CRITICISM OF SOME GOLD-STANDARD ARGUMENTS.
Before proceeding with the main line of this argument, we will digress
to notice some of the arguments put forth in support of the stability
of the value of gold by those who cannot but recognize the great fall
in general prices.
While such writers do not deny the truth of the fundamental principles
we have already considered, they either forget or ignore them.
Notable among such writers is Mr. David A. Wells, and as his views may
be taken as representative of many others, some statements from his
article in _The Forum_ for October, 1893, previously mentioned, are
here selected for criticism.
In the beginning of that article, as well as in his work, "Recent
Economic Changes," he clearly recognizes and states that there has been
a great and universal decline in the prices of a variety of commodities
within the last thirty years. He claims, however, that such a general
fall of prices does not prove that the value of gold has increased,
for the reason that, as he endeavours to show, such fall in prices was
caused by lowered labour cost of production, due to improved machinery,
better methods, greater division of labour, etc. All these facts may
be freely admitted; the error lies in supposing that it makes any
difference what the cause is. Since value is a relation, it will be
altered by a change in either of the terms between which that relation
exists, and it is immaterial whether a day's labour produces more
commodities in general, and the same amount of gold, or a less amount
of gold, and the same amount of commodities in general, as compared
with some former period. The value of gold, other things being the
same, is greater in both cases. The fact remains that if gold exchanges
for more commodities in general than formerly, its value has risen.
It is not clear what Mr. Wells' conception of value is, on which his
arguments are based. He, however, seems to regard the labour that a
commodity will purchase as the measure of its value, since he says, in
the magazine article: "And then, in respect to the one thing that is
everywhere purchased and sold for money to a greater extent than any
other, namely labour, there can be no question that its price _measured
in gold_ has increased in a marked degree everywhere in the civilized
world during the last quarter of a century."
"Measured by the price of labour, therefore, gold has unquestionably
depreciated; and can anybody suggest a better measure for testing the
issue?"
The fallacy of using labour in any form as a test of value was pointed
out in the chapter on value. That the labour a commodity will purchase
is not in any way a standard of value, as between two different
periods, has been shown by almost every economist from Ricardo down to
the present time.
The above quotations, in connection with the following from the same
article, bring to light an important phase of the subject, which it may
be well to make clear. Mr. Wells remarks:--
"A decline in prices, by reason of an impairment of the ability of
the people of any country to purchase and consume, through poverty or
pestilence or by reason of the misapplication of labour and capital,
_i.e._ waste, ... is certainly an evil. But a decline in prices caused
by greater economy and effectiveness in manufacture and greater skill
and economy in distribution, in place of being a calamity, is a
blessing and a benefit to all mankind."
With growing knowledge, and the advancement of the arts and sciences,
there is a continual improvement in methods of production and
distribution, enabling the same amount of labour to produce and
distribute to consumers a far greater amount of commodities in general
than it formerly could. This has been conclusively shown in detail by
a mass of statistics in Mr. Wells' book. The question arises, to whom
should this increased product properly belong?
For the purpose of this inquiry the community may be considered as
divided into three separate classes, according to the source from which
their principal income is derived; viz.--
(1) Labourers,--including all whose income is principally derived from
their work, of hand or brain, whether as wages, salaries, or products
directly created.
(2) Employers of labour,--including all whose income is mainly derived
from investments of capital directly in productive enterprises in
the widest sense of the term,--those who take the risks of business
incident to the doing of the work of the community.
(3) Money lenders,--those whose income is derived from interest on
loans; who, not wishing to take the risks and cares of active business,
prefer to loan their capital to others who will do so, accepting as
their share of the profits a definite amount as interest.
The incomes of many people are derived, of course, from all three of
these sources, but they may be considered as belonging to the class
determined by their greatest revenue.
It is evident that labourers should have a share of the increased
product that greater skill, improved methods, machinery, etc., create;
since labour is the direct cause of such increase, and not only the
greater skill but the improved methods are due to labour.
Equally evident is it that the capitalist who has taken the risks
of business and whose wealth and enterprise have contributed to the
results, should also share in the increased product.
But all considerations of justice and equity forbid that those who,
declining to take any risk themselves, prefer to loan their capital
to others at a fixed compensation, should receive any share of the
increased product which labourers and employers may succeed in
creating, beyond such fixed compensation. Justice is satisfied when to
them is returned the _value_ they loaned with the interest agreed upon
for its use.
It must not be forgotten that what is really loaned is
capital,--commodities in general,--not money; the money is only a
medium for effecting the transfer, and a measure of the capital
transferred. What should be returned, therefore, in repayment of a loan
is the same amount of commodities in general that was borrowed,--the
same value.
It is _not_ meant that bond-holders and money-lenders should be
entitled to no share in the generally bettered condition of mankind
due to lowered labour cost of producing commodities. They should, and
in the long run would, receive their full share, through the higher
rate of interest that increased general profits would bring if money
value were constant, and by this means would obtain a _just_ share,
determined by open competition and not an unjust share, determined by
the insidious device of a varying measure. It _is_ meant, however,
that the money-lender is entitled to no share in any increased
productiveness of labour during the lifetime of his loan, beyond the
interest stated. He gets his share of such increased productiveness
through the higher interest he will subsequently receive in re-loaning
his capital.
If prices of commodities have declined while wages have increased,
as Mr. Wells claims, it shows that the labourer, on the whole, has
received some share of the increased production, since his wages will
buy more of commodities in general than formerly. Whether the employer
of labour has also received a share is more difficult to determine; but
it is absolutely certain, if prices have fallen, that the money-lender,
who is entitled to no share at all, aside from interest, has also
received a share, and a very large one in many cases; since the money
returned to him in discharge of a debt will purchase a much larger
amount of commodities in general than it would when it was loaned; and
this share has evidently been drawn from what should have gone to one
or both of the other classes, and they are wronged to that extent.
While the labourer may, or may not, have received the share to which he
was entitled during the last twenty years, it seems highly probable,
from Mr. Wells' statistics and arguments, that it is the employer of
labour--who as a rule is the borrower--who has been injured most by the
fall of prices.
One of the great aims and endeavours of mankind is to produce the
largest amount of commodities possible, with the least labour,--or to
lower the labour cost of commodities. It is this lowered labour cost,
which is "a blessing and benefit to all mankind," not lowered prices.
The two are not the same, nor have they any real connection. Lowered
labour cost depends solely on the improvement in skill, methods,
machinery, etc., which will go on as well with prices constant on
the average, as with falling prices,--in fact, even better,--and the
product will then be distributed honestly; while with falling prices
the distribution is dishonest.
It is important to keep clearly in mind the distinction between capital
and money. That Mr. Wells has not always done so, the following
quotation will show:--
"Nobody, furthermore, has ever yet risen to explain the motive which
has impelled the sellers of merchandise all over the world, during the
last thirty years, to take lower prices for their goods in the face of
an unexampled abundance of capital and low rate of interest, except
upon the issue of the struggle between supply and demand."
Capital is accumulated wealth devoted to the production of more wealth;
money is merely a medium for the exchange and transfer of wealth:
they are not synonymous terms. An abundance of capital may exist with
a small amount of money (relative to the demand) and consequent low
prices, or with a large amount of money and high prices: they have no
connection.
The rate of interest, also, has nothing to do with the question.
Interest is determined by the amount of capital seeking investment in
loans, relative to the demand, and in a time of relative contraction of
the volume of money, and consequent falling prices, will, as a rule,
be low, since there is less inducement for men to borrow capital to
engage in business, and more men wishing to lend. The risks of business
are much increased at such a time, and the profits much lessened, and
as the rate of interest is determined by the profits of business in
general, it will be low also. Mr. Wells, indeed, has recognized this
fact elsewhere in his writings, but has evidently forgotten it in the
above quotation.
The accumulation of money in banks in times of depression indicates
not too much money, but a general belief that its value is rising, or
a fear that it will rise; testifying, if to anything, to too little
money, in fact. Men do not hold a thing that brings no income unless
they expect to profit by its rise.
As to the main point of the above quotation, certainly men accept lower
prices for merchandise because of the issue between supply and demand,
but the supply of money is as much involved in the calculation as the
supply of merchandise. Men accept lower prices--that is less gold--for
commodities in general, because gold has increased in value. Mr. Wells
further says:--
"No one has ever named a single commodity that has notably declined in
price within the last thirty years, and satisfactorily proved, or even
attempted to prove, that its decline was due to the appreciation of
gold."
No one, of course, could prove by the decline in price of a _single_
commodity that money or gold had appreciated; but when a writer
admits, as Mr. Wells has done so clearly, that prices in general have
fallen, no proof is needed; the statements are but different ways of
saying the same thing.
That in order to establish the appreciation of money it is necessary
to show that _all_ commodities have fallen in price, or that the price
experiences of different commodities had harmonized in their decline,
as Mr. Wells implies, is manifestly absurd. Even if average prices
were constant, there would be continual fluctuations of individual
prices, some rising, others falling, and these continue the same with
an increasing money value, so that some prices might not alter at all,
or might rise even with a rising money value, but others again would
decline in a greater degree than if the money value were constant. If
the average purchasing power of money is greater, then its value is
greater, whatever be the cause.
So much space has been devoted to a criticism of this article because
the opinions expressed in it seem to be fundamental and dangerous
errors. Moreover, they are given added weight by the reputation and
prominence of the author, while they are more or less representative of
the arguments of other defenders of the gold standard.
Either Mr. Wells is mistaken in his conception of _value_, and of the
standard by which it is measured, or Ricardo, John Stuart Mill, and all
other authorities on Political Economy are mistaken in supposing that
the value of a commodity is its general purchasing power.