MONEY.
_Definition of Money._
Money has been variously defined by different writers. Perhaps the
definition given by Prof. F. A. Walker, though lengthy, is the most
comprehensive. He says: "Money is that which passes freely from hand
to hand throughout the community in final discharge of debts and full
payment for commodities, being accepted equally without reference to
the character or credit of the person who offers it, and without the
intention of the person who receives it to consume it, or enjoy it, or
to apply it to any other use than in turn to tender it to others in
discharge of debts or full payment for commodities."
This definition has been indorsed by several other writers; by some,
however, the term _money_ is restricted to coin, paper money being
called currency. The distinction is perfectly proper, though not
generally concurred in. People commonly use the terms _money_ and
_currency_ indiscriminately for both coin and paper money, since they
perform identically the same work where both are used together, and the
paper is convertible into coin at any time. Where the paper is used
alone--"inconvertible paper"--coin is really not money; it ceases to
circulate as money; it is hoarded as treasure, or bought and sold as a
commodity, but fails to have that general use in current transactions
in that country which alone entitles any commodity to be called money.
The distinction sought to be made between paper money and coin arises
largely, it is thought, from the idea that coin has a value in itself
which paper money has not. This idea is erroneous. Value, as we have
seen, is a ratio or relation, and though the value of anything is
based on a desire for it, that desire may arise either from the
satisfaction which the use or consumption of it will bring, or from the
belief that it can be exchanged for some other thing that will give
satisfaction in use or consumption. The value of money is due to the
latter of these two causes. No one wants money except for the purpose
of exchanging it for other commodities; under modern conditions it is
necessary for this purpose,--it is the indispensable requisite to the
satisfaction of certain human wants. Money, therefore, possesses an
indirect if not a direct subjective value which forms the basis of its
exchange value. Paper money possesses the power of satisfying this need
for money to the same extent that coin does, under like conditions, and
it has, therefore, both subjective value and exchange value, and the
latter is governed by the same law of supply and demand that operates
in all cases.
The fact that the material of which the money is made is, in one
instance, of great cost, and, in the other, of little or no cost, is
of minor consequence. The minting of gold and silver into coin may,
or may not, add to its value; it really transforms it into another
commodity--money--and its value is thenceforth determined by the law
of supply and demand as applied to money. The same is true of paper
money, the low cost in the production of which is not an element in
determining its value, for its production is always a monopoly. There
is no reason, then, for not considering paper currency as money, and
in using the term we will consider its meaning to be that given by
Professor Walker,--which is also its popular significance,--and as
including both paper money and coin.
It should be considered, whether of one material or of several
circulating concurrently, as a single commodity created for the purpose
it fulfils, and as separate and distinct from the material of which it
is made. In short, as that commodity to which, by common consent and
usage, generally sanctioned by law, all other commodities are referred
as a measure of value, and by means of which exchanges are effected.
_The Functions and Requirements of Money._
Professor Jevons, in his valuable work, "Money and the Mechanism of
Exchange," gives to money the following threefold functions, viz. as:--
A medium of exchange.
A measure of value.
A standard of deferred payments.
He also inquires if it does not perform a fourth function as a 'store
of value.'
All authorities give the first two of the above as the principal money
functions. Some include one or both of the others, and some omit both.
Prof. F. A. Walker objects to the use of the term "measure of value,"
on the ground that value, being a relation, cannot be measured but can
only be expressed. He proposes, instead, the term, "common denominator
of value." It is not quite clear why a relation _or_ ratio cannot be
measured,--the measure, of course, being a similar ratio,--nor does
there seem to be anything gained by the change, while the term proposed
seems less clear and correct than the one in general use. Money, or the
_value_ of the unit of money, is used as a measure in comparing the
values of other things just as a yardstick, or the _length_ of a yard,
is used in comparing the lengths of other objects.
Money, in acting as a medium of exchange, must also act as a store
of value to some extent, since it stores the value received until it
is expended; but the use of money for the purpose of hoarding is not
to be regarded as strictly one of its functions, at least not in the
sense of requiring to be especially provided for. The fact that it is
so used, however, should be borne in mind, as it interferes more or
less with its other and more important functions; but in considering
the qualities necessary to the best performance of the functions of
money we may omit this last function, as any money which fills the
requirements for the others will fulfil those necessary to this in a
sufficient degree considering its minor importance. As our inquiries
in this work will be confined to the money materials now in general
use, viz., gold, silver, and paper, we need not consider the qualities
necessary to a money material, as given by Professor Jevons,--such
as portability, indestructibility, divisibility, etc.,--further than
to say that the qualities he mentions are possessed by all of the
money materials now in use, in a sufficient and nearly equal degree.
Coin, to be sure, is more indestructible than paper; but as the paper
is sufficiently acceptable for the purpose, the difference need not
concern us.
Aside from that general acceptability, which is the very essence of
money,--without which no commodity could be considered money, and
which, therefore, all money may be considered as having,--the great
requirements of money are _invariable value_, added to _convenience of
form_, _size_, _weight_, _and value_.
This latter requirement pertains to the function of a medium of
exchange, and the degree in which it is possessed by the different
money materials or kinds of money, depends wholly on the values to be
transferred by its use. For small amounts, silver is preferable to
either gold or paper; as the amount increases, gold becomes preferable
to silver; and for all amounts above fractional currency, paper money
is unquestionably more convenient in every way than either gold or
silver, and the advantage increases with the amount.
_Invariable value_ is the great requirement for both the functions,--"a
measure of value" and "a standard of deferred payments." Indeed these
two functions may practically be considered one; the only difference
between them being centred in the element of time, and that is more
or less involved in every exchange requiring the use of money, since
some interval must elapse between the sale of one commodity and the
purchase of another with the money received,--which constitutes the
whole exchange transaction,--and during such interval the money should
maintain a constant value. When the interval over which the transaction
is spread is a large one, as in the case of notes and bonds, any
variability is more noticeable than when the change is distributed
among many holders of money.
Before considering further the great necessity for invariable money
value, it will be best to consider the laws and forces which determine
and control the value of money.
_Money Value._
That money is a commodity, and that its value varies like that of
every commodity in accordance with the law of supply and demand, are
incontestable.
The fluctuations in the value of money can be detected, it is clear,
in the same way that changes in the value of any commodity can be
detected, by comparison with all other commodities,--by its average
purchasing power, in short.
The value of a commodity, when measured by money and expressed in
terms of the unit of money, is called its _price_. If the prices of
all commodities, or the average of all, rise or fall, it is conclusive
evidence that the value of money has changed, for its purchasing power
is less in the one case and greater in the other. Indeed the statement
that general prices have fallen is equivalent to saying that the value
of money has increased, and _vice versa_. Therefore, if the value of
money remains stable, average prices must remain constant.
The following quotations will show that these views are correct,
and that they are generally accepted by authorities on finance and
political economy, though very commonly overlooked and neglected in
discussions on the subject.
John Stuart Mill, in his "Principles of Political Economy," says:--
"There is such a thing as a general rise of prices. All commodities
may rise in their money price. But there cannot be a general rise of
values. It is a contradiction in terms." "That the money prices of
all things should rise or fall, provided all rise or fall equally, is
in itself, and apart from existing contracts, of no consequence. It
affects nobody's wages, profits, or rent. Every one gets more money in
the one case and less in the other; but of all that is to be bought
with money they get neither more nor less than before. It makes no
other difference than that of using more or fewer counters to reckon
by. The only thing which in this case is really altered in value is
money; and the only persons who either gain or lose are the holders
of money, or those who have to receive or pay fixed sums of it....
There is a disturbance, in short, of fixed money contracts, and this
is an evil whether it takes place in the debtor's favour or in the
creditor's.... Let it therefore be remembered (and occasions will often
rise for calling it to mind) that a general rise or a general fall of
values is a contradiction; and that a general rise of prices is merely
tantamount to an alteration in the value of money, and is a matter of
complete indifference save in so far as it affects existing contracts
for receiving and paying fixed pecuniary amounts."
"The value of a thing is what it will exchange for: the value of money
is what money will exchange for; the purchasing power of money. If
prices are low, money will buy much of other things, and is of high
value; if prices are high, it will buy little of other things, and
is of low value. The value of money is inversely as general prices:
falling as they rise and rising as they fall."
"The value of money, other things being the same, varies inversely as
its quantity; every increase of quantity lowering the value, and every
diminution raising it in a ratio exactly equivalent."
"That an increase of the quantity of money raises prices, and a
diminution lowers them, is the most elementary proposition in the
theory of currency."
The expression, "other things being the same," in one of these
quotations, evidently means "demand remaining the same," and the terms
_increase_ and _decrease_ of money unquestionably refer to the increase
and decrease relative to demand, since the writer further says:--
"If there be at any time an increase in the number of money
transactions, a thing continually liable to happen from differences
in the activity of speculation, and even in the time of year (since
certain kinds of business are transacted only at particular seasons);
an increase of the currency which is only proportional to this increase
of transactions, and is of no longer duration, has no tendency to
raise prices."
_Per contra_, therefore, unless the currency be increased to meet such
increased demand, there will be a tendency to decreased prices and
consequent change in the value of money.
Stronger statements than these of Mill's, or by an abler authority,
could not be asked for.
Prof. R. T. Ely, in his "Political Economy," remarks, p. 179:--
"Values are merely relative, and consequently there can be no such
thing as a general rise or fall of values."
"Value expressed in money is called price. There can be such a thing as
a general fall or a general rise of prices. A general fall in prices
means an increase in the value of money, and a general rise of prices
means a fall in the value of money."
David Ricardo observes that:--
"The value of money, then, does not wholly depend upon its absolute
quantity, but on its quantity relatively to the payments it has to
accomplish."
The last edition of the "Encyclopædia Britannica" says, as a conclusion
in discussing the value of money, and referring evidently to coin
alone:--
"The most correct way to regard the question of money value is that
which looks on supply and demand, as interpreted above, as the
regulator of its value for a limited time, while regarding cost of
production as a force exercising an influence of uncertain amount on
its fluctuations during long periods."
This view is in exact accordance with the conclusions previously stated
in regard to the values of all commodities.
The Encyclopædia further says:--
"Where the coinage of a State is artificially limited, the value of its
money plainly depends on supply and demand."
Quotations might be multiplied indefinitely to the same effect; but
enough have been given to show the general consensus of opinion.
Indeed it may seem that there is no necessity for accumulating evidence
in support of propositions so apparent as those stated; unfortunately,
however, not a few recent writers have ignored some of them, and the
general public seem to make the same mistake; hence, it is of the
utmost importance that they be kept clearly in mind.
_Money Demand and Supply._
Mill affirms that: "The supply of money is all the money _in
circulation_ at the time."
Money that is hoarded has no more effect on prices than if it did not
exist. Money lying in banks or in the hands of merchants or others
to the extent necessary for the safe conduct of their business may
be considered money in circulation, but beyond the amount needed for
conducting any business the excess may be considered as hoarded. The
supply of money in any country depends directly and primarily on the
legislation of that country; and secondarily, in most, but not in all
cases, on the legislation of other countries, and the production of
precious metals available for coinage, etc., all of which can be better
analyzed in explaining the different systems.
The demand for money is most complicated, since it is affected by
a great variety of forces. It varies directly with the activity of
commerce, and universally with the activity of money,--a less amount
of money doing a greater work when active than when sluggish. It
is affected by changes in the customs and habits of the people, by
changes in transportation facilities, in diversity of employment, in
concentration of population, and, more than all other, it is affected
by the extent of credit, the use of banking facilities, etc.
Credit in its various forms takes the place of money, and does its
work in this respect to an enormous and continually increasing extent.
Through the medium of banks,--which are really institutions for the
exchange of credit,--and by means of checks, drafts, notes, bills of
exchange, letters of credit, post-office and express money orders,
etc., the great bulk of the world's business is transacted.
Statistics gathered from national banks in this country in 1881, showed
that of the total deposits, ninety-five (95) per cent were in forms of
credit to five (5) per cent in actual money, the percentage of credit
paper rising in New York City to as high as 98.7.
While these percentages may not show accurately, on the whole, the
relative work done by money and by forms of credit, they do show the
enormous extent to which credit takes the place of money, and the
greatly increased demand for money that arises, when, from lack of
confidence or other causes, the extent of the credit is lessened.
Unless the volume of money immediately adapts itself to such demand,
the value of money must inevitably increase, or the demand be lessened
by a checking of all business transactions, and a partial paralysis of
the industries of the country. Generally both of these results follow.
With these facts in mind, it is evidently futile to attempt to fix any
definite amount of money, per capita, as the proper one. Not only does
the amount necessary to meet the demand vary with different countries,
per capita, even among the most civilized nations, but it varies with
the seasons in each country, as crops have to be moved or not, and with
the state of credit and enterprise from day to day. France, where the
habits and customs of the people have prevented their making so large a
use of credit and banking facilities as in England, requires a larger
amount of money, per capita, than does England.
Since the value of money depends on these two factors, supply and
demand, if we are to have a money of invariable value, we must
evidently control one or both of these. It would be hopeless to attempt
to control all the various conditions and forces which, we have seen,
affect the demand for money. Fortunately it is not necessary. We cannot
control the demand, but we have, or can have, complete control over
the supply, and we can by this means maintain that constant relation
between the supply of, and the demand for, money which is essential to
its stability of value.
_Necessity for Invariable Money Value._
Returning to the reasons for an invariable money value, they are best
appreciated by considering the effects of one that is variable. While
the statement of Mill, previously quoted, "that the money prices of all
things should rise or fall, provided all rise or fall equally, is in
itself and apart from existing contracts, of no consequence," is true,
yet is it true only under the condition specified, that _all shall
rise or fall equally_, and this condition in the case of a fluctuating
money value never obtains. Aside from the exception which Mill makes
of fixed money contracts, which can never adjust themselves at all
to a changed money value,--and the exception is of enormous volume
and importance,--the prices of many commodities are not adjustable
quickly or readily to a change in money value, especially when such
change is an increase. There is a persistency or inertia about prices
that in many instances resists a reduction. Wages can never be reduced
without friction and often strikes. The fact that commodities have
fallen and that the lower wages will buy as much, or more, than the
higher ones formerly did, is slow of appreciation; hence the employer
caught between the difficulty of reducing his employés' wages and the
falling prices of his products, is injured by an increased money value.
When the change, on the other hand, is a decrease of money value, the
employer will not as a rule advance wages until compelled to do so, and
the labourer suffers meanwhile from the rising prices of commodities.
When prices fall, the producers of a commodity are not apt to recognize
that it is a general fall, a change in money value; but accustomed to
regard money as invariable in value, as it should be, and, failing to
see anything in the conditions affecting their own particular product
that should lower the price, they delay or refuse to sell, hoping for
higher prices; and all, or a large number, doing this, makes business
dull.
The great injury and evil of changing money value comes, however,
through fixed money contracts. The enormous amount of bonded
indebtedness, railroad, municipal, county, state, and national, makes
the slightest change of money value of vast importance, and added to
these is the aggregate volume of commercial and private debts.
In short, a change of money value either way is a robbery, and none
the less reprehensible because it is legal and insidious. Indeed,
it is perhaps more damaging in its secondary effects because of its
insidiousness. An open danger may be guarded against, but the hidden
danger, known to exist, but which cannot be located or prevented, only
excites fear and distrust, and checks all movement. Nor is the damage,
in its secondary effects, confined to those involved in fixed money
contracts. Piracy on the seas or robbery on a highway, when common,
injure not alone those who are robbed. The fear and distrust engendered
by such occurrences damage and delay all commerce; and the cost of
protection against these menaces, or of avoiding them by taking more
circuitous routes, are a burden on the whole people. So the robbery by
a fluctuating money value affects, indirectly, the whole community,
while the indirect effects are far worse. In the case of a decreasing
money value the robbery does not bring such disastrous consequences in
its train as where the change is an increase, owing to the different
conditions of the people robbed.
A slight decrease of money value generally brings about a stimulation
of trade and industry, the rising prices of commodities acting as a
spur to greater production and new enterprises.
Mr. F. A. Walker, indeed, considers that for this reason, and in spite
of the recognized injustice to some classes, that such a condition
when slight and brought about by natural causes, is a benefit on the
whole. It can hardly be admitted that robbery of one large class in a
community is defensible, even if it does result in a gain to another
class greater than the loss to the first. It is indisputable, however,
that the opposite case, where money is increasing in value, brings
such disasters in its train that it would be better, if an invariable
value for money could not be attained, that the variation should be a
decrease rather than an increase. In the latter case not only is the
robbery equally great, but falling upon the most active, industrious,
and enterprising class of the community,--for it is this class as a
rule that are borrowers,--it not only imperils all they possess, but
discourages, when long continued, all forms of industry and enterprise.
In this way it throws thousands of men out of employment and brings
suffering and hardship to thousands more. No other one cause, perhaps,
is more responsible for "panics" and "hard times," with their attendant
evils--tramps, pauperism, and crime. Its evils have been painted by
many writers, and it is scarcely possible to exaggerate them. Of all
ills, war and pestilence alone seem to fill the cup of human suffering
more nearly full than the depression and stagnation of industry which
is brought about by constantly declining prices.
In view of these facts, the necessity for a money that shall vary in
its amount in accordance with the demands of business is evident.
Not only must it respond to the long-continued, slow, and almost
imperceptible increase of demand due to growing trade and population,
but it should also respond, quickly and surely, to those sudden
demands, known as panics, when credit fails for any reason to do its
usual work. This need is recognized by bankers in their demand for a
flexible or elastic currency.
Quotations are hardly necessary in support of the foregoing statements,
but a few may be given. David Ricardo, in "Proposals for an Economic
and Secure Currency," observes that:--
"All writers on the subject of money have agreed that uniformity in the
value of the circulating medium is an object greatly to be desired."
"A currency may be considered as perfect of which the standard is
invariable, which always conforms to that standard, and in the use of
which the utmost economy is practised."
"During the late discussions on the bullion question, it was most
justly contended, that a currency to be perfect should be absolutely
invariable in value."
Prof. J. L. Laughlin, in "The History of Bi-metallism in the United
States," remarks, p. 70:--
"The highest justice is rendered by the state when it exacts from the
debtor at the end of a contract the _same purchasing power_ which the
creditor gave him at the beginning of the contract, no less, no more."
Prof. R. T. Ely says, in his "Political Economy," p. 191:--
"It is not the 'much or little,' but it is the 'more or less' that
is of vital concern. Nothing produces more intense suffering than
a decrease in the amount of money, and this is on account of the
connection between past, present, and future in our economic life."
This refers to a decrease relative to the demand, evidently, and he
says, further:--
"If the amount of money is arbitrarily increased, so that the value of
all debts may fall, it amounts to virtual robbery of the creditors.
When arbitrarily the amount of money is decreased, it amounts to
virtual robbery of the debtor class."
"It may also be urged that with the progress of improvements in
industry, prices tend to fall, and that unless money increases
in amount, those who take no active part in these improvements,
nevertheless gain the benefit of them."
Prof. Sidney Sherwood, in the "History and Theory of Money," says, p.
225:--
"The ideal that we want, so far as price adjustment is concerned, is
to keep prices stable, so that a contract which is payable in one year
from now can be paid with just the amount of commodities which will
then represent the value stated in the contract of to-day....
"That is what we want,--a stability of prices that persists from one
year to another and from one generation to another....
"The object at which we aim is, as it seems to me, a currency which
shall keep prices stable, a currency which shall expand, therefore,
with the expansion of trade and commerce and development generally, a
currency which shall not be lagging behind the commerce and development
of the country, and hindering that development, and a currency
which shall not, by being too rapidly increased, lead to excessive
speculation and to loss."
We may summarize these conclusions in regard to money then as follows:--
Money should have an invariable value.
The test of invariable money value is stability of prices in general.
The value of money depends on the supply of it relative to the demand
for it.
The demand for money is variable and uncertain. It is affected by a
great variety of circumstances, most of which are beyond control.
The supply is in all cases regulated directly or indirectly by law, and
can be controlled.
In any monetary system it is necessary, therefore, that the supply
should adjust itself quickly and correctly to any changes in demand, so
that prices of all commodities shall, on the average, neither rise nor
fall. In this way, and in no other, can an honest money be obtained.
It is believed that these conclusions cannot be successfully
controverted, and, using them as a basis, we now purpose to examine
existing monetary systems, and some proposed changes therein, to see
in how far they conform to this requirement, and what can be done for
their improvement.