§ 1. The value of Money, in a state of Freedom, conforms to the value of
the Bullion contained in it.
But money, no more than commodities in general, has its value definitely
determined by demand and supply. The ultimate regulator of its value is
Cost of Production.
We are supposing, of course, that things are left to themselves.
Governments have not always left things to themselves. It was, until
lately, the policy of all governments to interdict the exportation and the
melting of money; while, by encouraging the exportation and impeding the
importation of other things, they endeavored to have a stream of money
constantly flowing in. By this course they gratified two prejudices: they
drew, or thought that they drew, more money into the country, which they
believed to be tantamount to more wealth; and they gave, or thought that
they gave, to all producers and dealers, high prices, which, though no
real advantage, people are always inclined to suppose to be one.
We are, however, to suppose a state, not of artificial regulation, but of
freedom. In that state, and assuming no charge to be made for coinage, the
value of money will conform to the value of the bullion of which it is
made. A pound-weight of gold or silver in coin, and the same weight in an
ingot, will precisely exchange for one another. On the supposition of
freedom, the metal can not be worth more in the state of bullion than of
coin; for as it can be melted without any loss of time, and with hardly
any expense, this would of course be done until the quantity in
circulation was so much diminished as to equalize its value with that of
the same weight in bullion. It may be thought, however, that the coin,
though it can not be of less, may be, and being a manufactured article
will naturally be, of greater value than the bullion contained in it, on
the same principle on which linen cloth is of more value than an equal
weight of linen yarn. This would be true, were it not that Government, in
this country and in some others, coins money gratis for any one who
furnishes the metal. If Government, however, throws the expense of
coinage, as is reasonable, upon the holder, by making a charge to cover
the expense (which is done by giving back rather less in coin than has
been received in bullion, and is called levying a seigniorage), the coin
will rise, to the extent of the seigniorage, above the value of the
bullion. If the mint kept back one per cent, to pay the expense of
coinage, it would be against the interest of the holders of bullion to
have it coined, until the coin was more valuable than the bullion by at
least that fraction. The coin, therefore, would be kept one per cent
higher in value, which could only be by keeping it one per cent less in
quantity, than if its coinage were gratuitous.
In the United States there was no charge for seigniorage on gold
and silver to 1853, when one half of one per cent was charged as
interest on the delay if coin was immediately delivered on the
deposit of bullion; in 1873 it was reduced to one fifth of one per
cent; and in 1875, by a provision of the Resumption Act, it was
wholly abolished (the depositor, however, paying for the copper
alloy). For the trade-dollars, as was consistent with their being
only coined ingots and not legal money, a seigniorage was charged
equal simply to the expense of coinage, which was one and a
quarter per cent at Philadelphia, and one and a half per cent at
San Francisco on the tale value.
§ 2. —Which is determined by the cost of production.
The value of money, then, conforms permanently, and in a state of freedom
almost immediately, to the value of the metal of which it is made; with
the addition, or not, of the expenses of coinage, according as those
expenses are borne by the individual or by the state.
To the majority of civilized countries gold and silver are foreign
products: and the circumstances which govern the values of foreign
products present some questions which we are not yet ready to examine. For
the present, therefore, we must suppose the country which is the subject
of our inquiries to be supplied with gold and silver by its own mines [as
in the case of the United States], reserving for future consideration how
far our conclusions require modification to adapt them to the more usual
case.
Of the three classes into which commodities are divided—those absolutely
limited in supply, those which may be had in unlimited quantity at a given
cost of production, and those which may be had in unlimited quantity, but
at an increasing cost of production—the precious metals, being the produce
of mines, belong to the third class. Their natural value, therefore, is in
the long run proportional to their cost of production in the most
unfavorable existing circumstances, that is, at the worst mine which it is
necessary to work in order to obtain the required supply. A pound weight
of gold will, in the gold-producing countries, ultimately tend to exchange
for as much of every other commodity as is produced at a cost equal to its
own; meaning by its own cost the cost in labor and expense at the least
productive sources of supply which the then existing demand makes it
necessary to work. The average value of gold is made to conform to its
natural value in the same manner as the values of other things are made to
conform to their natural value. Suppose that it were selling above its
natural value; that is, above the value which is an equivalent for the
labor and expense of mining, and for the risks attending a branch of
industry in which nine out of ten experiments have usually been failures.
A part of the mass of floating capital which is on the lookout for
investment would take the direction of mining enterprise; the supply would
thus be increased, and the value would fall. If, on the contrary, it were
selling below its natural value, miners would not be obtaining the
ordinary profit; they would slacken their works; if the depreciation was
great, some of the inferior mines would perhaps stop working altogether:
and a falling off in the annual supply, preventing the annual wear and
tear from being completely compensated, would by degrees reduce the
quantity, and restore the value.
When examined more closely, the following are the details of the process:
If gold is above its natural or cost value—the coin, as we have seen,
conforming in its value to the bullion—money will be of high value, and
the prices of all things, labor included, will be low. These low prices
will lower the expenses of all producers; but, as their returns will also
be lowered, no advantage will be obtained by any producer, except the
producer of gold; whose returns from his mine, not depending on price,
will be the same as before, and, his expenses being less, he will obtain
extra profits, and will be stimulated to increase his production. _E
converso_, if the metal is below its natural value; since this is as much
as to say that prices are high, and the money expenses of all producers
unusually great; for this, however, all other producers will be
compensated by increased money returns; the miner alone will extract from
his mine no more metal than before, while his expenses will be greater:
his profits, therefore, being diminished or annihilated, he will diminish
his production, if not abandon his employment.
In this manner it is that the value of money is made to conform to the
cost of production of the metal of which it is made. It may be well,
however, to repeat (what has been said before) that the adjustment takes a
long time to effect, in the case of a commodity so generally desired and
at the same time so durable as the precious metals. Being so largely used,
not only as money but for plate and ornament, there is at all times a very
large quantity of these metals in existence: while they are so slowly worn
out that a comparatively small annual production is sufficient to keep up
the supply, and to make any addition to it which may be required by the
increase of goods to be circulated, or by the increased demand for gold
and silver articles by wealthy consumers. Even if this small annual supply
were stopped entirely, it would require many years to reduce the quantity
so much as to make any very material difference in prices. The quantity
may be increased much more rapidly than it can be diminished; but the
increase must be very great before it can make itself much felt over such
a mass of the precious metals as exists in the whole commercial world. And
hence the effects of all changes in the conditions of production of the
precious metals are at first, and continue to be for many years, questions
of quantity only, with little reference to cost of production. More
especially is this the case when, as at the present time, many new sources
of supply have been simultaneously opened, most of them practicable by
labor alone, without any capital in advance beyond a pickaxe and a week’s
food, and when the operations are as yet wholly experimental, the
comparative permanent productiveness of the different sources being
entirely unascertained.
For the facts in regard to the production of the precious metals,
see the investigation by Dr. Adolf Soetbeer,(230) from which Chart
IX has been taken. It is worthy of careful study. The figures in
each period, at the top of the respective spaces, give the average
annual production during those years. The last period has been
added by me from figures taken from the reports of the Director of
the United States Mint. Other accessible sources, for the
production of the precious metals, are the tables in the
appendices to the Report of the Committee to the House of Commons
on the “Depreciation of Silver” (1876); the French official
Procès-Verbaux of the International Monetary Conference of 1881,
which give Soetbeer’s figures to a later date than his publication
above mentioned; the various papers in the British parliamentary
documents; and the reports of the director of our mint. Since 1850
more gold has been produced than in the whole period preceding,
from 1492 to 1850. Previous to 1849 the annual average product of
gold, out of the total product of both gold and silver, was
thirty-six per cent; for the twenty-six years ending in 1875, it
has been seventy and one half per cent. The result has been a rise
in gold prices certainly down to 1862,(231) as shown by the
following chart. It will be observed how much higher the prices
rose during the depression after 1858 than it was during a period
of similar conditions after 1848. The result, it may be said, was
predicted by Chevalier.(232)
Chart IX.
_Chart showing the Production of the Precious Metals, according to Value,
from 1493 to 1879._
Years. Silver. Gold. Total.
1493-1520 $2,115,000 $4,045,500 $6,160,500
1521-1544 4,059,000 4,994,000 9,053,000
1545-1560 14,022,000 5,935,500 19,957,500
1561-1580 13,477,500 4,770,750 18,248,250
1581-1600 18,850,500 5,147,500 23,998,000
1601-1620 19,030,500 5,942,750 24,973,250
1621-1640 17,712,000 5,789,250 23,501,250
1641-1660 16,483,500 6,117,000 22,600,500
1661-1680 15,165,000 6,458,750 21,623,750
1681-1700 15,385,500 7,508,500 22,894,000
1701-1720 16,002,000 8,942,000 24,944,000
1721-1740 19,404,000 13,308,250 32,712,250
1741-1760 23,991,500 17,165,500 41,157,000
1761-1780 29,373,250 14,441,750 43,815,000
1781-1800 39,557,750 12,408,500 51,966,250
1801-1810 40,236,750 12,400,000 52,636,750
1811-1820 24,334,750 7,983,000 32,317,750
1821-1830 20,725,250 9,915,750 30,641,000
1831-1840 26,840,250 14,151,500 40,991,750
1841-1850 35,118,750 38,194,250 73,313,000
1851-1855 39,875,250 137,766,750 177,642,000
1856-1860 40,724,500 143,725,250 184,449,750
1861-1865 49,551,750 129,123,250 178,675,000
1866-1870 60,258,750 133,850,000 194,108,750
1871-1875 88,624,000 119,045,750 207,669,750
1876-1879 110,575,000 119,710,000 230,285,000
[Illustration: Rise of Average Gold Prices.]
Chart showing rise of average gold prices after the gold discoveries of
1849 to 1862.
The fall of prices from 1873 to 1879, owing to the commercial
panic in the former year, however, is regarded, somewhat unjustly,
in my opinion, as an evidence of an appreciation of gold. Mr.
Giffen’s paper in the “Statistical Journal,” vol. xlii, is the
basis on which Mr. Goschen founded an argument in the “Journal of
the Institute of Bankers” (London), May, 1883, and which attracted
considerable attention. On the other side, see Bourne,
“Statistical Journal,” vol. xlii. The claim that the value of gold
has risen seems particularly hasty, especially when we consider
that after the panics of 1857 and 1866 the value of money rose,
for reasons not affecting gold, respectively fifteen and
twenty-five per cent.
The very thing for which the precious metals are most recommended
for use as the materials of money—their _durability_—is also the
very thing which has, for all practical purposes, excepted them
from the law of cost of production, and caused their value to
depend practically upon the law of demand and supply. Their
durability is the reason of the vast accumulations in existence,
and this it is which makes the annual product very small in
relation to the whole existing supply, and so prevents its value
from conforming, except after a long term of years, to the cost of
production of the annual supply.
§ 3. This law, how related to the principle laid down in the preceding
chapter.
Since, however, the value of money really conforms, like that of other
things, though more slowly, to its cost of production, some political
economists have objected altogether to the statement that the value of
money depends on its quantity combined with the rapidity of circulation,
which, they think, is assuming a law for money that does not exist for any
other commodity, when the truth is that it is governed by the very same
laws. To this we may answer, in the first place, that the statement in
question assumes no peculiar law. It is simply the law of demand and
supply, which is acknowledged to be applicable to all commodities, and
which, in the case of money, as of most other things, is controlled, but
not set aside, by the law of cost of production, since cost of production
would have no effect on value if it could have none on supply. But,
secondly, there really is, in one respect, a closer connection between the
value of money and its quantity than between the values of other things
and their quantity. The value of other things conforms to the changes in
the cost of production, without requiring, as a condition, that there
should be any actual alteration of the supply: the potential alteration is
sufficient; and, if there even be an actual alteration, it is but a
temporary one, except in so far as the altered value may make a difference
in the demand, and so require an increase or diminution of supply, as a
consequence, not a cause, of the alteration in value. Now, this is also
true of gold and silver, considered as articles of expenditure for
ornament and luxury; but it is not true of money. If the permanent cost of
production of gold were reduced one fourth, it might happen that there
would not be more of it bought for plate, gilding, or jewelry, than
before; and if so, though the value would fall, the quantity extracted
from the mines for these purposes would be no greater than previously. Not
so with the portion used as money: that portion could not fall in value
one fourth unless actually increased one fourth; for, at prices one fourth
higher, one fourth more money would be required to make the accustomed
purchases; and, if this were not forthcoming, some of the commodities
would be without purchasers, and prices could not be kept up. Alterations,
therefore, in the cost of production of the precious metals do not act
upon the value of money except just in proportion as they increase or
diminish its quantity; which can not be said of any other commodity. It
would, therefore, I conceive, be an error, both scientifically and
practically, to discard the proposition which asserts a connection between
the value of money and its quantity.
There are cases, however, in which the _potential_ change of the
precious metals affects their value as money in the same way that
it affects the value of other things. Such a case was the change
in the value of silver in 1876. The usual causes assigned for that
serious fall in value were the greatly increased production from
the mines of Nevada; the demonetization of silver by Germany; and
the decreased demand for export to India. It is true that the
exports of silver from England to India fell off from about
$32,000,000 in 1871-1872 to about $23,000,000 in 1874-1875; but
none of the increased Nevada silver was exported from the United
States to London, nor had Germany put more than $30,000,000 of her
silver on the market;(233) and yet the price of silver so fell
that the depreciation amounted to 20-¼ per cent as compared with
the average price between 1867 and 1872. The change in value,
however, took place without any corresponding change in the actual
quantity in circulation. The relation between prices and the
quantities of the precious metals is, therefore, not so exact,
certainly as regards silver, as Mr. Mill would have us believe;
and thus their values conform more nearly to the general law of
Demand and Supply in the same way that it affects things other
than money.
It is evident, however, that the cost of production, in the long run,
regulates the quantity; and that every country (temporary fluctuation
excepted) will possess, and have in circulation, just that quantity of
money which will perform all the exchanges required of it, consistently
with maintaining a value conformable to its cost of production. The prices
of things will, on the average, be such that money will exchange for its
own cost in all other goods: and, precisely because the quantity can not
be prevented from affecting the value, the quantity itself will (by a sort
of self-acting machinery) be kept at the amount consistent with that
standard of prices—at the amount necessary for performing, at those
prices, all the business required of it.