_Free communication._—From what has been said in the preceding chapter as
to the nature of value and price, it will appear that the most fundamental
condition for ready exchange is perfectly free communication between
individuals as to wants and abilities to meet wants. There is implied,
also, an absolute protection of property rights and of equity in dealing
through the laws and customs of the community. No one acquires property
for the purpose of exchange unless he can foresee the possibility of
carrying out the exchange at any future time. He must also feel that he is
protected by surrounding circumstances from misinformation as to values.
In short, any community is ready for free exchange among its members only
when it maintains the conditions for fair competition. To this fairness of
competition many things contribute, aside from the governmental machinery.
There can be little trade without a common language, and the full
advantages of common speech are reached through every facility for ready
communication between all the individuals of the community. An universal
press, postal facilities, telegraph and telephone systems have all grown
up in meeting this need.
The same is true of established market places, boards of trade and produce
exchanges. Not only does the multitude of exchanges in one place lessen
the cost of such exchanges, but these make it possible for multitudes to
reach a fair understanding of what is wanted and what is offered in any
line of production. This need accounts for the tendency so frequently
noticed to establish great centers of trade in particular commodities. The
world wants a fair understanding of what the world contains, and these
methods of bringing together buyers and sellers are the natural outgrowth
of this need.
_Full statistics._—The same end is served still more fully by frequent
publication of price-lists, and a daily record of the transactions in any
market gives information which every dealer can use to advantage. Public
statistics, carefully and honestly prepared, serve both buyers and sellers
of any article of commerce. The farmer needs as much as anybody the
fullest information as to what his fellow farmers have to sell, whether
they are immediate neighbors or in distant parts of the world. The price
of wheat on any farm ought, if perfect understanding is reached, to
conform to the general law of supply and demand throughout the world, and
the yield of wheat in Russia, India and South America affects the value of
every bushel raised in our country.
Every advance in the perfection of statistics and the rapidity of
collection makes more certain the bargain of every producer and consumer.
People have sometimes opposed the gathering of statistics for fear that
large dealers and speculators may take unfair advantage from such
information. But a careful consideration will show that managing of the
market depends chiefly upon want of information on one side of the
bargain. If farmers were as thoroughly informed as to the crops of the
world as carefully collected statistics might make them, no false rumors
could mislead them in selling their produce. The evident tendency toward
more stable markets, as shown by the records of the last twenty years, is
accounted for partially, at least, by the more perfect information
available. If farmers themselves would take interest in furnishing
accurate estimates of the extent and condition of every product held for
sale, they would in the long run reap the highest advantages of clearly
understanding the supply and demand in the markets of the world. This
would do more to destroy the demoralizing force of mere speculation than
any possible legal enactment.
_Ready transportation._—An equally important part of the machinery of
exchange is easy transportation. Every improvement in the transportation
of persons or products not only lessens the cost of the article when
delivered, but increases the actual stability of price and range of the
market.
The pioneer farmers of northern Ohio found absolutely no market for their
wheat until the opening of the Erie canal. Farmers upon western prairies
found corn their cheapest fuel until railway transportation brought coal
mines and corn fields into closer relations. The rural community which
takes pains to have good roads not only lessens the cost of hauling grain
to market by saving friction and toil, but actually enlarges its market at
home. Hard roads enable them to do four times the work they can do on soft
roads. In the same way any improvement of railroads, construction of pipe
lines for gas and oil, or introduction of pneumatic tubes, for mails and
light packages in cities, directly spreads the range of market for the
products of every individual laborer and makes more sure the returns for
any effort he may give in production. Perhaps this is even more easily
seen by considering how the world’s markets are opened by improvement in
water transportation. Water freight on a bushel of wheat from Chicago to
New York from 1865 to 1874 averaged over twenty-two cents; from 1885 to
1894 it was less than seven cents.
The universality of markets for all kinds of products is clearly shown by
realizing what we have within reach of every country community today. Such
easy transportation adds to the productive abilities of every person. Over
ordinary roads the cost of transporting wheat two hundred miles is equal
to its value at the end of the journey. Corn will usually pay its way not
more than half that distance. So in countries where railroads do not exist
the people consume only what they themselves produce, or devote themselves
to very few products, and so occupy only a portion of their time. In the
best developed regions of our country, every family can reach a steady
supply of all kinds of goods, and can know that every article produced has
its proper place in the market without waste. The cost of delivering bread
in Boston is greater than the cost of carrying the flour in it two
thousand miles. This ready transportation leads to more complete and more
definite occupation and so to larger returns in the way of satisfaction
from all efforts. The extended market gives added value to all permanent
or fixed capital. It makes both farms and homes more useful, if full
advantage of such improvements is taken. At the same time, values of land
tend toward an equality throughout the world.
_Diminishing cost of transportation._—That the cost of transportation
keeps diminishing in spite of combinations of capital to prevent it, and
in spite of local legislation restricting it, proves that the increasing
perfection of machinery and the accession of capital in railroads and
waterways are stronger than the purposes of men. That freights are
regulated by “what the traffic will bear” is merely another way of saying
that transportation comes under the universal law of values—what the
service is worth in the market, or what people are willing to give for it.
According to good authority, the net profit of carrying one ton of freight
one mile has fallen in twenty-five years from one cent to less than
one-ninth of a cent. The same principle fixes a classification of freight
according to service. We can afford to pay more for carrying valuable
produce than for carrying cheaper products. It also leads to special rates
for developing traffic, as illustrated in rates on baled alfalfa hay from
western plains to Chicago.
Wise managers, if not misled by speculation in stocks, care more for
enlarging traffic than for immediate returns upon a smaller bulk, because
the bulk of profit is greater. A good illustration of development of a
special traffic is found in the milk trains running two hundred or three
hundred miles to supply the city of New York. The railroads are compelled
by the needs of the traffic to carry the milk cheaply enough to prevent
its being made into butter and cheese. Laws regulating this charge are
effective, because such a necessity exists in the nature of the case.
_Weights and measures._—Another important growth in the machinery of trade
is found in standards of quantity,—weights and measures of every kind. It
is scarcely possible to realize the uncertainty of exchange without exact
weights and measures. The story of the Indian trader who bought furs by
weight, putting his hand upon the scales for one weight and his foot for
its double, illustrates how uncertain such judgments of quantity may be
without system. The present names of weights and measures indicate their
origin in similar ways.
Measures have usually been connected with some part of the body: as
“finger,” used one way in measuring the load of a gun and another on a
stocking; “hand,” still used in measuring the height of horses; “span,”
once considered sufficiently definite for any measurement; “foot,” now
made to conform to an accurate system; and “pace,” still used in many
communities. Connected with the arm, are “cubit” and “yard.” Many ladies
still measure their dress goods by arm’s lengths. For small measures,
“grain” and “barley-corn,” still used as names, indicate dependence upon
average quantity in articles of general growth.
Today all civilized governments settle upon a definite system of measures
and weights, all accurately connected with each other and with some
precise dimension in nature supposed to be invariable. Our common yard is
distinctly associated with a pendulum vibrating seconds; and in the great
decimal system, adopted by most countries in Europe, and likely to be
reached in all countries, the whole is connected with a measured meridian
upon the earth’s surface. Care is then taken to have standard measures and
weights prepared in such a way as to be free from all effects of any
change of temperature, and legal enactments distinctly define each measure
and weight, actually punishing one for the crime of using false weights or
measures. Units of quantity thus enter into all our calculations and form
an essential basis of all exchange. Cheating in measure and weight grows
less and less possible with this clear understanding of exact units. The
New York Legislature has defined the size of fruit packages, and the
Massachusetts poultry raisers ask a law requiring eggs to be sold by
weight.
_Metrical system._—If the whole world should unite on a single decimal
system of measures and weights, like that now used in most of Europe, all
would be gainers from the reduction of misunderstandings and
miscalculations increasing the cost of exchange. The difficulty of
adopting a new system arises chiefly from the absolute importance of any
system and the unconscious use of that to which people are already
accustomed, together with its application in a thousand unthought of ways
to every tool and every rule. That the advantage of a uniform decimal
system would more than balance the difficulty of change, no student of the
subject now doubts. Some have estimated the saving at nearly one-half of
the present clerk hire. Our government has already taken steps for such a
change, though years may be required to accomplish it.
_Standards of quality._—The machinery of exchange also involves standard
units of quality, but these must vary with every different kind of
commodity. Custom has given rise to all sorts of devices for expressing
degrees of fineness, strength and hardness, as well as more delicate
qualities of flavor and odor. Boards of Trade often establish offices of
inspection with brands upon grains, flour, butter, pork, etc., and these
become definite parts of a contract which the government rightly enforces.
Private trade-marks and brands, if honestly used, become a prominent
element in exchange. These are protected rightly by being filed with the
government, which secures to the originator his sole use of such a proof
of quality.
In some articles of trade, when a whole community is interested, the
government goes further and undertakes inspection and branding by an
official. This in most states applies to kerosene oil, first for public
safety, but afterwards for protection of exchange. Laws regulating the
quality of fertilizers are based upon the necessity of knowledge, that
bargains may be fair; and in many parts of our country now the branding of
ground feeds, with an analysis of their qualities, is deemed an essential
of safe bargaining. The extent to which this effort to establish the
certainty of qualities may need to be carried can be estimated by the
recent agitation over adulterations of food products. All believe that, as
buyers, they have a right to know the quality of what they buy. It is
conceivable that markets may some time establish a system of terms,
descriptive of qualities, almost as definite as weights and measures. All
this contributes to fair competition in exchange.
_Standards of value._—More important still in the machinery of exchange is
a standard unit of value. We have seen that value in any article of
commerce can be fixed in terms of any other article, but prices remain
indefinite so long as there is want of universal appreciation or appraisal
in essentially the same terms and ideas. The tendency toward definite
prices in well understood units of value is as clearly perceptible in the
progress of commerce as is the tendency toward definiteness in weights and
measures.
In early ages almost any article of common use, so that its qualities
might be generally understood, has served as a standard of value, in terms
of which all wealth has been estimated. Communities engaged in grazing
counted all their wealth by cattle. Homer’s heroes wore armor valued in
cattle, and early Roman coins bore the images of cattle, while the very
name of Roman coins, _pecunia_, is supposed to have been derived from the
name of the flock. Communities of fishermen for a long period have
estimated wealth in dried fish. More mechanical peoples have used some
article of manufacture, like nails in some Scottish villages and the
country cloth of western Africa. Sometimes a single prime article of
export has served the purpose, like tobacco in the colony of Virginia and
dried hides on the plains of South America. In most of pioneer America the
hunters’ pelts have served the same purpose, the average “coonskin” having
a value which all could understand. As communities became more wealthy the
display of wealth in ornaments made of precious metals and in precious
stones has led to the use of these as standards of value. American Indians
used their wampum, and African tribes employed peculiar shells. But as
commerce increased, embracing wider regions, gold and silver became the
staple article of value everywhere, since these, so easily tested for
purity, could have their value estimated definitely by weight. Thus the
standard unit of value has been definitely connected with standard
weights.
_Coinage._—Gradually these weights, for greater ease of transfer and for
clearer understanding of values, became the basis of coinage. The stamp of
the coiner became a certificate of quality and quantity, and finally, as
in the case of weights and measures, governments assumed the whole
responsibility for fixing the weight and fineness of coins, and reduced
all coinage to system, that every citizen might know the value of the unit
in which he estimates any article of commerce.
The early coins were definite weights of gold, silver or copper, and in
many countries coins still bear the names that indicate their original
weight. Yet arbitrary rulers have often sought to cheat their subjects by
issuing coins of lighter weight and baser metal. The French livre, now the
franc, is one seventy-second of its original value. English coins were
debased ten times between the years 1299 and 1601 to exactly one-third of
their original value. The loss from such debasement falls almost wholly
upon the poor, whose wages fail to buy the usual food and clothing. Henry
VIII reduced the coins of his realm again and again, until it would have
taken five years’ revenue of Elizabeth’s reign to restore the currency.
Elizabeth chose to take the standards as she found them, but to establish
an absolute degree of purity and fix by law the weight of each coin in the
system. The standard of purity since maintained in England is 22 carats,
or eleven-twelfths fine, and weights have been maintained in spite of
several efforts to reduce them. Other nations have taken similar steps
with varying standards of purity: .835 in the Latin union, .9 in the
United States, and over .96 in most coinage of western Asia. In this way
the standard of value for every citizen of a country is as clearly defined
as the standard of weight, and every transaction in trade, with every
account of such transaction, involves that unit.
_United States coinage._—A brief statement of the system of coinage now
established in the United States may illustrate the definiteness of the
standards of value. The United States mint at Philadelphia and its
branches at New Orleans, Denver, San Francisco and Carson have the sole
authority for making coins. Any effort at coinage by outside parties is
criminal. The mint receives the gold and silver by weight and assay of
purity, melts and refines and mixes with alloy, to bring the mass to
required fineness, nine-tenths pure, and casts the metal into bars called
bullion. These bars are then most carefully assayed, and, if found of
exact standard purity, are rolled and drawn into plates the thickness of
the coins desired. From these plates disks are punched by machinery, each
disk being weighed, and if found too light thrown aside, if too heavy
reduced by filing, until every disk represents exactly the required weight
of the coin desired. The disks then pass through a milling machine which
raises the edges, and when cleaned by dilute acid and carefully dried, are
stamped by a steel die with some device covering both surfaces completely.
This effectually gives the seal of the nation to the purity and weight of
the coin, and, since it covers the whole surface, prevents the possibility
of reducing that weight without marring the coin.
_United States standards._—The system of coinage in the United States
since 1873 embraces standard coins of gold, silver, nickel and copper, but
gold alone actually furnishes the standards of value, all other coins
being at present subsidiary. Gold is coined for individuals free; that is,
a certain weight of metal presented at the mint is assayed, to determine
the exact weight of pure gold, and an equal weight of pure gold is
returned to the owner in coin. Sometimes a slight charge for the expense
of coinage is made and called seigniorage. At present no such charge is
made, for the reason that when a nation bears the cost of coinage, foreign
coins are kept from circulation, and its own coins are current everywhere.
The standard unit of value for the United States is 25.8 grains of gold
nine-tenths fine, and this is called a dollar, although no coin of this
weight is at present struck. In actual practice, the standard is shown in
the ten-dollar piece, or eagle, weighing 258 grains. The half eagle (five
dollars) and the quarter eagle (two dollars and fifty cents) indicate upon
their face their relation to the principal coin. The double eagle, or
twenty-dollar piece, is coined for greater convenience. These coins
connect all the currency of the country directly with the market value of
commodities in the world, through gaining their value directly from the
market value of gold, where gold is bought and sold. Thus gold furnishes
the standard of value with which all other values are compared.
Silver coins of the United States are made from silver purchased by the
government. The dollar, adopted from the Spanish rix-dollar, itself
derived from the German thaler, is by law a coin of 412-½ grains of silver
nine-tenths fine. This silver dollar has a story of its own, which will be
given later, and does not form a part of the system of 1873. The half
dollar, the quarter dollar, and the dime, for fractional currency, are
proportional parts of 385.8 grains of silver nine-tenths fine. These are
about five per cent less in weight than the proportional parts of the
silver dollar. The original purpose of this reduced weight was to prevent
the consumption of these coins in ordinary uses by making them worth on
the face a little more than their bullion value. These fractional coins
are legal tender in the courts to the amount of five dollars. In nickel
and copper coins no effort has been made for many years to maintain a
standard of value, the amount of metal in any of them being far less in
value than their face. They are legal tender only to the amount of
twenty-five cents.
_Fluctuation of standards._—In the study of the precious metals as the
standard of prices, it is necessary to remember that the value of these
metals, like that of all products of labor, is subject to considerable
fluctuations. The very fact that gold and silver are durable metals, not
easily consumed or readily worn away, tends to make the increased product
in a series of years less and less valuable. While the ordinary increase
in product may be provided for by increased demand through extended
exchange, the very improvements in the machinery of exchange, especially
the extension of general credit, operate in the opposite direction.
It is certain that the value of gold and silver within one hundred years
after the discovery of America, when European nations took possession of
accumulations among the inhabitants of Central and South America,
diminished to a little more than one-fourth of the value previous to that
discovery. It is estimated that the value of gold since the discovery of
1849, in California, followed by the opening of mines in Australia and
South Africa, has been reduced to little more than three-fifths of its
value in 1850. This estimate is based upon careful comparisons between
what an ounce of gold in 1850 would buy of some hundred staple products,
and what the same ounce of gold will buy today of the same hundred
products. The test is a somewhat uncertain one, from the fact that many
products are much more affected by improved methods of production than
others, and changes of habits and customs among the people greatly affect
the prices by changing demands. The combination of a large number of
products being less likely to be affected than any one, the comparison is
worthy of some confidence. Nevertheless, it is possible for two different
persons, making different selections for comparison, to arrive at very
diverse results. If the selected articles are those of ready manufacture
where improved methods have most largely entered, the value of gold will
seem to have increased; if, on the other hand, the selected articles are
raw materials, in which the law of diminishing returns gives greater cost
of production, the value of gold will seem to have diminished.
A test easily applied, though not absolutely correct, is in the amount of
labor of the most common sort which an ounce of gold would pay for at the
different periods compared. Careful comparisons show that an ounce of gold
today buys more of all sorts of manufactured articles and more of most
articles of food, though less of the better class of meats and less of
labor, than ever before. This fluctuation in the value of gold has its
chief importance in connection with long extended credits, though its
influence is felt in other directions through a common system of accounts,
in which the standard unit of some system of coinage is the sole basis of
comparisons. If the standard unit is growing less valuable, in a series of
years the book-keeper will show a constantly increasing total of wealth;
if, on the other hand, it is growing more valuable, the books will show an
apparent loss. Were a perfectly uniform standard possible, all interests
would be best provided for.
_Ratio of silver to gold._—More directly important in its effect upon
exchanges is the unequal fluctuation of gold and silver when both are made
the standard of value. That silver and gold are from independent sources,
subject to variations of their own in product and processes of extraction,
makes it impossible that they should sustain always the same ratio to each
other in value.
A careful study of the subject by Professor Rogers shows that early in the
thirteenth century one pound of gold was worth ten pounds of silver, at
the close of that century would buy twelve and one-half pounds of silver,
and in the middle of the fourteenth century bought thirteen and
three-fourths pounds; but in the fifteenth and sixteenth centuries, after
the new world was pillaged, one pound of gold bought from ten and one-half
to twelve pounds of silver. In the seventeenth century fifteen pounds of
silver went for one pound of gold, and in the eighteenth, fifteen and
one-half pounds. Early in the nineteenth century the ratio was fixed in
this country at sixteen of silver to one of gold, and that estimate was
assumed to be essentially correct as late as 1877, when a pound of gold
would exchange in the market for three and one-half pounds of platinum,
seven pounds of aluminum, sixteen pounds of silver, seventy-one pounds of
nickel, 942 pounds of tin, 1,696 pounds of copper. Twenty years have
produced great changes in both the total annual products and the relative
cost of mining. The estimate of 1877 would now be incorrect for any of the
metals named. A pound of gold now buys 1,540 pounds of aluminum, the
change being due to an invention for reducing aluminum ore. It now takes
about thirty-seven pounds of silver to pay for one pound of gold, a change
in part due to new systems of coinage in which silver plays a subordinate
part, but chiefly due to the greatly increased product of rich mines and
greatly improved methods of reducing ores.
_The cheaper money drives out the good money._—In any system of coinage,
employing both silver and gold as standards, it is found by actual
experience, repeated hundreds of times, that a change in the ratio between
the two metals in open market always leads to hoarding for speculative
purposes of the most costly metal of the two.
Thus, in our country previous to 1873, when silver was worth more than
one-sixteenth of its weight in gold, uncoined silver was necessarily worth
more than coined silver for some purposes, and the coins already struck
were worth more in the manufacture of spoons and plate than to circulate
as coins. Prior to 1853, when the half dollars, quarter dollars and dimes
were coined at the ratio of sixteen to one, such coins could not be kept
in circulation, for the reason that they were worth more than their face
value. The law of 1853 reduced the weight of these coins so that their
market value as silver was sure to remain a trifle less than their face
value. The result was no further melting up of these small coins for use
in the arts or for bullion. This fact is only one illustration of what is
called Gresham’s law, formulated in the time of England’s base coinage
during the sixteenth century, but noticed centuries earlier, that _cheap
money always drives out a more costly money_. The principle is as constant
as human nature, that nobody will give a greater value when a less value
will serve the same purpose. For this reason, no country in recent times
has been able to keep both gold and silver as the actual standards of
value at the same time. Either the ratio must be changed with every
fluctuation of either metal, or one of the metals must be undervalued in
the system of coinage, as has been done in England for the greater part of
this century; or else the total coins of the cheaper metal must be limited
in amount, as has been done by the Latin Union in Europe during the last
twenty-five years. In either case the tendency is toward a single
standard. The commercial world prefers a stable, well understood unit to a
changeable one. And while the fluctuations of gold alone affect somewhat
the stability of prices, these are thought of less importance than the
necessary legal adjustments for new systems of coinage.
_Monometalism and bimetalism._—The discussion has led to two opposing
views, distinguished as monometalism and bimetalism. The monometalist
holds that since one metal only can, under ordinary circumstances, set the
standard of price, it is wise to choose the one subject to the least
fluctuation for the universal standard. The bimetalist holds that a
nation, or at any rate a group of nations, can fix by agreement the price
of gold and silver in terms of each other, when used as money. Since the
use of these metals as money makes the chief demand for them, it is
thought possible to make this legal ratio hold upon the total product of
both gold and silver. If, then, in any country the supply of gold should
be out of due proportion with silver, its overvaluation will at once
attract gold from other countries until it becomes no more profitable
there than elsewhere. The result is assumed to be a somewhat ready
equalization of values for the territory establishing the standard, so
that the actual fluctuations of the standard unit will follow the line of
lowest prices for either of the metals. The monometalist feels certain
that the actual withdrawal from circulation, and so from use as money, of
the higher priced metal causes greater hardship and probably greater
fluctuations in values of other commodities than any fluctuation of a
single standard can produce.
It is very certain that the commercial world recognizes the tendency
toward a single standard, and that the coinage systems of all civilized
countries are practically, if not in definite form, based upon a single
standard. The countries of wide commerce and extensive credit are using
the gold standard. The less developed countries adhere to the silver
standard. Many which nominally sustain both have, by some legal
restriction in the coinage of silver, become practical supporters of the
gold standard. Few, if any, thorough students of the subject believe it
possible by statute in the present conditions of mining and commerce to
bring the commercial world anywhere back to the ratio of sixteen to one,
established in the United States in 1834. Statute law might declare a
sheep to be equal to a horse, but no power on earth could make it pull as
much. So even agreement among nations, by legal enactments, cannot enforce
an unnatural relation between two products.
NATIONAL STANDARDS OF VALUE, 1899
_Gold_ _Gold, with _Gold or _Silver_
silver limited_ silver_
Great Britain, United States, Haiti, Uruguay, Mexico, Central
Germany, France, Argentine America,
Sweden, Norway, Belgium, Italy, Republic, Columbia,
Denmark, Switzerland, Venezuela, Bolivia, Peru,
Austro-Hungary, Greece, India. Spain, Servia, Equador, China,
Roumania, Bulgaria, Hong Kong and
Turkey, Netherlands, Straits, Cochin
Portugal, Algeria, Tunis, China.
Brazil, Canada, Japan, Java,
Newfoundland, etc.,
Egypt, Russia, Philippine
Chile. Islands,
Hawaii.
_Actual bimetalism._—It is necessary to caution against supposing that the
use of both gold and silver as currency in any country implies true
bimetalism, nor is it at all certain that the making of either gold or
silver legal tender at option touches the question of bimetalism. Only the
issue by free coinage at the will of the owner of both metals shows a
distinct attempt to maintain bimetalism. The actual maintenance of both
standards has always been, and always will be, by alternation, when the
ratio of the two metals as to value is established at very nearly the
market value of the two metals in bullion.
Popular demand for a return to the old ratio in the United States is
founded in part upon misconception of commercial principles and largely
upon a misunderstanding of current events during a financial crisis. The
supposed dangers from a single standard of value are largely exaggerated
from confusion of standards with currency in exchange. It is quite
conceivable that gold may still serve as a standard unit of value, while
90 per cent of exchanges have no other use for gold beyond its furnishing
terms of comparison. We must measure value by value, and the unit of value
must be true to its name, just as we measure length by something long. But
the number of yardsticks in actual use in a store may have no constant
ratio to the number of yards of cloth sold by that measure. The folding of
calico in yard folds relieves the yardstick, but does not change the
nature of the yard. So gold, or silver, is relieved of many functions in
exchange through banking systems without materially affecting its use as a
standard unit.
_The multiple standard._—It is proper to mention in connection with units
of value a theoretical device for overcoming the necessary fluctuation in
all articles of value. This is sometimes called the multiple standard. The
plan, in brief, is to appoint a committee of experts, whose record of
current prices, in some general market, for a hundred or more staple
articles of commerce, shall be compared from week to week, or day to day,
in such a way as to indicate how far above or below the average the price
of any article may be. If, then, gold is made a legal tender, a comparison
of its price with the average of all prices will show how much weight of
gold must be given on any day to actually return a value exactly
equivalent to what was borrowed sixty days or a year previous, when the
ratio of gold to average prices was different. In this way it is supposed
that natural fluctuations in gold, silver or any other commodity made
legal tender for debt can be fully provided for without loss to either
debtor or creditor.
The objections to this ideal standard are the practical difficulty of
settling, first, the wide range of commodities to serve as the basis;
second, the importance to be given each in adjusting the standard; and
third, the nature of the commission under which the work should be done.
In the history of the world, custom has preceded law in devising for
welfare; in this, law without experience will have to precede custom. The
difficulty which most men would experience in understanding and trusting
such a system puts off indefinitely the possibility of a general adoption.
_The currency._—The last essential in perfect freedom of exchange is a
satisfactory means of transferring completely and quickly all property
right in any article of trade. Exchange of commodity for commodity or
service for service is possible to a very limited extent, since the man
who wants my horse may have nothing which I want in return, or if he has,
the values may be unequal, and one or the other must remain in debt, which
means that one of the articles belongs in part to both. In some new
countries exchanges are confined to this slow and uncertain method of
barter, where nobody can buy until he finds a neighbor wanting just what
he himself has to sell. Traders in such countries contrive to accumulate a
variety of things needed by all sorts of people, that they may be ready
with some kind of exchange to meet particular wants. No community,
however, begins to reap the clear advantages of exchange until some
universally acceptable medium of exchange is discovered and accepted. The
process of developing this medium is essentially the same as that
described in establishing a standard of value; and so the word money
naturally represents both the standard of value and the common currency of
trade. It is easy, however, to see by further examination that the two
functions of money are quite easily separable, and that, while it is
difficult to substitute for the standard of value, a variety of
substitutes can serve as currency.
In speaking of coinage hitherto, the standard of value has been assumed to
be the most important, but in fact a large proportion of our coin serves
simply as currency without materially affecting the standard of value.
This is true of all the fractional coins, which are purposely over-valued,
and equally true of the silver dollar under existing circumstances. In
fact, the primary use of coin was simply for the purpose of transferring
property. In the words of Aristotle, 350 B. C., “Men invented among
themselves, by way of exchange, something which they should mutually give
and take, and which, being really valuable in itself, might easily be
passed from hand to hand for purposes of daily life.” This coined money
supplies the needed means of exchange most readily because it carries its
value with it. In all civilized communities, and in many only partially
civilized, it is readily exchangeable for any article of commerce. It is
also valued in proportion to its weight, so that any bulk in gold or in
silver may be easily divided by exchange for smaller coins. With a little
painstaking the coins are made identical in value, so that every trader
knows what he gives and receives. They are exceedingly durable, resisting
almost all the forces of nature with little loss. For this reason they are
likely to have an almost universal value, that is to be wanted by
everybody, in any place, at any time, and under any circumstances. These
facts are proved by the tendency to hoard such coins whenever individuals
have a surplus of wealth beyond present wants, or whenever there is risk
in using wealth as capital because of distrust of government, of
individuals or of future enterprise. A buried treasure is almost sure to
be in the form of coins.
Under a system of coinage, inequalities in exchange are easily adjusted,
like “the boot” in a horse trade, or the balance between produce carried
to the store and the articles carried away. Most of all, coin is used
where for any reason there is distrust of the future. Coin, or its
equivalent in bullion, is needed in all transactions where credit is
wanting. This appears prominent in all lawless communities with a
fluctuating population, and may be found in ignorant communities where
methods of credit are not established. It is often essential in the
settlement of claims between hostile countries, and is the final means of
adjusting balances in all foreign trade. Occasionally this need appears in
a universal panic, where each man takes his fellow by the throat, saying,
“Pay me that thou owest.”
_Coin a part of a country’s capital._—The coined money of a country thus
becomes wealth in store for constant use as a machine of exchange. Its
operation is effective when it keeps in constant motion, being itself
consumed very slowly in the wear and tear of motion. It is sometimes
compared to an endless screw, transmitting motion to everything else with
which it comes in contact. Like other machines, it may be either too
abundant or too scarce for the best advantage of the country. In either
case there is waste. When the coin is idle it is unproductive, but suffers
less waste from deterioration than almost any other kind of machine. In
case of scarcity the cost of its use is increased under the general law of
supply and demand, exactly as the cost of other machinery in use is
advanced when many desire to use it. This machine is a prominent part of
the capital of a country, greater in some countries than in others. In
France the value of coin is estimated to be 3 per cent of the value of all
real estate, including buildings. The use of such a machine makes a
material part of the annual cost of exchanges. The coin of England, where
interest is comparatively low, costs for its use in interest, wear and
tear, and re-coinage more than $20,000,000 annually.
An additional cost to individuals is in the extra risk of carrying such
wealth, as shown in express charges and special insurance, and still
greater expense for safe keeping, and a considerable use of time in
counting. These facts have led to many devices for lessening the need of
keeping wealth in this form.
_Credit by accounts._—The most obvious method of avoiding the use of coin
in exchanges is a current account between individuals having many
transactions in trade. A farmer carries his butter, eggs, fruits, grains
and live stock, perhaps, to a single dealer in all these articles, and
takes in return articles of household use or for any necessity as he
requires them, from a spool of thread to a harvester. If both keep
accurate accounts, a settlement once in six months satisfies most
conveniently all the requirements of perfect trade. Indeed the settlement
is needed only that the accounts may be verified. Except for the dangers
of waste in unlimited credit and carelessness in expenditure where future
wealth is drawn upon, this method of exchange is simple and inexpensive.
In the nature of the case, however, it must be limited, for safety, to
trade between people having confidence in each other’s honesty of purpose
and ability to keep correct accounts. It also requires a mutual
expectation of ability on the part of either to meet indebtedness at any
future time of settlement.
_Credit by due-bills._—An extension of this credit in well established
countries, so as to take in other persons than the two involved in book
account, is found in due-bills, notes of hand payable on demand, or more
formal securities, any of which may require a final decision in court.
These pass from hand to hand, often in connection with coin, and under
ordinary circumstances serve their purpose cheaply. In some countries a
note of hand, with endorsement of each user, may make exchanges until it
is covered with endorsements. The danger of waste is considerable from the
impossibility of knowing the financial standing and honesty of the various
endorsers, and the system is limited, of course, to the range of
confidence in such trustworthiness. So easy is it to extend this credit of
individuals beyond the range of safety that most governments have found it
necessary to protect their citizens against its dangers by limiting or
prohibiting its use as currency.
_Credit currency._—So convenient, however, and so economical is the use of
credit, that all well established nations have developed systems for the
issue of a credit currency founded upon the stability of strong
corporations or upon the national credit. Nations themselves have often
issued bills of credit in the form of notes, or promises to pay at the
national treasury. If these are payable on demand in the coin of the
realm, they are said to be redeemable. If the time of payment is
uncertain, or indefinitely postponed, they are said to be irredeemable.
Thus we have the many forms of paper money so familiar to everybody and
the various practices and speculative theories regarding it, which make a
large part of the discussion of financial questions throughout the world.
No one doubts the worthlessness of currency in any form of note, from
individual or firm, which cannot be paid when presented. The notes of the
government, so long as that government is considered stable, may circulate
readily, and even after doubts exist as to the final ability of the
government to redeem, they still circulate, perhaps with greater
readiness, in the feeling that hoarding is utter loss and the stopping of
trade in the ordinary perishable products of industry will be an enormous
disaster. This feeling often leads to the use of a currency without value,
like the token money used for change in the absence of legal coins. Though
nobody is bound to redeem these tokens, everybody takes the risk of loss
as less disastrous than no exchange. Paper money issued by corporations is
universally considered dangerous to the interests of communities, unless
very carefully restricted within distinct and clearly understood limits.
The discussion of such issues will be given in another chapter devoted to
banking. The issue of paper money by governments has been a frequent
device for enforcing contributions of citizens to extraordinary expenses
in war or other disaster. A history of such issues cannot be given within
the limits of this book, but is well worth the study of those who seek an
understanding of the powers and limitations of government under natural
laws, in making a satisfactory currency. A government’s stamp upon the
piece of paper is so far good, and only so far, as it secures to the
receiver of the paper an equivalent value to what he gave for it. If the
government itself is unable to give that value, it can never insure the
ability or the willingness on the part of any individual to give such
value. While millions of dollars in such form may serve as currency
without any deterioration, as at the present time, when government
promises in all the various forms amount to nearly $1,000,000,000, should
any of these, on any day, be refused payment for want of means in
government possession, every individual in the land would feel that the
value of his possessions in the shape of such notes was made just so far
doubtful as the chances of redemption are postponed. All issues of such
notes at once become certificates of debt rather than credit, and lose, to
greater or less extent, their exchangeable value.
In the extraordinary issue of “greenbacks” during the civil war, the
purchasing power of a paper dollar was reduced to less than half, and
gradually appreciated in value as the expectation of early redemption
increased. The effect of such issues upon government revenues will be
treated in its proper connection. As currency, it certainly robs each
creditor and holder while depreciating, and as surely robs each debtor
while appreciating. As wage earners are universally creditors, according
to prevailing customs, they suffer most in a depreciation of money values:
i. e., they work for dollars at one value and a week or a month later
receive them to expend at a less value. Speculative debtors, on the other
hand, always thrive on depreciating currency, paying their debts in what
costs less exertion. Under appreciating currency, the creditors gain, be
they bankers or workmen.
_Banking._—The peculiar convenience for saving found by experience in the
use of each of these methods of settlement in exchange leads to a natural
commingling of all. Coins serve some purposes best, and accounts have a
limited range; notes of hand are often desirable, and paper money, if
safe, is universally convenient. This natural combination has led to a
more systematic arrangement for handling various kinds of currency, called
banking. The most obvious addition to the machinery of exchange in the
system of banking is the possibility of immediate transfer of property
right in a bank deposit by check and account, or by a draft in account
between banks, or by bills of exchange in more distant transactions. The
bank deposit is made up of individual wealth, or titles to wealth,
supposed to be immediately available for use in exchange. It may consist
of all the kinds of currency described or conceivable. Checks are orders
upon these individual accounts or deposits, and by their means exchanges
are made with great ease and little risk between individuals in the same
neighborhood or even in distant cities or distant countries. The cost of
storing, handling or transferring any form of currency is reduced to a
minimum. So far-reaching is this comparatively modern machine of exchange
that it is properly assumed to be the means of settling 90 per cent of all
exchanges, domestic and foreign, with almost no use of money in any of its
numerous forms. Its importance as a machine of commerce entitles banking
to a more distinct consideration, and chapter XI will be devoted to the
subject.
_Deferred settlement._—In certain stages of civilization exchanges
involve, not simply present wealth, but prospective accumulation. A farmer
may purchase his farm upon the assurance of crops and stock to be raised
in a series of years. In this exchange final settlement is deferred by
notes payable at definite future dates, the promise to pay being secured
by a deed in trust, a mortgage deed or individual endorsement. If many
individuals are united, a purchase may be made by means of issuing more
formal notes called bonds, the property of the company being pledged for
the payment of the bonds when due. Sometimes such purchases are made by
the issue of stock, establishing the right of the seller to a certain
undivided share in the wealth controlled by the company. In this case the
time of final settlement is indefinitely postponed, to be fixed by limits
of the charter or by a vote of the stock-holders. All these certificates
of indebtedness serve to a limited extent in exchange of property. So far
as they enter into commerce, after the first transaction, they are simply
articles of purchase and sale, having a more or less established market
value. Since they usually represent an accumulating interest or a
provisional dividend, the market value is constantly fluctuating, and they
can therefore serve almost no purpose of currency.
The ease with which such notes, bonds and stock can be made the basis of a
single purchase in establishing some enterprise gives to them an
indefinite influence in trade, sometimes immensely extending the apparent
purchasing power of a community. The advantages and disadvantages of such
deferred settlement are so varied and important as to make it worth while
to treat the subject more extensively than is proper in this analysis, and
such treatment will be found in Chapter XII.