Flürscheim – Money

from Michael Flürscheim
Clue to the Economic Labyrinth

Chapter III – Money

“Gold! gold! gold! gold! Bright and yellow, hard and cold; Molten, graven, hammered and rolled; Heavy to get and light to hold; Hoarded, bartered, bought and sold, Stolen, borrowed, squandered, doled; Spurned by the young, but hugged by the old To the very verge of churchyard mould; Price of many a crime untold; Gold! gold! gold! gold!
—Thomas Hood,


If Land is the skeleton of the social body, if Labour supplies its muscles, Money may be regarded as its life-blood, without which the muscles do not move and the bones remain an inert mass.

As blood was circulating for millions of years before Harvey expounded the system of its circulation, so money, even in our days, is used by millions who have not the least conception of its real nature. Many of those who know most about it have a personal interest in concealing their knowledge. So early as 1577 we find the keen and piercing intellect of Bodin remarking thus; “For men have so well obscured the facts about money that the great part of the people do not see them at all. The moneyers do as the doctors do, who talk Latin before women, and use Greek characters, Arab words, and Latin abbreviations, fearing that if the people understood their receipts they would not have much opinion of them.” (Quoted from Dunning’s Philosophy of Prices.)

I do not wish to fatigue the reader with the many conflicting definitions given of Money by economists, but shall follow thecourse adopted through the whole of this book, of taking the word as nearly as possible in the meaning given to it by the custom of everyday life. In this sense I shall confine the term to anything which is legal tender for debts, i,e., which has to be accepted as the final settlement of a debt by the creditor to whom it is tendered. In Great Britain sovereigns and half-sovereigns are legal tender for all debts; smaller coins are only legal tender for debts up to 40 shillings, and Bank of England notes for all debts above £i„ except the debts of the Bank. British coins and Bank of England notes, therefore, are Money in Great Britain. Other means of payment or exchange, such as those banknotes which are not legal tender, cheques, bills of exchange, promissory notes, etc., are not money, but money representatives, money promises. They are included with money under the general name of currency; but whereas money is only that which has been made legal tender for debts, currency is anything which passes as a means of exchange and payment Money is always currency; currency is not always money. There are three kinds of money.

1. Any kind of merchandise may be made money by law or general agreement. We might call this money merchandise money, or commodity money. A number of different kinds of merchandise have been chosen as the money commodity at different times and in different countries. Cattle has been mostly used, of which “pecuniary” (from “pecus” = cattle) still reminds us. Different metals paid out by weight come next in order. Certain shells, salt, fish hooks, etc., have been or still are money in certain countries. Whether a special form is given to the money commodity, whether it is marked by some kind of stamp, or whether the special form and the stamp exist concurrently, makes no difference so long as the value of the money, as such, does not differ from that of the raw material it contains, the newly-minted English sovereigns and American gold coins, for instance. It is self-evident that the parity between the value of the coin as money and the coin as bullion exists only so long as no abrasion has taken place, and can only be maintained while free coinage exists, for without free coinage, which enables any possessor of bullion to change it into coins of equal value, coinage becomes a monopoly, and coins obtain a monopoly value liable to differ from their bullion value. Without free coinage gold coins enter the confines of money class 2.

2. The stamp is applied to a commodity which would fetch an appreciable price even if the stamp had not been added; but the stamp increases this value, more or less. Silver, copper, and nickel coins at present belong to this class, and also gold coins which, through seignorage or wear and tear (unless the State gives new ones for them without cost), have a higher value as money than they possess as bullion. Class 2 offers a transition to class 3.

3. The commodity value has entirely disappeared, the value imparted by the stamp alone remains. We have reached Token Money ox Money of account. In our time it is exclusively known in the form of paper money—not to be confounded with banknotes payable or supposed to be payable in coin. The best known prototype of this class is represented by the French Assignats of the eighteenth century; but money of this kind was used in remote antiquity, in China, Rome, Lacedaemon, and Carthage in the shape of small pieces of leather supplied with certain signs.

The wooden tallies issued by the English Treasury up to the reign of William III. belong to the same class. They were accepted in payment of taxes by the Treasury, but not paid in gold or silver.

Confusion of Paper Money and Paper Currency
What has more than any other cause contributed to complicate the money problem is the difficulty of drawing a sharp line between this third class of money and one special kind of currency, a certain kind of money representatives called bank or treasury notes. Where these are merely money promises, they are not money; but where they have been made legal tender they are legitimate money, even though, as in the case of the Bank of England notes, the bank has to pay gold for them at any time. With most of the legal tender bank or treasury notes this obligation does not exist; for though at some time or other coin was obtainable for them, the practice has become obsolete, and to all ends and purposes they are just as much mere tokens or paper money as the French Assignats were. To this class belong the notes of Argentina,[1] Brazil, Greece, Portugal, Spain, Italy, Turkey, etc. For Austria-Hungary and Russia there was an intention of resuming specie payments after a very long period of non-convertibility; but I do not know whether the payments have been permanently resumed in the case of Austria, except in money of the second class, of silver coins; or whether, regarding Russia, gold payments have been maintained since they were begun a few years ago. At that time, in spite of the text of the notes promising coin, the people had so entirely ceased to associate paper roubles with coin that the peasants in many cases refused the new coins, because in their eyes—exclusively familiar with the paper—they were not roubles.[2]

Elastic Boundary Line between Class 1 and Class 2
Though the hybrids just enumerated are responsible for most of the confusion reigning in the field of currency reform, the elasticity, of the boundary line between class 1 and class 2 is equally productive of confusion. Thus the main bone of contention between monometallists and bimetallists is the question whether or not the value of gold or silver as merchandise can be kept at par with their money value where both are made legal tender for all debts, after a permanent relation between the amounts of metal respectively used in the gold and silver coins has been established; or, in other words, whether both together can be kept within our first money class. It is evident that, whenever the merchandise value falls below the money value, the coin has, for the time, passed from class i into class 2. A possible temporary excess of the merchandise value over the money value can be left out of account, because dealers in the precious metals will at once take care to eliminate such coins from the money domain altogether by selling them as bullion for melting purposes. Coins selling at a premium in legal tender are practically no longer money, but a merchandise.

Money Evolutions
Without wishing to prejudge at this stage which class of money proves the best in practice, we can at least conclude that each presents a degree of evolution from the preceding class, an evolution corresponding to a more advanced state of civilisation, just as class i itself was a decided progress from primitive barter. It is barter still, but improved barter; or, as it has also been called, a double barter. The tailor who wanted to exchange a coat for a table had not only to find a person who wanted a coat, but one who at the same time had a table to dispose of. If by general agreement, or by law, certain commodities are accepted in exchange by everybody, whether specifically required or not, because, through this general acceptance, other things which are required can be procured for this special commodity, the work of our tailor is much simplified. He has only to find someone who wants a coat and is willing to give the generally accepted commodity for it. He is sure then to obtain a table if one is in the market, even if the owner of the table does not want a coat; because the latter will certainly accept the special commodity, for which he in his turn can obtain anything he may need. The next step will be that the community makes its taxes and fines payable in this special generally accepted commodity; and finally, not only prices of all goods and services are computed in the quantities of the special commodity for which they are obtainable,[3] but debts are also figured in the same way, and any person can liberate himself of a debt by simply tendering the promised quantity of our commodity, which thus has become legal tender, and consequently money. When it is supplied in exchange for anything else, or when it is handed over for a debt, we call the transaction a payment; bartering becomes buying and selling.

Preference given to certain Metals
It is generally considered that the adoption of certain metals as the money commodity, because of their comparative indestructibility, their divisibility and their general use in the arts or as ornaments, marked a further progress. We shall yet have to consider later on whether another of their qualities—their scarcity—usually given as their principal claim to the money honour, was not more in the nature of a disqualification than of a benefit through the dangers it involved.

Another good quality of metals, usually stated, is their impressionability. It offers the great advantage of delegating the trouble of weighing and assaying each piece of metal to special parties, instead of forcing this work on every receiver of money. It is a perfection, however, which in its consequences supplied the most powerful weapon for the gradual but certain dethronement of the precious metals from their money kingship. Gradually the stamp itself obtained a value more and more independent of that of the raw material to which the stamp was applied, until, after class 2 was passed, the value of the raw material entirely disappeared, and class 3, token money, was reached—a class perhaps even more ancient than class i and class 2, as the money of some high civilisations of the past belonged to it, and capable of a perfection to which the other classes cannot aspire.

Token Money the Means of Exchange of a higher Civilisation

The money of the first class is the remnant of a stage of development not far distant from the savage condition. Credit, the child of confidence and trust, is not born. The money accepted has as much value as the commodity or service which is supplied for it, if sold as an ordinary merchandise. The money of the third class, however, has no other value but that imparted by the stamp, which causes those with whom we are dealing to supply goods or services of a certain market value for this money. It has no mercantile value by itself, independent of its stamp, for the material on which the stamp has been affixed is practically worthless in this small quantity. Parting with valuable goods for a mere token of no independent market value presupposes a certain amount of trust in others, the trust that they will pay the same honour to the stamp as the party who accepted it.

Robert Ellis Thompson says, in his Political Economy, p. 152: “If barter may be compared to the rude mode of transportation on human backs, and coin to transportation in carriages by horses, paper money is the steam carriage, whose use calls for larger precautions against danger, but whose superior utility far outweighs that consideration”; and further on, pp. 156, 157: “The third and the most perfect form of money is money of account. It possesses in a still higher degree all the advantages that make paper money better than coin.” (Under paper money Thompson understands banknotes: money promises.) “As much as paper money is less material than coin, by so much is money of account less material than paper money.” After comparing it with a flying machine as related to a steam carriage, he goes on: “It is the money of civilisation; its use involves a degree of intelligent insight into the true nature of wealth and of exchanges; and a strong confidence in the genial honesty and trustworthiness of mankind, that are impossible to the savage or half-civilised man. … It originated in the communities of Italy; from there it came to Amsterdam, Hamburg and Stockholm.”

Thompson here leaves out of sight the token money of ancient times, of China, Carthage, Rome, Sparta, etc. He relates that the republics of Venice and Genoa authorised their creditors to establish banks on the basis of the certificates of the city’s debt. After stating that the bank of Venice dated from 1171, he proceeds:

“Then to secure a uniform currency, the Government decreed that all wholesale transactions should be paid in the form of a transfer of bank stock—unless otherwise stipulated—so that whoever had a boxful of coins gathered from the four quarters of the earth through the manifold channels of Venetian trade took them to the bank to get credit upon its books according to their weight and fineness. The standard by which their value was estimated was called ‘money of account,’ to distinguish it from the various moneys that were translated into it. The Government treated these masses of coin as payment for the privilege of a credit in the bank’s book, and all idea of their repayment was lost sight of.

“Yet, in 400 years, or until the conquest of the city by Napoleon I., the money of account circulated freely, and was at a premium in coin; trade proceeded with a rapidity previously unknown; no Venetian ever raised his voice in complaint of an institution which was the pride of the city and the envy of Europe. When the French destroyed it they found no funds to reward them.”

The Encyclopedia Britannica gives the following under “Banking”: “Historians inform us that the republic, being hard pressed for money, was obliged, upon three different occasions, in 1156, 1480, and 1510 to levy forced contributions upon the citizens, giving them in return perpetual annuities at certain rates per cent. The annual dues under the forced loan of 1156 were, however, finally extinguished in the sixteenth century, and the offices for the payment of the annual dues under the other two loans having been consolidated, eventually became the Bank of Venice.

This might be effected as follows: The interest on the loan to the Government being paid punctually, every claim registered in the books of the office would be considered as a productive capital; and these claims, or the right of receiving the annuity accruing thereon, must soon have been transferred by demise or cession from one person to another. This practice would naturally suggest to holders of stock the simple and easy method of discharging their mutual debts by transfers on the office books, and as soon as they became sensible of the advantages to be derived from this method of accounting, bank money was invented. It will, however, be seen that the establishment thus described was at first no more than the transfer office of a national debt, transfers of which were accepted at par in discharge of private debts, and it is indeed said that the funded debt transferred sometimes commanded ‘agio’ or premium, above the current money of the republic.”

In Munera Pulveris, p. 21, John Ruskin says: “The use of substances of intrinsic value as the material of a currency is a barbarism, a remnant of the conditions of barter, which alone renders commerce possible among savages.”

In thus considering the third class the highest evolution of money, I do not wish to prejudge the question whether it is also to be considered the best money under any circumstances, for this important question will be treated later on. Our first task was to define and classify.

II The Value of Money

There can be only one way of finding the value of money: it is to obtain the price of goods of all kinds. In other words,

The Value of Money is its purchasing Power
There is no other gauge; just as money measures the value of merchandise, so merchandise measures the value of money. This holds good for money of all three classes, with the only difference that, as the value of the money of the first class corresponds to that of the merchandise it is composed of, it is immaterial whether we speak of the value or price of this merchandise or that of the money made out of it.

In Gold Currency Countries the Value of Money is the Value of Gold
Gold is the money material adopted by the principal commercial nations which are using money of the first class; for even in the three bimetallistic countries: France, Switzerland, and Belgium (I leave Italy and Greece out of account, being for the time practically paper currency countries), the silver money no more belongs to the first class, since free coinage has been given up—of which more when we discuss bimetallism. Consequently, we may as well speak of the value of gold in these countries when we speak of the value of their money. It is immaterial whether, for instance, in England we speak of the value of the pound sterling, or of the value of the 123.374 grains troy of standard gold composing it, as anyone who carries this quantity of gold to the British mint can obtain a sovereign for it, a right to which we give the name of Free coinage.

Cheap and dear Money
This definition of the value of money is certainly simple enough, and seemingly beyond any possible chance of dispute; yet even here, as everywhere in monetary science, confusion has crept in, and we cannot proceed without devoting some space to two causes of error.

One is due to the jargon of the Stock Exchange. When its devotees speak of cheap or dear money, they do not mean the only thing which these words really signify: the increased or decreased purchasing power of money or gold, its appreciation or depreciation, but the rate of interest at which money can be borrowed. We often find money very cheap—in Stock Exchange parlance—in times of commercial depression, because capital is shy, and prefers the 2½ to 3% it can obtain on best securities to any percentage offered in commerce, which, in times when the discount of the Bank of England is at its lowest, often cannot obtain money at all unless a security is offered that the average business-man cannot supply. The rate of interest is low, but the risk premium is exceptionally high. This difficulty of finding money, this height of the risk premium, forces the business world to sell goods at any price; and usually such times of exceptionally low rates of interest are accompanied by low prices. But low prices of merchandise mean a high price of money, whose purchasing power has risen, has appreciated. Thus when the bill-broker says that money is cheap, it is dear. On the other side, when he finds it dear, it is cheap; because when industry and commerce are flourishing, when capital finds remunerative investment in business, it does not compete so sharply for the securer investments bearing a lower rate of interest. In such times the price of consols falls, because many people sell them to take stock in industrial enterprises, and the Bank of England rate rises because the business world eagerly offers bills for discount. But when industry and commerce are in a flourishing condition, prices generally have a rising tendency, and, consequently, the purchasing power of money becomes reduced. So money is cheaper at the very time when the broker tells us that its price has risen.

But this is not the only source of error in this field. When the fall of prices during the last thirty years is discussed, you often hear that this does not imply the appreciation of gold, but that it means, through our technical progress, goods are produced at lower prices. The worthy gentlemen who reason in this way forget that their argument is on a level with that which denies that John is taller than Charles because Charles is smaller than John. It is absolutely immaterial whether less gold is given for woollen goods because woollen goods can be produced at one-half the price of thirty years ago—the same worker being able to spin and weave during the same number of working hours a much greater quantity of wool by means of our improved machines—or because gold has become scarcer and costs more to produce. All we want to know is whether or not it is true that twice as many woollen goods have to be given for the same quantity of gold. If they have, then the purchasing power of gold measured in woollen goods has doubled, and if all other goods have fallen in price at the same rate gold has correspondingly appreciated. If, on the other side, the new goldmines opened within the same period had produced so much gold that the offer of gold in the market had increased much more rapidly than the supply of all other classes of merchandise for gold, the prices of merchandise might have risen in spite of reduced cost of production, and gold would have depreciated.

The Quantity Theory
The relation between the quantity of money offered for goods and the quantity of goods supplied for money—in other words, the law of supply and demand—determines not only the price of goods, but also, at the same time, the price or the value of money. We must be very careful, however, before we infer from this definition—usually called the quantity theory—that there is anything like a fixed relation between the quantities on both sides of the equation, such as, for instance, John Stuart Mill seems to assume, when he says (Book III., Chapter VIII., par. 2 of his Principles of Political Economy): “If the value of money in circulation was doubled, prices would be doubled. If it was only increased one-fourth, prices would rise one-fourth.” He qualifies his dogma, however, in Chapter XIII. of the same book, when he discusses the effect of credit on prices. He could not fail to see that elements more powerful than the mere money or goods quantity come into play, which make such a raw conception of the quantity theory impossible.

Influence of Circulating Quantity
He certainly realised that it is not the quantity of the money stock we must consider, but the quantity, which circulates in the market. Money may be plentiful, but it may be locked up in the safes of misers; and the poor producer who wants to sell his goods to obtain the money he needs may find a good deal of truth in the facetious German saying: “Money by itself does not confer happiness unless we possess it.” Prices may thus be very low, in spite of a large stock of money. Then we have the

Rapidity of Circulation
which plays an important part in the problem. Francis Bowen illustrates this influence well when he says: “The circulation of money and merchandise bears some relation to the momentum spoken of in physical science, which is composed of the velocity multiplied by the mass. The movements are equal, though the velocity should be increased tenfold, provided that the mass is but one-tenth as great. So also the momentum of wealth is its value multiplied by the rapidity of its circulation.”

 Influence of Barter
On the other hand, the quantity of goods offered in the market by itself has no influence on the prices of goods and money, but only the quantity offered for money. Where exchange transactions are mostly done by barter, a comparatively small quantity of money may correspond to a much larger turnover of goods than where business is done solely on a cash basis. And barter has played, and plays, a much more important part in business transactions than many people are aware of. Many of our colonial farmers’ business transactions are thus performed on the basis of mutual exchange. Prices and sums are expressed in money, but no money passes. In some parts of the world even barter has not been reached yet for many goods, which city people obtain only by purchase. In industrious New England, for instance, the farmer’s wife, during the first half of the nineteenth century, still made her own soap, candles, sugar (maple), linen, and part of the woollen apparel of the household. The farmer brewed his own beer or pressed a sour wine from poor grapes. Rosegger, an Austrian author still living, tells us in one of his most humorous writings, from his own experience, how the peasants in his native village tanned their own leather, which the shoemaker, while he boarded in their houses, made into shoes in exchange for produce, in the same way in which the weaver made cloth from the homespun wool or yarn. Most of the furniture was homemade, from the table and chair to the mattress and bedcover made from homespun flax, and filled with hair cut from the farmer’s own horses, or feathers from the geese of the barnyard.

That a great part of the business with savages is done by barter is well known.

Influence of Credit
But barter in our time is a less important substitute for money in business than credit, and especially one form of credit money representatives. In some countries the cheque does the most work of this class. A buys some goods from B, B from C, C from D, and so on until Z buys from A. Each gives a cheque; and if all transactions have been made on the same day, all these cheques come into the bank at about the same time, and they are booked for and against the parties. A large turnover may thus take place without a penny of money having passed, even if the parties have different banks; for the banks among themselves have an institution, called a clearing house, where all bring their cheques payable on the other banks, and these are compensated just as the cheques of the customers who bank in the same establishment are compensated in the books of this bank. In England, the balances are paid by cheques on the Bank of England; and thus many billions are turned over without a single coin. “In a return,” says M’Leod, “laid before Parliament by an eminent City firm, it was shown that out of £ 2,000,000 payments and receipts by the firm, only £40,986 were paid in gold, silver, and copper, all the rest in different forms of credit, and some bankers found that in banking only .0025 per cent, were paid in coin; all the rest in credit.”

Money Debts and Money Stock
Next to cheques: banknotes, bills of exchange, promissory notes, and I.O.U.’s are the principal forms which the money representatives usually take. It is very difficult to estimate their quantity relation to the money stock. Anyhow, I think M’Leod’s estimate exaggerated when he calculates the credit resting on 110 millions of actual coin in Great Britain to amount to 10,890 millions; or about one hundred pounds of credit to each pound of coin. We cannot take as a basis of calculation the proportion of coin paid in the daily business transactions, for this would leave out of account the stock hoarded by the public and the banks. We must add the debts of all kinds which are payable in coin, and take their proportion to the stock of coin and bullion. In this way I came to the conclusion that the relation certainly does not exceed 40 to 1; and if we deduct those debts, which are compensated by other debts due to the debtor, the proportion will probably not exceed 30 to 1, and may perhaps come down to 20 to 1. According to the Director of the United States Mint, the assumed debts of the world payable in gold in the year 1893 were 12,000,000,000, while the stock of the world’s gold amounted to £716,521,000, which is 17 to 1; but I think this a good deal below the real relation. Even this lowest figure is, however, quite ominous enough, for it simply means that if all creditors, after a compensation of mutual debts, press for the payment of the balance in money, only one pound for seventeen can be forthcoming. If we assume that even our large financial concerns owe about six times more than their money stock amounts to, we are on the safe side. J. C. Leaver states in Money, p. 20, that the chief London banks, exclusive of the Bank of England, owe to the public 227,000,000, and that the cash in hand and at the Bank of England amounts to 27,000,000.

Mr. George Clare, in his Money Market Primer, which has been included in the list of books recommended by the Council of the Institute of Bankers, says: “The sum due on 31st December, 1890, by the banks of the United Kingdom, under the head of Deposit and Current Accounts, was estimated by the Economist on the basis of the balance-sheets published by the joint stock establishments at, in round numbers, 650 million pounds, while our whole stock of legal tender does not exceed 126 million pounds … and of these 126 millions it is quite likely that half to two-thirds are in actual circulation among the people, leaving a balance of, say, 50 or 60 millions available for banking purposes.” (Pp. 48, 49.)

A similar state of affairs obtains in the colonies. Our New Zealand banks, including the saving banks, owed in 1900, for deposits, about £21,000,000, to which about £1,000,000 due for banknotes has to be added, for which about; £2,700,000 of gold and silver coins and bullion was on hand: only about one pound to eight due. If we deduct £8,000,000 of fixed deposits for which a certain time is given within which the banks are supposed to be able to raise the money—a very vain hope when we consider the similar position of the English money market and of other countries, and the fact that financial crises usually extend all over the world—we have still £14,000,000 left which the creditors may claim from one day to another, and of which only four shillings in the pound can be paid.

State of Credit affects Prices more than Money Stock
Under such conditions, the actual money stock can only have an indirect effect on prices, and consequently on the value of money. Th. Tooke and W. Newmarch, in A History of Prices and of the State of the Circulation from 1793-1837, give some interesting facts, showing how the state of credit is of much more importance than the money stock, and how periods of low prices at different occasions coincided with a larger, and of higher prices with a smaller money stock. Most instructive is

The Course of the Crisis of 1847
The prices at the Stock Exchange fell enormously; from one day to another as much as 1½% discount was paid, which is at the rate of 450% per year. General ruin was in view, when at last the Government promised a suspension of Peel’s Act. At once the panic disappeared, and large treasures of sovereigns and banknotes came out of their hiding-places. That there was no exceptional demand for gold was proved by the fact that during the whole time of the crisis there was no diminution in the issue of banknotes; and what is more, as soon as the permission was given to the bank to issue more notes, not quite £400,000 in all were demanded. This was specially mentioned in the defence, which the Chancellor of the Exchequer made in the House of Commons on the 30th of November. He said that the money in the hands of the public was absolutely sufficient, but that its circulation was lamed by a panic fear, as all reports received by him proved. The Government was asked for assistance from all sides, but everyone said: “We don’t want any banknotes, we want confidence. Tell us that you will assist us, and we have enough. When we know that we can obtain banknotes we do not need to take them. It is indifferent how high the interest rate demanded, confidence will at once return.”

Here we see clearly that it was assuredly not the gold coins which the people wanted, and not even the banknotes, but only the certainty that they could obtain them in case they wanted them. Banknotes, they knew, could not be converted into gold in case the attempt had been made to any large extent; for even in ordinary times, without any repeal of Peel’s Act, the issue of 15¾£ million pounds of notes is permitted to the Bank of England (at that time not less than 14 millions) without any gold cover; and the suspension of the Act might have largely increased the amount for which no coins and no bullion were in stock. The people made no attempt to demand gold for their notes. The notes were legal tender, they could be used to pay off liabilities, and that was all they wanted.

We have thus arrived at the conclusion that in the last resort the condition of credit determines the value of money, a credit the foundation of which is the certainty people possess, or believe to possess, that monetary engagements can be regularly kept, that the money promised will be forthcoming when due and demanded. The actual money stock of the country—as a remarkable historical example has shown us, and as the facts of every-day life prove—plays a much less important part than other causes of which the temporary disposition of the money-owners is the principal one. When I use the word “money-owners,” I do not merely mean the rich, powerful as their influence necessarily must be.

 The Financial Crisis of July, 1893, in the United States,
though it may have been started by rich speculators who, for purposes of their own, produced a tightening of the money market, was principally caused by the fears of the poor savers, who became afraid for their balances at the savings banks, and came in crowds to claim their own in cash. Savings banks cannot keep much ready money in stock, but are forced to invest the deposits for more or less extended terms, so that they may obtain the interest, which their depositors claim from them. If an exceptional demand be made on them, when a tightness in the money market disables them from borrowing at reasonable terms enough to tide them over the temporary difficulty, they must of necessity suspend payment. The simultaneous demands made by their depositors thus caused a general suspension of these banks. Other financial institutions, whose creditors pressed for money in the same way, followed suit, and finally the excitement of the small savers became the panic of the nation. Money was as good as unobtainable, and as much as 1% per day, or 180% per year, was paid by solvent parties offering the best kind of securities.

This crisis of 1893 is especially instructive because there was no exceptional cause for the sudden alarm. No war threatened the country or the world; no catastrophe of nature had caused unexpected losses; the crops were good. The Chicago Exhibition brought millions into the country and into circulation; politics indicated fair weather. It was merely the case of a sleep-walker quietly stepping across a chasm. He has not the least fear; he has passed over much more hazardous places before without heeding them. But suddenly something or other awakens him; he becomes conscious of his danger; he sees it, and headlong he falls. The chasm between the amount of money due and the actual money stock may have been much wider at other times; but the people did not realise it, and went on with their daily routine without paying special attention, when a mere trifle occurred: a report from somewhere that there was danger of suspensions—a danger threatening them all the time and sometimes even with much greater force, but a report now, spreading and swelling through the very effects it brought about. When this report made them start and survey the position, they immediately recognised the patent fact that there was absolutely no money to be got if they really should choose in a body to claim their dues. The simplest calculation would have shown this all along; but their thoughts were elsewhere, and thus they had not seen what suddenly—like an apparition illuminated by the lightning of an ink-black night—gave challenge to their horror-smitten minds.

The Chronic Crisis
But not all are sleep-walking, awakening only in panic times, and dearly paying for their previous blindness. Our financiers have their eyes open all the while, and though they do not know the hour of the impending catastrophe, they see the chasm and they know their danger. This knowledge finds its expression in the high risk premium demanded, so high that the average debtor cannot pay it, and eventually collapses beneath it. The permanent load of usury presses with a much heavier weight on the people than the dangers and losses of the occasional crises. These are the acute outbreaks of a chronic disease, which is sapping the life-energy all along, growing in violence from year to year, from crisis to crisis. Take away this terrible nightmare generated by the certainty that whenever an exceptional demand for money may occur a crisis must ensue, and our wild struggle for life will have lost its intensity at once. But this struggle must be hopeless with a money whose quantity corresponds to that of a certain precious metal, a quantity so ludicrously small when compared with the demand that a credit building about thirty times the height of the narrow foundation had to be erected on it to enable us to carry on at all.

The Gold Basis an Inverted Pyramid
Jonathan Duncan, in a highly interesting little volume, The Principles of Money demonstrated, and Bullionist Fallacies refuted, which appeared in London in 1849, touches this important subject. I quote his Chapter XIV. in full. At that time the credit building was not so high as in ours, though even then it exceeded Duncan’s estimation of ten to one, if we include mortgages, the public debt, etc., which the author did not count in:

“That the use of Money is now so economised that Gold is sufficient for all Purposes.

“This fallacy mainly rests on the clearing-house system of the twenty-four London bankers, who settle their drafts twice a day by the payment of balances, and these transactions amount, in the year, to £1,500,000,000, which immense sum is liquidated by a comparatively insignificant sum of money. This contrivance, however, is a proof that the instrument of exchange is altogether incommensurate with commercial necessities, which inconvenience the bankers are compelled to overcome by economising money.

“But this does not put the arguments in a full and clear light. This country could not sustain itself without a very ample use of the credit system, in the shape of promissory notes and bills of exchange, which are always floating to the extent of 250 to 300 millions. These rest on the metallic basis of 22½ millions of gold, according to the Earls of Liverpool and Ripon, or of 30 millions of gold, if we take higher estimates. The gold basis, therefore, may be compared to an inverted pyramid. If, then, the basis consists of 30 millions, and the credit transactions amount to 300 millions, the basis is to the superstructure in the ratio of one to ten, since each million of gold sustains 10 millions of paper. Take away one-third of the basis, and then you remove 100 millions of credit securities, and a large stride is made towards barter; remove the whole basis, and money entirely disappears, and the system of barter is completely established. Such was very nearly the case in 1825, and such would literally have been the case in 1847 had not the Government letter to the Bank of England suspended the action of the bill of 1844.

“If, in addition to the London clearing house, we include the credit transactions of Liverpool; Manchester, Glasgow, and Bristol, and all the agricultural produce of the country, and consider that we have only 30 millions of gold to perform the business of 30 millions of people, we find that we have only £ a-head. Then let a revolution come, which nothing is more likely to cause than a metallic currency, and those who now account themselves worth £20,000, £50,000, or a million of pounds sterling, would be only worth 20s., unless in the scramble some got more than their share, in which case others would be penniless. It follows, therefore, that if the national affairs were wound up, we could only pay a solitary shilling in the pound, after having applied a sponge to the national debt, of which not a single farthing could be liquidated. It is also undeniable that if the depositors in the savings banks were to make a universal demand for payment, national bankruptcy would be inevitable, unless that calamity were warded off by a suspension of cash payments.”

The danger inherent in this state of things has been realised by growing numbers of thinking men, and it is the soil on which a strange plant has grown, called

Bimetallism has been attacked on the ground that it is impossible to make two precious metals at the same time the standard of value, that if both are coined as legal tender money, one of them has generally to lose its money character, becoming a mere merchandise for the time. This seems plausible, for bimetallism presupposes free coinage of both metals at a certain unchangeable ratio. Suppose this legal ratio to be twenty to one, this would mean that anybody bringing to the mint 123.374 grains troy of standard (23 carat or 11/12) gold has a right to claim for it a new gold sovereign containing the same quantity of gold; and anybody bringing to the mint twenty times the 123.374 grains (=5.14 ounces troy of 11/12 silver), can claim one pound sterling in silver coins, which are to be legal tender for all debts, just like the gold sovereign. But will the market price of the two metals—which follows supply and demand—permit the maintenance of a fixed ratio? You could certainly not buy in the market the 5.14 ounces troy of 11/12 silver for nineteen shillings, and thus make a shilling profit on every pound sterling coined, never mind how much lower twenty pounds of silver could be produced than one pound of gold, as long as the mint gives one pound sterling’s worth of shillings which are legal tender for the silver. But the price of money would fall together with, and in the same way in which the price of silver falls; the price of merchandise would rise, and especially one class of merchandise—gold, provided its cost of production did not cheapen in the same proportion with that of silver. It is certain that if it costs more to produce one pound gold than twenty pounds of silver, the price of standard gold must rise above one pound sterling for 123.374 grains; and consequently, not only will no more gold come to the mint which gives only a sovereign for this quantity, but the existing gold sovereigns will be withdrawn from the market and will sell as bullion, provided they have not suffered too much from abrasion.

Gresham’s Law
would come into operation, according to which the better money is driven out of the market by the inferior one[4], and the country will practically have a silver currency. This is not a mere theory, but has been the result of bimetallism wherever tried. Generally either gold or silver became a merchandise, and was withdrawn from its circulation as money, at least as far as wear and tear had not too much reduced the weight of the coins. My own experience during my apprenticeship in a banking house proved to me the fact most unpleasantly in the beginning of the sixties. It was a continual calculation whether gold was at a premium, or silver; and accordingly, gold or silver coins of different kinds were bought to be sold as bullion. Many a weary day had I to assort five-franc pieces into four different kinds. Those up to and including Louis XVIII. contain a certain amount of gold, and therefore were sold to Allard’s refining establishment at Brussels. Those of Charles X. contain less gold, and were sent separately, fetching a little less. The newest pieces after these reigns, those of Louis Philippe, the Republic, and Napoleon III. were sorted out to go off as silver bullion to Amsterdam; while those of these last three reigns which were too much worn to pay as bullion were sent to the nearest branch of the Bank of France, and we drew bills of exchange on Paris against them. They alone were left in circulation, or in the vaults of the bank; the others disappeared, as fast as bankers and money-dealers could get hold of them. Gresham’s law began to produce its usual effects: the money with the greatest raw material value disappeared from the money into the bullion market. National bimetallism would then have received its doom if France had not resolutely maintained free coinage for both metals, in spite of the falling of gold below its ratio value; if she had then stopped free coinage of gold, just as she stopped free coinage for silver in our time. The consequence would have been the demonetisation of gold, and a silver monometallism for the same reason which at present gives us gold monometallism: the influential men in all countries, the great financiers and capitalists, preferring the scarcer and dearer metal as the money material, for their money claims upon their debtors thus obtained a greater purchasing power.

There is nothing in this which reasonable bimetallists will not agree to, as they are fully aware that bimetallism can only succeed if carried internationally: if all commercial nations—anyhow, the principal ones among them—open their mints to the free coinage of gold and silver to any amount, both metals being legal tender for all debts. This would so increase the demand for silver that its price could never fall below the relative money value assigned to it by the law. The use as money is paramount to any other to such a degree that the market value of the metal is bound to conform to its money value as long as the value of its use in the arts does not prime the money value, which might finally be the case if the money value fell too low. This might happen to silver in case the ratio between the two metals were put farther apart than the present market price of silver puts it, if this ratio were beyond 30 to 1. As far as gold is concerned, the limit of the ratio in the opposite direction also depends on the value which gold would maintain for its use in the arts, independent of its money value. The ratio was as low as 6 to 1 in Japan in the sixteenth century, and if Boeckh’s Political Economy of Athens is to be believed, there were even times when silver had a superior value to gold. But how about

 Cost of Production?
Price never can keep far apart from cost of production whereever a commodity is regularly produced; and if silver costs 30 times less to produce than gold, it seems that no law in the world can permanently change this ratio of value. This is correct; but in thus reasoning, we ignore the influence, which the demand has on cost of production. Ricardo’s rent law is still more applicable to the precious metals than to wheat, for while a larger consumption of wheat is soon met by a correspondingly increased production through a slight pushing back of the margin of cultivation (see p. 55), the scarcity of the precious metals renders this effect on the margin much more powerful. It is quite certain that the remonetisation of silver would make mines paying which now lie untouched, just as the demonetisation of this metal has stopped the working of many mines which before yielded a dividend. The farther the margin is forced back, i.e., the less fertile the least paying mine yet worked, the higher is the cost of production, and, according to Ricardo’s law, the cost at the margin determines the market price.

Price of precious Metals determines Cost of Production
In other words, it is not the cost of production, which dictates the price of the precious metals so much as their price influences cost of production. The remonetisation of silver would at once open to it the money market, together with gold; and its value, as money, would dictate its price as long as this Value is not inferior to that in the arts. As the latter is now found at a ratio to gold which bimetallists would never adopt, the ratio of 30 to 1, whereas the ratio they propose varies between 20 to 1 and 15 to 1, we may leave out of consideration this contingency of the value of silver in the arts ever exceeding its money value under bimetallism. Thus the only question will be how far down the limit of the ratio might be extended without forcing gold out of the money market. This question cannot be answered, for nobody can foretell what value gold will preserve after it ceases to be used as money. Some say that under such a contingency it would not be worth one-tenth of its present price; which is probably an exaggeration, when we consider that silver only fell to one-half after its partial degradation.[5]

Anyhow, I think even a reduction of the ratio to that of Japan in the sixteenth century of 6 to 1 need not necessarily drive gold out of the money market; and as long as this does not happen, such a ratio would simply mean that new silver mines will be opened and gold mines will be closed until the least fertile silver mine produces six pounds of silver at the same cost at which the least fertile gold mine produces one pound of gold. To understand this we have only to remember (see p. 55) that the cost at the margin of cultivation determines the price, and that in mines more fertile than those on the margin the saving in cost is paid out as rent or royalty, but has no influence on the price. The reduced gold price would cause mines to be abandoned which now are worked; others would yield a reduced rent, or cease to pay rent altogether. However, I have to add a few words in regard to another element entering into the cost of mine produce particularly, though not quite absent in other fields of production:Speculation.

Speculation and Mining:
Del Mar states that the 90 million pounds sterling of gold produced in California, from 1848 to 1856 inclusive, cost in labour alone some 450 millions, or five times its mint value; but this is not the economic cost I mean. His cost price includes the element of speculation, of gambling[6], which makes lotteries such paying enterprises, because the dazzling effect of great prices entirely blinds the gambler to the well-known fact that, on the average, a lottery ticket only brings back a fraction of the price paid for it. This element of gambling may be responsible for the fact that certain gold and silver mines are worked though they swallow every penny expended, in the hope of finally striking the long-expected lode; but still there remains a margin beyond which speculation refrains, and this is the margin which must rise with the depreciation and fall with the appreciation of the metal. Speculation may have the effect of forcing the margin beyond its economic level, but this artificial level must finally follow the same laws as the economic one.

The Effect of Bimetalism on the Value of Money
Whether and how far bimetallism would force back the margin of production in gold mines, thus cheapening its cost by destroying the rent of now rent-yielding mines, depends on the question whether the large increase of legal tender money would have a price-depressing effect on money or not. It may seem preposterous merely to express a doubt as to the absolute certainty of a general depreciation of money under bimetallism; but I have already shown that we must not accept the quantity theory in the literal sense given to it by some tyros. Never mind what kind of money the twentieth century may have, business will continue to be done by means of the money representative, the money promise; but this assuredly does not signify that the amount of the stock behind the promises is of no importance whatever. The admission of silver would certainly increase this stock; but whether this increase would be sufficient is another question, as I shall presently show. Taking the price of silver as it stood before its demonetisation began, thirty years ago, the actual yearly production of both metals will not much exceed 100 million pounds sterling. From this we should have to deduct a very considerable part, at least one-half, for abrasion, loss, and use in the arts; but I refrain, because we have to add, on the other side, the increase of the silver yield through the opening of new mines, which would be rendered possible by the rise in price following its remonetisation. Our present stock of gold is figured at 800 million pounds; that of silver is unknown, as we cannot even guess at the amounts hidden and circulating in the East. Let us add another 800 million, and thus bring the total of our stock of precious metals to 1,600 millions. The yearly increase would, therefore, be one-sixteenth of the existing stock. To reach the amount of money promises so as to make our money representatives represent a reality instead of a dangerous fiction, our stock of 800 million pounds gold, which forms the basis of a credit building of, say thirty times its basis, would have to be increased to 24,000 millions of the new bimetallistic money. Even if we considered our present stock of silver available—and certainly the stock in the East will never come into our Western civilisation or into the vaults of our banks—it would take, at the present rate of production, 224 years before the 24,000 millions were reached. But this calculation presupposes two conditions: (i) Our gold and silver production must never fall below the present figures; and, what is much more important, (2) Our turnover must not increase.

Now, whoever has realised the enormous increase of trade within the past century, in spite of the fettering effect which our social conditions have exercised, with our currency system as one principal hindrance, will agree with me when I prognosticate such an immense increase for the next couple of centuries that, before the 224 years are passed, money representatives would have got farther ahead of the actual money stock than in our time, increased as the stock would be by the addition of silver; so that the basis of this circulation would certainly not be as broad as the one we now possess: 20 to 1 or 30 to 1. Independent of this, however, the mere cheapening of merchandise production through further technic progress would, as in the past, cause an appreciation of money.

For the time being, the remonetisation of silver might be beneficial for all that. The mere temporary widening of the insecure foundation on which our whole financial circulation rests would greatly revive confidence, and would largely increase credit and trade; until soon the money promises would as much outrun the money stock in both metals as they are now exceeding the gold stock. For a time prices might rise, and thus debtors would be eased in a double manner. The depreciation of the money would reduce their debt, and the greater demand for products of labour would give them a chance of satisfying their creditors.

Waste of Productive Power
But this help would only be a temporary one, and would be obtained at a ridiculous sacrifice. Millions more of workers would be employed in digging ores from the ground, extracting, transporting, and perhaps also coining these precious metals; as well as in feeding, clothing, housing the metal producers; making the water-pipes, machines and tools they require; or providing the means of transportation, etc. And what would be the real practical outcome of all this labour? Simply taking the money material out of one set of earth-holes to put it into another, where most of it will practically be as undisturbed as before the miners went down to get it, that it might be shifted from the vaults of Nature to the vaults of the banks. There the silver and gold can lie till Doomsday, without serving any other use than to form the basis of the credit paper circulation, which will always be the real tool of exchange and payment.

Enriching of Mine Owners
I forgot another result: the creation of a large number of new millionaires and the further enriching of others, the owners of the gold, and especially the owners of the silver mines. How far the latter form the officers of the bimetallistic army of which the debtor class are the soldiers may be left un-investigated. This is the plight we have come to at the dawning of the twentieth century by dragging into it that old fetish of a past civilisation: the commodity money.

The old Commodity Money Groove
Prince Bismarck once told a story in the German Reichstag of a ferocious watchdog kept on a chain for a dozen years because he might otherwise have proved dangerous. For twelve long years the animal ran forward and backward in front of its kennel, as far as the chain would permit, until a deep rut had been worn into the ground in the form of a semi-circle. Meanwhile, the dog’s teeth gradually decayed, danger faded away, and liberty was at last granted to him. The chain was taken off, and the dog released. The poor creature might have gone where it listed, but habit had so accustomed it to its old groove at the chain’s length that it continued in this groove until it died. A stupid dog! Certainly; but are we less stupid in continuing in the old groove of commodity money, the old relic of primitive barter, when the greater part of our business is actually done by means of mere tokens only. Like the dog, we do not make use of our liberty to run free from the old chain from which in reality we have long since been released—the old chain of distrust and ignorance. Why continue making believe we trade by means of gold and silver? a belief sadly destroyed to our great cost whenever we want to put it to practical test. As the currency of our world is in reality money of our third class—token money to the extent of at least nineteen-twentieths,—why preserve the virtually worthless one-twentieth which exposes us to such terrible dangers, when practically the question in nineteen cases out of twenty lies not between gold and paper money, but between no gold money and paper money? Because we must have some

Standard and Measure of Value
is the reply we mostly obtain even from comparatively unprejudiced men. A nice standard of value indeed, which has appreciated almost 100 per cent, within the last thirty years! The very quality of the precious metals, which their defenders always fall back upon, makes them a bad standard of value. I mean their intrinsic value, as it is falsely called. Falsely, for there is no such thing as an intrinsic value. Value—in the sense of market value, here meant—is a relation, the mere result of supply and demand. Where was the intrinsic value of the bag of gold found by the dying Arab in the desert? Gladly he would have given it for a drink of water; but the water was not forthcoming, and the gold was valueless. No supply of water, no demand for gold in the water market then and there! It is true gold has a market value in most times and places, and water has not; but it is not true that this gives us a right to call value intrinsic in one case, and refuse to call it intrinsic in the other, nor does the value of gold remain more stable than that of most other commodities.

The friends of gold money point to the large stock which serves as a huge reservoir to eliminate the effect of a varying supply, but the very effect of this large stock disqualifies gold as a standard of value. As value is a relation, the most serviceable standard must be the one, which most closely keeps unchanged its relation to the objects it has to measure. It is true that an unchangeable yardstick is a better standard of length than a changeable one, but it is true only under existing conditions. In a world, however, in which everything without exception gradually grows, or in which everything decreases in size in the same proportion, though an unchangeable yardstick might have the advantage of showing the general rate of growth or of diminution of things, and thus form a scientific instrument of great value for philosophers who are interested in such phenomena; still, such yardstick would not be as practical and advantageous for the purposes of everyday life as one which changed in size at the same rate with everything else. To the merchant who purchased cloth by the unchangeable yardstick before the cloth increased in lengthy and who sells the cloth by measure at the old price, the increase would yield an extraordinary profit, and his customers would be losers at the same rate. If, on the other hand, everything in the world—except the yardstick—became shorter, the merchant would lose, if under a contract to supply goods at the old prices without any regard to the change of length. Which is exactly what happened in regard to goods sold by the gold yardstick, whose admirers boast that it has remained unchanged while other things have varied. The man who, for the last thirty years, has been under a contract to supply a regular quantity of goods yearly—say, as rent for land—has this land much cheaper than his neighbour who pays a money rent, for the same amount of money will now buy more goods, and the same quantity of goods will fetch less money in the market than they did thirty years ago. We have always to keep in mind that the price of goods measures the price of money as much as the price of money measures that of goods. More goods have to be sold to pay now a money debt of twenty or thirty years’ standing than were obtainable for the money when it was borrowed. And a money of this class is called a perfect standard of value! Just as a yardstick, which increases or decreases in length in the same proportion with all other things in this world, would be a much better measuring instrument of length than an unchangeable one, so a money which changes its value in exact proportion with that of all kinds of merchandise would be a much better measuring instrument of value, to all intents and purposes, than one the value of which remained unchanged. As value, in its economic sense, is a mere relation, the standard which changes as the things it measures change, and thus keeps up the same relation to them, is more perfect than the standard which has remained fixed, and has thus varied in the only direction in which its stability is of practical importance: in its relation to the things it measures.

Thus the defenders of silver are perfectly correct when they maintain that silver has for the last three decades been a more perfect standard of value than gold because its price fell with that of other merchandise. An amount due in silver since the last thirty years now buys about the same quantity of merchandise as it bought then, while an amount of gold then borrowed buys almost double what it could buy at that time.

But we have not the least guarantee that this relation will keep up for the next three decades. Processes of manufacture may be found which reduce the cost of all kinds of merchandise one-half, while silver becomes scarcer and rises in price instead of falling at the same rate as other goods. In this case our children would be in the same predicament with silver debts incurred in our time as we are in regard to gold debts due since 1870. After what I have said about the relation of the money quantity to the turnover, according to which it is not likely that even the greatest increase in silver-mining which we could expect would be likely to keep up with the growth of our turnover in merchandise and our money demand, it may be realised that such a change in the relation of the silver price to the price of merchandise would almost inevitably occur.

Wheat proposed as Money
Nor will it help us to look round for other classes of merchandise to serve as the money commodity, for we never have any certainty that their price relation to other commodities will not vary considerably in the course of time. Wheat has been proposed, for instance. We shall presently discuss the one great advantage which wheat money has over that made out of the precious metals, which goes far to balance its acknowledged inferiority in other directions, evinced by the facts that, value for value, wheat is much more voluminous than gold and silver, and that the precious metals are comparatively indestructible; while wheat is subject to all kinds of destructive influences. Besides the cheaper storage, we can therefore accumulate an indefinite amount of gold and silver, but not of wheat, unless we artificially reproduce the conditions of Pompeii, where wheat grains have been found which germinated after eighteen centuries; or of Egypt’s mummies, which bestowed a much longer continuance of vitality. As such a system of preservation would be too costly to be of any practical worth, wheat would never be as perfect a store of value as gold and silver. But even if such a storage were practicable, it would merely result in intensifying another defect which wheat shares with the precious metals: the changing relation of its cost of production to that of other merchandise. The larger the store of wheat we should have to accumulate, the more land for wheat culture would be needed, the farther back the margin of cultivation would be forced, and consequently the higher the wheat price would rise. The clumsiness of wheat as money, independent of the cost of storage, would not be so great a drawback as we might think at the first look. That a bushel of wheat is not as handy a means of exchange as a half-crown is undoubted; but that a paper-note promising a bushel of wheat is as easily pocketed as a paper note promising a half-crown is equally true, and also that most of our business is done by means of paper representatives. Even the smallest payments might be, and are, thus made. An Argentine five cents banknote is worth a trifle more than a penny, and our halfpenny postage stamps are also passing as money among the people. The wheat would remain in the storehouses as the gold and silver bullion are doing, only to be handed over in the exceptional cases in which the holders of the wheat warrants, the new banknotes, would want the real money.

The want of scarcity is the other indictment made out against wheat—an indictment the very preferring of which exhibits the degree to which the financiers have influenced public opinion. They have made us look at scarcity as a good quality of money, because it makes the latter such a dangerous weapon in the hands of the money owners. The scarcer the money material, the stronger the monopoly which the possession of money confers, the tighter the corner into which the money creditors can squeeze the money debtors, the higher the usury they can exact from them. In fact, here we have the unavowed reason why the financiers have used their powerful influence to force through the demonetisation of silver, and thus to increase the scarcity of the money material. That England, the world’s creditor, has always been the stronghold of monometallism, is not a mere accidental coincidence. Through the demonetisation of silver the debt due to its capitalists has been increased in purchasing power by untold millions, and the tribute chain they have laid on the balance of the world has been made proportionately heavier.

Superiority of Money which the Workers can produce
Cattle and wheat money are certainly clumsy currencies, but they have one immense superiority over gold and silver money: everybody can produce wheat or raise cattle by his labour, provided he can gain access to land, the condition without which existence is impossible. But few can gain access to paying silver or gold mines, and to obtain this class of money somebody has to be found who is ready to sell it for other goods. The more the productive power of labour increased, and consequently the easier it was for the money owner to procure those other goods, the more difficult it became for the producer to exchange his product against the scarce gold or silver money. The owner of this money has his choice among the products of the land. All are at his disposal; the producers are at his feet, anxious to sell their goods for the scarce money which they not only need to buy necessaries of life with—barter might do that to a certain extent—but mainly to pay money debts, which are growing all the time, through the usurer’s interest charges in consequence of the very difficulty of obtaining the money. With a money consisting of ordinary products of labour the usurer’s chain could never have been forged; for while on the one hand the debtor could produce the money by means of his labour, not depending on the goodwill of a customer who owns the scarce metal money, on the other the treasuring of this money through its perishability necessitates so much labour that the money owner perforce becomes more dependent on the worker than the worker on him.

Leo Tolstoy’s illustration
Count Leo Tolstoy illustrates this important difference between money, which the people can—and one which they cannot—produce, in one of his little essays, called Money. He refers to the recent history of the Fiji Islands as told by Professor Yanjou in the Literary Magazine: “The inhabitants of the islands were prosperous. But in 1858 the kingdom found itself in a desperate condition: the Fiji nation and its king, Kakabo, wanted money. They needed 45,000 dollars to compensate the United States for alleged injuries that had been inflicted by Fijians upon certain citizens of the American Republic. To collect the tax, the Americans sent a squadron, which suddenly seized some of the best islands as collaterals, and threatened to bombard and destroy the settlements if the tax should not be paid to the American representatives at the specified dates …”

As the Americans raised their tax to 90,000 dollars, “Kakabo, pressed from all sides, and unfamiliar with European methods of credit transactions, acted upon the suggestions of European colonists, and tried to raise money from Melbourne merchants, at any rates and conditions, not hesitating to yield his kingdom to private parties. At Kakabo’s instigation, then, a stock company was formed at Melbourne. This stock company, which called itself the ‘Polynesian Association,’ made contracts with the rulers of Fiji, stipulating for itself the most advantageous terms. Undertaking to pay the debt due to the American Government in instalments at specified times, the Company, in consideration of this, received at first 100,000 and then 200,000 acres of the best land, chosen by itself; exemption from all taxes and duties, for an unlimited time, for its factories, operations and colonies, and the exclusive right, for a long period, of maintaining banks of issue, with the privilege of the unlimited issue of notes.”

Then the story goes on to tell how finally the king was forced to levy a direct tax in money, to raise which the natives sold their produce at any price, or they borrowed money on their produce at usurious rates; or else they had to go to the planter and sell their labour-power, at wages reduced as low as one shilling a week for an adult man, in consequence of the large and simultaneous supply. Hence, merely to pay this tax, the Fijian had to abandon his home and sell himself to the planter for at least six months, often having to go very far, to another island, in search of employment. Or six months’ prison for failure of the tax was the lot of the man, which meant forced labour for the first white settler who offered to pay the tax and costs for the prisoner.

“At first the duration of this forced labour was limited to six months, but subsequently bribed judges easily extended the term to eighteen months, often renewing the sentence at its expiration. Very speedily, in a few years, the whole aspect of the economic condition of the Fijians was completely changed. Entire districts were impoverished and depopulated. The entire population, except the aged and infirm, worked for the white planters, to obtain the money needed for the payment of the tax, or to satisfy the judgment of the Court. The women in Fiji do hardly any fieldwork, and therefore, in the absence of the men, the households were neglected or utterly abandoned. In a few years the population of Fiji became the slaves of the white colonists.”

The sad tale goes on to tell of the final annexation by Great Britain, and the abolishment of the poll tax; with the further great improvement that produce was accepted in payment of taxes by the Government, to provide for the expenses of the administration, “until such time as will see money more plentiful on the islands.”

I have quoted so extensively from this tragic little tale of real life because I wanted to show

The Great Difference between a Money consisting of the ordinary Produce of Labour and one which can only be obtained through the Sale of such Produce
If the tax levied on the Fijians had been demanded in cocoanuts, the impost might have enforced some extra labour and some privations; it could have been paid, though, without any outside help. But the tax was demanded in something not existing and not producible on the islands—gold and silver coins, or the raw material out of which such coins are manufactured. To obtain these things, the islanders had to appeal to the privileged parties who could procure them, and had to accept any conditions those men chose to impose. As Tolstoy very correctly points out, we are too apt to forget that

Money is not merely a Measure of Value and Means of Exchange, but is also demanded in Payment of Debts
Whatever advantages the precious metals may offer in the two first-mentioned qualities are greatly outweighed by the terrible danger their use as money implies in consequence of their having been made exclusive legal tender for debts. We have seen that the amount of debts in gold currency countries exceeds at least twenty-fold the value of the gold they possess, which gold is practically the only legal tender for these debts.

Power of Usury produced by our Legal Tender Money
The power of extorting interest for the loan of the scarce money enables the money owners to double their demands within fourteen years at 5%, a percentage rather below the average rate of gross interest (interest proper, plus risk premium). Experience has confirmed what arithmeticians could foretell in such a case—that the chain of usury weighing upon the workers gets heavier from year to year, while the victims’ power of self-ransom grows weaker and weaker. There is no need even to call in taxation, which Tolstoy sees in the foreground: taxation payable in something which can be procured only from the party who imposes the taxes, or anyhow from those who are behind him with their Government bonds, whose coupons are nothing but indirect orders addressed to the tax-gatherers. Thus the monopolists of the scarce money have it in their power to fix their own prices at which they will accept labour’s product, or even to decide whether they will be gracious enough to accept it at all. The whole of our civilised world has become an enlarged Fiji, whose inhabitants are the slaves of the money power, with the titular dignity of free workers. In the case of skilled labour the title may be even more sonorous, though the facts are unaltered. The poor professor at a German university, to whom the State gives the title “Hofrath” to make up for a not forthcoming increase of salary, is just as really a slave of the money power—under-paid and bowed down by the cares of keeping soul and body together, of educating his children and keeping up appearances—as a simple labourer, with whom he perhaps would like to exchange roles.

Need we wonder that, under such conditions, the wealth purchasing power of gold increases from year to year—that since three decades it has almost doubled?

A nice Standard of Value, indeed!
A standard changed at the will of the creditor class, who, besides the regular and certain increase of their claims which the widening gulf between the demands of compound interest and the gold-earning power of labour creates can at any time force on a financial panic that will put the produce of the workers at their mercy. It is just as valuable a standard as a yardstick which a merchant can lengthen at his own good will when he goes round to make his purchases of dry goods.

The Power of Habit
If it were not for the power of that wonder-working giant, Habit, the fact—that with the full knowledge of all these conditions, we are still religiously conserving the gold standard—would be inconceivable. Only habit—which veils our eyes so that we see without observing the wonders of Nature all around us: the development of the tiny acorn into the mighty oak, the metamorphosis of the humble caterpillar into the brilliant butterfly—only habit makes us support the worst monstrosities without even thinking about them. And even where we think, it is generally in the direction of justifying or even sanctifying that which is, and merely because it is. As an amusing proof of this truism, I cannot abstain from quoting a few passages out of Money and its Laws, by Henry V. Poor. (Kegan Paul, 1877.)

The Financier’s Gospel
“They (the precious metals) are the foundation upon which rests the superstructure of civilised society. Without them there could have been no exchanges, no wealth, no government, no institutions, no history; nothing but the eternal iteration of savage or barbarous existence. … Without them utter chaos would at once take the place of the order which now conducts to prosperous ends the industry of every labourer. … As without such standards there could be neither industry, wealth, nor civilisation, the inference is irresistible that the universal demand for the precious metals at their cost, and the uniformity of their supply, are, equally with moral laws, ‘part of God’s providence with man.’ ”

Then, speaking of the possibility of leaving money for the endowment of scientific institutions, and pointing out that this could not be effected by “dedicating thereto great store of food or clothing,” which are speedily perishable, he says that, “in this way, through silver and gold, man can invest himself, as it were, with the attributes of immortality. … No commercial people ever have adopted, nor will they ever voluntarily adopt, standards of value other than those providentially appointed.”

The man evidently believes in a bimetallistic providence, and if ever he should become a monometallist, he will have to change not only his currency theories, but also his theology and religion.

H. D. Macleod once made the striking comparison of modern circulation to the movements of a peg top, which spins round on a very fine metallic point. As civilisation rests upon circulation, it is no wonder our civilisation is in continual danger of toppling over, and that it keeps going only by continual whipping! Under such conditions we need no longer be surprised at Mr. Poor’s giddiness. Not everybody can stand the continual turning of a top on which he is forced to dwell.

My quotation from this amusing book reminds me that I have totally omitted to discuss the function of

Money as a Store and Representation of Wealth
The fact is, I could not well imagine that anybody in our times should be so hare-brained as to recur to such an obsolete conception, unless the reading of A Thousand and one Nights, with its treasure-troves and its Ali Baba caves, or of Dumas’ Monte Christo, has turned his poor head. Our modern Monte Christos, our Rockefellers, Rothschilds, Vanderbilts, Carnegies, etc., own very little gold and silver; the security of their wealth rests on something much more solid—on human stupidity, which makes something exclusive legal tender which does not exist in nineteen cases out of twenty, and so gives the power of claiming enormous tributes to the creditor class; on still greater human stupidity, which permits the few to own part of God’s earth given to all, and to claim tribute from those who want to use it.

The wealth of our present world, including the land values, exceeds by far 80 billion pounds sterling, while the total value of its precious metal stock certainly does not reach 2 billions; in fact, would not reach one billion if the precious metals were demonetised. Of every 30£ of wealth £1 now is, of every 100£ of wealth £1 would then be, based on the possession of gold and silver. And such things are called stores of wealth!

An American lady wrote a tale lately, describing the discovery of immense deposits of gold. The State, their owner, distributes the metal among the people at the rate of $10 of gold per day per inhabitant. The result is a general catastrophe, because not one of these “rich” people wants to work any longer, and all would have had to starve if the gold had not finally been confiscated and destroyed.

Let us contrast with this starving Golconda our New Zealand as it would be if it had not a particle of gold or silver either above or below the ground, but simply its present thrifty population, its soil, climate, and minerals of different kinds, exclusive of the precious metals. Does anyone imagine that production and distribution would stop, that less wealth would be produced? On the contrary, it will be quite clear to all who have learnt to understand the real function which the precious metals and the money made out of them are playing in our economic system, that, once freed from their pernicious effect on distribution, and consequently on production of wealth, our country would soon be much richer in everything required by human beings, and that our civilisation would rise to higher levels, in spite of our Poor friend and his co-religionaries.

Labour Time
Another standard of value—labour time—has often been proposed, and, in one case at least, tried: in Owen’s Labour Exchanges{see Chapter IX.)—a very poor standard, as the failure of Owen’s experiment proved. A good standard only with men like that peasant who had his tooth extracted by a celebrated dentist, and who protested when he was asked to pay ten shillings for the operation: “Ten shillings! Why, man, our barber at home only charges me a shilling, though he pulls me about the room for a couple of hours, and you want ten shillings for two seconds!”

Until the period arrives when communist Utopias become reality, until the hour spent by an Andrea del Sarto at his canvas or by a Newton at his desk shall be estimated as valuable and worth the same pay as that spent by a washer-woman at her tub or a crossing-sweeper with his broom, labour time—as a measure of value—must be relegated to the domain of those day-dreams which give a zest to the poet’s compositions, but which are better left out of economic dissertations. As long as labour is paid according to its market value—found as the result of supply and demand, the higgling of the market; as long as its price does not correspond to mere time units, so long will the labour-time standard remain a mere theory—and a false one at that—without any practical application, in spite of the most learned disquisitions of a Karl Marx and his fanatical disciples.

The device of counting skilled labour in multiples of ordinary labour does not advance us in the least, so long as there can be no fixed rule for the magnitude of the multiplier.[7]

Only what is Marketable can be a Standard of Value
It seems unnecessary to insist upon the fact that nothing can be a standard of value without being obtainable in the market. It is a truism; for how can we gauge a standard of value except by the result of supply and demand in the market; and how can this result be obtained unless there is a real supply? To find out the value, the standard of money, it must be offered in the market like any merchandise, and only its regular and permanent supply can enable us to effect a continual verification of its price relations to other merchandise. If I at all insist on this self-evident truth, it is because I have often met with the assertion that gold might be preserved as a standard of value for paper money, even though the paper were not convertible into gold, a single gold piece being sufficient to preserve the standard. The persons who maintain such nonsense cannot see that the value of this gold piece is its purchasing power for goods, which can be estimated in no other way but by a market operation, and this single market operation may take our gold piece out of the market for ever. Where is now the standard for all other market operations? It is self-evident that these market operations must be continuous, as the purchasing power of gold in general can be found only by the regular supply of gold for other goods offered in exchange. In other words, neither the value of gold nor that of any other commodity can be found in any other way but by the higgling of the market, which higgling implies the offer of the real Article in quantities more or less corresponding to the demand, and nothing can be a standard of value without having market value.

What is the best Standard of Value?
Criticising standards of value can be productive of little good unless something better than the existing ones is proposed; for even an inferior standard is better than none at all. From the negative part of my work I therefore now proceed to the positive. From the pulling down business I come to the constructive department.

The money of the first class has been found wanting; The money of the second class is only money of the third class burdened with an unnecessary expensive raw material. Instead of putting the money stamp on cheap paper it is affixed to expensive silver, copper, nickel, or whatever material coins are made of. Much labour is wasted; and for all that, forgery is easier than in the case of paper money, the raw material of which can be prepared in a special way with water marks, and other distinctions, which are imitable by paper makers only and their trade cannot so easily be followed in secret as that of the coiner.

J. Shield Nicholson, in A Treatise on Money, says (p. 220): “As to forgery, it is a curious fact that in Scotland spurious sovereigns are more frequently met with than forged £1 notes; and the art of engraving notes has made much progress since England had £1 notes in circulation (1826).”

Has Token Money Market Value?
We shall now pass on to class 3: the pure token money.

The first objection against this kind of money will belong to the intrinsic value domain, which I have already exhibited at its real worth. But even on the principle that value is a relation, it seems impossible to compare a thing, which has no market value at all with real wealth, with merchandise of any kind. At least, such has been the objection made by men like Professor Karl Knies (Heidelberg), who has written some valuable books on money and credit. According to him, money must be a merchandise, because you can as little measure the value of a commodity by anything else but the value of another commodity as you can measure a length without something that has a length.

We might agree with the learned gentleman without, in consequence, being compelled to exclude inconvertible paper money from the money category. What is the autograph of a celebrated man? What is a postage stamp when cancelled by the post office? Are they a commodity, a merchandise or not? Both sell as merchandise in the market, and professor Knies cannot take their merchandise quality from them. He will also have to agree with me that their merchandise or market value in no way depends on the amount of labour they embody, as the exploded theory of Ricardo and others would demand.[8]

To a certain extent their value depends on their scarcity, for an autograph which can be had by the million or a common cancelled postage stamp which can be had anywhere for the asking are practically worthless, even if the former is in the handwriting of the most celebrated man, or if the other has the most beautiful picture impressed on it. But scarcity alone does not give value to an autograph; for the signature of an illiterate boor who only wrote his name once in his life does not gain any value thereby. The only real element of value in an economic sense in these, as in all cases, is supplied by the market, by supply and demand.

Value is the price, which the market is ready to pay. This makes a picture of Raphael valuable in our markets, while in the markets of Central Africa it might not fetch as much as its canvas without the painting on it. This gives value to the autograph, to certain cancelled postage stamps, and to the piece of paper money. There is no difference from an economic point of view between the value of Raphael’s Madonna, an autograph, a cancelled or uncancelled postage stamp, and an inconvertible bank or treasury note. Their value is what they will fetch in the market. The motives of the buyers have as little to do with the matter as in any other case. A race-horse which has just won the Derby will equally be a merchandise whether bought with the intention of making sausages from it or of winning races through its help. Nor will the merchandise character of a piece of paper be changed in the least, whether it is bought because a great artist painted something on its surface, because a great man appended his signature to some words written on it, or because the Government applied a certain stamp. Neither does it make any difference whether the picture is bought for its artistic value or for its scarcity, for the purpose of adorning a drawing-room or of completing a collection. The economic classification of the postage stamp or banknote does not change in the least, whether they are bought for a collector’s album, or if the one is used to prepay a letter and the other to purchase goods. The fact that a certain piece of paper printed with certain signs is accepted as money at a certain price in the market does not change its commodity character; and in so far we might as well have refrained from dividing money into three classes. In thus dividing it, we do not pretend that the money of our third class is not as much a commodity as our money of the first class; but merely that, whereas money of the first class maintains its market value after it ceases to be money—a new gold sovereign being worth a pound sterling even if sold as bullion—the money of the third class loses its market value after losing its money quality. Even this is only true within certain limits; for if all gold coins cease to be money after gold has been demonetised their value as bullion will no doubt decrease thereby; and paper money, though demonetised, may still conserve a value for collectors or amateurs of certain classes of wall-paper.

Facts prove the Money Quality of Token Money
In this way, I maintain that token money is money even according to the German professor’s definition. Not that I value this definition; it contradicts that given by others who more correctly define as money anything which is universally accepted in payment—and this is equivalent to the definition I adopted: only that which is legal tender for debts is money. If, according to a vulgar saying, the best proof of the pudding is in the eating, the best proof of the money quality of inconvertible paper notes is that they pass as money in many countries of the earth. Facts, however, have no such power over academicians as over ordinary mortals. They often act like the physician who had declared a patient incurable, and who, when the man had the impudence to recover in spite of the doctorial dictum, quietly told him: “Scientifically you are dead, sir!” Or our learned professor may imitate one of his colleagues, who, when shown that facts did not agree with his theory, replied: “So much the worse for the facts! ”

The Assignat Scare
It is, however, insufficient to prove that paper money exists scientifically as well as practically; we have to show that it is a better money than our metal money, or any money of our first and second classes. The general opinion is that paper money has been a failure. Gold may have appreciated considerably within the last three decades, but it never has shown such variations of value as most of the paper money we are acquainted with. As a warning example, three different historic cases are produced: Law’s bank paper, the French Assignats, and the notes of the American confederacy. From parity with gold to no value at all are fluctuations which no commodity money ever experienced; and it is not to be wondered at that, with all their drawbacks, our gold, or gold and silver currencies, are generally considered as superior to a paper currency. The ground thus taken seems unassailable, for the money of our first two classes can never lose its value to such an extent as paper money; but for all that, I intend to prove that

Paper Money can be made a better Standard of Value than Gold or Bimetallistic Money
Adam Smith, M’Culloch, Ricardo, Tooke, Stuart Mill, Jevons, and other great authorities, have freely acknowledged, and the facts of every-day life have proved, that paper notes, though inconvertible into gold, if made legal tender, can be kept at par with gold, under certain conditions, i.e., if they take the place of gold withdrawn from circulation. Nor will any noted economist doubt that they may even be at a premium when compared with gold coins, where these are demonetised and where paper alone is legal tender. 15¾ million pounds of the notes issued by the Bank of England are inconvertible into gold, and yet they are at par with gold, as they will always be required for internal circulation. That paper money has often been of great benefit —even where it did not keep at par with gold— is also well known.

R. H. Patterson says in The Economy of Capital (p. 447); “How did England manage from 1797 to 1815, when there was hardly a guinea in circulation? That period was the most trying which the British Empire ever came through, a period remarkable for a great expansion of our trade and commerce; nevertheless, though gold almost disappeared from circulation, no difficulty was found in settling the foreign exchanges; and the Government was even able besides to obtain large sums of metallic money to pay and feed our armies abroad and to subsidise those of other states.”

The difficulty remains of finding the exact margin for the quantity of inconvertible paper money which can be kept floating at par. Must not the paper depreciate, when a certain amount required for internal circulation is overstepped, when, according to Gresham’s law—that the bad money drives out the good—the gold coins have disappeared, and gold has to be bought at a premium for outside payments?

The History of the American Greenbacks
has shown this very clearly; for it belongs to one of those exaggerations or downright falsehoods, which have helped more than anything else to discredit paper money, that its advocates pretend: what brought greenbacks into disrepute, what finally reduced their gold-purchasing power to almost one-third of their nominal value,[9] was the law which made the interest of certain loans and the custom duties payable in gold. These people do not reflect for one moment what the loans were contracted for. At that time many goods required by the country, especially for war purposes, could not be produced fast enough within the States, and had to be bought outside where greenbacks were not accepted, but where gold or other saleable merchandise of some kind were demanded in exchange. Now for the time the merchandise or gold thus demanded could not be produced in sufficient quantity, and money had to be borrowed abroad to pay for the passive trade balance. The parties who lent this money wanted their capital and interest guaranteed in gold; for nobody could tell whether greenbacks would ever procure them gold at their face value or goods at a corresponding price, when even the very continuance of the Union was in question.

So the foreign loans had to be made payable in gold capital and interest, and it became necessary to ensure a sufficient gold revenue to pay for the incurred debts. It is true the Government might have accomplished this otherwise than by making the duties payable in gold. These duties might have been made payable in greenbacks, with which the Government would have bought in the market the gold it required. But foreign exchanges naturally were against a country, which had an unfavourable balance of trade to pay for with a soon-exhausted gold stock. Gold had to be borrowed in some way or other at its market price, which grew with the demand for it. The Government’s financial measures had nothing to do with the premium thus paid for gold, which was made by the foreign exchanges. Even if the duties and loans had been made payable in greenbacks, the premium paid for the gold needed to pay the outside debts would have been just as high. The foreign creditors who had to lend gold would never have accepted greenbacks above their market price in gold, a price dictated by the foreign exchanges; and instead of paying duties in gold which they had to purchase at a premium with greenbacks, the importers would have had to pay their duties in greenbacks, but the amount of the duty would have been raised sufficiently to enable the Government to purchase the gold it needed. The only difference would have been to force the importers to provide the Government with enough greenbacks to buy gold, instead of having to buy the gold themselves. Greenbacks were bound to fall in value in either case, as long as their issue exceeded a certain quantity demanded for internal circulation; and more money being required to pay for outside goods, more greenbacks had to be offered for gold in the market. Still, their fall would never have been so considerable if the Government had not committed the folly of authorising the so-called “National Banks” to issue a currency of their own, even making them a present of the interest profit thus obtained. This concession added unnecessarily to the inflation.

The friends of paper money would do well to profit by an experience daily realised in any department of reform work: the experience that

Exaggeration and Radicalism defeat their own Ends
Temperance reformers, in English-speaking countries, instead of working for mere temperance, fight for total prohibition, and thus make enemies of many who detest the use of alcoholic drinks, but shrink from infringing the freedom of the individual. If they took example by those countries, which are working on the Gothenburg or related systems—aiming at decrease of drunkenness—they would be much farther advanced. Fifty years ago the annual consumption of alcohol in Scandinavia was 30 litres (nearly 7 gallons) per individual. It has now been reduced to 2 litres; and in Norway delirium tremens has become an almost unknown disease. An anti-treating law—fining the publican who serves liquor to any person who does not pay for his own drink—might do away with one of the most prolific causes of drunkenness, and one of the most idiotic limitations of personal liberty: the unwritten law which, in the colonies, at least, compels every member of a party of friends who meet at a bar to pay for the whole group, so that each individual pays in turn, and each drinks far more than he would have imbibed otherwise—with inevitable consequences. Temperance would also be promoted by all improvements in the economic condition of the people; for experience demonstrates that misery causes drunkenness quite as much as drunkenness causes misery.

Single Taxers afford another Example
of radicalism overshooting its own mark. Their opposition to any kind of land restoration, which includes a system of compensation has done more to keep back the progress of the great idea than any other cause. I lately met one of their class, a highly estimable gentleman, who, though he would not deny the fact that land nationalisation by purchase must bring the land into the people’s possession in less than one-quarter of the time, and at less cost than the system of gradual confiscation by means of a tax, simply answered that he would never sacrifice principle to expediency. My reply that principle did not weigh so much with me as the wish to save millions of our own contemporaries from misery, instead of postponing the full effects of the reform for generations yet to come, did not seem to make any impression. I have seen

Co-Operative Settlements
go down because of a similar radicalism which insisted on complete communism, that finally broke up the society, instead of consenting to a more moderate kind of socialism which might have maintained the organisation.

If anywhere, such radicalism is truly pernicious in the domain of currency reform.

The Greatest Enemies of a Rational Currency
are those radical apostles of paper money to be issued to any amount, secured by wealth of some kind, preferably real estate. This class of currency reformers finds its principal adherents among land-owning farmers, who thus hope to obtain from the State cheap money on mortgages. Such a new concession made to land-owners would merely add to the unearned increment by forcing up the prices of land, and thus the compensation which the community would have to pay some day when the people take back their own; but leaving this aside, the whole plan shows an entire ignorance of the currency question. The plan is condemnable, because

There can be only one kind of Security behind Money of our Third Class, Token Money, and that is its Wealth-purchasing Power
If real estate is the wealth on which the money is issued, the money is only good if the real estate can at any time be obtained for it, which is not at all the intention of the men who propose the plan. They do not dream of handing over their farms and houses to anyone who presents the money lent to them on such security. They merely want to keep this money for an indefinite time, or anyhow for an extended period, at a low rate of interest. Their real estate is not in the market for the money they received; in fact, usually it is not in the market at all, most certainly not at those very periods when people want to see something substantial for the paper in their hands—those times of crises and panics; for at such moments their property would certainly not fetch more than was borrowed on it, and probably not even that. Thus the security is no security at all in the only sense in which a security is needed, i.e., to keep up the full purchasing power of money, the security that is quantity, corresponds to the quantity of merchandise offered for money in the market.

Currency reformers of this class have done more to retard money reform than the most conservative gold monomaniacs. Can we blame the latter if they stick to their gold standard as long as experience justifies them in the belief that gold, with all its fluctuations of value, is after all not subject to such vagaries in this direction as most of the paper currencies on record? But they leave out of sight the fact that

Not a single Case is known in modern History where an inconvertible Paper Money was issued under normal Conditions

for the purpose of providing a better money than metal coins. Invariably such money was issued in times of wars or revolutions, or at least as the result of acute financial distress. Under such conditions it could not be expected that the issue would conform to certain rules adapted to maintain a fixed standard of value for the paper, which does not prove that such rules might not be devised.

On the contrary, a closer investigation will show us the feasibility.

A perfect Standard of Value for Money
is reached when the average price of merchandise does not vary, and this can only be obtained where the quantity of the money supply in the market adapts itself to the demands of the market, where at once more money appears when prices tend to go down, and disappears when the tendency is in an upward direction. This is impossible in the case of metal money, whose supply depends on the goodwill of those who control the bullion market; but it is within the reach of possibility in the case of paper money, which can be supplied to any amount at the shortest notice, whose issue can thus be adapted to the market’s exigencies, more money being issued when prices fall, and money being retired from circulation when prices rise. Thus, whereas our present law fixes the price of gold, the new task is to fix the average price of goods in general.

Money Circulation regulated by a Tabular Standard of Prices
All we have to do is to keep a watch on the average prices of goods, and to regulate the money circulation accordingly. All those commodities, which constitute an appreciable portion of the general turnover have to be tabulated, their prices being multiplied with the ratio which their turnover bears to the total of the yearly turnover of the country. The addition of the products thus obtained gives us the average figure, which has to guide us in the issue or withdrawal of the paper money.

To make this clearer, I shall give an example taken from Die Anpassung des Geldes und seiner Verwaltung an die Bedürfnisse des Modernen Verkehrs, (The adaption of money and of its administration to the wants of modern circulation), by Silvio Gesell. (Buenos Ayres, 1897.)

Taking the total turnover of the country to be represented by the figure 1,000, he gives the relative turnover of the following commodities, which here are supposed to comprise all commodities bought and sold in the country during the year, by the first figure annexed to each. He then makes the figure 1,00 represent what has been agreed to stand for the normal price, reducing all future prices to a percentage of 1,00. The last column gives the tabular standard.Table showing relative turnover of commodities

The results show that in the first period prices have fallen 1,2%, in the second even 3,34%, below the normal rate, and, of course, money has appreciated accordingly; never mind what has been the cause of the price fall. Whether this fall is the consequence of a greater scarcity of money or of reduced cost of production is absolutely immaterial. All we have to take into consideration is the changed relation between the value of money and the value of merchandise. If the change is in favour of money, i.e. if the same quantity of money buys more goods, or if less money buys the same quantity of goods, money has appreciated; and, in the opposite case, it has depreciated. To bring back the normal relation between the two, more money has to be issued in the first case; in the other, money has to be withdrawn from circulation.

It is a matter of indifference which name we give to the new money units. We may call them tom-toms, pounds, dollars, francs, or whatever we please. Whatever we call them, they will represent nothing but a certain and unchangeable average quantity of goods and services which are obtainable for the unit in the market. The figures of the average price table determine this quantity once for all. It is also immaterial on which prices we base the first standard table. We may adopt the prices of the year in which the reform is introduced, or we may take the average of a number of preceding years, as Wallace proposes; and if we consider certain prices as temporarily too low, we may put them in at higher figures; though to avoid any unnecessary departure from our habits, it is not advisable to go very much above existing prices or to adopt any new name for the unit. The objection that our new paper pound will be something different from the real meaning of the word—a gold piece containing 123.374 grains of standard gold—has certainly little weight when we consider that this gold pound has itself departed from its real signification: a pound’s weight of certain silver coins. Gradually the coins were made to contain less and less silver, until finally the value of the pound sterling became reduced to its present standard. In Russia, where the paper rouble had taken the place of the gold or silver rouble for half a century, the new gold rouble lately issued was adapted to the paper rouble and not to its metal ancestor, containing 40% less gold than the latter.

History of the System
It may never be found out who was the first to reach the simple solution of the problem here given; and, as is often the case with great inventions and discoveries, it is very likely that the idea germinated at the same time in different heads.

Gesell has not been the only inventor of this excellent system. England’s greatest living scientist, Alfred Russel Wallace, added another leaf to his laurel wreath by his proposal of a paper currency whose circulation is regulated by the prices of merchandise. I found the essay in the Clarion, end of 1898.

Wallace’s system is not so exact as that of Gesell. If I understand him correctly, he fixes once for all the quantity relations of the different articles, whereas Gesell takes the actual figures of the year.

I further met the proposal of this scheme in Money and Social Problems, by J. Wilson Harper, published in 1899. I cannot find out how long before this date the author held the Idea, which also forms the basis of an article published by the Hon. C. L. Poorman, editor of the Ohio Bimetallist (middle of 1899). It is likely that this is only a repetition of the same proposal made by the latter at a previous date.

Differing from former Tabular Standard Proposals
This excellent scheme must not be confounded with the socalled tabular standard or multiple standard device mentioned in Moneyby W. Stanley Jevons, and, according to him, first proposed in 1822 by Joseph Lowe, eleven years later by G. Poulett Sorpe, and in 1838 by G. R. Porter. According to the Arenas the idea of the multiple standard was carried out in practice as much as forty-two years before Joseph Lowe proposed it. The magazine published a reproduction of a Treasury Note issued in 1780 in the State of Massachusetts, which indicates that their currency of that time was not reckoned so stable as currency now is in England. The note promises repayment not of So much gold, but of a sum equivalent to given quantities of corn, beef, wool, and leather. This multiple standard was intended as a safeguard against fluctuations in the currency, and is described by the editor as the most nearly honest piece of money ever issued in a civilised state.

The only point of resemblance between the two systems is in the method of finding an average of merchandise prices by tables. Apart from this, the “tabular standard” is just as impracticable as the system advocated by Gesell, Wallace, etc., is easily applicable. Any business man can see this at the first glance, when he knows that the originators of the tabular standard idea propose to adjust all payments for debts or contracts according to the variations of their table results. Supposing, for instance, that these tables show a decrease of the average price standard of 10%, all debts and contracts are in that case reduced 10%, because money has appreciated to this extent, and consequently, it is only just that the creditors receive so much less of this more valuable money. The amount of pensions, salaries, fines, taxes, duties, etc., is also to change all the time according to the results of the tabular standards. Just imagine what that means! A man has to pay his butcher a bill of last year, another has signed a promissory note, and so on through thousands of mutual engagements of daily life. Before any payment is made the tabular standard must be consulted, a discount has to be taken off or a premium is added, according to this tabular standard; and these complicated calculations are to be carried on daily, hourly, and mostly by men to whom the job of multiplying quantities with prices and adding the products, when they buy a bill of goods, is just complicated enough. When they have borrowed money, the calculation what they have to pay is hard enough for them; and now they are also to add or deduct percentages varying with the money standard. Most of them will have to rely on the cleverer people who understand “this new fad”; and we know what that often means. Adding another trap for the unwary, and heaping additional work on everybody, would cause the tabular standard to be looked at as such an unmitigated curse that people would rather put up with all the dangers of our monetary changes than correct them in this insane fashion.

The general abhorrence of inconvertible paper money entertained by most English economists of that period, alone can explain how such intelligent men should have stumbled—by the only practical application of the tabular standard—into such impossible proposals. Had they been less prejudiced they would easily have seen that, instead of using their standard to change money obligations, leaving the money itself untouched, the obligations might have been left untouched by changing the money circulation accordingly to the standard. By thus approximating the price of money to the price of merchandise, its only gauge, the value or price of money, its purchasing power, remained invariable, and obligations could safely be left alone.

The way of ascertaining the standard had already been improved from the original raw notion of simply taking the prices of a number of articles and finding the arithmetic or geometric middle—the system used by Laspeyres, Scetbeer, Jevons, and others—to the method proposed by the German professors Drobisch in 1871, and J. Lehr in 1885, of taking into consideration the quantities of each merchandise.

Professor Erwin Nasse sees a certain difficulty in the work of exactly finding the quantities of the different articles, which are to form the basis of the calculations. Others have discussed the question whether wages and tools of production, or whether land values, i.e., rent, ought to be included in the lists. In any case, we shall never quite eliminate all sources of inaccuracy; but by the wanderer lost in the wilderness, even the rough indications of the native he meets as to direction and distance will be welcomed. He will not refuse to avail himself of them because a map with exact delineations would be preferable. Even an approximate price standard is better than none at all, and certainly no system of tables made out on the best available data would hide from us fluctuations like those which have almost doubled the value of money within the last three decades, or which, in the English crisis of 1857, caused the prices of the principal staples to fall 27% within two weeks; not because their cost of production had decreased so much within that short period, but because money had suddenly become exceptionally scarce. R. H. Patterson, who gives statistics in The Economy of Capital (p. 190), mentions another price fall of cotton, going down from 7 to 43½% for the different numbers between August 15 and November 5, 1866, in consequence of the scarcity of money (p. 366). It would never do to give up the attainable because perfection seems out of reach. However, I do not think the difficulty quite so great as Nasse finds it. Of course, we would not take

 Retail Prices,
but the prices obtained by the producer and those paid by the importer. If we also gave retail prices, we should only increase the total of each article in the same proportion without affecting the result. If prices vary in different parts of the country, we should take the middle price.

Raw Materials
would figure several times in the list wherever they are used as the component of other merchandise; but so would manufactures which enter into the composition of other fabrics, such as leather in shoes and saddlery wares, cotton thread in cotton cloth, etc. This can only affect the quantity relation which each article can claim; but as the same addition to quantity takes place in all branches of manufacture it would not sensibly affect the final result It makes no difference whether in our lists the price of every article is multiplied with half or double the quantity: the average will not change thereby. Neither can it well be avoided that some manufactures which enter into the composition of others will not appear in the list, because they are produced in the same factory, and thus do not pass through the market; as, for instance, where the yarn is spun and weaved in the same works, or where the tannery and boot factory are in one hand, and thus will only figure once where others manufactured by different firms are counted twice. This does not matter much, however, as such causes of error will occur in different branches, and thus will compensate each other in a certain measure.

Land Values and Rents,
on the other hand, ought not to figure in the list, for their relation to the value of money is not the same as that of the products of labour. Though both rise with the rise of prices and the depreciation of money, it does not follow that the opposite tendency will force them down; for the simple reason that the fall of prices in our times is mostly due to the greater productivity of labour in consequence of technic improvements, and that the fall has by no means kept pace with the increase of this productivity. The surplus appears to a small extent in a rise of wages, to a larger extent in the increase of profits, including interest, but chiefly displays itself in the rise of rent. Rent and land values have risen much faster than the value of our metal money, which is easily accounted for by the fact that, though the quantity of our metal money does not increase so rapidly as the productivity of labour, still it increases quicker than the surface of available land. The price of the latter, therefore, is forced up more rapidly, especially as a growing portion of it is absorbed by the necessity of providing the increasing population with houseroom. The inclusion of land values and rents in our tabular standard would therefore simply falsify the result. We might see prices of goods fall with rising land values and rents, and if we included the latter in the tabular standard they would produce a corresponding counter effect on the influence of the price fall, and thus prevent a sufficient issue of new money. On the other hand, an issue of money would cause such an upward tendency of land values that the currency restriction this would entail would overstep the real necessity. The question whether

ought to figure in the list, or not, is a little more complicated. In Chapter VIII we shall see that, at present, wages enter into the retail price of goods to the amount of not over one-sixth, and that labour could conquer enough of the remaining fivesixths to treble its wages, without thereby raising the price of goods paid by the workers as consumers. Any future increase in the productive power of labour could further increase wages without raising prices. If wages figure on the list their rise restricts the money issue, and consequently reduces prices. A fall of prices thus produced, on the other hand, reduces wages. The effect of such a reduction on the tabular standard causes circulation to increase and prices to rise, until finally the point of rest would be found in a partial fall of prices and a partial rise of wages. Prices might, for instance, fall to one-half, and money wages double, which would be identical with a four-fold increase of wages measured by their purchasing power. If, under the same conditions, wages are not counted in the list, the average prices of goods remain unchanged, and money wages increase four-fold. Their purchasing power would be the same in either case.

I think it is better to leave the average prices of goods at the same level, and therefore to omit wages from the list, because not only much work is saved, but a rise in the purchasing power of wages through a reduction of prices would have to be shared by the workers with the savers, the purchasing power of whose economies must rise with every fall in prices. The objection might be made that this would mean a discrimination to the absolute loss of those who live on their incomes, because the wages of domestic servants would also rise without causing a reduction of merchandise prices; but persons who keep servants could well afford the slight difference, even if it has not been made good to them by their higher earnings and greater saving power as workers. Still, I see no reason why wages of domestic servants and all other wages, which do not enter into the prices of tabulated products should not be tabulated.

Methods of Issue
We now come to the methods of issuing the paper money or of contracting the circulation when needed. Different systems are possible, and each would probably find a partial application. To a certain extent, the State would probably issue the money for public works of different kinds—for salaries and wages, for the defence of the country, etc.—and would accept it for duties, taxes, fares, freights, etc. Beyond this, the system of issue practised by our banks would no doubt be followed; overdrafts would be allowed and bills discounted. This system supplies the simplest mode of reducing the circulation when necessary by calling in overdrafts, temporarily raising the rate of discount or stopping discount altogether.

Crises Prevented
The danger now connected with such a procedure—crises often being precipitated through the very efforts, which the banks make to prevent them—could not exist under the new system. The reason is obvious. A financial crisis and a fall of prices are inseparable, for every merchant who is in financial difficulties naturally first tries to sell his stock at a sacrifice, if necessary, to obtain ready money; and wherever many merchants are making the same efforts simultaneously—as must be the case in any crisis—a rapid fall of prices must result. The case of the 1857 crisis, with its price fall of 27%, has illustrated this to us. But when prices fall under the new system money is immediately issued, and will meet a ready demand, because this very fall of prices shows that for the time there is not money enough in circulation; and this new issue must at once put an end to the crisis. Or rather, there will not be an end because there is no beginning, of which the crisis of 1847 furnishes an illustration: the trouble disappeared as soon as the Government showed its readiness to help. We saw that, practically, the Bank of England did not even make use of its privilege to issue more notes to any extent worth mentioning, for as soon as it was known that the notes could be obtained they were no longer demanded, because at once all over the country the money came out of its hiding-places. The United States crisis of 1893 was brought on merely because the depositors in the banks did not think they could get their money; and often, in a panic, we find people coming to demand their balances, and at once depositing the money again after they have obtained it. In fact, the first barometric sign of a trade depression, and its outcome, a financial crisis, is a fall in prices; and where such a fall at once brings more money into the market and thus stimulates the demand for merchandise, the prices must as quickly rise again, and the depression must cease.

However, this is a subject better treated later on, when we investigate the economic effects produced by a scientific paper money. Nor is this chapter the place to discuss the question whether the issue of the paper had better be left to private banks or to a State bank. My purpose here was merely the definition and classification of money in the first line, its value in the second. The proof had to be supplied that it is possible to create a paper money which can be relied on to maintain its standard of value better than gold coins, the limited stock of which can be cornered at any time with ease, in a world where a mere hundred of our millionaires are worth 1,200 million pounds—an amount one and a half times as high as the whole stock of our gold. Whereas the issue of gold money is narrowly limited by the existing gold stock, that of paper money can be adapted to the demands of the market. Cornering and locking it up can in no way influence the market, because at once other money will take the place of the money withdrawn. Paper money is thus the only money the value of which can be made as good as unchangeable.


[1] The Argentine Republic offers an interesting example of the hybrid nature of certain kinds of paper money. In 1869 the province of Buenos Ayres issued real paper money, on which was printed: “La Provincia de Buenos Ayres reconoce este billete por i peso moneda corriente.” (The province of Buenos Ayres recognises this note for i peso current money.) The present paper money of the Argentine Republic has the inscription: “La nacion pagara all portator a la vista por medio del Banco de la nacion Argentina i peso.” (The nation will pay to bearer at sight through the bank of the Argentine nation i peso.) Which means that for the paper another paper of the same kind is handed over on demand, as this paper is legal tender money, and is issued even for small change down to 5 centavos. As a peso in paper is worth 1s. 10d., the 5 centavos paper is worth about a penny. No other money, no gold or silver coins, are paid out by the State, or by the bank. These notes are not only a hybrid between paper money and money representatives, but also one between treasury and banknotes.

[2] This recalls a remark made by Thompson, in his Political Economy of the Scotch banknotes down to 1845: “The people will take guineas instead if they must, but they pass them off as soon as possible, as a pretentious, unthrifty, eminently un-Scottish kind of money, much inferior to a native banknote coined in any corner of Scotland.”

[3] Jevons draws special attention to this function as a measure of value by pointing out that “between one hundred articles there must exist no less than 4,950 possible ratios of exchange … all such trouble is avoided if any one commodity be chosen, and its ratio of exchange with each other commodity be quoted.”

[4] Better and inferior in the sense of the market price of the material coined. As William A. Whittick points out in his Value and an Invariable Unit of Value(Philadelphia, 1896): “The best money is that money that performs the money function the best and at the least cost. – The use of a valuable metal as a tool of exchange is just as absurd as would be its use in the manufacture of spades and shovels, and other tools of industry. An iron or steel shovel would always drive out a gold shovel, just as cheap money drives out dear money. For three centuries this paradox has been the apologist of an absurd system of money—a system in conflict with the universal law that the fittest survives. The money that runs away from its duties—that refuses to circulate—is, according to this absurdity, the best money. The soldier who runs away from the field of battle is, by this reasoning, the bravest and best soldier.”

[5] An interesting example showing how gold can even fall in value where it is not legal tender, in spite of its possessing that dignity in other parts of the world, is given by R. H. Patterson in The Economy of Capital; or, Gold and Trad

“In December, 1864, during the dearth of money at Calcutta, merchants who took £20,000 in gold to the bank could not get a single banknote or rupee advanced on it. The gold was of no use to them as money, nor could they get money in exchange for it. ‘The price of gold in Calcutta,’ said the Bombay Times of January 9, 1864, ‘sank early in this month so low that it could have been reshipped to London at 3% profit.’ In other words, although gold is the standard of Europe and America, and although it has been used for centuries as money in India, the fact of its not being legal tender in that country sufficed to lessen its value to the extent of 4½%”

When once a rational paper currency will begin its triumphal march round the world, when one country after another will sell its gold stock, it is quite certain that those last in the race will be the heaviest losers, as is the case with silver at present.

[6] I do not wish it to be understood that I accept Del Mar’s figures. He arrives at them by calculating the labour of miners at the wages paid during the mining boom, figuring from £3 per day for the year 1848 down to 16 shillings per day in 1856; and not satisfied with this, takes 300 days a-year as the regular working time. Even assuming these were only living wages, as cost of living was extraordinarily high, we have to go farther back to the providers of victuals, clothing, etc., before we can find the ultimate real cost of the gold. For instance, as much as a shilling was paid for an onion, and other things were in the same proportion. Now supposing the raising and bringing to market of 600 onions took a day’s work for one man, can we count the £30 thus made as the real cost of the onions? If such a farmer got fifty times as much for his labour as it was worth in ordinary times, even by taking into consideration his own greater outlays for necessaries of life which he could not produce himself, have we a right to count the miner’s labour, thus artificially raised in cost price, at this false level? If all those who supplied the miners with necessaries of life had only counted the usual wages of their labour, the miner would have been as well off with a fraction of the wages thus counted, and we certainly cannot reckon the extra profits so made in the cost of the gold. In fact, wages were artificially inflated, and as much has to be deducted on this score as on that of labour time. The idea of counting 300 days in the year on the average as really worked by thousands of dissolute men who, through debauchery and disease, often were more days idle than busy! If we reduce Del Mar’s figures accordingly, it is questionable whether a deficit will remain, especially when we consider that a good portion of the miners were shiftless men, adventurers who would have done very little work of any other kind if this work had not turned up. Del Mar entirely ignores the fact that there is such a thing as want of employment in this world; he seems to assume that every man born finds in his cradle a billet for every year of his life at the regular rate of wages for 300 days. When we find such calculations or those of Lewis A. Garnett, manager of the San Francisco Assaying and Mining Works, who counts 100,000 persons as employed on the extraction of the precious metals in 1869, costing at the rate of 12 shillings per day during 300 days in the year:  £18,000,000 against a production of only £10,000,000 worth of metals—we wonder where such reasoners obtain their absolute certainty of 300 days’ regular and good wages for 100,000 men if there had been no gold-mining.

There is no need for such exaggerations. Even the real figures supply a sufficiently stem accusation against our money system, which is at the bottom of such waste of economic power; to which has to be added the ruin brought down upon fertile lands through placer and hydraulic mining. Del Mar estimates that 20,000,000 acres have been—in the United States—torn up by placer mining alone; and a report from the Agricultural Bureau of the country computes the annual damage done by hydraulic mining at £2,400,000 a-year, which comes up to the whole yield from hydraulic mining and drifting.

Add to this loss the corrupting influences upon soul and body of such a congregation of adventurers coming together from all parts of the world, whose very work is a kind of gambling, and whose terrible hardships are a prolific cause of disease and death! Certainly the accounts need no swelling by the voluble pens of statistic manufacturers. That the association of mining and gambling is not new is proved by the following passage from Adam Smith: “The same most respectable and well-informed authors (Frezier and Ulloa) acquaint us that when any person undertakes to work a new mine in Peru, he is universally looked upon as a man destined to bankruptcy and ruin, and is on that account shunned and avoided by everybody. Mining, it seems, is considered there in the same light as here, as a lottery in which the prizes do not compensate the blanks, though the greatness of some tempts many adventurers to throw away their fortunes in such unprosperous projects.”

[7] Proudhon expressed it in these words: “The value of labour is a figurative expression, an anticipation of effect from cause. …, It is a fiction by the same title as the productivity of capital. Labour produces, capital has value; and when, by a sort of ellipsis, we say the value of labour, we make an ‘enjambment,’ which is not at all contrary to the rules of language, but which theorists ought to guard against mistaking for a reality. Labour, like liberty, love, ambition, genius, is a thing vague and indeterminate in its nature, but qualitatively determined by its object; that is, it becomes a reality through its product. When, therefore, we say: This man’s labour is worth five francs per day, it is as if we should say: The daily product of this man is worth five francs.”

[8] Professor Senior says very correctly: “Any cause of limiting supply is just as effective a cause of value in an article as the necessity for labour for its production. The cost of producing money is only important as affecting the supply. Limit the supply, and it does not matter whether there be any cost of production or not.”

[9] On July II, 1864, the proportion became 285 dollars in greenbacks for 100 dollars gold.