The money problem: an essay on the nature and office of money; the importance of having a fixed standard of value, and the wrong inflicted by inflation

Preface

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At the time the legal tender act was taken up for discussion, in January, 1862, the people generally took but little interest in it, and comparatively few, as I apprehend, understood its fearful significance. It is charitable to suppose that Congress itself (or a majority of it) was not fully aware of what it was about to do. History had been forgotten ; the costly and bitter experiences of the Revolution were set aside ; the remonstrances of a few earnest men were unavailing, and an experiment repeated which a hundred times had failed with disaster. When the law had begun to work out the expected results, I undertook to write the early history of paper money in Connecticut, hoping in that way to do my part in setting forth the perils of the course pursued by the government. The work, entitled “ A Historical Account of Connecticut Currency, Continental Money, and the Finances of the Revolution,” 192 pp., appeared just at the close of the war. It made a part of the first volume of the New Haven Colony Historical Society.

Twelve years later, after the law had wrought out the mischief it was fitted to produce, and the speculating phrensy had run through its customary ^ stages, culminating in the panic of September, 1873, 1 prepared and printed fo for private circulation a small pamphlet, in which I attempted a brief exposition of the nature and office of money, and the laws which govern it.

* It bore the title of “ The Money Problem.” A few friends appeared to €

J think so well of it that I have undertaken to write a second essay on the ^same general subject, in the latter treating of topics not mentioned or barely ^ alluded to in the other. Each was intended to be an independent article, 7 more or less complete in itself, which fact may account for occasional re- 0 petitions. Both will be found in the pages which follow ; but in some cases P the last essay — “ The Money Problem Again ” — will be put in covers of its own. If I have failed in any or in all, I have done no more than many ' others who have written at more length, and spoiled paper in larger amount.

New Haven, CoNN.,Apn7, 1877.

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THE MONEY PROBLEM.

Money is to most of us a familiar object, a necessity of our daily life. It is used as an instrument or medium of exchange by which the wants of trade, perennial as our industry, are supplied. The representative of all material good, it becomes known to us before we begin to reason, and in after years the facts which are so old seem, as with all our early acquisitions, to need little explanation, and none which appearances do not suggest. Time-worn and seemingly simple, they excite in most men no curiosity and no serious inquiry. Like the phenomena of our own minds, their nearness and perpetual presence too often breed indifference, and turn aside philosophical investigation. In this manner, indistinct and erroneous views come to be entertained. Another thing should be noted. Our business men who have most to do with money have little time for study, none for abstract thought. They are not trained to it, and can see no profit in it. In the evening of life, when riches and some leisure have been secured, new tastes and habits cannot well be acquired; faculties long unexercised cannot be awakened, or will not work effectively. There is, as I am aware, one splendid exception to these remarks. David Ricardo, the profoundest of all the writers on Political Economy, was long and extensively engaged in the business of the London stock exchange, and thereby acquired a large fortune. But Ricardos are not a common growth, and cannot be extemporized. Usually, men in trade, whatever their natural gifts, are fully occupied in the management and supervision of their affairs; cannot devote themselves to science, and would not succeed if they did.

Notwithstanding this manifest unfitness, caused by occupation, the banker or capitalist who has spent his best years among money-bags and greenbacks thinks himself specially qualified by his experiences to dogmatize concerning the nature of money, and the laws which govern it. Nor does the unthinking world question his authority to teach. If the secretary of the U. S. treasury be in doubt regarding a proposed measure or policy, he takes the “ fast train ” to consult the magnates of Wall street. He does well to get the impressions of experienced financiers. They have much knowledge of details which mere politicians and scholars have not, and are familiar with the practical working of the commercial machinery. Some of them too are men of enlarged and cultivated understandings. To say the least, it requires as much intellect to organize and superintend, with the best results, an extensive trade or industry, as it does to be a reputable professor, a senator in Congress, or a college president. At the same time, it must be admitted that no uninspired man, whatever his ability, can understand, much more, safely teach, that which he has not studied. Neither scholarship, professional eminence, or observation behind the counter gives the requisite qualifications. One may be a skillful helmsman or navigator and be ignorant of astronomy, and vice versa. An astute lawyer, learned judge or useful legislator may know little of monetary science. Too conspicuous illustrations may be found in the speeches of bewildered congressmen and the decisions of benighted courts. True wisdom imposes silence, or at least modesty, at the point where knowledge ceases.

The confusion and diversity of opinion which find a lodgement in the common mind concerning money, have, for the most part, come from false and incompetent teaching. Mischief has been done by book-worm expounders and abstract thinkers, but far more by persons called practical or business men. So long as the multitude (the “talking” multitude) of the latter class, without reference to natural or acquired fitness, continue to be the trusted instructors of. the popular mind, writing on its blank pages whatsoever they will, so long shall we have among the people crudity of thought, contradiction and misguided pernicious effort, all of which will find a resting-place in legislation.

Though on questions of currency, the facts which first meet the eye lie on the surface, there are others more recondite, more fundamental, which reveal themselves to the reflective faculties alone. These key-stone facts, to be understood, must be studied with the advantage of all the lights which the best thinkers have supplied. A new explorer in any field of science first endeavors to learn what has been done by other inquirers. It is folly (or worse) for any finite man, however learned and able, to neglect external helps, and attempt to excogitate from his own brain, untrained in that kind of work, a true theory of money. Yet, this is done exultingly by those who have never learned the elements of Political Economy; who have not read a page understandingly of Adam Smith, Malthus, Ricardo, Say or J. S. Mill. It is not possible that anything but chaff should come from the intellectual throes of these persons.

To the thoughtful, Political Economy, to which the money problem belongs, is an attractive science. Its fundamental principles are more durable than the hills, and its reasonings and conclusions almost as exact as the demonstrations of mathematics. Step by step, under the guidance of a few master-minds, it has grown up within a century. A multitude of heterogeneous, apparently discordant facts have been reduced to order, classified and traced to their sufficient causes. All this has been done by trained workers — those who have been content to begin at the beginning, to forget their prejudices and conceits, to crucify their love of origiilality and invention, and to become patient, earnest laborers in a neglected field of inquiry. Accepting all that has been done by others, starting from the vantage ground the foremost have reached, they press forward cautiously, perhaps painfully, but surely, each adding something to the growing mass of knowledge. In our era, this is the course followed in all the sciences. He who pursues it may hope at least to comprehend what others have done. Raw recruits and three days’ volunteers never reach this point.

The questions relating to money have been so long to a large extent in unskillful hands, and are so overlaid with error and rubbish, that it will be necessary to go back for a moment to first principles, and in the light of these, to examine the speculations and assumptions which have been put forth so confidently, and which at this moment are vexing and perplexing the nation. To be obliged to do this is not a little discouraging, but to him who would make himself understood there is no alternative. Preaching on this subject can have no effect till there be something like agreement as to those primary truths which underlie all our reasonings, and to which the last appeal must be made in cases of doubt. Having placed before the mind these simple, fundamental truths, and obtained for them that acceptance which is inevitable, it will be easy to go forward and correct mistakes — easy to overturn the card-houses which dreamers and our ten thousand teachers have erected. Standing in the light of these, it will be possible to bring forth order out of confusion, perhaps noon-day out of midnight. I do not mean that there will be no dark corners left, but the field of distinct vision will be greatly enlarged.

In setting forth the laws of monetary science, it may not always be convenient to ennumerate all the transient influences^ which may slightly effect results. My object in writing the following pages is to show the tendencies of recognized and controlling principles, sometimes overlooking momentarily disturbing elements.

Among rude peoples and in the early stages of society, commodities exchange one for another without the intervention of money. A spear, say, is given for an oar, two beaver-skins for a salmon, or a wigwam for a canoe. This is barter. In each case, the producer or proprietor parts with his labor, and expects to get as much in return, or in other words an equivalent. If gold be discovered, and become desirable for use or ornament, the owner must be paid current wages for the time spent in obtaining it. On no other condition will he bring it to market. In his just view, his labor is as valuable as that of the oar-maker or trapper, and should be as well rewarded. If others think differently, he will give up gold-digging, and follow some other occupation. As is the fact with all products, gold may be regarded as embodied and condensed labor having a fixed relation to other articles. If on the average, one day’s toil be required to secure 23.2 grains of fine gold, this quantity will exchange for a day’s toil in every other occupation, oar-making, beavercatching, &c. Of course allowances must be made for exceptional skill and risks — All this is obvious.

In process of time, on account of its many advantages — its scarcity, portability, divisibility, imperishableness, &c., gold was employed as a common measure of value, as the yard stick was of length and the pound of weight. If a man had something to sell, he exchanged it first for gold, and then with that bought whatever he desired, taking care in each case to get as much as he gave. The great convenience of the practice — the having a commodity which in the market would be accepted by all, and the consequent saving of time and trouble — secured its general adoption. From the moment the glittering bauble was sought and held, not for its ordinary uses, but as a medium of exchange, it became money. At this point government came upon the stage, for the moment beneficently. To save the cost of weighing, proving, &c., and to meet more perfectly the wants of traders, small and great, it invited the producers and holders of gold to bring it to the mint and have it coined. It was divided into suitable pieces of determinate weight and fineness, stamped, named, made a legal tender, and returned to the depositor as coined money. The unit-piece of our currency, by a law of Congress passed in 1834, contains 23.2 grs. of pure gold, and is called a dollar. The government stamp is only a certificate and pledge of weight and fineness, while the legal-tender provision compels creditors to receive it for what it claims to be. It neither adds to or takes from its intrinsic worth. It is still the product of, say, a day’s work packed in a convenient form; is the necessary equivalent of a day’s work in the market, and will everywhere be received in payment for oars, spears, shoes, hats, coats, &c. Five thousand dollars will buy a house because the sum named and the house represent and contain each the labor of fifty men for one hundred days. They are commercial equivalents. No matter how complex the product, the aggregate of all the items entering into it will show its natural value in exchange. The fixed relation of one thing to another, which relative value establishes, cannot be changed by legislation. The law-makers may alter the forms, names and weights of the coins — may call a dime a dollar, or make one dollar into two or five — but they cannot cause 23.2 grains of fine gold to be given for more or less than the labor it contains.* Herein is one advantage of a metallic currency. In an important sense, it has a stable value determined by its weight, and not at all by the names it may bear. Once in possession, the holder may go to sleep with the assurance that it will not turn to ashes.

But the administrators of governments are needy, often crafty and depraved. They spend more than their income, and to eke out a living, sometimes resort to plunder and deceit. To benefit themselves, their retainers and supporters, they abuse the sovereign power, and debase the coinage. Though they cannot alter the intrinsic and exchangeable value of 23.2 of gold, they can

* In all the products of industry, where society is at all advanced, the profit which is obtained for the use of capital is one of the elements of value. But profit usualty bears but a small proportion to the other element, and may, without disturbing the reasonings, be ommitted. Accordingly, for the sake of simplicity, it is left out of the account in this essay. For the same reason, no reference is made to the effects of monopoly on exchangeable value.

put fewer grains into the coins. Having provided that “ dollars ” shall be legal-tender, they can, without changing the name, make four out of three or two, thereby reducing their indebtedness one-quarter or one-half, and robbing their creditors to an equal amount. (A pound of silver was originally coined into twenty English shillings; it is now coined into sixty-six shillings.) In this way, by a system of false naming, industry is deprived of its reward on an enormous scale. As the cheapest and poorest lawful or accepted currency is always used for paying debts, debtors with gleeful hearts take advantage of the change. Every man who lent dollars containing each 23.2 grs. of gold, and costing, say, a day’s toil and sweat, is repaid in dollars of three-fourths or half the weight. Every laborer who bound himself in law to work one hundred days for one hundred dollars, and did as he agreed, receives payment for only seventy-five or fifty days. If a husbandman sold his corn, his cow or his farm, the merchant his merchandise, or the manufacturer his goods, made or to be made, and were not paid till the new dollar appeared, he is swindled out of a large proportion of his own. But this debasement of the coin would only affect those who stood in the relation of debtors and creditors. Its retroactive operation would be oppressive, but future contracts would not be embarrassed. He who had property of any kind to sell would ask and obtain for it as much gold as before. The practice however of making light coins is so plainly and contemptibly dishonest, that reputable governments are not now guilty of it. The more certainly to prevent it in future, they should be compelled, when possible, to stamp on each piece its weight and fineness, and to apply the name to none of a different standard.

Hitherto, very briefly, I have dealt only with foundation-principles, and the simplest elements of monetary science. They will not be disputed; but there are other truths somewhat more complex, logical inferences from them, and equally undeniable, which must be considered. That the derivative truths may be understood, the primary facts must be borne in memory, and at every step applied.

Coin, which is itself given for the commodities it measures, does not indicate values with quite as much certainty as the yard-stick does lengths, the pound weights and the bushel solid contents. Gold is not at all times the product of an equal amount of labor. When a day’s work will produce more than

23.2 grs., production is stimulated, and depreciation follows. But the amount in currency and bullion throughout the world is so large that hitherto the effect of any increase has been very gradual. Since the remarkable discoveries in California and Australia, more than twenty years ago, and the gross addition to the treasure of the nations of, say, two thousand million dollars, it is estimated that in England gold has fallen in value twenty per cent, in New York much more than that, and in the neighborhood of the mines still more. A man who loaned “trust money ” twenty -three years since at seven per cent, returnable in specie, has not probably received in interest more than five per cent, while the principal is not now worth more than seventy per cent of its former value. But recent events, on so large a scale, are not likely to be repeated, and the precious metals still remain, all things considered, the most perfect measures of value now possible. Nor would it be difficult to prove that they are the most economical. It is not true that they are unsuited to a brisk, enterprising, commercial people like ourselves. In the large cities, where the commodities of the country are exchanged, and trade is most active, there is little need of 'any other currency. In these places, expedients are adopted — banks and clearing-houses instituted — so that a much smaller amount of money, in proportion to the exchanges made, is required than any where else. By the agency of the clearing-house in New York, the banks of that city pay to one another, in ordinary times, one hundred million daily, by the transfer of less than three million in cash. In the smaller transactions of a rural population, specie as the sole currency is not inconvenient, but on many accounts the most desirable. No populous country in the world is so abundantly and cheaply supplied with precious metal as the United States. Yet we take the most effectual measures to drive it from our shores, and to deliver over, chiefly to our rivals in trade, all the benefits wdiich in theory it is supposed to confer. For centuries, nations have been striving by custom-house restrictions and prohibitions to draw, each to itself, the treasure of the world; but we have been laboring with better skill and more success to get rid of it.

Under the impression apparently that the amount of money in use should be equal in value to the exchanges made within some indefinately short period, say a year, it is often remarked by the unthinking that “there is not money in specie enough in the world to do the business of the country,” meaning thereby that other money is necessary to eke out the supply. Those who say thus, some of them governors or judges of our highest courts, forget that, of all the payments required in business, a vast majority, reckoned in dollars, is made by book-credits, bank checks and drafts, and that the same coin may pay a dozen debts in the same day. A rich people like the English, having a varied and complex industry, and doing an unequaled amount of business, are most economical in the use of a circulating medium. I suppose that Khode Island, with its sixty-two banks, its active trade and nimble sixpences, does not employ in proportion to its exchanges, a tenth part as much currency as Texas. An extensive business then may not demand a very large circulation.

Again, it should be remembered that the efficiency or sufficiency of a medium of exchange has no connection with its quantity or volume, but depends solely on its value — in the present case on its cost in labor. To meet the pressing wants of trade, and perform the office of money, a certain value, in other words, a given number of days’ work, is required, and this cannot be increased or diminished so long as the exchanges to be made remain the same. As only a definite number of transportation wagons can be used to carry to market a certain amount of goods, so only a fixed value in money can be employed to transfer the same goods from the producer or seller to the buyer. The cases differ however. The unused wagons would be left by the roadside to rot, while the superfluous money would temporarily become a part of the currency, swelling its volume without increasing (unless momentarily) its value. As value does not determine the sufficiency of the wagons, so quantity does not determine the sufficiency of the money. Money has but one essential attribute, and that is value — exchangable value. That it may perform its office perfectly, volume is no more needful than length or color. Unlike iron and coal and every other product, its usefulness is independent of any common quality. The name too is nominal, evanescent, but the value is real and permanent. In the business of buying and selling, coined gold is fifteen and a-half times more efficient than coined silver for the sole reason that it is more valuable in that proportion. If the mines become more productive so that a day’s labor will secure more precious metal, say thirty grains instead of twenty-three and two-tenths, the weight of the dollar must be increased six eight tenth grains, or the coin will depreciate as compared with commodities whose cost has not been reduced — so depreciated that the larger whole will have no more value than the smaller had before. The two wholes will do the required service equally well. In case the weight <ff the coin be augmented, each man will carry more gold in his pocket, but will be no richer than before, and can command no more of the conveniences and luxuries of life. On the other hand, if the weight be not changed, each person will have more dollars than formerly, but will find himself no better off when he takes them to market. The poor fellow who happens to have been a creditor before the change — a creditor on account of labor — is indeed poor. He is obliged to be satisfied with 23.2 grs. of gold received at a time when the services previously rendered would command thirty grains. He gave say one hundred days’' work, and gets the value of seventy-seven days. The wrong is no less grevious because there is no remedy.

It follows from what had been said that no industrious, willing people who have gold and silver mines of their own, or are in commercial intercourse with nations which have such mines, can be without a sufficient currency. This will be obvious when it is remembered that value not quantity is demanded. The need of gold, in other words the demand for it, will call forth a supply. No matter how scarce or difficult to be obtained, or what the cost per ounce, so long as it is to be had, and there is a market for it, it will come when called. One thousand grains will go as far as two thousand, provided they represent as much labor. Satisfying a nearly indispensable want, and bringing to the producer an adequate reward, the supply of gold can no more fail than that of iron or cloth. It is true it costs something. To obtain its benefits, a nation must sacrifice, or rather sequester, millions in labor, but the expense is little when compared with the facilities and conveniences it provides.

In one particular, gold as money differs from every other commodity. The demand ceases when a certain value has been obtained. More money may be coined, but the slight depreciation it will undergo will cause its ejection from the circulation. Its value in the arts and for exportation being undiminished, the surplus will quickly disappear. Dollars will not be paid out for goods when bullion is worth more than coin. Promptly they will go into the melting-pot, and any disparity which may have existed will be rectified.

Much has been said in recommendation of an elastic currency — one which will expand as the demand increases — and at this moment the brains of our statesmen and financiers are vexed with multitudinous ideas on that subject, and torn with the throes of a wondrous parturition. The notion of an elastic measure of value, in the popular sense, is like that of an extensible yard-stick or “rubber” bushel, and my impression is that we have had enough of that. I do not suppose it possible to invent a safe method by which every man, or even every solvent man, can, in a time of panic, have cash means enough to pay all his debts at the moment when due. The only elastic currency which an honest man should endure, or which pretends to be a measure, is furnished by specie. As in a tempest the winds rush toward the point of lowest barometric pressure, so in a money-crisis, the specie of the world flows in copious, life-giving streams toward the financial storm-center, filling a temporary void, and comforting the afflicted. We are now only ten or twelve days from the great treasure-stores of Europe, where there are hundreds or thousands of eager eyes watching the barometer in other lands, and looking for an investment. Goods will find no market, but specie may be sent with beneficent results and a telling profit. In the late panic in New York, the millions of gold which came pouring in from Europe brought no relief because our local currency, often expanding but never contracting, had “ demonetized ” it! When the vacuum in a specie-paying country is filled, the incoming stream is first arrested, then turned back; the precious, but now superfluous metal going abroad, seeking a better market, and it may be, relieving the violence of other panics. This perpetual ebbing and flowing, this fiux and reflux, in obedience to the laws of attraction and repulsion, preserves a just equilibrium, giving to each country, according to its needs, its due proportion of the money of the world. Under the influences named, no people, if government will but stand aloof, can long be deprived of any part of the currency which their best good requires; nor can they retain more than their proper share. The to and fro movement by which stringency is relieved and reducency cured, usually quiet and decorous, but sometimes tumultuous, corrects inequalities, and gives us a nearly uniform standard of value.

A government, not deterred by the fundamental law — a law so plain that the courts of last resort can not disregard it — can make any thing legal tender — acorns, bits of leather or iron, or scraps of paper — and calling it money, and giving it the names the coins bear, compel creditors to take it in satisfaction of their claims. In this way a great wrong may be perpetrated — one class plundered and another enriched on an enormous scale, while the all-important connection between industry and its reward is shamefully severed. In our time, the thing which is made a substitute for hard money is the product of the paper-mill and printing-press. Pictured promises to pay dollars, called notes of circulation, are issued. They cost nothing, have no intrinsic value and contain no labor. If, however, they come from a source in which men have confidence, and are at all times and in convenient places convertible into coin, they will rarely be presented for payment, will become a part of the currency, and have the same exchangeable value as the coin itself. As an effect, this addition will depreciate the whole mass of the circulation, now part paper and part specie; at first slightly, afterward, if the additions be continued, more conspicuously. More money than before will be in the hands of the people; more consequently will be brought to market to be exchanged for goods. Increased competition on the part of buyers, and the comparative indifference of sellers, will be followed, according to the well-known law of demand and supply, by augmented prices.

This appreciation is in truth owing to a fall in the value of dollars; but it is attended by enhanced, or seemingly enhanced profits, and succeeded by additional production. More labor is sought and more wages must be paid. This increased cost of production, if supported by further issues of notes, will sustain prices, while the eagerness of purchasers will continually advance them. Erelong, goods of domestic growth and manufacture become too high for exportation. The foreign merchant, who compares specie values in different countries, and is quick to learn where he can buy cheapest, goes to other markets. At the same time, imported goods have participated in the upward movement. They have risen in price and been quickly sold, filling the coffers of the importer. The latter, improving his opportunity, sends new and larger orders to his correspondents. Thus our markets and price-lists become irresistibly attractive to the foreigners who wish to sell, but repulsive to any who desire to buy. No fact shows this more plainly than the augmented imports and diminished exports. Constantly, during the inflation, specie is leaving the country, driven out by paper. It goes in search of a better market, and helps to pay a foreign debt. This movement is salutary — in the highest degree conservative. It depletes the currency, tends to drag down prices, and does what it may to preserve a just measure of value. But the outward flow is at first insufficient to accomplish the desired object, otherwise it would cease. In some of its aspects it is to be deplored, but it is the only thing which will compel the note-issuers to take in sail, and restore trade to its customary channels. Like the locomotive’s whistle, it is the signal of danger,— a warning which, if heeded in season, will save a nation f 1 am disaster. Continue it must till its primary and chief cause, a redundant circulation, is removed.