HONEST MONEY
HONEST MONEY
BY
ARTHUR I. FONDA
New York
MACMILLAN AND CO.
AND LONDON
1895
_All rights reserved_
COPYRIGHT, 1895,
BY MACMILLAN AND CO.
Norwood Press:
J. S. Cushing & Co.--Berwick & Smith.
Norwood, Mass., U.S.A.
PREFACE.
In an article in the "American Journal of Politics" for July, 1893, I
gave a brief statement of the conclusions I had reached in an attempt
to analyze the requirements of a perfect money.
The limits of a magazine article prevented a full discussion of the
subject; many points were left untouched, and all quotations from the
works of other writers, in support of the brief arguments given, were
of necessity omitted.
As the course of events since the article referred to was written has
more fully confirmed the conclusions stated therein, a desire to give
the subject ampler treatment, which its importance seems to demand, has
led to the writing of this little work.
If apology is needed for a further contribution to the mass of
literature on the subject of money, with which the country has of late
been flooded, it must be found in the above explanation of the reasons
which have led to the production of the present volume, coupled with
the fact that the questions involved are far from being settled, and
that the loud complaints, and the many financial schemes and plans,
that have appeared all over the country make it probable that further
legislation on the subject will be attempted in the near future.
It must be conceded that there is something radically wrong in a
country like the United States, rich in all of the necessaries and
most of the luxuries of life, where nature has been most bounteous,
and where the not excessive population is exceptionally enterprising
and industrious, when a large part of the people cannot at times find
employment. When, with an abundance of unoccupied land, and a great
diversity of undeveloped resources, capital and labor--both anxious
for profitable employment--cannot find it; and when men suffer for the
necessaries of life, not in one section only, but universally and in
large numbers, while our warehouses are filled with manufactured goods,
and our barns and granaries are bursting with food products. This is a
condition that is certainly as wrong as it is unnecessary.
Such a condition occurring once or twice in the history of a
country might be attributed to accident, but recurring, as it does,
periodically, it argues a fault in our economic system. So wide a
disturbance, extended also to other countries, betokens a general
cause. What that cause is, it is not difficult to perceive--all
indications point to our monetary system as the chief source of the
trouble. There are doubtless other causes that contribute in some
degree to create variations in prosperity, but no other single cause,
or combination of causes, seems to us competent to account for the
great fluctuations; while the one we have cited alone may easily do so.
This work may have little direct effect in bringing about an
improvement in our money system, but it is the hope of the writer that
it may have at least an indirect effect by helping to spread a better
knowledge of the requirements of such a system and of the principles
involved.
Much of the current discussion of the subject of money betrays
ignorance of those fundamental principles of the science which are
agreed upon by all economists, if it does not wholly disregard them.
I have endeavoured in this work to avoid such errors by a painstaking
analysis of the subject, and by a careful comparison of the opinions of
authorities on the principles involved. Starting from this foundation I
have deduced the requirements for an honest money, shown the faults of
our present system in the light of these requirements, as well as the
merits and defects of various changes that have been proposed for its
betterment, and, in conclusion, have outlined a system that seems to
meet the requirements and to correct existing faults.
I desire to acknowledge my indebtedness, not only to the many works
mentioned and quoted from herein, but to others, neither mentioned nor
quoted, which have been of material assistance in corroborating the
opinions I have ventured to advance.
A. I. F.
DENVER, COLO.
CONTENTS.
CHAPTER I.
PAGE
VALUE AND THE STANDARD OF VALUE 1
Definition of Value 1
Supply and Demand 8
The Standard of Value 12
CHAPTER II.
MONEY 21
Definition of Money 21
The Functions and Requirements of Money 25
Money Value 29
Money Demand and Supply 36
Necessity for Invariable Money Value 40
CHAPTER III.
EXISTING MONETARY SYSTEMS 51
The Gold Standard 54
Gresham's Law 57
The Silver Standard 65
Bi-metallism 67
Paper Money 71
CHAPTER IV.
STABILITY OF GOLD AND SILVER VALUES 81
Gold-Standard Prices 81
Silver-Standard Prices 94
CHAPTER V.
CRITICISM OF SOME GOLD-STANDARD ARGUMENTS 98
CHAPTER VI.
FOREIGN COMMERCE 112
CHAPTER VII.
MONEY IN THE UNITED STATES 125
CHAPTER VIII.
SOME PROPOSED CHANGES IN OUR MONEY SYSTEM 137
CHAPTER IX.
A NEW MONETARY SYSTEM 151
The Standard of Value 158
The Medium of Exchange 164
CHAPTER X.
MERITS AND OBJECTIONS CONSIDERED 181
Merits of Plan 181
Objections Answered 187
CHAPTER XI.
CONCLUSION 196
INDEX 205
HONEST MONEY
CHAPTER I.
VALUE AND THE STANDARD OF VALUE.
_Definition of Value._
A clear conception of the meaning of the term _value_ is the first
essential to a discussion of the subject of money.
Under the general term _value_ the older economists recognized two
distinct conceptions, which they distinguished as _value in use_ and
_value in exchange_.
To the former they gave little attention, merely stating that while it
was essential to value in exchange, the latter was not proportional
to nor determined by the former, and citing air and water as familiar
examples of objects having great utility, or use value, yet having
little or no exchange value.
Modern economists--chiefly those of the Austrian school--have analyzed
the subject more thoroughly, especially the relation between the two
conceptions, and have shown that utility or subjective value, as it is
generally termed by them, is an expression both of human desire and
of the quantity of the necessary commodity available to satisfy such
desire.
The utility of a thing grows less as the quantity of it increases, and
it is the utility of the last increment of supply, or the marginal
utility, that determines the subjective value of the whole supply,
and it is the ratios between these subjective values that determine
exchange values. Air and water, for instance, have no great utility,
as viewed by the older economists, except where the supply is limited;
ordinarily, their abundance makes their utility, or use value, small.
It is not essential to the purpose of this work to enter into an
abstract discussion of the theory of value further than is necessary
to make clear the fact that the present analysis in no way lessens
or invalidates the distinction between the two conceptions of value
noted by the earlier economists,--a fact which has been overlooked by
some who have accepted the marginal utility theory. The distinction
remains, broad and clear. The one conception, whether called "value in
use," "marginal utility," or "subjective value," pertains wholly to the
relation which a single good, or unit group of goods, bears to a single
individual, or society unit, in respect to human well-being, and has no
reference or relation to any other individual or other good.
The other conception, called "objective value," or "exchange value,"
is dual in its nature, involving in all cases two or more commodities.
Abstractly, it is _the ratio at which commodities may be exchanged
for each other_, or, since such ratio for a unit of one commodity is
expressed by the amount of another given for it, the exchange value
of a thing is the quantity of some other thing that will be evenly
exchanged for it, or, considered in a general sense, the amount of
commodities in general it will exchange for,--_its general purchasing
power_, in short.
This latter conception--exchange value--is the one that principally
concerns us in discussing the subject of money. It is also the
conception generally in mind when the simple term _value_ is used
either by economists or by the general public, and wherever the term is
used in this work without qualification it is to be understood in that
sense.
The Austrian economist, E. von Böhm-Bawerk, says, in his "Positive
Theory of Capital," p. 130:--
"Value in the subjective sense is the importance which a good, or
a complex of goods, possesses with regard to the well-being of a
subject."
"Besides the expression 'value in exchange,' English economists
use, quite indifferently, the expression 'purchasing power,' and we
Germans are beginning in the same way to put in general use the term
_Tauschkraft_."
The value of a thing may be considered either in a particular sense,
with reference to some other specified thing, or it may be considered
in a general sense, with reference to all other things considered as
a whole. We may say the value of a bushel of wheat is two bushels of
corn, meaning that these two commodities exchange for each other in
that ratio; or we may speak of the value of wheat having risen or
fallen, meaning that its general purchasing power, or the ratio between
that and all other things taken as a unit or a whole, has increased or
decreased.
The term must invariably be used or considered in a general sense,
unless otherwise specifically stated, for we must always have some
other thing in mind besides the one whose value we are considering;
while if no other is stated, commodities in general (taken as a whole)
is that thing.
Value being a ratio, it is impossible for all values to rise or
fall simultaneously. The sum of subjective values may increase or
decrease,--indeed it is one of the great objects of human endeavour to
increase the sum of want-satisfying power,--but the sum of the ratios
between these subjective values is constant. As one term of any ratio
rises relative to the other, the second necessarily falls as regards
the first.
This principle is so universally recognized that quotations might be
given from almost every work on political economy in support of it. The
following will be sufficient, however, as regards both the definition
of value and this principle.
John Stuart Mill says, in his "Principles of Political Economy":--
"Value is a relative term. The value of a thing means the quantity of
some other thing, or of things in general, which it exchanges for. The
values of all things can never, therefore, rise or fall simultaneously.
There is no such thing as a general rise or a general fall of values.
Every rise of value supposes a fall, and every fall a rise."
Again, he says:--
"Things which are exchanged for one another can no more all fall, or
all rise, than a dozen runners can each outstrip all the rest, or a
hundred trees all overtop one another."
Prof. S. N. Patten says, in "Dynamic Economics," p. 64: "Objective
values, however, are never a sum, but only a relation between
subjective values. There can never be high or low objective values
of commodities as a whole. It is therefore impossible to add to or
subtract from them."
This latter quotation, as well as the preceding one from von
Böhm-Bawerk,--both exponents of the marginal utility theory,--may help
to correct a quite prevalent impression that this later theory does not
distinguish between the two conceptions of value, and that because the
sum of subjective values may increase, the sum of objective or exchange
values can increase also.
_Supply and Demand._
All economists recognize the fact that the immediate determiner of
value is the relation between supply and demand. These terms in their
economic sense mean something more than mere desire and mere quantity.
_Supply_ means the amount offered in exchange, and _demand_ means not
only a desire, but a desire coupled with the ability and willingness to
give other commodities in exchange for the one wanted.
In this sense the terms are strictly correlative. The supply of a
commodity (that is, the amount offered) may be considered as equivalent
to a demand for some other commodity, or for commodities in general.
We may say, then, that the value of any commodity is determined by
the ratio that the demand for that commodity bears to its supply; or
by the ratio that the demand for that commodity bears to the demand
for some other commodity,--or commodities in general, when the term
_value_ is used in a general sense and not with reference to some other
specified thing only. (The objection that has been made by some writers
that a ratio could not logically exist between a desire [demand] and
a quantity [supply], does not apply to these terms in their economic
sense; for, as above stated, they are something more than a mere desire
and a mere quantity, and the expression is translatable into the other
expression, "ratio between the demand for one commodity and the demand
for others in general.")
The statement of the later economists that exchange value depends
on, and is determined by, the ratio between subjective values in no
way conflicts with the above statement that value is determined by
the ratio between demand and supply, for the demand for a commodity
is determined by its subjective value and by that alone, and must
vary with it. Hence, as the quantity of anything increases and its
subjective value lessens, the demand for it relative to the quantity of
other articles also lessens, and its value falls, and _vice versa_.
This close connection between value and the ratio between demand and
supply--value rising as the ratio increases, and falling as it grows
less--is true in all cases. No other factor can affect the value of any
commodity except by altering the relation or ratio between these two.
Cost of production is a more remote factor that enters into the
determination of value in most but not in all cases, through its
effect on supply. It is used, like the term _value_, in two senses,
a subjective and an objective sense. In the former it means the pain
of labour and waiting that must be undergone to produce the good that
is being considered,--the negative pleasure given to get the positive
pleasure to be derived from that good. In its objective sense--the
sense in which it is generally used--cost of production means the
goods that must otherwise be given for, bartered or set against those
desired; in a simple case of direct production, it means the goods that
might have been produced, in lieu of those that have been produced,
with the same subjective cost; in more complex cases, it means the sum
of the goods sacrificed, in the shape of raw materials, rent, wages,
interest, etc., to get the one produced.
When the value of a commodity falls to or below the cost of production,
or even when it approaches it so closely as to reduce the margin
between the two--the producer's profit--below that in other industries,
then, men will cease to produce the one and turn their labour and
capital to producing the others which offer greater profit, thus
lowering the supply of the abandoned product and raising that of the
more profitable, thereby affecting the value of both.
The effect of this operation of the law of cost is to equalize profits
and make the values of things conform to their cost or be proportional
thereto.
The law can only operate when men are free to turn their labour from
one industry to another. Hence arises the important exception to the
law, that the values of goods produced by a monopoly are not affected
by their cost of production. Only under free competition does the law
operate in full force. As monopoly becomes a factor cost ceases to be,
and, when the monopoly is complete, cost has no weight whatever in the
determination of value.
For analogous reasons, cost enters but partially into the determination
of the value of such goods as are dependent more or less on luck or
chance for their production, as in the case of precious stones, gold,
silver, etc.
_The Standard of Value._
We may use the value of anything as a measure by which to compare
the values of any and all other things, but as all the factors that
determine value are variable, the value of everything is variable. Any
value may rise with reference to some other value, and at the same time
fall with reference to a third.
By what standard, or invariable measure at all times and places, can we
compare the values of goods to determine their constancy or variability?
We must not forget that there are two kinds of value, and that it is a
standard of exchange value we are seeking. So far as it may be possible
to formulate a standard of subjective value, it must consist of the
pain or inutility of labour; for this kind of value pertains only to a
single good, and cannot be referred to other goods without confusing
it with the other conception. We cannot measure the absolute pleasure
a good will give to an individual except by the pain he will undergo
to get it. It is not a standard for this sort of value we want. It was
evidently some such conception as the above--confusing, however, not
only the two kinds of value but the two descriptions of labour--that
led Adam Smith to consider labour as the ultimate standard of value. He
appears also to have confused the idea of a standard of value with that
of a determiner of value.
These errors were pointed out in part by Ricardo and, in part also,
by J. S. Mill and later writers; hence the contention that labour is
in any way a standard of value has long been abandoned by the ablest
economists. The idea still lingers, however, and is frequently brought
forward in current discussions, and for this reason it seems necessary
to analyze briefly the relation of labour to value.
Labour is necessary to the production of all commodities, but it is
not itself a commodity, nor anything which for itself is desired. It
is a force, and, like every force, valuable according to the results
it accomplishes. If unproductive, it has no value; if productive, its
value varies according to the value of the commodities or utilities
it creates. We use the terms "price of labour" or "value of labour,"
implying that it is the labour which is valued, and which is bought and
sold; but the terms are merely a convenience. What is really bought
and sold is the commodity or utility such labour has produced or will
produce. If it were the labour itself, then the purchaser would receive
not only the labour, but the commodity it produced, in exchange for the
wages paid,--a double return,--which, of course, is absurd.
Three descriptions of labour may be distinguished in connection with
the value of a commodity, viz.:--
(1) The labour expended in its production.
(2) The labour in general it will purchase.
(3) The labour necessary to produce more of it.
The first kind of labour in no way affects the existing supply or
demand of the commodity, and is neither a measure of its value nor
a regulator or determining factor of such value. Evidences are not
lacking to prove that a commodity will frequently not exchange for as
much labour as was expended in producing it.
The second kind of labour, the amount in general which a commodity
will purchase, depends on the amount of commodities such labour will
produce, less the share which goes to capital as its reward; for,
neglecting rent or classing it with capital, these two, labour and
capital, are joint factors in production and divide between them
the total product. It is hardly necessary to observe that labour is
continually growing more efficient; that improved skill and methods
enable a much larger amount of commodities in general to be produced,
with a certain amount of labour, than could formerly be produced; and
that labour receives, as its share of such product, a much larger
amount than formerly.
It is thus evident, that a commodity which would exchange for the same
amount of labour now as formerly, would exchange for a much larger
amount of commodities in general now than then, and, if we adhere to
our definition of exchange value, would be worth _more_ than formerly;
while if labour be taken as a standard of value, it would be worth
the _same_. The use of this form of labour as a standard of value is,
it will be seen, incompatible with the definition of value. It may
serve as a measure of the relative values of two commodities at any
particular time and place, just as any third commodity may; but, as
Ricardo remarks, "is subject to as many fluctuations as the commodities
compared with it."
The same argument applies to the third form of labour--that necessary
to produce more of a commodity. This form of labour, however, is one of
the factors in the cost of production, and through its effect on cost
is one of the more remote factors that determine value, as explained in
considering cost of production, but this does not make it in any sense
a standard.
We may conclude, then, that labour in any form is not a standard of
value; that, as John Stuart Mill observes, it "discards the idea of
exchange value altogether, substituting a totally different idea, more
analogous to value in use."
Since the values of things can never rise or fall simultaneously,
every rise supposing a fall, and every fall a rise, it follows that
the values of all taken together must be constant; in other words,
that general values cannot change. Thus it is that we find whether
any one thing has risen or fallen in value, as between one period
and another, only by comparing it with all others,--in short, by its
general exchange or purchasing power. If this has increased, then its
value has risen; if it has decreased, its value has fallen. It is
evidently not necessary that anything should exchange for more or less
of _every_ other thing to show a rise or fall of value, but only that
it should, on the average, exchange for more or less of all; that its
average purchasing power should be greater or less. If it has exchanged
at different times for the same amounts, on the average, of all other
things, its value, clearly, has remained constant.
This is the only standard, or test, which can be applied to the
exchange value of any commodity to determine its constancy or
variability, and it is inherent in the very definition of exchange
value.
The values of commodities may be compared to the surface of the
ocean, which, vexed by winds and tides, is never at rest, every point
continually rising or falling as compared with others. As some points
rise others fall, yet there is a mean level which does not vary, and by
comparison with which the variations of level of any particular point
may be determined. So with values, there is a mean or average which is
constant, and by referring individual values to that we can determine
their fluctuations.
These ideas will become clearer as we proceed to apply them concretely
to the special case of money.
Although there can be but one real _standard of value_, invariable at
all times and places, yet, as before stated, any commodity may serve as
a _measure of value_, and the great convenience subserved, by all the
people of any locality or country using the same commodity instead of a
number of different ones for this purpose, early led to the adoption of
some one commodity in each locality as a "money" to measure values and
facilitate exchanges.