Wall Street_, 1912 ed., pp. 166-167, 180, 273. The figures are for the
big year, 1901, when 266 million shares were sold, more than in 1909 by
51 millions of shares, and when the Stock Exchange Clearing House should
have done better, in the magnitude of the undercounting, than it did in
1909. Figures since 1901 are, Pratt states,[431] not available. Pratt
also gives figures for 1893, but does not give data as to the percentage
of stocks handled by the Clearing House, so that comparison with the
1901 figures cannot be made.
In 1901, 265,944,659 shares were sold. Of these, 15% were "X-Clearing
House," _i. e._, not on the list of stocks handled through the Stock
Exchange Clearing House. This 15% was paid for in full by check. The
bond sales are not cleared, and so another billion dollars of checks is
required for this item.[432] If we assume (on the basis of the estimates
given to the writer by DeCoppet & Doremus, and Mr. Byron W. Holt, for
recent years) that 25% of the 100 share sales would be added if "odd
lots" were counted, we have another large item that does not go to the
Clearing House. "Private clearings" reduce the number of checks in
connection with odd lots, but not so effectively as is the case with
hundred share sales put through the Clearing House. So far the Clearing
House has done nothing. What did it do with the 85% of the stocks in
hundred share lots offered for clearing?
The figures are perfectly definite. The 85% of the 266 million shares
sold was 226 million shares. The "share balance" remaining after the
Clearing House had done its best was 134 million shares.[433] The number
of shares sold, then, for which checks did not have to pass as a result
of the clearing process was 93 millions. In terms of dollars, we may put
the same figures. The estimated money-value of the 266 million shares
sold was 20.5 billions;[434] 85% of this is 17,425 millions. The
certifications required to pay for the 134 million share balance was
10,930 millions. The saving in checks was, thus, 6,495 millions of
dollars. This is the full extent to which the Stock Exchange Clearing
House undercounts recorded share sales. This is less than 1.7% of
Professor Fisher's 387 billions! To offset this, however, we have
_over_counting in the 5% of checks for all dealings on the Exchange
which pass between brokers and customers, as shown, and all the checks
between brokers and out-of-town brokers. We shall also find items of
_over_counting which vastly more than offset this undercounting, in
_loan_ transactions between brokers, and between banks and brokers, to
which we shall shortly give attention.
This six and a half billions in checks saved on account of sales of
stocks is no small matter, absolutely. But this, though measuring the
extent of undercounted _sales_, by no means measures the services of the
Clearing House to the Stock Exchange. Not merely stocks _sold_ have to
be cleared. Stocks _borrowed_ are also cleared. Borrowing of stocks is
not _trade_, but borrowing of stocks requires the passage of money and
checks. When stocks are borrowed, money is _loaned_. A bear sells short.
He has to deliver next day. He accomplishes this by having his broker
"borrow" the stock he needs from a broker representing a bull, who is
long on the stocks, and who needs money to "carry" them. The bull, who
lends the stock, receives dividends from the bear, as they accrue, and
pays the bear interest on the money lent. An enormous lot of this takes
place. Moreover, to some extent, these transactions are increased
artificially, in order that the broker may make his "clearing sheet"
misleading, and avoid revealing his position with reference to the
market.[435] Loans of stock and sales of stock appear alike in the
transactions of the Clearing House. Moreover, apart from the necessities
of the bears for stocks to deliver, we have the necessities of the
bulls for money to carry their stocks. If a broker who has borrowed
largely from the banks finds his customers turning to the bear side of
the market, he has an excess of funds. He may repay his loans, but they
may be, in part, time loans, and in any case, he may find it just as
well, if he can make a small fraction of 1% in interest, to lend to
another broker, among whose customers the bulls are increasing. A vast
deal of money is thus transferred, on collateral security, by means of
"loaning stocks." Brokers prefer to borrow money from one another in
this manner, since no margins are required, in general, whereas banks
would require margins. These various reasons make a vast deal of
"borrowing and carrying" transactions, and a regular place is set aside
for them on the Floor--Post 4, commonly called the "Money Post." At this
post, also, the banks, through brokers, lend on call, and the published
call rates are established there. Of this, however, we shall have more
to say later.
The extent to which this loaning of stocks takes place at the "Money
Post," as compared with the loaning done privately, varies. It makes no
difference, however, from the standpoint of the volume of these
transactions that go to the Clearing House whether they are put through
at the "Money Post" or outside. The loans made by the _banks_ at the
"Money Post" do not affect the Stock Exchange Clearing House
totals.[436] Formerly the "Money Post" was a place where the position of
the bears could be gauged in a given stock. If the demand for a stock
was great, the bulls could take heart, and increase the pressure. To
avoid giving away this information, however, borrowing is done on a
large scale privately, at present.[437] Of course, if the pressure gets
too strong, it will manifest itself at the money post anyhow, since
bears borrowing particular stocks will forego all or part of the
interest, or even pay a premium for the stock.[438]
Now it is possible, from the figures given for the total clearings of
the Stock Exchange Clearing House, in conjunction with the figures of
recorded sales, and the percentage of "X-Clearing House" sales, to get a
fairly accurate idea of the magnitude of these stock borrowing
operations between brokers. The total number of shares offered for
clearing by "both sides" in 1901 was 926,347,300! This is double the
actual amount, since both buyer and seller report the same transaction
to the Clearing House, the former with a "receive from" sheet, and the
latter with a "deliver to" sheet. Half this amount, or 463,173,650
shares, represents the actual number of shares to be handled. As we have
seen, 226 millions of this (85% of the recorded sales of 266 millions)
represents sales. The rest, or 237,173,650, represents borrowing of
stocks.[439] Borrowing exceeds actual sales, if the figures for 1901--a
year of enormous sales--are representative. We have, now, an
explanation of the prevailing opinion among brokers that the Stock
Exchange Clearing House dispenses with the major part of the checks that
would otherwise be required. _For their purposes_, it does make a vast
difference. Pratt's figures[440] show that, without the Clearing House,
certifications of $27,995,896,400 would have been required; that
certifications of $17,065,042,800 were obviated[441] by the Clearing
House, leaving the balance of $10,930,853,600 of certifications which
had to be used. This balance, as we have seen, is the major portion of
what would have had to be paid anyhow for the stocks actually sold and
offered for clearing. The saving on the actual sales is only 6.5
billions. But the saving to the brokers was, of course, much greater.
Even six and a half billions is no slight matter for any purpose except
the explanation of our 245 surplus billions! Pratt gives an estimate at
another place of the certifications required by the Stock Exchange
sales, reaching virtually the same conclusion that we have reached by a
somewhat different combination of his figures. He indicates that 14
billions of certifications were required, counting in the bonds, in
1901.[442] This compares with the 20.5 billions estimated value of
stocks sold, and approximately one billion of bonds. This leaves 7.5
billions of certifications obviated on sales. This takes no account of
the "odd lots." If they run to an additional 25%, we have five billions
more which are not put through the Clearing House. My information is,
however, that "private clearings" reduce the checks in connection with
these, though not so efficiently as is the case with the big Clearing
House.
Do the figures that get into the "all other" deposits from those
connected with the Stock Exchange undercount sales made there? Not yet
have we taken account of an item which swamps all that we have
considered. I refer to loan transactions by the banks, particularly call
loans. The volume of these is enormous. At the "Money Post" alone, the
figures average between 20 millions and 25 millions a day.[443] The
range is from 10 to 50 millions. The major part of these loans are not
made on the Floor of the Exchange, however, but privately, between banks
and brokers. Even on the Floor, no records of the loans are kept, and
only estimates are available. For the loans made privately, no figures
are attainable at all. The total must be enormous. One authority writes,
in a letter, "The total amount of money loaned at the post varies
considerably, depending upon the rate. For instance, when money is under
3%, loans are largely made directly between the banks and the brokers,
but when it gets over 3% and gets strong, more loans are made at the
post. Some national banks make all their loans there right along, so I
understand." My information from an officer of the National City Bank is
that it lends the major part of its demand money on the floor of the
Exchange. The other chief lenders, according to the Pujo Report,[444]
are the National Bank of Commerce, The Chase National, the Hanover
National, J. P. Morgan and Co., and Kuhn-Loeb. The same report states
that the bulk of such loans are made directly between banks and brokers,
and not at the "Money Post."
How do these transactions affect Kinley's figures for deposits, and so
Fisher's total of 387 billions? The small dealer deals, usually, with
one bank. When he borrows, he gets a "credit" on his deposit account,
but makes no "deposit" that would get into Kinley's figures. But
stockbrokers deal with many banks. They have one bank which "certifies"
for them, and with which they regularly keep a "balance." But for their
loans, they deal with whatever bank gives them the best rate, or has the
funds to spare. In time of tight money, they shift their loans with
great frequency. They borrow also from one another. "Money" is "worth
money" in New York, and idle funds will be lent by whomever has them for
whatever the market will pay, on collateral security on call. When a
broker deposits money in his bank borrowed from another bank or another
broker, he gets a deposit credit which does get into Kinley's
figures--he deposits a certified check, or a bank draft. The following
has been described as a typical transaction by the bond expert of a
Boston banking house, and has been amplified by several Wall Street men
with whom I have discussed it. A, whose home bank is Bank W, has
borrowed, on call, $500,000 from Bank X. Bank X calls the loan. A finds
Bank Y willing to lend him enough to pay it off. Before he can get the
new loan from Bank Y, however, he must get his collateral released by
Bank X. Before he can do that, he must pay off the loan at Bank X. His
recourse, then, is to Bank W, his regular bank, which certifies for him,
and with which he keeps his balance. Bank W gives him a certified check
(either an overcertification, or a "morning loan" transaction), for
$500,000, with which he pays off the loan at Bank X. He then takes the
collateral from Bank X to Bank Y, and makes a new loan. He gets a draft
from Bank Y, which he deposits with Bank W, and then draws another check
against his deposit with Bank W to pay off the "morning loan," in case
the transaction took that form. Here are three checks for this loan
transaction, two of which get into clearings, and one of which gets into
"all other deposits." But the checks may be multiplied. A, instead of
getting a new loan at Bank Y, may call a loan from broker B, who may
then call a loan from broker C, who may go to Bank Y to get the funds he
needs to pay B. Here are two new checks in the series, both of which get
into the "all other" deposits. Checks fly about recklessly in Wall
Street, and men will turn over money many times, if an eighth of 1%, or
less, can stick by the way, on a good sum, for a few days! This is
strikingly illustrated by a fact which caught my attention in the
monthly bank statement of a brokerage house which I was allowed to
examine. The deposits made during the month, and the checks drawn during
the month, balanced to within five hundred and fifty dollars out of
several millions. The broker said of this: "It would be true even for a
single day, and it would be true for a year. The bank requires us to
keep a minimum balance; it is to our interest not to keep more than
that. If we have more at the end of the day, we lend it out; if we have
less, we borrow to make up the deficiency. We try to have just that
balance, and no more, to our credit at the bank at the end of every
day." The handling of funds by a brokerage house is a fine art,
involving both technical skill and a philosophic grasp of the factors of
the "money market." Are rates going up? Then it is well to reduce call
loans, and borrow more on time. If lower rates are anticipated, more
call money will be employed--with the possibility of a "squeeze" if too
much is taken that way. Hidden dangers must be foreseen. The sums
borrowed are enormous, and brokers' profits depend in very substantial
degree on their skill in borrowing as cheaply as possible, and in
utilizing their funds to the utmost.
It is here, I think, in loan transactions between banks and brokers and
between brokers, that we have a major part of the explanation of the
huge deposit figures for New York City, and for the tremendous influence
of stock sales on clearings, which Mr. Silberling's[445] figures show.
This is the opinion of Professor O. M. W. Sprague, who first called my
attention to the volume of call loans, and rapid shifting of call loans,
in New York, and it is the opinion of every Wall Street man with whom I
have discussed the matter. The actual pecuniary magnitude of the share
sales and bond sales is not enough to do it. The mass of connected loan
transactions, however, substantially greater in volume than the actual
sales of securities, is, with the security sales, enough to do it.
When the call rate is high, which will particularly happen when bank
reserves are low, the shifting in loans will be much increased. One bank
will have money to lend one day, but the next day will have to call it,
to meet heavy demands at the Clearing House, while some other bank will
have the surplus funds to lend. The brokers, by bidding up the rate,
will tempt the temporary lending even of small surpluses, if their
necessities are great. The volume of "all other deposits" and of bank
clearings will be swelled by this much beyond ordinary. That this should
not be revealed to ordinary statistical tests is due to the fact that
speculation tends to fall off at such a time, so that the other factors
in the stock exchange operations tend to reduce daily deposits and bank
clearings. Mr. Silberling has applied to this problem the technique of
a refinement of the correlation method, the method of partial
correlation, with the result of confirming this view.[446]
I conclude, therefore, that stock exchange transactions, instead of
being undercounted in bank deposits, are very greatly overcounted.[447]
The big item that does it is loan transactions between brokers and
brokers and between brokers and banks.
The evidence from the Chicago Board of Trade, with reference to the
extent of clearings within the exchange there, comes in a letter from
the Secretary of the Board of Trade to Professor Taussig. The only
clearing house transactions are in connection with "futures." All
"spot" transactions are paid in full by check. All futures other than
those offset by clearing are paid in full by check. The total amount put
through the Clearing House in 1915 was 118 millions, of which the
balances paid were 41 millions (saving checks to the extent of 77
millions). This 77 millions is a trifle indeed as compared with the gap
of 245 billions we are trying to fill! It is a trifle also as compared
with the business done on the Board of Trade. The Secretary estimates
that commodities to the value of $375,000,000 actually arrived on the
exchange in 1915. On the average, the figure would be $350,000,000. For
the Stock Yards "it is approximately the same--last year was
$375,000,000. Of fruits, vegetables, poultry, butter, eggs, etc., sold
in South Water Street, it is claimed by their statisticians, the value
is $350,000,000, or a total of about eleven hundred millions _arriving_
[Italics mine] yearly at this great market place, all of which is paid
for by checks, and when the ownership changes, the change of ownership
is always paid by check." How many times the goods change hands, cannot
be stated on the basis of records of the Board of Trade. The Secretary
contents himself with saying that they are "sold and resold many times."
We have discussed this, on the basis of reputed figures of the Federal
tax on grain futures in 1915, in our chapter on "Volume of Money and
Volume of Trade." In any case, it is clear that the 77 millions of
checks economized, though absolutely great, is relatively a bagatelle.
It is, moreover, more than compensated for by loan transactions. The
Secretary estimates that for a sixty-day period, when grain is coming
in, from two to four millions will be lent by the banks daily on
_arriving_ grain. How great the loan transactions on subsequent sales
will be we can only conjecture.
While able to find, then, important cases of trade and speculation
which dispense with the use of checks, I cannot find anything of
magnitude sufficient to aid Professor Fisher's case, and I find, on the
other hand, enormous overcounting in every field where business and
banks meet, as well as in the relations of banks to non-commercial
depositors.
I conclude, therefore, with reference to the figures of Fisher and
Kemmerer[448] for volume of trade, that they are much exaggerated for
the base year, and that for every other year they are wholly wrong, both
because of their excessive magnitude, and because the index of variation
has been wrongly chosen.
The discussion of P, the price-level, in the statistics of Kemmerer and
Fisher need not be extended. P, for the equation of exchange, and for
the quantity theory, is a _weighted_ average, each price that goes into
it being weighted by the number of exchanges involving the commodity of
which it is the price. The weighting of P should correspond to the
elements in T, the volume of trade, and should vary from year to year,
as the elements in T change.[449] Now Kemmerer's P is weighted as
follows: wages, 3, security prices, 8, wholesale prices, 89.[450] If our
conclusions with reference to the composition of the volume of trade, as
developed in the chapter on "Volume of Money and Volume of Trade," are
valid, this weighting gives us a P which has no relevance to the
equation of exchange. The wholesale items should have a weight of not
more than one-sixth of the total for 1909. Certain commodities, as wheat
and cotton, in which there is heavy speculation, should be given great
weight, and securities should have, probably, the greatest weight of
all. If "trade" is to be extended to cover transactions in bills of
exchange and loan transactions (as it is by Kemmerer),[451] then P
should contain these things, weighted more than all else put together,
particularly if call loans are included. The weights should be radically
altered from year to year. We should then get a P which would fit the
"equation of exchange"--though what else it would be good for is hard to
say! The same criticism applies to Fisher's P. It is dominated by
wholesale prices.[452] It therefore has no relevance to an equation of
exchange in which only one-sixth at the very most of the items are
wholesale items. Neither Fisher nor Kemmerer alter their weights in P at
all, to correspond to yearly alterations in the composition of T.
As _indicia_ of changes in the _absolute value_ of money, Kemmerer's and
Fisher's index numbers, or other index numbers of numerous wholesale
prices, with a substantial weighting of wages, are probably better than
an index dominated by stocks. Stocks fluctuate more widely than
wholesale prices and wages, their values are more affected by variations
in business confidence, and by variations in the rate of interest. For
measuring _the value of money_, the index numbers here criticised are
very good. But for the purpose for which they are chosen, namely, to
fill the equation of exchange, and to measure variations in a
_price-level_ of the sort the quantity theory and the equation of
exchange are concerned with, they are simply irrelevant. If it were
really true that such an index number varied with the quantity of money,
then the quantity theory would be effectively disproved!
Now, in general summary of our criticisms of the figures of Kemmerer
and Fisher: they have systematically buried New York City, and
systematically covered up speculation. All the errors converge in this
direction. The _indicia_ of trade cover up speculation and the other
things that go on in New York, and other financial centers. The
_indicia_ of prices do likewise. Fisher weights New York clearings only
1, while weighting country clearings 5, in his index of variation of
check transactions. He also counts New York returns for March 16, 1909,
as complete, and gives all of his estimate for non-reporting banks to
the country. Kemmerer does not do this, but he does exaggerate the
importance of money, as compared with checks, and does not allow the
velocity of money to vary at all in his figures, thus getting a much
greater constancy in the figure for total circulation of money and
checks than is proper, and covering up the flexibility and variability
which New York gives to our system.[453] In general, our task in this
chapter has been an archaeological excavation--we have rediscovered a
buried city.
PART III. THE VALUE OF MONEY
CHAPTER XX
RECAPITULATION OF POSITIVE DOCTRINE
The chapters which have gone before have been, in considerable degree,
concerned with the analysis of unsuccessful efforts to solve the problem
of the value of money, as the quantity theory, or the attempts to apply
the notions of supply and demand, marginal utility, and cost of
production, to the problem. Not all that has gone before has been, even
in form, primarily critical. The chapter on "Economic Value" lays the
foundation for the main constructive theory of the book, and in
virtually every chapter some portion of our positive doctrine has been
developed. In the doctrines criticised, elements of truth have been
noted, and in showing the errors of the doctrines considered,
constructive doctrine has been presented by way of contrast. The
theories criticised, moreover, even where they have gone astray in
solving problems, have at least the merit of _stating_ problems, and so
have aided in clearing the way for theories better based.
It is the task of the present chapter to present, in a series of theses,
the main constructive results so far attained. No effort will be made to
follow the order of the exposition which has preceded. A summary of that
will be found in the detailed analytical table of contents. Rather, we
shall seek to draw from what has preceded the positive doctrine which is
scattered through the preceding chapters, and to present it by itself,
as a basis for the more systematic formulation of constructive theory
which the following chapters are to contain.
1. The theory of the value of money is a special case of the general
theory of value.
2. Value is a phenomenon of psychological nature. Not physical
quantities, but psychological significances, are relevant when the
problem of value and price causation is involved.
3. Value is not a ratio of exchange, or "purchasing power," but is an
absolute quantity, prior to exchange. It is the fundamental and
essential attribute or quality of wealth, the common or homogeneous
element present amidst the diversities of the physical forms of wealth,
by virtue of which comparisons may be instituted among different kinds
of wealth, and different items of wealth may be added to make a sum, put
into ratios of exchange, and so on.
4. Economic value is a _species_ of the _genus_, _social value_,
cooerdinate with legal value, and moral value. It is part of a system of
social motivation and control.[454] Psychological in character, it none
the less presents itself to an individual as an objective, external
force, to which he must adapt himself.
5. Individual prices have two cooeperating causes: (a) the social
economic value of the money-unit, and (b) the social economic value of
the unit of the good in question.
6. The average of prices, or the "price-level," is a mere mathematical
summary of the particular prices. The causation involved in the average
of prices is nothing more than the causation involved in the particular
prices.
7. The value of money is to be distinguished from the "reciprocal of the
price-level," or the "purchasing power of money." The value of money is
an absolute quantity, one of the factors, determining each particular
price. Particular prices and general prices may change because of
changes in the values of goods, with no change in the value of money.
Or, particular prices and general prices may change because of changes
in the value of money, with goods remaining constant in value.
8. The absolute value of money, assumed constant, is presupposed by the
great body of present day price theory, as supply and demand, cost of
production, and the capitalization theory. These theories are,
therefore, inapplicable to the problem of the value of money.
9. But supply and demand, cost of production, the capitalization theory,
and other laws concerned with the concatenation and interrelations of
prices, being applicable to the problem of particular prices, are also
applicable to the problem of general prices. (Chapter on "The
Passiveness of Prices.")
10. The general price-level, as a consequence of changes in particular
prices, growing out of changes in the values of goods, may rise or fall,
without antecedent changes in the value of money, or the quantity of
money, or the volume of credit, or the volume of trade, or in the
"velocities of circulation" of money or credit. (Chapter on "The
Passiveness of Prices.")
11. The general laws of prices, supply and demand, cost of production,
the capitalization doctrine, the imputation doctrine, etc., conflict
with the quantity theory. In the cases where they conflict, the first
named doctrines are correct, and the quantity theory is wrong. (Chapter
on "The Passiveness of Prices.")
12. The value of money, being a special case of economic value, is
subject to the same general laws. This means, from the standpoint of my
theory, that the theory of social value is applicable to the problem of
the value of money.
13. This is not the same as saying that the whole value of money is to
be explained by the social value of gold bullion, conceived of as a mere
commodity. A hypothetical case was constructed in the chapter on
"Dodo-Bones," in which gold is the standard of value, but is not
employed as a medium of exchange or in reserves, where the whole value
of money is to be explained by the value of gold bullion, conceived of
as a commodity.
14. But, in general, money gets part of its value from its monetary
employments. (Chapter on "Dodo-Bones.")
15. The additional value which comes to gold bullion as a consequence of
its employment as money, is itself to be explained on social value
principles. It grows out of the social value of the services which money
performs.
16. The functions of money remain to be examined in detail. And the
relation between the value of particular services of money and the
capital value of money, has not yet been analyzed. There is a relation
between the two--a relation which varies under different
conditions--even though it has been shown in the chapter on the
"Capitalization Theory" that the relation is not the simple one which
holds between the values of services and the capital value of ordinary
income-bearers. There must be an increment to the value of gold bullion
as a consequence of its being coined, however, since otherwise there
would be no force leading it to be coined.
17. This increment in value to bullion, as a consequence of coinage,
becomes evident when free coinage is suspended. An agio of coin over
uncoined bullion may easily appear.
18. But this is not to assert the doctrine of the quantity theory.
Because
19. The money service presupposes the existence of value for money from
some source other than the monetary employment (chapter on
"Dodo-Bones"); and
20. Hence the monetary employment can explain only a differential
portion of the value of money.
21. The proposition that money must have value from some source other
than the monetary employment does not mean, necessarily, that money must
be made of precious metals, or be convertible into precious metals. The
value of money is, indeed, most stable and best sustained when such is
the case. But it is possible for money made of paper to have value apart
from the prospect of redemption--though no clear case has been made, in
the writer's opinion, for the view that this has historically occurred.
But as a hypothetical possibility, my theory holds that paper money may
attain a value of its own, growing out of various factors which a social
psychology can explain, including law, patriotism, and custom. Social
values in every sphere are imperfectly rationalized. Values which in
their origin are secondary and derived may become substantial and
independent of their "presuppositions." This is true of legal and moral
values. It is true of the capital value of land. It may be true of paper
money. This matter has been discussed in the chapters on "Economic
Value" and on "Dodo-Bones." The social value theory has not the
limitations of the utility theory in dealing with such cases, nor is it
tied to a metallist or bullionist interpretation. Legal, moral, and
patriotic factors, and the influence of social custom, all fall readily
into the social value doctrine.
22. The "measure of values" function, and the "standard of deferred
payments" function, need not require the actual use of money, and need
not add to the value of money. The function of "medium of exchange," and
other functions to be analyzed in a later chapter on that topic, do
involve the actual employment of money, and are sources of value for
money.
23. The quantity of money and credit are matters of high importance in
economic life. They affect vitally the smooth functioning of production
and exchange. While not accepting the extreme view of those writers who
see in scarcity or abundance of money the primary cause of the ebb and
flow of civilization, I maintain that the quantity of money and credit
does make a vast difference, and that the quantity theory contention
that, after a transition is effected, the only consequence of a change
in the quantity of money is a proportional change in the price-level, is
wholly indefensible. (Chapter on "Volume of Money and Volume of Trade.")
24. Very much of economic theory has been developed in abstraction from
money. For economic statics, with its delicate marginal adjustments, on
the assumption that friction is banished, that the market is fluid, that
labor and capital and goods are mobile, etc., money does appear a
needless complication. But the static assumptions are only possible
because money and credit have smoothed the way. It is the business, the
function, of money and credit to overcome "friction," to effect
"transitions," to make it possible for "normal" tendencies to manifest
themselves. (Chapter on "Volume of Money and Volume of Trade.")
25. The main work of money and credit is in effecting "transitions,"
bringing about readjustments, enabling society, with little shock, to
adapt itself to dynamic change. The great bulk of the actual exchanging
that takes place is speculation, and would not occur if economic life
were in static equilibrium. This is true both as a matter of theory and
as a matter of statistics. More than half of the checks deposited in the
United States are deposited in New York City, where "wholesale" and
"retail" deposits are a small factor. Bank clearings fluctuate in close
conformity with stock exchange transactions. Great banks, and the bulk
of banking transactions, are everywhere found in the speculative
centres. (Chapters on "Volume of Money and Volume of Trade," and "The
Rediscovery of a Buried City.")
26. Hence a functional theory of money must be essentially a dynamic
theory: must rest in a study of "friction," "transitions," and the like.
And,
27. Hence a theory of money like the quantity theory, concerned with
"long run tendencies" and "normal equilibria" and "static adjustments"
touches the real problem of the value of money not at all.
28. An increase of money tends to increase trade. (Chapter on "Volume of
Money and Volume of Trade.")
29. An increase of credit tends to increase trade. (Same chapter.)
30. An increase of trade tends to increase the volume of credit, and,
where the money supply is flexible, tends to increase the money supply
also. (Chapter on the "Volume of Trade and the Volume of Money and
Credit.")
31. Production waits on trade. The problem of marketing in the modern
world is often more important than the problems of production in the
narrower sense. Selling costs are probably greater than strict "costs of
production." "Volume of trade," far from being dependent on "physical
capacities and technique," is almost indefinitely flexible, with
changing tone of the market, with changing values, and with other
changes, including changes in the volume of money and credit. (Chapter
on "Volume of Money and Volume of Trade.")
32. The relation between the volume of money and the volume of credit is
exceedingly flexible. The relation between the world's volume of credit
and the world's volume of gold is likewise exceedingly loose, uncertain,
and flexible. (Chapters on "Volume of Money and Volume of Credit," and
"The Quantity Theory and World Prices.")
33. "Velocity of circulation" is a blanket name for a complex and
heterogenous set of activities of men. It is a passive resultant of many
causes, and is itself a cause of nothing. The safest generalization
possible concerning it is that it varies with the volume of trade and
with prices.
34. Barter remains an important factor in modern economic life, and is a
flexible substitute for the use of checks and money, increasing when the
money market "tightens." It is greatly facilitated by the "common
measure of values" function of money.
35. The general criticism of the mechanistic scheme of causation
involved in the quantity theory has, as its positive corollary, the
doctrine that psychological explanations must be given--that the
phenomena are intricate and complex, as intricate and complex as the
play of human ideas and emotions, and the network of social
relationships.
36. This means that the theory of value, and of the value of money, as
here presented, cannot assume the simple form, or the mathematical
precision, which have made the quantity theory so alluring. It means,
further, that the present study, as in part pioneer work, will lack
finish and definiteness in many places, will contain errors and gaps,
and will leave many problems unsolved, and many distinctions undrawn. At
many points, the analysis is confessedly incomplete, and the problems
imperfectly thought through--often inadequately _stated_, if seen at
all.
In what follows, these theses, with doctrines yet to be developed, will
be woven together into a systematic theory of money and credit.
The study of the functions of money, in relation to its value, will best
be approached, I think, through a study of the origin of money. In this,
I shall base my conclusions chiefly on the work of Karl Menger and W. W.
Carlile, who seem to me to have done most in this field.
On the basis of the general theory of value developed in the first
chapter, and the results of the two chapters which are to follow on the
origin and functions of money, I shall reach my main conclusions as to
the laws of the value of money. On the basis of this theory of value,
and of the theory of the functions of money, I shall also try to develop
a psychological theory of credit, and to assimilate credit phenomena to
the general phenomena of value. The development which the theory of
credit has had, at the hands of men whose chief interest was that of the
jurist or accountant, is valuable and important. I do not wish to
discredit what has been done. Many important doctrines concerning credit
have been developed. The general theory of elastic bank-credit, worked
out in the controversy between the "Currency" and the "Banking" Schools,
is of the highest importance. This theory I have discussed in the
chapter on "The Volume of Trade and the Volume of Money and Credit." I
still feel, however, that there are gaps in the prevailing ideas on
credit which only a social psychology can fill. I shall undertake to
construe credit as a part of the social system of motivation and
control, and to differentiate it from other parts of that system by an
analysis of its functions. I think, too, that the theory of the relation
of credit and money is in especially unsatisfactory shape, particularly
with reference to the factors governing reserves.
A final chapter, in Part IV, will undertake to bring together the
various points in our discussion which deal with the theory of
prosperity, and will seek to bring the notions of "theory of prosperity
_vs._ theory of wealth," "statics _vs._ dynamics," "normal _vs._
transitional tendencies," and certain other similar contrasts, into a
higher synthesis, which will, to be sure, not rob these contrasts of
their significance, but will rather find certain generic principles
which they share, and so make it possible to measure considerations in
one sphere in terms of considerations in the other sphere. In very large
degree, students of dynamics and students of statics have been talking
at cross-purposes, missing the force of one another's arguments, and
have been quite unable, even when understanding one another, to come to
agreement, precisely because they have lacked principles by means of
which they could compare in any quantitative way the forces which each
studies. A higher synthesis, which would give static and dynamic
theories common ground, would seem to be a desideratum of high
importance. Such a synthesis would go far toward unifying the science of
economics. I believe that the theory of money and credit, approached
from the angle of the social value theory, will meet this need.
CHAPTER XXI
THE ORIGIN OF MONEY, AND THE VALUE OF GOLD
This chapter is not concerned with history or anthropology for their own
sake. The present writer has made no independent historical or
anthropological researches, in connection with the question of the
origin of money. The chapter is primarily concerned with giving an
exposition of the theories of two writers, Karl Menger and W. W.
Carlile.[455] It is not important, for my purposes, whether either
writer has presented a theory which anthropology will accept as a
correct account of actual origins. The theories do throw light on
present functioning, and seem to me to be correct as analytical
theories, whether historically adequate or not. There are two main
questions with which the chapter is concerned:
(1) How did money come to be?
(2) Why should gold and silver have passed all rival commodities in the
competition for employment as money?
Viewing these questions from the standpoint of present functioning,
rather than from the standpoint of historical origins, we may restate
them as follows:
(1) Why should men accept small disks of metal, or paper representatives
of these metal disks, for which, _as_ metal, they have no use, or at all
events far in excess of the amount which they can make use of as metal,
in return for economic commodities which they can use? The social
utility of a money economy may well be granted, without giving an answer
to this question. Granting that social economic life works better by
far when men do accept these disks of metal in payments, the question
still remains not merely as to why the practice started, but also as to
why it continues. Granted that it is to the individual, as well as to
the social advantage, that each individual should accept these metal
disks in excess of his personal need for the metal, _if he is assured
that he can pass them on to others at will_ in return for the goods he
wishes to consume, the question still remains as to why the individual
should have this assurance, as to why the general practice should
continue. Menger quotes Savigny as holding that the thing is downright
"mysterious," and the Aristotelian answer of social convention
(sometimes interpreted as "social contract") is, in effect, a confession
that the thing does baffle explanation on the ordinarily understood laws
of exchange. The convergence of individual and social advantage, which
English economic theory has done so much to emphasize, is less clear by
far in connection with money than with the case where A trades a sheep
(of which he has a surplus) to B for a quantity of grain (of which B has
a surplus), while A has not enough grain, and B has not enough sheep.
This exchange is clearly to the advantage of both A and B, and the
practice of making such exchanges is clearly to the general advantage.
But in the case of money, A trades sheep (of which he may not have an
excess, so far as his capacity to consume is concerned) for disks of
metal which he probably does not intend to consume at all. The social
advantage of a general practice of the sort is easily established, but
it is not clear that it is to A's advantage, _unless we assume the
practice general_. But there are many practices which could be shown to
be socially advantageous if all men practiced them, and, indeed,
individually advantageous, if generally practiced, which can, none the
less, not be made a general practice. If thieves would cease stealing,
we could dispense with a vast expense now incurred in police and safe
deposit vaults and heavy locks, etc., and with a small fraction of the
savings could give pensions to the thieves which would surpass by far
their present incomes! Individual and social advantage would converge.
But for many reasons the practice could not be instituted, and would
break down quickly if instituted. Very powerful social pressure indeed
is needed to make an advantageous social institution--like
morality--work, so long as individuals sometimes find advantage in
breaking the general practice, even though the general practice, _on the
part of other people_, is of advantage to every individual. Now it is
clear that the institution of money is to the social advantage. It is
clear that it is to the advantage of every individual who has money that
everyone else should be ready to accept it in unlimited amount, in
return for his goods and services. But it is not clear, on the surface,
why everyone should be ready to take metal disks in unlimited amount in
return for goods and services. People will not take coal or horses or
hay or land or white elephants in unlimited amount in return for goods
and services. Why should there be such a general practice regarding
metal disks or pieces of paper?
This question, to one who has always lived in a money economy, may seem
childish. Such questions regarding anything to which we have grown
accustomed seem childish to those who have not been used to raising
them. Why does the sun rise? Why does seed-corn sprout? But these also
are proper scientific questions, the answer to which is of high
practical importance! The answer to the question just raised regarding
money will go far toward explaining the functions of money, and the
theory of the functions of money, together with the general theory of
social value, will give an answer to the question as to _how the money
function adds to the value of money_. The answer which I shall give on
the first question will in large measure follow the lines laid down by
Menger.
(2) The second question needs little revision, when stated from the
standpoint of present functioning, rather than of historical origin. We
have more recent history to deal with in connection with this question,
and Carlile, in his answer, offers substantial historical and
anthropological proofs. It is still, however, present functioning that
is important, and the question may be restated thus:
Why are gold and silver, and particularly gold, the standard money of
the great part of the world to-day? The principles of social psychology
which Carlile employs in explaining the historical development, are also
important in explaining the present attitude of mankind toward gold and
silver, and will serve, together with the general theory of social
value, to answer the question as to the value which money receives from
the employment of the money metal _as a commodity_.
It is worthy of note that neither of these questions has been seriously
raised or discussed by most recent writers of the quantity theory type.
Professors Kemmerer[456] and Fisher give no attention to them at all.
Both assume money as circulating, as the starting point of the argument,
without noticing how much is involved in the assumption. Neither,
moreover, gives an _analysis_ of the functions of money. Considerations
drawn from the question as to the origin and functions of money are hard
to bring into the quantity theory scheme. If money circulates, there are
causes for it. Fully to understand those causes, would be to understand
also the _terms_ on which money circulates, that is to say, the
_prices_. But then a quantity theory would be superfluous! And if the
quantity theory answer should not be obviously in harmony with the
answer already given by the theory of origin and functions, then doubt
would be cast on the quantity theory explanation. The quantity theorists
do well to avoid mixing up with their discussion considerations drawn
from the general theory of value, and from the theory of the origin and
functions of money.
The answer to the first question rests primarily in the fact that there
are differences in the _saleability_ of goods. Value and saleability are
not the same thing. A copper cent has high saleability; a farm has low
saleability.[457] Some valuable things cannot be exchanged at all. The
Capitol at Washington cannot be exchanged, yet has value. Under a
communistic or socialistic regime, exchange, as we now know it, would
largely or wholly cease. An entailed estate cannot be sold, yet has
value. If society should really come to the stable equilibrium of the
"static state," most of the exchanges of lands,[458] securities, and
other long-time income-bearers would cease, but they would still be
valuable. I have developed these notions in my article on "Value" in
the _Quarterly Journal of Economics_, Aug. 1915, and have referred to
them again in the chapter on "Value" in the present book, and so need
not expand the discussion here. Exchangeability and value are different
characteristics of goods. Value is an essential precondition of
exchangeability, but can exist without it. Value is, however, commonly
increased by exchangeability. But the theory of exchangeability is a
separate matter, and cannot be deduced from the theory of value alone.
Menger points out the difference between "buying price" and "selling
price." You can buy a piano for $400. If you try the next minute to sell
it for $375 you will probably fail. You may pay ten thousand dollars for
a farm. The income of the farm may increase. The tax assessment may
increase. The capital value of the farm may increase. And yet, you may
have to wait for a long time before you find a buyer who will pay you
ten thousand dollars for it. One buys pianos or farms, as a rule, only
when one wishes to use them, or when one has such special knowledge of
the market that one knows pretty definitely where purchasers can be
found for a resale, at a profit. Even in such highly organized markets
as the stock and produce exchanges, one cannot usually buy in quantity
and sell immediately without some loss. "Buying price" and "selling
price" of such a stock as Industrial Alcohol Preferred are sometimes
five points apart, at a given time. The forced sale of land in
bankruptcies, or for taxes, notoriously often bring prices far below the
price which would correctly express the value of the land. It is only in
the ideal fluid market assumed by static theory, where adjustments are
instantaneous, where causal-temporal relations have become timeless
logical relations, that values are perfectly expressed in prices.[459]
All these difficulties were enormously greater in days of primitive
barter, before money and organized markets had been evolved. The
difficulties of barter have been much elaborated in the literature of
money. I shall recur to the topic in my chapter on the "Functions of
Money." Part of the trouble arises from the "want of coincidence" in
barter--the failure to find the man who has what you want, and who at
the same time wants what you have. Goods have high or low saleability,
depending, in considerable degree, on the _universality_ of the desire
for them. They may have high _value_ if only a few rich men desire them,
provided they be scarce. The paintings of old masters would be a case in
point. Incidentally, the difference between buying price and selling
price is often enormous in this case, and the making of a sale may well
involve long and expensive negotiations. The difficulties of exchange
here arise not alone from the limited market, however, but also from the
fact that each painting is a unique, and a unique of high value. A good
might have high saleability despite the fact that the ultimate demand
for it comes from only a few rich men, if it could be easily subdivided
and standardized.
Menger enumerates a number of circumstances connected with a good which
increase its saleability. Among them are the following:
1. Widespread and intense desire for the thing (to which should be
added, adequate wealth on the part of those who desire it).
2. Scarcity of the commodity in question.
3. Divisibility of the commodity.
4. Considerable development of the market.
5. That the demand for the article should be more than local.
6. That it be cheaply transportable.
7. That commerce between localities in the article be unrestricted.
8. That demand for the article be constant, not fluctuating, in time.
9. That the article be durable.
10. That it be uniform in quality, so that standardization is easy.
In general, Menger's list meets the requirements often laid down for a
good _medium of exchange_. In general, to the extent that any commodity
meets these tests, it will be _saleable_. Commodities will vary
indefinitely in the extent of their saleability.
Starting with the distinction between value and saleability, and with
the analysis of the circumstances affecting saleability, we may now
undertake to see how money tends to develop out of a barter economy.
Suppose that a man, in a barter economy, has a good of low saleability,
which he wishes to trade for some other specified commodity. He finds no
one who possesses the commodity he wants who is willing to trade with
him. But if he can trade his article of low saleability for some other
commodity of higher saleability, _still not the thing he wants_, he has
yet made progress, he has got _one step nearer_ the object which he does
want. It will be possible now, perhaps, to trade the new article, of
higher saleability, for the commodity he wants. If not, he can trade it
for some article of still higher saleability, which he can finally
trade for the article he wants. By several indirect exchanges, he
finally reaches his object. Incidentally, it is erroneous to distinguish
money and barter economies as economies based on direct and indirect
exchange. The barter economy may well involve much more indirection than
the money economy, in many cases.
If there be in the market some one commodity which has a conspicuously
higher degree of saleability than any other, the more sagacious men in
the market will make it a point to get hold of it and accumulate it in
excess of their anticipated consumption of it. They will do this,
because they will see that they can thereby get other things which they
do need more easily than in other ways. With the accumulation of a given
kind of highly saleable goods, in excess, by a few men in the group, in
the expectation that the surplus will subsequently be used to buy other
goods,--as yet perhaps not specifically determined--we have, not money,
but a big step toward money. At first only a few grasp the great idea.
They succeed and become wealthy. Then others see the advantage of the
thing, and imitate them. The prestige of the wealthy and successful men
would induce imitation even if the advantage were not clearly seen. Then
a tradition and a custom grows up. With the growth of tradition and
custom, picking out one or a small number of things as particularly
desirable objects to accumulate because of their saleability, with the
practice of accumulating these articles in excess of intended
consumption, money becomes an accomplished fact. There is no need for
agreement or legislation. Money is not, in its origin, certainly, a
matter of law or conscious public planning.
With the development of a highly saleable article into money, moreover,
we have further a great increase in that saleability itself. The
quality which made the practice possible becomes greatly enhanced by the
practice. Menger thinks that this leads to an absolute difference
between money and goods, the money article, which formerly was merely
superior to other goods in saleability, now becomes absolutely saleable.
The absoluteness of this distinction, which would make it a distinction
in kind, rather than in degree, seems to me not to be sound. I think
that the distinction remains a distinction of degree. For one thing, the
development of money, while it adds to the saleability of the
money-commodity, _also adds to the saleability of other goods_. _Two_
things must be exchanged, in order that _one_ may be! It is the business
of money to facilitate exchange, to overcome the difficulties of barter,
to bring about the fluid market. And it does this not merely by acting
as a medium of exchange. The fact that goods can be _priced_ in terms of
money, can have a common measure of value, makes barter itself easier,
as I have shown in my chapter on "Barter" in Part II. There are many
articles in trade at the present time whose saleability is not much less
than that of money, in ordinary times. Wheat in the grain pit is surely
highly saleable. Stocks and bonds are. If it be objected that in the
wheat market there is always some difference between buying price and
selling price, if considerable quantities are involved, it may be
answered that the same is true in the "money market" The man who has
just negotiated a three months' loan of five hundred thousand dollars at
3-1/2% may well have trouble in turning that loan over to someone else
immediately without shaving 1/4% from the money-rate! Besides, it is not
true that values remain unchanged when a big buyer shifts from the bull
to the bear side of the market. Buying price is higher than selling
price in that case partly because _his economic power_ has ceased to
sustain the value of the wheat, and the price would not correctly
express the value if it remained uninfluenced by that fact.
Further, as we shall see when we come to the analysis of credit, one
chief function of modern credit is to increase the _saleability of
goods_, and to enable men to use the value of their goods in effecting
exchanges without actually alienating their property in the goods. It
seems to me that the drift of modern systems of exchange is toward
closing up the gap between money and goods, in respect of saleability,
rather than to widen it.[460] But this is to anticipate later
discussion.
It is not necessary, in answering our second question, as to the reasons
why gold and silver have become the standard money of the world, to go
far in the study of primitive moneys. Wheat has almost never been money.
The value of wheat sinks rapidly with increase in supply, and is very
unstable. Wheat meets some other tests that fit it for money, as easy
divisibility, ease in standardization, and even has some degree of
durability, though subject to deterioration and waste with keeping, and
involving expense in keeping. Carlile and Ridgeway think that wheat was
used to some extent among the Greeks in Southern Italy as money, at one
time.[461] But this was possible because there was a regular export
trade in wheat--the same thing that made tobacco available as money in
Virginia. In general, however, commodities which minister to easily
satiable wants are ill-adapted for money. And that is especially true of
current stocks of goods currently consumed.
The accumulation of money, moreover, implies a stage of human
development where the accumulation of _capital_ is possible. It implies
foresight, the suppression of present wants in the interest of future
wants, and almost always money has been a commodity well suited to serve
as provision against future contingencies. Cattle, slaves, knives,
fish-hooks, cooking implements, and similar things have been money. The
"store of value" function manifests itself early.
But very early a different sort of commodity comes in. Articles of
_ornament_ early begin to take the place of articles that minister to
more animal wants. It seems strange that articles meeting wants which
are commonly counted frivolous and fanciful should distance those
obviously necessary in the race for a place as money. It seems strange
that the nations now at war should seem more concerned about their gold
supplies than about their wheat supplies.[462] But it is none the less a
fact that men in all ages have been enormously concerned about ornament.
In warm regions, ornament has commonly preceded clothing. Very early,
necklaces, bracelets, rings, earrings, nose-pendants, etc., became
objects of exceedingly great desire. And very early, gold and silver
were used for such purposes, and men made long expeditions for them and
fought wars for them in very early times, before the money economy was
developed far. Other ornaments than those made of gold and silver have
also become money. Wampum, polished shells, iron ornaments, etc., have
all been money. The Karoks of California were accustomed to use strings
of shell ornaments as money. When this was supplanted by American
silver, they used strings of silver coins as ornaments, dressing their
women lavishly with rows of silver dimes, quarters, and half-dollars!
Ornament and money are freely _inter_changeable in primitive life.
To-day, in the Western world, the thing is more specialized and
differentiated, and the interchange of money and ornament is largely
confined to jewelers, bankers, especially international bankers, gold
brokers, and the mints, _through_ whom the rest of society make the
interchange. In India, however, the peasant's hoard takes the form of
bracelets, bangles, and earrings for his wife and daughters, and the
peasant himself seems to regard them in the double light of provision
for future needs, and as conferring social distinction. They are both
ornament and savings bank, and are superior to a savings bank from the
standpoint of effective saving, since the natives would spend what they
put in the bank, but only famine can make them dispose of the ornaments
of their women.[463] Saving is a practice not easily started. There are
powerful motives in human life making for prodigality. Social prestige
comes to the man whose hospitality is lavish. Social expectation, which
is the most powerful steady motive power in human life, makes powerfully
for prodigality. Thrift is a virtue little esteemed among primitive men,
and none too highly esteemed among the masses in most countries. The
grudging person, the tightwad, the man who fails to do his share of the
treating, the woman who entertains her guests with inadequate fare--none
of these enjoy high social esteem. To offset this, a motive equally
powerful must manifest itself. It would be considered mean and
contemptible for the Hindu to put money away instead of spending it on
feasts at marriages and funerals, and in hospitality on other festive
occasions. But he gains, instead of losing, in social esteem and
prestige, if he decorates his women with gold and silver. Later, the
advantage of such a practice as a matter of provision against future
wants would get into men's minds, and would become an added incentive to
maintain and increase the practice. Thus the frivolous and fanciful side
of men's nature furnishes a powerful lever for the development of both
money and capital. In the store of value function we find one of the
earliest and most significant functions of money. Carlile offers a
wealth of evidence to show this interchangeability of money and ornament
among many peoples, at different stages of culture.
Three powerful elements of human nature work together in sustaining the
value of the metals which become widely used as ornament:
(1) love of approbation;
(2) the sex impulse;
(3) the spirit of rivalry, or competition.
In these three we have, perhaps, the firmest basis which it is possible
to construct for the value of anything! When religion is added, as has
often been the case with the precious metals, the basis becomes solid
indeed! Modern social psychology has increasingly made clear the power
of the first. Social expectation can take the raw stuff of human nature,
and mold it into almost any form it pleases. Original, hereditary
differences remain. Some raw stuff is so inferior that no high social
organization can be built out of it. Some stuff cannot respond very
effectively to the social stimuli. But _qualitatively_, the tendency is
for men to become what society expects. Individuals succeed more or less
in meeting social expectation. But the very elements of individual
aspiration and ambition, the very self of the individual, are molded to
the social pattern, and, with the same racial stock, vary almost
indefinitely from time to time and from place to place, with the
_mores_. If ornament confers distinction,--and almost everywhere it
does--men will seek to possess ornaments.
Commonly it is for the sake of the other sex that men seek ornaments.
Ornaments are an aid in wooing! Men gain wives by being able to give
them ornaments.--Not that this is the whole story!--And social
expectation, almost everywhere, requires that men decorate the wives
that they have won. Wives usually reinforce social expectation in this
matter.
Further, the desire for ornament is competitive. One's women must be
_better_ ornamented than the women of one's neighbors, if _distinction_
is to be gained thereby. But this sets a faster pace for the neighbors,
and the standard of social expectation is raised as to the necessary
amount of ornament. It is the same sort of competition that arises among
armed nations. A new battle-ship for one requires that all increase
their naval strength. New armies in Germany call for new armies in
France. A vicious circle is created. The desire for ornament, unlike the
desire for food, becomes insatiable. And hence, the value-curve for the
metal used as ornament sinks very slowly, being reduced, not by
satiation of want, but by limitation of economic resources. I need not
elaborate these notions further. They are of the same sort that Veblen
has developed in his _Theory of the Leisure Class_. They rest on
fundamentals in human nature, however much they differ from the
psychology of the "economic man." They give assurance, I think, that,
unless radical change in tastes and fashions come in, which displace
gold and silver from their position as ornaments and as means of
display, we may expect the value of gold to maintain itself at a high
level regardless of great increase in quantity. I do not share the view
which Carlile himself seems, at times, to express[464] that gold does
not sink in value with the increase in quantity. It seems to me easily
demonstrable that it has sunk, and does sink. But I should expect the
value of gold to survive the shock that might come if gold were entirely
displaced from monetary use vastly better than any commodity which
serves wants of a different character could stand a similar shock. The
demonetization of silver has, of course, not entirely displaced silver
from the monetary employment. It has, however, made it necessary for the
arts to absorb a greatly increased proportion of the new silver,[465]
and not a little of the old silver. The demonetization of silver,
moreover, was accompanied and followed by a great increase in silver
production. But silver has stood the shock amazingly well.[466]
It is, of course, thinkable that the attitude of mankind, under new
social conditions, and with new tastes and fashions, may change, with
reference to gold and silver. Love of approbation and distinction, the
sex impulse, and the spirit of rivalry, are eternal elements in human
nature. But their manifestations may change. There have been times when
love of distinction gratified itself in poverty and filth and
asceticism. Almost anything may be exalted into a social ideal. Society
may even reach ideals of such a sort that a man may gain social approval
and the love of woman in high competition with his fellows in the
service of mankind! But even here gold and silver may have a place. They
are beautiful, as we now see beauty, and beauty itself is good! The
world is better if it has beauty in it.
It is just as well to conclude at this point what I shall have to say
regarding the value of gold as a commodity.[467] The same quantity of
gold and silver may have widely varying values, depending on the
distribution of wealth and power. It is not alone intensity of
individual desire that controls values, but also the social weight of
those who manifest the desire. And this depends on the legal and other
institutional values concerned with social organization. The point is
strikingly illustrated by Walker's[468] account--designed for another
purpose--of the effect on the values of gold and silver of the conquests
of the great Eastern empires by Alexander the Great and the Romans. The
production of gold and silver, for the great Eastern empires, was like
the rearing of the pyramids in Egypt. All power was centered in the
hands of a few despots. Control of vast masses of laborers was in their
hands. The social values--it is difficult to classify them as legal,
economic and religious, since all three are blended--gave little weight
indeed to the desires of the masses, and tremendous weight to the
slightest whims of the despot. Thus, since the love of gold and silver
was intense in these despots, and since religious considerations also
called for the accumulation of great treasuries of gold and silver,
enormous numbers of laborers, living miserably, toiled in the mines to
produce them, and amazing stores of gold and silver were accumulated.
The precious metals had, in these Eastern empires, a high value per
unit, since so large a portion of the social energy of motivation
attached itself to them. With the conquests by Greeks and Romans,
however, a great change came. The old, gold-loving despots lost their
power. The conquerors had vastly less love for gold and silver for their
own sake. Moreover, the leaders among the conquerors had very much less
power in their own social systems than had the oriental despots. Their
soldiers were in considerable degree free mercenaries, who had a right
to a share in the spoils, and who cared much less for hoards of precious
metals than for many other things. In the new regime, the social centre
of gravity was changed. There remained few who loved great stores of
precious metals who had power enough to accumulate them. Mining on the
old basis was impossible. Though slavery persisted, more and more of
the labor of slaves went into the production of things that the masses
of men could consume. Gold and silver sank enormously in value.
Radical readjustments in the distribution of wealth in our own day,
might well make substantial changes in the value of gold, without any
change in its quantity. That a more equal distribution of wealth and
power, however, would lower the value of gold now, as in the case just
discussed, is not so clear. The masses in the Western countries are
already fed and clothed, as a rule, even in times of adversity, and
usually increasing income for them means increasing expenditure to
satisfy less pressing wants, and particularly to satisfy wants connected
with social esteem. The laborer's wife gets an expensive cab for her
baby when she can afford it. The negroes have gold fillings put in their
front teeth--sometimes when the teeth are sound! The practice of giving
wedding rings, and even engagement rings, is spreading among the poor.
Our American rural poor, of pioneer stock, have had less concern for
gold and silver ornament than the masses of the Asiatics and recent
European immigrants. But among the rural poor in America, as city
standards spread, the tendency to use gold and silver ornaments seems to
be increasing, while we may with considerable confidence expect, I
think, that the rise of the immigrant to better economic conditions will
mean a larger use of gold and silver on his part. Gold leaf on ceilings
and radiators would cease, doubtless, except for public buildings, if
great fortunes disappeared, and the use of gold, at least, for plate,
would be impossible in an economic democracy.[469] Silver might well
gain in value at the expense of gold if there were radical changes in
the distribution of wealth. It is notorious that prosperity among the
agricultural masses of India is promptly followed by absorption of gold
in that country. I venture no concrete conclusions on this point, beyond
the general conclusion that a redistribution of wealth, with no change
in the quantity of gold, might well be expected to alter the value of
gold.
It may be added that the general impoverishment of Europe, growing out
of the present World War, will probably lower the marginal value of gold
in the arts (and hence as money) in considerable degree. From this cause
alone, to say nothing of causes growing out of the money-employment of
gold, and growing out of the values of goods other than gold, we might
expect higher prices after the War than before the War, for articles of
consumption.[470]
CHAPTER XXII
THE FUNCTIONS OF MONEY AND THE VALUE OF MONEY
In preceding chapters, I have spoken of the "money-service" as a source
of additional value of money, under certain conditions. Before money can
function as money at all, it must have value from some non-monetary
source.[471] But, given this prior value, money performs valuable
services. These valuable services, in certain cases, add to the value of
money. Moreover, the fact that money, when made of a metal used in the
arts, lessens the amount available for use in the arts, raises the
marginal value of that metal there, and consequently raises its value in
monetary form as well. It is now necessary to analyze the money-service,
and to see in precisely what ways it does affect the value of money. And
first, we must notice that the money-service is not simple, but
compound; that in fact there are several services of money, in many ways
distinct from one another; that not all money can perform all of these
services; that most of them may be performed by things other than money,
that these services are not all equally important as sources of the
value of money, and that the same service varies, from time to time and
from place to place, in its significance from this angle; and finally,
that one of these services which is of the greatest social importance,
namely, the "common measure of values" function, does not add to the
value of money at all.
I shall not now undertake a history of theories of the functions of
money. Many of the points which follow are common property of many
writers.[472] The nature of some functions has been more clearly
explained than that of others. I have not found in the literature of the
subject any very clear statements, moreover, as to the relations of
different functions to the value of money. I shall try in what follows,
by a series of hypothetical cases, to isolate each function of money, as
far as may be, and shall try, by varying my hypotheses, to indicate
variations in the influence of the different functions on the value of
money.
The functions of money have been variously described and named. The
following list seems most satisfactory to me:
1. Common measure of values (standard of value).
2. Medium of exchange.
3. Legal tender for debts (_Zahlungs-_ or _Solutions-mittel_).
4. Standard of deferred payments.
5. Reserve for credit instruments, including reserve for government
paper money.
6. Store of value.
7. Bearer of options.
The common measure of value function rests in the intellectual needs of
man. It grows out of the necessity for calculation, for bookkeeping, for
understanding what is going on. Any object of value may be used to
measure the value of anything else, just as any object of weight--say
an irregular mass of iron--may be put in the balance against some other
object, and the relation between the absolute weights of the two objects
thus more or less definitely ascertained.[473] But it helps little, in
getting at the aggregate weight of a collection of objects, to know that
A among them is heavier than B, while D is lighter than F. To get a
knowledge of the situation adequate for quantitative manipulation, it is
best to compare all of the objects with some _one_ object, chosen as the
standard of weight, or common measure of weights. Thought is thus
immensely simplified. If we may imagine the calculations of a dealer in
a rural region, where no common measure of values is used, it will help
to make clear the nature of this function. Let us suppose that he deals
in nails, wire, cotton cloth, eggs, butter, hams, sugar, and moonshine
whiskey, and that his customers also make and use most of these things,
using him as a central clearing house in their rude division of labor.
Without a common measure of values, it is necessary for him to keep in
mind the price of every commodity in terms of every other commodity. If
there are twelve commodities, this means 66 ratios which he must
remember, according to the formula for permutations and combinations. In
general, in such a situation, there would be the following ratios: (n -
1) + (n - 2) + (n - 3) + ... (n - (n - 1)). Let him choose, however, one
of his commodities, say eggs, as the common measure of values, and he
needs to bear in mind only eleven prices, namely, the prices of each of
the other eleven articles in eggs. Thinking is immensely simplified. In
general, with a common measure of values, dealers need bear in mind only
(n - 1) prices. Suppose that at the end of the day, after considerable
trading, our dealer finds the following changes in his stock:
_He has gained_ _He has lost_
8 doz. eggs 12 lbs. nails
3 gallons whiskey 8 lbs. wire
4 hams 13 lbs. butter
5 yards cloth 10 lbs. sugar
Has his trading been profitable? How can he tell? Reduce all the items
in both columns to their equivalents in eggs, however, and the answer is
very easy. No complicated business is possible without this common
measure, and common language, of values.
Be it noted that this common measure of values does not necessarily
involve the use of a medium of exchange. The practice of _thinking_ in a
common measure is what is involved. If the article chosen be eggs, which
all are accustomed to use, the service of a common measure might easily
be performed without the practice of indirect exchange, assuming that
other physical difficulties of barter to which I shall shortly refer,
were absent. Indeed, as I have pointed out in the chapter on "Barter" in
Part II, a great deal of barter goes on in modern life, made very much
easier by the fact that we have a common language of values, a common
measure of values. For the easy working of the system, it is important
that the common measure of value be an article with whose value the
group is well acquainted. The frequent testing of this value in actual
exchanges vastly facilitates this. But actual exchange is not necessary
for the performance of the measure of value function. We have cases
where the measure of values and the medium of exchange are different.
Thus, in the Homeric poems, we find indications that cattle served as a
measure of values, even though payments were made in gold. The
Virginians commonly _thought_ in pounds, shillings and pence, even when
using tobacco as a medium of exchange. The need for a common measure of
values would manifest itself in any complex socialistic society, even
though exchange were largely dispensed with. No systematic plans for
utilizing the resources of such a society would be possible, no
bookkeeping would be possible, without some such device.
For this function, I prefer the term, "common measure of values," to the
term often used instead, "standard of values." The latter term, as used
in connection with the expression "standard money," sometimes carries
the connotation of "money of ultimate redemption," and its main function
is thought of as serving in reserves. The reserve function is a separate
function, however. It is common to have money made of the standard metal
in reserves. But this need not be the case. I would refer once more to
the hypothetical illustration developed in the chapter on "Dodo-Bones":
gold, not coined, as the "standard of value"; paper as the medium of
exchange; silver bullion, at the market ratio with gold, as the reserve
for redemption of the paper. This may suggest that a distinction may
properly be drawn between measure of values, and ultimate standard
money. The paper money, in this case, would be the thing of which the
masses would ordinarily _think_, so long as the system worked smoothly.
And the paper could serve as a measure of values. The case is not unlike
the case where a "standard yard," or "standard pound" is kept for
ultimate reference in a government bureau, while yardsticks or pound
weights in the shops and warehouses do the actual measuring. The cases
do not, indeed, run on all fours. The measurement of weights and lengths
involves physical manipulation; the measurement of values is an
intellectual operation, made by comparing two objects of value. The
comparison may be made in actual exchanges; it may be made by an
accountant's estimate; it may be made by comparing the results of
several exchanges, in sorites form, only one of which involves the
ultimate standard measure. The yardsticks actually used may vary more or
less, by accident or design, by variations of temperature, etc., from
the standard yard. The paper dollars, under a smooth working of the
system described, would be held closely to the ultimate standard, and
would, in any case, not vary as compared with one another at the same
time and place.
When the medium of exchange diverges in value from the ultimate
standard, as in the case of the American Greenbacks during the period
from 1862 to 1879, we have, sometimes, shifting relations among the
functions. The Greenbacks were the measure of value most commonly in
use. They were legal tender for debts, except where gold was specified
in the contract. They were commonly the standard of deferred payments.
To a considerable extent, however, gold was used in reserves, and even
as a medium of exchange. People _thought_ in both standards. And
finally, gold remained an ultimate standard to which the Greenbacks were
referred, and by which variations in their value were measured. The
terms, "primary standard" (gold) and "secondary standard" (Greenbacks),
have been employed to aid in straightening out this confusion.[474] I
think, on the whole, that the term, "common measure of values" describes
the function which I wish to emphasize more clearly than the term,
standard of values, and I shall, in general, employ it for that
purpose.[475]
The medium of exchange function grows out of the physical difficulties
of barter, rather than out of intellectual needs. The discussion in the
preceding chapter of the origin of money has emphasized the nature of
the difficulties which a medium of exchange meets. A has an ox, which he
wishes to trade for shoes, sugar, and a coat. Neither shoe-maker, tailor
nor grocer cares to take the ox, however, and, besides, no one of them
could supply A with all three of the things he wishes to get. Moreover,
even if A should meet a man who had all three things, he would not care
to give up the ox for them, since the ox is worth more than all three.
If there be a medium of exchange, however, A may sell his ox to the
butcher, and take his pay in that medium, which will be something easily
and minutely divisible, buy coat and sugar and shoes, and take the
surplus of his medium of exchange home, waiting for another occasion.
The medium of exchange function overcomes the difficulties arising from
low saleability of many goods, due to limited number of possible buyers,
lack of divisibility, etc., etc.
The common measure of values aids greatly in determining the prices, the
terms, at which exchanges may be made; the medium of exchange makes
possible exchanges which could not be made at all in its absence.
The measure of value function does not add to the value of money. The
medium of exchange function is commonly a cause of additional value for
money. The source of this extra value is the gains that come from
exchange.
Exchange is an essential part of the productive process, where you have
division of labor with private ownership of the instruments of
production, and private enterprise. Values[476] may be created by
changing the forms, the time, the place, or the ownership of goods. All
these operations are necessary in an economic system like our own. Those
who possess money are in a position to take toll, in values, from those
who wish to get rid of the goods which they have produced, and to get
hold of the goods which they wish to consume. The holders of money do
this by means of the money, and under the laws of economic imputation,
these gains are attributed to the money itself, first in the form of a
rental value, and sometimes, under conditions later to be discussed, as
increments to capital value.
Before giving full discussion to this topic, it will be well to consider
certain other functions, which are, or may be, sources of value for
money.
The reserve for credit instruments function cannot be fully discussed
till we take up credit. Provisionally, it may be said that it is a
source of absolute value for money, _per se_, even though the effect on
prices may be that, owing to a rise in the values of goods, the prices
rise. The fact of credit may even tend to lessen the absolute value of
money itself, by lessening the value that comes to money from the medium
of exchange function. On the other hand, credit increases exchanges,
making possible a vast mass of transactions which without it would not
occur at all. Of course, in our hypothetical case above, where the
reserve for credit instruments is silver bullion, the reserve for credit
instruments function does not add to the value of money at all.
The "bearer of options" function of money is also a source of value for
money. It is a valuable service. The man who holds money, waiting his
chance in a fluctuating market, anticipates a gain which justifies him
in holding his capital without return upon it. Money is not alone in
performing this service. High grade bonds also perform it. They bear a
lower yield per annum to compensate. The service of bearing options is
itself a part of the yield, and is itself capitalized, in their case.
Two 5% bonds, each equally secure, but one of which has a wide market,
while the other has a restricted market, will have a very unequal value.
This "bearer of options" function is often identified with the "store of
value" function. The two are properly distinguished. If a man has in
mind a definite contingency, at a definite future time, for which he
wishes to hold a store of value, he may well find that a high yield
bond, or a loan upon real estate, or many other productive investments,
will serve him better than money or bonds with wide market. So far as
money is concerned, the "bearer of options" function is much more
important than the "store of value" function to-day. The reserve of
value in liquid form, for undated emergencies (like the War Chest at
Spandau, or the big reserve accumulated between 1900 and 1913 by the
_Banque de France_), would, from the point of view of this distinction,
come under the "bearer of option" function, rather than the "store of
value" function. The important thing about the distinction is that for
one purpose a high degree of saleability in the thing chosen is
necessary, while in the other, such is not the case. The most common
case of the "bearer of options" function arises when men hold money,
liquid securities of low yield and stable value, short loans, call
loans, or bank-deposits, waiting for special opportunities in the
market.
The medium of exchange function would exist in a society where business
goes always in accustomed grooves, where uncertainty is banished, and
where most of the assumptions of static economic theory are realized.
If we push static assumptions to the limit, and assume "friction" of all
sort gone, assume that all goods can flow without trouble or expense to
the places and persons where their values are highest, etc., even the
medium of exchange function would disappear. But if we make our static
assumptions a bit more realistic, leaving the "friction" of barter, but
banishing the need for readjustment, and the uncertainties that grow out
of dynamic changes (whether caused by growth of population, or changes
in laws and morals, or in fashions and tastes, or in technical methods,
or by accidents of various kinds), then the medium of exchange function
will still remain. Given dynamic changes, we have need for a vast deal
more of readjustment, and a vast deal more of speculation. I have shown
in the chapter on "The Volume of Money and the Volume of Trade" that the
great bulk of trading in the United States to-day is speculation, which
increases or decreases with the amount of dynamic change, with its
accompanying uncertainty and need for readjustment. The major part of
the medium of exchange function arises from this. The whole of it arises
from factors which purest static theory is accustomed to abstract from.
The _whole_ of the "bearer of options" functions arises from dynamic
change. _This is the dynamic function_ of money _par excellence_. It is
commonly treated by economists as an unusual and unimportant function.
Merged with the store of value function, it is frequently treated as of
historical, rather than present, importance. In my own view, it is of
high present importance.[477] I should count it as in considerable
degree a _function_ (using function in the mathematician's sense) of
"business distrust"[478] waxing and waning in importance as business
distrust increases and decreases. In past ages, this function was
primarily concerned with consumption, money and other goods being held,
at the loss of interest, as a safeguard against personal danger and as a
means of subsistence in emergency. Increasingly to-day, it is concerned
with _acquisition_ of wealth in _commercial_ transactions. When war and
domestic violence were the main cause of social disturbance, the
consumption aspect was most prominent. That aspect came strongly to the
fore at the outbreak of the present war. The heavy selling of
securities, which closed the bourses of the world, grew out of men's
efforts to get money and bank-credit as a "bearer of options" for the
old reasons. The old reasons explain in large measure the accumulation
of gold by the _Banque de France_, and by the German Government,
referred to above. But to-day, in general, the main purpose of those who
use money, or other things, as a "bearer of options" is to make gains,
or avoid losses, in industry and trade. The man who, in a given state of
the market, is afraid to lend, or afraid to invest, foregoes the income
which lending and investing promise, and holds his money. The man who
sees uncertainty and fluctuation in the market, and expects them to give
him bargains in time, foregoes income for a time, and holds his money.
The man who has investments of whose future he is uncertain, and who
fears to try any other investment for a time, sells what he has,
foregoes income, and holds his money. It is not always possible, in
discussing the money functions, to preserve the distinctions between
money and credit, or money and "money" in the money-market sense. How
much difference is made by these distinctions will best be discussed in
our chapter on "Credit."
The significance of the "bearer of options" function is especially
manifest, I think, in connection with call loans. The "call rate" is
commonly well below the regular "discount rate," or rate for thirty-day,
sixty-day, or ninety-day paper. The explanation is to be found, I think,
in the fact that the lender of call money does not entirely dispense
with its service. He reserves a part of the "bearer of options"
function. To be sure, he will, in practice, have to wait an hour or two,
or even more for it,[479] and this may well mean that he cannot take
full advantage of an option. But the right to demand money on even
twenty-four hours' notice is more available than a high-grade bond, as a
means of meeting rapidly changing situations. This principle will
explain, too, I think, why money-rates in general, including even
ninety-day paper, are usually lower than the long-time interest rate on
safe farm mortgages, or on real estate mortgages in a city. The
thirty-day rate will commonly be lower than the sixty- or ninety-day
rate--though exceptions can easily be found, if the thirty-day period is
to cover a time of active business, which is expected to grow less
active during the second or third month. The influence of the bearer of
options functions is not the only influence at work on the rates. If it
be objected that the long-time interest rate on high grade railroad
bonds or government securities is sometimes lower than current
money-rates, or just as low, the answer is that these bonds also share
the "bearer of options" function, and that the interest rate on them is,
like the money-rate, lower than the "pure rate" of interest.
Writers[480] have been accustomed to look for the "pure rate" of
interest, _i. e._, an interest unmixed with insurance for risk, in the
highest grade of government securities. I think that this is a mistake.
I think that the "pure rate" should be sought in long-time loans, of
assured safety, which lack a general market. Such loans, _at the time
they are made_, should represent the "pure rate" _for that time_.[481]
I shall recur to the question of the money-rates, and the question of
the relation of the money-rates to the general rate of interest, in the
chapter on "Credit."
For the present I would call attention to the interesting case of
Austria, where the money-rates are normally very low, because the volume
of commerce and speculation is small, and the volume of banking capital,
politically fostered, is large; and where, on the other hand, the
general rate of interest on long-time loans is high, owing to the
scarcity of capital in industry and agriculture, as distinguished from
commerce.[482] This case may illustrate, incidentally, that even as a
"long run" or "normal" tendency, an excess of currency in a country may
lead, not, as the quantity theorists contend, to high prices, but rather
to low money-rates. Austria presents simply a striking case of what I
should regard as the general tendency. The money-rates and the
interest-rates tend to approach one another to the extent that paper
representatives of many different industries get into the "money
market"--to the extent that industrial investments in general become
saleable enough for it to be safe to finance them by means of short-time
banking credit. When banks lend on collateral security of corporation
stocks to the buyers of those stocks, they are, in effect, financing the
corporation itself.[483] Industries differ widely in the extent to which
they depend on the money market for their finances. The difference
depends often less on the nature of the industry than on the type of the
industrial organization. An individual farmer cannot get the bulk of his
credit that way! But there is no reason why a well-organized
corporation, assuming it successful in agriculture, might not draw on
the money market, even if not so freely as a manufacturing corporation
does.
For the contention that the money-rates for short periods are lower on
the average than the rates on longer loans, and that the call rates are,
on the average, well below all time rates, there is abundant statistical
evidence. From 1890 to 1899 in New York City, the average rate on 4- to
6-month paper was 5.99%; the average rate on 60- to 90-day paper was
4.58%; the average call rate was 3.29%. In the same city, for the period
from 1900 to 1909, the averages were: 4- to 6-month paper, 5.61%; 60- to
90-day paper, 4.78%; call rate, 4.05%.[484] This last figure for call
loans represents an average of quotations at the "Money Post" at the
Stock Exchange. While normally the call rates are well below this,
occasional high figures, like those in 1907, pull this average up. The
high rates at the "Money Post," however, are not always representative.
Banks frequently do not charge their regular customers as much as the
quoted rates.
Even more detailed evidence for our thesis is to be found in W. A.
Scott's investigation of New York money-rates, for the period,
1896-1906.[485] He studies _two_ sets of quotations for call loans,
those at the Stock Exchange "Money Post" and those at the banks and
trust companies; _seven_ sets of quotations (five of which appear
regularly) under the head of "time loans," namely, 30-, 60-, 90-day, and
4-, 5-, 6-, and 7-month; and _three_ under the head of "commercial
paper," namely, double name choice 60- to 90-days, and two varieties of
single name paper.
He finds a clear tendency for the rate to vary with the length of the
loan, although noting many exceptions. "The difference between these
quotations rarely exceeds one-half of one percent, and the general rule
seems to be that the influence of time in raising the rate grows less as
the length of the loan increases. For example, there is apt to be a
greater difference between the quotations of 60-and 90-day paper than
between 90-day and four months. Likewise there is a greater difference
between 90-day and four months than between 4-months and 5-months
paper."
The call rate, though much more variable than all time rates, and
sometimes high above them, is, on the average, well below them. For the
period, 1901-06, the averages are: call loans, 3.3%; time loans, 4.5%.
The declining influence of differences in time as the length of the
loans increases, is what our theory would require. If the "bearer of
options" functions of short loans is the explanation of the lower rate
on them, it is a factor which would count for less and less as the
length of the loan increases. A month's difference is all-important,
when the month involved is proximate, say the difference between 10 and
40 days. But it is of virtually no importance, from the standpoint of
the man who wishes to meet sudden and indeterminate emergencies,
whether the note he holds matures in eleven months or twelve months. The
difference between a one-year loan and a five-year loan might, on the
other hand, still be important from the angle of bearing options. The
factor should cease to have any meaning at all, or at least any
appreciable meaning, when the difference is between, say, twenty and
twenty-five years.
I have no statistical evidence that the one-year loan can normally
expect a lower rate than the five-year loan. At times, short time
financing may be even more expensive than long time financing. But such
study as I have given to quotations of short-term notes of corporations,
as compared with the longer term bonds of the same corporations, would
leave the distinct impression that short-term notes fare better in the
security market, and yield less return. A complication arises, here, of
course, that the short-term note may often lack the safety which a first
mortgage bond of the same corporation would have.
The legal tender for debts function calls for a brief discussion.
Whatever gives legal quittance from contract obligation, or from legal
obligation as for taxes, performs this function. "Legal tender" money,
in the strict sense, is not alone in performing this function. Usually a
government will by law or administrative practice with the force of law,
bind itself to accept forms of money which it will not compel other
creditors to accept. Thus, silver certificates, without being "legal
tender," are a means of legal quittance from obligations to the Federal
Government. Sometimes governments will receive only gold at the customs
house. This was true in the Greenback period, when Greenbacks were
"legal tender," but not good for payments of customs duties. The reader
who is interested in refinements of the legal distinctions among
different kinds of money will find the thing elaborately worked out by
G. F. Knapp, in his _Staatliche Theorie des Geldes_.[486] But "legal
tender" money is not always an adequate means of quittance. If the
contract calls for corn, or wheat, or Northern Pacific stock, the best
legal tender money is a poor substitute! Witness the "Corner" in
Northern Pacific in 1901. It is doubtless true, as Davenport[487] points
out, that all contracts, whatever they call for, may be ultimately met,
under the common law, by money damages, but that does not mean that a
man can maintain his solvency or position in business by offering money
when Northern Pacific is designated in his contract. Doubtless even
there money will free him, _at a price_, but Northern Pacific stock is
at least more convenient for the purpose! A man does not need money to
get free from debts, even when money is required by the contract. He can
turn in whatever he has in an assignment for the benefit of his
creditors, and get free _via_ the bankruptcy court. In other words, the
legal tender function of money, while it does distinguish money from
other goods as a matter of _degree_, does not erect an absolute
difference of _kind_.
Under a smoothly working monetary system, where all forms of money are
kept at a parity by constant and ready redemption, and where people have
no doubt that this redemption will occur, the legal tender quality which
attaches to part of the money is a matter of no consequence. It adds
nothing to the value of the money. In times of stress, the legal tender
quality may be a source of a considerable temporary value. This is
especially likely to be true of an inconvertible money. The legal tender
quality of the Greenbacks led to a very considerable fall in the gold
premium in the Panic of 1873. I have mentioned this point in the chapter
on "Dodo-Bones," where part of this discussion has been anticipated. In
general, the legal tender quality may be recognized as a factor in
sustaining the value of money, if as a consequence of this quality men
take the money when they would not otherwise take it, or take it on
terms which they would otherwise not agree to. Where, however, the money
is money which they are glad to get in any case, the legal tender
quality is a matter of supererogation.
The standard of deferred payments function, as distinguished from the
legal tender function and the medium of exchange function, does not add
to the value of money. Of course, if the standard of deferred payments
is actually used in making the deferred payment, then it finally becomes
assimilated to the other two functions. But it is quite possible to
divorce them completely. Suppose, for example, that the standard named
in a contract in the Greenback Period was gold, but that payment was
made in Greenbacks at the market ratio. Or, suppose that the standard of
deferred payments should be a composite of commodities, the tabular
standard, with the understanding that the index number on the day of
payment should determine the amount of money to be paid. In neither of
these cases does the standard of deferred payments function supply any
reason for an increase in the value of the thing which serves as the
standard.
In general, the standard of deferred payments and the measure of value
functions do not, _per se_, add to the value of money. The legal tender
function may or may not do so. The medium of exchange function, the
store of value function, the reserve for credit function, and the bearer
of options function, normally do occasion an added value which is to be
attributed to money, either as a capital increment, or as a rental.
The question remains, however, as to the relation of the rental value,
and the capital value, of money. This question is not easy to answer.
As I have already shown, in the chapter on "Capitalization" and
elsewhere, various complications present themselves in the case of
money. (1) In the case of money, the rental, and the prevailing rate of
interest at which rentals are discounted to make a capital value, are
not independent variables, but tend to vary together. Thus, whereas
increased rentals would in the case of most income-bearers tend to give
a higher capital value, this is offset, in the case of money, by the
fact that rentals are subject to a higher discount. (2) In the case of
income-bearers generally, the magnitude of the income, or rental, is
causally prior to the capital value. The capital value, in our
illustration of the candle, the disk and the shadow on the wall, is the
shadow, while the rental is the disk. This is the general relation
insisted upon by the Boehm-Bawerk-Fetter-Fisher line of capital and
interest theory. Productivity theories of capital have been criticised
on the ground that capital value is not productive, that only concrete
capital-instruments are productive, and that they produce, not value,
but goods, that these goods receive value from the market, which is
reflected back, but discounted, to the capital instruments which
produced them, so that, in value-causation the line of causation is
precisely the reverse of the line of technological causation. Capital
instruments produce consumption goods, but the value of the consumption
goods is the cause of the value of the capital instruments. In the case
of money, however, this is not true. It is the _value_ of the money, the
capital value, which does the work that makes a rental value. The value
of the money is a precondition of the money-function. So far as money is
concerned, both "productivity theories" and "use theories" seem
vindicated. There is a "use," an "enduring use" in addition to the
"uses."[488] (3) The capitalization theory, as hitherto formulated,
assumes money and a value of money. It is a part of the general body of
price theory for which this assumption has been shown to be needed.
With reference to the second, at least of these points, however, it has
been shown that money is not unique. Diamonds, and all other goods which
have as part of their function the conspicuous display of wealth,
likewise perform this function _because_ they have value. This gives
them an additional value. Diamonds are bought for this purpose, when
they would not otherwise be bought, or when they would not otherwise be
bought in such quantity. This additional value makes diamonds still more
effective as a means of displaying wealth, with a further increment in
their value, etc. We seem, here, to have an endless, and vicious, circle
in value causation, the value mounting indefinitely, building upon
itself, a sort of "pyramiding" process. But the limitation comes from
several angles. In the first place, _as_ diamonds rise in value, from
whatever cause, a smaller and smaller number of diamonds is required to
display a given amount of wealth! The increase in the value makes each
diamond so much more effective for the purpose in hand that it tends to
cut under the cause of the increase. These two tendencies come into some
sort of equilibrium. I suppose that by making strict enough assumptions,
and limiting the problem rigidly, it would be possible for the
mathematician to work out a formula for this equilibrium, letting the
increment in value grow feebler with each rebound, till at last it is
dissipated in infinitesimals. In the second place, diamonds are not
alone in performing this service. They must compete with other precious
stones, with the precious metals, with limousines and Turkish rugs,
with servants and livery, with houses and lots in restricted
neighborhoods, with opera boxes and memberships in clubs which confer
prestige, with a very wide range of goods, for the detailed discussion
of which I would refer again to Veblen's _Theory of the Leisure Class_.
The _differential_ advantage of diamonds, when it is borne in mind that
the conspicuous display of wealth is not the _only_ purpose, as a rule,
for which any of these things are bought, that the concrete diamond, or
other good bought, is a _bundle_ of valuable services,[489] of which the
displaying of wealth is only one, is not, necessarily very great. For
many people, other forms of wealth do better. And, as a rule, diamonds
would not perform that service satisfactorily alone. A large number of
diamonds, without proper "setting," in clothing, servants, house, opera
box, etc., would excite ridicule, and fail[490] in their purpose of
gaining social prestige. They must be part of a complex of goods of the
same sort, to accomplish their purpose.
Now it is the _differential_ advantage of diamonds which makes possible
the extra value, in this use. If all wealth were equally serviceable in
conspicuous display, if cattle and barns and shares in a coal mine or
slaughter-house or glue factory could display themselves as well as
diamonds can, and if possession of these things conferred prestige as
much as possession of diamonds does, this differential advantage of
diamonds would disappear, and with it all extra value from that cause.
Diamonds are members of a _class_ of goods, a restricted, but still
large class, which possess this advantage. We may apply the old
Ricardian rent analysis here, arranging goods in a series from the
standpoint of their capacity to perform this additional service. Bread
would, for the purpose in hand, be a "no-rent" good. Ford automobiles
are probably nearly no-rent goods now! That the differential factor is a
_cause_ of value in land, as the Ricardian doctrine seems to hold, is
not, I think, true. If all land were of equal quality, and of equal
accessibility to the market, all land would still bear a rent, if it
produced goods which had value, and if the land were sufficiently
restricted in quantity.[491] But here is a case where the differential
factor is an actual _cause_ of value. If all wealth were equally
effective in displaying itself, no form of wealth could gain in value as
a means of display.
This proposition calls for one important qualification. The fact that
wealth, in general, confers prestige is, undoubtedly, a source of
stimulus in wealth creation and acquisition, and a big source of the
value[492] of total wealth. It is probable, however, that it is so great
a stimulus to production that it defeats itself so far as the values of
_units_ of goods are concerned. It stimulates production, which reduces
the marginal values that arise from other causes. Thus, while a source
of additional value to the _aggregate_ of wealth, it probably reduces
the values of given items.
I have dwelt at length on the case of diamonds, because principles
applying there will give us important clues to the case of the value of
money.
Money, by being valuable, is so far equipped to perform the money
service. But its _differential_ advantage over other valuable things
comes from its superior _saleability_. Its original value comes from
non-monetary causes, and has been sufficiently explained in the chapter
on "Dodo-Bones" and in the chapter on the "Origin of Money." The extra
value which comes from the money functions rests chiefly in its superior
_saleability_. Saleability is itself a cause of additional value. But
here again we may arrange goods in a series, starting with the least
saleable, and ending in money. Money has an advantage, but its advantage
is not absolute. Under a system of free coinage, gold bullion is
virtually on a par with coin, and even without free coinage, bullion is
for many purposes as good, and for foreign exchange may be better.
Modern credit, moreover, as has been indicated before, tends to add to
the saleability of all goods, and so to lessen the differential
advantage of money.
Here, again we may see the principle that the extra value that comes
from the differential advantage tends to limit itself. As the money-use
adds to the value of money, a smaller amount of money is required to do
the money work, and hence the source of the increment of value is cut
under. This principle will partly explain why the rental of money cannot
be capitalized in the same way that the rental of land can be.
Increasing the capital value of land is not the same as increasing the
productive power of land. But increasing the capital value of money does
mean an addition to the power of a dollar to do money work. It tends,
moreover, to lessen the work that there is for money to do, both by
reducing the total amount of trading, and by increasing the incentive to
the use of substitutes for money. Only a part of the value of the
services of money, thus, can be added to the capital value of money.
There is a further point which is important, as differentiating money
from diamonds: much more of the value of the services resting on the
value of diamonds can be added to the capital value of the diamonds than
is the case with money. The reason is that diamonds may give forth a
continuous flow, _in the same hands_, of the service of conspicuous
display of wealth. Money, however, can perform most of its services for
a given owner _only once_. For a given owner, it can serve only once as
a medium of exchange. For one owner, it can serve only once as legal
tender for debts. It can serve indefinitely as a store of value, or as
"bearer of options." In these cases, however, the relation between value
of service and capital value does work out in accordance with the
capitalization theory. The money thus held brings in no money income. It
is held thus only if the services which it performs are equivalent to
the income which would come if it were alienated, and something which
would bring in a money income were purchased in its place. Money may
have added to its capital value the value that is created by _one_
marginal exchange, but the whole series of values which a dollar may
create in exchanges cannot be capitalized, if only because the same
owner cannot get them all. This holds strictly true only so long as no
credit arrangements exist. If loans of money can be made, then the
lender can take toll on successive exchanges, and get an income which
may be capitalized in part, subject to the limitation already discussed,
that increasing capital value of money cuts into the rental, and so, in
large measure, destroys its own source.
Where money is not freely coined, there may be an increment, growing out
of the capitalization of the money-services, in the value of the coin.
The coin may be worth more than the uncoined bullion. This need not be
true. If the amount of money work to be done is not increasing, it will
not be true, unless the value of the bullion declines, and need not be
true then. But an agio on coined over uncoined metal is quite possible,
and has frequently occurred. Such an agio has limits, however. In the
first place, the bullion may be used as a substitute for coin, so
lessening the amount of work there is for coin to do, and lessening the
source of the agio. Bullion would tend to rise in value from being thus
employed, and coined money would lose in value from a reduction in the
services it performed. Further, _anything_ which has more than ordinary
saleability may be used as a substitute, in one or another capacity.
Again, the agio, if it appeared in a country where men are accustomed to
thinking about money, might well arouse distrust, lessen the scope of
the coin still further, and so cut into its own source. But such agios
have appeared, and while a pure case, where the sole source of the agio
is the values created in the money-functioning, is hard to find, I think
it is not to be questioned that cases where this is part of the
explanation have arisen. I should be disposed to find part of the
explanation of the rise of the rupee in India after the closing of the
mints in 1893 in this factor. There seems to be evidence, however, that
Laughlin is right, in part, in ascribing the rise to an expectation of
the adoption of the gold standard.[493]
Modern money, in general, however, rests on a system of free, even
where not strictly gratuitous, coinage. Coined metal thus rarely gets,
save to a limited extent or temporarily, an agio over uncoined bullion.
Uncoined bullion is acceptable in a host of places where coin would
otherwise be used, particularly in reserves for credit instruments.
Bullion is even superior in international trade as a medium of exchange.
Credit paper (particularly bills of exchange), is superior to both in
international exchange, as a medium of exchange, because of various
reasons of economy. Such paper is even used in reserves in many places,
particularly by the Austro-Hungarian Bank.