A NEW MONETARY SYSTEM.
In the development of commerce from simple barter between savages up
to its present complicated form and enormous volume, an evolution
is apparent, similar in character to that which has taken place in
the organic world. In both the change has been from the simple and
homogeneous to the complex and heterogeneous. In both it has been a
differentiation of the functions of the several parts, accompanied by
an increased sensitiveness of the whole.
The primitive form of commerce, direct barter, may be compared to one
of the lowest forms of animal life, in which all parts are alike mouth
and stomach, and which if cut into pieces, will exist, severally, as
a complete animal; while modern commerce, with its various parts, each
with a separate function, and its highly sensitive organism, is more
like a human being, in which each part is adapted to the work it has to
perform and is dependent on all the others, so that the failure of any
one to do its work cripples all the rest.
Just as the cutting or maiming of a low form of animal life is of
little damage to it, while a far less injury, relatively, would kill
or seriously maim a man, so an injury to commerce, that in a primitive
form would amount to little, in our modern highly developed system
would cripple it greatly. Money is one of the most important parts of
our industrial system,--the very life-blood, in fact,--and if, for any
reason, it fails to perform its functions fully and completely, the
consequences are far more disastrous than they would have been under
the more primitive systems of the past.
Along with the evolution of commerce in general has gone an evolution
of money and the mechanism of exchange. As the volume of traffic grew
larger, the use of the bulkier commodities as money was gradually
abandoned for the more valuable metals. In time, even these became too
bulky and inconvenient for use as a medium of exchange, and credit, in
its various forms, now does the work of money, as to this function, to
a far greater extent than money itself does, and even the money itself
is mostly a paper money,--a sort of certified credit.
As previously stated, about 95 per cent of the bank deposits are in
forms of credit, and of the actual money deposits only about one-tenth
is gold, the balance being paper money and silver; so that, on the
strength of these estimates, only .6 per cent of the exchanges of
commodities are effected through the direct use of gold.
This evolution of money, however, has been almost wholly confined to
the one function, a medium of exchange; there has been no advance for
centuries in regard to the other function, a measure of value. Men
have continued to cling to the fiction that gold was a standard of
value, and that, so long as their monetary system was based on that
metal, their unit was of invariable value. We have seen how little
ground there is for this claim; that a gold basis for our money is not
necessary to our foreign commerce; and how small a part gold really
plays in domestic commerce as a medium of exchange. Is it not about
time, then, to abandon the fiction that gold is either a standard of
value or a medium of exchange, in any proper sense of the terms, and
to take a forward step in the evolution of money by adopting a more
scientific standard of value, and making the money, as a measure of
value, conform thereto?
Professor Jevons, in "Money and the Mechanism of Exchange," in the
chapter on "A Tabular Standard of Value," inquires whether it is not
possible to have a standard based on a large number of commodities,--a
"multiple legal tender," as he terms it,--and concludes that the plan
would resolve itself into those severally proposed by Joseph Lowe in
1822, and, independently, by G. Poulett Scrope in 1833, and by G.
R. Porter in 1838. These plans were practically alike. Recognizing
the fluctuations of money value, and the injury done especially to
long-time debts thereby, they proposed that tables be prepared showing
the variations from year to year of the prices of the principal
commodities, taking into account, also, the amounts sold. These
tables were to be used for reference, to ascertain in what degree a
money contract must be varied so as to make the purchasing power of
the money returned equal to that loaned. The plans seem to have been
only suggestions, and the details not worked out. Professor Jevons
speaks favourably of them, as perfectly sound in principle, and the
difficulties in the way as not considerable. He suggests a method by
which the average prices of the commodities could be computed, and
closes with the statement: "Such a standard would add a wholly new
degree of stability to social relations, securing the fixed incomes
of individuals and public institutions from the depreciation which
they have often suffered. Speculation, too, based upon the frequent
oscillations of prices which take place in the present state of
commerce, would be to a certain extent discouraged. The calculations of
merchants would be less frequently frustrated by causes beyond their
own control, and many bankruptcies would be prevented. Periodical
collapses of credit would no doubt recur from time to time, but the
intensity of the crisis would be mitigated, because, as prices fell,
the liabilities of debtors would decrease approximately in the same
ratio."
Prof. F. A. Walker, referring to these schemes, and to similar ones
proposed by Count Soden and by Professor Roscher in Germany, criticises
them as too cumbersome for general use, but thinks they might be
advantageously employed for long-time contracts. The criticism is
evidently just; not only are the plans too cumbersome, but they only
partially accomplish what is needed. They contain, however, the germ
of a plan which it is believed would be both more effective and less
open to the criticism mentioned. Long and short time contracts, and
cash transactions, are too intimately connected to make it possible in
practice to use different and varying standards for each.
Since the values of all commodities constitute the only true standard
of value, as close an approximation to this standard as possible should
be adopted as our standard of value.
Since the value of the circulating medium--the money--depends on supply
and demand, the supply should be so controlled that the value of the
money would always correspond with that of the standard adopted, and
since paper money is the cheapest, the most convenient, and the only
money entirely free from outside influences affecting its volume and
value, our currency should be a paper money.
The following is given as the outline of a plan embodying these
features and requirements.
_The Standard of Value._
Let a commission be appointed by Congress to select a sufficient number
of commodities, say, one hundred, to be used as a standard of value.
This selection should comprise the commodities most largely bought and
sold and most independent of each other in their values; preference
should be given to those which are products of this country,--but
foreign products should also be included,--and to those which are
reliable in quality and of which the prices are regularly quoted--such,
for instance, as wheat, corn, oats, rye, barley, cotton, wool, tobacco,
rice, gold, silver, lead, copper, tin, iron, steel, cotton and woollen
cloths, leather, hides, lumber of various kinds, sugar, beef, pork,
mutton, etc.
The aim should be, while not including all commodities, which would
of course be impossible, to include a sufficient number and of such
varied kinds as to fairly represent all. Less than a hundred might be
sufficient, or it might be better to take more than that number.
With the aid of statisticians, the average price of each of the
commodities selected, in their principal markets for a few years past,
should be ascertained and tabulated. The commodities, of course, should
be of specified grade and quality, and in a specified market, but not
necessarily the same market for all.
The length of time over which the average of prices should extend would
be determined as closely as possible by the average length of time that
existing indebtedness had run. (The reason for this will be explained
later.) In addition to the average prices of each commodity, the
approximate amount or value annually consumed in this country, should
be ascertained.
From these data, a table should be prepared showing the amount one
dollar would have purchased, on the average, of each of the commodities
for the time determined, and from this a final table should be made
taking such multiples of the amounts found in the previous table as
should represent their proportionate consumption,--in other words,
their relative importance in trade.
For example, suppose the time selected were five years, as representing
twice the average time existing debts had run; that during that time
one dollar would have bought, on the average, 1.25 bushels of wheat,
or 3 bushels of corn, or 100 pounds of pig iron, or 10 pounds of
cotton, all of specified grade in specified markets; that, further, the
importance of each of these commodities in the trade of this country
was in the approximate proportions of 5, 3, 2, and 1, respectively.
Then the final table would show:--
5 × 1.25 = 6.25 bushels of wheat = $5.00
3 × 3 = 9 bushels of corn = 3.00
2 × 100 = 200 lbs. of pig iron = 2.00
1 × 10 = 10 lbs. of cotton = 1.00
-----
Total, $11.00
Considering these four commodities only, the dollar, as the unit
and standard of value of our system, would be defined by law as
one-eleventh of the sum of the values of 6.25 bushels of wheat, 9
bushels of corn, 200 pounds of pig iron, and 10 pounds of cotton. This
illustrates the method of arriving at, and the definition of, the
standard. Extended to all the commodities selected, the definition
would be the same with the substitution of the proper figures.
This would evidently provide a standard that would closely represent
the average purchasing power of one dollar for the time selected. As
to the length of time over which this average should extend, if there
were no such thing as existing debts, it would clearly be of little
importance what the value of the unit selected was, just as it would be
of no importance now whether the foot or the pound had been originally
fixed at greater or less than their present length and weight; but
because of the vast amount of existing indebtedness, the value of the
unit that is to be made permanent should be most carefully fixed at the
value it had when such indebtedness was created, so as to do as little
violence as possible to outstanding obligations. The fact that in the
past the debtors have been wronged to the advantage of creditors, by an
increasing value of money, furnishes no excuse for a reversal of this
injustice and a wronging of creditors by permanently fixing the value
of the dollar at what it was twenty or thirty years ago. The debtors
and creditors of to-day are not the same individuals who stood in those
relations at any time in the past, and two wrongs do not make a right.
The object should be, therefore, to determine as closely as possible
how many years, on the average, existing debts have run, and take twice
that period for the total length of time over which our prices should
be determined. The average of the prices would then correspond with
what it was when average debts were incurred.
This would doubtless work a slight injustice to those whose debts were
of longer standing,--though a less injustice than they are subject to
now,--and would be a slight injustice to the creditors of more recent
date; but as some time would be occupied in getting the system to
work, so that the actual value of the money would correspond with the
standard, the injustice would be more or less distributed, and would at
most be slight. It would be substituting only a gradual rise in prices
for the decline that has been going on, until prices were back to the
level of perhaps two or three years before, and then fixing the level
at that point.
_The Medium of Exchange._
After the statistical work outlined above had been completed, Congress
should repeal the present monetary laws, substituting for the
definition of the "dollar" the new definition agreed upon. It should
then provide a currency or money to take the place of that now used.
This currency should be a paper money similar to our "greenbacks." It
should be a legal tender for all debts public and private (except,
of course, such as by their terms are payable in gold). In fact, the
only difference between such notes and existing "promises to pay" of
the government would be that the new notes, as is evident from the new
definition of the dollar, would be promises to pay _a definite value_,
and not a definite quantity of one commodity of uncertain value.
The notes could be made redeemable _in any commodity at its current
market price_, and should contain a pledge, on the faith of the
government, that the amount of the currency in circulation would be at
all times so controlled by the government that its actual purchasing
power would conform to the standard on which it was based.
To carry out this pledge, it would be necessary to have a small corps
of statisticians who would receive and tabulate the current market
prices for each day; and who would calculate therefrom the aggregate
prices of the specified quantities of all the commodities constituting
the standard,--in similar form to the final table before mentioned,
and of which an example has been given. If this aggregate for any clay
were more or less than the total of the standard table, it would show
that prices in general had risen or fallen, and some money should
be withdrawn from circulation, or more issued until the daily total
corresponded with the standard total.
Doubtless several plans might be proposed for putting such a money into
circulation and controlling its volume. The following seems to commend
itself by its simplicity and effectiveness of control, for at least a
part, if not all, of the issues, viz.: The money to be loaned by the
government on approved securities, such as their own bonds; other bonds
of states, counties, cities, railroads, etc.; warehouse receipts, gold
and silver deposits, etc. First-class commercial paper, when guaranteed
by solvent banks, might also be taken, especially in case of threatened
panic. In short, such securities as would be considered the safest
for banks and trust companies to loan upon, all under such proper
restrictions and safeguards as would insure their safety as collateral.
The rate of interest charged for such loans to be a _variable one_,
decreasing as prices tended to fall, and increasing as they tended to
rise, and without other restriction. This would absolutely control the
volume of money, within narrow limits, since more would be borrowed at
a lower, and less at a higher rate, of interest, yet the control would
be elastic.
While the loans should be for short time, they could be renewed at
pleasure, and as often as desired, at the current rate of interest,
the security remaining good.
Such a plan would not interfere with general banking business to any
considerable extent. In order to prevent monopoly, the loans should
be open to all on equal terms, and the list of approved securities
acceptable as collateral should be made as wide as possible, consistent
with safety. It would probably be found by experience, however, that
the principal borrowers direct from the government would be the banks,
who would re-loan the money (at a sufficiently higher rate to pay them
for their trouble) to their customers, on local securities, commercial
paper, etc., as they now do.
In fact, the present system of national banks could be made, with few
changes in the regulations governing them, a most valuable adjunct
to the plan as a distributing agency, and the plan is one that it
would seem ought to meet with approval. They would, it is true, lose
their present note circulation, but that, under existing laws and
conditions, is of little or no profit to them. They would gain by its
being unnecessary for them to keep so large a reserve of cash on hand
as they are often obliged to do now; for not only would the whole
financial system be more stable than now, but they might safely be
allowed to carry a part of the present 15 to 25 per cent. reserve,
required by law, in such securities as they could at all times use
as collateral with the government. They would gain even more by the
security such a system presents against panics and senseless runs,
which so often compel solvent banks to close their doors. In short,
the government would act toward the banks, not as a competitor, but
rather in the relation that the New York clearing-house has several
times acted toward its members in times of panic, by the issue of
clearing-house certificates,--a quasi-money that helped them in time
of need. The government would not be subject to the limitations of
the clearing-house, however. The money it loaned would be, unlike
clearing-house certificates, a legal tender everywhere; and the
protection would extend to all the banks of the country. The government
would act toward the banks in somewhat the same way as they act toward
individuals, or as the Bank of England acts towards the other English
banks, as a sort of reserve agent. In this case, however, the resources
as to money would be unlimited. In the manner of regulating the volume
of money, also, this plan would resemble that of the Bank of England,
since that institution attempts in a feeble way, and prompted doubtless
by self-interest, to regulate the volume of money, to some extent, by
raising the discount rate when the volume is decreasing, as evidenced
by exports of gold, and lowering the rate when gold is being imported.
If it were impossible or inexpedient to loan in the above manner all
the money the country required, a sufficient amount could be so loaned
as to give an absolute control of the volume, and to regulate its value
at all times, and the balance could be issued in exchange for the
present greenbacks, and for interest-bearing bonds of the government,
thus converting a part of the interest-bearing debt into a permanent
non-interest-bearing one.
It is evident that the control of such a system should rest with
the government, and not be left to any banking institution; for a
bank would be more influenced by considerations of profit than of
proper control in the interests of all. The interest received by the
government would be a minor consideration, the control of the volume
being the main object, and the rate of interest a means merely to that
end. The people, besides, would have at all times a greater confidence
in notes issued directly by the government than they could have in
notes issued by any bank, however strong.
The department of the government to be charged with this issuing
function should, of course, be entirely distinct and separate from
the other departments. Its sole business should be the maintenance
of an honest money. It should have no connection with the general
expenditures of the government, further than to pay into the Treasury
such profits, in the way of interest, as might be received. The
government expenses should be met, as they now are, by the receipts
from taxes and duties, or, if these were insufficient at any time, by
borrowing money on its bonds. Under no circumstances should money from
the issuing department ever be taken for the expenses of government,
except in the same way that banks or individuals might receive it, and
never then to an extent that would raise average prices.
The legal tender provision of the notes would be necessary only as
specifying the medium in which payment of debts should be made,
to prevent misunderstanding, and for the protection of debtor and
creditor alike. The new dollar being a quantity of value, and not of a
specified commodity, a loan might be returned in any commodity of that
value but for some such provision.
The provision could in no case wrong a creditor, for what he would
receive in payment of the debt would be a positive guarantee to deliver
him the _value_ specified in any commodity he chose. Making the money
redeemable in any of the commodities on which it is based would be
only a form, and might be omitted; it is suggested merely as obviating
any objections to an irredeemable money. Of course the government
would never be called upon to so redeem money, since the holder of
it could exchange it for the commodity wanted in the open market to
equal advantage. No reserve of commodities of any kind need be kept,
therefore, for redemption purposes. One great difference between this
plan and existing systems will, of course, be seen at once: the present
system promises a definite amount of gold, and must, therefore, keep a
gold reserve; but as no one really wants the gold, except to exchange
for commodities, this plan proposes to do away with the necessity for a
gold reserve by guaranteeing that the money can be directly exchanged
for such commodities at the current market price,--which is all that
can be done with the gold,--and that the average purchasing power of
such money shall not vary as gold does.
It must not be supposed that this plan contemplates any control of
individual prices. Such will be free to fluctuate in accordance with
the law of supply and demand, as they now and ever must do, regardless
of the monetary system used. It would not be desirable, even if it were
possible, to make individual prices constant; but what is desirable
and possible, and what it is believed this system would accomplish, is
to relieve the prices of all commodities from the fluctuations due to
changes in value of the one commodity by which all others are measured;
to make the money--the one commodity which no one wants except for
measuring the value of and exchanging for other commodities--of
constant value. The prices and values of gold and silver would then
depend on their use for other than money purposes, or for money
purposes in other countries, and if the value of either metal should
fall, or fail to continue to rise, there would be no room for complaint
that it was being discriminated against by the laws, since all
commodities would be treated alike, and the demand for none increased
over what it would otherwise be by its selection for monetary uses.
It is evident that gold could still be used as a hoard of value, if
desired, but such use would in no way interfere with the volume of
money, as it now does. Neither would the hoarding of money itself
affect prices and cause business stagnation as is the case now. The
reasons for such hoarding would be mostly done away with, but if any
should remain and the money be hoarded, the government would at once
issue as much more as was needed to supply the deficiency so created,
thus maintaining its value constant, and when the money hoarded was
again put in circulation the government would withdraw a portion of it
if it were excessive in amount.
The exchange of the new money for the existing kinds would be a matter
of practical financiering, presenting no unusual difficulties. This
need not be enlarged upon.
The gold certificates should be redeemed with the gold now held for
that purpose. This gold, as well as that now in private hands, would
thereafter take care of itself.
The silver dollars, and all forms of paper money, should be redeemed in
the new money, dollar for dollar; the paper money should be cancelled,
and the bullion--both gold and silver--sold gradually, with due
regard to the effect of such sales on the prices of gold and silver,
especially the latter. The proceeds of such sales in the new money
should also be retired from circulation.
As a final result, the new money issued would all be in the form of
loans to banks or individuals, except to the amount used in redeeming
the uncovered paper now outstanding, less the reserve fund (and some
loss that would result from the sale of silver below the price paid for
it). This net balance of the new money issued, above what was issued as
a loan, could be left as an uncovered paper issue, as it now is; but
for the sake of uniformity it would be better to make all the money a
loan issue, in which case it would be necessary to issue bonds to take
up such amount. It represents now, of course, a remnant of our war
debt, not refunded. No increase of interest charges would result from
funding it in bonds, for the interest on the bonds would be offset by
the interest on the equal amount of extra money that would be loaned
in that case. It would make no difference as regards this general plan
which of the two methods were adopted.
This plan should not be confounded with any "fiat money" or unlimited
"greenback" proposals. Its main point is directly the opposite of
these, to secure a more complete control of money volume. It is not
an attempt to make something out of nothing, or to create value by
government fiat or authority where none existed before, or to coin the
government's credit,--although there is no valid objection to doing the
latter when properly limited.
It is simply an exchange of credit, analogous to the operation of
every bank. The government would loan a command over immediate goods
(represented by its promise to deliver such goods on demand) in
exchange for a promise to return such command over goods at a future
time, and secured by a deposit of collateral; and in payment for the
difference between the value of present and future goods it would
charge interest. This is precisely what the loan department of every
bank does. Every man who accepted the money in payment for goods would
deposit, for the time being, with the government the command over
commodities in general which he owns; the money being his certificate
of deposit. This would constitute the fund from which the loans were
made, just as the deposits in a bank constitute, in the main, its
loan fund. When the money was used to purchase goods, it would be
redeemed, so far as the purchaser was concerned, and the claim would
be transferred to the seller of the goods, who in turn would become a
depositor.
Like every bank, the government would rely on the probability that all
claims against it would not be presented for payment at once, but this
probability would amount to a certainty in the case of the government,
for there would be no probability of _any_ of the claims being
presented for direct redemption, as every one who had goods to sell
would redeem the notes, so far as the holder was concerned.
The honesty of the government as an agent for all the people is, of
course, assumed in this plan; but the credit of the government, in any
other than a trust capacity, is neither assumed nor involved, since
it would hold secured claims against others for every dollar issued
(unless, of course, a portion of the money was left as an unsecured
issue, which, as above stated, is no necessary part of the plan).
Money, in its ultimate analysis, is simply a claim which the holder has
against society for goods in general. It is the faith that such claim
will be recognized, and its value be stable, that gives currency to all
money.
This faith, in the case of coin, is based wholly on long custom and
usage; in the case of paper money, it rests on such custom joined to
the pledge--express or implied--of the issuer of the paper.
Selling is simply the exchange of a particular thing for a command over
things in general, and the reverse--buying--is the exchange of the
general command over goods for some particular good.
In all existing moneys, this claim is one only of usage, and its value
is variable. In the plan proposed it becomes a definite promise of such
goods in general, and to a definite value, the government being the
guarantor.
The plan closely resembles the present national banking system, but
broadened and improved, and with the objectionable features of that
system removed.