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values, is not conventional, but is determined by the cost of
reproduction. If, however, the general agreement to use them
as money were to cease, and they were to be demonetized, the
excessive supply for other uses would cause their purchasing
power to decline very greatly. Their intrinsic utility would, in-
deed, be more generally made use of, since they would be far
more generally employed in the arts than at present, and in this
respect there would be a net gain to mankind in the change.
Their use — especially that of gold — as ornaments would cease
on this decline in price, and this would make them still cheaper.
However well fitted their color and brilliancy to attract the eye
and please the fancy of childish savages, the refined taste of
civilized man would cast them aside as barbarous. They still
hold their place in the toilet because they are " condensed
wealth, the trophies of industrial warfare," analogous to the
savage's string of scalps. Very few of the articles made of
them have any artistic merit.

§ 159. They are difficult of reproduction, and therefore valu-
able, because they are scanty in supply and hard of access in
their natural deposits. Gold especially is found in very small
quantities, and to dig for it is — considering the number of per-
sons employed in it — the most unprofitable of human employ-
ments. It has the fascination of a lottery, in which a few suc-
ceed, but thousands fail. The Mexicans have a saying that he
who mines for copper will grow rich ; he who digs for silver may
or may not; he who seeks gold never will. Were it otherwise,
success would defeat itself, through the decline in the value of
its products.

These metals are, therefore, a very expensive instrument for
effecting exchanges. They require a vast outlay of capital, labor


and intelligence, that might otherwise be expended in producing
what would directly meet and satisfy the primal needs of hu-
manity. " It is a heavy price, and each ounce of gold repre
sents so much labor withdrawn from agriculture aud other indus-
trial pursuits, which minister directly to the comforts and
necessities of mankind. "

See R. H. Patterson's Economy of Capital (1864).

These two metals do not circulate equally in all parts of the
world, nor is their purchasing power the same everywhere.
Since 1771 gold alone is "legal tender" for large payments in
England; i. e., is such an offer of payment as the creditor must
accept or forfeit his claim to interest. The United States fol-
lowed the example of England, but on the Continent of Europe
both are legal tender. In the East gold has never been a circu-
lating medium ; China will not accept it in payment for her teas
and silks; in India gold mohurs are coined, but have never been
legal tender. During the panic of 1866, merchants of Calcutta
offered 20,000?. in gold at the banks, but could not obtain even
bank notes in exchange.

Cowries, a species of shell, are used in the native kingdoms of Central
Africa and some parts of India. Part of the land revenue of Orissa is
paid in them, at the rate of 6000 or 7000 to the rupee. Similar were the
wampum belts of our Indians. Carthage had a coinage of metal
enclosed in stamped leather; Sparta had an intentionally cumbrous one
of iron. Russia during the present century tried to get coins of plati-
num into circulation, but they were bought up and withdrawn because
of the too great variation in the commercial value of platinum. Copper
and bronze have been commonly used for coins of small value, but lat-
terly an alloy of nickel and copper has been adopted by several of the
most enlightened nations as the best material for small coins.

§ 160. The " precious metals" are often spoken of as " the
standard of value," which is true only in a restricted sense. A
standard must remain the same, however other things change ;
and this is certainly not true of gold and silver. Their pur-
chasing power has been continually varying, generally declining,
as the natural deposits of their ores have been laid bare, and
the resistance of nature to those who searched for them has


diminished. Vast quantities of them were furnished to Europe
by Spanish America from the conquest of Mexico and Peru,
till the revolt of those colonies in 1810. During the thirt3
years that followed, the supply was largely interrupted, and the
supply of money in other forms was hindered by restrictive legis-
lation. It was a time of great popular distress, and of em-
barrassment to the money markets of the world. Commerce
and manufactures were growing, but the instrument of ex-
change was nearly a fixed quantity. In 1840 Russia began to
work the Ural mines: the gold discoveries in California (1848)
and in Australia (1854) came next. Since then the annual
increase of coined money has been nearly quadrupled, and a vast
extension of commerce and manufactures has followed through-
out the world.

While both the periods of increase have seen a decline in the
purchasing power of gold and silver, in neither of them has it
fallen in anything like the ratio of increase. Humboldt esti-
mates that in the eighteenth century there were thirty times as
much coin in circulation as in the fifteenth ; yet money had, on
the very highest estimate, only twelve times as much purchasing
power at the era of the Reformation as at present. When the
new flow of gold into Europe began, economists of the English
school (Chevalier, Cobden, etc.), predicted a rapid fall in its
value ; others of the same school (Caird, Jevens, etc.), claim
that this has been the case to some extent, say ten or fifteen per
cent. But even this much is not universally admitted. " We
have seen," says R. II. Patterson, " three hundred million pounds
added to the general currency within fifteen years, with so little
effect that it is still doubted by many authorities whether there
has been any depreciation at all." A small depreciation seems,
however, to have taken place.

§ 161. On the principles generally accepted by the English
school, and first enunciated by David Hume in 1752, the rate
of decrease in value should have been exactly proportional to
the increase in amount. He says that " the only influence which
a greater abundance of coin has in the kingdom" is " by


heightening the price of commodities and obliging every one to
pay a greater number of these little yellow or white pieces for
everything he purchases." He admits indeed a temporary effect
of quite another kind : " In every kingdom into which money
begins to flow in greater abundance than formerly, everything
takes a new pace; labor and industry gain life; the merchant
becomes more enterprising, the manufacturer more diligent and
skilful, and even the farmer follows his plough with greater
alacrity and attention."

Mr. J. S. Mill applies the well-worn formula of demand and
supply to the subject in this way : " The demand for money
consists of all the goods offered for sale. . . . The money and the
goods are seeking each other for the purpose of being exchanged.
. . . Hence if the whole money in circulation was doubled,
prices would be doubled ; if it was only increased one-fourth,
prices would rise one-fourth." Mr. Mill does not appear to be
aware of the fact that all but a small percentage uf purchases
are paid for by offset (checks, bills of exchange, etc.), without
the use of coin.

§ 162. The element of truth in this mechanical theory is
separated from the falsehood in Mr. Patterson's statement: " An
addition to the currency of a country is not necessarily a benefit.
... If the currency be doubled, while the productions of that
country and the demand for money remain as they were, the
double amount will do no more than the lesser one, — only all
prices, wages, rents, etc., will be doubled in amount. The
prices which a fanner or manufacturer gets for his goods will be
increased; but so also in similar proportion will be the amount
of his outlay in rent and taxes. It is like adding to both sides
of an equation. It would be a sheer waste of money. ... A
case like this, however, never occurs in the actual world." And
why ? Because in the actual world money is always drifting to
the nations whose industry and enterprise give it the highest
utility, — to the nations whose increased productiveness and in-
creased demand for money furnish a sphere of usefulness to the
increase, — to the nations whose worth, honor and intelligence


make them the safest depositaries of the world's loose cash,
and thus the centres of credit. England has raised her coin
circulation to 150,000.000/., but her annual savings are between
a hundred and a hundred and thirty millions. The vast quan-
tities of the precious metals that flowed into Europe after the
discovery of America, may well, in the absence of new enter-
prises and industries to employ it, have had a different effect,
and produced " a dearness of all things without a dearth of
anything." Europe — especially Spaiu — was industrially inert,
incapable of safely absorbing so large a quantity of the precious
metals, incapable of receiving the industrial impulse they would
most naturally have imparted. The lack of stimulating in-
fluence on a stagnant and stationary society is seen in India and
China, which absorb every year $50,000,000 in silver, only to
hoard it away.

§ 163 The influx of money into a progressive country is one
of the most powerful promoters aud increasers of production.
To money (as to labor) " time is money ;" whoever possesses
it must seek an investment for it, or lose the profits ; when it is
plenty, all sorts of productive work are stimulated ; labor is the
master of capital, and industrial enterprise gains a more than
proportionally larger return for its outlay, with every increase
of the outlay. Labor becomes more productive as the instru-
ment of association is more universally accessible. Its price rises
while that of commodities falls.

The drain of money away from a country does not make it —
as some have said — " a good place to buy in but a bad place to
sell in," — just the reverse. It makes it a bad place in which
to buy anything but special products of its soil or climate,
because although labor is cheap, the commodities produced by
labor are dear through its inefficiency. It makes it, therefore, a
good place for the sale of the merchandise of countries more
happily situated. " To him that hath shall be given." Money
tends to where money is ; start a shilling in circulation in Thibet
or Central Africa, and the chances are that it will turn up in
London. It will do so, because the presence of great accumu-


lations of capital in England, have made English labor produc-
tive to a degree that outweighs all other considerations.

§ 164. For the same reason, the money market in poor countries
always tends towards stringency. However great may have been
the recent supply, it is speedily drawn off into a thousand side
channels, and the main stream is diminished. The effect of this
is far more than proportional to the amount involved, for this
market is extremely sensitive. On the first intimation of a
scarcity, the rate rises, and they who must have money to pav the
current expenses of large establishments, or to meet their out-
standing obligations, are at the mercy of the lender. The cap-
tains of industry, and, through them, their laborei's, are no
longer the masters but the servants of capital.

§ 165. A second form of money, and one that is in many re-
pects superior to coin, is paper-money. It is open to none of
the objections that we have presented to the use of gold and
silver. It wears out sooner, indeed, but can be replaced at a
trifling cost ; its production withdraws no large portion of the
race from productive industry; its use abstracts from the arts no
substance of intrinsic value ; it circulates more rapidly than
gold because it represents great values by a smaller bulk, and is
easier of transfer. And when, as can be accomplished by wise
legislation, the public have security that the note is really issued
by the firm that it professes to come from, and that that firm is
able to meet all just demands upon it, the last objection to its
use is removed. If barter may be compared to the rude mode
of transportation on human backs, and coin to transportation in
carriages drawn by horses, paper-money is the steam-carriage,
whose use calls for larger precautions against danger, but whose
superior utility far outweighs that consideration.

The earliest form of paper-money was the bill of exchange.
From a letter of Cicero to his brother Atticus, directing him to
obtain a sum of money at Athens, we learn that this or some-
thing equivalent to it existed in antiquity. It was reinvented
in the Middle Ages, not by the Jews, but by the Caursins, a
class of money-changers employed by the Papal See in the col-


lection and transmission of its revenue from all parts of Europe
to Rome or Avignon. The Hanse towns adopted it, and it
passed into currency as one of the ordinary methods of com-
merce between distant traders.

By this plan a debtor in Hamburg, who wishes to pay his
London creditor, goes "on 'change" and buys of a discouut
house a draft on London for the amount. This draft has pre-
viously been drawn by some Hamburg merchant upon his London
debtor, and sold by him to the discount house for a trifle less
than the market rate of exchange. This exchange is " in favor
of Hamburg " when drafts on London are plenty and sell for a
small percentage less than the " face value." It is " against
Hamburg " when the reverse is the case ; and unless the course
of exchange changes, some specie will in that case have to be
exported from Hamburg to London to restore the balance.
The amount of the discount or the premium on bills of exchange
can never be greater than the cost of transmitting specie, in-
cluding interest and insurance. By this method, it will be seen,
the debts of London merchants to Hamburg merchants are paid
by set-off against the debts of Hamburg merchants to London
merchants, and the amount of money exchanged between the
two cities is reduced to a minimum.

§ 166. The advantages of this plan are so great that the
advantage of something like it for the transaction of business
within each city was readily seen, and banks of deposit and
issue were established as early as the fifteenth century. The
first Italian banks, however, were mere associations of the public
creditors in each city for the joint care of their interests, and
when they became banks in the modern sense, they did not begin
the issue of paper-money, but dealt ouly in money of account,
which is yet to be described. The same is true of the banks of
Amsterdam, Hamburg, and Stockholm. By 1673 we find the
Bank of Genoa issuing bills of pretty large amount, which
passed into circulation for wholesale transactions. About the
same time the English goldsmiths began the practice of issuing
bills which circulated in the same way, and when in 1694 the


Bank of England, and in 1605 the Bank of Scotland, were
established, the issue of these bank-notes to those who bor-
rowed money was a feature of each institution. These were at
first "time-notes" bearing a low rate of interest, and conse-
quently certain to be presented for redemption. Growing a little
bolder, the Bank of England issued demand notes that bore no
interest, and these passed rapidly into circulation, imparting a
vigorous impulse to all sorts of business. As the country really
needed these, it was almost impossible that any large quantity
of them could be presented for redemption at once, except in
cases of extraordinary panic. Of course the bank was enabled
to extend its discounts far beyond the amount of coin at its
command. For the bank did not — no bank could — keep on
hand specie enough to redeem its entire circulation. It was
sufficient if it kept as much as experience showed would meet
the largest ordinary demand for it.

Such was the genesis of the modern banknote, which has
been one of the most powerful agents to promote and fertilize
industry. To establish a bank of issue in a community where
none has existed before, is to coin the mutual credit and confi-
dence of the people into available money. It is to bring men into
closer and more helpful association, by furnishing a new supply
of the instrument of association and of the exchange of ser-
vices. It is to put the means of industrial activity into the
hands of those captains of industry who will open avenues of
useful employment to the idle and the dependent. It is to
recall from distant banks, and to draw out of old stockings and
cash-boxes, the accumulated savings of the commuuity, and
make them doubly efficient in the promotion of local interests.
By adding to the rapidity of societary circulation it adds new
profits to every bargain, and gives a new efficiency to every blow
on the anvil, a new value to the crops in every field.

Sir Walter Scott says of the Scotch system of banks of issue :
"The facilities which it has afforded to the industrious and
enterprising agriculturist or manufacturer, as well as to the
trustees of the public in executing national works, have con-


verted Scotland from a poor, miserable and barren country into
one where, if nature has done less, art and industry have done
more than in perhaps any country in Europe, England not
excepted. Through the means of credit which this system
afforded, roads have been made, bridges built, and canals dug,
opening up to reciprocal communication the most sequestered
districts of the country; manufactures have been established,
unequalled in extent or success, — wastes have been converted
into productive farms, — the productions of the earth for human
use have been multiplied twenty fold, while the wealth of
the rich and the comforts of the poor have been extended in
the same proportion. And all this in a country where the
rigor of the climate and the sterility of the soil seemed united
to set improvement at defiance. Let those who remember
Scotland forty years since bear witness if I speak truth or false-

See "Malachi Malagrowthcr's" Letters on the Proposed Change in the
Currency (Edinburgh, 1826).

§ 16'7. The community, in using the notes of the bank as
money, pass a vote of confidence in the general solvency. They
are authorizing the directors to monetize a small portion of the
capital of the neighborhood, that the utility of the rest and the
facility of its transfer may be increased. They are passing, at
the same time, a vote of confidence in the honesty and prudence
of those directors.

<; What security have we that the confidence thus extended
will not be abused ?" Two: (1) government inspection should
be continually exercised over every such institution, and should
extend to all the details of its management. Of course this
implies no publication of the bank's affairs, save when the re-
sults are such as to justify its dissolution.

(2) Under restrictions imposed by general laws, any number
of citizens should be as much at liberty to establish a bank as
to open a store to sell dry-goods. The profits of legitimate bank-
ing are always large enough to attract thither capital sufficient to
supply safely all the demand for paper-money and discounts It


is only when the business is made a monopoly, and confined to a
small number of firms, that their limited capital is unequal to
the demand for money made upon them by the community.
The best guarantee for safety is freedom.

The supposed danger that over-issues are practicable, and
that they may not only bring the holder of bank-notes into a
position of risk, but also derange the whole market for money,
and with it all other markets, is in the main a mere bugbear.
Banks do not break down because their note circulation is too
large, but because the other departments of their business are
so badly managed that their notes, be tbey few or many, have
no guarantee behind them. A bank can ordinarily put into
circulation no more notes than the community needs. The
avenues of return are always more open to the public than those
of issue to the directors. But one class of English economists
have said " over-issue " so often that they are ready to stake
their reputation as financiers upon this theory, which is sustained
by no facts, and is disputed by the ablest men (Tooke, Ash-
burton, Fullarton, etc.) of their own school. " It was a pair of
spectacles which the Bullion Committee [of 1811] left as a
legacy to the subsequent generation, and which became the
medium through which all our monetary difficulties were viewed.
The increase of the bank's issues to the extent of a million or
two above the ordinary amount, was held capable of producing
the most momentous consequences. It ' depressed the currency,'
and was the parent of our recurrent monetary crises. The up-
holders of this theory, it is true, never demonstrated by a refer-
ence to prices that the currency was depressed. They took
that for granted, and a good deal more besides " (R. H. Patter-

§ 168. The third and the most perfect form of money is
money of account. It possesses in a still higher degree all the
advantages that make paper-money better than coin. It passes
in circulation most rapidly ; it performs the vastest amount of
service in proportion to its amount ; its use involves no loss by
wear ; its production is so nearly costless that its cost hardly


enters into men's thoughts. As much as paper-money is less
material than coin, by so much is money of account less material
than paper-money. As we have compared coined money in its
efficiency and utility to a carriage drawn by horses, and paper-
money to the car moved by steam-power, so might we conceive
of money of account as a vehicle of transportation through the
air, moving with electric swiftness, and impelled by some of
those subtler physical forces whose mastery is yet to be achieved.
It is the money of civilization ; its use involves a degree of
intelligent insight into the true nature of wealth and of ex-
changes, and a strong confidence in the general honesty and
trustworthiness of mankind, that are impossible to the savage or
the half-civilized man.

Money of account originated in the commercial cities of Italy,
and its use was thence transferred to the great emporiums of
Northern Europe — Amsterdam, Hamburg and Stockholm. The
republics of A^enice and of Genoa authorized their creditors to
establish banks on the basis of the certificates of the city's debt.
The Bank of Venice dates from 1171, when a forced loan was
raised to fit out a fleet ; that the burden might be felt as little
as possible, the persons assessed were formed into a company for
protection of their common concern and the receipt of interest j
at the same time the debt was made easily transferable by order
on the company, and thus its use for the discharge of obligations
grew up naturally. At first it was a forced loan under special
guarantees ; then a desirable investment ; then a means of pay-
ment. The first character of the deposits so entirely disappeared
that government ceased to pay interest on the capital. Then to
secure a uniform currency, it decreed that all wholesale transac-
tions should be paid in the form of a transfer of bank stock,
unless otherwise stipulated; so that whoever had a box full of
coins, gathered from the four quarters of the earth through the
manifold channels of Venetian trade, took them to the bank to
get credit upon its books according to their weight and fineness.
The standard by which their value was estimated was called
" money of account," to distinguish it from the various moneys


that were translated into it. The government treated these
masses of coin as payment for the privilege of a credit on the
bank's book, and all idea of their repayment was lost sight of.
Yet for four hundred years, or until the conquest of the city by
Napoleon I., this money of account circulated freely, and was
at a premium (or agio) in coin ; trade proceeded with a rapidity
previously unknown ; no Venetian ever raised his voice in com-

Online LibraryRobert Ellis ThompsonSocial science and national economy → online text (page 15 of 38)