Part 13

And again, in whatever degree, therefore, the quantity of money is increased or diminished, other things remaining the same, in that same proportion the value of the whole, and of every part, is reciprocally diminished or increased.

John Stuart Mill (Political Economy) says:

The value of money, other things being the same, varies inversely as its quantity; every increase of quantity lowering the value, and every diminution raising it in a ratio exactly equivalent.

And again:

Alterations in the cost of the production of the precious metals do not act upon the value of money, except just in proportion as they increase or diminish its quantity.

Ricardo (reply to Bosanquet) says:

The value of money in any country is determined by the amount existing. * * *

That commodities would rise or fall in price in proportion to the increase or diminution of money, I assume as a fact that is incontrovertible. * * *

Ricardo further says:

There can exist no depreciation in money but from excess; however debased a coinage may become, it will preserve its mint value; that is to say, it will pass in circulation for the intrinsic value of the bullion which it ought to contain, provided it be not in too great abundance.

In this case Ricardo's illustration is the supposed case of a country actually using one million gold pieces each containing 100 grains. He maintains that they would be of the same purchasing power, if the Government took out 1 grain, or even 50 grains, the quantity remaining the same, but that if, from the grains so deducted, an additional number of pieces were struck, a corresponding depreciation would result.

William Huskisson ("The Depreciation of the Currency," 1819), says:

If the quantity of gold in a country whose currency consists of gold should be increased in any given proportion, the quantity of other articles and the demand for them remaining the same, the value of any given commodity measured in the coin of that country would be increased in the same proportion.

Sir James Graham says:

The value of money is in the inverse ratio of its quantity; the supply of commodities remaining the same.

Torrens, in his work on Political Economy, says:

Gold is a commodity governed, as all other commodities are governed, by the law of supply and demand. If the value of all other commodities, in relation to gold, rises and falls as their quantities diminish or increase, the value of gold in relation to commodities must rise and fall as its quantity is diminished or increased.

Wolowski says:

The sum total of the precious metals is reckoned at 50 milliards, one-half gold and one-half silver. If, by a stroke of the pen, they suppress one of these metals in the monetary service, they double the demand for the other metal, to the ruin of all debtors.

Cernuschi says:

The purchasing power of money is in direct proportion to the volume of money existing.

Prof. Francis A. Walker, in his work on "Money" (page 57), says:

The value of money in any country is determined by the amount existing.

Its [money's] power of acquisition depends not on its substance, but on its quantity. [Paulus, author of the Pandects, sixth century.]

Professor De Colange, in the American Cyclopedia of Commerce, article on "Money," says:

The rate at which money exchanges for other things is determined by its quantity. * * *

Supposing the amount of trade and mode of circulation to remain stationary, if the quantity of money be increased, its value will fall, and the price of other commodities will proportionally rise, as the latter will then exchange against a greater amount of money; if, on the other hand, the quantity of money be reduced, its value will be raised, and prices in a corresponding degree diminished, as commodities will then have to be exchanged for a less amount of money. * * *

In whatever degree, therefore, the quantity of money is increased or diminished, other things remaining the same, in that same proportion the value of the whole and of every part is reciprocally diminished or increased.

A curtailment of the volume of money in a country will, _ceteris paribus_, increase the value of the money of that country. All the authorities agree that this law applies to all forms of money, whatever the material; so that it applies to paper money with precisely the same force that it applies to metallic money.

Mr. Stanley Jevons, in his work on "Money and the Mechanism of Exchange," says:

There is plenty of evidence to prove that an inconvertible paper money, if carefully limited in quantity, can retain its full value. Such was the case with the Bank of England notes for several years after the suspension of specie payments in 1797, and such is the case with the present notes of the Bank of France.

Mr. Gallatin said:

If in a country which wants and possesses a metallic currency of seventy millions of dollars, a paper currency to the same amount should be substituted, the seventy millions in gold and silver, being no longer wanted for that purpose, will be exported, and the returns may be converted into a productive capital, and add an equal amount to the wealth of the country.

In his Proposal for an Economic and Secure Currency Ricardo says:

A well regulated paper currency is so great an improvement in commerce, that I should greatly regret if prejudice should induce us to return to a system of less utility. The introduction of the precious metals for the purposes of money may with truth be considered as one or the most important steps toward the improvement of commerce and the arts of civilized life; but it is no less true, that with the advancement of knowledge and science, we discover that it would be another improvement to banish them again from the employment to which, during a less enlightened period, they had been so advantageously applied.

Mr. J. R. McCulloch, in commenting on the principles of money laid down by Ricardo, says:

He examined the circumstances which determine the value of money * * * and be showed that * * * its value will depend on the extent to which it may be issued compared with the demand. This is a principle of great importance; for, it shows that intrinsic worth is not necessary to a currency, and that provided the supply of paper notes, declared to be a legal tender, be sufficiently limited, their value may be maintained on a par with the value of gold, or raised to any higher level. If, therefore, it were practicable to devise a plan for preserving the value of paper on a level with that of gold, without making it convertible into coin at the pleasure of the holder, the heavy expense of a metallic currency would be saved.

It appears, therefore, that if there were perfect security that the power of issuing paper money would not be abused; that is, if there were perfect security for its being issued in such quantities, as to preserve its value relatively to the mass of circulating commodities nearly equal, the precious metals might be entirely dispensed with, not only as a circulating medium, but also as a standard to which to refer the value of paper.

In adopting a paper circulation--

Says Lord Overstone--

we must unavoidably depend for a maintenance of its due value upon the adoption of a strict and judicious rule for the regulation of its amount.

Lord Overstone further declared that:

The value of the paper currency results from its being kept at the same amount the metallic currency would have been.

Alexander Baring, in his evidence before the secret committee of the House of Lords in 1819, said:

The reduction of paper would produce all those effects which arise from the reduction in the amount of money in any country.

Prof. F. A. Walker says:

Let me repeat, money is to be known by its doing a certain work. Money is not gold, though gold may be money; sometimes gold is money, and sometimes it is not. Money is no one thing, no group of many things having any material property in common. On the contrary, anything may be money; and anything, in a given time and place, is money which then and there performs a certain function. Always and everywhere that which does the money-work is the money-thing.

Sir Archibald Alison says:

The suspension of specie payment in 1797, making bank notes a legal tender receivable for taxes by providing Great Britain with an adequate internal currency, averted the catastrophe then so general upon the Continent, and gave it at the same time an extraordinary degree of prosperity. Such was the commencement of the paper system in Great Britain, which ultimately produced such astonishing effects, and brought the struggle [of the Napoleonic wars] to a triumphant close.

THE TRUE MONEY STANDARD.

The true money standard of any country is not the material of which the money is made. The standard is not a concrete object, but a numerical relation. It is the relation between the number of units composing the monetary circulation of the country and the numbers of the population.

It is the legal-tender function that constitutes money. It is the power which the law imparts to any material to pay debts and liquidate obligations. It can not for a moment be doubted that the money function, being conferred by the supreme authority, is the all-sufficient guarantee of the money value. There is no necessity for re-enforcing that value with any inferior value that may attach to the material on which the money stamp is placed. The money function is immeasurably the most important that can be conferred by society upon any material, and it is absurd to urge that that function is not of itself sufficient for the maintenance of the value of money. All the value that money can possibly have--the totality of value that can exist in the shape of money in any country--will attach to anything upon which the sovereign authority stamps it, whether the material on which the stamp is placed be gold, silver, paper, or anything else. Legislators or executive officers of the Government, by increasing or decreasing the volume of money, correspondingly decrease or increase the value of each unit of that money. For no matter how many or how few the units may be, the total value of the money of the country will be comprised within the total number of those units. A change in the number of the units effects a proportionate change in the value of each unit, and whatever the value of the unit may be, it is of the utmost importance that that value should remain undisturbed.

It is absurd to maintain that a gold unit, which, as time goes on, is constantly increasing in purchasing power; is a better unit than a unit of any other material that maintains unchanging value through time.

Whenever the business of the country accommodates itself to a given number of units, the only question for the Government to deal with is to maintain that value as free from disturbance as possible; and according to all authorities on political economy that can only be done by increasing or decreasing the number of units in circulation in accordance with the demands of increasing or decreasing population.

If it be admitted that one of the most important offices of government is to see that the equities are preserved between its citizens (and if this be not so, to what purpose are our courts of equity instituted?), then it can not be denied that it is one of the highest offices of government to see that money, which measures all equities, and which must for all time continue to be the principal measure in the service of civilized society, shall be of unchanging value. It is impossible to secure this characteristic of uniformity in the value of money if we are to select as the only material on which to stamp the money function a substance whose yearly production is becoming more and more limited, and the prospect of whose sufficient yield becomes less and less encouraging.

IF SILVER REMAIN DEMONETIZED AND GOLD CONTINUE DECREASING, WHERE IS THE WORLD'S FUTURE MONEY SUPPLY TO COME FROM?

If the distinguished authorities I have quoted are correct, that a diminution of the volume of money increases the value of the money unit--which is but another form of stating that it lowers prices and produces stagnation, distress, and discontent,--what good reason can be offered by the advocates of the gold standard for confining the business of this rapidly growing country to a basis of gold, when it is well known that the entire stocks of gold and silver together are now insufficient to serve the purpose of the world's money, and have to be supplemented and re-enforced by large issues of paper notes? Do they not reflect that the production of gold is constantly diminishing and is likely to continue to diminish? And do they not know that our population is growing at the rate of over 3 per cent. per annum and will double in thirty years? Do they mean that the money volume which serves a population of 65,000,000, and is far below the needs of that population, will suffice for the 130,000,000 of the next generation? To be sure, if we are to take no note of prices, the question is a simple one.

But prices must be taken into account. The entire money question is one of prices. When it is said that money is scarce, what is meant is that business is depressed and that money is difficult to get, at the present range of prices. Should prices fall 25 per cent. money would be found plentiful enough to conduct exchange at the lower range. But when prices fall, goods sell below cost, business is unprofitable, workshops are closed, and men are thrown into idleness. If lowering prices do not affect injuriously either the business or the prosperity of the country, then it makes no difference what the volume of money may be; a small amount will meet the requirements as well as a large amount. In that case, the gold standard is as good as any.

But if gold alone is sufficient to bear all the enormous monetary burdens of the Western world, why do the advocates of the gold standard admit the necessity for any more circulation? To be logical, instead of favoring an increase of credit money, which has always lurking within it an element of danger to the business of the community, they should demand the retirement of the $347,000,000 of greenbacks and the $350,000,000 of coined silver, and base the business of the country exclusively on what they call "honest money." If that should be done all that could happen would be a fall in prices. Judging by the experience of the past it would not be surprising if the next move of the gold-standard men would be an agitation for the retirement and cancellation of the greenbacks. Such a movement is fully in harmony with the opinions of the gold-standard advocates for the past twenty years. Indeed, the Secretary of the Treasury who took charge of the finances at the opening of the last Administration, himself a banker, recommended the demonetization of the greenbacks almost as vigorously as he opposed silver.

MONEY VALUABLE ONLY FOR THE IMPORTANT SERVICE IT PERFORMS.

Money is valuable rather for the service which it performs than for the material of which it is composed.

When we consider the transcendantly important character of the service which money performs--when we reflect that, without it, the achievement of an advanced civilization would be impossible, we can not escape the conclusion that, compared with the value of that service, the commodity value of any material on which the money function may be stamped is too trifling to merit serious attention.

This will be made clear by reflection on the necessities of the situation.

So long as society chooses to maintain the automatic or metallic money-system, it must be obvious that to escape the evils that would result from a sudden and overwhelming increase in the supply of the money-material as compared with the entire stock in existence, and the infinitely more serious evils that would result from a wholly insufficient yearly addition to that stock, it must have on hand an enormous accumulation of the metals on which the stamp is placed. It must be manifest that no material would be fit for universal acceptance for so important a function as money unless there were available so great a quantity of it that no sudden shock could be inflicted on society by ordinary fluctuations in the current yield, or in the current consumption in the arts.

But, in the nature of things, a supply sufficient to effect that result would be so enormous as practically to destroy the market value of the material as a mere commodity if the money function and use were withdrawn from it.

THE MONEY DEMAND, NOT THE COMMODITY DEMAND, THAT GIVES GOLD ITS VALUE.

Mr. Giffen the statistician of the London Board of Trade, in an article recently published in an English magazine, berating and deriding the bi-metallists, maintains that it is not the demand for gold as money, but for gold as a commodity, to be used in the arts, that determines its value.

To prove his case, Mr. Giffen states that the supply of gold is about $95,000,000 per annum, the annual demand for the arts $60,000,000, or about two-thirds of the annual supply; while the demand for money is only $35,000,000, or about one-third that supply. He therefore argues that the art demand, being the greater of the two, contributes more largely to the maintenance of the value of gold than does the demand for that article as money. It is hardly necessary to point out the absurdity of this claim.

The commodity demand in any one year is not made upon the current year's supply, but upon the entire amount in existence, which, is estimated to be about $4,000,000,000. If the demand for the arts entirely ceased, would the addition, to the money volume, of the $60,000,000 now used in the arts produce any appreciable effect on the value of the $4,000,000,000 in existence?

On the other hand, what is the demand on gold for the money use? All the labor and all the salable property of the western world are constantly offered in exchange for it. It is a moderate estimate to assume that each dollar is earned, demanded, and paid once a week, or fifty times in each year. This constitutes a total annual money demand of $200,000,000,000, compared with which colossal sum how inconsequential is the commodity demand of $60,000,000 in maintaining the value of gold.

The amount of gold annually used in the arts is not very definitely ascertained, but in 1886 it was estimated by the then Director of the United States Mint to be $46,000,000 per annum. Mr. Giffen estimated it at $60,000,000. It is my opinion that the arts forage on the money-stock of gold to the extent of about the entire annual yield. The bullion or commodity value of that metal being determined by its money value, whoever desires to use it for any purpose other than money, takes the bullion at its coinage value, or else melts up the coin.

Were gold demonetized and deprived of its money function, and its demand confined solely to that arising from its adaptability for various other purposes, the present stock of that metal on hand and in use as money would, according to the estimates of the director of the mint, supply the art demand for more than seventy-five years to come. But, assuming that the estimate of the Director of the Mint is too low, and that my own is nearer the truth, there is at least fifty years' supply on hand. Were there fifty or seventy-five years' supply of any other commodity on hand in the market, what would be the commercial value of that commodity? What would be the value of copper, of brass, or of iron, if there were fifty or seventy-five years' supply of either of those metals in the market for disposal at one time? Nobody can pretend that any commodity of which there is an available supply on hand equivalent to the whole demand for fifty or seventy-five years can have any but the most trifling value.

Contrary, therefore, to the generally received conviction that the commodity demand is the dominating force in fixing the value of gold I maintain and insist that the commodity demand, if entering into the account at all, is insignificant. It is the supremely important _money_-demand, as correlated to the supply, that fixes the value of all money of every description whatsoever.

The demand for gold as a commodity is limited and fluctuating, but when that metal is invested by law with the higher function of money, and thus constituted a common denominator of all values, that limited and fluctuating demand is changed to an unlimited and constant one, which fixes its value for other and inferior uses. If the commodity-demand for gold were, as many believe it to be, essential to its acceptance as money, it would be a great misfortune to society. The happiness and prosperity of the world, if not wholly dependent upon, are largely influenced by, steadiness in the value of money, and this can not exist without steadiness in its volume. Whatever demand exists for gold as a commodity can only affect the volume of money injuriously--that is to say, by decreasing it. The admonition of history is that a deficiency in the money-supply is more probable, and infinitely more to be feared than an excess, and this deficiency is, in great measure, caused by the insidious and constant encroachment, upon the precious metals, of demands for them for other than the money use. When we contrast the magnitude of the world's interests and equities, which rest on steadiness in the value of money, with the comparative unimportance of the uses of the metals as commodities, it becomes apparent that the subjection of the value of money to disturbance from the demands for gilded signs, looking-glasses, bangles and breast-pins, is an evil for which society is but poorly compensated by the benefits derived from such uses.

Whatever other quality gold may posses than as the bearer of the money function is inconsistent with the healthful and proper exercise of the task assigned it as such. Whenever any portion of the metal is used for any other purpose than money it destroys the money and thus changes the value of every unit of money in circulation, for, at already stated--other things remaining unchanged--the value of each dollar depends on the number of dollars that are out. Without forewarning, and with out knowledge on the part of the people, large amounts of the money volume, on which so infinite a number of equities rest, and on the basis of which all debts and time contracts have been entered into, are, as it were, surreptitiously abstracted and appropriated to other and always inferior uses, for by far the highest and noblest use of any material upon which the money function has been conferred, is the money use. No other use can possibly be so high or so noble as that of maintaining all equities undisturbed.