the theoretical system of
discount points operate? Consider any
single discount point, A (e.g. the
discount point for Delhi.) Those in and
around Delhi wishing to receive a gold
income would exchange their gold for
gold bills lodged at discount point A.
How would bills be lodged there? By
those wholesalers in and around Delhi
lodging their bills accepted by retailers
in and around Delhi.

Now consider any two pairs of discount
points: A, B. Let A remain as the
discount point for Delhi and introduce B as the same for Bombay. There would be goods
destined for Delhi from Bombay and vice-versa. For example, a Delhi clothier sending cloth to
be sold in Bombay, or a Bombay vintner sending wine to be sold in Delhi.

Consider further the Delhi clothier and their Bombay retailer. Upon receipt of the cloth, the
Bombay retailer would sign the Delhi clothiers invoice for payment in 30 days, say. The Delhi
clothier would possess a bill that matures into gold at Bombay in 30 days. This bill could be
lodged at B in exchange for the cash gold of willing Bombay depositors. The cost of sending this
gold to Delhi would be offset by those wishing to send gold in the opposite direction.

Consider the Bombay vintner; they would have gold waiting in Delhi from bills lodged at Delhi
in exchange for Delhi depositors gold. They would be in exact counterpoint to the Delhi
clothiers position. If the amount of gold to be transferred matches, then the cost for the Delhi
clothier, or the Bombay vintner, to have their gold sent to them in their home city would be
precisely zero. If the amount of gold doesnt match as it most likely would not, then a cost (up
to a maximum of gold transportation costs from Bombay to Delhi) would be absorbed by either
the Delhi clothier, or the Bombay vintner depending on who had the larger volume of gold to
transfer.

Of course, this little example assumes that only the Delhi clothier and the Bombay vintner are
conducting business through their discount points. Naturally, there would be many groups
wishing to do the same, but the essential procedure would be similar. Netting off the aggregated
gold flows through any pair of discount points would result in an (equally apportioned) cost to
the merchant customers of that discount point in gold surplus.

The concept of liquidity expanded

It has been shown how a system of bills of exchange, such as the Indian hundi in this essay, can
and will naturally develop from society employing a subjectively but communally determined
means of exchange. To see how this has the potential to evolve into a formal system of huge
benefit to society, the concept of marketability (or liquidity) must be appreciated. When Menger
first introduced the concept of marketability ( Ger: absatzfhigkeit; marketability/acceptability) he
went to great lengths to emphasise that marketability of a good is no inherent characteristic of
the good. It isn't some measurable aspect of the good, such as mass, or volume, that determines
its marketability.

Of course, were this to have been the end of the matter, progression in the field of economics
would not get very far. There is much that can be said by the comparison of some characteristic of
goods for determining relative marketability. For example, a dress shirt cut in the western style is
more marketable than a dress shirt cut in the Japanese style. In both cases, the cut of the hat or
shirt (ignoring material for ease) is what determines the relative marketability between any two
hats or shirts. Menger gives the example of the Tyrol valley hat being of a less marketable nature
than any hat produced in Paris. A change in the surroundings of a good - rather than a change in
the good itself can make the good more marketable. Menger gives the example of the
establishment of a grain market in a town making grain more marketable itself and in nearby
towns
4
.

As soon as a codification of marketability is attempted in an absolute sense by looking at the
mentally perceived characteristics of the goods under consideration, the concept of marketability
as elaborated by Menger is misconstrued. The full set of what makes any particular good
marketable in an absolute sense is locked up in the higher conscience and totally beyond any
mundane codification. This is still overlooked, or worse not understood, by many who professed
(and profess) to be in the Austrian fold.

Money is defined as the most marketable/liquid good and the comparison in exchange of less
marketable goods against the most marketable good should that occur crystallises the
concept of price.

The bill of exchange
drawn on fast moving
consumer goods,
maturing into money as it
does is second only to
money itself in terms of
marketability. But there
are further dimensions to
add bearing marketability
in mind. Ceteris paribus,
a bill of exchange that matures ahead of another bill of exchange is more marketable. A bill of
exchange drawn on a more marketable good might be more marketable itself. At this stage, it's
important to bear in mind that the bill of exchange is nothing but the representation of (hopefully
legitimate) business in the process of clearing; from the manufacture of shoes and garments to
the distribution of farm produce. Arranging all goods by decreasing marketability, money (by
definition) sits a top followed by bills of exchange drawn on fast moving consumer goods of
successively increasing maturity. Then would follow those fast moving consumer goods themselves
with a less discernible division of marketability between any pair of consumer goods.

When the bills of exchange that would naturally arise between interactions are cleared from a
centralised perspective within a given region (discount point), and that discount point linked
with all other discount points across the world through modern technology the gold bill of
exchange market has the potential to maximise global employment and promote interaction for
sound business on a scale never witnessed by mankind. Naturally, people might prefer to own
bills exchanged for a discount to face value for gold. Such people would comprise the natural
depositors at the various discount points. Depositor should always be understood as someone
who exchanges cash gold for discounted gold bills.

The destruction of the current system of payments

For an understanding of true buying and selling, a step back must be taken and the action of
buying and selling must be distilled step by step from the observations of subjectively
determined exchange as originated by Menger. Selling a good means exchanging a good for the
most marketable good (i.e. money) and buying a good means exchanging the most marketable good
for (by definition) a less marketable good.

When exchange is centred on that most marketable good, all roundabout exchanges to achieve final
ends are minimised. Any form of exchange centred on a contrived object other than the most
marketable will not lead (at the very least) to a minimisation of roundabout exchanges to achieve
final ends. At the very most, it could cause a complete collapse in general payments and the
destruction of all activity.

Consider the following situation: exchange of goods must through state dictate or similar civil
provision be conducted against an intermediary that is not the most marketable good by a large
margin (ignoring marketability in the small/large.) Large margin here is meant to be understood
as a good of a markedly lower marketability than the most marketable good; for example gold
compared to cowrie shells, not gold compared to silver. The forcible exchange of a good for a
sharply less marketable good will result in a greater number being unable to exchange what they
have successively less marketable goods, for what they want successively more marketable
goods. Even exchange centred on a benevolent construct that is not the most marketable good
will lead to the same situation. Whether it occurs straight away or not is irrelevant.

Marketability is the key to deciphering the coming monetary collapse; for there is no precedent
for the kind of collapse that we shall all experience. When that most marketable item, gold,
closes in exchange against fiat, it will set off a reaction perhaps slow, perhaps fast of
successively less marketable goods than gold, but more marketable than fiat, losing their exchange
against fiat. The speed, or lack, of this unravelling will be related to how long the general
population cling to the idea of fiat a state managed number - as being money. Accordingly, the
collapse might happen a lot more slowly than the expectations of the more aware.

The resumption of exchange centred upon the most marketable good will mean the spontaneous
birth of the aforementioned discount points across the world, with the attendant gold bill of
exchange structures around them. Discount points will be linked up and perhaps a centralised
location of discount might emerge, as London did in the C19th, or perhaps not. But be assured,
this system will emerge. Whether its after the destruction of civilisation from fiat, or parallel to
the orderly extinguishment of fiat, is up to us.

That most marketable good,
We found through mind-absorbed meditation,
That promotes exchange to the greatest,
Is still beyond our comprehension.

Sandeep Jaitly, Fekete Research, 16
th
January 2014
LONDON.

References
1. Detractors of Adam Smiths Real Bills Doctrine, essay by Antal. E. Fekete, 2005.
Link:http://www.professorfekete.com/articles/AEFDetractorsOfAdamSmithsRealBillsDoctrine
.pdf
2. The Theory of Money and Credit, Ludwig von Mises, Yale University Press edition, 1953. Chapter
XVII, Fiduciary Media and the Demand for Money.
3. The Imperial Monetary System of Mughal India, J. F. Richards, Oxford University Press edition, 2000.
4. The Principles of Economics, Carl Menger, New York University Press edition, 1976. Chapter VIII,
The Theory of the Commodity.