SOME PROPOSED CHANGES IN OUR MONEY SYSTEM.
Of the many plans that have been proposed to correct the evils of our
existing money system, it is not necessary to notice here more than
two or three. Most of the others are more or less temporary expedients
which, even if meritorious, fall so far short of an adequate or
permanent solution of the problem as to merit little attention.
The change which has been most urgently advocated is a return to the
free coinage of silver.
It is not proposed to enter into any extended discussion of the merits
or demerits of this proposition. Much has been written on the subject
already, most of it, unfortunately, from a partisan standpoint, and
ignoring all facts and principles, however well established, which did
not agree with the views advocated. This, it may be said, is equally
true of both sides to the controversy. It seems desirable, therefore,
to point out how the principles we have already investigated apply to
the question.
Those who advocate free coinage of silver claim that the value of gold
has increased since free silver coinage was stopped, while the value of
silver has remained more nearly constant. This claim, as we have seen,
is correct. They claim not to desire to substitute silver for gold in
the coinage, but to use both together at the ratio of 15.988 to 1,
under a bi-metallic system, increasing the volume of money, and thereby
raising prices to a higher level.
Their opponents say that free silver coinage will drive gold out of the
country and the value of our standard will at once fall to the present
bullion value of silver (about 50 to 60 cents, measured in gold), and
that bi-metallism is only practicable by agreement between the leading
nations.
That free coinage of silver would result in driving gold from the
country has been largely denied by the advocates of that measure. In
this denial they make a great mistake, not only because the statement
is strictly true, as theory and experience in the past have alike
shown, but also because it would accomplish what they are aiming at,
and is the only way in which it can be accomplished through silver
coinage. The increase in the volume of money here would raise prices,
and the flow of gold to other countries would raise their prices also,
and thus a general rise of prices and a lowering of the value of gold,
would result.
The gold-standard advocates have also made an error in supposing
that free silver coinage would result in the _immediate_ fall of our
standard to the present bullion value of the silver dollar.
It would be rather difficult to trace the immediate effects of such a
measure, as several conflicting forces would be brought into play, the
relative strengths of which could not be foretold. It seems probable,
however, that the first effect would be a large rise in the price of
silver bullion, and a hoarding of gold, followed by its export in
exchange for silver. For a time this would cause a fall in prices of
other commodities, followed by a rise, as the new coinage began to fill
the place of the gold hoarded and exported. However this might be, it
can hardly be doubted that the final result would be a rise in prices
of commodities--including silver--as measured in gold, or a fall in the
value of gold all over the world as measured by commodities. Our money
would probably remain at a slight depreciation below our gold standard,
while both together would gradually lower. This condition would be made
manifest by gradually increasing prices, and would continue either
until all the available gold had been exported, or until the rising
value of silver met the falling value of gold at the coinage ratio of
15.98 to 1. Whichever of these results took place would depend on the
relative amounts of gold available for export and of silver for import,
and could hardly be foretold. It seems more than likely, however, that
the gold would all be exported. In this case, the country would have
the silver standard, and the value of the dollar would be somewhat
lower than the value of a gold dollar then, and considerably lower than
the value of a gold dollar now, but also considerably higher than the
bullion value of the silver dollar is now.
If the two dollars reached a parity at their coinage ratio before all
the gold was exported, the country would have not only a bi-metallic
standard, but would practically force such a standard on the rest of
the world, as long at least as the gold supply held out. If foreign
nations returned also to the free coinage of silver, they would either
have to change their ratio to agree with ours, or, if they kept their
present ratio of 15-1/2 to 1, the silver would gradually leave us in
exchange for their gold.
The fear of a sudden fall in the value of the dollar, as a result of
free silver coinage, is not justified. The value of the dollar would
fall gradually as the volume of the money increased,--as would be made
manifest by gradually rising prices,--except that this fall would be
more or less counteracted at the start by a hoarding of gold, which
would decrease the supply of money, and perhaps by a disturbance of
credit, which would increase the demand for it. The first effects might
be, therefore, an increase instead of a decrease of money value.
It would probably not make so very much difference whether bi-metallism
or the single silver standard was the final result. The value of the
dollar would not be greatly different in the two cases. Before we
reached a silver basis we would have exported some five or six hundred
millions of gold, and bought its equivalent in silver, securities, and
commodities, and the result would necessarily be a great advance in the
value of silver, and a corresponding fall in the value of gold,--the
reverse, in fact, of what happened when Germany and other nations
changed from a silver to a gold basis. Whether, therefore, this country
were able or not to restore the parity of the two metals at the present
coinage ratio, the departure from such parity would not be nearly so
great as it now is. Provided that the volume of the uncovered paper
money remained the same as now, and that, when the change was finally
accomplished, credit were used to the same extent as before, the value
of the dollar would be somewhere between the present bullion values of
the gold and silver dollars, and probably nearly as high if the result
were the single silver standard as it would be if bi-metallism were
accomplished.
The merits and demerits of the plan may be summed up as follows:--
The change would necessarily cause a great disturbance of business,
which might result, at first, in a lowering of prices, but would
eventually result in a gradual but considerable increase of general
prices, and a stimulation of industry.
Debtors would be benefited considerably, and creditors wronged
considerably, especially in short-time obligations; though the
long-time ones--those that had run for a number of years--would not be
affected so much.
Once established, the money value would probably be less variable than
gold has been, and rather more variable than silver has been in the
past, but this could not be said with certainty, as the money value
would continue to be the result of a variety of forces, of which no one
could predict or control the strength.
The inconvenience of so bulky a metal in large amounts would almost
necessitate its deposit in vaults and the issue of paper money in its
place for actual circulation. If this paper were issued only to the
amount of the silver deposited, it would be a most uneconomical system,
since the greater part of the silver might evidently just as well be in
the ground from which it was dug, so far as any real use was concerned.
If paper were issued in excess of the silver deposited, it would not
make a market for very much more silver than we now use, and the value
of silver would be raised but little.
The value of the money would therefore depend largely on the use that
was made of paper in connection with it. Without some control of the
volume of the money besides the control the supply of silver would
give, its value would continue to fluctuate at all times, and greatly
so in times of panic, as it always has done. With proper control the
silver is wholly unnecessary, as its only use is to limit the volume
of the money, and this can be done far more cheaply and efficiently in
other ways.
Little need be said of the "Greenback" or fiat money proposals, so
prominent some years ago, though they are seldom advocated now. Their
only merit was a dim perception of the fact that gold and silver are
not necessary to a money system. Their errors were that they failed
to provide any standard by which money value could be tested, or any
control had of its volume. They also failed to recognize the fact that
money value is wholly dependent on money volume.
Various plans have been proposed for changing our money system by
increasing the issues of bank-notes. One of these plans is to repeal
the present prohibitory tax on State bank-notes, which would, of
course, result in the issue of such notes to any extent that was
profitable.
Several other plans propose to increase the issue of national
bank-notes by removing some of the present restrictions, and allowing
the banks to pledge other securities than United States bonds as a
guarantee of their circulation, or by allowing their capital to serve,
in part, as such guarantee.
All of these plans are merely makeshifts, and merit little attention.
Considered, however, only as makeshifts, and with reference solely
to the claims they advance, they are of no permanent benefit to the
public. They only allow the banks to make a profit that should go to
the community. It is claimed that the money volume will be made more
elastic by these issues. This claim does not appear to be justified by
an analysis of most of them, and, so far as it holds good in any of
them, it is a most dangerous feature. If the issues are made profitable
to the banks,--and otherwise there would, of course, be no issues, as
they are not compulsory,--then the banks would undoubtedly increase
them to the full limit allowed by law at any time. If they were limited
so as to be profitable only when interest rates were high, then, when
times were prosperous, prices rising, and profits large, the interest
rate would be high, and the increased issues would enhance the "boom."
When, however, the inevitable reaction came, and prices began to fall,
and credit to be withdrawn,--the time, most of all, when more money
would be needed,--the banks would not only be helpless to increase
their issues, but would very likely reduce them, because of the
increased risk at such times, and the fact that, in times of depression
and declining prices, interest rates are apt to be low also.
Elasticity of volume is a most necessary feature of a money system,
when it is rigidly controlled, to make money value constant; but it
would be a most dangerous feature when the control was governed by
the desire only to make the most profit. It would simply result in a
greater fluctuation of money value than there is now.
We have, so far, examined these various plans for amending our faulty
money system rather in regard to the truth of their pretences than
in regard to the requirements of an honest money. In this latter
respect, all the plans ignore the necessity for an invariable standard
of value, and provide no method for controlling the volume of money,
and adjusting it to the demand, as might be done, to some extent, even
with the gold standard. The general decline of prices could not be
prevented, though some of the fluctuations might.
The fact must be faced, that any attempt to increase the volume of
money in this country, and thereby raise our prices above those of
other countries, or to maintain our prices in gold constant, while
those of other countries are declining, can result only in the export
of gold. This might not happen at once, for it takes time for Gresham's
law to operate, but it would be inevitable. It would probably be
delayed somewhat by foreign speculation in our securities,--always a
powerful factor in determining the value of our money,--but it would
come; and the resulting depression would be all the greater for the
delay and the height of the prosperity that preceded it.
So long as our money is based on a metal that forms a part of the money
of other countries, under a free coinage system, so long will the
value of our money fluctuate under the influence of foreign monetary
legislation, wars, panics, and a hundred forces beyond our control.
Only by divorcing our money from that of other countries can we control
it, and only by controlling it can it be made honest money.