of exchange are money, or, at least, that they discharge the money
function and act on prices the same as money; but this definition
excludes checks and bills of exchange. A bill of exchange or bank
check is not accepted without reference to the character or credit of
the person who offers it. But Francis A. Walker leaves us in no doubt
on this question. On page 123 of his work on "Political Economy" he
says:
Money is a medium of exchange. Whatever performs this function,
does this work, is money, no matter what it is made of, and no
matter how it came to be a medium at first, or why it continues
to be such. So long as, in any community, there is an article
which all producers take freely and as a matter of course in
exchange for whatever they have to sell, instead of looking
about, at the time, for the particular things they, themselves,
wish to consume, that article is money, be it white, yellow, or
black, hard or soft, animal, vegetable, or mineral. There is no
other test of money than this. That which does the money work is
the money thing. It may do this well; it may do this ill. It may
be good money; it may be bad money; but it is money all the same.
We said _all_ producers, since it is not enough that a thing is
extensively used in exchange, to constitute it money. _Bank
checks are used in numerous and important transactions, yet are
not money._ It is essential to money that its acceptability
should be so nearly universal that practically every person in
the community who has any product or service to dispose of will
freely, gladly, and of preference, take this thing money, instead
of the particular products or service which he may individually
require from others, being well assured that with money he will
unfailingly obtain whatever he shall desire, in form and amount,
and at times to suit his wants.
It appears from the accepted definitions that bank checks and bills of
exchange are not money. They may to some extent, as other forms of
credit may to some extent, add to or increase the rapidity of
circulation; but, certainly, credit is not money nor does it possess
the essential elements of money. I think it is an essential element of
money that when used it closes the transaction between the parties to
the transaction. In other words, money, when paid in the purchase of a
commodity, closes the transaction, and neither party to the
transaction has any further claim or demand against the other.
Anything which does this (barter, of course, excluded) is money, and
anything which fails to do this is not money. If a credit is given or
a check received the transaction is not closed until the debt is paid
or the check cashed. I do not find that any economist has made this
distinction, in so many words, between money and credit, but I am
satisfied that it exists.
Does all the money available for use act on prices? It is contended by
a certain class of economists that only money of ultimate and final
redemption--in other words, gold and silver, in countries where gold
and silver are the standard money, and gold only, in countries where
gold is the standard money--can act directly on prices, and that other
forms of money can only act on prices in an indirect manner, and to
the extent only that they may increase the rapidity of the circulation
of redemption or standard money; that paper money, whether convertible
or inconvertible, covered or uncovered, and token money, can have no
direct influence on the general level of prices.
Is this contention true? We have already seen that money is a medium
of exchange, a counter for reckoning, an order for goods, and that its
value does not depend upon the intrinsic qualities which the material
out of which it is made may possess, but depends entirely upon
extrinsic qualities which law or common consent may confer, and that
anything (barter, of course, excluded) that closes transactions
between the parties to the transactions, is money; and also that the
value of money, that is, its purchasing power, is fixed and regulated
by the amount of money available for use. Why, then, should any part
of the money that possesses and discharges all the functions of money
be excluded? What peculiar property has money stamped on gold and
silver that it only can act on prices?
John Stuart Mill says:
After experience had shown that pieces of paper, of no intrinsic
value, by merely bearing upon them the written profession of
being equivalent to a certain number of francs, dollars, or
pounds, could be made to circulate as such, and to produce all
the benefit to the users which could have been produced by the
coins which they purported to represent, governments began to
think that it would be a happy device if they could appropriate
to themselves this benefit, free from the condition to which
individuals issuing such paper substitutes for money were
subject, of giving, when required, for the sign, the thing
signified. They determined to try whether they could not
emancipate themselves from this unpleasant obligation, and make a
piece of paper issued by them pass for a pound, by merely calling
it a pound and consenting to receive it in payment for taxes. And
such is the influence of almost all established governments, that
they have generally succeeded in attaining this object: _I
believe I may say they have always succeeded for a time, and the
power has only been lost to them after they had compromised it by
the most flagrant abuse._--"Political Economy," Book 3, Chap. 13.
Mill further says that such inconvertible paper money will act on
prices. And if inconvertible paper money will act on prices, why will
not convertible paper money, that is, paper money convertible into
coin on demand, also act on prices? Token money, especially if a legal
tender, and whether a legal tender or not, if accepted without
objection in the payment of debt, or if received in full payment for
commodities, discharges the money function, and is to all intents and
purposes money. It is not absolutely necessary that to make a thing
money it should be a legal tender in the payment of debt. Anything
which is commonly accepted in exchange for labor or property and in
payment of debt, whether so accepted by force of law (that is, its
legal tender property) or by common consent, is money. From 1861 to
1873 we had no gold or silver money in the United States, or virtually
none. The official reports of the Secretary of the Treasury show that
the gold and silver coin, including the gold and silver bullion in the
United States Treasury during that period, amounted to but
$25,000,000, and even that was not in circulation, except to a very
limited extent on the Pacific Coast. Yet during that period prices
reached the highest level ever attained in this country. Certainly,
the level of prices during that period was not fixed by the gold and
silver money available for use. In view of the foregoing facts I think
it must be apparent that any money which is received in full payment
for commodities, whether so received on account of its legal tender
property or by universal consent, and whether it is gold, silver,
paper, or token money, acts on prices, and tends to fix the general
level of prices.
It is claimed by a great many writers on political economy that credit
has the same influence in fixing the general level of prices that
money has, and that an expansion or contraction of credit would
inflate or contract prices in the same manner and to the same extent
as would result from a contraction or expansion of money; that if
credit is extended, if more commodities are sold on credit than
formerly, such extension of credit will tend to raise prices in the
same manner and to the same extent as would so much additional money;
and that if credits are contracted, if less credits are given than
formerly, such contraction of credits will tend to depress prices in
the same manner and to the same extent as a withdrawal of a like
amount of money from the channels of trade would depress them. At the
head of this school of political economists stands John Stuart Mill.
He says:
I apprehend that bank notes, bills, or cheques, as such, do not
act on prices at all. What does act on prices is credit, in
whatever shape given, and whether it gives rise to any
transferable instruments capable of passing into circulation or
not. (See Book 3, Chapter 12.)
Is this contention true? If so, then it is not true that the general
level of prices is determined by the amount of money available for
use; but is determined, rather, by the amount of credits available for
use. The debts of the world (and the credits, of course, are precisely
equal to the debts, as there could be no debt without a corresponding
credit) amount, in round numbers, to $200,000,000,000, and the money
in the world amounts in round numbers to $10,000,000,000. That is,
there are twenty dollars of credit to one dollar of money; and if
credit exercises the same influence in fixing the general level of
prices that money exercises, then it is absurd to say that the volume
of money available for use fixes the general level of prices, and at
the same time to contend that credit, dollar for dollar, is an equal
factor in fixing prices. If credit affects the general level of
prices in the same manner and to the same extent that money does, then
credit exerts an influence on prices twenty times greater than that
exerted by money, and we should say: The general level of prices is
fixed by credit, modified, it may be, to some extent by the amount of
money in circulation.
The difficulty seems to be in distinguishing between money and credit.
If we keep in mind the fact that anything which closes the transaction
between the parties to the transaction (barter excluded) is money, and
anything which leaves something still to be done is credit, we shall
have no difficulty in making the distinction.
Can credit affect the general level of prices? One of the most
familiar and common illustrations given by those who contend that
credit will raise the general level of prices, is that of a man
entering the market to buy cotton.
They say: "Suppose a person with $5,000 in money enters the cotton
market, and with his money purchases $5,000 worth of cotton. His
demand for cotton and his purchase of $5,000 worth will tend to
advance or stimulate the price of cotton." "Now," they say, "suppose
he has a credit of $5,000 and with this credit he purchases an
additional $5,000 worth of cotton. The second purchase, made on
credit," they contend, "will tend to still further advance the price
of cotton in the same manner and to the same extent that the cash
purchase did." Is this true?
Let us suppose that he purchased the second bunch of cotton on ninety
days' time. At the end of the ninety days he must pay for this cotton.
If he draws the $5,000 with which he pays this debt from money
invested in the cotton trade, the withdrawal of that sum from money
invested in that industry will tend to depress the price of cotton to
the extent that it was stimulated by the credit. If he withdraws it
from the grain trade or from some other industry, the withdrawal of
that sum of money will tend to depress prices in the industry from
which it is withdrawn to the same extent as the cotton industry was
stimulated by the credit. Whether the money to pay the debt is taken
from the cotton industry or from some other industry, the general
level of prices has not been raised. The purchase in the first
instance may have temporarily stimulated the price of cotton, but if
the payment of the debt is made from money drawn from that industry,
it will depress the price of cotton to where it was before the credit
purchase was made; and if the payment is made from money drawn from
some other industry, it will depress prices in that industry to the
same extent that the price of cotton was stimulated. In either event
the general level of prices remains the same. It is like robbing Peter
to pay Paul. It may make Paul richer, but how about Peter? There is no
more wealth in existence than before the robbery was committed.
Again, it is claimed that credit stimulates prices by causing
commodities which are sold on credit to be sold for higher prices than
commodities of the same value are sold for when sold for cash. It is
true that sales on credit are, as a rule, at a higher price than sales
for cash in hand. Why is this so? For two reasons:
1st. Business done on credit is always attended with considerable
risk. Even when the utmost caution is exercised, bad debts will be
made, and a greater margin on sales is necessary.
2nd. When time is given a certain amount must be added to the price of
the goods to compensate the seller for the use of his capital between
the date of sale and the maturity of the account.
The additional price, thus received, is of no advantage to the
producer or to the seller of the commodity. The addition to the price
is consumed by losses from bad debts and in interest on capital. In
fact, the additional prices charged, when properly analyzed, are not
for the goods, but for the risk on the credit and for interest on
capital. The net selling price of the commodity is not increased.
Experience has proven that men who sell for the lesser price for cash
in hand are more apt to succeed than those who charge the higher rate
on the credit system.
Credit is always burdened with interest. If interest is not directly
charged, the goods are sold at an advance on the cash price equal to
the interest, which amounts to the same thing. Interest acts on
commerce like friction on machinery. As friction absorbs a portion of
the motive power, so interest absorbs a part of the value of all
commodities sold on credit. Interest, the necessary accompaniment of
credit, produces no wealth; but, on the contrary, absorbs wealth and
tends to concentrate it in the hands of the few; and, necessarily, in
the same ratio it takes from the masses the power to purchase the
things they desire and would otherwise consume. Its ultimate result
must be to lower prices. Credit burdened with interest, as it always
is, may temporarily increase the demand for a certain commodity and
consequently temporarily raise its price; but it must do this at the
expense of other commodities. Like a stimulant administered to a human
being, it may produce spasmodic results of extraordinary power; but
when the stimulant has spent its force it leaves the individual weaker
and in a worse condition than he was before the stimulant was
administered.
Henry Thornton, an English economist, attempts to prove that a bill of
exchange is money, and that, being money, it acts on prices. He says:
Let us imagine a farmer in the country to discharge a debt of £10
to his neighboring grocer by giving him a bill for that sum,
drawn on his corn-factor in London, for grain sold in the
metropolis; and the grocer to transmit the bill, he having
previously indorsed it, to a neighboring sugar-baker in discharge
of a like debt; and the sugar-baker to send it, when again
indorsed, to a West India merchant in an outport; and the West
India merchant to deliver it to his country banker, who also
indorses it and sends it into further circulation. The bill in
this case will have effected five payments, exactly as if it were
a £10 note payable to the bearer on demand. A multitude of bills
pass this way between traders in the country, in the manner which
has been described; _and they evidently form in the strictest
sense a part of the circulating medium of the kingdom_.
Mill in his "Political Economy" quotes this illustration with
approval. Is the conclusion arrived at correct?
Suppose that instead of a bill of exchange for £10, a horse worth £10
had been made use of, and the farmer had delivered the horse to the
grocer in satisfaction of his debt, and the grocer had turned it over
to the sugar-baker, and the sugar-baker to the West India merchant,
etc. The horse would have paid the five debts in precisely the same
manner that the bill of exchange did, but would such a use of the
horse _have made the horse, in the strictest sense of the term, a part
of the circulating medium of the kingdom_? I think not! A bill of
exchange is not money, but an order for money, and would be valueless
unless honored by payment on presentation. From the time the bill was
drawn until finally paid an amount of money equal to the demand of
the bill must be held out of circulation for its payment. It adds
nothing to the circulation, and in no sense does it constitute a part
of the circulating medium. It may, possibly, increase the rapidity of
circulation, but it is difficult to see how it could do even this. The
£10 held out of circulation for the payment of the bill would have
paid the debts in the same manner that the bill of exchange did, and I
fail to see why they would not have made the circuit as quickly. If a
horse had been made use of in the settlement of the debts mentioned by
Mr. Thornton, it would have been barter, pure and simple, and not a
money transaction.
That the contraction of the volume of credit will not tend to depress
prices in the same manner and to the same extent that a contraction of
the volume of money would will be apparent from the following
illustration.
The most conservative estimates place the national, municipal,
corporate, and individual debts in the United States at
$30,000,000,000. The Secretary of the Treasury estimates the amount of
money in circulation at $1,600,000,000. There is not, in fact,
one-third of the amount available for use; but for the purpose of this
illustration we will take the Secretary's estimate as correct. Now let
us suppose that the volume of credit should be reduced to
$28,400,000,000, either by the payment of $1,600,000,000 of the debt
or by bankruptcy proceedings or in some other manner. If that amount
of the credits were extinguished by payment, business would be
stimulated. That sum of money, or at least a considerable portion of
it, would pass into the hands of the creditor class, where it would
seek investment, and the tendency would be, not to contract, but to
expand prices. If that amount of the credits were extinguished by
bankruptcy proceedings in which no money passed in either direction,
such an extinguishment could not depress or expand prices; it could
have no influence upon them.
Now suppose that $1,600,000,000 of the money, every dollar now claimed
to be in circulation in the United States, should be withdrawn from
the channels of trade, it would not be difficult to see that prices
would fall; would, in fact, be completely annihilated. There would be
no money with which to make purchases or to pay debts, civilization
would go backwards, and universal bankruptcy and ruin would ensue.
Suppose that only one-half or one-third of the money available for use
should be withdrawn from circulation; even then business would be
paralyzed, the money remaining would be hoarded or would be collected
in the great money centres, prices would fall, and business men all
over the country would be forced into bankruptcy. I think that it must
be perfectly apparent that a contraction of credit does not act on the
general level of prices in the same manner and to the same extent that
a contraction of the volume of money does; that, in fact, it does not
act on the general level of prices at all.
I, therefore, conclude that money, and money only, acts on the general
level of prices, and that credit does not and cannot act on prices
except only as it may increase the rapidity of the circulation of
money; and even then it is the greater efficiency of the money, and
not the credit, that stimulates prices. Credit may temporarily
stimulate the price of the product of some particular industry, but to
do this it must attract money from some other industry, and the
stimulation will be at the expense of a corresponding depression in
prices in the industry from which the money is attracted.
LOS ANGELES, COL.
POINTS IN THE AMERICAN AND FRENCH CONSTITUTIONS COMPARED.
BY NIELS GRÖN.
There are several reasons why, particularly in the light of what is
going on in the two countries, a comparison between certain points of
the constitutions of the French and United States republics should be
of more than passing interest. Successive ministerial crises in France
threaten the stability of the republic; here, while political
conventions representing millions of people meet and produce radical
platforms, nobody is apprehensive of revolution or trouble. The
constitution is a bulwark against sudden change; its wisdom is
believed to be guarded by impregnable security against caprice or
panic.
One in the Eastern hemisphere, the other in the New World, the two
countries are the only great republics; both are watched by monarchies
with invidious eyes, and, as before suggested, both have passed
through, or are passing through, interesting not to say exciting
experiences. American admirers of the republican form of government
believe that the cause of human liberty would be seriously injured
were the French Republic to cease to exist; they go further, and say
that the death-knell of civil freedom would be sounded the moment the
American republic became a failure. Something like a crisis is seen in
the United States to-day, brought about by a whole series of
concomitant causes, such as business depression, bank failures,
industrial disputes terminating in strikes and lockouts, Coxey armies,
panicky people, and unsettled views regarding commerce and finance,
this last cause predominating.
Though France has her difficulties about raising sufficient money to
carry on the administration, and an income tax is just as unpopular
there as it would be here, nevertheless the chief cause of her trouble
is to be traced, not to financial, but to constitutional sources. The
country is very rich, and its ministers probably will always find some
means of raising enough money to pay the cost of administration.
Quite true, it is a sore point for a proud country which yearns for
revenge upon Germany and longs for large colonial possessions, that
its population does not increase, while the populations of its enemy,
Germany, and of its well-wisher, the United States, go up by leaps and
bounds. True, there are economic writers who regard the dearth and
even the decrease of population in France as an advantage to the
country. But these need not be considered in this inquiry, for it is
quite obvious that any country which really aspires to be numbered
with the great powers, and effectually wishes to own important
colonial possessions, must have a stalwart and increasing people. And
it is a real source of weakness that there should yet be in France so
many Royalists constantly on the alert and hoping always for a change
in the existing form of government.
Happily, on the contrary, no matter how widely the Western American
may differ from his friend in the East, or how keenly the
ex-Confederate may feel over the "lost cause," the warm-blooded son of
Kentucky will fight as bravely under the flag of the republic as will
his frozen-featured brother from Minnesota, and the dreamy individual
who gazes poetically upon the placid waters of Puget Sound will shout
as loudly for one country, and one allegiance to its glorious emblem,
as will the gilded youth whose republicanism is artistically refreshed
by a constant vision of the Statue of Liberty triumphantly standing in
New York harbor.
Royalism, conservatism, concentrationism, moderate republicanism,
opportunism, radicalism, ultra-radicalism, socialism, and heaven knows
how many other "isms" besides, exist in France to-day, and make it
hard for any ministry to carry on the government. Numerous
disintegrating influences are ever present, and political convictions
are seldom sufficiently decided for any ministry to form a stable
majority.