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By Root 1272 0

have to transact business at the same time, be attained more indirectly in ways which, while they are formally of a more complicated legal structure, nevertheless fundamentally simplify the technical transaction and make it possible to dispense in particular instances with the physical presence of pieces of the medium of exchange. If A has to deliver a piece of cloth to B and receive a sheep from him for it, and if A at the same time has to give a sheep to C and receive from him a horse, these two exchanges can also be transacted if B gives a sheep to C on behalf and on account of A, so freeing himself from the obligation that he is under to give A a sheep in return for the cloth and A from the obligation that he is under to give C a sheep in return for the horse. Whereas the direct transaction of these two exchanges would have necessitated four transfers, this procedure necessitates only three.

The possibility of facilitating exchanges in this way is extraordinarily increased by extension of the custom of using certain goods as common media of exchange. For the number of cases in which anybody simultaneously owes and has a claim to a certain fungible good will increase with the number of cases in which one and the same fungible good—the common medium of exchange—is the object of exchange in individual transactions. Full development of the use of money leads at first to a splitting up into two acts of indirect exchange even of such transactions as could in any case have been carried through by direct exchange. The butcher and the baker, who could also exchange their products directly, often prefer to have their mutual relations take the form of an exchange carried through with the help of money which their other transactions assume also. The butcher sells meat to the baker for money and the baker sells bread to the butcher for money. This gives rise to reciprocal money claims and money obligations. But it is clear that a settlement can be arrived at here, not only by each party actually handing money over to the other, but also by means of offsetting, in which merely the balance remaining over is settled by payment of money. To complete the transaction in this way by full or partial cancellation of counterclaims offers important advantages in comparison with direct exchange: all the freedom connected with the use of money is combined with the technical simplicity that characterizes direct exchange transactions.

This method of carrying through indirect exchanges by cancellation of counterclaims is very greatly stimulated at the time when the cases where its employment is possible are increased by the fact that credit transactions, or the exchange of present goods for future goods, are becoming customary. When all exchanges have to be settled in ready cash, then the possibility of performing them by means of cancellation is limited to the case exemplified by the butcher and baker and only then on the assumption, which of course only occasionally holds good, that the demands of both parties are simultaneous. At the most, it is possible to imagine that several other persons might join in and so a small circle be built up within which drafts could be used for the settlement of transactions without the actual use of money. But even in this case simultaneity would still be necessary, and, several persons being involved, would be still seldomer achieved.

These difficulties could not be overcome until credit set business free from dependence on the simultaneous occurrence of demand and supply. This, in fact, is where the importance of credit for the monetary system lies. But this could not have its full effect so long as all exchange was still direct exchange, so long even as money had not established itself as a common medium of exchange. The instrumentality of credit permits transactions between two persons to be treated as simultaneous for purposes of settlement even if they actually take place at different times. If the baker sells bread to the cobbler daily throughout the year and buys from him a pair of shoes on one occasion