Currency; or, The fundamental principles of monetary science postulated, explained, and applied ..

Front matter

£>tate College of Agriculture at Cornell Untoersttp

Stbaca, &. g.

Currency; or, The fundamental principles

Preface

A portion of the postulates on which this work is founded appeared in the winter of 1875-6 in "The Anglo-American Times/' a journal published in London. My object was to direct attention to the desirability of embodying in a few simple, if not self-evident propositions, the ascertained and generally accepted principles of Monetary Science.,- Many friends and others for whose judgment I have much respect, to whom I had sent copies of the journal containing my articles, having expressed themselves warmly in favor of this plan of treating the money question, I determined to extend its scope, and to write the work I now have the honor to submit to the candid criticism of those who make economic science a study. One of the gentlemen referred to, Professor Bonamy Price of Oxford, an able analytical writer on Banking and Currency, in his usual frank and , candid manner, wrote me promptly on receipt of the number of " The American Times " as follows : —

"So many thanks for your letter in 'The American Times.' It is exceedingly good; and I rejoice over it much, especially the postulates and principles. The 21st (35th in this work) is capital. I had the thought, but not definitely expressed. The meaning jumps on the reader, and masters him ; and it is most true."

IV PREFACE.

When I commenced my investigations on this subject many years ago, it was my intention to write a sort of history and synopsis of the theories and practices of ancient and modern nations in respect to their currencies. This I soon found would occupy much more time than I could then devote to the subject. Again, in the winter of 1875-6 I took up the same idea; and, though I felt that such a work would be of much utility, I found on an examination of the authorities in the British Museum, that I had not the time to carry out the plan. Hence, I turned my attention to reasoning out the principles of the science of currency, and applying them to practical purposes, with the hope of influencing thought towards currency reform, in those countries where the question is undergoing constant discussion. Such are the circumstances that have led to the writing and publication of this work.

Finding in the present systems of issuing and supplying paper money, so much that is at variance with correct scientific principles, I have devoted much space to attacking the prejudices and ignorance which uphold them. No sound system can be established in any country without rooting out the "vested rights " of those who make a profit out of issuing paper money. I have, therefore, vigorously assailed the plan of delegating the right to issue paper money to the Bank of England and National Banks of the United States, on securities or otherwise. The result of my deductions has been the evolvement of a purely automatic method of supplying both coined and paper money, — supply and demand

PREFACE. V

being the only motive power to be used in keeping the automaton in motion.

The attention of those who are laboring in the same field is directed to the circumstance, so often pointed out by Professor Price, that the "mercantile theory," which teaches that the first consideration of economists and legislators is to pursue measures that will accumulate the largest possible stores of the precious metals in a country, is still a fundamental doctrine in some minds, and exerts a powerful influence in the action of the Bank of England as well as of a large class of protectionists in America. The plan I contend for leaves these metals free to the distribution of the natural forces of industry and trade.

In conclusion, to the plan I have adopted in the treatment of the money question will be conceded the characteristic of novelty, and is put forward with the confident hope that it will lead others to perfect it. It is desirable to eliminate erroneous dogmas and fundamental errors, in order that a really correct system may be left as the result. Much has been done since the days of Adam

Smith, but much still remains to be done.

H. B. W.

New Yoek, May, 1879.

SYNOPSIS OF THE WORK.

Chapter II. Labor, Capital, Wealth, Skill, And Machinery

PAR.

1. An authoritative treatise on Political Economy still a

necessity „ . . . .16

2. The civilization of a country is in the ratio of its knowl-

edge of correct principles 18

3. Points insisted on in this work 18

4. Definitions of terms used in this chapter - . . -19

5. Capital and Wealth in their largest sense identical, and

include every thing having market value ... 20

6. Mr. Thomson Hankey's definition of Wealth ... 20

7. His errors, and want of clear perceptions . . .21

8. Every thing that can be sold, or used to raise capital, to

be treated as capital 22

9. Some modifications in use of terms 22

10. Great confusion of ideas among writers of " money arti-

cles " on the subject of " money " and " capital " . -23

11. The term "Trading Power" introduced .... 23

Chapter III

CAPITAL AND "TRADING POWER" FURTHER CONSIDERED. — ITS TRANSFER FROM ONE FORM TO ANOTHER.

1. Absurdity of treating capital and money as the same

thing, and the terms as synonymous .... 24

2. Floating capital, on analysis, is resolved into goods, and

the accumulated profits of industry .... 25

Vlll SYNOPSIS OF THE WORK.

PAR. PAGB

3. Fixed capital is whatever possesses the quality of per-

petuity 25

4, 5. Cash capital explained and defined .... 26

6. Capital invested in money yields no profit ... 26

7. Distinction between money, the tool used to measure val-

ues, and the things it measures. Paper money only a more convenient tool 27

8. A plethora of trading capital indicates a condition of

over-trading. The safety valve 28

9. Co-operation suggested 28

10. Dangers of accumulations of vast amounts of wealth . 29

11. The happy medium, where labor and capital work in har-

mony 3°

12. How money measures capital and values .... 31 13-15. The business of a banker to develop trading power.

The marvellous effect of modern banking . . ■3 I >3 2 16. The mistake in clamoring for more money when it is

more trading capital that is needed .... 32

Chapter IV. Value

1. John Stuart Mill, on the importance of the subject . . 33

2. Still an unsettled question 33

3. Errors of Adam Smith and other economists about mar-

ket value 34

4. Value the average price of goods in an open market . 34

5. Error of Mill's theory 35

6. Mr. Dunning McLeod's dicta on the question 35

7. The principles which govern market value postulated . 36

8. Supply and Demand an equation 36

9. 10. It takes both sides the equation to establish and regulate value 37

11. Mr. McCulloch's formula a non sequitur .... 38

12, 13. Other illustrations fallacious 39

14. The illustration of the two knights and the shield very

15. Some absurdities of Professor Cairnes's theories . . 41

16. Numerous trashy books on political economy ... 41

SYNOPSIS OF THE WORK. IX

Chapter V. How The Value Of Money Is Set And Regulated, And

HOW IT DIFFERENTIATES OTHER VALUES.

PAR. PAGE

I. The value of money in the ratio of its volume, or set and

maintained by supply and demand .... 42

z. Difference between convertible and inconvertible paper

money 42

3. Superior fitness of gold and silver for measuring values . 43

4. How the value of the metal and the volume of money in

circulation act on each other 43

5. The supply of money the nearest approach in most coun-

tries to free trade 43

6. The coinage of money illustrates the advantages of free

trade 44

7. How the value of money and of bullion are made to coin-

cide 44

8. Paper money issued on gold or fully covered by gold is

regulated by the same principles as gold money . . 44

9. Under free coinage and conversion, no more gold or

paper will ever be issued than is needed for use . . 45

10. The absurdity of the cry for " more money " . . 45

11. The cry for more inconvertible and depreciated currency

still more idiotic 45

12. No accurate method of regulating the volume of incon-

vertible paper money 46

' 13. Remarks of Mr. J. B. McCulloch on the subject . . 46

14. Ignorance of legislators on the subject .... 46

15. Subject better understood in France than in other coun-

tries 47

16. Science demonstrates the superior fitness of gold and sil-

ver for coinage . . 47

17. Taxation for revenue the justifiable method of taxing the

products of labor 48

18. Distinction between the terms " Standard of Value " and

" Measure of Value " 48

Chapter VI. "nomisma," Or Legal Tender, And Bi-metalism

I. The ratio between gold and silver regulated by supply

and demand 49

X SYNOPSIS OF THE WORK.

PAR. PAGH

2. Bi-metalism in France and the United States ... 50

3, 4. In France the market value of subsidiary silver coin

maintained by limitation of volume . . . . 5 1

5. The " craze " about silver coin in the United States . 51

6. Bi-metalism in Great Britain and Germany ... 52

7. Inconvenience and effect of having two standards of

8. Aristotle on nomisma, or legal tender .... 52

9. Justinian's admirable exposition of money • • • S3

10. He points out the desirability of using a metal of high

market value 54

11. M. Cemuschi's errors about money 54

12. 13. Sir Isaac Newton's views generally correct . . 55

14. Gold the best of all metals for a measure of value . . 55

15. Evils that are certain to follow from the Act of Congress

of March, 1878 56

16. Great recent fluctuations in value of silver ... 57

17. No object and no economy in silver money ... 57

18. Overvaluing of the silver dollar a fraud .... 57

19. 20. M. Cemuschi's views on a bi-metallic currency, and

money 58

21. If the proposal to have two standards were admissible,

nothing would be gained 59

22. Great variations in the market value of silver in three

centuries and notably of late 59

23. Modified views of M. Cemuschi 59

24. The chief object of the bi-metalists is to create a market

for silver, which is contrary to monetary science . . 60

25. The true plan is to leave the people to choose how many

of each kind of coins they require .... 61

Chapter VII

THE ORGANIZATION OF THE BANK OF ENGLAND. — THE LAW, THE FACT, AND THE SCIENCE OF THE CASE.

1. Misconceptions respecting the law and of the bank in

the monetary system g 2

2. The law leaves a large discretionary power never exer-

cised 62

3. The provision for separating the Issue from the Banking

Department (j 2

SYNOPSIS OF THE WORK. XI

4. The law mandatory only as to first issue on securities . 63

5. Thereafter amount of such issue might be lowered and

raised, within statutory limits, at pleasure ... 63

6. Error in not acting on such discretion .... 64

7. First statement under the Act 65

8. The Issue Department a statutory state-office, but the

bank is liable over for all the notes .... 65

9. The practice of the bank not the result of the law . . 66

10. Error of Mr. Hankey on that subject .... 67

11. Notes held in reserve must be held to be the same as

others ; namely, in circulation 67

12. Mr. Leonard Courtney, M.P., on this subject ... 67

13. He suggests a "mechanical separation" of the two de-

partments to get rid of confusion of ideas ... 68

14. Mr. Hankey's claim only true as to notes issued on

metal 69

1 5. The bank ought not to be a dealer or speculator in bul-

lion 7°

16. He correctly states what is good cash reserve ... 70

17. The error of treating all notes as if issued on metal . 71

18. The summing up of logical conclusions . . . .71

19. Bank doctrinaires treat with scorn what they cannot an-

swer 72

Chapter VIII. Professor Bonamy Price On The Bank Charter

1. The error of the Professor about the power of the bank

directors over the issue 73

2. Erroneous view of the directors and the Professor about

the calls for gold. He claims that the gold in the Issue Department does not belong to the bank, though the bank draws it for its own business .... 73

3. The Act is not responsible for the bad system of the bank,

as alleged by the Professor 75

4. Professor Price inconsistent with himself .... 75

5. The bank equally inconsistent with itself .... 76

6. The Professor declares the Bank Act a failure as to the

purposes of its " promoters " * 77

7. The Professor's suggested amendment . . . -77

SYNOPSIS OF THE WORK.

8. A surgical operation, severing the connection between the

bank and the Government, alone capable of effecting a change in the present system 78

9. The Professor called on to " rise and explain " 78

Chapter IX. Theory And Practice Of The Bank Of England Fur- Ther Considered

I. The policy of the bank opposed to sound theory and

practice 79

z. The traditional policy of the bank induces a chronic

feverishness in financial affairs 80

3. Its whole proprietary capital being loaned to the Govern-

. ment, the bank trades wholly on borrowed capital . 81

4. Illustration of this fact 82

5. If the notes issued on securities and metal were made, by

law, distinguishable from each other, this fact would become conspicuous 82

6. A million of coin would not then be held to be sufficient

cash margin against forty or fifty millions of immediate liabilities 83

7. The practice of the bank, in respect to cash reserve, dif-

ferent from that of other banks 84

8. The alleged prudent management considered ... 84

9. Does the bank make, or follow, the " rate " ? . . -85

10. Motives imputed to the bank for playing with the rate . 85

11. The effect, on industry, of frequently changing the rate . 86

12. In effect the same as a changeable tax on industrial

productions 86

13. Imputations of mercenary motives considered ... 87

14. Bank losing its power in the loan market .... 87

1 5. Raising the rate often fails to stop export of bullion . 88

16. The bank policy opposed to free trade .... 88

Chapter X

FALLACY OF THE THEORY OF "ACTING ON THE EX- CHANGES " BY THE BANK OF ENGLAND. — VIEWS OF MR. ERNST SEYD.

1. Mr. Ernst Seyd's views from an actuarial point . . 89

2. He shows the error of the bank in treating its own share

of the note issue as good cash reserve .... 90

SYNOPSIS OF THE WORK. Xlll

3. Not good banking to invest other folks' capital in long

securities liable to rapid fluctuations .... 91

4. Bad effects of the practice on other banks and banking . 91

5. The falling in, to the Bank of England, of the whole cir-

culation of the kingdom, will intensify the evils of the

present system of management 9?

t>. A change in respect to the note issue needed, if the bank

absorbs the whole circulation 92

7. Mr. Seyd rightly treats the notes held by the banking side

the same as if issued to the public . . -93

8. He points out the evil of playing with the rate . . 93

9. The only remedy, an independent state department at

Whitehall 94

10. Mr. Seyd's arguments prove demonstrably that Mr.

Hankey's assertion that the bank has no control over

the note issue is erroneous 94

11. Mr. Seyd's fallacy about " a more perfect working system

between bullion and interest " 95

12. Bullion has no more influence on interest than any other

commodity 95

13. Side issues ought to be avoided, in considering the note

circulation 96

Chapter XI. Money And Bullion. — Wrong Theories Respecting

THEM.

1. The precious metals only one of many factors in the great

sum of commercial transactions 96

2. Money and bullion confounded with each other . . 97

3. The distinction obvious and important .... 98

4. Wherein they differ from each other .... 98

5. Other distinctive features. Action of supply and demand

on the circulation of money 99

6. A universal monetary system necessary to an equable

action of the natural laws on circulation ... 99

7. Great confusion of ideas growing out of the use of the

terms " bullion " and " money " indiscriminately . . 99

8. Mr. Stuart Mill's fallacies respecting the action of supply

and demand on money 100

XIV SYNOPSIS OF THE WORK.

9. Goods are not sold for money, but trading power, of

which money forms a very small percentage . . . 100

10. Goods furnish their own trading power .... 101

11. Modern banking affords the method of using it . . 102

12. Bullion is not used to settle foreign balances of trade, so

long as any other article pays a better profit . . . 102

13. The importation of bullion a sign of poor trade . . 103

14. Ignorance on this subject in the United States. Errors

concerning the " balance of trade " to be considered . 104

Chapter XII

POPULAR ERRORS RESPECTING THE BALANCE OF TRADE. — THE NEW MERCANTILE THEORY.

1. The old mercantile theory. It taught that the leading

object of foreign trade should be to attract the precious metals to a country 105

2. The policy of the Bank of England founded on this false

theory, and opposed to free trade 105

3. What Professor Bonamy Price has done to expose this

policy 107

4. The theory of the bank stated. Identical with the old

mercantile theory in effect. The true principles of trade postulated 107

5. No difference in principle between domestic and foreign

trade 108

6. These postulates overthrow the Bank of England dogmas.

Former delusions of the bank managers . . . 108

7. Palpable absurdities respecting the "favorable balances

of trade " 109

8. Foreign and domestic trade must be treated as identical

in principle 1 10

9. Delusions respecting debtor and creditor nations . .111

10. The vulgar theories of trade pushed to the argumentum

ad absurdum . . . . . . , . . nfc

11. Bullion no better to settle balances than corn or cotton . 112

12. A great practical illustration of this truth . . .112

13. All trade should be regarded from a universal stand-point . 113

SYNOPSIS OF THE WORK. XV

Chapter XIII. Money, Currency, Loans, And Checks. — True And

FALSE PRINCIPLES.

PAR. PAGE

1. The necessity of eliminating erroneous from true princi-

ples in economic science 114

2. Great confusion of ideas respecting currency and loans.

J. Stuart Mill on the subject 115

3. Necessary to differentiate the principles and processes

involved in the loan business 116

4. Wherein Adam Smith failed of a clear and precise view

of the things dealt in, in the loan market . . .116

5. He did not perceive how goods are made to " finance "

for their own production and distribution . . -117

6. What is the loan market ? 117

7. The " money market " not the loan market . . .118

8. The demand for money, or currency, not regulated by

population, but by industries 118

9. No connection between currency and loans . . . 1 19

10. No other natural rate of interest than that set by supply

and demand 120

11. Bankers and all others should buy their paper money of

the state, the same as they do metallic .... 120

12. Both kinds of money perform identical services . . 121

13. " Vested Interests " impede monetary principles . . 121

Chapter XIV

MONEY, CURRENCY, AND BANKING, AND THE ECONOMY OF PAPER MONEY CONSIDERED.

1. Fallacies respecting the advantages of delegating the

issue of paper money to banks 122

2. Errors of Professor Bonamy Price on the subject . .123

3. The question, Who is entitled to the profits of paper

money, — the nation, or the banks ? . . . .124

4. The Professor's error respecting the labor and capital in-

vested in mining, bullion, and money, and in perishable goods ... 125

5. Greater economy of a state over other issuers . . .125

6. The Professor inconsistent with himself . . . .125

XVI SYNOPSIS OF THE WORK.

PAK. TAGK

7. The substitution of paper for metallic money one of con-

venience, and the amount must be left to the regulation

of supply and demand 126

8. The present system of supplying paper money by the

Bank of England Issue Department one of great extravagance of metal 127

9. The circulation of the United States . . • .127

10. Estimate of actual net gain of the note issue in Great

Britain 127

11. The theory that paper money should be primarily con-

sidered as a financial expedient, discarded . . . 128

12. Comparison between issue of paper money in Great Brit-

ain and the United States 129

Chapter XV

BANKS OF ISSUE, DEPOSIT, AND DISCOUNT. — THEIR ORI- GIN. THE ISSUE OF PAPER MONEY NOT LEGITIMATE

BANKING. — CANNOT PROPERLY BE DELEGATED TO BANKS.

1. The great importance of the subject discussed in this

chapter. What is legitimate banking ? . . . . 130

2. Clearly and distinctly stated by Professor Price . . 130

3. The chief business of a bank is to utilize the market

value of goods in course of production, etc. . . . 131

4. The distinction between banks of deposit and discount,

and banks of issue 132

5. A banker the borrower and lender of other folks' capital

and trading power 1 33

6. When he lends his own notes, he simply trades on his

own credit His notes do not represent goods . . 133

7. The distinction between a man's trading on his own credit

and other people's goods 134.

8. The difference between ancient and modern banking . 135

9. The Bank of England the first bank of deposit and

issue established in England (1694). The name of banker unknown in England in the time of Charles the First I3 6

10. Started, and continued ever since, on false principles . 136

11. The epochs of manias for paper money .... 136

12. The original banks of issue neither borrowed nor lent

capital. Notes issued only on metal .... 137

SYNOPSIS OF THE WORK. XVU

PAR- PAGB

13. The note issue no advantage to Bank of England . . 138

14. Profits of issue not a primary object of paper money, but

to create a more convenient tool 139

15. The absorption by the Bank of England of the whole

issue of the kingdom will be calamitous, under present policy of the bank 139

Chapter XVI

BANKS OF DEPOSIT AND DISCOUNT, OR LEGITIMATE BANK- ING, versus banks of issue and clearing-houses.

1. How a bank of deposit and discount should be organized.

Must have an adequate cash reserve .... 140

2. The banker debits himself with his own and his custom-

ers' capital, and credits himself with the cash he holds, and bills, and other securities held for loans . . . 141

3. What capital a banker trades on, — money treated only

as capital 141

4. The check, the talisman that sets the whole in motion,

and makes trading capital available, where money plays

its part 142

5. A bank of deposit, pure and simple, as defined by Mr. J.

B. McCulloch 143

6. Such a bank an immense utilizer of money . . . 143

7. Other descriptions of business of bankers . . . 144

8. The clearing-house a mighty agent for settling balances

of traders, domestic and foreign 144

9. The common fund on which a banker trades made up of

all kinds of unused capital held by him, awaiting more permanent investments 145

10. The Bank of England an exception to the rule. A clear-

ing-house bank suggested 145

11. The issue of notes adds nothing to the successful conduct

of a bank. American financiers 146

1 2. The views of the late John E. Williams on the issue of

notes by banks 146

13. Views of F. A. Spinner, late United States Treasurer,

respecting the issue of paper money .... 147

14. Mr. E. G. Spaulding's contributions to the stock of knowl-

edge on banking . . • . . . . « . 147

XV111 SYNOPSIS OF THE WORK.

Chapter XVII

"THE PRIMARY OBJECT OF PAPER MONEY IS TO SUPPLY A BETTER TOOL OF INDUSTRY THAN METALLIC MONEY.

INCIDENTALLY ONLY CAN IT BE PROPERLY TREATED

AS TRADING POWER, OR RESOURCES" (POSTULATE 49).

1. This postulate opposed to the hitherto accepted doctrines

respecting the issue and uses of paper money. This theory wrong 148

2. The original banks of issue acted on the principles stated

in the postulate, in part. The creation of a better tool ignored entirely 149

3. Inconsistency of this theory. Issuing notes on public

securities a plan for organizing a bank without any capital 150

4. The idea of issuing paper money to make two pounds

out of one, fascinating, but delusive . . . -151

5. This idea at the bottom of all the fatal calamities result-

ing from the issue of paper money . . . . 1 52

6. This erroneous idea the chief motive heretofore, and in

America and the Colonies still, for establishing banks

of issue 152

7. Banks of issue always " over-issue," when not limited by

law. The Bank of England no exception . . .153

8. The only true principle laid down in the postulate at the

head of this chapter 153

9. 10. Traders and bankers should buy their paper money of

the state, as they do metallic money, at its full market value 154

11. The practice of taking up loans, by the issue of paper

money, fundamentally wrong 155

12. The public cry for the issue of notes by banks, a. mere

device to favor a class 156

13. Chevalier's theories in favor of a state issue . . .156

14. The India Issue Department, and the evils of a silver

standard 157

SYNOPSIS OF THE WORK. XIX

Chapter XVIII

SUGGESTIONS FOR STATE ISSUE DEPARTMENTS IN GREAT BRITAIN AND THE UNITED STATES, AND CONSIDERA- TIONS CONNECTED THEREWITH.

1. The elements for constructing such departments already

exist, and only need consolidation 157

2. May be called the " Money," or " Currency Department," 158

3. The change to the new system nearly imperceptible to

the public 158

4. Specification of chief duties 1 59

5. The question of using a part of the cash received for

notes to retire a portion of the public debt considered . 1 59

6. Question of compensation to issuing-banks discussed . 160

7. How to maintain equilibrium of currency during change

of system 161

8. The American system more difficult to deal with. The

Government bound to uphold the banks, and furnish

all the cash 161

9. Objections to selling coin reserve to any considerable

amount 162

10. If such sales were confined to a part or the whole of the

increased annual demand for currency, no great harm could ensue 163

11. The public should have the choice of small notes or sil-

ver, as well as of other coins 163

Chapter XIX. Sir Robert Peel's Position On The Note Issue. — Mr

GLADSTONE CLAIMS THAT IT BELONGS TO THE STATE.

WHEREIN THE ACT OF 1 844 HAS FAILED.

1. The Act of 1844 and the Acts of Congress authorizing

the issue of treasury notes a great step in advance, but fall short of the requirements of a perfect system . 164

2. The American Acts passed solely to create resources . 165

3. Sir Robert Peel's Act fell short of his knowledge and

convictions. His remarks on the subject . . . 165

4. Causes which led to the passage of the Act. Total cir-

culation of the kingdom at the time .... 166

5. The Act provides for the ultimate absorption of the

entire note circulation of the kingdom . . . 167

XX SYNOPSIS OF THE WORK.

6. Sir Robert Peel's apology for perpetuating the issue by

the bank through a separate department . . .168

7. His motives and policy quite different in the matter of

passing the Act repealing the Corn Laws . . . 168

8. Mr. Gladstone's opinions on the note issue . . . 169

9. Monetary science no longer rests on mere opinions of

men, however eminent 169

10. It was an error of the Act of 1844 to leave it discretionary

with the bank to issue, to itself, the whole of the fiduciary notes to be used as cash reserve . . . .170

1 1. The absorption, or concession, of all the country banks'

issue will cause greater evils than any hitherto arising from the issue of notes on public securities . . . 171