Paper money, the root of evil. An examination of the currency of the United States, with practical suggestions for restoring specie payments without robbing debtors

Front matter

Cotne"

UnWersttV ybrarv

Cornell University Library

Contents

PAGE

Chap. I. — Of hie Pbeciocs Metals as a Cikcdlatino- Medium, AND 01' THE Law of theiu Cieccla-

TION, 1

Chapter I

OF THE PEECIOUS METAIS AS A CIECULATING MEDIUM, AIJD OF THE LAW OF THBIE CIECULATIOIT.

No branch of political economy presents more certain conclusions than that which treats of the functions of money. This certainty remains, however, only while the money treated of is that which is coined from the precious metals. Whenever paper money becomes the subject of consideration, certainty gives place to doubt and ignorance. There is no economical question, where so wide a difference of opinion exists, as in determining its true place.

In an investigation, therefore, of paper money, it is well to begin with that which is certain, and consider money -which is coined before treating of that which is printed.

Money is defined to be the instrument which men use in exchanging the objects of desire, as the medium of exchange, and the standard by which values are measured in making exchanges.

Barter in kind is the first form of exchange ; but 2 direct barter is possible only on a limited scale. The husbandman can take his wheat to the tailor, and obtain in return a coat, if the tailor desires the wheat, and they can agree upon the quantity to be given for a coat. The tailor can take the wheat to the cabinet-maker, and receive for it a chair, if the cabinet-maker is in want of wheat, and they can agree upon the quantity. The latter can exchange it again for some other article, whenever he can find a person possessing the article he desires, who is willing to give it for the wheat, and they can determine what amount of one article ought to be exchanged for a given amount of the other. But this process is slow and laborious. It is easier and simpler for the husbandman to barter his wheat for some article at once portable and divisible, desired alike by the tailor, and cabinet-maker, and the rest of mankind, and exchange that article for a coat, or a chair, or whatever else he desires, leaving the tailor and cabinet-maker to use it in the same manner to satisfy their desires. That the division of labor may be perfected, it is necessary that there should be some such common object which all the world is willing to receive in exchange for the objects of desire, and to use as a measure of their value. Such a medium is money. Without it the division of labor, and exchange on a large scale, are impossible.

But the use of money does not change the nature of a transaction. All exchange of the products of labor is essentially barter in kind. A comijaon medium is used merely to facilitate the operation.

In considering this subject of exchange, the classification of values made by Adam Smith must always be kept in view. Every article has two values : in-

THE PEEOIOUS METALS. 3

trinsio value, or value in use, and relative, or desirable value; wMch latter is expressed by tbe amount of other objects of desire men are mlling to give in order to obtain it. This, for want of a better term, is called exchange-value or value in exchange.

When a common medium of exchange is used, the value in exchange of any given article is expressed by the amount of the circulating medium, or money, it will exchange for, which is called its price.

But value, evidently, cannot be measured by a mathematical abstraction of space or quantity. A dollar, like a bushel, is a unit of measure or calculation. It is also something more. A bushel of wheat, of oats, of rye, can be contained in the same measure, while a bushel of wheat may exchange for three bushels of oats, and two of rye, and each of these quantities may exchange for a dollar. The dollar, therefore, is the standard by which the relative or exchange-value of these articles is measured, and, as it will exchange for any one of these . quantities, it possesses also value in exchange as much as the wheat, or oats, or rye. The measure dollar is a unit of calculation ; yet a dollar is a thing as well as a name. There must be a substance or commodity possessing exchange-value, to which the name is given, and which then becomes money. The choice is not necessarily restricted to the precious metals. Whatever article or commodity is accepted by a community as the cornmon standard of value and medium of exchange becomes money by virtue of such consent, whether it be the wampum, or cowry shells of savages, or the paper to which, in civilized communities, an imaginary or credit value is given. Money derives its force, as such, from common consent. The common consent of mankind, however, has fixed upon the precious metals to he used as the only money of universal circulation, owing to the fact that of all known commodities they are hest adapted for the purpose. They are portable, durable, divisible, and always of the same quality. Above all, their value is more stable than that of any other article. On the importance of this quality it is needless to dilate. A fluctuating measure of value, like a fluctuating measure of quantity, or distance, fails in the most essential particular. The fundamental idea of measure is stability.

The stability of the value of the precious metals arises principally from the fact that, unlike paper, their quantity can never be artificially increased. They can only be produced by actual labor. A coined dollar, therefore, always represents a dollar's worth of labor. The amount of gold designated in the United States to be stamped as a dollar is 23.22 grains of pure gold, or 25.8 grains of gold, nine-tenths fine.

The precious metals, however, do not furnish an absolute standard by which values, at considerable intervals of time, can be compared. Corn and labor have been set up as such standards by dififerent writers, but without success. There is no such unvarying standard, nor is there need of any. Its use would be fanciful. The value of money is sufficiently stable, if the variation extends only over long periods, so that current transactions can be closed before the change has accumulated enough to be felt. Although, therefore, gold and silver vary in value from age to age, and from one generation to another, this fact does not

THE PEECIOUS METALS. g

disqualify them for their office. The precious metals decliaed in value after the discovery of America, and again after the settlement of California and Australia, owing to the increased supply. But the decline being secular, current transactions Avere not appreciably affected thereby. Nor is there any danger to be apprehended from this source in the future. The decline, if any, will be gradual, and the only consequence will be, that each succeeding generation will transact its business at a higher scale of prices.

When gold and silver are accepted as the circulating m.edium, it becomes desirable to put them in the foi-m best fitted for that use. For every dealer to keep a pair of scales, ready on each sale to weigh " the dust," and estimate its purity, is an inconvenience submitted to only in remote mining districts. It is much more convenient to have that part of these metals used as money divided into pieces of suitable size, and their weight and fineness guaranteed by a recognized authority. This is done by govei-nment, which coins them into pieces whose denominations are multiples or decimals of the unit of calculation used to compare values.

But to make gold and silver into coins is a matter of convenience meielj. It does not affect their nature, or the laws which regulate their value. .

It is the general practice of governments to receive all bullion that is offered at the mint, assay it, and coin it into money at the request of the holder, charging him only the Bare cost of the operation. If we suppose this cost to be one-half of one per cent., then, if coin is worth more than bullion by at least that percentage, the holders of the bullion send it to the mint to be coined. If, on the other hand, coin is not ■worth more than bullion by a fraction equal to the expense of coinage, it goes to the melting pot. The only difference in value between coin and bullion is the expense of coinage. When they vary in value more than this difference they are interchangeable. The laws, therefore, that regulate the value of bullion regulate the value of money in exchange.

But gold and silver, like other metals, are mined from the earth ; and their permanent value throughout the world is detiermined by the same causes that determine the permanent value of other metals. It depends principally on the cost of production, and in the cost of production the main element is the quantity of labor. But the cost of production of the precious metals varies little, if any, from year to year. No new methods of mining nor new processes of reducing ores have yet been discovered which increase the amount produced for a given quantity of labor, except in such temporary instances as the placer mines of California and Australia.

There is a difference, however, between the precious metals and other products of labor in one respect. The demand for other articles is limited. Men are willing, ordinarily, to receive of them only enough for consumption. These products must seek a market. But the precious metals find a market wherever there is a civilized man. They exchange for every thing else, and hence are always in demand ia the sense of always being desired. Consequently, gold and silver vary less than any other article from their natural value, or that which is proportioned to their cost of production. They are not subject to the fluetuations of other articles of commerce — ^bought and sold in open market. Tkey are, therefore, more stahle in value than any thing else.

But it must not be supposed that they are actually free from temporary fluctuations. They are subject, like other products of labor, to the law of supply and demand, though in a less degree, and in a diflferent manner.

The fluctuations in value of all articles that are bought and sold are marked by variations in their price — that is, the amount of money for which they will exchange; and under the law of supply and demand, if the demand for any article remains the same, an increased supply thereof thrown on the market will cause its price to fall. But price cannot be predicated of money. Money exchanges for every thing that can be bought and sold, and not for any single article by which its exchange-value can be measured. If the amount of the goods that are bought and sold in a country, that is, the number of exchanges to be effected, remains the same, and the amount of money, is increased, the increased amount of money will exchange for the same amount of goods as the smaller sum : the greater sum will have the same purchasing power as the smaller; but the prices of the goods, being measured by an increased amount of money, will be raised. Each particular sum, therefore, will have less purchasing power than before. Ten dollars after the increase will not buy as much as ten dollars would before. If, on the other hand, the sum of money is decreased, and still exchanges for the same amount of goods, the prices of the goods will be decreased, and each particular sum will buy more than before. An increased supply of money, therefore, in a country, the uses for it being the same, increases the prices of the goods bought and sold, and a decrease of the amount of money lowers prices. It does not follow that the price of each article will be affected equally ; but the average increase or decrease of prices will be proportioned to the increase or decrease of money, the other causes which affect prices remaining the same. "When, therefore, average or general prices are high, money will buy but little ; when general prices are low, money will buy much. The purchasing power or value of money is inversely as general prices. That quality in money which corresponds to price in other articles, is general purchasing power, and the value of money is subject to the law of supply and demand, like that of any other commodity. The demand for money being considered a constant quantity, an increased supply lowers its. value. The purchasing power of money then falls. There is an advance in general prices.

But it must not be supposed that there is any gain by such an advance. The country is not enriched by it. The values of different articles, relative to each other, are not necessarily changed. The change is in their value compared with money. They will bring in exchange more money, but not more of each other. There is, and from the nature of things there can be, no general advance of values.

But, while the temporary value of money, like that of every other product of labor, depends on the law of supply and demand, the supply of money, unlike that of other commodities, may be increased by another means than the actual introduction of more

THE PKECIOUS METALS. 9

money. The money on hand may be made the instrument of effecting more exchanges than formerly. It may be made to do more work. Thus, if one dollar is used to make a single purchase, and is then hoarded by its last owner, while another doUar is used to make one purchase, and then another and another, until it has been so used by ten successive holders, the last dollar does ten times as much work as the first, and is equivalent in its effect on the supply of money to ten such hoarded dollars. The supply of money, therefore, may be increased by an increase of its rapidity of circulation, that is to say, of the amount of work which it does. But this increase of supply does not necessarily enhance prices. For an increase of the demand for money, that is, of the amount of the exchanges which the business of the country requires to be effected by it, may be met, not by an actual increase of the supply of money, but by an increase of the rapidity of circulation, or-effective power of that on hand.

It follows further, that, although general prices are increased or decreased by an increase or decrease of the quantity of money in a country, the increase or decrease of prices is not necessarily inthe same ratio as the increase or decrease of money. If the amount of the circulating medium is increased or diminished one-quarter or one-half, prices will rise or fall, but not necessarily one-quarter or one-half. The extent ot the rise or fall will depend on the rapidity with which the money circulates. While an increase is in progress, money will be likely to circulate rapidly, and prices may increase more than one-quarter, or one-half, and after the increase of money ceases, or a diminution commences, money will be withdrawn from circulation by hoarding, and prices will recede toward the point from which they started ; so that there will be no time at which the increase of prices will be exactly as the increase of money. The effect of money on prices depends on two factors, the quantity of money, and the rapidity with which it circulates.

From this brief summary of the functions of the precious metals as a circulating medium, it is evident that all exchanges made through the medium of money are in reality barter. Instead of exchanging a bushel of wheat for two bushels of rye, we exchange it for a certain amount of the precious metals, and then exchange the latter for rye. But things that are equal to the same thing are eqiial to one another. Things that exchange for the same thing exchange for one another.

In the immediate distribution of the produce of labor the same holds true. A house is built. One man furnishes the lumber. Another paints it. Others give their time and labor toward its construction. Each, therefore, is entitled to an interest in the house when completed : the lumberman to a room according to the value of his lumber; the painter to another room for his paint ; the carpenters each to a room for their services. But they are not all desirous of receiving rooms for their shares. Therefore they take money, and with it buy such habitations as suit them. But that, in effect, is the same as if they had bartered their labor and supplies for a dwelling.

These are the simplest cases ; but commerce in all its ramifications is an extension of this fundamental idea. Money is merely a means of exchanging different articles for one another.

In the commerce between two nations this fact is even more evident. Thus, an American merchant sends wheat to England. An English merchant sends cotton goods to us. The American who sent the wheat, having sold it, has money to his credit in England against which he can draw a bill of exchange. The Englishman, having sold his cotton in America, and wishing to remit the money home, buys the bill of exchange, which represents funds in England, and receives there the money for which he sold his goods. The effect of the transaction is, that the wheat and the cloth have been bartered for one another. This is true of the whole commerce between the two countries. We are constantly sending cotton and bread-stuffs to England, and receiving manufactured articles in return. K, as is generally the case, we import more from England than we export to it, it will happen that there are not enough bills of exchange procurable in New York, at a rate less than the cost of shipping specie, to remit all the money that must be sent, and gold or bullion will be sent instead. The exports are bartered for the imports, and the difference only is paid in gold.

But men do not barter one article for another, unless each expects to make something by the trade. The prospect of profit is the impelling motive on both sides. The same is true of foreign trade. It is only barter, and it is entered into because both parties gain by it. It is mutually advantageous. It increases the producing powers of both countries.

But bullion is an article of merchandise, like any other product of labor, and it is therefore exchanged by one country for the goods or merchandise of another, as any other community, for the reason that it is for the mutual advantage of the countries to do so. It has already been stated that the cost of production of the precious metals, being always nearly the same, their permanent value throughout the world varies little, if any, while their temporary value, at particular places, may fluctuate with variations in the supply and demand, and that the part of the precious metals which has been coined, cannot vary from the value of bullion above the expense of coinage. It follows that money may sometimes be of higher value in one country than in another. The country, then, in which it is higher, will wish to buy it as an article of trade from the country in which it is cheap, by exchanging something else for it ; while the other country where it is cheap will be willing to part with it, and obtain in its place something more needed. But_ as, where money is high in value general prices p,re low, and where, on the other hand, money falls in value prices rise, it often happens that in one country prices are high because money is plenty and cheap, while in a neighboring country prices are low because money is scarce and dear, in which case the country last named would send a part of its goods to the former, and that country would pay for the goods with the article of which it had the most, and which it could part with at the lowest rate, namely, money, and not other goods.

Thus, England sends woollens to France and receives silks in return. But suppose an addition suddenly made to the money in active circulation in England ; the increased amount of money would ha,ve the same purchasing power as the smaller amount to which it had been added, and general prices would rise, including, probably, woollen goods. England could not then continue to exchange with France the same amount of woollens for the same amount of silks, as formerly ; but the value of money having continued the same in that country, the same amount of money would buy the same amount of silks as before, and instead of sending woollens for the silks, England would send that which was cheapest, money. Silks and other goods would then pour in from France to realize the high prices, and, as the precious metals are the only money current among nations, the money sent to France in payment would be gold or bullion. A stream of gold would flow from the former country to the latter. But England has no mines of the precious metals. It would be compelled, therefore, to obtain from those countries which have mines a supply of gold and silver, by exchanging therefor such of its products as those countries were willing to receive. Thus, England exports to the United States manufactured articles, and receives in return breadstuffs and cotton. But, as it sends more goods to the United States than it receives from them, the difference is paid by the latter in gold or bullion. For bullion, being a product of our mines, is just as much an article of merchandise as our cotton or wheat, and we send it to England in exchange for manufactured articles, for the same reason that, in the case first supposed, England would send it to France in exchange for silks ; it is the cheapest thing we have to send at that time. Genei-al prices may be higher in this country than in England, because we have proportionately more money in circulation, and money consequently has less purchasing power ; and though the money used for our internal trade, and which has raised prices, may not he gold, the money of commerce that we send ahroad is necessarily of that kind. Thus it would happen that a stream of gold would flow from this country to England, and thence to France.

This is hut a single instance of the manner in which the precious metals flow from one country to another in the course of trade, owing to dififerences in the value of money. But it is enough to show that, between countries having intimate commercial relations, gold tends toward the one where it has most purchasing power ; that is to say, where its value is highest, as measured by the quantity of goods it will exchange for. Such has usually been the state of prices and exchanges between Er^land and the United States.

To examine fuUy the causes affecting the values of commodities themselves, apart from the causes pertaining to the value of money, which influence and determine the circulation of the precious metals from one country to another, would require an examination of the whole^ subject of international trade in all its complicated relations. This cannot be done at the present time. It is sufficient to remark, that the low prices of commodities — that is, the high value of money prevailing in the older countries — may be attributed to the tendency of profits to a minimum, in the absence of new fields of employment for accumulated capital, to the low wages resulting from the pressure of population upon the means of subsistence, and to the effective power of machinery, and the consequent diminished cost of labor. These causes tend to keep

THE PKECIOUS METALS. 15

prices in general at a low range, even though, breadstufis and raw materials are largely imported, and to attract the precious metals to those countries from the mining regions.

The last mentioned of these causes is the most potent. The saving of labor which the use of machinery affects, is the chief source of tjie accumulated wealth of the highly-civilized nations, and the means by which they attract to themselves the necessary supplies of the precious metals. A commodity which, produced by direct labor, would require the time of a workman for weeks, or months, can be produced by the aid of machinery in a few days. But to those who have no machinery such a commodity represents as much labor as it would cost them to produce it without machinery. Thus, a piece of cloth, which in England would require labor equivalent to that of one workman for two days, would require, if made in the mining states of South America, or in the wheat districts of Russia, the labor of one workman for a month, and the homespun article produced would be a sorry substitute. The South American, and the Russian accordingly, are glad to unite their rude labor directly with the gifts of Nature, and to exchange the gold and wheat which result for the cloth of the Englishman, the product of skilled labor aided by machinery. Commodities, then, may be said to attract the precious metals according to the amount of labor they represent. Raw produce attracts them the least, manufactured articles the most.

There is still another cause influencing the circulation of the precious metals which deserves mention, as its influence is increasing rapidly with the progress of civilization, and is particularly potent in our own country at the present time. I refer to the movement of capital from one country to another for purposes of investment.

Foreign capital may be attracted to a country for security of the principal, or in order to realize higher rates of interest

Thus, suppose an English capitalist, attracted by the high rates of interest paid in the United States for the use of capital, desires to take advantage of the fact by investing in American securities. He meets in London a railway projector from America, who sells him railway bonds. The American thereupon with the proceeds of his bonds buys railway iron of the English makers, and ships to New York the iron with which his road is constructed. Here is a transfer of capital without any transfer of money. But the railway constructor may prefer to buy his iron in Pennsylvania. He, therefore, if exchange, as is tisually the case, is in favor of England, deposits the money realized from the sale of his bonds in London, and, with the proceeds of the sale of his bill on London, pays for his iron. In this case, again, the capital is transferred without any shipment of gold. But the bill on London, having been sold in New York, has been purchased by some one, who, without it, would have been compelled to have shipped specie to England to have mefhis payments there.

Thus it happens that a high rate of interest, con fidence existing, tends to attract capital to the country which can afford to pay it, and either draws gold into the country, or keeps at home a portion of that already there, and this influence may act irrespective of the purchasing power of money, as marked by the scale of general prices in the respectire countries from which the money is, drawn, or to which it comes. But when capital is sent abroad for investment, it usually takes the form of a loan. A debt is then created which must sooner or later be liquidated, and the interest on which must be paid as it accrues. The eifect, therefore, of the movements of capital seeking investment on the circulation of the precious metals is temporary, and as the rate of profits which can be derived from the differences of prices is greater than the interest paid for the use of capital, it follows that the controlling cause in determining the circulation of the precious metals remains the exchange-value of money. They seek the country where they buy the most. Gold flows from California, where interest is two per cent, per month, and commodities are coiTespondingly high, to Holland, where interest is two per cent, per annum, and commodities are low. The flow of the precious metals to India and the East proceeds from the same cause. Prices being exceedingly low, the purchasing power of money is very much greater in those countries than in the so-called civilized portions of the globe, and it is probable that for generations to come the Orient will furnish a vacuum for the reception of the surplus products of our mines.

The foregoing is but an imperfect sketch of the causes determining the movements of gold and silver through the commercial world. Enough has been said, however, to show that, like other articles of merchandise, these flow from country to country in accordance with the demands of trade, and the ability of each country to attract them, and to indicate the foundations on ■which rests the law of the circulation of the precious metals, first pointed out by Ricardo, viz.:

" Gold and silver having been chosen for the general medium, of circulation, they are, by the competition of commerce, distributed in such proportions among the different countries of the world as to accommodate themselves to the natural traffic which would take place if no such metals existed, and the trade between countries were purely a trade of barter." *