Currency and banking

Preface

This work is founded on the view of Currency and Banking taken in the Lectures on the Principles of Currency, delivered at Oxford, and published in 1869, and also in other writings. I have met with no reason which, in my opinion, requires that the views therein expressed should be altered.

Chapter I. Metallic Currency

To commence an investigation of the principles of currency is to enter a region which may be justly described as chaos. The very sound of the word currency makes a man turn his back or shut his ears ; his immediate instinct is to fly from a subject with which he associates such unendurable jargon. To obtain clear, definite, and intelligible knowledge in currency almost seems to be a task exceeding the powers of the human intellect. " There was no need," exclaimed recently an Ex-Lord Mayor in the House of Commons, " to go into all the deeper quagmires of bank-notes and such things, which no man could understand in this world, or, as he believed, in the next." Yet what is currency but one of man's own inventions, a contrivance which he has himself devised for rendering an indespensable service to the practical life of every civilized people ? It is easy to conceive that the most familiar natural objects should possess secrets which no research

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2 IS MONEY THE ONE INCOMPREHENSIBLE THING t

nor acuteness can explore ; the meanest plant and the humblest animal inexorably refuse to reveal what life is. But that machinery expressly invented by man himself to accomplish any obvious purpose — that tools which men constructed at the dawn of civilization, and which are now at work every hour and in every country — that the action of such instruments should be incomprehensible to man's reason is assuredly a most astonishing marvel. And what increases the wonder is the certain fact that it is of vital importance to every nation to solve correctly the questions of currency. A bad currency, as experience has only too often shown, inflicts severe calamities on a nation ; loss and ruin, public and private, all history teaches, are the deadly arrows which an ill-constructed currency carries in its quiver. Thus every kind of political and social motive calls for the right understanding of a tool which is in every man's hand, and yet, if we may judge from the floods of speaking and writing which have been poured forth about it, what money is and does, what is a sound and what a bad money, how it works, what effects it has and what it has not, are matters absolutely undiscoverable.

This failure, had it been inevitable, would have constituted the most wonderful enigma in the history of the human mind ; but it is neither necessary nor real. Currency can be easily and naturally explained if only men choose that it shall be. It is the one subject which mortals refuse to study. Every man thinks himself qualified to lay down rules concerning it, but without any sense of responsibility of first learning what it is. Thus currency has become the prey of every kind of arbitrary and ignorant assumption. In other subjects men know that they must not speak about them until they have mastered them by systematic study ; but every one thinks himself fit to dogmatise off-hand on currency. And who are the persons who inevitably come to the front as leaders under such circumstances ? The practical men, those who make large fortunes by handling these tools : who so likely to know all about them ? But do great bankers and bill-brokers study currency ? Have they, generally, any conception of disciplined and methodical investigation of the real nature of the operations they carry on ? Do they follow the road of all true science, and analyse down to first principles ? Had such been the course pursued by so-called authorities, currency would not be in the mire of confusion where we find it to-day. To extemporise dogma is far easier ; just as great astronomical authorities laid down, as the first principle of their science, that the planets moved in circles, for God Almighty would not suffer them to revolve in any but perfect curves.

True science alone is clear : and there is but one road to true science, a thorough analysis of all the facts and elements of a subject. With this law must be combined

4 ANALYSIS ALONE WILL TELL WHAT MONEY IS.

another — a firm determination to accept all that analysis teaches, and resolutely to reject all that is inconsistent with it. This last rule is of supreme importance in currency. No one accepts calculations which contradict the multiplication table ; in currency the common practice is to have no multiplication table, to lay down no first principle to which every doctrine must be referred. The absence of any effort to establish logical connection between new utterances and previously established conclusions is the peculiar misfortune of currency. Let us then eschew d priori and gratuitous theory, the theory of the great City practical man, the man of money ; let us seek, as others seek, that carefully co-ordinated science, founded on the facts yielded by analysis, which alone constitutes true knowledge.

We now proceed with our investigation. We seek to discover the motive, the action, and the laws of currency. But the word currency is an abstract term, a generic expression ; we must begin with the concrete, before we can sum up and generalise in an abstract formula. We must go to another word, money, for our starting point. Diverse meanings are loosely given to this word, many inconsistent with each other ; so that to say that currency is money would throw no light upon our path. Fortunately, however, there is a sense of the word money which no one disputes, which is recognised by the whole world. Whatever else may or may not be money, coin, at any rate, is money ; and coin is a definite, concrete, substance. The derivation itself of the word proclaims the fact : it comes from Juno Moneta, whose temple was the mint in which Roman coin was made, the stamped pieces of metal which constituted the currency of Rome. Thus the word money implies minting, that is, the shaping and stamping those bits of metal which are employed in buying and selling. Here we are on solid ground : we have an objective substance which it is our business to analyse, as to what it is and what it does ; every logical consequence we obtain from it we may rely on with perfect safety. No one denies that coin is true and complete money ; what coin yields us belongs to money. Now what does the examination of a coin teach us ? It is a shaped piece of metal with a mark upon it. The first point we observe is — (we will speak here of gold, confessedly the best material for coin)— that it is composed of a metal, and that this metal is a very valuable commodity. It is an article very expensive to procure, possessed of high value before it was manufactured into a coin. Whoever has obtained a sovereign, whether on the sale of goods or in payment of a debt, has given twenty shillings worth of property to acquire it. It has cost miners in distant regions, and under •circumstances often of great difficulty and trial, a large amount of labour and a heavy expenditure for maintenance and tools, to extract it from the bowels of the earth. They can afford to part with it only on the same general

6 TO GET MONEY NOT AN INCREASE OF RICHES.

conditions as those on which iron or tin miners give their metals to the community. They must be repaid their expenses and receive an adequate reward for the services which they render to society. The quantity of gold won is small compared with the cost of working a gold mine ; gold consequently is dear : a small portion of it will fetch in exchange a large amount of other commodities. This satisfaction must be rendered to the miners or the gold coin will not be produced : and every one who acquires that coin in succession, except as a gift, has been obliged to restore to the person from whom he got it the cost originally paid to the miner. This is a fact of capital importance in currency. No man acquires a piece of metallic currency, of money, except by giving for it its full value in other goods. From this fact it necessarily follows that to sell property and to receive in the place of it golden coins, money, is no increase of riches. It is an exchange of two equal quantities of wealth, of a precious metal for some other article. In the estimation of the two parties to a purchase, the coin is worth the property, and the property the coin ; and that is the whole of the matter. The bearing of this truth on the common idea that money is in a peculiar sense riches — that the object of all trade should be to obtain money — that a trade which exports more goods than it imports, and brings in the difference in gold is the truly beneficial trade — that gold is a possession more to be rejoiced in than any other by every nation is obvious and will be considered hereafter.

The question immediately arises : Why do civilized nations buy this costly metal ? Property is given away for it at all hours : what has led to such a practice ? It is easy to understand the pursuit of food and clothing, of ornaments for house and garden ; they are desired for consumption and enjoyment. But it is otherwise with a coin. It is not procured for pleasure or ornamentation — nay, it is obtained to be parted with at the earliest opportunity. It yields nothing whatever to its possessor, except when it leaves him. This energetic desire to acquire money at heavy cost must find its gratification in something which money bestows in the act of going away again. To keep it is wholly without profit or enjoyment ; what, then, is the explanation of this incessant purchase of gold and equally incessant parting with it as soon as got ? The answer is plain. Coin is manufactured in order to effect a service : in other words, it is a tool, which has the work it performs as the sole reason for its being made. It renders a useful and valuable service. In the act of passing away money is a tool : it does its work, not by staying in its owner's hands, but by leaving them : no other conception of coin is rational or intelligible. It may be purchased long before it is used, as Napoleon I. stored many millions of pounds at the Tuileries in readiness for possible war, or as bankers pile up reserves to guard

8 MONEY A KIND OF CART.

against the uncertainty of the payment of their debts being suddenly demanded of them. But this changes nothing in the nature of money : it only indicates that it is occasionally wise with money, as with other tools, to provide a stock of it beforehand, lest it may not be procurable at the moment when it is required for use. The truth always remains the same that money is of no utility whatever except when employed as a tool, that is, except when it exercises its proper function by being got rid of in exchange for other property. It is a machine — a means, not an end — an instrument of the same class as a ship or a cart, a means of conveyance. The common cart transfers weights, the money cart transfers ownership. Who ever bought a cart for the purpose of enjoyment in itself ? What man, not under a delusion, ever bought money, coin, except with the object of exchanging it for something which he needed ?

But why was such a tool required ? A cart which should transport weights which human arms could not carry is an obvious want. The intervention of coin at first sight is not so apparent. Yet the need of money in some form is one of the most urgent wants which beset humanity. Without its aid society would be brought to a stand-still, for the very decisive reason that those who wanted to obtain particular goods would otherwise be seldom able to find sellers who would be willing to accept those which they had to offer in exchange.

The tailor might starve before he found a baker who was in want of a coat. This great want is the consequence of the most distinguishing peculiarity of social existence, the division of labour — or rather the separation of employments. This is the fundamental law of society. Whether in a small village or a great nation, whether in a poor land or in a country filled with gigantic manufactures, the same phenomenon ever presents itself ; the providing of the multitudinous things which human life consumes is distributed naturally and necessarily amongst special makers. No man above a savage supplies all his own wants ; every one has recourse to fellow-men for procuring every article that he uses, except those very few which he can make himself. Here springs up at once the great problem — by what method and upon what principle can he obtain these things made by others ? Only by exchanging, by giving to others what he made for them, and receiving from others what they made for him. But for exchanging each party to it must desire to acquire the articles which the other offers, otherwise he will refuse to exchange. This dilemma might arise with every article needed. The hatter might find neither baker nor butcher nor shoemaker who was in want of a hat ; direct barter would be impossible, and his trouble might be great. To overcome this difficulty — a difficulty which would have been fatal to civilization — money was invented ; and it removes the obstacle perfectly. The

IO WHY MONEY WAS INVENTED.

action of money is to substitute double for single barter, and the difficulty is instantly conquered by it. The impediment to exchanging was that one of the exchangers did not want the article offered by the other ; the solution consisted in interposing a third article, for which each of the two articles might be separately bartered. Go and barter your hat for money, cried the shoemaker, then bring me that money, and the shoes shall be yours. In other words, the shoemaker demands money, and with it he selects for himself in any shop any article that he desires to attain. That is the action and essence of the use of money. A sale for money is thus half a transaction — the exchange is completed only when the shoemaker has obtained with the hatter's money at his own choice one of those commodities which was his motive for engaging in the manufacture of shoes.

i. The first point to be noticed in the transaction is that the seller must feel sure that all other tradesmen will consent to do exactly the same thing that he has done — will give him their goods for money as readily as he gave away his shoes for it. Now this assurance rests only on voluntary consent ; no law commands traders to sell for money. A banking oracle of great eminence once expressed unbounded astonishment on being told that a shopkeeper was not bound to give his goods away for money ; he confounded the voluntary affixing of money prices on goods with the

METALLIC CURRENCY. I I

obligation imposed by the law of legal tender of discharging debts with money. Aristotle knew better, but then he was a scientific analyst rarely equalled among men. He stated that men " agreed " to take money in exchanging ; and it is a matter of voluntary agreement to this hour.

2. But what is the foundation of this voluntary agreement to take money ? A seller cannot part with his property in exchange for money which is useless to him unless it furnishes him with a guarantee that in the end he shall procure by its means as much property as he gave away. How does money supply him with such a guarantee ? By the value of the metal, as a commodity, in the metal market, of which the money, the coin, is composed. The coin places in the hands of a tailor a portion of metal which is worth to a goldsmith as much as a coat is to the tailor. The one function of the tool of exchange is to give to a seller a guarantee, a thoroughly trustworthy security, that he shall get by a second purchase all that he gave away on the first. This is as truly, as essentially, the work of money as to cut is the work of a knife. This work is performed by giving value for value, and it is precisely because he gets value for value that a seller parts with his property without hesitation. He knows that the same feeling will act on every other trader ; with metallic currency, with coin, every one has a complete assurance that he gets in money a commodity worth that which he is selling.

1 2 THE WORTH OF THE METAL THE VALUE OF COIN.

The convenience of having a common tool to serve as a medium of exchange is overwhelming ; every shopkeeper will take the coin, because every one in succession is exchanging equal property for property. It is the value of the gold in the metal market which enables the tool of exchange to command equal goods in every shop. Double barter, the hat exchanged for money, and the money in turn exchanged for shoes, thus effects one exchange, a hat for shoes, by the agency of two half-transactions : such is the action of money.

But many deny the accuracy of this analysis. It is the coining, they say, the stamp impressed on the money, which gives it its value. The worth, the buying power of a sovereign, they insist, is settled by the stamp. The Mint coins an ounce of gold into £3, 17s. io^d. Here is the definition of a pound, and a pound is the meaning and worth of a sovereign. The absurdity of these assertions is so ludicrous that it would scarcely be worth the trouble to refute them, were it not for the obstinate tenacity with which so many persons cling to them, to the consequent confusion of all ideas on currency. If the stamp gave value to the coin, the same stamp on a piece of copper would bestow on it equal value with a golden sovereign, and the decree of the Mint would enable it to buy an equal quantity of goods in the shops — which, in the language of Euclid, "is absurd." If a copper coin could be obtained from the miners only at the same cost with a gold one, they both would

METALLIC CURRENCY. I J

be equally valuable ; but it cannot, and so the goldsmith will give a vast deal more for the gold coin than the coppersmith will for the copper one ; and that is the very reason why every seller will give many more goods for the one than he will for the other. That money is a commodity, and acts by virtue of being a commodity, was clearly perceived by Aristotle. " Men agreed," he remarks, " for exchanging to give and take one of the useful things," that is, a commodity, and consequently a commodity has ever been the instrument of buying, the tool of exchange. In one country furs, in ancient times cattle, sometimes rocksalt ; at this day, amongst the Tartars, small cubes of compressed tea, most frequently some metal. Aristotle's dictum is abundantly verified at the present hour, in the case of English money, for sovereigns which foreigners have purchased with their goods are constantly melted down abroad into ingots — a proceeding which could not possibly take place if the stamped sovereign were worth more than the gold it contains. It is the intrinsic value of the metal, its cost as a commodity, which does all the work of a coin.

The absurdity of the notion that the Mint, by coining sovereigns, assigns to them their value, is refuted at once by the remark that when gold was some fifteen times dearer than it is now — that is, when a quantity of other commodities fifteen times larger had to be given to the miner to persuade him to dig the same quantity

14 WHAT IS A POUND ?

of gold out of the earth — the same coin purchased fifteen times as many other goods as it would now. Prices were then fifteen times lower in nominal amount. A buyer puts his own value on his money quite as really as the seller does upon his goods. Each party values for himself his own commodity in the act of barter called a purchase. Those who bring in the Mint as a regulator of price have no conception of the answer to be made to Sir Robert Peel's famous question, " What is a pound ? " The answer, no doubt, is furnished by the Mint, not in value, but in quantity. The Mint replies by setting an arithmetical sum. Given that 20 shillings make a pound and 12 pence a shilling, it declares that a pound is that part of an ounce of gold which will produce £$, 17s. io}4d. for the whole ounce ; in other words, it proclaims that in law and fact a pound is so many carats weight of gold. These carats are contained in the current coin called a sovereign ; so that a pound is another name for a sovereign. Whenever a pound comes before a court of law, it will compel a sovereign to be given for a pound. Not a trace of value is contained in the expression.

3. The Mint imposes a stamp on the coin ; for what purpose ? To give information ; to make known, on the word of the Government, that the coined sovereign handled is made of standard gold and possesses in full the prescribed weight. In the words, again, of Aristotle, " impressing a stamp on the money, to relieve men of the trouble of measuring it." As Mr Adams has well phrased it, " to save every man the trouble of carrying about with him a bottle of acid and a pair of scales." Ingots have to be tested before they are received in payment; a stamped sovereign or dollar tells every one what it is. Nothing can be more obvious than this fact ; yet how many, even intelligent men, have been puzzled to say what the stamp it bears does for a sovereign.

4. Although any commodity, in principle, may serve as the tool of exchange, practically, every nation that could obtain the precious metals has employed them as money. They had excellent reasons for the choice. Gold and silver are veiy portable, that is, they are light compared with their great value, clean to handle, beautiful to look at, go into small compass, hard and therefore enduring in use, retain the marking stamp easily and long, and extremely divisible. They bear being cut into coins of different size, with proportionate value to their weights. When much worn, they still possess a perfectly real value up to what remains of metal in the coins. The bullocks of Diomed and America must have been very awkward money, most hard to dispose of till the time came for making purchases with them ; they required stables and food. The precious metals do not deteriorate in their physical qualities by being handled and used. Cattlemoney is very perishable ; equally so lumps of rocksalt. Nor can cattle be divided ; an ox could be dealt

1 6 WHY GOLD AND SILVER CHOSEN FOR MONEY.

with only as a whole ; a piece could not be cut off from him to serve as small change. Then again coins, especially gold ones, if no longer wanted for money, are readily convertible into pure metals, retaining their full value as commodities for use. The demonetisation of gold would not injure holders of full weighted sovereigns or dollars ; they would be converted into jewels and ornaments at once. Lastly, the precious metals possess in an eminent degree the first requisite of good money, steadiness of value. The essence of the action of money lies in the guarantee it gives for purchasing other goods of equal value with those given for it ; a changeable guarantee breaks down in its most vital quality. Every contract, every debt, supposes that the value understood at the time shall be paid when due. Absolute certainty on this point is not obtainable ; because value is expressed in a commodity, and there is not a single commodity which is not liable to some fluctuation of value. But the money which ismade of the steadiest commodity is incomparably the best. Professor Sumner humorously points out the unsoundness of the guarantee furnished by several forms of money, or rather of the tool of exchange. " If a cow will pay taxes, as it did in America, the leanest cow will be given. If corn will pay a debt, the corn which is of poorest quality, or is damaged, will be paid." No doubt, gold and silver, on the discovery of America, sustained a heavy change of permanent value, to the great disturbance of all contracts and debts stipulating payment in these metals. They may subsequently have undergone some further depreciation, although this by no means must be taken as proved ; nevertheless they are less open to the charge of changeableness than any other commodities.

These weighty considerations combined have prevailed in establishing metallic coin as the universal money ; and this money is a collection of small portions of a precious metal, called coins, whose weight and purity are attested by the State.

The right of attesting the public money, of coining, is usually claimed as a prerogative inherent in the State ; but this doctrine belongs to a political philosophy which is fast passing away. Thomas Aquinas saw the truth long before it dawned on the mass of mankind — "Rex datur propter regnum, non regnum propter regem'' Whatever authority or right is possessed by rulers had its origin in the interest of the whole people ; but mediaeval kings, who reaped large profits from the adulteration of the coin, were slow to perceive the application of this principle to currency. That coining should be exclusively vested in the State rests on a vastly stronger foundation than prerogative ; the State can do the work best, and that reason is sufficient and decisive. That the public money should be honest and be what it professes to be, deeply concerns the public welfare ; and no attestation furnished by private persons

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1 8 THE GOVERNMENT THE BEST COINER.

can compete in authority with the stamp imposed by the Government Mint. Private persons are capable of putting as good coin into circulation as the State, just as they circulate ingots ; still no authentication can give a warranty as good as that of the State.

5. Our analysis lastly teaches us the origin of the expression Currency. It is derived from the Latin curro, I run ; and our description shows that money runs. It circulates. Its office is to place certain goods in a buyer's hands : that done, it leaves him in order to repeat the same operation for the seller who took it. He has no motive — save occasionally for a spare stock — for keeping the money ; he accepted it for his goodsonly to buy with it in turn. The sooner he calls upon it to fulfil its office, and to run away from him, and to transfer itself to the pocket of some other seller, the better. The faster money circulates, the greater is the quantity of work got out of it. The longer it lies in a pocket or a till, the more it assumes the character of a cart or a plough lying unused under a shed.

We now reach the second great benefit conferred by money. It was invented in order to escape the insuperable difficulty presented by single barter to the exchanging of the products of industry, which, by the law of human life, no man can make entirely for himself.. So they are all first bartered for money, and the money re-exchanged for other goods. Thus, as a necessary consequence, every commodity is compared with money;, the quantity of money to be given for a particular quantity of the article is determined ; in other words, every article acquires its price. But, by the fact that each article is compared with money, and its exchangeable value with money affirmed, all commodities can be compared in value with one another. Price is the value of an article calculated in money; and as every article has its price, the prices of all can be compared with another. Money becomes a standard of measurement, precisely as the yard is the standard of length. Lengths and distances can be stated as longer or shorter than each other by each being expressed in yards ; so the relative worth of saleable goods is measured by the worth of each singly being expressed in money. Thus money is the common measure of value. Money, however, I conceive, was not invented for effecting this great service of providing a common measure of value ; the service was the result of the fact that money, by its very nature, was measured in barter against every commodity, all being sold for money. To get over the difficulty that a seller of goods might not want the other goods offered by the buyer was alone the true origin of money.