The comment is by Nix, copied from the 29 Jan 1659/60 entry: http://www.pepysdiary.com/diary/1660/01/29/#c988 ]
Some observations on money and credit:
In reading Pepys’ discussions of money, credit, “notes”, debts, wealth, etc., it is clear that the financial system under which he lives is drasticallly different from what we have now.
The important thing to remember is that financial transactions were not institutionalized: “Banks” were not large, impersonal institutions — they were individuals who made their living handling money for others.
Because there was no paper money, the only currency was metal coinage. This was highly inconvenient for transactions of any size, so a person purchasing something for, say, 20 l. would give a promissory note. The note could say “I will pay you this whenever you ask” — a demand note. The maker of the note was, at least theoretically, obliged to pay over in cash whenever the payee showed up at his home or place of business (they were quite often the same, particularly in the case of tradesmen). Or it could say “I will pay you this in 30 days” or 60 or six months or whatever.
The person to whom the note was offered as payment had to make the same sorts of judgments creditors make today: How confident am I that I can collect this debt? They didn’t have credit reports in those days, so the basis for the decision would include the reputation of the payor (if he was known), the appearance of the payor (that is one reason why clothing was viewed as so important), the address for payment (both as evidence of substance and to evaluate how far you’d have to go — how much trouble it would be to collect it), etc.
Having the paper, what was the creditor to do with it? He could retain it and try to collect it when it came due. But (a) collection was likely outside his “core competency”, as they say in business today, and (b) his capital was tied up until he could collect it. So the practice arose of “discounting” — essentially, selling the note to a third party for something less than face value. That passed the risk of non-collectability as well as the time delay on to the third party — the greater the perceived risk, the greater the discount from the face value. Offering cash for notes was one of the earliest functions of bankers, and you can still see its remnants: Your checks don’t say “Pay to Smith”, they say “Pay to the Order of Smith” — that is, Mr. Banker, please give the cash to whoever buys this note from Smith. And the indorsement on the back of the check is the way Jones shows the bank (and ultimately the court) that he did in fact buy the note from Smith.
Sorry to go on and on, but I hope this provides some clarification on these murky financial doings.
P.S. — A while back, people were asking about Pepys’ possible misuse of government funds. My impression is that, in those days, one of the perks of public office was that you had the use of funds from the time they were given to you until they had to be paid out. You were responsible for being sure they were there when they were needed, but in the meantime you could lend them out and earn some interest. That is, after all, what banks do even today.