Second extract from the book:

MONEY

BY

CHARLES MORAN.

1863

 

MONEY CHAPTER II.

IT was the constant alteration by the sovereigns of the weight and fineness of the coins, as well as their depreciation by wear and by clipping, that gave rise to the ideal money of account of the banks of Venice, Genoa, Amsterdam, Hamburg, &c. These institutions received all kinds of coin on deposit, but only credited the depositors with their actual weight of fine metal, by reducing them to the weight and fineness of their ideal money of account. These moneys of account were alone received in payment of debts due to the banks, and, for a long time, were at a considerable premium. The reason for this premium is very evident from the fact that the general average value of the coins circulating in Amsterdam in 1609, when the Bank of Amsterdam was founded, was 9 per cent, below their standard value. (Encyc. Britannica, Money.) The certificates of deposit issued by these banks, finally suggested the use of bank bills as money. The first bank bills that circulated as money were those of the Bank of Stockholm, established in 1668. They were mere receipts for coin deposited with the bank, but by a law of 1726, they were made receivable in payment of all bills of exchange. The first institution, however, that was legally authorized to issue bank bills payable to bearer at sight, was the Bank of England, founded in 1694.

There is to-day a greater difference of opinion on the subject of money, than on almost any other subject treated of by the economists. Bastiat, in his little pamphlet entitled ” Maudit Argent,” makes an economist say: “I curse money because it is constantly confounded with wealth, and from this confusion arise errors and calamities without number. I curse it because its functions are ill understood and very difficult of comprehension. I curse it because it confuses all ideas, causes the means to be mistaken for the end, the obstacle for the cause, alpha for omega because its presence in the world, beneficial in itself, has introduced a false notion, a begging of the question, a fallacious theory that, in its numerous ramifications, has impoverished man, and encrimsoned the earth with blood. I curse it because I feel myself incapable of wrestling against the errors to which it has given birth, otherwise than by a long and fastidious dissertation to which no one will listen.”

To appreciate clearly the functions of money and the natural laws that govern it, it becomes necessary to establish a few preliminary principles.

Wealth and utility are synonymous terms so are value and capital. But wealth and capital utility and value are not synonymous terms, although constantly used as such by most persons. It is not the utility of a thing itself that constitutes its value, but the usefulness (not the amount) of the human labor and intelligence incorporated in the thing at the time when it is sold. Water is indispensable to man, and yet water has actually no value, notwithstanding its great utility. But the labor of bringing water from a distance to the hands of those who need it, has to be remunerated, and this often gives value to water. In such a case, the price paid for the water is the mere remuneration of the human labor incorporated in the water, and thus saved to the purchaser. The water itself is one of the innumerable bounties bestowed on man by the Creator, all of which ever remain gratuitous, no matter through how many hands they may pass, except when human monopolies, the fruit of human laws, intervene.

The labor incorporated on things, and thus saved to those who acquire them, is what constitutes value or capital. Nothing is capital but the existing results of previous labor that can contribute to man’s enjoyment and well-being. This analysis of capital shows the correctness of the theory of Bastiat, that all exchanges are mere exchanges of services.

Money is not capital, but a mere representative of capital, although the material of which it is made may be capital when not used as money. Capital is sought with a view to be consumed or retained, whereas money is only sought as means of obtaining useful commodities and services; in other words, men seek money only because it is universally accepted in exchange for commodities and services, which it therefore represents. But representatives are constantly confounded with the things they represent, and this is particularly the case with gold and silver and paper money. In consequence of having been at first used as commodities, at their value for consumption, although, now generally used as representatives of capital, as means of obtaining commodities and services, the precious metals are still generally looked upon as capital itself in fact,

as the only true capital. (“Gold and silver being useful for other purposes besides serving for currency, have a certain intrinsic value, and for that reason alone they are, to a certain extent, wealth in themselves. Many persons who cannot discriminate the simple ideas involved in one complex one, entertain very erroneous opinions on this subject, and are apt to consider money and wealth as convertible terms. Gold and silver, however, derive their chief value from their peculiar fitness to form a currency, and they are less useful for general purposes than almost any other metal.” – Macleod, Theory and Practice of Banking, vol. i, p. 35.)

This is carried to such an extent that we are elated at an arrival of $1,000,000 in coin from any quarter; while we are alarmed at an arrival of $5,000,000 in commodities indispensable to the welfare of the community, because we fear it may lead to the exportation of a portion of our dearly prized gold and silver, in exchange for the commodities; and yet it is evident that the only use of coin or money is to obtain with it the things useful to humanity! Of what use is money where there are no commodities or services to exchange? The idea that money alone is real capital or wealth, has undoubtedly diminished the general welfare and progress of humanity, by diverting its attention from industry, the sole source of all capital. The same idea originated the celebrated mercantile system, first introduced by the Emperor Charles V, in the relations between Spain and her colonies, and subsequently introduced by Colbert in the relations between nations; a system most injurious to all, and yet gradually adopted by all nations, and still retained by them to a greater or lesser extent.

["According to the crude ideas that were generally received about a century ago, gold and silver were almost universally considered to be nearly the only species of wealth, and it was considered to be the true policy of every country to encourage, by every means in its power, the influx of bullion, and to discourage its export; and most, if not all, of the European nations have gone so far, at one time or another, as to prohibit its export. The profit of foreign commerce was estimated solely by the quantity of gold and silver it brought into the country; and the theory of commerce seemed to be reduced to a general scramble among all nations, to see which could draw to itself most gold and silver from the others. According to this theory, the gain of one party was the loss of the other; every article produced in another country, and imported into this one, was considered a direct loss to the country. This was what was called the mercantile or commercial system."

"So far from the principle of the mercantile theory being true, that gold and silver are the most profitable and desirable object of import, the direct reverse is unquestionably true, that gold and silver are, of all objects of commerce, the most unprofitable." (Macleod, Theory and Practice of Banking, vol. i, pp. 297-299.)]

” Gold and silver, though they serve for few, yet they command all the conveniencies of life, and therefore in a plenty of them consists riches.” (Locke, vol. v, p. 12, London edition, 1823.)

Man, in his operations for his own individual account, rarely commits the error of confounding capital and its representatives, because this would be fatal to his own well-being. An individual never borrows money to retain it as direct means of enjoyment: he invariably seeks money as means of obtaining, by exchange, those things which contribute, per se, to his enjoyment or well-being. An intelligent man never long retains money on hand. He invariably exchanges it for useful or productive things. But in their collective capacity, as legislators and theorists, where the results of their actions and theories fall principally upon others, men constantly assert and act on the theory that capital and money are identical. (Report of Committee on Commerce of House of Representatives, September, 1850.)

Of all the representatives of capital and services, gold and silver have been the most generally used. They were undoubtedly first resorted to by merchants as mediums of exchanging commodities, from their general use for ornaments, which gave them a current value everywhere. The scarcity of these metals also gave them a great value in a small volume, another great advantage they offered as means of exchanging commodities.

It is evidently this idea, that gold and silver are the only true wealth, that induced England, since the 18th Charles II, to coin the precious metals without charge to the owners of the bullion deposited at the mint a custom which has most improperly become general among nations; for coining money is a service rendered to the owners of bullion, who should, therefore, bear the expense, and not the community at large. Mr. Mushet, in his evidence before a committee of the House of Lords in 1819, stated that gold could be coined at the English mint for one half of one per cent., and silver probably for one and a half per cent. In France the expense of coining has been reduced for gold to 6 francs for every 3,100 francs, or 0.193 percent.; for silver, to 75 centimes for every 100 francs, or per cent. In Russia it costs 0.35 per cent, for gold and 2.95 per cent for silver.

At first the value of gold and silver was entirely regulated by their value at the silversmith’s, for merchants then only used the precious metals as commodities, easily bartered everywhere for any other commodity desired; and as long as this was the case, their value followed the same law as the value of other commodities. But experience having demonstrated that gold and silver were admirable instruments for facilitating the exchanges of commodities and services, they were each day more and more used for that purpose alone, without the slightest view to consumption; and this change in their use, from commodities for consumption to mere counters representing commodities delivered or services rendered, was so gradual and imperceptible that to this day it is generally believed, even by economists of eminence, that the value of gold and silver entirely depends on their intrinsic value, or on the amount of labor required to produce them.

[Mr. Senior, in one of his lectures on the value of money, observes: "The value of the precious metals, as money, must depend ultimately on their value as materials of jewellery and plate; since if they were not used as commodities, they could not circulate as money." (Tooke, History of Prices, vol. v, p. 224.) Mr. Senior had evidently in view only the original cause which led to the use of the precious metals of their use as commodities easily bartered everywhere: he entirely ignored their use as counters representing commodities and services.]

But this evidently is an error, for as soon as the use of gold and silver as coin, as representatives of commodities, became infinitely greater than their use as commodities, their value as coin, as instruments of exchanges, regulated their value as commodities. Should either metal ever be more useful or more sought for as a commodity than as money, it would soon disappear from circulation as coin, no matter what efforts might be made to retain it as coin; but so long as they are mostly used as money, gold and silver as commodities will always be worth the value given them as coin, the delay and expense of coining alone deducted; for no one will ever sell the precious metals as bullion, at less than their value as coin, so long as they can be coined and used as money; nor will anyone ever pay more for gold and silver as commodities, than their value as coin, so long as they can be obtained by melting the coin. This is well established by the fact that all the precious metals used in the arts are paid the exact value, neither more nor less, that they are worth as money.

As commodities, gold and silver are capital – but as money, they are mere representatives of commodities, of capital itself. It is this double function of gold and silver, as commodities and as representatives of commodities, that has confused all the economists and writers on the subject of the precious metals. And it is from not separating, from confounding these two opposite and entirely different attributes of the precious metals, that have arisen most of the erroneous theories in regard to their value.

[" But there will be found to be no inconsiderable difference, if we distinguish as we ought to do, for the purpose whether of theory or practice, between gold considered as merchandise, i.e., capital, and gold considered as currency, circulating in the shape of coin among the public." (Tooke, History of Prices, vol. iii, p. 224.)]

It is from considering metallic money as capital that Macleod arrives at the absurd conclusion that credit is capital. (Theory and Practice of Banking, vol. i, p. 262: “Hence as capital and credit perform exactly the same functions and are essentially of the same nature the one being the symbol of past labor, the other of future labor, but both being transferring power, it is not an incorrect expression to say that CREDIT IS CAPITAL. ”

” Money is capital – money commands and exchanges commodities and services so does credit to a still greater extent therefore credit as well as money is capital” That this is the process of reasoning by which he arrives at this absurd conclusion, is very evident from the fact that he says, ” a banker s notes in circulation are quite as much banking capital to him as gold deposited with him by his creditors.” How can a banker’s indebtedness be capital to him?

[See Theory and Practice of Banking, vol. i, p. 259.]

Macleod’s extraordinary theory that credit is capital, comes also from his employing the term capital in its mercantile sense, as designating money, instead of in its scientific sense, as designating all economized, existing results of labor. He says, vol. i, p. 262: “What is capital in the ordinary sense? It is that portion of currency which is employed in reproductive operations: when the harvest is reaped, part of the corn is consumed and part is sown again. Now currency is like corn, the part that is consumed is revenue, and the part that is sown again is capital.”

Here are two important errors:

1. Capital held idle is just as much capital as when used in reproductive operations. The idea that nothing is capital that is not used reproductively, is one of the exploded errors of the earlier economists, an error arising from the mercantile sense of the term capital.

2. What part of currency is consumed? and by what process? Until Mr. Macleod answers these queries we cannot admit that currency is consumed like corn, either productively or unproductively.

Macleod seems to look upon labor as productive only of money wages, for he says, vol. ii, p. xliv: “But suppose that instead of spending all his earnings on commodities, he saves a portion, . . . that saving is called capital.” The only capital produced by the laborer, that can become an addition to previously existing capital, is the result of his labor money, whether metallic or paper, is only an instrument which, like the highway or the wagon, aids the transfer of commodities from one person or place to another; and the money, exactly like the highway or the wagon, must be in existence before it can be used to facilitate exchanges. Consequently, in no way can any portion of money wages saved by a laborer be an addition to existing capital. How Macleod should have fallen into the error of using the term capital as synonymous with money is really incomprehensible, for he says, vol. ii, p. xlv, ” The primary, genuine, and exclusive meaning of capital is the accumulated savings of labor, and its symbol is money. How can a symbol be bona fide capital? Capital always designates something real, something useful, per se. Macleod says himself, vol. ii, p. liv: “It is true that capital is not exactly synonymous with money; but money is its symbol and representative.”

The metal contained in a coin is a commodity before it is coined, and also after it is melted; but as long as it is used as money, to facilitate the exchanges of commodities and services, it is a mere counter, a representative of commodities and services, no more subject to the laws that govern commodities and services than paper money.

["Money of every kind is an order for goods; it is so considered by the laborer when he receives it, and is almost instantly turned into money’s worth. It is merely the instrument by which the purchasable stock of the country is distributed with convenience and advantage among the several members of the community." (Thornton, An Inquiry, &c., p. 260, quoted by Macleod, Theory and Practice of Banking, vol. i, p. 390.)]

For example, increase the representatives of commodities and services, and in no way will it increase the enjoyment and progress of the community. On the contrary, increase the amount of commodities and services available to the community, and the well-being of all will be increased, no matter how little money there may be; for the absence of money would only render the exchanges of commodities less rapid and easy, but it would not prevent the general enjoyment and progress produced by commodities and services. Civilization is possible without money, but civilization is perfectly impossible without the commodities and services that contribute to man s progress and well being. This seems to have been clearly perceived by the celebrated Marshal Vauban, who said, “the true wealth of a kingdom consists in the abundance of products useful to man. Also by Voltaire, who said: ” A nation that should have only gold and silver, would be most miserable, whilst a nation that possessed none of these metals, but produced all other things that contribute to man’s enjoyment and welfare, would be very wealthy.”

Money is the measure of value of all things except itself. But in this world there is nothing absolute; all is relative. Therefore money does not, cannot measure the absolute or intrinsic value of things, but merely their relative value; or rather, the momentary estimation of the relative usefulness of the human labor and intelligence incorporated in things. And money measures this relation, not because it contains in itself an equivalent amount of usefulness or labor, but because it is everywhere accepted at a fixed value in exchange for all other things. “When $2 are paid for a pair of shoes, and $4 for a hat, it does not indicate that the hat and the shoes contain the same amount of human labor as the silver or the gold contained in the coins, or the paper on which are printed the banknotes, given for them. It indicates, merely, that it requires

two pairs of shoes to purchase one hat in other words, that the human labor incorporated in one hat is as much prized as that incorporated in two pairs of shoes that with one hat the hatter can purchase two pairs of shoos, and “vice versa.”

Anything that is not generally accepted in exchange for commodities and services, cannot perform the functions of money, no matter how great be the amount of human labor required to produce or procure the material it is made of. A counterfeit coin, almost worthless, and even a counterfeit bank note, entirely worthless, successfully perform all the functions of money as long as they are accepted in exchange for commodities and services.

["Coin is an ordinary commodity, like any other, authenticated as to quality and weight by the stamp of the state. But coin, so long as it circulates within the realm for the purpose of buying and selling, loses for the time its intrinsic value. It resembles a steam engine, a field, or any other machine. Its intrinsic value is suspended till it is sold, and its worth consists solely in the work it achieves. Sovereigns, when passing from hand to hand, are no better than counters or tokens. They are not wanted for the sake of the gold they contain, but simply as pledges that a man shall be able to buy with them as many commodities as those he gave in exchange for them. A bad shilling does the work of coin quite as well as a good one till it is found out; and it then becomes worthless, because the absence of the intrinsic value destroys faith in its power to persuade a seller to part with his wares. If that seller knew that he could pass it off as good upon another man, he would (apart from the question of morality) be as willing to take it as a silver shilling. Metallic money, whilst acting as coin, is identical with paper money, in respect of being destitute of intrinsic value; with this single difference, that when it is desired to reproduce that intrinsic value, the sovereign can be instantly turned into bullion; whilst, in the case of a note, an intermediate step is necessary it must be sent to the bank before its intrinsic worth is recovered. The security for the value is already in the hands of the holder of the sovereign; for the note, the solvency of the issuer is an additional requisite. Still, whilst circulating, both make no use of intrinsic value; and this is the great point to grasp firmly" (What is Money? North British Review, Nov. 1861 without exception the best article on money we have yet met with.)]

All commercial nations now use either one or both of the precious metals as money. They are supposed to give them a fixed value by coining them, and making them a legal tender in payment of all taxes levied by the Government that coins them, and of all individual contracts. But this fixed value is only illusory. Coining money does not establish its value. It only indicates the quantity and quality of the metal of which the coins are made.

[" The province or function of the Government in regard to coinage, as conducted by the Mint in obedience to the prescribed regulations, is simply to certify by a stamp, bearing the effigy of the sovereign, the weight and fineness of the piece of metal to which it is applied." (Tooke, vol. v, p. 517.)

" When nations advanced beyond the stage of direct barter, and began to use the precious metals as a common measure to which the value of all other commodities was referred, it was the weight of the pure metal which was invariably used as the index of value, and merchant carried scales about with them, for the purpose of weighing out the metal on each separate occasion. . . . The necessity of carrying about scales to weigh out the metal on each separate occasion being felt to be tedious and irksome, the plan was devised of cutting the bullion into pieces of a certain definite weight by the public authority, and putting a stamp upon them to certify to the community that they were warranted to contain a certain weight of bullion of a certain definite fineness. Values were then estimated by the number of these pieces of bullion, which were called coins, which were given for commodities, and then they were said to be reckoned by tale.

It is clear that the sole object of coining was to save the trouble of weighing, and that though the prices of articles were estimated in figures, it was essentially part of the understanding that these figures denote certain specific quantities of pure metal." (Macleod, Theory and Practice of Banking, vol. i, pp. 275, 276.)

" The stamp on the coin is the guarantee of the state that it contains a certain weight of bullion." (Macleod, Theory and Practice of Banking, vol. j, p. 289.)]

Coins are mere pieces of metal, of fixed weight and quality, tested by an authority recognised by all, with which purchases may be made and all contracts for the payment of money fulfilled. A contract to pay one thousand dollars, pounds, florins, francs, or any other coin, is simply a contract to deliver a certain number of pieces of metal of a certain weight and fineness; and the coins are such pieces, certified correct by competent authority.

[*"Money has two functions: the one, that of serving as an instrument of exchange; the other, that of being the subject of contracts for future payment. It is in the latter capacity that the fixity of a standard is most essential. It is as the subject of engagements or obligations for future payment, that in every view of justice and polity, the specific thing promised, in quantity and quality, should be paid at the expiration of the term." (Tooke, History of Prices, vol. i. pp. 145, 146.)

"An alteration of the standard is a direct fraud upon debtors or creditors, according as it is raised or lowered ; because the essence of every, contract is, that the debtor is to pay a certain weight of gold, and not so many abstract ideas which are called pounds." (Macleod, Theory and Practice of Banking, vol. i. p. 289.)

"When one man lends another a sum of money to be returned to him at some future period, ... he grants the use of a certain number of pieces of metal of given weight and fineness during a definite period, on condition that an equal number of pieces of the same weight and fineness shall be restored at the expiration of the time. . . . There is here no question of value, or what quantity of commodity or set of commodities the gold will command in exchange. This has no part in the contract. The agreement respects the quantity and not the value of the gold; it has nothing to do with the purchasing power of gold in the market. . . . This is a correct representation of the nature of all mere pecuniary bargains. . . . We must come to a quantity of something at last."

" It is true that contracts may be made which shall have reference to the value of gold or silver as well as to its quantity. ... I may with great propriety stipulate, that, inasmuch as the 100 which I lend when wheat is at 50s. per quarter is equal to 40 quarters of wheat, the value of 40 quarters of wheat shall be returned to me when the loan is repaid. In effect this is lending the wheat. In the same way any other commodity may be lent, or any other stipulation may be made. The freedom of bargain is and ought to be quite unrestricted." (Bailey, Money and its Vicissitudes in Value quoted by Tooke, History of Prices, vol. v. pp. 148-149.)]

How unjust, then, how great the abuse of power, for a Government to debase the coin, or to make paper a legal tender, and thus force creditors to accept, in liquidation of existing contracts, something else than what the contracts stipulate! After one of the parties to a contract has fulfilled his part of it, what principle of law or equity authorizes the enactment of a law absolving the other party, in whole or in part, from fulfilling his portion of the contract? Is it not a well-established principle of legislation that no law shall be retroactive in its effect, or shall impair the obligation of existing contracts? That coining the precious metals does not give them a fixed value is very evident from the well-known fact that any given amount of money will, at one time, purchase a much greater amount of commodities than at another, although the money contains, at “both moments”, the same amount of metal of the same fineness. And yet it is the almost universal opinion that the only thing that retains a fixed, unalterable value is metallic currency; and this opinion, however erroneous it may be, greatly aids in giving gold and silver their universal circulation.

Money can neither be a proper measure of value, nor the proper subject of contracts for future payments, if it be subject to alterations. The only attribute of money that cannot be fixed is its exchangeable value, which can only be expressed or measured by the quantity of other things obtained in exchange for a given amount of money. Therefore, while gold and silver measure the value of commodities and services, commodities and services alone can measure the value of gold and silver. (“Gold and silver do not measure the value of commodities more than the latter measure the value of gold and silver. When one commodity is exchanged for another, each measures the value of the other.” – Encyclopaedia Britannica, Money.)

The use of the precious metals as money, everywhere, enables commerce to resort to them as an universal measure of relative values. By knowing the relative quantity and fineness of the metal contained in the coins of any two countries, and the money price of things in both, the relative value of anything in both countries can at once be accurately ascertained and compared. Without this knowledge a large portion of the beneficial operations of commerce and industry would be impossible.

Metallic money is supposed to carry its value in itself. This was the case at first, when it was used exclusively as a commodity. This value in itself was an indispensable attribute of money in the early stages of civilization, when it was used as a medium of exchanges between strangers, and between parties having no confidence in each other, or in the laws that protected them, and who, therefore, would not part with their property unless they received in exchange, on the spot, something of equal intrinsic value in their eyes.

But to-day the most important use of money is as an acknowledgment, as a certificate, of services rendered but not yet remunerated, which the community is bound to liquidate by rendering equivalent services to the holders, on demand. Gold and silver coin must be redeemed by commodities or services on demand, or they can no more perform, the functions of money than irredeemable paper money.