The political economy of Great Britain, the United States, and France, in the use of money. A new science of production and exchange

Front matter

THE LIBRARY

OF

THE UNIVERSITY

Dedication

posits. Deposits, as distinguislaed from the reserve, are not money, but a power to put in circulation money out of, into, and in some cases (by clearing) in the reserve, equivalent, so far as the circulation into, out of, and in the reserve is concerned, to so much money. They are powers to put in circulation, by means of the stream coming into the reserve, the same amount of money the owners of the powers could circulate if they had bank-notes or metal equaling the powers in volume ; while the banks at the same time have an unlimited power to put in circulation, through loans, all the money the producing market will stand short of a crisis ; and these loans are all supplied, as they are made, out of the same stream. This results from the unit character of all money. The only check possible or supposable in the case, is a limitation of the volume of these powers (created by bank loans) by the incoming stream of deposits, whicli is supplied by actual exchanges of merchandise for consumption. Why and how such a limitation naturally results from the use of sound, convertible bank-notes, coming from banks of issue only, having no function of deposit or discount (for all which we have the testimony of Adam Smith in respect to the Scotch banks of issue of his time), and why and how it happens that no such limitation exists in respect to the powers referred to, called deposits, which are equivalent to bank-notes, I have discussed in every form I could think of, and from every angle of observation I could find, in the book referred to above.

My theory thus answers the old question : " Of what use is metal in banking reserve beyond supplying the calls of those who want to carry it away from the bank ? " It is equally efficient in solving the problem in respect to the remonetization of silver by the United States. The objections to remonetization do not arise from the cheapness of silver or dearness of gold. Probably no material difference would exist between the purchasing power of silver in the United States, should our barter rate of monetization drive out all the gold, and the purchasing power of gold, should we refuse to remonetize. Other things being equal and no

DEDICATION. vii

Introduction

PAOE

The subject of production and exchange vastly complex ; excess of production anywhere blocks the exchanges 1

Production on credit ; bank credit does not circulate .... 2

Paper supplies the jdace of coin ; convertibility alone in.sufficient . . 3

New science needc<l 4

Deposits expand with production C

They are a consolidation of money reserves 7

IJanLs do not deal in debt 7, 8

The money unit 9-12

Fallacies crystallized in temis 12

Mercantile theory of intrinsic value in gold ...... 13

DEFINITIONS AND TI':RMS.

Want of precision in terms ; what a commodity is, and wliat a service . 14

What overproduction is ; what absolute necessaries are; bank debt . 15

Bank debt the result chiefly of production on credit ; has no objective reality as money 15, 16

Bank-notes equivalent in their character of money units to units of gold

and silver ; money not a commodity ....... 16

Value of a commodity ; conventiDiial value of metal ; units of money are

the units in the denominator of a viduinj; ratio at every sale . . 17

Quantity of money does not determine jjrices, but (juantity and circulation ;

neces.sarics . . .18

The word Commodity should be banished from economical science, unless

limited or extended in its application 18

SOME OF THE NEW THEORIES PROPOUNDED.

Advantages resulting from tlie u.se of gold ami silver as money -1^, 20

The distribution of gold ami silver, bank-notes and commodities, and the

supply of the latter 20, 21

How the value of a commodity mu!>t be nrkoned . . . .21,22 Absurdities of the mercantile theory of intrinsic value . . .23, 24

XXV] CONTENTS.

PAGE

The circulation of money may be artificially increased through payments

to labor 24

Production increased chiefly by the aid of loans 25

Inconvertible notes in France 26

Falsity of the doctrine of M. J. B. Say and his followers as to overproduction 26, 27

Conditions which render overproduction possible .... 28-31 The remedy 31

Chapter I. Development Of Monet And Its Uses

The invention of money ; a mode of measuring the value of commodities

Valuation must be by units at the second stage of development, as well as

the first 35

The diflFerence is, that the second stage locahzes and limits the ideal or abstract unit, and thus gives it conventional value in place of one of the commodities 35-37

The doctrine that bank reserve ought to vary, the logical result of the

mercantile theory of a commodity value in gold and silver coin , 37, 38

The doctrine that convertibility is sufficient, false. The perfection of metallic money lies in its distribution and its limitation ; hence convertibility should be carried far enough to insure the latter . . . 37-39

The English system ; why the plan of the Bank of England has failed ; it cannot be explained upon the mercantile theory of gold and silver as commodities, in bank reserve ....... 39-44

Why gold has not risen, and why silver has not fallen in value as money 42, 43

The difference between money and commodity values ; the former can be fixed because it is only a unit value in a ratio or equation ; the latter cannot because it is a commodity, and quantity is essential . . 43-45

Productive energies of English-speaking people ; the problem is, to harmonize production .......... 45

It has become necessary to demonstrate that bank reserve makes all payments, and is alone drawn upon by checks 46-50

Bullion ratios can be changed by general consent ; purchasing power must

be apportioned between gold and silver ...... 53

The natural ratio ought to be adopted as nearly as possible . . .53, 54

The prevailing idea, in respect to the steadiness of metallic money, right , 55

Chapter II

THE PRIJIARY CAUSE OF BANKING AND COMMERCIAL CRISES EXPLAINED UPON AN ENTIRELY NEW THEORY.

The original cause 56-60

Fallacies embodied in the terms "overtrading," "speculation," etc. . 57-61

CONTENTS. xxvil

rAOB

Overproduction entails loss from it!\ commencement .... 60

Tlie loss is tlisKiiist-'d by rise in unit price CO, 61

Bank contraction is not the cause 63

In the absence of money, four co-factors would demonstrate loss ; money

conceals the demonstration ........ 63, 64

Non-redemption of bank liabilities out of tht; commercial world's stock of

coin cause ; its effects .......... 66

The post-auxiliary causes which accelerate and nia^;nify industrial and

commercial crises 67, 68

Tendency to unequal production increased by the very fact of its artificial

introduction, through increased loans to producers on credit 69

How tariffs and taxes may aid towards a crisis 69, 70

The conse(|ucnces of an industrial and bankinp crisis . . . .70

Its progress and development, illustrated by diagram .... 71 Loss is not the cause, but a result ; the cause, a misdirection of energy . 74 Defective monetary .systems of Great Britain and the United Slates furnish the conditions which enable tlie active cause to work . . 74-77

Mr. McCulloch's policy 77

Exj^ansion of ])roduction ; consum])tion, and contraction ... 77 Gold and silver may, when in bank reserve, cause exj)ansi<>n of circulation 79 Production and consum])tion were nearly balanced in Adam Smith's time 79 American and French currency ; Michigan agricultural and Western freebank currency 80

"Money," "exchanges," "intrinsic value," etc., but chaos, without explanation 80

Immense masses of treasure in China ; prices there arc steady because

production is steady 81,82

Theorists who favor inconvertible paper money 83

The operative credit which leads to crisis is the extra circulation of money

tiirough increased production ........ 83

Science of Troduction and Exchange 84

CIIArTEll III.

THE THEORIES OF MILL AND miCE, AS TO THE CAUSES OF DANKIXO AND COMMERCIAL CRISES.

Mr. Price's theory 85

Mr. Mill's theory ; credit the active cause, according to his and Mr. Price's

theory 86, 87

The English mind wedded to the idea conveyed by "overtrading" . . 87 The oflice of money is to pay labor as well as to distribute its fruits . 87, 88 Kiso and fall of prices in consequence, resulting from ])ayments to labor,

not of credit, Itut of money 88

The agricultural base line 89

Mr. I'riec's theory of deposits ......... 89

Set-offs are not jiayments 90

Deposits arise from production, and not sales merely . . . . 90, 91

XXVlil CONTENTS.

PAGB

Bank reserve increases, on the other hand, through sales of the ai'ticles produced by the aid of bank loans, to consumers 91

How money acts on prices .94

Chapter IV. Value And Price

Value and price are in reality the same ; intrinsic value a contradiction

in terms 95

Value is an equation expressing the terms of exchange between two

things 95

Intrinsic value, if it means anything, must mean intrinsic utility and limited supply 95, 96

Commodity value of the material of money absorbed in the money value . 96 In like manner the money value of bank-notes and credits is extrinsic . 96 And depends upon the quantity of other things it will exchange for . 96, 97 Opinion of bankers, merchants, and manufacturers, as to rise and fall of

prices 99

Absolute necessaries cannot be overproduced, nor, upon the average, relative necessaries, because the latter would not support the laborers 99, 100 Increased production of pi-ecious metals will not raise prices fast enough

to do any injury unless largely in excess of any past production . 100

Overproduction the cause of rise in prices 100

The fallacy of mercantile value in money conservative in its influence,

where the money is kept out of circulation by its means . . 100

Bank loans furnish money and not credit .101

They furnish money to labor, which soon finds its way to bank reserve ; the important fact is payment, and not whether money actually moves

out of the reserve 101

Fallacy upon which the English Bank Act of 1844 is founded . 101, 102 Metallic reserve would be unnecessary, if production were balanced by consumption ; excess the result of the operation of two compound

factors 103

Harmony of production essential 103

Chapter V

BANKING IN ENGLAND, AND EXPANSION AND CONTRACTION OP CIRCULA- TION, UNDER THE BANK ACT OP 1844.

Banking in England is like banking in the United States, in nearly all

essential particulars ; the difference 104

Circulation takes place inside as well as outside of banks ; circulation is in all cases a delivery of units of money, or transfer of the right to them ; balancing of debts a result only 104, 105

The fallacy in calling gold coin a commodity merely because the unit and

its bullion may happen to coincide in value 105

CONTENTS. XX ix

PAOI

The change introiluced by the Bank Act of 1844 ; its effect . . 105, 106 Fallacies in tilt" tlu'Dry of the act . ....... 106-124

Abundance of metal in the reserve ........ 108

Bank credits are the 77. «»// of loanin;,' depijsits 109

If not sto[ijied at a dcMnite point, they ivry without reference to the reserve, and therefore without reference to outstanding circulation 109, 110

Mercantile credit not analogous to bank credit Ill

A bill of exchange cannot take the place of money ; it ia an instrument to

put money in circulation, and a bank loan pays it . . . .112 It cannot take the ])lace of money, because bills of exchange cannot l>e redeemed by bills of exchange ; a.s one kind of money is always redeemed with another, or money in one place with money in another

place 112

Bankers' credits and guaranties will not pay wages . . . .114

The true object of a reserve ; a greater power than money causes rUo of

Analysis of the circulation of money ; three kinds 116

What English banks deal in ; what purpose banking reserve as actuallv

kept answers in England and the United States . . . 117,118

Actual depreciation of the unsold products of labor ; how the depreciation is masked for a time ......... 118

On what kind of credit jjroduction is founded . ..... 119

Necessity of rigorously adhering to the theory that all money po.^sesses conventional value only, in order to perceive clearly that prices depend upon production, consumption, and circulation . . .119

Clearing verifies the theory 119,120

If production and consumption balance, the expansion and contraction of

the circulation of money will lialance 122

The Bank Act has failed in its object, because the metallic units of money in the reserve arc controlled by instead of controlling the units of

credit in deposits . . 123, 1.33

Steadiness the paramount advantage of a circulation of gold and silver . 124 To understand fully why the Rank Act has failed, it is essential to learn under what conditions gold and silver possess this steadiness, and under what conditions they do not ...... 124-128

It is harder to establish the ri;,'ht rule .is matter of fact than to prove it . 128 Sound banks of issue are, comparatively, self-rcLTuIating . . . 128, 129 The advance of jnoduction ; the reason why banks of deposit-loan are not

self-reirulalint; in respect to loans . . . .... 130-132

Adam Smith's opinion in relation to the volume of bank-notes . . 129

Items of bank clearings 132

A due limitation of all units of money requires as a condition th.it metallic units shall form a definite portion on the average of nil the nnit.s

fn circulatiim 129

Units of mercantile credit might, but in jmint of fact do not. circtilate 13.)

The English bankint: crisis of 1806 and the English commercial, industrial, and l)anking crisis of 1874-75 ...... 133-143

Investments in cotton planting . 134

XXX CONTENTS.

FAOB

Production of absolute necessaries cannot be unduly stimulated by rising prices 134

Artificial derangement of the distribution of metallic money a cause of

local rise of prices 136

Steadiness of metallic circulation, lost by the artificial contrivance of banking, requires an equally artificial arrangement of banking reserve to

restore it 136

Brief statement of the causes of the failure of the Bank Act . . 135-142 Definite quantities of the precious metals would go into coin and manufacture, if their distribution equally in the tracks of commerce were

not interfered with 135

All loans produce an expansion of circulation 137

What an English bank deals in 137

Credit and debt 138

Why the reserve pays all checks 138, 139

The mistake of the authors of the Bank Act arose from supposing the variation of gold to be that of a commodity instead of that of a series of metallic units, when used by buyers to purchase labor as well as commodities .... 141

And hence the true objective point was limitation, in order to insure steadiness to the highest degree possible by the aid of gold . . . 141, 142 The true principle of variation, therefore, was that the circulation of money, or, in other words, loans, should be made to vary with gold in the reserve, instead of the latter being made to vary with the former 140-142

Chapter VI. Banking In The United States

In point of true science writers have not defined excess of issues . .143 Whether one bank can control the issues of other banks . . 143-146

When circulation is in excess 145, 146

Sound banks of issue, where there are no banks of deposit-loan, are compelled to keep their issues limited by metallic money . . . .145

The true object of this limitation . 144

Of banks combining the functions of issue, deposit, and discount in the

United States 146

Banking a common law right 146

The theory of the founders of the Bank of England and English as well as American bankers and writers upon the subject of money and exchange is that banks deal in debt 147

It has been maintained with great vigor and force by Professor Bonamy

Price 147

To say that a bank deals in debt has no more real meaning in point of

sound logic than to say that it deals in confidence . . . .147 The use and the value of gold as money alike conventional; conventional

value controls and absorbs mercantile value 148

CONTENTS. XXXI

PAGE

Gold is not worth what it buys by reason of the Jal>or in producing it, but

conventional value causes labor to be employed for that purjwse ' . 14S

Bank coffers are, as a rule, amply stored with metal, not only to meet all

ordinary calls, but witli much more 1-15

The true office of bank reserve is, therefore, not merely that of a consolidated fund, but to limit the circulation 150

The mistake lies not in supp()>iii;,' liank loans to l>e founded on credit and confidence, but in supposing that credit and confidence and metallic commodity enter into the exchanges 150,151

The essential difference between gold coin and inconvertiide bank debt . 151

The distril)Ution of metallic money is in the tracks of commerce, and not

of production 151, 152

Expansion of circulation under banks of issue, deposit, and discount, in the

United States, compared with that taking place under banks of issue 152

Banks disturb the natural distribution of the precious metals . . .153

France requires more than Eughuul, and England more than the United

States 154

The benefit of metallic limitation of circulation lost unless the metallic units are allowed to distribute themselves according to the laws of commerce . 153

Steady jirices might bo obtained with a " credit" currency, if production

The theory that unsteady jirices arise from want of harmony in production

established by the author a new one 155

The theory that overproduction is irapo.ssible is true only in a general (or abstract) sense ; because it is true in a general sense, commercial crises come and cause a rectification of excess .... 155-157

The paramount forces which control all production . . . .157

Rigorously exact analysis of the causes and conditions which bring about

expansion of in-odnction through bank loans .... 158-161

" Clearings" help to create and maintain the fallacy tliat banks deal in their own debt instead of tliat extra or additional circulation or use of money, in exces^s of the exchanges of commerce and industry which would be po-^sible in the absence of banks ..... 161-164

Summary of banking in the United States . . . . . .164

Under banks of issue, deposit, and discount, without any regulation by reserve, bank debt is redeemed out of a reserve having no relation to commerce 164

All banks redeem out of their reserve 164

The reserve makes all loans, and its ecjuation always is Deposits minus

Deposit Loans f 71/(1/ Ucservo . . . . . . . 1 ('>4

The important difference between the banking of banks of issue only and banks of dejwsit loan consists in the nitio of reserve to liabilities, and the mode of re])lenishiiig the reserve ....... 165

The important part j)layed by s;ivings banks in the grand business of |)ro-

duction . IGT), 166

All money substantially the same 166

The pr:u;tical (juestion for every banker to answer before making a lo.in 163 xxxii CONTENTS.

PAOB

The true proportion, upon sound principles, between written bank debt and coin, in circulation outside of banks, and bank debt by book and coin reserve 166

Harmonious production 167

The guaranty of the maintenance of conventional value in metallic

Demonstration of the fact that banks deal in the extra circulation or use of money which can be given it in excess of that given it by depositors, and not in credit or debt 169, 170

What kind of money the banks of the United States put in circulation 170, 171

Deposit and discount banking only one among other possible phases of loaning money (by means of an extra or additional circulation) out of a consolidated reserve 171

The best kind of bank to carry out the principle of a regulated reserve in

the United States 172,190

Bank debt over and above reserve, plus 1 76

Banking reserve, as a total, is the sum of the money reserves of all depositors, which, if not in banks, would be (in the shape of metal and bank-notes) in pockets, tills, and safes ; and bank reserve makes the same payments reserves in pockets, tills, and safes would make if there were no bank loans 184, 185

The monetary systems of the United States, Great Britain, and France,

represented by inscribed square and polygons 185

All banking reserve ought to be metallic 186

The national banks should be retained 172

Banking reserve is the money of commerce paid in by consumers who

w^ere sellers before they were buyers 186

Weak banks of issue, in the absence of all deposit loans, demonstrate their

weakness, and cannot conceal it 186

But their notes are now constantly redeemed for them by banks of deposit-loan, and bank debt by book given in exchange for them . 186, 187

The redemption is completed by the checks and drafts of deposit-loan

banks, and thus each bank virtually redeems for all other banks . .186

What kind of practical political economy required for the nations of the

Anglo-Saxon family 18S

Deposits, including reserve, in the view of true economical and monetary

science, belong to depositors . . . . . . . .190

Banks can no more deal in their own credits or debts than a house can

stand in the air 190

It were well if they could, because they would then be banks of issue, and

their reserve would regulate itself 184

Chapter VII. Redemption Of Currenct

Fallacy involved in the assertion that bank-notes ought to be redeemed in metal because it has intrinsic value as a commodity, which the notes have not, conceals the true object of redemption in point of science . 191

CONTENTS. xxxiii

PAGI

The value of all money is of the same kind ; all money value is conventional 191, 192

Monetization gives and demonetization takus away its value more or

less 193

Money possesses no value in itself, becau-e its value lies whully in what it buys; it is mathematically certain, tlierefore, that it has no value a*; a

commodity 194, 195

Taxation of money in hank, ami bank stock ...... 194

Monetization and demonetization are inerely modes of transferring conventional value from one kind of material to another . . .196 A check is the voucher to a banker for ])ayinjjr on de}«>sitor's account. . 196 The value of wheat, if used as money, would be so far entirely conventional,

because all money must value and pay in the cliaracter of units . 197, 198 By a mathematical necessity conventional value can only l)e stated in the

form of abstract units; conventional value is in itself an abstraction 196, 198 The banks of Venice and Amsterdam furnish practical proof to this effect 199 The money unit is ideal, and limited cither by the material which supplies

tlic units, or by commodities ........ 199

What redemption of a currency is ....... . 200

National redem])tions cost nothinj;, because the value of all money lies in what it will procure, and the new metal or material in which the old money is redeemed acquires value as fast as the old material can lose

Absolute utility in any material makes it unfit for money .... :iOI Policy of the United States in reference to funded debt .... 201 Holders of money have been sellers of products personally or representatively . . " 203

Value of gold coin being debased by the issue of substitutes, redemption alone cannot compensate for the debasement ; iedenii)tion must therefore have some other object than to furnish commodities possessed of

intrinsic value 205

Conversion by exchange, of mercantile into bank debt .... 20f) A banker does not loan liis credit by this exchange ; he loans the use of the money of his depositors, and takes mercantile bills and notes in exchange ; he guaranties his dei)ositors against loss by reason of his act through his credit with them, and his capital .... 2U6, 207 If there were no money, and he received dejrosits of commodities, the nature of his loans and guaranties would be substantially the same . 207

Absolute necessaries cannot be overjiroduced 207

Mere credit can by no ])ossil>ility bring on a banking and industrial

crisis 207

The manner in which credit temporarily checks the operation of the well established law, that there can bo no excess of production, by failure

to maintain purchasing jKJwer 203

Purchases on credit cannot raise general prices 20S

It is a fallacy, therefore, to a.ssert that commercial cri>es ari.so from excess

of credit 208, 209

Bills of exchange and checks do not buy merchandise, unless there is

money behind them for which they can be exchanged . . . 209

c xxxiv CONTENTS.

PAOB

They cannot properly be called money, because they are soon exchanged

either for gold, bank-notes, or banker's credit 209

Bank credit cannot take the place of money without a reserve ; it is the

measure of economy of the precious metals and bank-notes . . 210

Bank loans are mostly made to producers 211

Say's doctrine of the impossibility of overproduction 212

Population and absolute necessaries abreast 212

Rise of prices comes through the circulation of money, and disguises the

actual depreciation of commodities 213

The three fallacies on which the credit theory (of bank dealings), in opposition to the money theory, are founded 213

No excess of credits in reference to production ; the excess becomes such, only by the inability of commerce and consumption to keep pace with

production 213

The three fallacies which are at the bottom of the theory of mercantile

value in money 214

The money unit, whether designated bj^ a given weight or measure, or by

a name which does not refer to weight or measure, is ideal only . 215

Least variation in the prices of absolute necessaries . . . .215

Local redemption of money 217

Conducted upon the same principle as the national or universal redemption 217

London clearings 217, 218

liedemption being only an exchange of one kind of money for another,

even gold is redeemed in England (by depositing it) with bank credit 218 Transfer of bank credit from A. to B. is only the registry of the movement of gold in the reserve from A. to B., or, what is the same thing,

of his right to it 219

The founders of the Bank of England, regarding gold coin as a commodity and a standard, failed to perceive that what they called bank credit was only the bank registry of the actual circulation of money which

had been deposited in the reserve 219

American banking system substantially like the English before 1844 . .219 What sound banks were subjected to prior to 1857, when exchanges were

in favor of clearing centres, through depreciated currency . . 220 Gold in London is not a regulator of its own circulation .... 221 It is made a kind of ballast only, and its movement regulated through interest rates 221

Prices depend upon the amount of circulation, even of gold, and gold in the Bank of England circulates in the reserve, in subordination to bank credits, instead of controlling by its circulation the creation of

bank credits 221

Redemption an infallible test of money 221

The initial movement of currency 221

All loans to manufacturers and merchants are loans to producers in excess of all their own money, and the loans to producers of absolute necessaries, as such 221, 222

Bills of exchange are not money, because they are not redeemed with bills 222

CONTENTS. XXXV

PAGE

The retnrn movement of money out of circiilaiion, when goods have been

bou;;ht by couMiiners .....••••• 222

Accoinmoilation bills 222

Tein{)orary auxiliaries, towards overproduction ...... 223

Keal value an es-sential in the selection of material for money, only for the

pur|)o.«e of maintaining; steadine.sj> in the number of units . . 224

Adam Smith's demonstration 225

The mercantile theory so called 225

Effect of the di.scovery of America upon production .... 225,226 The advantages of a metallic circulation, a-s shown by France . . 227

The final test of what constitutes money is not its original coet, but its

cost to the owner, and that it is always redeemable with commodities

whicli have cost actual value 227, 228

Labor does not measure values, but values eiiualize labor .... 229 Overvaluation of one of the precious metals, and metallic circulation in

the markets of overvaluation 230

Redemption of bank-notes and the fallacies connected therewith . 230, 231 Redemption declared by certain writers to be au end in itself ; thi> is a

fallacy 231

Gradual gain of gold in piirchasing power 232

The ratio of metallic production to existing miisa of metal being small,

maintains steady purchasing power in metallic units .... 232

Chapter VIII

PRODUCTION, OVERPRODUCTION, ILL-DIRECTED PRODUCTION, PRODUCTION ON CREDIT, AND 8PECUL.A.TION.

Production the foundation of commerce ; what it is 233

What labor is ; what ca])ital is 2.33

Commerce ; in a general sense i.s a branch of production .... 233 Money is the conventional commodity by means of which it is effected 233, 234 There is a natural tendency to invent and use money ns well as huiguage 2.34 A commodity employed for jjurposes of money necessarily ceases to be a

commodity subject to the common law of sujjply and demand . . 234 Money resolves itself, therefore, into a series of units, and commodities can

only be valued and exchanged by units .so long as money is usetl . 234 All money, whether that of the precious metals or inconvertible notes,