It may be laid down as an axiom, that no country will ever export for

the sake of buying other things those things which are more needful

for its own welfare at home. So long as human nature continues what it

is, what it always was, what it always will be, no persons in any

nation will ever export gold and silver except to buy therewith other

valuables then and there more important to them and consequently to

their country. There need not be the slightest fear that any nation

which cultivates its own commercial advantages under freedom will ever

lack for a day a sufficient _quantum_ of the precious metals; because

under freedom these metals will always go, and go in just the right

proportions, to and from those countries which produce and offer in

exchange those desirable Services which other countries want. The

greater the enterprise and skill, the keener the development of all

peculiar and presently available resources, the more honorable and

free the commercial system, so much the surer is any nation whether it

be a gold-bearing country or not, of securing all the gold and silver

which it needs. This is so, because _there_ will be a good market to

buy in, an abundance of good and cheap goods will be there, and they

who have gold will resort thither to buy. But such a free and

enterprising nation will also want to buy other things besides gold

and silver, and other things than those itself can make or grow to

advantage, and when enough of the precious metals is secured for money

and the arts, the residue will be exported, perhaps to the very

countries from which it originally came, in payment for some products

which _those_ countries have an advantage in producing.

The United States, for example, is a gold- and silver-bearing country,

and exported in the years 1850-60, both inclusive, $502,789,759 in

coin and bullion, according to the official Report on the Finances,

1863; and during the same period imported from other countries

$81,270,571 in coin and bullion. Where was the famous and fallacious

"balance of trade" in that case? The United Kingdom, on the other

hand, is not a gold- and silver-producing country at all, but it is

the central market of the world for the precious metals all the same,

its imports and exports of them are immense in all directions, because

it is an enterprising country within the lines of Nature in

agriculture and manufactures and commerce, and is not afraid to allow

its people to buy and sell freely with all the world. Where lies in

the technical sense the "balance of trade" between Great Britain and

the rest of the world? Who can tell? All that is known, and all that

is worth knowing, is, that all that trade is immensely profitable to

all the parties to it wherever situated.

Now, there is always a double advantage in these free movements of

coin and bullion in exportation and importation. In the first place,

more and better commodities are secured to the countries exporting,

whether they be gold-bearing or not, than the gold could have bought

in those countries, otherwise it would not have been carried abroad,

that being the sole motive that stirs it from its present haunts; and

in the second place, the benefit to the countries importing is the

market for their own commodities created by the gold brought in, for

we must never forget that a market for products is products in market,

is a benefit also in naturally and easily filling up a chance

deficiency in the quantum of coin there, and incidentally too a

benefit to the world as tending to keep _in equilibrio_ the

purchasing-power of the metals everywhere. This last is especially

seen when new and pregnant sources of supply are opened in any

country. For example, in the United States about the middle of the

century the stock of gold was more than doubled in ten years' time;

unless by much the larger part of this had been carried abroad in

commerce, it would have inevitably depreciated the whole mass and

disturbed the prices of everything; but by causing the new gold to

impinge on the whole world's stock, the shock of the new production on

the measure of Services, though perceptible, was reduced and deadened.

The world's mass of the precious metals is comparatively torpid

beneath the action of an accretion which would break down by its

weight the metals of a single nation. Therefore, in conclusion on this

topic, the Fluency of gold and silver, by which they pass easily in

commerce to those places where their present value in exchange is

greatest, or to such countries as India and China which have shown for

centuries a wonderful power to absorb the metals of the West, and

return as easily when the conditions are reversed, or when a larger

use of paper-credits releases some portion of the coin, tends

powerfully to make their general value uniform throughout the world,

and consequently to make them the best medium of Exchange and the best

measure of Services.

(e) On account of this Circumstance, that every general rise or fall

in the value of gold and silver tends quickly to check itself. This

principle, indeed, is applicable more or less to the value of all

commodities, but owing to their quantity and durability and fluency

pre-eminently applicable to the value of the precious metals. The

check is double in either direction. First, let us suppose that the

purchasing-power of an ounce of gold or silver be rising: then,

production will be stimulated at all the mines, and the more

stimulated as the rise is more; and this new and enlarged Supply will

tend to check a farther rise, and unless the permanent Demand has been

in the meantime intensified, to bring back the value to the old point;

moreover, when there is a rise in the value of the coin, a less

quantity is required to do the same amount of business; and the demand

for gold which causes the rise tends to be checked by the rise itself,

because a lessened quantity is needed for money-use in consequence of

the rise. If the exchanges mediated by money have become permanently

greater than before, then of course the Demand will continue greater

than before, and the rise in value may be maintained.

And just so, _mutatis mutandis_, of a fall in the purchasing-power of

the coin. The production of the metals is thereby slackened at the

mines, and the lessened Supply tends naturally to enhance the value;

and if the same amount of business is to be done as before, there is a

stronger demand for money while the fall continues, and this new

Demand helps also to bring back the old value. All this is in the

interest of a steady value.

(f) On account, lastly, of this Circumstance, that a stronger Demand

for Money is met in either one of two ways, by increasing the stock of

coin, or by an increased rapidity of circulation of that on hand. It

is exceedingly fortunate that a brisker demand for money, especially

if it be but temporary, does not necessarily enlarge the Supply or

alter the value, but only hurries round the existing money.

Oscillations in the Demand are responded to by a slower or a more

rapid circulation. This tends admirably to keep the value of the

existing-stock of money steady within certain limits. Ignorance of

this principle, or indifference to it, has caused mighty mischiefs in

the United States. In General Grant's administration, for instance,

the cry that a larger _volume_ of money was needed "_to move the

crops_" was disastrous in its results. The truth is, that the volume

of Money in the United States was then, and has been ever since, by

much too great, considering its character, as we shall see by and by.

The multiplying and fructifying nature of Rapidity of Circulation has

never been understood by our national financiers. When, however,

enterprises are multiplying and Exchanges are being permanently

increased in number and variety, then there must be a larger volume of

money, and this larger amount is secured in the ways already

indicated, with perhaps slight disturbances of value, but the

temporary ebbs and flows of business should have no effect at all on

the mass of money, but only on its movement, and its value

consequently would scarcely be disturbed.

These Six grounds appear to be satisfactory and sufficient to account

for the superior steadiness of the value of gold and silver, so far as

their value is determined by considerations relating to these metals

themselves. We now proceed to the two reasons additional to this why

gold and silver constitute the best Money.

(2) The second general reason why gold and silver make the best money

is found in the fact _that Governments have little to say or do about

the Value and Quantity and Mode of Circulation of such Money_. In

respect to Credit-Moneys, like our own Greenbacks and national

Bank-Bills, the Government has everything to say. When we remember how

governments are constituted, that they are only a transient Committee

of the citizens for special purposes; of what sort of persons they

commonly consist; the variety of subjects they are obliged to consider

during short periods of office; the absence for the most part of

expert knowledge among them; the enormous blunders they have made in

the past in all financial measures; and that those who know the most

about their action in the past and present in such matters have the

least confidence in their ability to act wisely; the better we shall

see the strength of the grounds of this second reason. In all

essential respects money of gold and silver regulates itself. These

metals came to be money and continue to be money in the main sense

independent of the enactments of any Government. The people chose

them: they choose them still. As we have seen, coins do not owe their

value to the stamp of the Government, since the metal in them is worth

within a trifle as much before coinage as after. Coinage publicly

attests the quantity and quality of the metal in the coin, and that is

all. Of the value of their coins governments say nothing. They can say

nothing. That depends on men's judgments, and not on edicts at all. No

law of the United States can add directly an appreciable fraction to

the value of a gold dollar. The law makes it consist of 25-4/5 grains

troy of gold 9/10 fine, the mint so stamps and attests it, and

thereafter it takes its own chance as to value.

Some Governments charge a little something for coining for their

People, and some do not. What is charged is called _seignorage_.

England coins gold for all comers at a seignorage of .032%, which is

practically a free coinage. France charges for gold .216%; and by the

law of 1874, the United States charge nothing for coining gold. It is

left to the People to say _how much_ money they will have coined; and,

having received it back from the mint, they may do just what they

please with it; they may hoard it, they may melt it, they may sell it

at home in purchase, and they may export it in foreign trade, at will.

Now, it is a great gain, an immense relief, to have a Money with which

the Government has nothing to do except to mint it; a money that asks

no favors, needs no puffing, never deceives anybody, knows how to take

care of itself, is always respectable and everywhere respected.

(3) The last general reason why gold and silver make the best Money is

to be found in their physical peculiarities, in accordance with which

they are (a) _uniform in quality_, (b) _conveniently portable_, (c)

_divisible without loss_, (d) _easily impressible_, and (e) _always

beautiful_.

Pure gold and pure silver, no matter where they are mined, are exactly

of the same _quality_ all over the earth. Not so with iron and coal

and copper. Gold is gold, and silver is silver. The gold mined to-day

in California differs in no essential respect from the gold used by

Solomon in the construction of the Temple, and the silver out of the

Nevada mines is the same thing as the silver paid by Abraham for the

cave of Machpelah. Nature with her wise finger has thus stamped them

for the universal money; and a universal coinage, that is, coins of

the same degree of fineness, and brought into easy numerical relations

with each other in respect to weight, and current everywhere by virtue

of universal confidence in them, though bearing the symbols preferred

by the nation that mints them, is one of the dreams and hopes of

economists, that will be realized in some

"Fair future day

Which Fate shall brightly gild."

Gold and silver are sufficiently _portable_ for all the purposes of

modern Money. Their weight is little relatively to their value. A

thousand dollars in gold are not indeed carried so easily as a Bill of

Exchange or a Bank-note; and expedients are easily adopted, and have

been in use since the days of the Romans (really since the later days

of the Assyrians), by which the transfer in place of large masses of

coin is for the most part obviated; and these expedients have all been

explained at length in the foregoing chapter on Commercial Credits.

But for the ordinary exchanges for which they are designed, gold and

silver coins are portable enough. The writer has carried across the

ocean, incased in a glove-finger and borne in a vest-pocket, a troy

pound of English sovereigns, worth about $230, scarcely conscious of

their weight though easily reassured of their presence by a touch of

the hand. The experience of those countries, like France and Germany,

in which the Money has been and is still mostly metallic, has not

pronounced it onerous on account of its weight; and, at any rate, it

is better to accept all the other immense advantages of gold and

silver money, together with some inconvenience as to weight, if one

chooses to insist on that, than to adopt substitutes every way

inferior as money, except that they are lighter in our purses. They

are unfortunately "lighter" in other respects also.

Moreover, gold and silver differ from jewels and most other precious

things, in that they are _divisible_ without any loss of value into

pieces of any required size. The aggregate of pieces is worth as much

as the mass and the mass as much as the pieces. This is a great

advantage in Money, because for the convenience of business a

considerable variety of coins is required, and the proper proportion

of each kind to the rest is a matter of trial, and if any kind be

minted in excess of the demand nothing more is required than to remint

in other denominations, and the whole value is thus saved to the

country in the most convenient form.

Then, gold and silver are easily _impressible_ by any stamp which the

Government chooses to put upon them. Indeed in their natural state

they are too soft to retain long the impress of the die. Accordingly

for coinage purposes they are always alloyed with another metal,

chiefly copper, since by a chemical law whenever two such metals are

mixed together the compound is harder than either of the two

ingredients. Most of the Nations now use in their gold and silver

coins 1/10 alloy, but England still adheres to her ancient rule of

1/12 only. So compounded coins receive readily and retain for a long

time with sharp distinctness the legend and other devices chosen for

them to bear. In monarchical countries the head of the reigning

sovereign is usually stamped upon the current coins; in all countries

national emblems of some sort; quite recently some of the coins of the

United States have been made to bear the appropriate legend "In God we

trust"; so that patriotic and even religious associations are

connected with the national Money. Although the alloys harden the

coins, yet after long usage they will lose a part of their weight by

abrasion, and Governments usually indicate a short weight, after

coming to which the coins are no longer a legal tender for debts. Thus

an English sovereign weighs 5 pennyweights 3-171/623 grains,

containing 113-1/623 grains of fine gold, and when it falls below 5

pennyweights 2-3/4 grains, it loses its legal-tender character.

Lastly, gold and silver when coined into Money are objects of great

_beauty_. This is no slight recommendation of these metals for the

money of the world. They are clean. They are beautiful. People like to

see them, and to handle them, and to have them. Their perfectly

circular form, the device covering the whole piece, the milled and

fluted edges, the patriotic emblem, whatever it be, the religious or

other legend, and their bright color, are all elements in their

beauty. The educating power over the young of a good coinage well kept

up, æsthetically, historically, and commercially, is a matter of

consequence to any country. A whole people handling constantly such

money cannot fail to receive a wholesome development thereby. The new

German coinage, for example, in contrast with the old moneys of the

German States, furnishes a good illustration of all this. The new

German coins from highest to lowest are very beautiful, and have

already tended and will tend more and more, other things being equal,

to a true German nationality.

11. Silver is much inferior to gold as a metal for Money, for this

main reason, that it has proved itself much less steady in its general

_value_; and its value is less steady, because it is subject to

greater changes in its Supply and greater variations in its Demand. As

an example touching Supply, we cite the fact, that the annual silver

product of the world _doubled_ in the third quarter of this Century,

rising from an average of $40,000,000 yearly, 1851-61, to $80,000,000

in 1875; and that Nevada alone yielded in 1876 as much as the whole

world yielded twenty years before. Then, too, Demand, that is,

effective public opinion, does not hold to silver as it does to gold

for a standard of Values. The action of England in 1816, of the United

States in 1853, of Germany in 1871, of Scandinavia in 1874, and of the

Latin Union in 1876, _in legally making gold the sole standard of

Services and silver subsidiary to that_, of course affected more or

less the Demand for silver as Money, and thus varied its value. We

have at hand the data to demonstrate the effect of these two causes

combined: the average price of silver in gold from 1833 to 1874, in

the London market, which is the bullion market of the world, was for

the 40 years just about 60 pence per ounce, never falling below 58-1/2

and never rising to 63. At 60 pence per ounce (444 grains of pure

silver, standard English silver being .925 fine) the ratio of gold to

silver is 1:15.716. But between May, 1875, and July, 1876, when both

the above causes had come into full action, silver dropped in the

London market to 47 pence per ounce, a fall of 21%, and a ratio of

gold to silver of 1:20. The price gradually rose again to about 53

pence per ounce, and remained in that general neighborhood till 1882,

between which date and 1890 the _sagging_ process went on to the

general result of 25% discount as compared with the old average of 60

pence in gold per ounce of silver.

These facts settle the question adversely to the fitness of silver to

become an independent Measure of Values. When, however, it is designed

that gold and silver shall circulate together in some numerical

relation to each other as Money, it becomes needful that Government

shall fix as well as it can, not the general value of either but the

relative value each in each for the time being. But this specific

value, too, goes on to regulate itself independently of government

edicts. No matter how well the work is done at first by ascertaining

the actual ratio in which they are exchanging in a free market, it

will certainly require revision from time to time. This is what is

called _Bimetallism_. The reader will now perceive the fundamental and

ineradicable difficulty with the bimetallic system, which has led by

bitter experience nearly all the European nations to abandon it. It

especially becomes us to understand how the United States have fared

in a century's attempt to keep _in equilibrio_ as a conjoint and legal

Measure of Services both gold and silver in a fixed numerical

relation.

Alexander Hamilton as the first Secretary of the National Treasury,

entering upon excellent preparatory work done both by Robert Morris

and Thomas Jefferson, guided the action of Congress in establishing

the Mint in 1792, and really determined the weight and fineness of the

first federal coins and their relative value each in each, the silver

coins being struck in 1794 and the gold ones in 1795. The silver

dollar was copied from the Spanish milled dollar of commerce, which

contained 371.25 grains of pure silver, and that has been the exact

content of our national silver dollar from that day to this. The

halves and quarters and dimes were exactly proportioned in weight and

fineness to their units. Hamilton supposed that gold was then worth in

Europe 15 times as much as silver, and advised consequently that the

gold dollar should contain 24.75 grains pure, and that both dollars

should be alloyed at the English rate of 1/12, thus making the silver

dollar weigh 405 grains and the gold dollar 27 grains; but Congress,

while enacting the gold dollar just as the Secretary recommended,

preferred to _alloy_ the silver dollar by 44.75 grains instead of

33.75, thus making its weight 416 grains. Alloy is of no account in

value.

From the ratio of 1:15 fixed by the act of Congress in accord with

Hamilton's opinion as to the relative value of gold in silver to be

maintained in the coins, unforeseen and important consequences

followed, since that was not the true ratio of their value at the time

in the markets of the world; an ounce of gold was worth more at that

time than 15 ounces of silver, and, accordingly, was worth more out of

the coinage than in it, and was therefore exported in preference to

silver in payment of foreign balances, especially after France had

changed the relative legal value to 1:15-1/2, which happened in 1803;

and of course the gold refused to circulate here under those

circumstances, being _undervalued_ in the coinage, thus giving a neat

illustration of the economical law to be unfolded under the next

numerical heading, namely, that the cheaper money will always push the

dearer out of the circulation. Not till 1834 was the attention of

Congress so strongly drawn to this fact and consequence, as to secure

an enactment to remedy it; and this coinage law of 1834 rated gold to

silver as 1:15.98. The weight of the gold dollar was at the same time

reduced from 27 to 25.8 grains, and the alloy increased from 1/12 to

1/10. These changes of 1834 increased the relative legal valuation of

gold in silver 6.53%. But this in turn was going too far in the

opposite direction; gold was not worth 1:15.98 in the bullion markets

of Europe; France was holding steady her ratio of 1:15.50; and,

consequently, the commercial current of the metals was now reversed,

silver passing in preference to Europe to liquidate the balances of

trade, and gold beginning to come to the United States, where it would

buy more than 3% more silver than in Europe.

Three years after the above changes, that is, in 1837, the standard of

9/10 fine instead of 11/12 was applied by law to silver also, and this

altered fineness made a change in the weight of the silver coins

necessary, if the ratio of 1:15.98 was to be maintained between the

gold and silver. Accordingly, the weight of the silver dollar, and of

two halves, four quarters, and so on, was reduced from 416 grains to

412-1/2, that is to say, less alloy was put into the silver coins, but

the fine silver to the dollar was kept just as it was, namely, 371.25

grains. Since 1834 there has been no change in the gold dollar and its

multiples, and since 1837 there has been no change in the silver

_dollar-piece_, and the legal ratio of value between gold and silver

in our coins is still 1:15.98, since the silver dollar of 1878 and

onwards to 1890 corresponds in weight and fineness with the dollar of

1837.

Still, notwithstanding the pains taken and the changes made from time

to time to keep the two metals in legal _equilibrio_, there never has

been any considerable period in the century now drawing to a close,

during which gold dollars and silver dollars have circulated freely

and indifferently in the United States. Sometimes it has been the one

kind, and sometimes the other kind, but never both kinds at the same

time. The present writing is in the spring-time of 1890: both kinds of

dollars are legal tender for all debts public and private in the

old-time ratio; the national Government professes to be indifferent

whether it pay out gold or silver in redemption of its paper-moneys,

but after all, with the exception of the Pacific States and a few

special branches of business in the cities of the East and of the

Middle, gold coins are not now in common circulation, the bank drawers

crowded with silver dollars feel little of the weight and see little

of the shine of the gold coins, and if any of these chance to be paid

out to ordinary bank-customers they are pretty certain to return in

speedy deposit. The theoretical bimetallism of the United States has

been a practical though alternate monometallism with various

incidental and concurrent disadvantages and losses.

By 1853 these disadvantages of a long-attempted double Measure of

Services made legal tender for all debts had become plain enough to

everybody, for experience had demonstrated that the Value of gold and

silver each in each was not constant but constantly variable; and

Congress then wisely determined to make Gold alone the legal tender,

except in sums below $5. In connection with this great change in the

coinage, a lesser one was introduced at the same time, namely, to

reduce the weight of the silver half-dollar and its subdivisions, so

that their nominal value in the coinage should be considerably above

their metallic value, and their exportations be thus prevented.

Accordingly, the half-dollar was reduced in weight from 206-1/4 to 192

grains, and the smaller coins proportionally. This was in imitation of

the English legislation of 1816, and brought into this country a

_subsidiary_ silver coinage, which still continues, and of which a

nominal dollar's worth weighed 6.91% less than the Silver Dollar,

which was not mentioned one way or the other in the law of 1853, but

which was then worth about three cents more than the gold dollar, and

was of course wholly out of circulation.

Through the influence of the late Samuel B. Ruggles, these subsidiary

silver coins were brought in 1875 into harmony with the silver-system

of France and the Latin Union. Their five-franc silver piece which is

also 9/10 fine, weighs just 25 _grams_ or 385.8 _grains_; a dollar's

worth of our subsidiary silver, as we have just seen, weighed 384

grains; and it was, therefore, needful to add only a slight fraction

of weight to our smaller silver coins in order to knit a real

connection between them and much of the European silver. Two halves,

four quarters, ten dimes of our silver since 1875, are debased in

weight (not in fineness) 6.47% as compared with the standard silver

dollar. A more important coinage connection with Europe was knit

through our first five-cent nickel pieces, each of which weighs just

five _grams_, and five of which laid along in order measure exactly a

_decimetre_ in length. These were the first official applications of

the Metric System on the part of the United States. The nickel pieces,

both the five-cent and the three-cent, are 75 parts copper and 25

parts nickel; and the one-cent piece is 95 parts copper and 5 parts

tin-zinc. Debts of 4 cents can be legally paid in one-cent pieces, of

60 cents in three-cent pieces, of 100 cents in five-cent pieces, of

500 cents in _subsidiary_ silver, and of any amount in gold coins or

in silver _dollars_.

12. _A money inferior in general value will, so long as it circulates

locally, drive a superior money out of the circulation._ This

proposition is a fundamental and universal one in monetary Science.

The only exception to it is found in _token-coins_, and in subsidiary

silver so far as that has the _token_-quality, that is, so far as its

_nominal_ is above its _bullion_ Value. The main motive in coining

tokens is to make sure for its own local uses of a nation's small

change. Token-money is worthless for export, is only designed for the

smaller exchanges, is legal tender only for very small sums, and is

acceptable only on local and conventional grounds. The exception

aside, the above proposition is a pervading and controlling Law of

Finance and has been illustrated over and over again in every Age and

Nation. It is as solid as the substance of truth can make it, although

it looks at first sight like a paradox. We naturally think that what

is excellent all round tends rather to displace what is inferior in

spots, but with Money the exact reverse is the law; and the perfect

coin of full weight, instead of driving out the light and the debased

pieces, is always itself driven out of the circulation by them.

The reason for this becomes obvious the moment we ponder the nature of

Money. Money is always a Valuable, taking on in addition under Law or

Custom the function of serving as an instrument of Exchange. As money,

nobody wants it except to buy with, and so long as the Government and

the community treat light coin and full coin as of equal value,

receiving them indifferently in payment of debts and of taxes, it is

clear that nobody will give in payment of debts and of taxes that

which is really worth more so long as that which is really worth less

will go just as far. The inferior pieces will abide in a market where

they will fetch just as much as the superior pieces, while the

superior pieces will take on a form or migrate to a place in which

some advantage can be gained from their superiority. Thrown into the

crucible, or exported in commerce, this superiority immediately

manifests itself; and therefore into the crucible or into the channels

of foreign trade it might be confidently predicted beforehand that

such money would be thrown, and all experience testifies with one

voice that exactly those are the destinations of such money.

Aristophanes, the Greek comic poet, in the 5th century before Christ,

seems to have been the first writer who noticed that good coins of

full weight are apt to be crowded out of the circulation by the

lighter and poorer pieces, and he, mistaking the cause of this,

satirized his countrymen unmercifully for preferring bad coins to

good, and demagogues, like Cleon, to honorable citizens for rulers.

The following are the verses:--

"Oftentimes have we reflected on a similar abuse,

In the choice of men for office, and of coins for common use;

For your old and standard pieces, valued and approved and tried,

Here among the Grecian nations, and in all the world beside,

Recognised in every realm for trusty stamp and pure assay,

Are rejected and abandoned for the trash of yesterday;

For a vile, adulterate issue, drossy, counterfeit, and base,

Which the traffic of the city passes current in their place!

And the men that stood for office, noted for acknowledged worth,

And for manly deeds of honor, and for honorable birth;

Trained in exercise and art, in sacred dances and in song,

All are ousted and supplanted by a base, ignoble throng;

Paltry stamp and vulgar metal raise them to command and place,

Brazen counterfeit pretenders, scoundrels of a scoundrel race,

Whom the State in former ages scarce would have allowed to stand

At the sacrifice of outcasts, as the scapegoats of the land."

Sir Thomas Gresham, financier of Queen Elizabeth and founder of the

Royal Exchange and of Gresham College in London, was the first thinker

to understand fully and explain scientifically what Aristophanes and

others had noticed as a fact, and what in its explanation may hence

properly be called "_Gresham's Law_." We will append a few historical

illustrations of the fact and the law as instructive in many ways.

(a) The City of Amsterdam founded its famous Bank in 1609, because no

other way seemed to open of preventing the clipped and worn foreign

coins then and for a long time circulating in that great Mart of Trade

from driving out completely the good money of full weight, which the

Mint of the City had been constantly pouring in. The Bank was devised

as a municipal Institution with this intent; it was a Bank of Deposit

only; it took in all the old coins at their _bullion_ value only; and

then had them reminted at full weight; it gave the depositors credit

on its books in the terms of the _new_ money for all of the _old_ they

chose to bring in; it then adjusted accounts between merchants and all

other of its customers by mere transfers on its books; the City

required all debts falling due in Amsterdam to be paid in the new

"bank-money," which took away all uncertainty from Bills of Exchange

drawn on Amsterdam, which were previously liable to be paid in the

clipped and worn coin, and were therefore sometimes at as much as 10%

discount in other cities; this simple requirement brought these

foreign bills to par, and kept them there; the full-weighted money now

stamped by the city Mint abode in the circulation, being now the sole

Measure of Services there; and thus it became the interest and

convenience of every business man in Amsterdam to have these simple

dealings with the Bank, which in turn enjoyed unlimited credit in the

commercial world for almost two hundred years.

(b) The great English Recoinage of 1696 was completed under the

imperatives of Gresham's Law. Graphically does Macaulay describe the

causes and the effects of this in his 21st Chapter. The old silver

coins had been stamped under the hammer; few of them were perfectly

circular; the edges were neither milled nor fluted; the legend was not

so near the edge as that the letters were impaired by a little

clipping; it was easy to pare off a pennyworth or two, and then pass

the coins along; it was profitable to do it, and in vain that

Elizabeth enacted that the clipper must suffer the penalties of high

treason; nearly all the coin of the realm became mutilated, and about

1660 a new process of coinage was brought in. A mill worked by horses

fabricated the new coins on better principles. They were exactly

round, and the edges were inscribed with a legend, and they were all

of just and equal weight. They were thrown out to pass current with

the hammered money, and it seems to have been expected that they would

soon come to displace it. But they did not. Both were received at

first without distinction by the individual traders and by the public

tax-gatherers. But the milled money soon came to be scarce, and the

old money grew constantly worse. The lighter the old coins became, the

scarcer became the new ones; for who would pay two ounces of silver

when one ounce was legal tender? The new money was melted, was

exported, was hoarded, but circulate it would not. At length the

lightest pieces began to be refused by some people, and other people

demanded that their silver should be paid to them by weight and not by

tale, and there was wrangling over every counter, and a dispute at

every settlement, and the coin was really so diverse in its value that

there was no longer any measure of value in the kingdom; business was

in utmost confusion, society was by the ears, poor people were

unmercifully fleeced, and shrewd ones grew enormously rich; and the

Jacobites secretly exulted in the hope of being able to avail

themselves of the prevailing discontent to overthrow the scarcely

established revolutionary government of William and Mary; when, by the

joint counsels of two such philosophers as Locke and Newton, and two

such statesmen as Somers and Montague, the government took the bold

resolution of recoining all the silver of the kingdom. An early day

was fixed by Parliament after which no clipped money could pass except

in payments to Government, and a later day after which it could not

pass at all.

(c) Gresham's Law has had beautiful illustrations in the monetary

history of the United States. We have already seen the reason why the

first silver dollars of 1794 could not compete in currency with the

gold coins of 1795,--the silver was under-valued in the legal ratio

1:15,--it would have been much nearer the European market at 1:15.5.

There was another reason operative in the same direction from the

beginning, which did not, however, come to the notice of the

Government till ten years later. Only 321 silver dollar-pieces were

coined in the year 1805; and May 1, 1806, there stands an order from

President Jefferson to the Director of the Mint,--"_that all the

silver to be coined at the Mint shall be of small denominations, so

that the value of the largest pieces shall not exceed half a dollar_."

The presidential reason given for this order is,--"_that considerable

purchases have been made of dollars coined at the Mint for the purpose

of exporting them, and that it is probable that further purchases and

exportations will be made_." The coinage of silver dollars thus

suspended was not resumed for 30 years. What was the matter with these

dollars? Nothing, only they were too valuable. Hamilton had adopted

for his new dollar the exact weight in fine silver of the normal

Spanish-Mexican dollar, then and for a long time the unit of the

thriving West India commerce; clipped and worn coins of this popular

stamp had slipped into circulation in large numbers throughout the

United States, and driven out the new and good pieces in accordance

with a principle much better understood now than then; the President's

order itself was not very intelligent, inasmuch as two halves, four

quarters, or ten dimes, were then equal in weight and purity with the

dollar-pieces, and as a matter of fact were almost (if not quite)

equally driven out by the smaller Spanish-Mexican coins. The

"four-pences" and "nine-pences" ("York shilling") of that coinage were

almost exclusively the small change of New York and New England during

the first half of this century. The "dimes" and "half-dimes" of our

own mintage, though long legalized, were but slowly naturalized. The

coin-changes of 1853, already described, gave a fair chance for the

first time to our smaller silver coins.

The last native illustration of Gresham's Law will force us to

anticipate here the discussion under the next numerical heading, so

far as to assume that there is such a thing as paper money, and that

the Law now in hand works in connection with that as well as with

diverse forms of metallic money. In 1862, Treasury notes, commonly

called Greenbacks, made a legal tender for debts though not bearing

interest, were issued by the national Government to the amount of

$450,000,000. Of course, under these circumstances they depreciated in

value as compared with the gold dollars, which gold dollars _they were

unfulfilled promises to pay_. Just so soon as the greenback dollars

fell fairly below the gold dollars in value, the latter left the

channels of trade in a very few days' time. Down sank the greenbacks

gradually below the _subsidiary_ silver coins in value, and the latter

obediently and utterly abandoned the commercial field. At last the

greenbacks went down even below the level of the copper cents, which

at that time cost the government about half a cent each, and this

invariable law of money swept the circulation bare of coppers, and the

people had to resort for their smallest change to postage-stamps and

shin-plasters and other abominations. Happily, the country survived to

see these processes exactly reversed, and the old law confirmed on its

other side. When, after a considerable interval, the paper dollar

appreciated to the proper height, it was interesting to watch the

copper cents put in a prompt re-appearance; after a still larger

appreciation of the paper, back came in abundance the subsidiary

silver; and as the day of the redemption of the paper drew near,

silver dollars and gold dollars greeted smilingly their old

acquaintances of the street.

13. So far we have treated only of Coin-Money in its two forms,

_substantive_ and _subsidiary_. The latter may now be dismissed as of

little consequence in itself, and as already elucidated fully: the

latter is the only Money that stands in its own right as a

_commodity_, and the only Money that can give birth to the

_Denominations_ of Value, such as sovereigns, dollars, marks, and

francs. _What is a Dollar?_ A dollar is 25-4/5 grains of a metal

compound coined, of which nine parts are pure gold and one part a

hardening alloy. It is a definite _quantity_ of a thing definitely and

legally described. It is a visible and tangible and well-known

_commodity_. Government is competent, if it pleases, to alter the

quantity of gold that shall constitute a dollar, although the People

will quickly and roughly readjust the prices of Services to a changed

measure of them; it is competent even to make a dollar out of silver,

as our Government has tried to do (for the most part vainly) for a

century, though it is _not_ competent to cause both dollars to

circulate as such at the same time; but civilized and advanced

Governments are not practically competent to make a Dollar out of

anything else than gold and silver.

Money is a current and legal Measure of Services; for the end and in

the way in which Money alone originates and becomes current its

material must be a valuable commodity; and after centuries of

experiments and exclusions no civilized People now tolerate any other

commodity in this relation than gold or silver. Such a selected

commodity becoming in the manner already explained an actual medium

passing from hand to hand in Exchanges, impresses its _name_ on the

minds of men as an ideal _measure_ of services, which measure they can

use, and do constantly use, without handling at the time the commodity

itself. But these ideal-dollars, these denomination-dollars, need to

be kept in check by a constant recurrence to actual, palpable

thing-dollars. The denomination only comes into existence in

connection with the use of the thing, cannot possibly exist

independently of it, and needs constantly to be reduced to it (as it

were by actual contact) in order to be useful as a measure. Just as

men talk about inches, and calculate by inches, in thousands of cases

in which no actual inch is used as a measure, and in every case of

doubt, dispute, or difficulty have recourse to the actual inch, and

thus the ideal inch is kept steady in the minds of men by frequent

reference to the outward standard; so the mental measure of services,

which men insensibly acquire from the use of the objective measure,

needs to be kept true by actual and frequent contact with that

measure.

But besides this Thing-Dollar and its Denomination, which always go

together like a man and his shadow, there is one other kind of Money,

namely, the Promise-Dollar. We must now attend to this. What is a

Dollar-Bill? How does it read? It is always a Promise of some Issuer

to pay to bearer One Dollar, that is to say, this legal and definite

quantity of a precious metal. There is no mystery here. There can be

none. A Dollar is a tangible and weighable commodity. A Dollar-Bill is

a Promise to render this commodity to bearer on demand. The difference

is the same in kind as that between a bushel of corn and a man's

promise to his poor neighbor to give him a bushel if he will come for

it. It depends on the _man_, on his ability and character, how much

the corn-promise is worth; and so it depends on the _issuer_, on his

ability and character, how much the coin-promise is worth. The Issuer

may be of such standing as to be able to secure for his promises that

they become "a current and legal measure of Services"; and if so, they

become Money under the definition.

There is, then, such a thing as Paper-Money, though many high

authorities are reluctant to concede, that any mere promises can be

money at all. For ourselves we cannot refuse the courtesy of the term

"money" to paper-promises-to-pay-coin, which our Country makes a legal

tender for all debts, public and private. The making them legal

tender, however, does not alter their nature one particle. They are

still promises,--and nothing more. Their _Value_ depends in all cases

upon the character and resources of the Issuer; their _Currency_ may

be quickened (at some rate of value) by their being made a legal

tender. Nothing can by any possibility become a Money unless it first

be a Valuable. The essential characteristic of Money is its possession

of a _generalized_ purchasing-power. The Value of a promise depends on

one set of causes, with which we are now very familiar,--the same

causes on which the value of everything depends; the Generalization of

any purchasing-power into money depends upon another set of causes, of

which the action of a Government in legislation may be one.

Paper-Money, as now defined, may be issued by Banks with or without an

indirect government sanction, or through the direct action of

Government. The Bank of England has been issuing since 1694

paper-money under a series of Charters granted by the Government,

which becomes thereby in a manner responsible to the bearers for the

redemption, that is, the fulfilment, of the direct promises of "The

Governor and Company of the Bank of England"; since 1863 the so-called

National Banks of the United States have issued promises-to-pay,

designed to circulate as money, under the direct authority and

quasi-endorsement of the national Government; and since 1862 that

Government has been putting out directly its own promises commonly

called "greenbacks." These last have rested and now rest for their

value solely on the good faith of the People as between themselves.

By a separate and additional act of legislation, which it is

mischievous as well as unscientific to confound with the original

promise-legislation, this particular paper-money was and is legal

tender for debts, which collateral circumstance whether wise or unwise

neither changes the nature nor lessens the obligation of the original

promise to pay coin. No so-called Decision of the Supreme Court can

abolish or abridge a natural and scientific distinction. Money is at

bottom of two kinds only: the first kind is an intermediate and

equivalent merchandise, COIN; and the second kind is Promises to pay

this to a bearer on demand, PAPER MONEY.

The only way to make any promise respectable is to fulfil it in due

time. The only way to make Paper Money a decency is to hold sacred in

action the promise that distends it. The United States undertook in

1862 and onwards to make its own plain promises respectable by a

different method, namely, by legally asserting in substance that the

_promise_ is its own _fulfilment_, and needs no other; and in this

persistent undertaking encountered a miserable failure throughout;

because the People also persisted in _estimating_ the promise solely

in the light of the _prospect_ of its literal fulfilment. The

greenbacks at one time lost two-thirds of their normal value under the

working of such estimation. This question of the relation of two kinds

of Money to each other is a question of Economics, and not of

Constitutional Law; or rather, it is a question of common sense and

common honesty, and the judgment upon it of nine men learned in the

Law is no whit better than the judgment of nine other intelligent men.

As Money is analyzable into two varieties only, Coin and Paper, so

Paper Money falls into two classes, Convertible and Inconvertible. A

convertible paper money consists of promises that are always _kept_

by the issuer according to their terms, that is to say, that are paid

in specie at the will of the holder. An inconvertible paper money is

only another name for unfulfilled promises. Is it any wonder that

unfulfilled promises to pay invariably become less valuable than

_that_ which they promise to pay? They are valuable to start with,

else they could not become money, and they are valuable because men

suppose the promise will be kept: they are commonly valueless to end

with, because men lose faith in the fulfilment of a promise long

delayed. This is the simple secret of the depreciation of

inconvertible money so soon as the amount of it passes a certain

limit, and so soon as a certain time has elapsed after its issue and

the issuer shows no signs of keeping his word. As money is only a

measure of Services, and as possible Services are limited at any one

time and place, and consequently as the amount of money needed for

healthful business is limited also, a steadily convertible paper

money, provided the limit of quantity be not overpassed, will

constitute a tolerable money. But this limit of quantity is apt to be

overpassed, whether the paper money be convertible or inconvertible,

and especially in the latter case, because the temptation to issue

promises to pay in excess of the means of promptly redeeming them

always besets the issuer on account of the _gain_ to him in such issue

at least for a time. This temptation has been yielded to first or last

by every nation, and probably by every corporation, that has ever

issued paper money. The Bank of England has been on the whole the best

managed Bank of Issue in the world, and its Bills (Promises) have

gained the most confidence and the widest circulation. This is because

they have been kept by the Issuers _convertible_ from the beginning,

with the exception of two comparatively brief intervals of time. As

already related under the last general proposition, the silver coins

of the realm were much worn and clipped when the Bank was established

in 1694, the Bank, however, had received them on deposit of customers

at their full nominal value; but after the Recoinage began in 1696, it

was obliged under the law to redeem its Bills in new coin of full

weight, that is, for perhaps 9 ounces of silver received, it was now

bound to pay 12. Consequently its enemies, the Jacobites, made a "run"

upon the Bank by collecting up its Bills to a large amount and

presenting them for payment. The Bank was obliged to suspend payment,

at first partially, and then generally. In February, 1697, the Bills

were 24% below par. The Promises could not be kept, and therefore they

drooped in value according to man's estimation of the probability of

their becoming again _convertible_, which happened in the course of

that year under a new charter and privileges from Government to the

Bank.

Just 100 years after the first suspension of specie payments, in 1797,

when the War of the French Revolution made such demands upon the

English for money, the Bank broke its solemn promises the second time,

and did not formally resume payments until 1821. Government and the

business men of London did their best to hold up the credit of the

notes during the suspension, _but they were not made a legal tender

for debts_. Government received them at par for taxes, and provided

that business payments in notes would be held as payments in cash if

offered and accepted as such. Debtors, having tendered bank notes,

which the creditor refused, had certain privileges before the law

which other debtors had not. The notes therefore had a _quasi_

legalization, but not a forced circulation. The bank was also

authorized at this time to issue £5, £2, and £1 notes. Cautiously

issued at first, bank paper continued at par for several years after

the suspension, which proves that when government possesses the

monopoly of issuing paper money, and carefully limits its quantity,

and both receives and pays it out at par, it may keep an inconvertible

paper at par, or even by sufficiently limiting its quantity carry it

above par. But this truth does not make an inconvertible paper a good

money, because it does not make it a self-regulating money, and

because government is not wise and firm enough to fix and maintain a

proper limit. Though Parliament intended in successive acts to confirm

to the Bank of England the monopoly of banking by enacting that no

partnership of more than six persons should take up money on its own

bills, yet the common law assured to private persons and smaller

partnerships the right to do this; and private bankers multiplied

after the suspension, since they were allowed to pay their notes in

Bank of England notes. Thus the quantity of paper money gradually

increased till in August, 1813, the Bank of England notes were at 30%

discount in gold.

The United States, both as Colonies and as a Country, have had varied

and instructive experience with inconvertible paper Money. We will

glance at two or three specimens only. The first issue of Treasury

Notes, commonly called Greenbacks, given by Congress the quality of

legal tender for all debts, public and private, except duties on

imports and interest and principal of the national bonds, was made in

April, 1862, and was justified in Congress and out solely as a war

measure. An aggregate of $450,000,000 was put out in all, of which

$87,000,000 were afterwards taken in, and the balance was still

circulating in 1890. In one month after the first issue of

$150,000,000, these greenbacks began to droop in value as compared

with gold; in four months, when the second batch of $150,000,000 was

authorized, their depreciation was already marked and firm; and in

nine months, when President Lincoln reluctantly gave his approval to

the third issue of the same amount in order to pay off the soldiers

and sailors, he uttered a solemn protest against the policy of thus

inflating the current money, which, he said, "_has already become so

redundant as to increase prices beyond real values, thereby augmenting

the cost of living to the injury of labor, and the cost of supplies to

the injury of the whole country_." In March, 1863, $50,000,000 of

paper promises for fractions of a dollar were authorized, redeemable

in sums of not less than three dollars in greenbacks, and receivable

for all dues to the United States less than five dollars, except for

duties on imports. Subsidiary silver coins have since taken the place

of these fractionals. In July, 1863, the greenback dollar had lost

one-quarter of its nominal value; in July, 1864, it had lost almost

two-thirds of its nominal value, as its lowest point was reached in

that month, namely, 35 cents as compared with the gold dollar; in

July, 1865, it had risen to 70 cents; in July, 1866, it stood at 66

cents, just two-thirds of a dollar proper; and from that time it

slowly rose, with many fluctuations, till New Year's, 1879, when it

became legally and actually redeemable in gold and silver. Its

variations for the sixteen years, however, cannot be counted by the

number of years, nor even by the number of days; for they were

numerous on each business day, and, as Comptroller Knox says, "_can

only be numbered by tens of thousands_." What a Measure of Services

that was!

Between 1863 and 1879 the Bills of the new national Banks were

redeemable in the greenbacks only, that is to say, one species of

national promises-to-pay were paid on demand by another species of

similar promises, both alike inconvertible into coin; and, as a

natural consequence, the bank-bills bobbed up and down in value in

servile obedience to the inconvertible legal tenders.

Massachusetts Colony was the first constituent of the present United

States both to mint silver, and to issue irredeemable promises to pay

it. Under the false impression that only Money made inferior to

Sterling would stay in the Colony, Massachusetts began to mint in 1652

silver shillings and sixpences and threepences purposely debased in

weight (including seigniorage) 22% below sterling. The silver for

these coins came in mostly from the trade with the West Indies, to

which were now shipped peltry, fish, various forms of lumber, beef,

pork, pease, cattle, and horses, for which they took mainly sugar,

molasses, rum, and silver. "_They would have brought more silver and

less rum and other merchandise, had the first been in greater request

at home._" (Bronson.) John Hull, the mint-master took out 15 pence out

of every £ for his own pay, and grew rich by the process. That was

over 6%. In 1662, a twopenny piece was added to the series, and the

mint existed (sometimes idle) for over 30 years, but all the pieces

coined bore the dates of 1652 or 1662. This paucity of dates is

commonly and perhaps properly accounted for on the ground that coining

in the colony was contrary to the prerogative of the Crown; but it is

to be added that John Hull was not a man to get new dies so long as

the old ones would answer his purpose. The law forbade the exportation

of these pieces under the penalty of thereby forfeiting one's whole

visible estate; because, though this money was much worse than

sterling, there was a worse money than this circulating in the colony,

and Gresham's law began to crowd it from the first, and to some extent

it was both smuggled out and clipped down. But it furnished a sort of

standard, nevertheless, and tended to keep the later money within

distant sight of the silver, and became the reason why in New England

there were six shillings to the dollar. The Spanish pillar dollar,

which was the standard in the West Indies, was worth 4_s._ 6_d._

sterling; and in 1672 a law was passed in Massachusetts allowing these

dollars to circulate at 6_s._ provincial, which was a discount on the

home pieces of 25%. Ever after there were six shillings in a dollar in

New England. Hull's money is called the "pine-tree" coinage, and was

the only coin money minted in the country till after Independence.

Also in 1690 Massachusetts set the first example, which was imitated

20 years later by the other New England Colonies and by New York and

New Jersey, of issuing "Bills of Credit" to meet the expenses of the

two disastrous Expeditions against the French in Canada. Those Bills

were not made legal tender in private payments, and pains were taken

to keep up their credit, but they were depreciated from the first, and

came to be very much depreciated. Massachusetts and Connecticut made

their bills receivable for taxes at a premium of 5%, laid special

taxes for their redemption, and from time to time called in portions

of the issues. In 1718 Connecticut enacted that a debtor tendering

these bills should not be liable to legal execution on his estate or

person for the payment of that debt, an expedient, as we have seen,

resorted to by England in the great Bank restriction of 1797-1821.

These early New England bills bore no interest, were not loaned out by

the colony, and were a convenient though dangerous means of

anticipating the income of future taxes; but after 1712 a paper money

scheme originating in South Carolina came into favor in the colonies,

which was, to open loan-offices for the issue of colony bills on the

mortgage of land, the interest on which helped to pay the colony

expenses, the principal of which at first, and on being paid back and

re-loaned, furnished a capital to borrowers, while the bills

themselves furnished a money for the people. Pennsylvania had the best

luck with this scheme of all the colonies which tried it: as early as

1729 Benjamin Franklin became thoroughly possessed of John Law's

notion, that paper money may be "based" on land or other valuables,

saying in a pamphlet of that year that "_bills issued upon land are in

effect coined land_": Pennsylvania bills nevertheless were at 46%

discount in 1748. Some of the later colony bills bore interest, some

were of a "new-tenor," so-called, designed to take up the old

ones,--Virginia in 1755 made hers a legal tender for debts,--some were

issued in bounties for Indian scalps and for various manufactures and

fisheries, but all ran one road of depreciation and gave birth to one

set of results. Connecticut managed her issues the best of the

colonies, and yet Bronson says of the state of things in that colony

in 1749, "_Trade was embarrassed and the utmost confusion prevailed:

no safe estimate could be made as to the future, and credit was almost

at an end: no man could safely enter into a contract which was to be

discharged in money at a subsequent date: prudence and sagacity in the

management of business were without their customary reward._"

John Law, a shrewd Scotchman, born in Edinburgh in 1671, son of a

goldsmith, with an innate talent for finance and well educated, was

the first to give scientific form and color to the false theory that

paper money _represents_ commodities of some sort, and may be issued

to an amount equal to the value of these. "_Any goods that have the

qualities necessary in money may be made money equal to their value.

Five ounces of gold is equal in value to £20, and may be made money

to that value; an acre of land is equal to £20, and may be made

money equal to that value, for it has all the qualities necessary in

money._" The fallacy in these words of Law is patent enough to any one

who will stop to think a moment about the _nature of Money_. Because

land, for example, has value, it does not follow that it has "_all

the qualities necessary in money_"; and, as a matter of fact, it lacks

the precise quality necessary in money, because, though it has

purchasing-power, it cannot from its very form and nature become _a

generalized and current_ purchasing-power. Money is indeed a valuable

thing, but that does not prove that all valuable things can be money.

With this radical vice of Law's view was wrapped up another, namely,

that there may be in any country as much paper money as the sum of the

values of all its valuable things. Now, we have learned perfectly,

what escaped the acute intellect of John Law, that Money is only a

valuable _measure_ of all other salable Services; and therefore, that

the amount of it that can be made useful at any one time and place is

strictly limited, and bears very little relation to the sum of the

values present at that time and place.

Scotland fought shy of Law's idea when he published it there in 1705,

and so did Paris the first time he visited that city, in which and in

other cities he gambled successfully and talked finance to princes and

statesmen fascinatingly; but when he returned to Paris in 1715 with

his ill-gotten fortune, he gained the ear of the Regent Duke of

Orleans, who permitted him to found a bank there, in which were

incorporated some sound principles of monetary science as well as the

prime fallacy of his system. The bank bought a portion of the State

Debt, just as the Bank of England had done, and laid in also a fair

stock of coin, and thereupon issued a paper money. For a couple of

years, or so, the bank surpassed all hopes, for Law had touched a

spring till then but little known in France, the potent spring of

Credit. But his whole thought, meditated on for years, could not be

expressed through a private bank. The State should be a banker; it

should collect all its revenues into a central bank, and attract the

money of individuals to it as deposits; besides, the State has public

property of vast value, on the strength of which paper money can be

emitted and made legal tender; and thus the State, instead of

borrowing, should lend to all on easy terms and the profits thus

accruing would lessen or abolish taxes. Nor was this all. The State

should also be a merchant; the whole nation should form a commercial

company, a body of traders, whose common treasury should be the State

bank. Commerce by individuals creates great wealth; why should not the

organized commerce of a State make everybody rich? The discounts of

the bank, and the profits of the trade, would surely provide for the

public service without taxation. These vast ideas were actually

carried out. Law's bank became the Royal Bank, issuing a paper money

guaranteed by the State and resting back upon the value of all

national property. The money was receivable in taxes, nominally

redeemable in coin, and made a legal tender. It actually bore at one

time 5 and 10% premium over gold and silver. People were anxious to

exchange their coin for notes. Meanwhile a commercial company was

formed in connection with the bank, to which the State ceded at first

the monopoly of the commerce of Louisiana and of the Canada beaver

trade for twenty-five years, and the soil of Louisiana forever; under

the auspices of which NEW ORLEANS was founded, and named from the

Regent, the patron of the grand system; and in succession, the

monopoly of tobaccos, the rights of the Senegal Company, of the East

India Company, of the China Company, and of the Barbary Company;

until, having almost all the commerce of France outside of Europe in

its hands, it entitled itself the COMPANY OF THE INDIES. Its shares

rose from a par value of 500 francs to 10,000 francs, more than forty

times their value in specie at their first emission. To support such

speculations, which completely turned the heads of all classes of the

people, the amount of paper money reached at last the sum of

3,071,000,000 francs, 833,000,000 more than had been legally

authorized to be emitted. The collapse of this most gigantic bubble of

history was terrific. Before the close of 1720, the shares of the

Company could be bought for a louis d'or, or twenty shillings

sterling, and the paper money of course became worthless.

The ghost of John Law reappears gibbering and chattering in some human

shape once in a generation or two in all civilized countries. In

March, 1890, Senator Stanford of California, himself reputed to be

worth $30,000,000, propounded the question in the Senate of the United

States, whether it were not advisable for the Government to issue

legal-tender notes on the basis of the real estate of the country. His

interrogative argumentation implied, (1) that there was a scarcity of

Money causing great hardship to individuals and depression to

business, (2) that if national bank bills are properly issued on

government bonds it is equally proper to base legal tenders on real

property, (3) that there is no natural and strict limitation to the

amount of Money in a country at any one time, and (4) that as far as

he knows there may well enough be as much money in amount as the

estimated value of the real estate. All this is John Lawism pure and

simple. All this utterly ignores the nature of Money as a valuable

measure of all other Services. It also ignores the truth, that an

advancing country needs less rather than more Money in amount as it

advances, because cheques and other forms of non-money Credits are

constantly increasing both absolutely and relatively. It is because

this Senator's monetary notions seemed to correspond with those of a

majority of the Senate, that it is perhaps proper to give them here a

moment's attention.

These supposed legal-tender notes would be secured by a government

lien on land and buildings, and by the direct credit of the Government

as well; just as the national bank bills are secured by the bonds of

the nation held in reserve for that purpose, and also by the direct

image and superscription of Cæsar upon every bill. People holding

mortgaged real estate could accept a non-interest bearing government

lien instead of a 6% or 8% private mortgage, that is, could pay off

their mortgages with the legal tenders given them by the Government,

the latter taking the lien or new mortgage; and people owning real

estate clear could, if they chose, execute a perpetual mortgage to the

Government, that is, give up the fee simple to their lands, and

receive legal-tender notes to the full amount in return. This would at

least relieve the "scarcity" of Money! The volume of national Money at

that moment was in round numbers $1,400,000,000; the assessed

valuation of the real property of the country was at the same moment

at least $15,000,000,000; so that, on this scheme, perhaps

$10,000,000,000 of additional legal-tender Money could be issued! Here

is paternalism and socialism and John Lawism all combined. Here is a

Government of strictly limited and carefully enumerated powers, under

a written Constitution as precise as language can make it, containing

the solemn declaration that all "powers not delegated to the United

States are reserved to the States respectively or to the People,"

owning or soon to own not only the railroads and the telegraphs but

also the major part of the lands of a free country, and going into the

mortgage business on the heroic scale!

If this honorable Senator and his like-minded colleagues were

tolerably familiar with the financial history of their country, and

perhaps they were, they would have known that this precise scheme had

had a practical trial in Rhode Island, just before the adoption of

the national Constitution. The Legislature authorized the issue of

$500,000 in scrip-money based upon the value of the real estate of the

farmers of the Colony. The law required a mortgage for twice the

amount of scrip-money based upon it, and it was therefore supposed the

money would be as good as gold or better. But somehow or other the

merchants of the towns could not see the matter in that light. The

depreciation of the scrip-money began at once, and the prices of wares

ran up in a way that should have set business in active motion,

according to all the views of the "scarcity" school. It was therefore

enacted by the Legislature, that anybody who refused to accept the

scrip at its face value should be fined $500 and lose the right of

suffrage! They made it a legal tender! But business refused to boom.

The merchants shut up their stores, the farmers could not market their

crops, and idleness and rioting set in all over the State. Then the

farmers organized a boycott against the towns, and food became scarce.

Meanwhile the mortgage legal tenders would not pass at the best for

over 16 cents to the dollar! There was more of "enforcing"

legislation, and appeal to the courts, but nothing could boost the

mortgage-money. The chief result of the experiment was, that Rhode

Island gained in this way the title of "Rogues' Island."

No matter how good the cause, how patriotic the People, an

inconvertible paper money is sure to run down at the heel. In June,

1775, one week after Bunker Hill, the Continental Congress voted to

emit $2,000,000 in "Bills of Credit" issued on the faith of the

"Continent." Eleven separate Colonies, New Hampshire and Georgia

issuing none, began about the same time their revolutionary issues of

the same sort, amounting in all during 1775-83 to $209,524,776. The

vice of such irredeemable scrip is, there is no economical limitation

of the Supply. The middle of 1777, when Burgoyne was prosperously

advancing from Canada towards New York, saw a general fall of the

notes both Continental and Colonial, and of course and in consequence

a universal rise of the prices of other products. At the close of that

year, the average depreciation from silver was not far from 3 to 1; at

the close of 1778, it was not far from 6 to 1; at the end of 1779, it

was about 28 to 1; the Continental press then rested, after

$200,000,000 nominally had been put out, but actually about

$40,000,000 more than that, a usual if not universal accompaniment of

such issues. When the stuff dropped out altogether in the spring of

1781, the country found no more lack of silver for Money than

Massachusetts had found in 1749, when and after she redeemed her

outstanding bills of credit at 11 for 1 in sterling silver, £138,649

of which, the share falling to her from the capture of Louisburg, was

shipped to the Colony in coin, and she became for the next 25 years

the "Silver Colony." Assuming that only $200,000,000 Continental had

been issued, Thomas Jefferson carefully estimated that the Nation

realized from them $36,367,720 in specie value, or 18% of the nominal

value.

14. Whether the Money of any Nation be coin or paper or both, when

once it is in the hands of the People, Government has properly nothing

to say _about the rate of interest at which one person loans this

money to another_. Usury Laws so-called, prohibiting the lender from

taking more than a prescribed rate % for the use of money loaned,

under penalties sometimes of the entire interest and sometimes of the

entire debt have disfigured the statute-books of all Nations and of

all the States of this Union. Such laws cannot justify themselves for

a moment in the light of sound principles of Political Economy. Their

origin may be explained by a reference to two false views, now

happily exploded.

(a) The laws of Moses forbade to the Israelites the taking from one

another any _interest_ on money loaned, but at the same time it

allowed them to take such interest freely of strangers; the permission

in the one case going to show that there is nothing in the taking of

interest that is unjust or sinful, and the prohibition in the other

being readily explainable from the general purpose of the municipal

regulations of Moses, which was to found an agricultural and not a

trading commonwealth, in which every family was to possess land that

could not be permanently alienated or sold, in which it was a great

object to maintain the personal independence and equality of these

families, in which the law for the recovery of debts was very summary

and effective, lessening the risk of losing the principal, and which

was to be and was sedulously separated in its usages from the

surrounding nations. It has been well understood for a long time that

the municipal code of Moses was local and peculiar, not necessarily

applicable at all to the circumstances of other States, and in no

sense binding on the conscience of legislators; and yet there

doubtless sprang from the prohibition referred to a prejudice against

interest, and this prejudice was perhaps deepened in the Middle Ages

and onwards by the conduct of the Jews themselves, who, in addition to

their sin of persistently growing rich in spite of the endless

disabilities laid on them by the people of Europe, always demanded, in

accordance with the permission of their great lawgiver, a good rate

_per centum_ of interest from those strangers to whom they became

money-lenders. The Jews were everywhere hated, and consequently the

usury which they practised was hated also. The fundamental absurdity

of forbidding in trading communities the taking of interest on sums

loaned to a borrower which he was at liberty to use for his own

profit, deterred the nations from going to the length of prohibition,

unless it might be in the case of the hated Jews. There is a clause of

Magna Charta, interesting as showing how early the children of Abraham

became the money-lenders of Europe, to the effect that, during the

minority of any baron, while his lands are in wardship, no debt which

he owes to the Jews shall bear any interest.

(b) Governments formerly deemed themselves competent to determine and

fix the _general_ purchasing-power of their own money. Even the

Constitution of the United States uses this language: "to coin money,

_regulate the value thereof, and of foreign coins_." There was

formerly, and there is still to some extent, a curious and harmful

confusion in the public mind in respect to this term, "the value of

money." In the only proper sense of the term the _value of money_

means its power of purchasing services in general, and the value of

money is _high_ when a given sum of it will purchase much of general

services, and _low_ in the contrary case; and a high or low value of

money in this true sense depends on a very distinct set of causes from

those which determine the high or low rate of interest on money

loaned; nevertheless, so long as governments supposed that they could

regulate the former, it is very natural that they should also suppose

that they could regulate the latter; and although all intelligent

governments have given over the idea of being able to regulate the

general value of the money they furnish to the people, many of them

still adhere to the notion, equally false with the other, that they

_are_ able to regulate the loanable value, or the rate of interest, at

least to prevent any more than their prescribed maximum rate from

being taken. A few simple considerations will sufficiently condemn all

usury laws.

(1) It is at once needless and invidious to deny by law to

money-lenders, who offer just as honorable and useful services to

society as any other class of men, the privilege of selling _their_

service for what it will bring in the market, while other men in every

department of business are allowed to exchange their services on the

best terms they can make without interference or control. Let us see

precisely the nature of the transaction when one man loans money to

another. It is a clear case of value. The lender does a service to the

borrower, and for this service justly demands a compensation. The

service is this: The lender might himself use the money to gratify his

own desires. It is his money; he may use it, as he pleases, for his

own gratification. Or he may himself employ it productively, and, at

the end of the period, receive back his principal with the customary

rate of profit. If he surrenders this advantage to the borrower, if he

passes over to him the right to use this money, say, for a year, he

practises what we call in Political Economy _abstinence_. For this

abstinence he has a right to claim a reward, precisely as the man has

a right to claim a reward who foregoes working for himself in order to

work for another. This reward of abstinence is _interest_. The

money-lender foregoes an advantage. He performs a service for the

borrower; and, therefore, the right to interest stands on just as

unassailable ground as the right to wages. Moreover, the loanable

value of money varies under Supply and Demand just like other values;

there are always those who want to borrow, and always those who want

to lend; both parties must be assumed to know their own minds, and to

be equally competent to make their own bargains; it is a case of

mutual exchange for a mutual benefit, like all other trade; and the

current rate of interest is determined at any one time by the actual

free exchanges between borrowers and lenders. Now for any government

to try to compel a lender by law to take only 6% when his money is

worth 8, is a direct violation of the rights of property. It is a

forcible and pernicious interference with the freedom of contracts. It

is based on the false premise that the loanable value of money is

uniform, and that government is competent to determine what it is. No

value is uniform. And no government is competent to determine even the

maximum price of money loaned, any more than the maximum price of

commodities.

(2) Usury laws are almost uniformly _disregarded_, both by the

governments which make them and by the people for whom they are made.

Indeed, such laws cannot be enforced in a commercial community. Common

sense is outraged by a law which requires a man to part with his

property at less than the actual value; and when common sense is

against a law, it stands a slim chance of observance. If the legal

rate be six, and the actual worth be eight, who lends at six? Not the

banks. They require deposits of their customers, the use of whose

money shall make up to them the difference between the legal and the

actual rate. The modes of evasion are various, but they are adequate

and universal. Besides, governments themselves have shown a noteworthy

inconsistency in this matter, which incidentally proves the

unsoundness of their whole action. While announcing pains and

penalties to those who take more than a given rate, they are careful

never to bind themselves down to any given rate. Governments are

always more or less borrowers, and if usury laws are necessary in

order to help borrowers in a pinch, there ought to be a clause in the

organic law of every country, forbidding the government to pay and its

lenders to take any more than a certain rate per cent. There is no

such clause in any organic law. Governments wisely follow the natural

market, and borrow low when they can, and pay high when they must. In

the last months of Mr. Buchanan's administration, the United States

paid 12% on a public loan, and could get but little at that. Sauce for

the goose is sauce for the gander, and if usury laws are good for the

citizens, some solid reason ought to be rendered why they are not good

for the government. The truth is, they are not good for either, since

natural laws are perfectly competent to regulate the rate of interest,

and do regulate it substantially in spite of a factitious,

impertinent, and mischief-making interference.

(3) If Usury laws were _not_ disregarded, they would be even worse in

their effects than they are now. We must suppose that their aim is to

aid borrowers, and make it easier for them to contract loans. But are

borrowers, as a class, any more deserving of the fostering care of

government than are lenders? Even if it could make its interference

effective, as it cannot, is there any reason why government, leaving

these borrowers to make all other bargains, sales, and transfers

according to their best skill and judgment, should rush to their

rescue only when they propose to borrow money? If they are competent

to do their other business for themselves, government pays their

capacity a poor compliment in undertaking to help them in the single

matter of making loans; and the borrowers in turn have reason to pray

to be delivered from their friends, since they, of all others, would

be the men especially injured if all the lenders obeyed the usury

laws. Suppose that a borrower is in great need of a loan, and that for

some reason his credit is now a little weak. Many men would be willing

to loan him at 9%, which affords a margin for the extra risk, but at

6, which we will suppose the maximum allowed by the law, he cannot

borrow a dollar, because his credit is not quite equal to the best.

If, therefore, the lenders obey the law, he, and such as he, must

fail. And because it is unlawful to take over 6% he will be obliged to

pay those who are willing to violate the law 10 or 12, to compensate

them for the risk and odium of such violation, while, under freedom,

he could borrow at 8. Moreover, if the loanable value of money at the

time be actually 9, while the law only allows 6, many men will attempt

to use their own capital productively, who would otherwise loan it, in

order to realize the high rate; and this action of theirs still

further restricts the loan-market and makes it more difficult to

borrow. If, then, the purpose of government be to aid borrowers, no

means could be more unskilfully chosen for that end than to pass usury

laws, since such laws, so far as they are obeyed, have necessarily the

opposite tendency; and even when violated redound to the disadvantage

of borrowers, so long as the laws themselves are popularly regarded as

of any legal or moral force.

In 1716, the Bank of England, as a great loaning institution, was

exempted from the operation of all usury laws: why the bank only, and

not other people as well, the Act of Parliament does not state. In

1867, the State of Massachusetts repealed all its usury laws, though

6% is to be understood in the absence of special agreement, and the

result has been entirely satisfactory to all classes of the people.

Rhode Island had done this previously, and Connecticut did it

subsequently, and both have experienced equal satisfaction in the

result. Other States will soon follow in their lead; and this relic of

ignorance and prejudice will pass away. Adam Smith left the Wealth of

Nations disfigured by the concession that governments might properly

enough pass usury laws; but it is gratifying to be able to add that he

was convinced of his error in that by Bentham's book on Usury, and

fully acknowledged his conviction in the spirit of a genuine lover of

truth. We conclude, then, that usury laws are needless, since

interest, like all other prices, will perfectly adjust itself. They

are disregarded, since lenders will loan or withhold their money

according to their own keen sense of interest. They are pernicious,

since they infringe the rights of property, and tend to prevent weak

borrowers from having a fair chance in the market.

The present writing is at midsummer, 1890; and, in order to complete

the entire discussion so far as this country is concerned, it is

needful to add, that, between 1878 (when specie payments were resumed)

and 1890, the circulating medium of all kinds is proven by official

statistics of the highest authority to have increased from

$805,793,807 to $1,405,018,000, or more than 57 _per centum_. This

circulating medium consists of six formal kinds; namely, gold, silver,

greenbanks, bank-bills, gold-certificates, and silver-certificates.

Each of these differs in important respects from each of the rest, but

all come alike under our fundamental classification of Moneys, as

either an intermediate merchandise or promises to render it. This

increase is way beyond any increase in the population of the country,

and way beyond any apparent or proven increase in the national

business; while at the same time the banking facilities of the

country, which always spare the use of Money by substituting cheques

therefor in the wholesale business and in a large share of the retail

business also, have been increasing in equal measure. The number of

national banks, especially in the West and South, has been

multiplying. The use of cheques has been enlarging in every commercial

community in the land. Yet up to the present time all of this vast

volume of Money has been kept at par with gold, and consequently at

the highest state of efficiency for commercial purposes.

What about the immediate future? Science is not prophecy except in a

quite subordinate sense. Congress is loudly threatening at this very

moment to more than double the enforced monthly coinage of silver

dollars at the public expense for the sole benefit of a comparatively

few miners of silver. If this threat be executed upon a long-suffering

people of tax-payers, who will have no one to blame but themselves if

they tolerate the outrage, Science is willing to venture the

prediction, that the monetary standard here will drop from gold to

silver within a twelvemonth or two; that general prices will rise much

beyond the appreciation of money implied in that drop, though they

will be illusory and gainless; that prudent debtors will hold high

carnival for a time at the expense of their creditors; that the

country will become as empty of gold as a contribution-box is of other

money between Sundays; that foreign trade (soon to be explained),

already in a sickening decline, under restrictions and prohibitions,

will hasten to a practical demise; and that the United States, at once

the laughing-stock and the victim to the superior intelligence of

other nations, will come through alternate fever and chills to a

position of common sense and ultimate recovery.