Skip to main content

Full text of "The principles of money"

See other formats


This  is  a  digital  copy  of  a  book  that  was  preserved  for  generations  on  library  shelves  before  it  was  carefully  scanned  by  Google  as  part  of  a  project 
to  make  the  world's  books  discoverable  online. 

It  has  survived  long  enough  for  the  copyright  to  expire  and  the  book  to  enter  the  public  domain.  A  public  domain  book  is  one  that  was  never  subject 
to  copyright  or  whose  legal  copyright  term  has  expired.  Whether  a  book  is  in  the  public  domain  may  vary  country  to  country.  Public  domain  books 
are  our  gateways  to  the  past,  representing  a  wealth  of  history,  culture  and  knowledge  that's  often  difficult  to  discover. 

Marks,  notations  and  other  marginalia  present  in  the  original  volume  will  appear  in  this  file  -  a  reminder  of  this  book's  long  journey  from  the 
publisher  to  a  library  and  finally  to  you. 

Usage  guidelines 

Google  is  proud  to  partner  with  libraries  to  digitize  public  domain  materials  and  make  them  widely  accessible.  Public  domain  books  belong  to  the 
public  and  we  are  merely  their  custodians.  Nevertheless,  this  work  is  expensive,  so  in  order  to  keep  providing  this  resource,  we  have  taken  steps  to 
prevent  abuse  by  commercial  parties,  including  placing  technical  restrictions  on  automated  querying. 

We  also  ask  that  you: 

+  Make  non-commercial  use  of  the  files  We  designed  Google  Book  Search  for  use  by  individuals,  and  we  request  that  you  use  these  files  for 
personal,  non-commercial  purposes. 

+  Refrain  from  automated  querying  Do  not  send  automated  queries  of  any  sort  to  Google's  system:  If  you  are  conducting  research  on  machine 
translation,  optical  character  recognition  or  other  areas  where  access  to  a  large  amount  of  text  is  helpful,  please  contact  us.  We  encourage  the 
use  of  public  domain  materials  for  these  purposes  and  may  be  able  to  help. 

+  Maintain  attribution  The  Google  "watermark"  you  see  on  each  file  is  essential  for  informing  people  about  this  project  and  helping  them  find 
additional  materials  through  Google  Book  Search.  Please  do  not  remove  it. 

+  Keep  it  legal  Whatever  your  use,  remember  that  you  are  responsible  for  ensuring  that  what  you  are  doing  is  legal.  Do  not  assume  that  just 
because  we  believe  a  book  is  in  the  public  domain  for  users  in  the  United  States,  that  the  work  is  also  in  the  public  domain  for  users  in  other 
countries.  Whether  a  book  is  still  in  copyright  varies  from  country  to  country,  and  we  can't  offer  guidance  on  whether  any  specific  use  of 
any  specific  book  is  allowed.  Please  do  not  assume  that  a  book's  appearance  in  Google  Book  Search  means  it  can  be  used  in  any  manner 
anywhere  in  the  world.  Copyright  infringement  liability  can  be  quite  severe. 

About  Google  Book  Search 

Google's  mission  is  to  organize  the  world's  information  and  to  make  it  universally  accessible  and  useful.  Google  Book  Search  helps  readers 
discover  the  world's  books  while  helping  authors  and  publishers  reach  new  audiences.  You  can  search  through  the  full  text  of  this  book  on  the  web 


at|http  :  //books  .  google  .  com/ 


THE   PRINCIPLES  OF  MONEY 


BOOKS  BY  J.  LAURENCE  LAUQHLIN 
PuBuaUD  BT  CHARLES  SCRIBNER'B  BON8 

Lattcr^DayProMeiBS tMCllJK) 

IntfMtrial  AoMrica net  tlJ25 

The  PrindplM  of  Moaey nM  $8.00 


THE 


PRINCIPLES  OF  MONEY 


vr 
J.  LAURENCE   LAUGHLIN 

^r^ts^r  of  Political  Economy  in  thi  Univtrsity  of  CkicQg9$ 

AtiUUrof*'  The  History  of  Biwutallism  in  the  UnUtd 

StaUs  ;  "  "  Tfu  Elements  of  Political  Economy;  " 

"  Tko  Abridgment  off  S.  Milts  Politietd 

Ecmomy:"  *' ReciprocUy ;'' He. 


NEW  YORK 

CHARLES   SCRIBNER'S  SONS 

191 1 

K 


By  Charlbs  Scribnbr's  Sous. 


221804 


To  My  Son 
LAURENCE 


TO  THE  READER 

IK  spite  of  the  great  literatDie  of  money,  it  has  seemed 
to  me  possible,  hj  a  restatement  of  results  aheady  ac- 
cepted and  by  a  reotgaoization  of  the  field,  that  we  might 
be  in  a  position  to  move  forward  to  additional  gains  of  a  oon- 
stroctive  character.  Especially  did  this  seem  hopeful,  if  a 
separate  and  orderly  exposition  should  be  made  of  the  prin- 
ciples of  money  quite  independently  of  their  countless  historical 
applications.  Although  the  earliest  glimmerings  of  political 
economy  came  from  the  study  of  money,  and  although,  as 
Hr.  Jevons  has  well  said,  the  Uteiature  of  money  is  so  ezten- 
siye  that  no  one  man  could  ever  have  read  it  all,  it  is  pass- 
ing strange  that  there  is  to-day  no  treatise  giving  a  scientifie 
statement  of  all  the  principles  of  money.  There  is,  it  is  true, 
mention  here  and  there  of  nearly  everything  which  one  might 
wish  to  assemble  in  a  treatise  on  monetary  principles;  but 
there  has  been  little  organic  and  constructive  study.  For 
instance,  no  such  problem  as  bimetallism  could  be  properly 
approached  without  first  disposing  of  the  laws  regulating 
the  value  of  money,  that  is,  of  the  theory  of  prices ;  in  fact, 
throughout  much  of  recent  writing  the  facts  and  the  principles 
have  been  mixed  in  inextricable  confusion.  The  central  point 
in  any  study  of  monetary  principles  must  be  the  theory  of 
prices ;  and  yet  one  of  the  best  general  treatises  in  English, 
Mr.  Jevons's  Money  and  Mechanism  of  Exchange^  gives  no 
attention  to  it  Even  in  the  monumental  work  of  Knies  (Oeld 
wd  Credit)^  the  volume  on  Money  (apart  from  Credit),  while 
treating  in  detail  the  functions  of  money  and  the  topics  covered 
by  chapters  i,  ii,  iii,  and  iv  within,  does  not  set  forth  any 


yiii  TO  THE  READER 

ezposition  of  many  other  important  principles  of  money ;  yet 
his  work  is  of  pre-eminent  value  for  any  serious  student  in 
this  subject  Treatises  there  are,  also,  many  and  good  ones, 
giving  invaluable  discussions  upon  special  experiments  or 
upon  certain  historical  operations;  but,  in  the  main,  they 
bear  upon  questions  of  the  day,  in  some  given  period,  such 
as  the  export  of  the  precious  metals  in  mercantilist  days, 
the  Bank  of  England  Restriction,  the  recent  possibilities  of 
bimetallism,  or  the  adoption  of  the  gold  standard.  Tet,  in 
this  kind  of  literature,  assumptions  have  been  lightly  made, 
as  if  bed-rock  had  been  reached,  when,  in  fact,  the  foundations 
have  had  scant  examination,  if  any  at  all. 

Indeed,  the  history  of  any  form  of  money  cannot  be  analyt- 
ically treated  without  the  use  of  a  body  of  principles ;  without 
such  a  body,  as  every  weary  reader  knows,  histories  of  money 
are  confusing  recitals  of  unrelated  details.  As  now  massed, 
principles  and  applications,  in  most  popular  treatises,  are  so 
combined  that  a  refutation  of  one  point  allows  the  routed 
opponent  to  find  cover  behind  some  otiher  shelter  which  to  the 
casual  observer  seems  connected  with  the  old  position,  when 
it  has  in  truth  no  such  relation ;  and  war&re  of  this  kind  can 
go  on  forever  without  issuing  in  definite  conclusions. 

For  these  and  kindred  reasons  —  and  at  the  risk  of  seeming 
presumptuous  —  an  attempt  has  been  made  to  reorganize  the 
treatment  of  money.  In  furtherance  of  so  large  a  task,  it 
became  necessary  to  establish  for  all  money  —  whether  metallic, 
or  paper  money,  deposit  currency,  or  what  not  —  the  general 
principles  supposed  to  be  operative  in  all  countries  at  all  times 
(friction  apart).  Whether  there  exists  such  a  group  of  prin- 
ciples in  the  subject  of  money,  or  whether  the  exposition  here 
given  is  the  right  one,  must  be  determined  by  the  criticism  of 
students  who  follow  me.  I  offer  my  contribution  with  a 
hearty  respect  for  the  inherent  difficulties  of  the  subject ;  and 
yet  I  must  say  that  to  me  the  principles  have  a  simplicity 
and  interdependence  which  suggest  at  least  a  strong  presump- 
tion of  truth,  even  if  no  claim  is  made  to  finality. 


TO  THE  RBADSR  ix 

The  present  yolome  is  the  first  in  a  series  which  aims — if 

the  plan  is  ever  finished  —  to  cover  the  main  field  of  money. 

After  treating  in  Volume  I  the  general  principles  of  money, 

then  one  can  take  up  later  the  problems  connected  with  gold 

and  silver  (such  as  the  logic  of  bimetallism,  the  compensatoiy 

theory,  etc.),  paper  money,  and  the  like,  unincumbered  with  the 

discussion  as  to  the  theory  of  prices,  and  similar  topics.    By 

sQch  an  analysis  of  the  various  sections  of  the  whole  subject,  it 

is  believed  that  greater  clearness  and  better  and  more  truthful 

lesults  may  be  obtained.    The  disclosure  of  distinct  and  sep- 

aiate  problems  and  their  place  within  the  total  province  of 

money  ought  to  bring  greater  acuteness  to  bear  on  each  part, 

and  to  ensure  greater  progress  in  the  future  treatment  of  our 

subject   Without  making  absolute  conmiitments,  a  provisional 

statement  of  the  plans  for  succeeding  volumes  may  be  thus 

indicated: 

I.  The  Principles  of  Money. 
IL  Metallic  Money :  Gold  and  Silver, 
m.  History  of  Metallic  Money  in  the  United  States. 
IV.  Paper  Money:  The  United  States. 

V.  Paper  Money :  Foreign  Countries. 
VI.  Banking. 

Some  of  the  main  topics  in  this  first  volume,  upon  which 
an  attempt  has  been  made  to  offer  new  points  of  view,  are  the 
following : 

An  emphasis  on  the  distinction  between  the  standard  and 
the  medium  of  exchange,  so  that  new  light  is  thrown  on  the 
historical  development  of  forms  of  money,  and  on  the  ex- 
planation of  modem  practice  and  prices ;  the  rejection  of  the 
old  assumption  that  credit  was  based  on  money,  and  a  pro- 
posal of  an  entirely  new  analjrsis  of  credit  and  its  effect  on 
prices;  a  collection  in  brief  form  of  all  noteworthy  tables 
of  prices ;  the  literature  of  the  quantity  theory  given  in  ex- 
tracts; a  destructive  and  constructive  study  of  the  theory  of 
prices;   a  restatement  of  the  relations  of  prices  to  foreign 


TO  THE   HEADER 


tmde ;  a  condensed  history  of  the  origin  of  legal  tender  in 
Great  Britain,  and  a  study  of  the  economic  effects  of  legd|l 
tender  on  the  value  of  money ;  and  a  fuller  examination  {J|| 
the  laws  r^ukting  the  value  of  token  coinage  and  paper 
money,  especially  as  regards  redemption.  On  many  of  these 
points  I  find  myself  at  variance  with  some  current  teachingi 
and  especially  with  a  body  of  doctrine  associated  with  the 
authoritative  name  of  Rioaido,  It  would  be  false  to  auppoae 
that  this  attitude  has  been  lightly  taken  ^  indeed,  only  after 
years  of  hesitation,  and  after  a  long  inability  to  make  the  old 
doctrines  explain  our  modem  phenomena,  could  I  have  had 
the  temerity  to  wrestle  with  so  large  a  problem.  It  is  entirely 
possible  that  there  may  be  many  shortcomings  in  the  work 
here  presented ;  but  there  may  be  considenilions  offered  whicli 
must  be  reckoned  with  by  the  future  economists  who  may 
eventually  give  us  the  whole  truth  about  the  principles  and 
operations  of  money.  The  volume  should,  at  least,  force  the 
discussion  upon  crucial  points;  and  the  constant  supply  of 
references  will  allow  students  the  opportunity  of  examining 
both  sides  of  any  disputed  question-  Indeed,  instructors 
removed  from  large  collectione  of  material,  by  use  of  one  or 
two  books,  such  aa  the  Aldrich  Report,  or  Walsh's  Measure- 
ment of  Exchange-Value,  could,  in  connection  with  the 
materids  given  in  chapter  vi  alone,  provide  a  very  full  com 
of  study  on  price  tables. 

In  spite  of  the  fact  that  an  attempt  has  been  made 
restate  the  principles  for  professional  economists,  it  has  been 
my  constant  belief  that  most  of  the  subjects  could  be  given  a 
simple  exposition  adapted  to  the  easy  grasp  of  the  layman. 
With  the  exception,  perhaps,  of  §  8  in  chapter  iii  (on  the  use 
of  the  disutility  of  labor,  or  of  final  or  total  utility,  as  a 
standard)  and  the  first  half  of  chapter  vi  (on  the  study  of 
averages),  I  have  tried  to  keep  the  writing  free  from  techni- 
calitieS;  so  that  it  ought  to  be  clear  to  any  reader.  The  theo- 
retical and  mathematical  portions  just  referred  to  could  not 
well  be  omitted,  on  grounds  of  completeness,  in  a  seientifie 


the 
I  tl 


TO  THE  REAPER 


XI 


treatise ;  but  the  general  readeTf  who  is  unwilling  to  give  due 
time  and  thought  to  these  points,  will  not  find  himself  unpie- 
pared  for  following  the  general  results  of  the  exposition.  If 
I  have  succeeded  in  the  aiin  of  making  myself  clear  to  the 
general  reader,  then  the  professional  student  will  have  no 
reason  to  complain.  The  presence  here  and  there  of  some 
very  simple  and  elementary  statementfi^  Bucih  m  the  definitions 
of  value  and  price,  is  due  to  a  desire  to  provide  unity  and 
completeness  within  the  limits  of  this  volume  for  the  unpro- 
fessional reader, 

I  wish  to  express  my  obligations  to  Br.  W,  C.  Mitchell,  to 
Dr*  S.  P.  Breckenridge,  and  to  Dr.  H.  J.  Davenport  for 
efficient  and  friendly  help  in  several  parts  of  the  work. 

Chapter  iv  has  alr^dy  appeared  in  the  Decennial  Volumes 
of  the  Univereity  of  Chicago;  chapter  x  m  the  **  Journal  of 
Political  Economy";  and  chapter  xiv  in  the  **yale Review/* 

J.  LAURENCE  LAUGHLm 


TbS    UmTtHSITT   OF    CfiICAOO| 
1S03 


CONTENTS 

CBAPTxm  Tjkom 

I.    Thb  FuHcnoNS  of  Monxt 

1 1.  On  Definition  of  Money 1 

1 2.  Value  and  Price 8 

1 3.  The  Common  Denominator,  or  Standard 6 

1 4.  The  Medium  of  Exchange 15 

i  5.  The  Standaid  of  Deferred  Fiiymenta S2 

IL     CoiHAGE 

1 1.  Reasons  for  Coinage S4 

1 8.  Technique  of  Coinage S5 

1 3.  Seigniorage  and  Brassage 27 

i  4.  The  Relation  of  the  State  to  Coinage 30 

*    UL     The  Standard  Question 

§  1.  Time  Element  makes  a  Perfect  Standard  impossible   .    .  34      . 

§  2.  Forces  tending  to  change  the  Valne  of  the  Standard   .    .  36   ^ 

f  3.  Why  the  Preciooii  Metahi  have  been  chosen 40 

§  4.  The  Standard  Problem 41 

f  5.  Relations  of  Debtors  and  Creditors       

§  6.  The  Commodity,  or  Multiple,  Standard 46 

§  7.  The  Corn  Standard       58 

§  8.  The  Labor  Standard 60 

§  9.  The  Question  of  Justice 62 

rV.    Credit 

§  1.  Meaning  of  Credit 71 

§  2.  Credit  based  on  Goods 77 

f  3.  Fonctions  of  Credit 85 

§  4.  Forms  of  Credit 88 

§  5-  Normal  Credit 92 

I  6.  Abnormal  Credit 104 

§7.  Crises 110^^ 

1 8.  Credit  and  Prices 112  v/ 


xiv  CONTENTS 

Cbafrb  PAaa 

V.    Deposit  Cubrxhct 

I    1.  The  Cnmney  Fnnctioii  of  Deponti 115 

i    S.  Bank!  do  not"  coin  Ciedit" 116 

I  8.  Identitj  of  Deposit  and  Note  Fimctioiis 118 

I   4.  Elasticity  of  Deposit  Comiiej iso 

i   5.  Testof  itsSolrencjriatheStaiidaid 1S4 

I  6.  Action  of  Deposit  Cnnencf  in  Times  of  Fluie  .    ...  129 

I   7.  EiEect  of  Deposit  Cnrrencj  on  Prices 134 

I   8.  Histoij  of  Deposit  Curencj  in  the  United  States  ...  139 

VL  /Tables  of  Pbicss 

I   1.  The  Nature  of  Price  TkUes 14S 

I   S.  Different  Methods  of  computing  A?eiages 147 

I  3.  The  Coefficient  of  Qnantitj  in  Theory .  157 

I  4.  Practical  Schemes  of  Weighting 159 

I  5.  Outcome  of  the  Discussion 164 

I   6.  Summary  on  the  Value  of  Moaej 167 

I  7.  Earlj  Tables  of  Prices 171 

t  8.  Modem  English  Tables  of  Prices 175 

^1   9.  European  Tables  of  Prices 190 

>  10.  American  Tables  of  Prices SU 

Vn.    HiSTOitT  AND  Literature  of  the  Quahtitt  Theobt 
OF  Monet 

I    1.  Earlj  Historj  of  the  Qnantitj  Theory  (1568-1757)      .    .  2S5 
I   S.  The  Quantity  Theory  opposed  by  Sir  James  Steuart  and 

Adam  Smith 235 

I   3.  Ricardo S40 

I  4.  The  English  Restriction  Period 250 

I   5.  The  Currency  School 256 

I   6.  The  Banking  Principle 263 

I    7.  Senior  and  Mill 269 

I   8.  Recent  English  and  American  Writers 281 

I   9.  Recent  German  Writers 297 

1 10.  Recent  French  and  Italian  Writers 302 

VnL    A  Critical  Examination  of  the  Quantitt  Theort 

I    1.  The  Question  of  Method 312 

I   2.  The  Conditions  only  under  which  the  Quantity  Theory 

is  supposed  to  hold 314 

I   3.  Fundamental  Error  in  regarding  the  Media  of  Exchange 

as  the  Cliief  Element  affecting  Price 315 

I   4.  Error  in  neglecting  the  Non-Monetary  Demand  for  the 

Precious  Metols 321 

I   5.  Error  in  applying  the  Theory  of  Demand  and  Supply     .  322 


C0NTEKT8  xv 

Pa«b 
I  ft.  Eziorini^pMliiigto  a^'Pordianiig  P<nrtr'' iDdepM^ 

ent  of  Ckwdi 8S8 

I '7/T&e  iiiiaDtitj  IW17  does  not  azplAin  Uw  Facti    •    .    •  3M 

§  '8.  ConaeqiifliioeB  of  tbe  Qoind^  Theocy 389 

IX.  The  Tbux  Theobt  of  Pbioss 

I   1. -The  PrieeBatio  between  Good!  and  the  Standnd   .    .    .  8S6 
I   S.  What  determines  the  Valne  of  Gold,  Gooda  being  Cob- 

stantl       887  ' 

§  3.  The  Snpply  of  Gold 84S 

i  4.  The  Demand  for  Gold 848 

i  5.  The  Frioe  of  a  Single  Article  in  Gold 848 

S  6.  What  determines  the  Value  of  all  Goods,  Gold  beiqg 

Constantf 888 

I  7.  Condnsion:  Price  Batio  when  both  Gold  and  Goods  Tary  889 

§  8.  The  STalaation  Proosss 861 

i  .9.  The  Bise  of  Prices  after  a  Depreasion 888 

X   PnCBS  AND  THX  InTBBMATIONAL  MOTBMSIIT  OV  SpBOIB 

I  1.  The  Qoanti^  Theory  and  International  Price  Blaking    .  868 

I  9.  The  Classical  Theory  of  Prices  and  International  Thtde  868 

I  8.  Inadeqoacy  of  this  Theory  on  many  Coonts 869 

I  4.  It  does  not  explam  the  Facts 879 

I  5.  Goods  exchanged  against  Goods  by  Aid  of  Bills  of 

Exchange 375 

I  6.  Exports  and  Imports  move  because  of  Particular,  not 

of  General,  Changes  of  Price 377 

I   7.  The  Financial  Account 381 

f   8.  The  Morement  of  Gold  and  the  Bate  of  Interest    ...  382 

f   9.  Gold  Imports  and  Banking  Beserres 387 

1 10.  Morement  of  Gold  in  International  Trade  has  little,  if 

any  Effect  on  Prices 388 

f  11.  A  Temporary  Scarcity  of  Gold 390 

XI.  Amoumt  op  Monet  needed  bt  ▲  Countbt 

I    1.  Confusion  between  Money  and  Capital 391 

f   9.  The  Theory  that  an  Increase  of  the  Currency  quickens 

Industry 399 

I   3.  Modicum  of  Truth  in  this  Theory 398 

f  4.  Are  Rising  or  Falling  Prices  in  themselres  desirable  ?     .  400 

§   5.  Control  of  Prices  by  the  State 406 

f   6.  Quantity  of  Wealth  invested  by  a  Young  Country  in  its 

Machinery  of  Exchange 407 

f   7.  Elasticity  of  the  "Currency" 409 

i   8.  The  Contraction  Bogie 416 


xn  ^^^  CONTENTS 

Ohaptxr  Page 

XUp    Gre&bam's  Law 

I  L  OrigiD  anJ  Me&ning     -. .....t  420 

§  2.  Some  IlluatrmtiTe  Cum    ...*,. 423 

{  3.  lu  ConoectioD  wkli  Free  Com^ge      ,.«,«*..  438 

§  4.  Its  Working,  aa  shown  by  Mint  Returns   .    .    •    «    h.    *  430 

I  5.  lu  Dependence  on  Legal  T«nde£  .*>.,«*.«,  431 

§  A.  Ita  Limjtatiotu 43!1 

XBL   Qbigik  and  History  of  Legal  Tekpes  m  Great         H 
Britain  and  the  United  States 

S  L  Th«  Field  to  be  ttttdied 438  -^ 

S  2.  OtigiQ  ftnd  Developmeiit  of  Legal  Tender  in  Englmnd  to 

1816     ,.*.,....,.,,.....  439-^ 

}  3,  Legal  Tender  in  the  AmencaD  Colonlei 447  r 

§  4,  Under  the  Continental  Congren 4!^  ^ 

f  5.  The  Const! tntjonal  Convention       ..*....,,  456  ^ 

%  e.  The  Metallic  Money  of  the  United  State*  > 461  ^ 

i  7.  The  Notes  of  Notional  and  State  Banks      .    .....  461.^ 

£  8.  GoTernment  Paper  Monej     .     , .  477 

XIV,    Economic  Effects  of  Lkgal-Tekder  Enacthbkts 

I  1 .  ReaaouH  for  Choice  of  a  Standard  Independent  of  L«gal- 

Teader  Acta ,  4^1 

§  a.  Effects  of  Legal  Tender  on  a  Medltun  of  Exchange  .  .494 
1 3.  Reqmrementi  of  Legal-Tooder  Money  in  Deferred  Faj- 

m&nts  .,.....«,..,..,.,  495 
S  4.  Small   Influence    of   the  Legal-Tender   Power  on  the 

Value  of  Money    ..............  497 

j  5.  Eflects  of  Legal  Tender  on  two  Unlike  Standards  ...  498 

j  G.  Legal  Tender  ml  in  Intern  atlonal  Trade     ......  50S 

f  7.  Should  the  Legal-Tender  Quality  be  attacked  to  Media 

of  Exchange? ♦    .    *  603 

I  a.  Illu^triittve  Caiee 60& 

XV*    Laws  of  Token  Monet 

I  I.  Demand  for  Fractional  Coins    ..««..•*..  508 

S  2.  Principles  of  Token  Money 510 

j  3.  The  "Limping  Standard" ,  514 

j  4.  The  American  Silver  Dollar      .*,«..*..,  518 

{  5.  The  French  Fire-Franc  Piec« .  521 

j  6,  The  Indian  Knpoe    ,     . 5t4 

{  7.  Inconvf^ttiblo  Paper  Monej 528 

$  8.  Aostrian  Paper  Money     ............  531 

5  9.  Ruieian  Paper  Money S34 

INDEX 539 


ILLUSTRATIONS  AND  TABLES 

TO   PACK   PAOB 

"Wampum  of  the  Six  NationB,  and  Shell  Money 12 

State  Banks  and  National  Banks  of  United  States,  1834-1900  139 

The  Prices  of  Various  Articles  at  Different  Times  .....  170 

Evelyn's  Prices 174 

£d^  Prices,  1850^1901 177 

JevoDs's  English  Prices,  1782-1865 181 

JeyoD8*8  Prices,  by  Groaps 182 

MolhaU's  Prices 188 

Saaerbeck's  Prices,  1846>-1900 186 

Atkinson's  Silver  Prices  in  India,  1861-1895 189 

Lupeyres's  Prices,  1851-1863 190 

FHces  of  Paasche,  Van  der  Borght,  and  Conrad,  1868-1899  199 

Knl's  Prices,  1850-1884 200 

Soetbeer's  Hambarg  Prices,  1850-1891 203 

DeFoville's  French  Prices,  1847-1880 207 

Walras's  Prices,  1871-1884 211 

Prices  from  Falkner's  Tables,  by  Groups,  1840-1891  ...  217 

Prices  of  United  States,  England,  and  Germany,  1851-1899  220 
Prices,  Circulation,  and  Circulation  per  Capita  in  the  United 

States 328 

Coinage  of  Gold  and  Silver  at  the  United  States  Mint,  1793- 

1833 430 

Coinage  of  Gold  and  Silver  at  the  United  States  Mint,  1834- 

1860 431 

The  Relative  Value  of  the  Rupee,  and  of  Silver,  in  Gold  .     .  524 

Bnssian  Paper  Money 535 


THE  PRINCIPLES  OF  MONEfi 

CHAPTER  I 

THE  FUNCTIONS  OF  MONET 

AD  thmgi  or  aemocs,  then,  which  an  to  be  exchanged  mnet  be  la  ■ome  wwf 
ndndble  to  a  common  meaaox«b 

lor  this  pnrpoae  monej  waa  inTented  -» and  senrea  aa  a  medium  of  exchange — 
for  by  it  we  can  mearaze  eyeiything,  and  ao  can  meaaore  the  aaperioritf  and 
inferiority  of  different  kinda  of  work, — the  number  of  ahoes,  for  inetance,  that 
iie(IiiTalent  to  a  home  or  to  a  certain  qnantitj  of  food.  —  Abistotui,  Nid^ 
I  Etkic9,  Book  y,  chap,  t,  f  la 


W.  Bdobwat,  n«  Oriffim  of  MtiaUie  amd  Weight  Biandard$  (18M).— 
I.  Babilo*,  Lu  Oripmt  d*  la  wunmaio  (1897). --F.  Lbvoxmaiit,  La  Momamit 
imnAfoti^  S  TOla.  (187S-79).  —  W.  8.  JxYOiii,  Mem}/  amd  M4ckamum  qfExekaago 
(U7I),  ekipt.  i,  iii,  and  it.  —  A.  Baubb,  Tkdori§  tt  praiifuo  d$  la  moaiMM  (1896), 
I.-F.A.WALKXB,  Mauijf  (1878),  chap.  i.~H.  Whitb,  Money  amd  Banking 
(my-RytoH  of  MonUarg  CommitgUm,  1898,  Part  I,  §§  1-18.  —  E.  NAaaa,  Dob  QM 
fmd  M%motun,  in  Schboberg*!  Handboch  (1890),  pp.  81fr-ai7.  —  C  Knxa,  GM  wad 
Cndit,  I  (9d  ad.,  1886),  pp.  SU-9S3.  —  Kaml  Mbjioxr,  Geld,  in  Haadwdrtarbach  der 
Staatnriimschaften  (1899),  III,  pp.  780-757.  —  Ibid.,  Ormndtatu  d*r  VoUuunrtk- 
9ckafUUkr§  (1871),  chap.  viii.  ~lBiD.,Ofi  fAe  Griffin  qf  Money ^  Economic  Joarnal,  1899, 
pp.  S9-S55.  —  W.  RoaCHBR,  GrwuRagon  der  Nationalokonomie  (1899),  $$  118,  119. 

§  1.  A  FOBMAL  definition  of  money  is  not  desirable  at  the 
outset.    When  a  clear  understanding  is   reached  in  regard 
to  the  offices  performed  by  money,  the  meaning  on  definition 
of  the  word  will  follow  as  a  matter  of  course.  <>'™'«»J- 
A  confusion  of  mind  upon  the  separate  functions  of  money 
has  led  to  the  use  of  the  word  in  many  different  senses, 
although  writers  have  often  not  disagreed  concerning  the 
ideas  which  they  intended  to  convey.    For  instance,  some 
discussion  has  arisen  as  to  whether  checks  should  be  included 
in  the  definition  of  money.    If  efficiency  as  a  medium  of  ex- 
change gives  the  right  to  be  called  money,  then  checks 


.THE  PRINCIPLES  OF  MONEY 


certainly  hsv^'  that  right;  but  it  would  be  nonsenea  to  speak 

of  checks  BAsi,  Btandard.    And  jet  the  idea  of  a  standard,  or 

common  denominator,  to  whose  value  all  other  articles  are 

referred  for  comparison,  is  fundamental  to  the  meaning  of 

moi^ey*  *•  In  short,  it  is  possible  that  aome  form  of  what  every 

on0^ijaeognizea  as  money  may  serve  only  in  one,  and  not  in 

alifthe  functions  of  money;  while  another  form  may  perform 

''all  of  these  functions.     But  wliatever  be  the  definition,  by 

, ;-.^  ftrst  making  exposition  of  the  work  actually  done  by  money 

/C[*'  ill  any  of  its  forms  all  hair-splitting  dialectics  may  be  avoided. 

\*'     To  this  end  examination  will  be  made  of  the  following  three 

functions : 

I.   A  Common  Denominator,  or  Standard* 
IL   A  Medium  of  Exchange, 
III.   A  Standard  of  Deferred  Payments, 
Writers  of   authority,  like   Roscher,   Kniea,    Nasse,   and 
Jevons,  have  added  another  function,  called  a  store  of  value*^ 
FaiieH(M3i  of      But  in  this  capacity  it  is  not  clear  that  the  money 
moo*y.  commodity  serves  a  purpose  different  from  tliat  of 

any  other  commodity  which  may  be  more  or  less  imperish- 
able. This  function  seems  to  have  been  illogically  added  to 
tlie  general  concept  of  money,  because  the  precious  metals, 
generally  associated  with  the  latest  evolution  of  the  money 
material,  are  durable*  Viewed  in  the  light  of  the  proposed 
function,  diamonds  and  precious  stones  are  equally  money. 
Indestructibihtyt  of  course,  is  a  desirable  quality  in  the  article 
chosen  as  money*  but  that  is  quite  apart  from  the  nature  and 
the  essential  functions  of  money.' 

^  EnriQ  Nuse  (Das  Geld-  ozid  Miinzweaen  in  Sch6nb«rg'ft  Il&ndbuch,  1890, 
pip.  315-^17}  also  flu^gefitfl  that  when  &  Rtat«  expresalj  recogolxm  m  cerUyn  form 
of  money  aa  &  leg^l  metuii  of  pavmeat^  it  becomes  "  moaej  m  the  le^i  maae^  or 
the  flUndai^  morier  of  the  itate/'  See  aUo  Hoscher  (Grtmdlagen^  p.  S98)  ftnd 
0tbeiii.    Cf,  boweferj  I'n/ra*  chap.  xIt, 

^  Earl  Maix,  Capital  (Eug.  tmtifll.,  I,  Ath  ed.,  Landon^  1691,  chap,  lii.pp.  6ft  fL}t 
■howi  some  coafnsioti  of  mind  io  Btatmg  thd  piz  foUowing  fimetiozL*  of  money: 

L   A  tneajitire  of  raluo. 

1.   A  standard  of  price, 

a.   An  ideal  nuit  of  acconnt. 

4*  A  drculating  m«4iaiii. 


TEE  FUNCTIONS  OF  MONET  8 

Kmes,^  among  others,  introduced  still  another  function,  a 
means  of  payment,  urging  it  to  be  distinct  from  a  medium  of 
exchange.  It  is  difBcult  to  see  how  an  act  of  payment  differs 
in  itB  essence  from  an  act  of  exchange.  Indeed  the  proposed 
separate  function  confuses  the  act  of  exchange  with  the 
motive  leading  to  the  exchange.  In  the  instances  cited  by 
Enies  —  payment  of  a  fine,  or  tribute,  or  marriage  portion  — 
Ae  only  new  concept  introduced  is  the  motive  leading  to  the 
payment.  Once  the  determination  to  convey  wealth  is  reached, 
the  property  must  be  transferred  according  to  the  methods 
existing  in  the  given  status  of  civilization:  by  payment  in 
kind  if  in  the  barter  period,  or  by  money  if  in  tlie  period  of  a 
medium  of  exchange.'  To  be  sure,  the  payment  of  fines  and 
the  transference  of  gifts  are  greatiy  facilitated  by  the  use  of 
money,  but  that  is  hardly  more  tiian  an  aigument  for  the 
dediability  of  a  medium  of  exchange ;  it  is  not  a  justification  of 
a  new  and  separate  function  of  money  as  a  means  of  payment' 

§  2.  Before  proceeding  to  an  examination  of  money,  as  a 
itandard,  or  common  denominator  of  value,  it  will  be  advisable 
to  state  the  primary  elements  of  value  and  price. 
If  a  commodity  has  qualities  which  satisfy  some 
need,  if  it  requires  effort  and  sacrifice  to  obtain  it,  and  if  it  is 
transferable,  we  are  ready  to  give  for  it  other  things  which 
we  prize,  and  we  say  such  a  thing  has  value.    The  exchange 

5.  The  sole  form  of  exchange  ralne  (e.  g.  when  hoarded). 

6.  A  means  of  pajment. 

The  second  is  practicallj  the  same  as  the  first,  when  coined  monej  is  n«ed ;  al- 
thoagh  ihe  first  is  reallj  an  abstraction.  The  third  cannot  exist  ideallj,  and 
raohes  itself  into  the  first    The  sixth  is  a  part  of  either  four  or  five. 

^  Geld  nnd  Credit,  I  Abtheilung.  Das  Qeld,  Darlegung  der  Gmndlehren  Ton 
dem  Gelde,  Zweite  Anflage,  Berlin,  1885,  pp.  211-223. 

'  Karl  Menger,  Handworterbnch  der  Staatswissenschaften,  m,  737,  is  opposed 
to  regarding  the  means  of  payment  as  a  separate  function  of  monej.  So,  also,  is 
Kiase,  op.  cit,  pp.  315  If. 

'  Aaguste  Amann^  (La  Monnaie,  le  credit  et  le  change,  Paris,  1894)  regards 
Donejas  "an  instrument  of  capitalization,"  and  as  "an  instrument  for  transporting 
wealth"  particularly  useful  in  international  relations  (p.  12).  These  services, 
lunrsTer,  can  be  performed  either  by  a  standard  or  by  a  medium  of  exchange. 


Talue  of  an  article  is  expressed  by  the  quantity  of  othe 
gooda  which  cao  be  obtained  for  it  Value  iu  this  set 
is  not  intTinsic  iu  anything,  because  it  can  be  expressed^ 
only  in  comparison  with  something  else.  The  exchange 
value  of  one  thing  is  stated  in  the  ratio  of  the  number 
of  unite  of  it  to  the  number  of  units  of  other  things^ 
which  are  exchanged  for  the  given  commodity.  For  ii^^^ 
stance,  one  beaver  skin  exchanges  for  a  pound  of  powder: 
the  value  of  one  Bkin  is  a  pound  of  powder,  or,  vice  verwa^ 
the  value  of  the  pound  of  powder  is  one  beaver  skin.  If 
skins  become  rare,  and  a  beaTer  pelt  exchanges  for  two 
pounds  of  powder,  then  the  value  of  skins  has  risen  rela- 
tively to  powder,  or  ^  which  is  the  same  thing  —  powder 
has  fallen  relatively  to  beaver  skins.  That  is,  exchange 
value  is  not  intrinsic :  it  is  a  relation. 

It  should  be  made  clear  that  we  can  approach  the  question 
of  prices  and  the  exchange  value  of  money  without  being 
drawn  into  the  discussion  as  to  what  determines  value*  What- 
ever be  the  cause  of  value  in  any  two  articles  —  whether  final 
utility^  or  expanses  of  production  —  when  we  propose  to 
exchange  them^  the  value  assigned  by  antecedent  causes  ia 
already  at  hand  to  assist  ns  in  detemtining  the  rate  of  exchange* 
When  we  attempt  to  compare  and  measure  exchange  valneSij 
we  do  not  need  to  know  the  causes  of  value.  ^M 

The  qualities  of  a  commodity  are  intrinsic ;  ^  but  its  utillty^^ 
or  power  to  satisfy  a  human  neetlj  arises  from  a  relationship 
established  between  men  in  differing  clrenmstances  and  these 
qualities  of  an  article.  The  exchange  value  of  a  thing  is  its 
purchasing  power  or  its  command  over  other  things,  quite 
irrespective  of  the  reasons  for  the  existence  of  timt  power. 
The  intrinsic  qualities  of  goods  may  not  change ;  but  their 
exchange  values  may  often  change.  This  conception  is  in 
accordance  with  general  usage :  we  all  agree  that  the  value 


1  It  ^nQot  bft  4dmitt«c],  a«  WaJbti  Uolda  (Tbe  Meftsni^ment  of  General  Ex- 
ctuiD^  Valo«,  chap,  i  ),  tb«t  ezcbAQge  valae  is  somethiDg  intrinjiic.  Be  iaji  t 
**  ExchKoge  value  is  a  relative  qiialit  j  io  material  ttiiugfl  *'  (p.  7).  Thii 
fosea  eKchang*  value  wltK  the  iotrinsic  qualities  which  give  rise  to  vila«. 


THE  FUNCTIONS  OF  MONST  6 

of  A  has  increased  if  A  has  exchanged  for  more  of  B.    What 
is  it  that  has  increased  ?    Evidently  the  command  over  other 


If  exchange  value  is  the  particular  phenomenon  we  are 
alone  concerned  with  in  this  study,  the  definition  of  what  it  is, 
i8  important.  If  exchange  value  is  purchasing  power,  how 
can  we  express  it?  The  exchange  value  of  A  is  quantita- 
tiyely  expressed  in  the  amount  of  certain  other  goods  for 
wUch  it  will  exchange.  We  can,  then,  measure  the  exchange 
^06  of  A  by  measuring  the  quantity  of  the  things  it  wUl 
bay.  At  this  point  we  are  met  by  the  necessity  of  further 
analyzing  this  quantity  idea.  The  utilities  of  the  goods 
most  be  taken  into  account  The  same  given  weight,  for  in- 
stance, might  be  made  up  of  different  proportions  of  the  same 
commodities.^  The  test  of  quantity,  therefore,  cannot  be 
merely  such  a  thing  as  weight  or  capacity;  it  must  include 
the  satis&ctions  obtained  from  such  goods.  Ordinarily  most 
persons  have  fairly  fixed  habits  of  consumption ;  then  a  con- 
tinned  command  over  the  same  quantity  of  goods,  in  the  same 
lelitive  proportions  in  which  they  have  been  customarily  con- 
somed,  means  an  unchanged  exchange  value  of  an  article.  In 
such  a  case,  its  relation  to  other  things  needed  by  the  con- 
sumer has  been  undisturbed. 

For  practical  purposes  we  get  fairly  accurate  ideas  of  the  ex- 
change value  of  a  particular  article  in  present  times  by  compar- 
ing it  with  the  quantity  of  a  given  precious  metal, 
either  gold  or  silver.    The  quantity  of  the  money 
material  for  which  an  article  will  exchange  is  its  Price.    This, 
of  course,  is  also  a  relation.    For  example,  if  the  price  of  an 
nmfarella   is  95   or  £1,  that  is  only  a  way  of  saying    that 
this  article  will  exchange  for  the  number  of  grains  of  pure 
gold  in  five  American  dollars  (116.10,  or  5  x  28.22  grains 
Troy),  or  in  an  English  pound  sterling  (118.0016  grains 
Troy).    If  gold  falls  in  value  relatively  to  an  umbrella,  a 
greater  number  of  g^ins  of  gold  will  be  exchanged  for  it ; 
hence,  an  umbrella  has  risen  in  value  relatively  to  gold,  — 

1  Cf.  infra,  chap.  ri.  §  6. 


6  THE  PRINCIPLES  OF  MONET 

in  other  words,  its  price  has  risen.  That  is,  any  change  in  the 
relation  between  goods  and  gold  would  change  the  price  ratios. 
When,  by  analogy,  one  boy  on  the  end  of  a  plank  balanced 
on  a  fulcrum  goes  up,  the  boy  on  the  other  end  of  the  plank 
goes  down;  and  tnce  verses  In  a  similar  way  goods  and 
gold  are  related ;  and  price  is  the  outcome  of  changes  in  the 
two  terms  to  be  compu^.^ 

§  8.  The  commodity  chosen  as  a  common  denominator  of 
value  may  register  the  exchange  value  of  any  other  article  at 
^  the  time  of  the  comparison.    The  quantity  of  the 

The  OOmilK)!!  T.  .^ 

dtnomiDAtoror  commou  denominator  for  which  anything  will 
exchange  is,  as  has  been  explained,  its  price. 
Every  case  of  price,  then,  is  an  expression  of  the  value  of 
a  given  commodity  in  terms  of  the  common  denominator, 
or  standard.  Appraisal  in  some  known  standard  may  go 
on  whether  exchange  is  subsequently  contemplated,  or  not. 
**  Knowing  how  much  com  is  to  be  bought  for  a  pound  of 
silver,"  says  Jevons,  "  and  also  how  much  flax  for  the  same 
quantity  of  silver,  we  learn  without  further  trouble  how 
much  com  exchanges  for  so  much  flax." 

Before  exchange  can  take  place,  however,  an  answer  most 
be  given  to  the  question :  At  what  rate  is  the  exchange  to  be 
made  ?  The  process  of  valuation  must  be  gone  through  with, 
even  in  conditions  of  barter.  The  necessity  of  expressing  the 
value  of  an  article  in  terms  of  some  accepted  standard  is  so  evi- 
dent that  the  conception  of  a  standard  must  have  appeared  in 
the  earliest  known  records  of  society. 

Philosophically,  the  use  of  money  as  a  standard  ought  to 
precede  its  use  as  a  medium   of  exchange;'  for  the  &ct 

1  Schiffle  makes  a  penetrating  obeenration  that  economic  life  requires  an 
objectiTe  representation,  or  sjmbol,  of  quantities  of  economic  valne  (Das  Ge- 
seUschaftliche  Sjstem  der  menschlichen  Wirtschaft,  Sd  ed.,  TUbingen,  1873,  I, 
p.  SSI).  He  also  finds  in  monej,  as  a  standard,  a  means  of  representing  on  a 
large  scale  snms  of  yalae.  Indeed,  some  go  so  far  as  to  say  that  ralne  is  see- 
ondarj  in  importance  to  price,  and  that  we  could  have  no  distinct  concept  of 
Talae  without  first  baring  a  statement  of  price. 

*  General  Walker,  howerer,  assumes  the  rerj  opposite :  "  It  is  evident  that 
gold  or  silver,  or  any  other  article,  can  only  serve  as  a  value-denominator  by 


THE  FUNCTIONS  OF  MONET  7 

af   exchange  demands  as  a  prerequisite  the  act  of  valuation. 
In  a  rade  state  of  barter,  a  rough  valuation,  to  be  sure,  may 
ha.ve  been  made  between  two  articles  directly  offered  in 
eicehsnge,  without  reference  to  a  third,  or  standard,  commod- 
ity; but  as  soon  as  more  than  two  or  three  articles  entered 
^e  field  of  exchange,  reference  to  a  common  denominator 
became  imperative.    Hence  arose  the  necessity  of  estimating 
nine  in  an  article  of  recognized  desirability.    How  could 
exchange  go  on  without  having  first  fixed  on  the  rate  of 
exchange?     So    natural    is  this  operation  of  the    human 
mind  that  the  evolution  of  the  standard  concept  must  have 
antedated  the  concept  of  the  medium  of  exchange. 

On  this  point  distinguished  writers  have  differed.  But, 
tnumg  others,  Kad  Menger  seems,  in  my  judgment,  to  have 
pot  the  cart  before  the  horse  when  he  states  that  ^^  ^ 
« money,  in  consequence  of  its  function  as  a  tundwrduiM 
medium  of  exchange,  is  also  the  thing  in  which 
palliations  of  goods  are  regularly  made."  In  fact,  the  whole 
hirtoiy  of  money  seems  to  show  the  existence  of  a  tendency 
to  use  as  a  medium  of  exchange  the  article  first  chosen  as 
a  standard.  When  Menger  points  out  how  persons,  to  avoid 
the  inconveniences  arising  from  non-coincidence  of  wants  in 
barter,  exchange  their  goods  for  a  more  salable  article,  be- 
cause thereby  Hiey  can  obtain  more  easily  other  things  which 
they  desire,  he  is  in  reality  giving  some  of  the  reasons  which 
led  to  the  selection  of  an  article  as  a  standard.  That  arti- 
cle, he  says,  becomes  money  which,  under  the  circumstances, 
becomes  most  salable.  For  these  reasons  he  points  out  that 
money  originated  as   a  medium  of  exchange.^    The   thing 

and  through  being  used  as  the  mediam  of  exchange.  ...  It  is  onlj  bj  being 
actnally  used  as  a  mediam  of  exchange,  that  the  power  of  monej  to  purchase  each 
eommoditj  bj  tarns  becomes  known."    Political  Economj,  p.  137  and  note. 

>  See  Gmndsatze  der  Volkawirtsohaftslehre  (Vienna,  1871),  chap,  riii,  Die 
Lihie  Tom  Gelde,  pp.  250-285;  and  "Geld"  in  Handworterbnch  der  Staats- 
wiMMiichaften,  IH,  pp.  730-757.  Also,  Economic  Jonmal,  Jnne»  1892,  U, 
pp.iS»-255. 

£.  TOD  Philipporich,  Grondriss  der  politischen  Oekonomie,  I.  Band  (Freibarg, 
1893),  Book  in,  §  91,  pp.  176-179,  follows  the  same  general  exposition,  making 
the  nlabilit/  of  an  article  the  basis  of  its  recognition  as  monej. 


8 


THE  PRINCIPLES  OF  MOKKY 


which,  because  of  Ob  great  salabilitjt  came  into  use  as 
medium  of    exchange  must  have  been  the  article  in  whio 
the  value  of  all  goods  which  were  exchanged  was  estimated.^ 

Knies,^  on  the  other  hand,  while  admitting  that  a  man  ha^^ 
ing  a  perishable  article  will  desire  to  ezchange  it  for  a  dm;^! 
ble  one,  or  to  exchange  a  rare  pearl  for  a  more  salable  things 
yet  says :  "  Every  exchange  of  a  good  requires  a  comparison 
of  its  value  with  some  other  good,  and  this  measuring  of  value 
will  be  most  often  done  in  that  good  which  is  most  frequently 
exchanged.  ,  •  ,  Thus  the  extension  of  the  medium  of  ex- 
change goes  hand  in  hand  with  the  use  of  the  same  thing  to 
express  the  vdue  of  other  commodities.'* 

The  doubt  as  to  the  origin  of  money  —  whether  in  the  coi 
cept  of  a  medium  of  exchange  or  of  a  standard  —  arises,  in 
probability,  from  the  fact  that  in  early  times,  when  economi 
processes  were  little  separated,  a  strong  tendency  existed 
make  one  and  the  same  article  do  duty  at  the  given  time  ai 
place  both  as  a  standard  and  as  a  medium  of  exchange.     Ind 
this  tendency  has  in  some  part  persisted  to  recent  timi 
And  the  present  discussion  might,  therefore,  be  dis^ 
as  frivolonSf  did  it  not  have  a  bearing  on  our  subsequei 
examination  of  the  modem  services  of  money* 

The  very  essence  of  a  period  of  barter  is  the  absence  of 
medium  of  exchange»  yet  there   is  considerable    historic 
evidence  to  show  that  a  standard  had  been  already  evolvi 
in  the  early  stages  of  barter.    If  so,  then  the  claim  that  tbi 
standard  function  must  have  preceded  the  medium  of  er 
change  fiinction  is  supported  by  historical  inquiry. 

"To  exchange,  to  buy,  to  sell,  in  brief »  to  trade,"   sai 
Babelon  truly,  *^are   the  operations  which   necessarily  pi 


1  Wllhetm    Roscheri    Graiidl&gen   der  Nattoualgkonamie   (Stattgart,  18921 
p.  29$,  impliei  th^  moiiej  ^iriginaled  from  the  incoDTeciiences  of  bftrter.    Tfa 
wm^  of  courM^  th«  raium  d^etrt  of  &  medJam  of  exchaoge,  but  not  necesftarllj  4 
tb^  Btand&rd  functioD.    So^  aliOj  thought  W.  B.  Henuaimr  cited  hj  Ro«cher«  t^'d 
§118,  n*  ^'     Amguflte  Beaiire,  Throne  et    pratiqcte   de    !&  motmatep  Tome 
Traits  iMorique  de  U  mouiaie  (Berlin  and  PahJi  1898},  p.  17j  takei  the  aame 
potitioiu 


THE  FUNCTIONS  OP  MONET  9 

suppose  the  yaluation  of  the  thing  exchanged,  of  the  thing 
bought  or  sold.    The  laborer  estimates  the  quantity  of  his 
wheati  by  weight  or  volume,  which  he  parts  with  as  against 
die  measure  of  genial  liquid  which  the  wine-grower  will 
defiver  to  him*"'  ^    Because  of  the  difficulties  of  barter,  because 
of  non-coincidence  of  wants,  and  in  order  to  strike  a  balance 
in  the  trade,  and  bring  about  an  equivalence  of  several  articles 
of  flmall  value  for  one  of  large  value,  it  became  necessary  to 
compute  the  large  and  the  small  article  in  terms  of  some 
common  standard.    Obviously,  the  most  desirable,  the  most 
'^odable,''  article  for  the  given  time  and  people  was  adopted 
88  the  standard.    In  early  tribal  life  cattle,  fish,  grain,  arms, 
bracelets,  or  feathers  desired  as  ornaments,  were  used  ^*  as  a 
common  measure  for  estimating  the  value  of  everything  traded 
in.*'*    For  instance,  in  Iceland,  about  1418-14^,  a  pair  of 
shoes  was  priced  at  four  dried  fish,  a  ton  of  wine  at  one 
hnndred  dried  fish,  etc.    In  the  same  country,  during  the 
Bepublic,  at  an  earlier  time,  a  certain  area  of  a  customary 
kixid  of  woolen  cloth  was  used  as  a  unit  in  which  the  valu- 
ation of  goods  was  made;  although  some  silver  was  then 
in  use.    And  innumerable  cases  of  like  tenor  have  been 
recorded  in  the  histories  of  early  money.    In  the  ^^^^^^  ^^^ 
valley  of  the  Tigris  wheat  was  used  as  a  standard  a  sundmrd 
of  value.    Also,  in  the  markets  frequented  by  medium  of* 
the  vessels  of  the  Phoenicians,   Etruscans,  and  •**^***°^- 
Greeks  before  the  invention  of  metallic  money,  edicts  stat- 
ing the  value  of    articles   have  been    found   engraved   in 
marble.    Among  the  Chaldean-Assyrians,  while  simple  barter 
existed,  the  precious  metals  were   used  as  a  standard  of 
value  in  which  goods  were  estimated.' 

The  habit  of  using  cattle  as  a  standard  of  value  in  which 
the  prices  of  other  commodities  were  estimated  —  when  the 
standard  obviously  could  not  be  passed  from  hand  to  hand, 

1  Las  OrigineB  de  la  monnaie,  p.  2.  In  fact,  all  recent  historical  and  archaeo- 
logical studies  seem  to  unite  in  proving  that  the  standard  preceded  the  func- 
tion of  the  medium  of  exchange. 

>  Babelon,  op.  eit.,  pp.  6-7.  *  Ibid.,  p.  9.    See  also  pp.  25,  55. 


10 


THE  PRINCIPLES  OF  MONET 


and  subdivided  bm  a  medium  of  ©xchaoge  —  became  m  fiimlj 
establtahed  that  in  many  countries  it  survived  long  after  the 
0%  th«  flnt  invention  of  metaUie  money.  Very  evident"  ~ 
n»*>°«r-  cattle^  although   movable,   were  not  passed 

delivery  as  a  medium  of  exchange.  They  were  fiist  us 
as  a  standard  of  prices.  The  ox  *  comes  down  from  a  time 
before  values  were  estimated  by  metallic  money,  —  that  is^ 
even  before  values  were  expressed  by  uncoined  weights  of  tlia_ 
precious  metals.  In  the  Homeric  poems  there  are  no 
of  coined  money,  reference  being  made  only  to  the  ox,  or 
a  weight  called  a  "talent."  The  latter  was  the  weight  o^ 
gold  (Homer  makes  no  mention  of  silver)  which  exchaaga 
for  an  ox,  being  the  metallic  equivalent  of  the  older  unit 
During  primitive  times  the  metals  were  usually  regarded 
merchandise,  not  yet  being  in  any  degree  set  apart  to  serve  t 
a  standard  *  in  the  terms  of  which  all  other  commodities  wet 
valued.  Later  the  metallic  unit  equivalent  to  the  ox,  beii 
more  convenient^  came  into  use.  But  the  coined  metal  bore  1 
head  of  an  ox,  and  the  vety  coins  themselves  were  often  caUe 
oxen.*  Hence  the  derivation  of  the  Latin  word  peeuni 
Early  coins,  as  Joseph  Hams*  has  pointed  out,  often  took  the 
names  from  the  weight  of  metal  contained  in  them;  for  instano 
talent,  mina,  drachma,  pound,  mark,  livrCi  shilling,  etc. 


1  For  man  J  facta  on  e&rlj  moiiflj,  see  W.  Ridge  waj.  The  Origin  of  Mo 
and  Weight  SCmidatdi  (1392), 

^  Bjdg«vraji  p,    10,  iLsed  the  pluise^  "a  mediam  of  «xch«Dge*'  wha& 
meanl "  a  itandard.^* 

*  '*  M?^  Glad«tOD6  «tat«s  that  iu  the  Bomeric  poeme  gold  is  mentioDed  aa  beu 
hoarded  and  iroasured  ap,  aad  aa  hemg  occasiooailj  oaed  in  the  paycaaat 
0«rvice9^  before  it  became  the  common  meaanre  of  value,  oxep  beiag  tben  used  14 
the  latter  parpose/*    Jctodb^  Mooej  and  Mechani^ni  of  Kxcbange*  p*  16. 

*  A  boat  s,G.  490  the  gold  Daric  was  the  equivalent  of  the  Btacer,  of  two  gold 
Attic  drachmaa,  of  a  cow  at  Deloa,  of  one  talent  of  gold,  or  of  130  grajoa  Troj^ 
At  this  reckoniDg  tbe  talent  contained  the  amount  of  gold  in  $5,60  of  oar  pit 
ent  gold  coins.    A  feitiak  ilare  was  then  exchanged  for  four  oxen. 

Another  measure  of  weight  waa  the  seed  of  a  given  plant  {Ktpdrtotr},  or  i 
which  was  eqnirali^iit  to  j^  of  an  untice  Troy.  To  thb  day  English  gold  < 
ice  made  on  a  baa  is  of  {]  fine,  24  carats  being  fine  gold. 

^  Of,  Hotivher,  op.  ciu,  f  Hi,  note  5. 

*  Easaj  upon  Monej  and  Coins  (17G7jj  pp.  48-40, 


THE  FUNCTIONS  OF  MONEY  11 

Passing  from  the  question  of  origins  to  the  subsequent  de- 
velopment, it  will  be  found  that  there  has  never  been  one 
standard,  immutable  and  universal,  for  all  periods  conditions  af- 
and  all  places.  On  the  contrary,  there  have  been  SS^^olt^*^ 
standards  as  various  as  the  climate,  geographical  •tandard. 
position,  and  stage  of  civilization  of  different  peoples.  In 
arctic  regions  the  inhabitants  naturally  find  in  skins  the  satis- 
faction of  their  chief  need,  and  therefore  skins  have  remained 
the  unit  of  value  to  them.  To  this  day  in  British  North 
America  an  article  is  valued  at  a  given  number  of  skins.  In- 
deed coon,  rabbit,  and  squirrel  skins  (in  that  order  of  prece- 
dence in  value)  are  yet  freely  used  by  the  mountaineers  of 
Kentucky  as  currency.  In  the  tropics,  where  clothing  is  not 
the  main  want,  articles  of  ornament  in  the  form  of  shells  or 
of  other  adornment  appear  as  the  most  desired  wealth.  This 
led  to  the  selection  of  the  cowry  shells^  (Cyprcea  maneta) 
in  tropical  regions  as  a  standard  of  value.  After  a  compara- 
tive study  of  many  races,  Mr.  Ridgeway  *  pithily  states  the 
results  of  experience  in  regard  to  the  choice  of  a  standard  as 

^  llr.  Min  (Book  m,  chap,  tu,  §  1)  erroneonalj  remarked,  on  the  aothoritj  of 
MoDteflqiiiea  (Esprit  dee  loie,  liv.  xxii,  chap,  riii  ),  that  among  the  African  tribee 
tborewae  in  nee  an  artificial  nnit  of  calculation,  called  a  **  macnte/*  which  did 
ootezprees  anj  real  thing.  Jerons  (op.  ctf.,  p.  71)  eajs  as  to  this :  "  When  Mon- 
tetquiea  affirmed  that  the  negroes  on  the  west  coast  of  Africa  had  a  pnrelj  ideal 
sign  of  Talue  called  a  macute,  he  misunderstood  the  nature  of  monej  of  account 
The  macnte  serred  with  the  negroes  as  the  name  for  a  definite,  though  probablj 
a  TSiiahle,  number  of  cowry  shells,  the  number  being  at  one  time  2000.  The 
macate  has  also  been  coined  in  silver  pieces  of  eight,  six,  and  four  macutes, 
rtrock  by  the  Portuguese  for  use  in  their  colonies,  the  macnte  being  worth 
about  S|(/."  The  cowry  shells  are  still  in  use.  Jevons  {Ibid.,  p.  24)  says  that 
tbej,  "  under  one  name  or  another  —  chamgoe,  zimbis,  bouges,  porcelanes,  etc., 
— hare  long  been  used  in  the  East  Indies  as  small  money.  In  British  India, 
Siam,  the  West  Coast  of  Afinca,  and  elsewhere  on  the  tropical  coasts,  they  are 
rtill  used  as  small  change,  being  collected  on  the  shores  of  the  Maldiye  and 
LaccadiTe  Islands,  and  exported  for  the  purpose.  Their  value  varies  somewhat, 
aeeording  to  the  abundance  of  the  yield,  but  in  India  the  current  rate  used  to  be 
about  5000  shells  for  one  rupee."  Cf.  also  Marco  Polo  (Tule^s  translation,  II, 
p.  70),  who  found  cowry  shells  in  use  in  China. 

For  the  discussion  on  *'  ideal  money,"  in  connection  with  the  Bullion  Report  and 
Sir  James  Stenart,  see  F.  A.  Walker,  Money,  p.  291. 

*  Op.  at.,  p.  11.    Cf.  Biicher,  Industrial  Evolution  (1901),  pp.  67-70. 


12  THE  PRINCIPLES  OF  MONET 

follows:  ^*  When  in  a  certain  community  one  partacnlar  kind 
of  commodity  is  of  geneial  use  and  generally  available,  this 
comes  to  form  the  unit  in  terms  of  which  all  values  axe 
expressed.^  ^ 

In  all  zones  the  passion  for  ornament  gives  to  certain  arti- 
cles a  value  which  has  led  to  their  use  as  a  standard.  To- 
Wamimm  as  ^7  ^^  accouuts  f or  the  laige  imports  of  silver 
aiundAni.  i^^  India  and  the  East,  where  the  metal  is 
hoarded,  or  converted  into  anklets  or  bracelets  for  women* 
Among  our  North  American  Indians  black  and  white  shells 
were  rubbed  down,  polished,  and  made  into  beads,  which, 
when  fashioned  into  belts  or  necklaces,  were  called  wampum. 
These  wampum  belts  were  used  as  money,  not  only  because 
beads  were  valued  as  ornaments,  but  because  the  belts  were 
antecedently  esteemed  as  the  most  fitting  means  of  com- 
memorating events  of  great  importance.  It  is  highly  inter- 
esting to  discover  that  the  wampum  which  became  money 
among  the  North  American  Indians  was  so  much  esteemed 
for  itself  that  it  was  used  as  a  commemorative  symbol,  quite 
apart  from  its  use  as  money.  Hence  not  all  wampum  was 
used  as  money  in  the  form  of  a  medium  of  exchange.  The 
reproduction  here  given  of  the  &mous  pieces  of  wampum  of 
the  Six  Nations,  belonging  to  Mr.  John  Boyd  Thatcher,  shows 
that  the  estimate  put  upon  them  as  memorials  to  celebrate 
such  happenings  as  the  treaty  of  1784,  or  the  league  of  the 
Iroquois,  gave  them  a  consideration  which  led  to  their  adop- 
tion as  a  standard.  They  did  not  command  regard  because 
they  were  used  as  money;  but  they  were  used  as  money 
because  for  other  reasons  they  already  commanded  regard. 
The  ordinary  belts  used  as  money  varied  in  value  according 
to  their  length,  color,  and  lustre.  The  black  was  worth  a 
double  length  of  white.  So  satisfactory  was  this  standard 
for  trading  with  Indians  in  Massachusetts  that  in  1649  wam- 

1  Held,  GrandriM  fiir  Vorlesongen  fiber  Nationalokonomie*  2d  ed. 
(Bonn,  1878),  pp.  55-56,  explained  that  some  article  was  made  monej 
bj  custom,  and  that  this  custom  was  strengthened  bj  legal  recognition  at  a 
standard. 


] 


1.  Dentalium  Shell.  —  2.  Cowry  Shell.  —  8.  The  belt  commemorated 
the  first  coming  of  Champlain  into  the  country  of  the  Troquois,  being 
2''  X  41"  in  its  present  condition.  —  4.  The  original  Hiawatha  belt,  and 
a  memorial  of  the  League  of  the  Iroquois,  being  10.5"  X  25",  strung  on 
buckskin  thongs.  The  white  heart  represents  the  Onondaga  tribe  in 
the  centre  united  to  the  Cayufras  »nd  Senecas  on  the  right,  and  to  the 
Oneidas  and  Mohawks  on  the  Irft.  The  Ixxly  of  the  belt  is  composed  of 
purple  beads. — 5.  Commemorated,  in  the  first  half  of  the  sixteenth 
century,  the  sight  of  the  first  white  faces.  It  is  Sf"  X  28 J".  —  6.  The 
belt  made  to  celebrate  the  Treaty  of  Fort  Stanwix,  Oct.  22,  1784,  the 
first  between  the  American  Government  and  the  Six  Nationt.  The 
fi<rure  on  the  right  of  the  house  represented  Washington  as  the  foremoet 
white  chief.     It  is  5^"  X  72". 


1 


•      •  • 
•••  • 


)  •     • 


•••.• 


THE  FUNCTIONS  OF  MONEY  18 

.  pum  waB  made  a  legal  tender  in  sums  as  high  as  forty  shil- 
lings in  payments  between  the  colonists  themselves.^ 

In  the  earliest  days  tobacco  was  used  in  Virginia  as  the 
standard  commodity,  in  terms  of  which  other  goods  were 
appraised.  The  tobacco,  in  turn,  because  of  trade 
with  England,  was  at  times  (even  if  with  evident 
difficulty)  stated  to  be  of  a  certain  value  in  English  money. 
The  Act  of  1688  **  recited  in  its  preamble  that  it  had  been 
the  usual  custom  of  merchants  to  make  all  bargains  and  con- 
tracts and  keep  all  accounts  in  tobacco."  *  Later  laws  even 
made  tobacco  a  l^;al  tender  for  contracts.  This  is  not  the 
place  to  discuss  the  causes  and  effects  of  a  fluctuating  stand- 
ard such  as  tobacco;  but  until  about  the  close  of  the  eigh- 
teenth centuiy  we  find  that  this  commodity  was  used  as  a 
standard  in  which  other  goods  were  valued.  This  service 
as  a  standard,  moreover,  was  often  independent  of  its  use  as 
a  medium  of  exchange. 

Among  the  present  tribes  of  California,  Powers  ^  says :  <^  For 

money  they  make  use  of  the  red  scalps  of  woodpeckers,  which 

rate  at  $2.50  to  95.00  apiece,  and  of  the  dentalium  ^  shell,  of 

which  they  grind  off  tiie  tip,  and  string  it  on  strings,  the 

shortest  pieces  are  worth  25  cents,  and  the  longest  about  two 

dolkis,  the  value  rising  rapidly  with  the  length.  ...  It  is 

called  alrli-ko'chik  (in  Yarok  this  signifies  literally  Indian 

money)  .  .  .  From  my  own  observations,  which  have  not  been 

limited,  and  from  the  statements  of  pioneers  and  of  the  Indians 

themselves,  I  hesitate  little  to  express  the  belief  that  every  In- 

^  For  a  good  account  of  wampum  monej,  lee  Weeden,  Economic  and  Social 
History  of  New  England,  1620-1789  (1891),  I,  pp.  32-46. 

Weeden,  p.  32,  following  Trombnll,  fajt  the  white  beads  were  made  from  the 
inner  whorls  of  the  shell  known  as  Pyrula  carica  or  eanictdata,  common  to  the 
loiith  coast  of  New  England.  The  dark  beads  were  made  from  the  dark  part  of 
th«  shell  of  the  common  qoahog  or  round  clamshell  {Venus  mereenaria).  It 
wai  itated  that  these  shells  were  not  found  north  of  Cape  Cod. 

*  See  H.  White,  Money  and  Banking,  pp.  5-11,  for  a  good  brief  account  of 
the  use  of  tobacco  as  money  in  Virginia  and  Maryland. 

*  Qnoted  by  Ridgeway,  op.  cit.,  p.  15. 

*  Babelon  (p.  11)  seems  to  assume  erroneously  that  these  shells  were  the  same 
n  wampum. 


14  THE  PRINCIPLES  OF  MONEY 

dian  in  the  State  in  early  days  possessed  an  average  of  at  least  100 
dollars  worth  of  shell  money.  This  would  represent  tiie  value 
of  almost  two  women  .  .  .  or  two  grizzly  bear  skins,  or  twenty- 
five  cinnamon  bear  skins,  or  about  three  average  ponies." 

In  fact,  the  standard  in  use  by  a  people  enables  one  fairly 
well  to  determine  from  it  the  stage  of  civilization  which 
Th  sundaid  ^^  ^^  reached.  In  the  hunting  stage,  weapons 
mast  itself  or  skins  Were  used;  in  the  nomadic  stage,  the 
unit  was  selected  from  oxen,  sheep,  goats,  horses, 
and  slaves;  in  the  fixed  farming  stage,  from  grain,  houses, 
and  metals  (gold  and  copper^  having  been  first  adopted^ 
In  short,  the  commodity  chosen  as  the  standard  has  itself 
always  had  value  to  the  community  by  which  it  has  been 
adopted.^  Indeed,  it  is  unthinkable  that  the  value  of  any 
one  article  could  be  expressed  in  a  common  denominator 
which  itself  had  no  value.  When  we  say  that  the  given 
thing  exchanges  for  a  certain  weight  and  quality  of  a  stand- 
ard, we  mean  thereby  that  the  value  of  the  one  is  expressed 
by  the  amount  of  the  other  for  which  it  will  exchange.  If 
the  common  denominator  had  no  value,  it  could  not  register 
the  value  of  another  thing,  and  hence  it  could  not  be  a  com- 
mon standard. 

In  speaking  of  a  standard,  warning  should  be  given  that 
it  is  not,  and  cannot  be,  synonymous  with  a  measure  of 
SerWceofa  value.  The  actual  process  is  as  follows:  a 
■**"***"^  commodity  is  chosen  as  a  standard.  Oiven  the 
ratios  of  exchange  of  goods  to  tins  standard  (or  common 
denominator),  the  exchange  values  of  these  goods  relatively 
to  each  other  are  convenientiy  ascertained.  But  the  ratios 
of  exchange  between  goods  and  the  standard  commodity 
are  their  prices ;  so  that,  given  their  prices,  we  can  at  once 
obtain  the  exchange  values  of  goods  relatively  to  each  other. 
This  is  the  essential  service  rendered  by  a  standard  of  prices, 
which  is  often  spoken  of  as  a  standard  of  value. 

1  Cf.  Boicher,  cp.  eiL,  §  119,  note  3. 

*  For  a  motit  thorough  list  of  trticlei  lued  bj  rariotifl  rmooB  in  different  itagM 
of  GiTilisation,  mo  Botcher,  op.  cU.,  (  11^»  ^^^  ^  >  §  119,  note  12. 


THE  FUNCTIONS  OF  MONEY  16 

The  commodity  chosen  as  a  standard  has  exchange  value, 
or  no  comparisons  could  be  made  with  it ;  but  one  should  not 
forget  that  exchange  value  is  not  inherent  in  anything  as  a 
quality;  it  is  only  a  relation,  a  ratio  in  exchange.  The  quali- 
ties^ of  an  article  which  yield  us  satisfactions  are  intrinsic; 
but  the  ratio  of  exchange  between  that  and  another  useful 
article  is  not  intrinsic.  Hence  we  should  not  speak  of  the 
*^ intrinsic  value"  of  gold,  or  of  any  commodity. 

If,  as  we  have  seen,  exchange  value  is  not  absolute,  but 
relative,  a  standard  commodity,  in  and  by  itself,  could  not 
** measure"  the  general  exchange  value  of  other 
goods.    A  commodity,  or  a  quality  belonging  to  does  not 
a  commodity,  is  one  thing;  its  value  is  quite  ™*""*^  '*•* 
another  thing.    In  any  true  meaning  of  the  word,  we  can 
^measure"  the  exchange  value  of  goods  only  by  the  ex- 
chaoge  value  of  some  standard.    But  this  is  not  what  we 
get  by  use  of  a  standard.    The  exchange  value  of  gold,  for 
instance,  is  expressed  by  the  quantity  of  other  articles,  in 
certain  customary  proportions,  for  which  it  will  exchange. 
What  we  often  speak  of  as  the  value  of  gold  is  its  exchange 
value  relatively  to  only  a  part  of  the  goods  in  the  world,  — 
that  part  usually  quoted  in  accessible  price  lists.     The  ex- 
change value  of  gold  varies  with  the  number  and  kind  of 
things  priced  in  it.     By  pricing  an  article  in  gold,  the  value 
of  that  article  in  relation  to  other  commodities  is  not  thereby 
"measured''  by  gold.     In  such  a  case  gold  serves  only  as  a 
common  denominator,  and  not  as  a  ^^  measure  of  value,"  be- 
cause it  does  not  thereby  state  the  relationship  of  exchange 
which  that  article  bears  to  all  other  exchangeable  goods.     All 
that  is  obtained  is  the  exchange  ratio  between  gold  and  that 
particular  commodity ;  and  it  is  only  by  subsequent  inference 
therefrom  that  one  may  obtain  an  idea  of  the  exchange  rela- 
tions of  that  given  article  to  all  other  goods  that  may  also 
have  been  priced  in  gold.     Moreover,  there  could  of  course 
be  no  ahsolute  standard  for  '^  measuring  "  value,  since  any 

^  Thinlationdiips  Mlabluhed  between  thoee  qualities  and  mankind  conld  not 
l^i^lKdadMintrinfic;  that  is,  ntilitj  itself  is  not  intrinsic 


16  THE  PRINCIPLES  OF  MONET 

one  article,  chosen  as  a  standard,  would  itself  vaiy  in  value ; 
consequently  the  values  of  other  goods  would  be  compared 
with  a  standard  itself  constantly  vaiying.  Not  infrequently 
one  hears  of  an  argument  in  favor  of  gold  as  a  standard  that 
it  is  as  '^  invariable  as  a  yardstick."  This  statement  contains 
the  fallacy  of  supposing  that  exchange  value  is  as  absolute 
as  linear  length,  when  it  is  only  a  relation  of  one  article  to 
another  expressed  quantitatively.^ 

§  4.  In  contradistinction  to  a  standard,  or  common  de- 
nominator, which  itself  has  value,  the  function  of  the  medium 
Hm  nMdiam  ^^  exchange  is  to  serve  as  a  means  by  which 
of  exchange,  transfer  is  made  from  goods  of  one  kind  to  goods 
of  another  kind.^  Unless  a  common  denominator  existed, 
we  should  have  no  means  of  getting  a  concrete  expression  of 
value  in  general,  —  a  conception  of  price  being  necessaiy  to  a 
practical  comprehension  of  value.  Until  a  valuation  in  the 
money  commodity  has  been  made,  we  cannot  have  convenient 
exchange.  Price  is  dependent  upon  the  conception  of  a 
standard ;  the  medium  of  exchange  can  come  effectively  into 
play  only  after  the  price  valuation  has  been  made.  But  a 
standard  could  exist  even  in  a  stage  of  barter.  Not  so  with 
a  medium  of  exchange.  The  latter  came  into  use  because 
of  two  difficulties  attendant  upon  barter:  (1)  the  incon- 
venience arising  from  lack  of  coincidence  in  barter ;  and  (2) 
the  indivisibility  of  ordinary  goods. 

The  want  of  coincidence  in  barter,  which  gave  rise  to  the 
need  of  a  medium  of  exchange,  has  been  well  described  by 
Mr.  Jevons.'  It  is  related  of  the  naturalist  Mr.  Wallace 
during  his  travels  in  the  Malay  Archipelago,  *^that  in  some 
of  the  islands,  where  there  was  no  proper  currency,  he  could 

^  Cf.  F.  A.  Walker,  Monej,  Trade,  and  Indoetry,  p.  32 ;  and  his  Bionej,  p.  S. 
Cf.  also  Knies,  op,  eU,,  p.  150. 

3  When  Roicher,  followed  bj  some  recent  writers,  sajs,  "In  the  social 
eoonomj  money  possesses  the  significance  which  blood  has  for  the  animal  bodj" 
(op.  at,  §  117),  he  can  be  thinking  of  onlj  one  function  of  monej,  the  mediom 
of  exchange.    As  a  standard,  it  serves  pnrposes  which  would  mix  the  metaphor. 

•  Op.  eit,,  pp.  2-4. 


THE  FUNCTIONS  OF  MONET 


IT 


not  procure  supplies  for  dinner  without  a  special  bargain 
and  much  chaffering  upon  each  occaaion>  If  the  vendor  of 
fish  or  other  coveted  eatables  did  not  meet  with 
the  sort  of  exchange  desired,  he  would  pass  on^  comcideQce 
and  Mr,  Wallace  and  bis  party  had  to  go  without  "^ 
his  dinner*  *  *  <  The  first  difficulty  in  barter  is  to  find  two 
persons  whose  disposable  possessions  mutually  suit  each 
other's  wants*  There  may  be  many  people  wanting^  and 
many  possessing  those  things  wanted;  but  to  allow  of  an 
act  of  tarter  there  must  be  a  double  coincidence,  which  wOl 
rarely  happen.  A  hunter  having  returned  from  a  successful 
ihase  baa  plenty  of  game,  and  may  want  arms  and  ammuni- 
tion to  renew  the  chase.  But  those  who  have  arms  may 
happen  to  be  well  supplied  with  game,  so  that  no  direct 
exchange  is  possible.  -  -  *  Sellers  and  purchasers  can  only 
be  made  to  fit  by  the  use  of  some  commodity  *  *  ,  which 
all  are  willing  to  receive  for  a  time,  so  that  what  is 
obtained  by  sale  in  one  case*  may  be  used  in  purchase  in 
another/' 

The  same  author  fitly  illustrates  the  second  difficulty  which 
arises  in  barter  from  the  indivisibility  of  most  goods ^  ^'  The 
tailor,  as  we  are  reminded  in  several  treatises  on  indiriaibiwiy 
political  economy,  may  have  a  coat  ready  to  ®*e^***<^ 
exchange,  but  it  much  exceeds  in  value  the  bread  which  he 
wishes  to  get  from  the  baker,  or  the  meat  from  the  butcher. 
He  cannot  cut  the  coat  up  without  destroying  the  value  of 
his  handiwork.  It  is  obvious  that  he  needs  some  medium 
of  exchange,  into  which  he  can  temporarily  convert  the  coatt 
so  that  he  may  give  a  part  of  its  value  for  bread,  and  other 
parts  for  meat^  fuel,  and  daily  necessaries,  retaining  perhaps 
a  portion  for  future  use." 

The  process  by  which  a  generally  acceptable  and  easily 
salable  commodity  came  into  use  as  a  medium  of  exchange 
is  admirably  described  by  Karl  Menger*^  A  person  possess- 
ing goods  not  easily  exchangeable  at  a  given  time  and  plaoe 
for  desired  satisfactions  will  have  a  motive  for  first  exchange 

^  Economic  JonriiA]  (1892)^  p^  S4S. 
2 


18  THE  PRINCIPLES  OF  MONEY 

ing  his  possessions  for  a  generally  desired  commodity,  not 
because  he  desires  it  per  «e,  but  because  he  thereby  draws 
nearer  to  accomplishing  his  end;  since  when  he  obtains  a 
highly  salable  article,  even  if  it  be  not  the  article  needed,  he 
can  then  more  easily  advance  to  the  final  act  of  obtaining  the 
desired  commodities  which  he  had  first  in  mind.    Hence : 

^^  Those  commodities,  which  relatively  to  both  space  and 
time  are  most  salable,  have  in  every  market  become  the  wares, 
which  it  is  not  only  in  the  interest  of  every  one  to  accept 
in  exchange  for  his  own  less  salable  goods,  bat  which  also  are 
those  he  actually  does  readily  accept.  And  this  saperior  sala- 
blenesB  depends  only  upon  the  relatively  inferior  salablenesa 
of  every  other  kind  of  conmiodity,  by  which  alone  they  have 
been  able  to  become  generally  acceptable  media  of  exchange." 

Just  as  no  article  which  does  not  itself  have  exchange 
value  can  be  a  common  denominator  of  value,  so  nothing 
which  is  not  itself  valuable  ^  can  serve  as  a  medium  of  ex- 
change. If,  in  order  the  better  to  obtain  other  goods  in 
exchange,  one  gives  economic  goods  for  money,  one  should 
be  assured  that  the  money  has  equal  value  with  the  goods 
parted  with.  No  one  would  consciously  give  away  commodi- 
ties of  value  for  a  medium  of  exchange  which  was  notoriously 
lacking  in  value,  and  which  he  might  possibly  be  obliged  to 
hold  for  a  time.  Otherwise  the  whole  purpose  of  exchange 
would  be  defeated;  since  for  a  worthless  medium  of  ex- 
change^ one  could  not  obtain  other  goods. 

As  soon  as  any  division  of  labor  appeared  in  society,  the 
need  of  a  medium  of  exchange  became  evident;  and  this 
need  has  increased  in  intensity  with  the  modem  development 
of  division  of  labor.  So  long  as  men  produced  all  their  own 
satisfactions,  no  exchange  was  necessary,  and  no  medium 

1  Cf.  Knies,  op.  cit.,  pp.  17S-191. 

*  Paper  money  is  not  an  exception  to  this  principle,  if  the  ymlne  of  the 
paper  is  dependent  on  the  coin  in  which  it  is  redeemable ;  and  hence  the  com- 
parison is  really  made  between  a  commodity  and  the  quantity  of  coin  generally 
heliered  to  be  associated  with  the  paper.  For  farther  discossion  of  this  general 
point,  see  chap.  xt. 


THE  FUNCTIONS  OF  MONET  19 

of  exchange  was  in  circulation.^  It  is  only  as  we  follow 
the  complicated  division  of  modem  labor,  with  its  time  ele- 
ment in  production,  that  we  realize  how  essential  ^ 
to  society  is  a  medium  of  exchange.  And  yet  exdung^d*. 
the  social  need  which  is  served  by  money  in  this  Siriiioii^f 
hnetion  is  not  a  primaiy,  but  a  secondaiy  need.  '^'- 
The  first  economic  object  of  men  is  by  processes  of  pro- 
duction to  secure  material  satisfactions;  and  money  is  only 
an  intermediary,  or  convenient,  aid  in  getting  from  goods 
we  have  to  those  we  have  not.  We  could  get  on,  at  the 
aaciifice  of  some  convenience  and  time,  without  a  medium 
of  exchange,  but  not  possibly  without  the  primaiy  results 
of  production.  The  utility  of  money  as  a  means  of  abridg- 
ing effort  and  of  aiding  in  exchanges  becomes,  however, 
80  great  in  modem  industry  that  it  is  not  easy  to  minimize 
its  essential  importance.  And  the  constant  presence  of  money 
before  the  eye  of  every  trader,  as  a  medium  of  exchange, 
easily  leads  him  to  regard  this  function  as  the  only  and 
most  important  one  in  money.  Hence  the  ease  with  which 
men  sometimes  set  money  above  the  products  to  be  ex- 
changed ;  and  hence  the  inclination,  for  this  reason,  to  esti- 
mate an  abundance  of  money  as  of  more  importance  than  an 
abundance  of  goods,  thus  making  the  means  greater  than 
the  end. 

In  early  times  that  article  of  general  desirability  which 
served  as  a  standard  of  price  was,  in  most  cases,  also  used 
as  the  medium  of  exchange.  The  distinction  in  that  period 
between  the  common  denominator  of  value  and  the  medium 
of  exchange  was  not  sharp ;  and  the  physical  qualities  of 
the  money  commodity  needed  for  one  function  were,  as  was 
to  be  expected,  mixed  with  those  needed  for  the  other.  In 
recent  years,  however,  we  get  no  clear  insight  into  the  evolu- 
tion of  money,  if  we  do  not  clearly  distinguish  between  these 

^  This  eonditioii  existed  in  central  Pennsjlvania  in  the  first  half  of  the  nine- 
teenth centuj.  A  legal  standard  existed,  bat  no  money  circolated ;  and  each 
fsnner  prodnced  his  own  food,  clothing,  shelter,  etc.  (From  private  memoirs  in 
mjpoMesfion.) 


20 


THE  PRTXCIPLES  OF  MONEY 


two  functions.  It  will  appear  that  entirely  different  things 
are  used  for  the  different  functions :  for  instance,  gold  may  be 
adopted  as  a  common  denominator^  in  which  prices  are  ex- 
pressed ;  whOe  goods  may  in  fact  be  exchanged  by  banking 
devices  without  any  but  the  slightest  use  as  a  medium  of 
exchange  of  that  article  which  has  been  adopted  as  the 
standaitl.  In  the  development  of  these  sepamte  functions, 
it  has  become  clear  that  money  has  been  evolved  out  of  the 
needs  of  society  as  a  means  of  lessening  human  effort.  In- 
deed, the  extent  to  which  the  distinctions  in  the  functions  of 
money  are  worked  out  in  any  country  is  a  fair  test  of  the 
division  of  labor,  the  variety  of  wants  and  products,  and  the 
industrial  civilization  of  its  people. 

Exchange  of  goods  has  taken  place,  as  we  all  know,  not 
merely  between  different  persons  in  the  same  region  but 
Evoitttion  of  ^*^^^°  persons  in  widely  separated  regions.  In* 
medm  of  ternational  exchange  was  but  a  case  of  extended 

^*"  division  of  labor.  Wherever  law  and  order  were 
weak,  or  wherever  transportation  became  unsafe,  a  premium 
at  once  arose  as  a  stimulus  to  save  the  unnecessary^  use  of 
the  common  denominator.  Itself  having  value^  tiie  risk  of  its 
loss  in  transportation  by  land  and  sea,  the  fear  of  robbery, 
theftt  or  accident,  especially  when  large  sums  were  to  be 
passed,  gave  an  ever  present  reason  for  avoiding  the  actual 
offer  of  the  valuable  standard  as  a  medium  of  exchange. 
Consequentiy,  the  continuous  pressure  to  discover  some 
means  of  exchanging  goo^ls  without  transferring  the  standard 
itself  as  a  medium  of  exchange  was  always  present  in  the  fl 
human  mind  as  soon  as  commerce  began  to  develop  to  any 
extent  We  see,  therefore,  in  response  to  the  monetary  needs 
of  mankind,  a  natural  evolution  which  displayed  itself 
in  the  establishment  of  the  early  banks,  such  as  those  of 
Venice,  Barcelona,  and  Amsterdam,  where  coins  were  de- 
posited and  the  title  to  the  coins  (or  common  denominator) 
was  transferred  without  their  removal.  Banks,  therefore, 
arose  in  response  to  a  need  of  the  community,  originating  in 
an  effort  to  abridge  labor  and  save  loss.     In  like  manner,  the 


THE  FUNCTIONS  OF  MONET  21 

iQYention  of  the  Inll  of  exchange  ^  by  the  Jews  of  Lombaidy 
in  the  fourteenth  century  was  another  step  in  the  same 
cYolution,  by  which  the  actual  transfer  of  the  valuable  stan- 
diid  was  saved  by  devising  another  medium  of  exchange. 
In  quite  recent  times  we  shall  see  this  carried  still  further 
by  the  notes  of  banks  and  governments,  and  finally  by  the 
depodt  currency  of  the  check  and  deposit  system. 

The  evolution  of  the  material  actually  used  as  money  is 
gobodiary  to  the  evolution  of  the  functions  already  described, 
and  it  has  been  dependent  on  them.  A  long  list  Honer 
of  articles  such  as  cattle,  furs,  salt,  tobacco,  copper,  "^^^""^ 
silver,  and  gold,  have  been  used  as  money  in  different  ages  by 
different  peoples;  the  choice  in  any  one  case  reflecting  the 
stage  of  civilization  and  of  industrial  development.  With 
the  mere  history  of  these  we  are  not  now  concerned.  The 
ideal  requisites  for  a  perfect  money  material  have  been  well 
stated,  among  others,  by  Je vons ;  ^  but  it  is  necessary  to  sepa- 
lata  these,  accordingly  as  they  apply  to  a  standard,  or  to  a 
mediiun  of  exchange  : 

I.  Standard    \    ^'  ^^^^^ 

I    2.  Stability  of  Value. 

f  8.  Portability. 
TT   "MoA'         f     \    ^'  Indestructibility. 


Exchange 


6.  Homogeneity. 
—  6.  Divisibility  (and  reunion), 
l^  7.  Cognizability. 

It  will  be  seen  at  a  glance  that,  where  the  medium  of  ex- 
change is  different  from  the  standard,  the  requisites  can- 
not be  indifferently  applied  to  both.  Articles  whose  prices 
are  expressed  in  terms  of  the  standard,  may  be  actually  ex- 
changed by  means  which  do  not  call  the  standard  into  use. 

1  *' A  bill  is  nothing  but  an  order  to  pay  money  addressed  bj  the  drawer  to 
the  drawee,  or  person  on  whom  it  is  drawn,  specifying  the  amount  to  be  paid, 
the  time  of  payment,  and  the  person  to  whom  it  is  to  be  paid."  Jerons,  op.  cit., 
p300. 

>  Op.  of.,  chap.  T. 


22  THE  PRINCIPLES  OF  MONET 

In  modem  conditions  the  last  five  requisites  really  apply 
mainly  to  the  large  and  small  coins  (or  '^  change ")  passed 
from  hand  to  hand  in  small  transactions. 

In  finally  agreeing  upon  the  precious  metals^  regard  was 
had  to  the  reasons  properly  associated  with  the  necessity  of  ' 
coinage  (see  chapter  ii).  In  order  to  avoid  the  delay  and^ 
annoyance  of  weighing  and  assaying  at  each  transaction  the  m 
money  commodity,  the  material  out  of  which  coins  were  madeae 
must  be  such  as  to  take  and  retain  a  stamp  certifying  to  ita^ 
weight  and  fineness. 

§  6.  As  soon  as  legal  conditions  permitted  any  permanence 
of  contracts,  and  as  soon  as  the  time  element  entered  materi- 
ally  into  industrial  relations  (especially  with  the 
deferred  extension  of  divisiou  of  labor),  the  third  function 

pajmenu.  ^£  money  as  a  standard  of  deferred  payments 
assumed  importance.  This  function,  however,  is  not  different 
from  that  of  a  simple  standard,  except  that  the  former  covers 
comparisons  in  which  the  time  element  appears.  By  some  it 
might  be  regarded  only  as  a  case  of  the  standard  function. 
It  is  not  important,  however,  how  it  is  distinguished^  provided 
only  that  the  problems  arising  from  the  time  element  in  con- 
tracts shall  receive  full  attention. 

To  express  the  exchange  value  of  goods  relatively  to  the 
common  denominator  at  any  given  time  affords  no  difficulty ; 
that  is,  prices  in  a  given  market  on  a  given  day  are  simple 
phenomena.  But  when  agreements  which  run  over  consider- 
able periods  of  time  are  entered  into  to  pay  and  to  receive 

>  Knies  (Geld  nnd  Credit,  I,  chi^.  i)  summarizes  the  reasons  for  choosing  th% 
precious  metals  as  follows : 

1.  Their  utility  as  consumption  goods.  People  of  all  times  hare  preferred 
them  for  ornament,  etc 

S.  The  want  they  satisfy  not  being  an  absolute  necessity,  their  Taloe  is  remark* 
ably  stable. 

9.  High  Talne  in  small  bulk,  and  hence  easily  transportable. 

4.  Durability  and  indestructibility. 

5.  Easily  dirisible  without  lose. 

6.  Homogeneous. 

7.  Capable  of  receiring  a  stamp. 


THE  FUNCTIONS  OF  MONET  28 

certein  amountB  of  the  oommon  denominator  many  diffioulties 

arise  from  the  vrell-known  &ot  that  the  rates  of  exchange 

lietween  the  common  denominator  and  other  goods  may  change 

iridely  during  the  period  of  the  contract.    Over  even  a  com- 

pntively  short  space  of  time,  it  is  impossible  that  valae 

nto  should  remain  unchanged.    Under  the  influence  of 

modem  discoveiy  and  invention  every  oommodity  is  constantly 

iSected  by  alterations,  from  week  to  week  or  from  jeeix  to 

jMT,  in  the  conditions  affecting  its  production.    Since  no 

single  article  can  escape  these  changes — not  even  that  one 

doeen  as  the  common  denominator  —  it  goes  without  saying 

tint  no  article  exists  which  can  possibly  be  a  perfect  standard 

of  deferred  payments.    No  article  could  possibly  adjust  its 

own  changes  to  the  infinite  number  and  rai^  of  changes 

going  on  in  the  many  goods  compared  with  money.    This 

inhsrent  difBculty  in  finding  a  standard  for  time  payments  is 

Ae  one  around  which  much  of  the  monetary  discussion  of 

leoant  years  has  centred.    It  has  led  to  the  proposals  of 

Uffletalliam,  the  multiple  standard,  and  other  schemes  which 

win  be  fully  discussed  hereafter  in  their  proper  place. 


24 


THE  FRIKCIFLES  OF  MONEY 


CHAPTER   II 


COINAGE 

It  h  correct  to  my  that,  in  genera],  namismatiits  haTe  tbowu  thenuelTep  e^ 
celient  archieologiflte  and  hintanana,  but  that  thej  liav«  gtven  little  attentioQ 
to  the  economic  l&wa  of  mouey.  -—  Bjlbblox^  Les    Ori§in€*  de  ia  mom^it,  h 
p.  V\\h  ■ 

W.  S.  J«voii%  Jfofiey  oJiil  Jfi-cAiwitfw  of  £aff Aa^^je,  chtps.  vii,  tiU.  —  C*  Einxa, 
<?p,  d*.,  pp.  l&2-ai0.  —  E.  Nauk,  op»  ctf.,  pp.  315  ff,  —  F*  A,  Walkek,  Jfcmey,  chAptt 
IX,  X  (pp,  181-1 8S}|  xL  —  E.  Whits,  Money  and  Saiiih'A^,  cb^p.  ii,  S 

§  1*  Since  the  purpose  of  the  present  volume  ifi  to  state 
the  general  principles  underlying  all  kinds  of  monay,  the 
second  volume  being  devoted  entirely  to  metallic  money,  only 
such  matters  of  coinage  will  be  discussed  here  as  have  a 
bearing  on  our  Immediate  study.  Obviously  the  mechanical 
and  chemical  details  of  minting  which  enter  largely  into  prac^  ^ 
tical  coinage  need  not  be  taken  up.  f 

The  reasons  why  coins  were  in  course  of  time  universally 
resorted  to  are  simple.  When  the  choice  of  the  community 
Bmtitnii  *-r       ^^    Settled   upon  some   article  to  be  used  aa 


money,  at  each  transfer  the  quantity  and  qual- 


eoinftga. 

ity  of  the  medium  of  exchange  had  to  be  determined  to  the 
satisfaction  of  buyer  and  seller.    This  in  itself  was  one  reason 
why  resort  was  had  to  some  metal,  either  iron,  copper,  silver, 
or  gold;   because  they  best  satisfied  the  requirements  o{h 
homogeneity,  cognixability,  divisibility^  (and  reunion),  in-" 
destructiblHty  and  portability.'    To  avoid  the  neceseity  of 


^  The  extfeme  difficult j  of  melting  platiniini,  and  ita  limited  aiipplj  maki 
it  an  inferior  monej  tn«taL  Hence  the  ^ctal  failure  m  1S45  of  the  Rnsaiaa 
atiempl  {begun  to  1626)  to  me  pl^mnm. 

^  The  advantages  in  regard  to  portahilit^  attd  in  regard  to  large  value  in 
iroall  hulk  of  gold  over  all  oth^r  metahi,  sucfa  as  iron,  copper,  and  aUver,  laj  at 
the  bottom  of  the  earlj  preference  shown  for  gold  when  it  could  be  had  foi 
coinage;  while  at  the  SMne  time  it  was  6<iaal]y  bomogeneoiu,  recoguiukbk^, 
diviiible,  and  indestraetible  with  anj  otber  metaL 


i 


COINAGE 


testing  the  fineness  and  weighing  the  qnantitj  of  a  money 
metal  at  each  act  of  exchange,  coinage  was  neceasarily  re- 
sorted to.  Coins,  therefore!  should  cany  on  their  face  in- 
disputable evidence  of  (1)  their  fineness^  (2)  their  origimU 
weighty  and  (3)  the  absence  of  any  subsequent  alteration, 
Similarly,  the  printing  of  paper  money  should  be  (1)  on 
distinctive  paper,  (2)  from  plates  as  secure  from  counter- 
feiting as  possible^  and  (3)  containing  numbers,  marks,  and 
signatures  which  unmistakably  indicate  the  respouBible  issuer. 
The  purpose  in  coinage  is  to  save  the  public  incoovenienca 
and  delay ;  this  service  is  in  no  sense  to  be  regarded  as  per- 
formed in  the  interest  of  the  owner  of  bullion.^  When  a 
state  attempts  to  consider  the  possibility  of  influencing  the 
value  of  a  metal  in  the  interest  of  the  bullion  owner,  it  is 
blind  to  the  general  interests  of  the  public,  which  should  be 
paramount 

§  2.  The  history  of  the  evolution  and  manufacture  of  coins 
into  their  present  forms  is  not  pertinent  to  the  present  study. 
Suffice  it  to  say  that  a  vast  quantity  of  literature,  especially 
in  the  iiifancy  of  political  economy,  was  called  into  escistence, 
dealing  chiefly  with  what  must  now  be  regarded  as  unessen- 
tial details  of  coinage,  recoinage,  Beignioragef  and  the  Uke.' 
These  matters  will  be  treated  with  brevity- 

At  first  coins  were  moulded,  later  hammered,  and  lastly 
manufactured  with  special  machinery,  so  that  the  designs  were 
artistic  (in  some  cases)  and  difficult  to  counter-  Technique  of 
feit*  while  the  edges  were  milled  to  prevent  *^''**^* 
clipping.  Ancient  coins  had  roughs  unstamped  edges ;  and 
Jevons  ^  tells  us  tliat  in  1573  Charles  IX.,  of  Fmnce,  issued 
the  first  coin  marked  with  a  legend  on  the  edge. 

^  A  itate  likewise  superrisei  a  b&nking  sjstem  to  Move  the  pabllc  the  ineon- 
t«Di«i)ce  skad  delaj  itiTolvod  In  examining  iuto  the  secunty  ol  eacb  note,  not  in 
the  inter^Bt  o{  the  bankA^  nor  prim  aril  j  even  to  protecl  Dote-holdert  Against  loii. 
Cf.  Report  of  Mouetary  Commidsitin*  lasS,  p,  165* 

*  Cf.  Wftlkfir.  Monej»  cliap.  in. 

*  Op.  €iL,  p.  60,  Engliali  cuini  were  firit  nuifked  on  the  edge  tn  165$  ot 
IMS.    JmouB  tnentiont  the  steam^xjintng  preM  of  BoulCon  anil  Watt,  and  th« 


26 


THE  PRINCIPLES  OP  MONET 


The  aize  of  coina  should  be  adapted  to  the  weight  amll 
value  of  the  metal  tuied.  The  large  copper  coin  of  Sweden 
in  the  eighteenth  century,  measuring  7^  inches  square  and 
weighing  3J  pounds*  was  obviously  an  absurdity.  For 
opposite  reasons  our  own  gold  dollar  piece  has  been  found 
to  be  highly  inconvenient  and  has  been  discontinued.  To 
be  satisfactory  the  coinage  should  abo  allow  the  use  of  that 
metal  which  permit  coins  of  small  denominations  to  have  a 
size  convenient  for  daily  handling.  Consequently  it  has  be- 
come almost  universal  to  authorize  the  issue  of  laiger  de- 
nominations in  gold,  and  of  subeidiaty  money  in  silver,  using 
nickel  and  copper  for  minor  coins. 

Because  it  is  almost  impossible  to  manufacture  two  coins 
exactly  alike^  the  officials  of  the  mint  are  allowed  by  law  &fl 
Limit  of  small  limit  of  tolerance  between  the  actual  and 

toUraoca.  nominal  weight  of  each  coin.  Abrasion  by  use 
and  wear,  however,  may  cause  a  still  wider  variance  of  the 
actual  from  the  legal  weight  In  most  countries  tlie  point  to^l 
which  this  divergence  can  go»  while  allowing  the  coins  to^" 
pass  at  their  face  value,  is  carefully  fixed  in  the  regulations 
of  the  mint.i  In  most  instances,  if  below  the  limit  of  toler- 
ance, the  coina  are  accepted  only  according  to  the  weight  of 
the  metal  contained  in  them«  If  thb  be  not  done,  the  coinage 
soon  deteriorates,  and  an  anomalous  condition  of  trade  arises, 
in  which  coins  are  always  regarded  with  suspicion. 

The  precious  metals,  moreovers  are  too  soft  in  the  pure] 
state  to  stand  the  wear  of  ordinary  usage;  therefore  thej 
coins  are  toughened  and  hardened  by  alloy.     In  the  Umtedl 

kD6«-pint  pnsf  of  UUmfn  and  Thoaneliev  »  grm^i  advuicet  in  Ihe  m^hanUm 
for  Btrikinf;  coins, 

^  Iq  Great  BriliUn  th«  ootjital  trial  of  the  Prx  holds  tho  mint  U$  dam 
aoconnt.  Certain  numbers  of  coin  of  each  deootnioiitioii  aft«r  each  4».j'»  work 
are  plained  m  a  box  called  the  FjXj  aad  annnAll^  an  official  board  makes  a  rigid 
test  of  tbi;  accur&cj  of  ihe  coinage.  The  aam^  kind  of  annual  trial  h  umA  at 
our  mintfi.  The  ataadard  Troj  pound  weight  is  kept  io  the  Chapel  of  the  Prac 
at  WegtmUister,  and  the  American  Mint  standard  was  takeo  from  that,  in  1837 
(flee  section  3&4B  Revised  8t«tut66).  The  English  limit  of  tolerance  on  the 
•overelgn  is  O.S  ^rain  (on  a  standard  weight  of  123.2T447  grains},  and  il 
test  shows,  often,  a  dirergeace  of  otitj  0.017  grain. 


COINAGE  27 

Ststes,  and  in  most  other  ooontries,  -^  of  the  standard,  or 
fan,  weight  of  a  ooin  is  alloy,  and  ^  pnre  metal  That  is, 
the  pare  metal  being  called  fine,  our  coins  are  spoken  of  as 
^  fine.^  Snce  the  value  of  the  alloy  is  not  counted  in  the 
Tilue  of  the  coins,  the  standard  weight,  including  both  the 
pore  metal  and  the  alloy,  is  not  the  proper  designation  of 
qoantity  to  be  associated  with  a  coin,  the  amount  of  pure 
metol  being  the  only  truth  of  general  importance  to  be  kept 
in  mind.  For  instance,  the  silver  dollar  of  the  United  States 
ahoold  be  generally  known  as  the  dollar  containing  871^ 
gniDS  of  pnre  silver,  not  4121-  grains  of  standard  weight 

§  8.  Since  the  alloy  does  not  enter  into  the  computation 
of  tfae  value  of  the  coin,  and  since  it  is  furnished  as  a  part 
of  the  expenses  of  coinage  by  the  mint,  it  is  ^^ 
erident  that  the  value  of  the  coin  differs  from  the  '•^■^•'■•^ 
filae  of  the  metal  it  contains  only  by  the  expenses  of  manu&c- 
tore.    The  difference  in  value  between  coins  and  bullion  is 
much  the  same  as  between  wheat  in  bags  and  wheat  in  bulk. 
This  difference  has  been  called  **  seigniorage ;  '*  but  it  would 
be  better  to  speak  of  it  as  the  expenses  of  coinage,  or  brassage. 
Seigniorage,  in  its  common  usage,  has  been  applied  to  the 
difference,  no  matter  how  great,  between  the  nominal  face 
value  of  the  coin  and  the  actual  market  value  of  the  pure 
metal  contained  in  the  coin. 

The  word  "  seig^orage,"  *  however,  has  come  to  include 
two  things  which  should  be  kept  distinct:  (1)  brassage, 
and  (2)  seigniorage  proper.  Brassage  should  be  used  to  ex- 
press the  actual  expenses  of  coining  the  metals  at  the  mint ; 

1  This  sttwdard  of  fineness  was  adopted  in  1837.  The  English  gold  coins 
eontain  ^  ot  alloy,  and  \i  of  pare  metal  or  916.66  fine ;  while  English  silrer 
eoins  haTe  11  oz.  2  dwts.  pure  metal  and  18  dwts.  copper  to  the  pound  Troy,  or 
-f/fg,  or  a,  fine.  The  b'mit  of  tolerance  as  to  fineness  is  j^-  '^^^  Tower 
pound  used  prior  to  1527  contained  5400  grains;  the  Troy  ponnd  substituted  by 
Benry  VUL  contained  5760  grains. 

*  The  charge  for  manufacture  had  a  Gothic,  not  a  Roman  origin  (Lirerpool, 
Corns  of  the  Realm,  p.  116).  It  was  continued  in  England  to  1666,  when  gratui- 
tous coinage  was  introduced.  In  the  United  States  gratuitous  coinage  of  gold 
was  adopted  in  1875. 


28 


THE  PRINCIPLES   OF  MONET 


and  (2)  seigniorage  should  be  employed  to  indicate  the  profit 
which  the  lord,  or  sovereign,  by  virtue  of  hia  prerogative, 
claimed,  over  and  beyond  the  expenses  of  manu- 
facture,* In  modem  usage>  seigniorage  should 
be  the  difference  between  the  actual  market  value  of  the 
metal  in  the  coin,  on  the  one  hand^  and  the  face  value,  less 
the  brassagei  on  the  other  hand.  For  example^  the  ex- 
penses of  coinage  for  the  American  silver  dollar  may  be  a 
few  cents  per  piece^  while  the  seigniorage  is  the  difference 
between  its  present  face  value  ot  100  cents  in  gold  (less  bras- 
sage) and  the  market  value  in  gold  of  the  371 J  grains  of 
pure  silver  contained  in  it  (varying,  of  course,  but  now  about 
42  cents)* 

For  a  time  there  was  a  voluminous  discusaion^  as  to 
whether  the  government  should  pay  the  expenses  of  coin- 
GrmtaitouB  ind  ^g^*  ^t  being  favored  on  the  ground  that  it 
frt^coiD*ge.  ^^  ^  pubUc  service,  the  payment  for  which 
should  fall  upon  all  citizens.  This  unimportant  question  has 
been  generally  disposed  of  by  the  action  of  most  modem 
governments  in  assuming  the  cost  of  the  minting.  Thus 
there  has  come  to  exist  what  may  be  called  "  gratuitous  coin- 
age ; "  and  there  is  no  divergence,  in  countries  which  follow 
this  practice,  between  the  value  of  the  coin  and  the  value  ot 
the  bunion,  beyond  the  loss  of  interest  due  to  waiting  for  the 
metal  to  be  coined.  Gratuitous  coinage,  however,  should 
be  carefully  distinguished  from  the  ordinary  usage  of  "  free 
coinage ; ''  the  former  means  the  manufacture  of  coins  with- 
out charge  to  the  owner  of  the  bullion,  while  the  latter 
implies  the  right  to  present  a  metal  in  unlimited  quan- 
tities at  the  mint  to  be  coined  into  legal  forms  of  money .^ 


^  Cf.  Lirerpoor«  Coim  of  the  Reidm.  p.  US.  J 

•  Cf.  F.  A.  Walker,  Money,  chap.  %,  antJ  other  ftuthoritief »  " 

*  It  might  here  b^  pointed  out  that  thoio  are  in  erro?  who  ipeak  of  m  price 
io?  gold  aovereifjijfl  ot  the  Bapt  of  Engtapd  na  an  evidence  of  their  ac&rcit/; 
sinco  it  is  bsia&d  on  nothin^r  nmre  thuo  n  form  of  seiiniionige.  The  English  mmt 
iniikc«  no  charge  for  eoiniiig  sovereigns,  and  nn  aimce  of  fine  gold  would  be 
coined  at  the  ftiU  ccjuivolcnt  into  £3  17j,  lOji^.  Initeiid  of  taking  bnlliOD  to 
the  mmt,  it  U  cti^tcmary  to  exchange  it  at  the  Bank  of  England  directly  fof 


COINAGE 


29 


There  may  be  fi^  eoinage  of  gold^  and  jet  do  gratuitous 
coinage*^ 

Besides  the  chosen  coin,  such  as  a  dollar,  or  sovereign, 
which  may  have  been  adopted  as  a  unit  in  the  mooetaiy  sys- 
tem, experience  has  led  to  the  stamping  of  frac- 
tional, or  subsidiary  coins  (usually  of  silver)  which 
have  a  seigniomge  greater  than  the  mere  expenses  of  coinage. 
It  has  heen  thought  that  by  reducing  their  value  they  would 
not  be  melted  and  withdrawn  from  circulation  when  changes 
in  the  market  mtio  affected  the  use  of  either  the  larger  gold 
or  silver  coins.  So  long,  for  example*  as  two  halves^  or  four 
quarters,  contained  as  much  sOver  as  a  dollar  piece,  the  same 
events  which  drove  out  the  larger  would  drive  out  the 
smaller  denominations.  Too  great  a  seigniorage,  however, 
in  Iractional  coins  is  a  temptation  to  private  coinage.  All 
coins  whose  seigniorage  is  greater  than  the  expenses  of 
coinage  fall  under  the  designation  of  token  coins,^ 

The  debasement  of    the  coinage,   which  was   a  marked 
featmie  of   monarchical   rule    in   past  centuries^  sometimes 
undertaken  to  reduce  the  burden  of  the  Crown's   DebMement 
indebtedness,  could  be  accompliBhed  in  two  ways  i  **'  ^^^f^ii^e*' 
(1)  by  retaining  the  old  standard  weight,  and  reducing  the 
amount  of  pure  metal  while  increasing  the  alloy ;   and  (2) 
by  openly  reducing  the  standard  weight,  while  retaining  the 
old  proportion  of  alloy  to  pure  meta].     The  more  unscrapu- 
lous  rulers  resorted  to   the  former  method^  because  it  was 
hoped  to  keep  the  reduction  more  or  less  a  secret  from  th" 
common  people.    The  money-changers^  however,  were  quick 
to  discover  such  frauds,  and  the  secrecy  could  not  long  exist. 
Much  space  would  be  needed  to  recount  the  various  debase- 
ments enforced  in  many  countries,  when  absolutism  gave  the 

coinB ;  bot  the  Bank  protects  itaeli  for  the  pouible  dekj  in  coinaj^e  hj  giring 
for  an  oanc«  of  gold  only  £S  Hi.  9J.  (according  to  the  Aet  of  1844)*  Willi 
tome  miaof  ch^rgenj  the  cost  of  getting  coin  for  hnlHoa  is  aboal  \  of  one  per 
cent.     See  Jctods^  op*  ciL^p.  116- 

1  Id  the  United  States  from  1873  nntU  ld75»  then  mm  a  charge  of  )  of  qjm 
percent  for  coining  ^Id*  hot  dnring  that  time  there  wai  free  coinage  of  goId< 

*  Gf,  infra^  chap.  xT. 


Funetioll  of 


10 


CrowBi  or  lord*  authority  over  the  coinage  without  control 

b^  any  parliament.  ^M 

I  4«  The  relation  of  the  stote  to  the  coinage  ha^  been  thm 
source  of  some  confufiion  of  mind.  Sometimes  it  has  been 
thought  that  the  mint  buys  the  metal,  and  that 
l^ere  is  thus  created  a  demand  for  it.  In  trutb,_ 
the  function  of  the  mint  is  only  one  of  public  conventene 
The  ownership  of  the  bullion  remains  in  the  hands  of  thdl 
one  who  brings  it  to  be  coined,  and  the  mint  merely  takea^ 
it  long  enough  to  assay  and  coin  it  Then  the  coins,  or 
equivalent  number,  belong  to  the  person  presenting  the  bul* 
Hon  at  the  mint  In  cases  of  token  money,  to  be  sure^  the 
state  buys  the  bullion  and  coins  it  at  its  own  expense ;  and 
it  gains  the  whole  of  the  large  seigniorage  (less  the  brassage)* 
because  it  issues  the  coins  at  their  nominal  face  value, 

Gmnttng  the  imperative  necessity  of  a  proper  coinage  sys* 
tem,  by  whom  should  it  be  supplied,  —  by  the  state,  or  by  pri- 
Antbority  to  vate  persons  ?  In  favor  of  the  latter  theory  it  baa 
^^^^'  been  ^*  held  that  just  as  people  go  by  preference  to 

a  grocer  who  sells  good  tea,  and  to  a  baker  whose  loaves  are 
sound  and  of  full  weight,  so  the  honest  and  successful  coiner 
would  gain  possession  of  the  market,  and  his  money  would 
drive  out  inferior  productions.'*  *  On  the  other  hand,  Jevons 
argues  that  this  view  overlooks  Gresham's  Law,  that  the  worse 
money  drives  out  the  better.  As  we  shall  see  later  (chapter 
ttii),  only  if  good  and  bad  coins  are  given  equal  purchasing 
efficiency  (^e.g,^  in  paying  duties  at  the  Treasury)  would  the 
worse  money  drive  out  the  better*  If  there  were  no  force 
such  as  self*interest  which  constrains  one  to  use  inferior  coin 
in  scaling  debts,  and  if  there  were  free  choice,  no  doubt  the 
better  coin  would  circulate.  The  ground  for  assigning  the 
sole  power  of  coinage  to  the  state  must,  therefore,  be  based  on 
other  grounds  than  those  given  by  Mn  Jevons*  The  fact 
that  coins  are  required  as  a  convenience  for  the  general  public 
—  a  matter  requiring  vigilance  in  the  common  interest  compa^- 
*  Herbert  Speoc«r.    Cf.  Jstoiu,  op,  eit.^  p.  64* 


COINAGE  81 

able  with  proteotion  to  life  and  property — seems  to  be  reason 
enoo^  why  the  responsibility  of  indicating  the  exact  weight 
and  fineness  of  coins  shonld  be  vested  in  the  authority  chosen 
\fj  the  people.    In  order  that  commerce  and  trade  may  go  on 
uunteiTuptedly,  the  state  should  insist  upon  the  integrity  of 
itB  coinage  as  certainly  as  it  should  upon  the  preservation  of 
the  peace.     From  tfads  it  follows  that  no  private  persons 
should  be  permitted  to  introduce  possible  uncertainty  into  the 
operations  of  a  machinery  which  should  be  placed  beyond  all 
qotftion  as  to  its  steadiness.    If  several  private  coins  were 
allowed  to  pass  current,  the  public  might  not  all  be  equally 
well  informed  as  to  the  reliability  of  the  best  coiners,  and  then 
00108  would  require  testing  and  weighing  at  each  exchange, 
just  as  with  the  metal  in  early  times ;   therefore  the  very 
object  of  coinage,  whereby  weight  and  fineness  should  be  in- 
dicted by  a  responsible  authority,  would  be  defeated.    Once 
the  system  has  been  adopted  and  come  into  general  use,  the 
peisistence  ^  of  monetary  habits  —  a  thing  of  such  importance 
that  it  cannot  easily  be  exaggerated — demands  adhesion  to  a 
single  and  unvarying  sjrstem  of  coins.    The  case  is  so  clear 
as  to  need  no  further  discussion. 

Moreover,  in  our  constitutional  law,  the  right  of  coining 
has  been  already  regarded  as  the  function  of  the  sovereign, 
or  state.  To  Cong^ress  our  Constitution  has  given  the  right 
**  to  coin  money,  and  regulate  the  value  thereof/'  "  To  the 
executive  government  and  its  scientific  advisers,"  says  Mr. 
Jevons,*  **  who  have  minutely  inquired  into  the  intricacies  of 
the  subject  of  currency  and  coinage,  the  matter  had  better  be 
left.  It  should  as  &tr  as  possible  be  removed  from  the  sphere 
of  party  struggles  or  public  opinion,  and  confided  to  the 
decision  of  experts.  No  doubt,  in  times  past,  kings  have 
been  the  most  notorious  false  coiners  and  depreciators  of  the 

1  In  the  United  States,  for  iiMtance,  shillings  are  jet  nsed  as  a  money  of 
accoont,  althongh  no  snch  coin  has  ever  been  issued  since  the  formation  of  the 
Union  in  1789.  The  actual  silver  shillings  (among  others,  one  12^  cents, 
another  16f  cents)  naed  in  the  colonies  gave  the  reason  for  a  name  and  a  method 
of  computation  which  has  persisted  for  over  a  centnry. 

*  Oj).  eit.,  p.  65. 


82  THE  PRINCIPLES  OF  MONET 

currency,  but  there  is  uo  danger  of  the  like  being  done  ^^ 
modem  times.    The  danger  lies  quite  in  the  opposite  dir^^Q 
tion,  that  popular  government  will  not  venture  upon  the  mx^^^^ 
obvious  and  necessary  improvement  of  the  monetary  system 
without  obtaining  a  concurrence  of  popular  opinion  in  xt9 
favor,  while  the  people,  influenced  by  habit,  and  with  littb 
knowledge  on  the  subject,  will  never  be  able  to  agree  upon 
the  best  scheme." 

In  coining  money,  the  government  can  regulate  ^  the  value 
thereof  only  in  die  sense  that  it  may  select  the  metal, 
State  cannot  *"^^  determine  what  weight  and  fineness  shall  be 
^f  th*^  ^^^^  ^^^  ^  ^^^  ^^^  ^^  ^^  monetary  system,  and  by  what 
name  that  unit  shall  be  called.  The  unit  of  value 
thus  chosen,  moreover,  means  only  that  the  exchange  value 
of  a  certain  number  of  grains  of  fine  metal  has  been  adopted 
as  the  unit  of  the  coinage  system,  thereby  designating  the 
term  in  which  all  prices  and  accounts  are  likely  to  be  kept' 
This  exchange  value,  taken  as  the  unit  of  the  Sjrstem,  may  or 
may  not  be  expressed  in  a  particular  coin.  For  instance,  the 
value  of  28.22  grains  of  pure  gold  may  be  the  unit  given  the 
equivalent  of  a  dollar  in  our  monetary  system,  and  yet  only 
gold  eagles  may  in  fact  be  coined ;  but  one-tenth  of  an  eagle 
would  of  course  be  28.22  grains.  And  if  it  were  possible  to 
secure  another  metal,  like  silver,  whose  value  relative  to  gold 
could  not  change,  an  attempt  might  also  be  made  to  express 
the  unit  in  the  number  of  grains  of  that  other  metal  whose 
exchange  value  was  the  same  as  that  of  28.22  grains  of  gold.* 
Exchange  value  can  be  expressed  only  by  something  having 
exchange  value ;  and  exchange  value  is  not  intrinsic.    The 


1  It  will  be  recognized  the  moment  it  is  mentioned  that  no  gOTemroent  < 
in  anj  economic  sense,  regulate  the  valne  of  a  metal  whose  supply  and  demand 
are  regulated  by  forces  operating  not  alone  in  any  one  country,  but  throoghoat 
the  world. 

>  Wolowski  pointed  out  that  it  is  the  ralue  of  the  gold  coin,  and  not  the  gold 
coin  itself,  which  is  used  as  a  standard  in  expressing  the  ralue  of  a  bushel  of 
wheat.    Question  de  Tor,  p.  7. 

'  This  was  the  case  in  the  first  American  Coinage  Law  of  1792.  In  France 
the  unit  of  value  is  the  franc  in  gold,  but  it  is  coined  only  in  fire,  ten,  and 
twenty-franc  gold  pieces.    Cf.  Jerons,  op.  eit,  p.  71 . 


COINAGE  88 

measure  of  capacity,  for  example^  is  a  bnshel  in  size ;  no 
one  would  think  of  confusing  the  capacity  of  a  bushel  with 
the  oak  or  elm  of  which  the  bushel  measure  was  composed. 
It  is  not  the  wood  or  metal  which  in  the  yardstick  is  a 
measure  of  length,  but  the  linear  distance  called  a  yard,  which 
is  represented  in  the  given  length  of  wood  or  of  metal.  The 
exchange  value  of  23.22  grains  of  gold  is  not  invariable ;  it 
is  subject  to  constant  change.  The  standard  unit  in  gold  or 
lihrer  may  exchange  for  more  or  less  of  other  commodities. 
It  is  a  common  unit  in  which  the  exchange  value  (or  price) 
of  all  goods  may  be  expressed  and  compared.  It  makes  no 
difference  what  the  absolute  weight  of  tiie  unit  is  when  first 
chosen ;  it  is,  however,  of  vital  importance  that  when  agreed 
upon  it  should  be  exactly  fixed  and  permanently  adhered  to. 

The  only  other  main  circumstance  to  be  kept  in  mind  in 
agreeing  upon  a  unit  is  that  it  should  correspond  as  exactly 
as  possible  with  those  of  other  commercial  countries  in  weight 
and  fineness,  in  order  to  facilitate  international  computations 
by  travellers  and  traders.  This,  however,  is  only  a  matter  of 
convenience,  and  is  not  of  indispensable  importance ;  since  the 
equivalents  of  coins  of  the  same  material  but  of  different 
weights  raise  only  the  difficulties  belonging  to  an  arithmetical 
computation.  If  coins  of  all  countries  had  the  same  scale  of 
weights  and  fineness,  it  would  be  more  convenient  to  obtain 
equivalents,  because  the  arithmetical  computation  would  be 
unnecessary. 


84  THB  PRINCIPLES  OF  MONEY 

CHAPTER  in 

THE  STANDARD  QUESTION 

It  is  the  interwt  of  trtrj  oonntry,  that  all  the  cnmnt  mxmi&y  of  It  should  be  of 
one  and  the  Mune  metal;  that  the  MToral  spedea  ihould  be  of  the  aaoM  alloy, 
and  none  of  a  baaer  mixture:  and  that  the  standard  once  thna  lettled,  ahoald 
be  inviolablj  and  immntablj  kept  to  perpetnitj.  For,  whenerer  that  ia  alteied, 
upon  what  pretence  loeTer,  the  pablick  will  loae  bj  it.— Jonr  Locks,  Cmi> 
tidtratimu  on  IntertMt,  p.  290. 

W.  8.  JxvoKS,  op.  cU.,  chap,  zxt.— C  KmmB,  o^,  eU.,  pp.  886-431. — J.  8. 
KiOBOLaoir,  A  Treatite  on  Momff  (8d  cd.,  1895),  pp.  19-80.  ~  RtpoH  of  Momttmrg 
CommiuUm,  1888,  Ptfft  I,  H  19^1.  — X///  AnnwU  RqtoH  U.  8.  />ejNM«Miif  ^ 
Lmbor,  1898. — AtmaU  of  Amoriean  Aoadomff,  1899-1895.    (See  Mctkm  8,  infra.) 

§  1.  CoNCEBKiKG  transactions  begun  and  ended  at  a  given 
time  and  place,  the  question  of  a  standard  is  simple,  and  what 
has  been  said  is  sufficient ;  but  division  of  labor,  the  complexity 
of  modem  industries,  and  the  existence  of  contracts^  running 
over  a  period  of  time,  have  introduced  into  monetary  opera- 
tions the  time  element  in  a  way  which  produces  special 
problems  of  right  and  justice.  In  fact,  most  of  the  monetary 
discussions  of  the  last  few  decades  have  hinged  on  questions 
arising  out  of  the  standard  in  its  relation  to  time  contracts. 
They  have  lain  at  the  bottom  of  the  whole  bimetallic  ques- 
tion. The  standard  question  is,  however,  not  merely  a  matter 
of  gold  and  silver;  it  goes  further  than  that,  and  raises  the  gen- 
eral problem  of  the  value  of  money.  The  essential  idea  in  it 
has  long  been  familiar  in  the  common  requisite  of  stability  of 
value  set  up  for  good  money  —  and  sometimes  it  was  hinted 
at  by  those  who  emphasized  a  separate  function  of  a  store  of 
value,  although  the  latter  is  of  a  different  category.' 

1  Transactiona  finished  on  the  spot,  began  and  completed  at  one  and  the 
■ame  time,  where  money  passes  from  hand  to  hand,  correspond  to  the  legal  con- 
ception of  Ezecnted  Contracts ;  those  in  which  a  period  of  time  elapses  between 
the  making  and  the  fnlfilling  of  the  ag^reement,  correspond  to  Execntorj  Con- 
tracts.   The  standard  question,  therefore,  has  to  do  with  the  latter. 

*  Knies,  op.  ciU,  in  chap,  xii,  points  oat  that  the  law  in  fixing  penalties 
years  ahead,  in  making  regulatioos  for  the  arrangement  of  the  property  of  minor 


f 


THE  STANDARD  QUESTION  86 

The  requirements  of  a  perfect  and  always  just  standard  for 
deferred  payments  are  such  as  to  make  impossible  their  reali- 
sation in  any  one  commodity.    As  has  been  al- 
ready explained,  no  unit  of    measurement   for  tundard 
exchange  value  can  be  found  which  is  not  itself  '^^ 
variable.^    A  commodity  having  exchange  value  may  vary 
in  value  either  from  causes  affecting  itself  or  from  causes 
affecting  the  articles  with  which  it  is  compared.    Of  course, 
this  is  equally  true  of  the  commodity  chosen  as  money,  even 
the  one  which  is  generally  used  as  a  standard  of  deferred 
pBTments.    The  ratios  of  exchange  between  a  money  com- 
modity of  any  kind  and  other  goods  are  constantly  changing 
doling  the  lapse  of  even  short  periods  of  time;  the  change  in 
metliods  of  producing  a  single  staple  article  change  the  pur- 
chasing power  of  money  over  that  article  and,  thus,  the  general 
purchasing  power  of  money.    It  goes  without  saying  that  no 
commodity  exists  which  can  so  change  that  it  can  possibly 
adjust  itself  to  constant  changes  in  the  ratios  of  all  other 
articles.    Hence  a  permanent  and  general  level  of  prices  is 
impossible.    No  chosen  article  can  by  any  stretch  of  the 
imagination  maintain  at  the  end  of  a  time  contract  the  same 
exchange  value  relative  to  goods,  rents,  and  wages  of  labor 
which  it  had  at  the  beginning.     The  desirability  —  and  hence 
the  possibility  —  of  keeping  a  given  level  of  prices  to  the  ad- 
vantage of  both  debtors  and  creditors  has  probably  arisen  from 
the  belief  that  prices  can  be  regulated  wholly  by  operating 
upon  the  standard  in  which  prices  are  expressed.     This  is 

hein,  and  the  like,  aMomet  that  the  ttandard  is  inTariable.  In  each  actiona 
Kniea  finds  that  the  law  accepts  the  existence  of  sach  a  f  onction  as  a  store  of 
Talne  in  monej. 

1  "Strictly  speakinj^,  there  can  be  no  permanent  measure  of  ralue.  A 
meaanre  of  ralne  should  itself  be  inrariable ;  but  this  is  not  the  case  with  either 
gold  or  ail^er,  they  being  subject  to  fluctnations  as  well  as  other  commodities. 
Experience  has  indeed  taught  us,  that  though  the  rariations  in  the  vetlue  of  gold 
and  ailrer  maj  be  considerable,  on  a  comparison  of  distant  periods,  jet,  for  short 
spaces  of  time,  their  ralue  is  tolerably  fixed.  It  is  this  property,  among  other 
excellences,  which  fits  them  better  than  any  other  commodity  for  the  uses  of 
money."  Bicardo,  Works,  p.  270,  note.  Cf.  also,  Wolowski,  Question  de  Tor, 
p|>.  7  ft. 


86  THE  PEIKCIFLES  OF  MONEY 

certainly  falla<3iou8  as  well  as  impracticable.^     Since  price  is 
value  ratio,  its  relation  can  be  changed  by  forces  touching 
either  of  the  temis  in  the  ratio ;  a  fraction  can  be  chBiiged  by 
changes  in  either  the  ttumeratx>r  or  in  the  denomiiiator. 
understanding  the  standard  and  its  relation  to  prices,  one  c 
not  insist  too  strongly  upon  always  keeping  in  mind  the  fun 
mental  value  ratio  of  price.    The  failure  to  do  so  has  led  to 
strange  vagaries  by  eminent  writers  on  the  subject  of  money. 


by- 


§  2.  Before  making  up  our  minds  as  to  the  justice  of  any 
standard,  it  would  be  well  to  examine  into  the  general  forces 
acner»)  for«i    tending  to  change  the  value  of  a  standard.     Al    ij 
J^hJeof  t^*      the  outset,  it  is  clear  that  the  purchasing  powe^f 
itaodafd.  over  other  goods  of  any  money  standard  may  be^' 

altered  (1)  by  changes  affecting  commodities  in  general,  onji 
(2)  by  changes  affecting  only  the  money  standard  itself.        ^M 

The  possibilities  of  changes  in  the  exchange  value  of  goods^* 
are  large.  For  the  sake  of  simplicity,  let  us  for  a  time  assume 
tliat  the  forces  affecting  the  money  standard  are  constant 
Commodities  may  then  change  in  value  relative  to  a  con- 
stant denominator  during  any  period  of  time  which  allows 
such  influences  as  the  following  to  be  felt : 

1.  A  revolution  in  the  political  and  social  status  of  a 
country,  such  as  the  abolition  of  slavery  in  the  South. 

2.  Settlement  of  new  countries »  such  as  the  opening  of  the 
Dacotas,  or  the  Alaskan  gold  mines. 

3.  Opening  of  new  markets,  such  as  the  gmntiug  of 
with  Japan  and  China  to  foreigners, 

4.  Changes  in  taste  and  fashion,  such  as  the  subsidence 
demand  for  certain  straw  goods  or  stiff  woolen  fabrics. 

5.  Gains  in  mechanical  skill  and  Invention,  such  as  the^ 
steam-engine  or  the  spinning-jenny. 

6«  Reduced  cost  of  ocean  and  inland  transportation,  sue 
as  the  lowered  rates  from  Calcutta  to  London  since  1873. 

One  of  the  mai-ked  differences  between  primitive  and  moder 
industry  is  the  time  element ,  or  the  lengthening  out  of 

^  Cty  infiaf  chip,  xi,  §  B, 


THE  STANDARD  QUESTION  87 

productiYe  process,  so  that  in  the  end  the  unit  of  commodity 
may  be  produced  at  a  lower  price.    This  evolution  has  gone 
hand  in  hand  with  the  march  of  invention  and  changes  on  the 
of  mechanical  and  scientific  skill.    At  no  time  Sdi^TthJ 
in  the  history  of  the  world  has  this  progress  pnce  ratio, 
been  so  wonderful  and  phenomenal  as  in  the  last  three  or 
four  decades  of  the  nineteenth  century.    The  fact  that  we 
are  living  in  the  midst  of  it  makes  us  familiar  with  events 
iriuch  are  really  surprising,  nay,  staggering  to  the  imagina- 
tion.   In  any  one  industry,  like  that  of  iron  and  steel  for 
example,  hundreds  of  small  improvements  and  scores  of  great 
ooes  are  constantly  altering  the  methods  and  hence  the  ex- 
penses of  production.     On  every  hand,  in  all  industries,  we 
are  witnessing  an  unparalleled  progress  of  invention  in  labor- 
saving  devices,  in  new  methods  of  extracting  and  manipu- 
lating the  raw  materials  of  the  earth.    Moreover,  there  have 
been  opened  up  to  modem  markets  great  areas  of  new  land 
capable  of  yielding  food  and  other  products.    This  has  been 
made  possible  by  the  marvellous  development  of  ocean  and 
land  transportation,  which,  the  world  over,  has  so  consider- 
lUy  cheapened  the  cost  of  carriage.    These  gains  have  been 
accompanied  by  the  commercial  use  of  the  telegraph  and 
telephone,  which,  giving  instant  knowledge  of  quotations  in 
markets  all  over  the  globe,  have  revolutionized  the  conduct 
of  trade.     Together  with  these  improvements  have  come  the 
minimized  function  of  the  middleman,  the  concentration  of 
iDdostry  on  a  large  scale,  and  a  lessened  cost  of  management. 
Such  influences  as  these  have  lowered  the  expenses  of  pro- 
ducing every  article  of  common  use  in  a  degree  quite  beyond 
the  usual  realization.^ 

The  characteristic  of  this  progress  is  the  possibility  of  ex- 
treme and  comparatively  rapid  changes  in  the  methods  of 
producing  any  one  article,  as  evidenced  in  the  price  of  a  par- 
ticular unit  of  the  commodity.  For  instance,  steel  rails  in  no 
great  length  of  time  have  fallen  by  virtue  of  exceptional 
inYentions  from  $60  to  $30  (and  even  to  $18)  a  ton ;  paper  has 

>  Cf.  Report  of  Monetary  Commiasioii,  1898,  p.  94. 


88  THE  PRINCIPLES  OF  MONEY 

fallen  rapidly  in  price  by  reason  of  the  discovery  of  chemically 
prepared  wopd  pulp ;  and  the  instances  like  these  are  legion.^ 
The  particular  characteristic  of  such  forces  is  a  rapid  and 
extreme  movement  in  the  prices  of  particular  articles,  quite 
independent  of  changes  in  other  goods.  Such  forces  as  these 
operating  to  change  prices  on  the  commodity  side  of  the  price 
ratio  must  be  kept  in  mind. 

From  not  understanding  the  effects  on  expenses  of  produc- 
tion of  the  great  industrial  revolution  now  going  on,  while 
still  noting  the  fact  of  a  serious  fall  of  prices, 
gremihMk  and  masscs  of  men,  under  the  leadership  of  agitators, 
•  ▼wmaniM.  j^^^  blindly  struggled  with  the  wrong  cause. 
Without  realizing  that  it  is  onesided  to  look  for  changes  in 
the  value  of  a  ratio  in  only  one  term  of  the  ratio,  they  have 
been  easily  led  to  the  fallacious  position  that  the  changes  of 
price  have  been  due  solely  to  forces  affecting  the  money  term 
of  the  price  ratio.  In  a  time  of  depression,  aware  of  a  great 
change  of  prices  —  since  invention  and  cheapening  methods 
as  well  as  lessened  demand  also  go  on  more  actively  in  times 
of  depression,  —  a  blind  and  passionate  attack  has  been  made 
on  the  supposed  scarcity  of  the  standard.  This  is  the  natural 
history  of  the  greenback  and  silver  manias — which  have  been 
based  on  the  fallacy  that  prices  were  to  be  fixed  by  manipulat- 
ing the  quantity  of  money  in  circulation.  A  curious  outcome 
of  the  phenomenal  era  of  invention  and  improvement  this  is.    ' 

Passing  now  to  changes  affecting  the  money  side  of  the 
price  ratio,  let  us  suppose  that  all  improvements  in  prodnc- 
ChaiiRMon  ^i^g  Staple  goods  are  at  a  standstill  and  constant; 
iwe"?  thJ  ^^^  w®  ™^y  study  by  themselves  the  effects  of 
price  ratio.  f  orccs  Operating  on  money  itself  to  change  prices. 
These  influences  may  work  either  through  the  demand  for,  or 
through  the  supply  of,  the  money  commodity.    The  marked 

1  Under  former  hand-labor  methods  the  amoant  paid  for  labor  in  making 
one  plough  was  $5.44,  and  the  time  spent  was  118  hoars,  or  $0,046  an  hour ;  but 
bj  modem  machine  methods  the  snm  paid  for  labor  in  making  one  ploogb  is  $0.79, 
and  the  time  spent  3  hours  and  45  minates,  or  $0.21  an  hoar.  For  other  rs* 
markable  instances  see  XIII  Annual  Report  of  Commissioner  of  Labor,  1898. 


THE  STANDARD  QUESTION  89 

peeoliarity  of  the  precious  metals  is  their  durability ;  and  for 
llie  sake  of  brevity  I  may  speak,  in  this  illustration,  of  gold 
as  the  standard  metal.    **"  After  a  long-continued  period  of 
production  the  total  supply,  of  gold  for  example,  assumes 
,  very  large  proportions  as  compared  with  the  annual  output. 
I  Hence  changes  in  the  annual  production  have  a  relatively 
I  small  effect  on  the  total  mass  in  existence.    The  effect  pro- 
duced is  somewhat  like  that  of  adding  a  barrel  of  water  to 
Lake  Michigan ;  it  does  not  perceptibly  raise  the  level  of  the 
kke.     From  this  fact  it  follows  that  when  the  existing 
gapply  of  g^ld  has  become  very  large,  moderate  changes  in 
dnnand  for  it  do  not  produce  any  material  change  in  the 
nlue  of  the  whole  of  the  large  mass  in  the  world.    A  falling 
(A  in  the  demand  would  be  dissipated  over  the  whole  of  a 
hige  quantity ;  a  considerable  increase  in  the  demand  (even 
if  not  at  once  balanced  by  an  increased  supply]^  must  be  dis- 
tribated  over  the  whole  mass  already  in  existence."  ^    The 
vDild  supply  must  be  kept  in  mind,  since  the  proper  value  of 
ID  exportable  article  like  gold  is  always,  except  for  slight 
t0mporaiy  fluctuations,  its  world  value.    Consequently,  ow- 
ing to  the  durability  of  a  precious  metal  chosen  as  a  stand- 
ttd,  ordinary  changes  in  demand  and  supply  cannot  produce 
any  extreme  or  rapid  changes  in  its  world  value.     It  is  not  to 
be  understood  from  the  above  that  the  value  of  a  precious 
metal  like  gold  may  not  be  influenced  by  changes  in  its  demand 
and  supply,  but  only  that  these  changes  cannot,  imder  present 
conditions,  be  sudden  or  extreme. 

In  studying  the  causes  affecting  changes  in  the  value  of  the 
standard,  then,  it  must  be  clear  tliat  rapid  and  extreme  fluc- 
toations  must  be  assigned  to  forces  working  on  commodities, 
and  that  only  slow  and  gradual  fluctuations  can  be  expected 
from  forces  working  on  any  standard  whose  supply  is  so 
great  as  to  give  it  stability.  For  instance,  the  existing  sup- 
ply of  wheat  is,  roughly  sp>eaking,  the  annual  supply ;  and 
the  change  in  the  demand  for,  or  supply  of,  wheat  can  pro- 
duoe  rapid  and  extreme  fluctuations  in  its  price.     While,  on 

>  Report  of  Monetarj  CommiMion,  1898,  p.  95. 


40 


THE  PEINCIPLES  OF  MOKir 


the  other  hand,  an  annual  production  of  nearly  $300,000^000 
seems  to  have  had  little  recent  effect  on  the  total  supply 
gold,  and  on  its  world  value,  bo  far  as  it  haa  been  manifi 
in  any  tendency  toward  rising  prices* 

§  8,  We  have  now  arrived  at  the  underlying  reason 
the  comaaercial  nations  of  modem  times  have  in  fact  gradually  , 
Wbj  gMid  ti*s  selected  the  precious  matals  as  the  most  desirabl^H 
cSS&aMT^^  commodities  for  a  standard*  And  since  the  enor^^ 
■umUrd*  mous  pioduction  of  gold  during  the  last  half  of  the  |^ 

nineteenth  century  (being  about  $6,500,000,000  in  1860-1900),  [[^ 
the  total  maas  of  gold  haa  by  its  quality  of  durability 
sumed  such  a  condition  of  stability  that  its  world  value 
leas  likely  to  be  shaken  by  ordinary  changes  in  its  own  des 
and  supply  than  that  of  any  other  known  commodity,* 
accounts  for  #ie  fact  of  the  tendency  toward  the  adoption  of  i 
gold  standard  in  recent  years.    It  is  the  explicable  prefer 
of  the  business  world,  based  on  correct  economic  analjfi 
which  has  been  crystallized  in  a  long  series  of  legislatiij 
since  1853*    This  is  why  it  may  be  said  that  standards  i 
created  by  governmeirts,  hut  that  governments  necessanlj 
adopt  the  standards  created   by  their  citizens.     If  by  anj 
chance  they  run  counter  to  those  preferences,  disaster  to 
prices  and  industry  generally  results.     To  be  sure,  gold  ma| 
not  be  a  perfect  standard,  hut  the  mere  fact  that  it  has  beeij 
chosen  by  the  most  enlighten^  commercial  nations  —  by  a  de 
mand  from  within,  not  by  imposition  from  with  out  ^ —  is  strong 
proof  that  it  is  the  fittest  single  commodity  for  practical 

^  Th<>  Tirj  reiftODB  which  cauM  iu  to-daj  to  prefer  g^ld,  led  Ricardo  iie&rij 
ce&tmj  zgo  to  prefer  flilrer : 

*'  SilTer,  too,  ii  much  mora  stead j  in  its  Talne^  in  cooseqaence  of  ita 
imd  i^pplj  being  more  regiilar ;  tjid  wiU]  foreifrti  cQiintri«»  regulate  the  Tt.] 
of  their  mucej  by  the  value  of  lilver^  there  can  he  no  don bt  that,  on  the  who] 
lilver  is  preferable  to  gold  as  a  Btandardj  a&d  ihonld  ba  p«rmAneiitly  odofpl 
fur  Chjit  purpose."     Works,  p.  403. 

But  tha  extraordiiiarj  and  rapid  Sactnattons  m  the  ralae  of  silref^  ei^n 
eompmiion  with  eommodtties  in  general,  m  the  six  months  of  1S7&^  and  in  the 
penud  i  to  mediately  after  1890,  has  put  It  ont  of  the  conteit  witti  gold  on  tl 
ground  of  stabiUtj  of  raiae.   Bat  this  question  will  be  fully  treated  in  Volume 


H 


THE  STANDARD  QUESTION  41 

IB  a  standard.  While  possessing  all  the  other  qualities  of  a 
desirable  money-material  (portability,  indestructibility,  homo- 
geneity, divisibility,  and  cognizability),  it  possesses  for  natural  ^^ 
leasons,  more  than  any  other  article,  the  one  requirement  of  ^ 
itabihty  of  value,  so  far  as  causes  affecting  itself  are  con-, 
eemed ;  and  that  requisite  is  the  most  essential  thing  in  the 
foDction  of  deferred  payments. 


r 


§  4.  No  commodity,  however,  not  even  gold,  has  perfect 
ilidiility  of  value.  Since  extreme  and  rapid  changes  may  be 
produced  in  the  exchange  value  of  the  standard  tim  ituidMd 
(even  of  gold)  by  forces  acting  solely  on  commod-  4i>**<^<^ 
ities  (snd  perhaps  not  touching  gold  itself,  except  indirectly), 
itiB  impossible  to  maint^ain  unchanged  ratios  between  the 
ityicUzd  and  goods.  The  standard  question,  therefore,  is  not 
one  relating  merely  to  the  choice  between  gold  and  silver ;  ^ 
it  ie  a  larger  question  than  that;  it  is  the  problem  granting 
the  inevitable  changes  in  prices,  as  to  how  justice  may  best  be 
nbeerved  between  debtors  and  creditors  in  time  contracts. 
But,  at  least,  it  is  not  reasonable  to  charge  the  inevitable 
ehanges  in  the  value  of  a  standard  arising  from  commodities 
to  influences  working  only  on  the  standard  commodity.  This 
has  been  the  wide-spread  cause  of  monetary  delusions ;  and  it 
is  well  to  emphasize  the  error.  But  whatever  we  may  think 
of  this  error,  we  must  all  admit  that  no  one  commodity  can 
possibly  be  a  perfect  standard  of  deferred  payments ;  and  the 
standard  question  becomes  an  inquiry  into  the  means  by  which 
the  closest  approximation  to  perfection  may  be  reached. 

Seeing  the  difficulties  in  exacting  justice  in  long  contracts, 
it  has  been  suggested  that  the  voluntary  action  of  mankind 
may  be  trusted  to  furnish  a  practical  solution  of  ^^^  „^^  ^^ 
the  problem  without  the  interference  of  the  state.  *  •tandard. 
But  in  a  regime  of  complicated  property  relations,  in  which 

^  For,  ervn  if  bimetalliflm  were  practicable,  there  would  be  changes  in  the 
ttpentH  of  prodnction  of  wheat,  steel,  etc.  as  compared  with  the  daal  standard.  | 
AttlMBMMt,  bimetallism  would  work  to  keep  gold  and  silyer  from  changing  rela-J 
tiftlj  to  each  other ;  bat  it  wonld  not  keep  goods  in  general  from  changing  re] 
tirdj  to  gold  and  silTer  thus  nnited  in  bimetallism. 


42 


THE  PRraCIPLES  OF  MONET 


contraots  are  being  constantly  interpFeted  and  enforced  by  I 

eourtB^  tlie  legal  reasons  for  ibe  clear  definition  of  what  1 

standard  is,  its  content  and  weight,  are  orerwhelining,    Thi 

must  be  some  means  of  defining  what  is  a  legal  acquittal  ( 

a  debt,  and  of  enforcing  the  decree  of  the  courts.^    An  aco 

rate  and  authoritative  interpretation  of  monetary  tenns  ill 

part  of  this  system.     The  necessity  of  a  standard,  howe^ 

ahould  not  be  confused  with  the   reasons  determinijig 

choice  of  the  standard  material. 

The  duties  of  a  state  to  the  parties  to  a  contract  may,  ho 

everi  be  easUy  exaggerated.     This   may  happen   when 

_       ,  .         claim  is  made  that  debtors,  or  creditors,  should  I 
Duty  of  the  .      .    i    ,         ,  *  ..    j 

iutttotiM        protected  by  the  government  from  any   unfofl 

seen  changes  in  price  which  may  have  altered  i 

value  of  money  during  the  existence  of  a  contract.    The  ^ 

ness  world  buj^  and  sells,  perfectly  aware  of  the  imposeiti 

ity  of  finding  a  perfect  standard;  when  entering  into  a  lo 

contract^  eveiy  m^i  knows  that  he  takes  a  risk,  be  it  small  or 

great,  of  altemtions  in  the  value  of  money  relative  to  goc 

It  is  no  defence  to  plead  that  he  could  not  have  known  enoT] 

about  money  to  understand  this  as  a  part  of  his  problem^ 

is  clmracteristic  of  our  world  that  a  premium  exists  on 

who  do  know  these  things  and  act  accordingly.    The  pc 

ity  of  industiial  changes  which  would  affect  prices  and  of  in| 

ences  which  would  touch  the  money  metal  and  change  the  va 

of  a  standard  is  as  much  a  part  of  the  necessary  risk  in  roah 

contracts  as  the  knowledge  of  the  soundness  of  a  buyer  i 

credits     It  is  one  of  the  risks  which  a  man  must  assuti 

taking  up  any  industrial  enterprise >     If  such  be  the 

would  be  carrying  the  plea  for  government  interference 

foolish  extreme  to  require  the  state  to  compensate  any  i 

every  business  man  for  all  mistakes  of  judgment  which  may 

have  involved  him  in  risk  and  loss.     Every  one  who  entais 

into  a  time  obligation  assumes  certain  risks  which  he  must 

face,  and  of  which  he  must  accept  the  consequences.     To 

throw  the  ordinary  risks  of  business  upon  the  state  is  a 

^  CI*  infra,  elui|s.  idw,  £  l. 


THE  STANDARD  QUESTION  48 

fBraum  of  flocialism  which  one  need  not  discuss  further.  Bnt 
sneh  a  policy  as  this  is  clearly  involved  in  the  frequent  propo- 
mk  that  the  government  should  so  control  the  currency,  in- 
ensse  or  decrease  its  quantity  (generally  increase  it,  of  course), 
tibai  prices  might  be  regulated  artificially,  and  contracts  thereby 
be  affected  through  action  upon  the  vsdue  of  the  standard. 

Likewise  in  regard  to  national  and  municipal  indebtedness, 
itihonld  be  understood,  as  one  of  the  deterrents  against  piling 
up  a  huge  mass  of  long  bonds,  that  events,  out-  K«tkmai 
ride  of  state  control,  may  operate  so  that  the  ^^ 
hnden  of  debt  may  become  much  heavier  as  decades  go  by. 
Hie  result  may  be  the  very  opposite,  and  prices  may  rise ;  but 
Alt  contingency  is  not  to  be  safely  counted  upon.  The  risk 
h  bng  contracts  should  be  faced  by  the  state,  just  as  it  must 
be  &eed  fay  good  business  men  in  private  enterprises.  There- 
iore,  after  a  heavy  weight  of  public  debt  has  been  incurred,  it 
if  iriuning  sentimentalism  to  bemoan  the  possibility  of  an  in- 
ereaee  of  the  burden  due  to  falling  prices,  even  if  it  be  granted 
tint  this  increases  the  burden.  Since  this  may  be  a  natural 
lenilt  of  improvements,  why  was  this  risk  not  foreseen  ?  If 
Uk  imderstanding  of  the  imperfectability  of  a  standard  of  de- 
fened  payments  should  eventually  lead  to  a  discouragement 
of  the  tendency  to  an  improvident  increase  of  public  debts, 
and  to  an  encouragement  of  a  tendency  to  cover  all  expenses 
out  of  current  receipts,  it  would  be  an  undisguised  blessing. 

§  5.  The  moral  and  economic  considerations  entering  into 
file  relations  of  debtors  and  creditors  are  not  always  kept  in 
mind.    In  legislation  on  money,  it  is  sometimes   whocompow 
aaaamed  that  the  debtor  class  should  be  favored  ^«  ^fbtor 

ClAM  f 

as  far  as  possible.  But  who  compose  the  debtor 
class?  It  is  true,  for  instance,  that  a  bank  is  a  debtor  to  the 
foil  extent  of  all  its  assets.  Large  capitalists  frequently 
have  outstanding  obligations  to  meet  far  in  excess  of  their 
actoal  capital.  Merchants  are  constantly  doing  business  to 
an  amount  far  beyond  their  own  capital.  They  borrow  ad- 
ditional means  by  discounting  their  paper,  and  create  the 


44 


THE  PRINCIPLES  OF  MONEY 


greater  proportion  of  general  indebtedness.  The  largest  part 
of  the  obligations  of  a  country,  so  far  m  amounts  are  coq^| 
cerned,  necessarily  arises  from  those  who  engage  in  the  more 
extensive  tranfiactions.  But  the  political  outcry  in  favor  of 
the  debtor,  heard  in  many  places,  has  no  origin  in  an  altru* 
istic  desire  to  help  the  large  operators;  and  yet  they  form  the 
most  important  part  of  the  debtor  class.  The  attitude  above 
referred  to»  doubtless,  had  its  inception  in  the  mistake  that 
tiie  poorer  membera  of  the  community  were  the  main  con-j 
stituents  of  the  debtor  class*  A  poor  man  may  be  in  debt^- 
but  the  total  burden  of  the  poorer  class  is  but  a  fraction  of  > 
the  obligationB  of  a  few  large  institutions,  and  legislation ]| 
giving  preference  to  debtors  will  serve  the  poor  man  infin*  I 
itely  less  tlian  it  does  the  large  producer*^ 

But  is  the  legislation  favoring  debtors  as  against  creditom 
for  the  good  of  the  country,  morally  or  economically?  Sup- 
KormUnd  pose  that  a  salaried  clerk  has  saved  something 
tfoM^ri'riJblor  ^^^^  ^'^  meagre  stipend  to  provide  for  old  age 
And  creditor,  q^  possible  death  ;  and  in  the  course  of  five  years 
that  he  has  accumulated  $1000,  which  he  wishes  to  invest 
safely.  He  lends  the  sum  to  a  farmer  in  KansaSf  secured  by 
a  mortgage  on  his  farm*  The  frugal  clerk  sees  his  savings 
of  five  years  pass  out  of  sight;  to  the  farmer  is  given  the 
power  to  consume  for  hie  own  use  all  that  the  $1000  will 
purchase.  After  the  farmer  baa  obtained  the  satisfaction 
which  this  sum  commands,  is  he  thereby  exempt,  merely  be- 
cause it  is  spent,  from  the  moral  and  legal  obligation  to 
return  SIOOO  with  interest  to  the  clerk,  who  went  througbfl 
painful  sacrifices  to  save  the  amount,  and  who  has  as  yet 
never  enjoyed  anything  from  the  results  of  his  saving?  The 
farmer  took,  and  he  must  meet,  the  risks  of  borrowing,  of 
production,  of  crops,  of  markets,  of  time  contracts.  Now 
suppose  the  crops  fail,  or  that  through  foolish  errors  of  Judg- 

1  The  moft|^|^  bonds  of  railwmya  ftlona  In  the  United  Ststea  &ro  §4,200,000,00(1 
while  ft]]  the  mortgaigefl  on  "ftcrea"  i«  99^200,000^000.  And  the  tnortgag^i 
on  **  acreii  "  in  many  caaes  result  from  operationa  of  well-to-do  men.  Cf.  ^ 
1890,  Heal  Eatftte  Mortg.,  p.  B7,  and  TraovportatioEi,  p,  U. 


THE  STANDARD  QUESTION  45 

ment  the  fanner  is  unable  to  repay  the  loan  on  maturity. 
Does  that  satisfy  his  obligations  to  the  lender?  By  no 
means.  If  mistakes  have  been  made,  if  the  fanning  has  been 
iDJndicious,  or  if  the  loan  was  fraudently  consumed,  so  that 
tfaeie  is  nothing  to  show  for  it,  then  it  is  clear  that  the  $1000, 
hj  the  process  of  lending,  has  passed  from  the  thrifty,  honest, 
ind  fore-sighted  to  the  less  efficient  or  less  honest  member  of 
society.  Should  the  latter  be  favored  at  the  expense  of  the 
foimer?  Clearly  not.  On  the  other  hand,  suppose  that  the 
fumer  had  made  a  good  investment  of  the  loan,  had  shown 
skill  in  the  use  of  the  new  capital  on  his  farm;  then  the 
bonower  will  have  earned  more  than  he  borrowed,  and  he 
will  have  the  means  to  repay  the  loan.  In  such  a  case  no 
question  is  ever  raised  as  to  the  right  of  repayment;  the 
discusBions  are  raised,  as  a  rule,  solely  by  the  debtors  who 
have  displayed  inefficiency  or  dishonesty.^  Economically 
speaking,  the  creditors  as  a  rule  are  those  who  have  savecL 
the  thrifty,  steady,  temperate,  and  industrious  members  oi^ 
sodely,  who  set  a  future  gain  above  a  present  indulgence. 
This  class  is  worth  more  to  the  community  than  the  shiftless, 
eaqr-going,  improvident  incapables  who  are  ever  looking  for 
outside  help  to  make  up  for  inside  weakness  of  character.  So 
&r  as  creditors  can  be  separated  from  debtors  as  a  class, 
there  is  no  ground  for  the  assumption  that  debtors  should 
be  &vored  as  against  the  creditors.  Both  should  receive 
impartial,  even-handed  treatment,  regardless  of  class. 

It  is  an  economic  common-place,  that  a  change  in  the 
Talue  of  the  standard  is  of  importance  mainly  to  those  who 
have  entered  into  time  contracts.     After  a  given  level  is 

^  An  objector  might  saj  that  the  abore  condiuioii  is  right,  but  that  it  does 
Mt  oorer  the  owe  where,  bjr  a  fall  of  prices,  the  debtor  is  obliged  to  pajr  back 
mon  than  the  ralne  of  the  $1000  at  the  time  he  borrowed  (and  this,  too,  from 
cuiet  bejond  his  control).  I  repljr  that  this  is  one  of  the  risks  of  a  time  loan, 
ud  the  debtor  most  keep  that  in  mind  when  he  borrows,  and  when  he  fixes  the 
rate  of  interest.  Prices  might  have  risen ;  in  that  case  he  would  probablj  make 
M  offer  to  pay  back  what  the  creditor  woold  lose  by  receiving  onlj  $1000. 
Momofver,  in  the  United  States,  the  average  term  of  farm  loans  is  onljr  4|  jrean 
{neCeDias  1890,  Real  Estate  Mortg.,  p.  107),  and  the  changes  in  the  standard, 
if  it  weie  gold,  would  be  inconsiderable  in  that  period. 


46 


THE  PRINCIPLES  OF  MONEY 


reached,  whether  one  of  high  or  low  prices,  payments  may  j 
on  without  touching  seriously  the  reUtions  of  debtors 
CiM»Jegii-       creditors.     The  process  of  transitiou  from  013 
Uthm  standard  to  another  of  greater  or  less  value 

the  whole  cause  of  difficulty.     Hence  no  govemmeiLt  should 
willingly  iDitiate  a  policy  which  may  lead  to  a  change  in  1 
value  of  the  standard,  unless  it  advisedly  proposes  to 
class  legislation.    To  go  from  a  metallic  to  a  depreciated  paj 
Btandaid  would  raise  the  level  of  prices^  and  permit  the  debta? 
to  cheat  the  creditor  of  a  |m.rt  of  his  inveatment ;  or»  to  go^. 
frora  one  metallic  standard  to  another  one-half  as  valuablaS 
would  be  a  blow  at  all  the  existing  money  contracts  of  the^' 
business  community,  and  would  create  indescribable  disorder 
and  uncertaintyi     A  measure  which  temporaiily  aims  by  class 
legislation  to  benefit  the  poor*  niay  suggest  a  policy  by  which 
the  rich —  who  can  bring  most  pressure  to  bear  on  legislatures 
—  may  obtain  special  legislation  for  their  own  advantage* 
This  is  a  two-edged  sword ;  it  is  best  never  to  resort  to  it< 


§  6.  The  standard  question  has  come  to  the  fore  in  conse- 
quence of  the  industrial  revolution  already  described^  which 
hj  improvements  has  surprisingly  cheapened  the 
iQ  pcrjodf  0*      expenses  of  producing  each  unit  of  goods,     Prog^ 

improvement*  ■      j.i_        _a  j   *  ii*  *         i_  t_ 

ress  m  the  arts  and  fallmg  pnces  here  have  gone 
together.  To  be  sure,  a  full  vision  should  take  into  account 
the  possibility  of  a  period  of  rising  prices  (such  as  that  from 
1850  to  1865),  but  the  present  generation  appears  to  be  dis- 
turbed mainly  by  the  problem  of  justice  in  time  contmcts 
only  when  prices  are  falling.  It  is  not  possible  here  fully 
to  discuss  the  causes  of  the  fall  of  prices;  the  fact  of  the 
decline  is  aaaumed.  In  this  regime,  however,  of  invention 
and  improvements,  the  change  in  the  value  of  the  standard  is 
traceable  to  the  commodity  side  of  the  price  ratio,  and  not  to 
the  side  of  money.  In  such  a  caBe,  what  is  the  problem  ?  IH 
1880  A  lent  to  B  ilOOO,  which  in  that  year  bought  z  com- 
modities, and  B  agreed  to  repay  $1000  in  gold  in  1900.  If 
processes  of  production  have  made  great  advances,  then,  in 


THE  STANDARD  QUESTION  47 

1900, 91000  will  buy  x  +  n  commodities.  Should  B  repay  in 
1900  only  that  sum  of  money  which  would  buy  the  same 
qoantity  and  quality  of  goods  which  he  could  have  obtained 
with  the  $1000  in  1880?  Would  that  be  more  just  than  le- 
papng  11000  in  gold,  which  in  1900  buys  z+n goods  ?  Has 
A  any  right  to  the  n  goods  in  addition  to  the  x  goods? 
For  that  matter,  has  B  any  ground  for  claiming  the  n  goods  ? 
Where  is  the  justice  ?  If  only  x  goods  are  returned  to  the 
creditor,  he  loses  the  gain  from  progress  in  the  arts,  while  that 
^  goes  to  the  debtor.  On  the  principle  that  the  return  of 
tte  same  quantity  and  quality  of  goods  at  the  end,  which  was 
obtuned  at  the  beginning,  of  a  contract  is  the  true  rule  of 
justice  between  debtors  and  creditors,  the  multiple  standard 
has  been  proposed. 

Hie  prices  of  a  long  list  of  staple  articles,  whose  quota- 
tiooi  have  been  collected  by  a  government  commission,  and 
iveraged  daily,  weekly,  monthly,  and  yearly,  .j,^  ^,^  ,^ 
when  added  up,  give  a  sum  of  money  which  will  or  maitiDto 
bay  the  same  quantity  of  the  same  goods  at  dif- 
ferent periods  of  time.  The  multiple  unit  is  the  same  quan- 
tity of  the  same  goods  at  any  time.  It  can  be  translated  into 
money,  or  money  into  the  multiple  standard,  by  the  given 
table  of  prices.  If  in  1880  9100  bought  the  articles  of  the 
list,  and  if  in  1900,  owing  to  the  gains  of  the  arts,  the  list 
could  be  purchased  for  $90,  a  contract  drawn  in  terms  of  the 
mnltiple  standard  could  be  discharged  by  the  sum  of  money 
(190)  which  in  1900  bought  the  same  goods  which  $100 
bought  in  1880.  Thus,  the  experiment  does  not  involve  the 
abolition  of  the  money  standard,  but  may  go  on  alongside  of 
it  It  is  assumed  that  the  government  will  authorize  the  en- 
foicement  of  contracts  drawn  in  terms  of  the  multiple  stand- 
ud,  bat  that  its  use  will  be  wholly  voluntary.  The  machinery 
could  easily  be  set  up  by  any  government  without  awaiting 
the  action  of  another  state.  And  if  two  parties  to  a  contract 
belieyed  that  such  a  standard  would  subserve  strict  justice,  it 
would  be  open  to  them  to  adopt  it  It  would  be  well  imder- 
Btood,  moreover,  that  in  case  of  a  progress  in  the  arts  the 


48 


THE  PRINCIPLES  OF  MONET 


gaioH  of  Bociety  under  a  multiple  standard  are  lost  by  the 
creditor,  and  won  by  the  debtor. 

An  attempt  has  been  made  by  the  Committee  of  the  Econo- 
mic Section  of  the  British  Association  in  1888  to  introduce  a 
system  of  weigh feiogt^  according  to  their  relative  importance  in 
the  annual  expenditure^  into  a  list  of  goods  large  enough  to  be 
recommended  as  a  tabular,  or  multiple*  standard  of  payments 
for  Great  Britain,  as  follows : 


WhfSMl^      .    .    ,    * 

Bftdej 

Oatg    .    .    ,   .    , 
Pottttoea,  rice,  etc 

Meat   ,    *    .    *    . 

Fiih     .    .    «    .    . 

Cb66M,  hnUew,  milk 


Bmt  . 

T«4      * 
B«er    . 

Spiriti . 
Wiiw    . 

Tobacco 

Cotton 
Wool  . 
Silk  . 
Leather 


Coal     . 
Iron 
Copp*r 
Lead,  dnc. 


tin 


Timber 
Petroletim 
Indigo 
Flux  and 
Falio  oil 
Caoutchouc 


Imneed 


ture  per 
AiuiuiB  on 

0OO.0O0I 


L3O 


20 


30 


-10 


20 


10 


FrioMtolMtekuf 


Gmiette  aTorage,  Enelwh  whe*t 
Englijth  barley 
"        EogJiJih  oata 
At.  ill] port  pri<»  English  potatoet 

Market  quotatioDfl,  lira  meat^ 
StDith^dd 

Board  o(  Trade  ReturQi;  mrer^ 
m^  per  ewt.  landed 

Cheese  and  butler^  averige  im- 
port price 

At,  tmooii  price,  r^flued  suew 

^*  "      tea 

At.  eipoit  price,  beer 
At.  impoH  price,  niirit#  ^ 

*'     wme 

At.  import  price,  tobaeco 

"     cotton 
'*         "  "      wool 

"     tawiilk 
"     hides 

At.  export  price  coal 
Market  price,  Scotch  pig-ifoii 
At,  import  price,  copper  ore 
"     leadoie 

Arerage  import  price 


1  Qt  Boirlej^  The  Elemento  of  Statiitict,  p.  £25. 


liaa 
■Uadaid. 


THE  STANDARD  QUESTION  49 

It  has  been  urged  also  that,  in  propriety,  the  price  list  of 
tihe  multiple  standard  should  include  rates  of  wages  and  rents 
in  such  a  way  that  their  relative  importance  to  ^  ^ 
other  expenditures  should  be  expressed.  In  the  ^^^ 
Tery  periods  when  the  arts  are  progressing,  the 
efficiency  of  labor  is  being  increased,  and  wages  are  higher. 
Hence  the  purchasing  power  of  the  standard  over  services  and 
goods  will  not  be  correctly  stated  if  compared  only  with  units 
of  goods.  It  is  desirable  also  to  have  a  means  of  comparing 
die  standard  with  the  efforts  and  rewards  of  human  labor. 

In  favor  of  the  tabular  standard,  it  is  to  be  noted  that  it 
does  not  introduce  in  any  way  a  new  medium  of  exchange. 
Its  use  would  emphasize  clearly  the  fact  that  ex-  Tabular  sund- 
changing  can  be  done  by  a  means  quite  separate  JJ|*Ji|'i'^^^J^ 
from  that  of  the  standard ;  and  it  should  reveal  of  •zdumfft. 
the  fallacy  of  supposing  that  the  difiSculties  of  falling  prices 
are  necessarily  bound  up  in  computations  as  to  the  abundance 
or  scarcity  of  a  medium  of  exchange.    Falling  prices  are  an 
expression  of  a  readjustment  in  the  exchange  ratios  between 
the  standard  commodity  and  goods,  but  the  fall  is  not  in  itself 
a  proof  that  the  medium  of  exchange  has  become  scarce,  any 
more  than  a  rise  of  prices  would  be  a  proof  of  its  abundance. 
Ab  to  its  practical  working.  General  Walker  ^  gives  the  fol- 
lowing illustration :  ''  For  example,  suppose  I  sell  a  house  to- 
day, the  value  of  which,  as  agreed  upon  between  jt,  practical 
myself  and  the  purchaser,  is  $20,000,  one-half  to  ''^'^n*- 
"be  paid  down  at  the  time,  two-tenths  to  be  paid  in  two  years, 
three-tenths  in  five  years,  with  interest  on  the  last  two  sums. 
One-half  of  the  purchase  money,  being  payable  at  once,  is 
paid  in  money,  $10,000  in  gold  or  bank  notes.     For  the  rest, 
the  purchaser  and  I  look  to  the  last  published  statement  of 
the  government  commissioner,  and  find  the  value  of  a  unit 
of  the  tabular  standard  to  be  $12.50 ;  that  is,  $12.50  will  now 
purchase  the  bill  of  goods  which  form  the  standard.     The 
poichaser  then  gives  me  two  notes,  one  for  320  units  of  the 
tabular  standard,  payable  in  two  years,  and  one  for  480  units, 

^  Political  Economj  (adranced  conne),  p.  371. 
4 


THE  PRINCIPLES  OF  MONET 


payable  in  five  yeai^,  with  interest  at  six  per  ceo 
annum,  meanwhile.  At  the  end  of  the  first  year»  the  twe 
parties  interefited  look  in  the  official  gazette,  and  find  tl 
value  of  the  unit  at  tlie  time  to  be  $12.75.  There  Is  then 
be  paid  one  year^B  interest  on  each  note,  amounting,  in  the 
of  the  first  note,  to  19.2  units,  which  obligation  is  discharge* 
by  the  payment  of  *244.80  in  current  money;  and,  in  the 
caae  of  the  second  note,  to  2S,8  units,  which  obligation  is  dii 
cbai^  by  the  payment  of  I367.20, 

**At  the  end  of  the  second  year  the  value  of  a  unit  q 
the  tabular  standard  might  be  ascertained  to  be  $13  o 
$12.25;  in  the  latter  case  the  interest  on  the  first  note  i 
discharged  by  the  payment  of  $235.20,  and  that  on  the  seconi 
note  by  the  payment  of  $352.80>  If,  however,  the  value  c 
a  unit  has  been  ascertained  to  be  $13,  the  interest  on  the  firi 
note  will  be  $249,60,  and  that  on  the  second  note  $374,40. 

*'But  the  principal  of  the  first  note,  320  units,  is  now 
be  paid*    A  similar  computation  shows  that,  if  the  value 
the  tabular  standard  is  $12.25,  the  maker  of  the  note  mug 
pay  $3920  to  discharge  his  obligation ;  if  the  value  of  the 
unit  be  $13,  he  must  pay  $4160*''  ■ 

Such  being  the  simplicity  of  the  plan,  the  objection  has 
been  made  ^  that,  in  practice,  it  could  not  be  used  by  mer^ 
W&iker'i  chants,  buying  and    selling,  giving    notes   anM 

oii]«cti<»ii.         taking  them  every  day,  because,  with  the  tabular 
standaid  it  would  be  impossible  for  the  merchant  to  strik^ 
an  exact  balance  between  assets  and  liabilities.     I  am  nofl 
able  to  see  the  force  of  this  objection  against  the   multl-^ 
pie  standard  itself.    Suppose  the  business  account  stands 
fallows : 


300  utitta  M.S<  due  Jaa«  1 
200 '     Oct  1 


500  unit*  M.S,  p»j&bk  Dec.  1 


If  on  any  one  date  the  merchant  wished  to  know  where 
stood  he  could  ascertain  it  at  once  in  terms  of  tabular  units? 
If  on  June  1st  the  units  were  equal  to  $15,  on  October  lst_ 
1  F.  A.  Walker,  Pol.  Ecoii.,  p.  374. 


THE  STANDARD  QUESTION  61 

to  $20,  and  on  December  Ist  to  il8,  it  is  evident  that^  while 
the  money  eqniyalents  wonld  not  be  the  same  at  any  one 
date,  there  would  be,  under  a  comparison  of  multiple  units, 
no  change  in  the  relations  between  buyer  and  seller,  and  con- 
sequently a  return  in  every  case  of  the  same  purchasing 
power  expressed  in  goods.  The  supposed  objection  brings 
into  a  clear  light  the  essential  nature  of  the  multiple 
standard. 

The  real  difficulty  with  the  proposed  tabular  unit^  how- 
eyer,  resides  in  the  fact  that  it  cannot,  by  its  very  nature, 
be  tried  as  the  sole  and  only  standard,  —  supplant-  i^bniar  ttuid. 
ing  entirely  a  metallic  standard,  —  but  that  it  S2if^S^ 
must  be  regarded  as  a  device  to  be  used  only  in  p"*'*^ 
conjunction  with  a  metallic  system.  If  one  were  to  argue  in 
byor  of  a  multiple  standard  as  the  sole  standard,  the  reason- 
ing would  presuppose  a  general  condition  of  barter ;  since  a 
nnit  (stated  without  the  prices  of  the  constituent  goods) 
would  represent  only  a  certain  quantity  and  quality  of  goods. 
Such  a  basis  for  discussion  of  a  modem  problem  is  impracti- 
cable, and  may  be  summarily  dismissed.  Therefore  all  treat- 
ment of  the  multiple  standard  necessarily  includes  a  list  of 
goods  having  price  quotations  in  a  monetary  standard.  The 
tabular  unit,  therefore,  at  its  best,  can  never  be  more  than  an 
expedient  to  aid  in  making  up  for  the  inevitable  shortcom- 
ings of  any  single  commodity  which  may  be  used  as  a  standard 
of  deferred  payments. 

Keeping  this  in  mind,  it  is  easy  to  understand  that  mer- 
chants would  be  unable  to  balance  their  accounts,  if  bills 
payable  and  receivable  were  expressed  in  both  multiple  and 
monetary  units.  That  is,  the  real  difficulty  arises  only  when 
two  different  standards  are  used  in  the  same  accounts.  If  a 
merchant  were  to  owe  multiple  units  and  also  to  receive 
money  units,  then  his  accounts  could  not  in  the  nature  of 
things  balance.  For  these  reasons  business  men  would  de- 
cline to  use  the  multiple  standard  together  with  a  monetary 
standard  on  the  same  grounds  on  which  they  would  object  to 
the  confusion  arising  from  using  any  two  standards. 


62  THE  PRINCIPLES  OF  MONEY 

Whether  merchantB  would  use  it  in  their  daily  accounts  or 
not,  however,  does  not  settle  the  validity  of  the  multiple 
Baal  objwstfon  Standard.  If  it  is  rejected,  it  must  be  on  other 
uSJd^ubSw  grounds.  In  my  judgment,  the  reason  why  it 
•*»'*<**^'  would  probably  never  be  adopted  in  the  mass 
of  every-day  transactions  running  no  longer  than  three  or 
four  months  is  that  the  term  is  not  long  enough  to  introduce 
serious  time  risks,  and,  therefore,  that  the  resort  to  the  mul- 
tiple standard  to  escape  these  risks  is  not  necessary.  The 
money  unit  in  short-time  operations  is  generally  free  from 
the  difiSculties  which  have  led  to  the  proposal  of  a  multiple 
standard. 

A  point  in  favor  of  the  new  standard  has  been  made  by 
Mr.  Jevons  *  that  its  adoption  would  introduce  stability  into 
social  relations,  and  render  commercial  crises  less  intense. 
**  Periodical  collapses  of  credit  would  no  doubt  recur  from 
time  to  time,  but  the  intensity  of  the  crises  would  be  miti- 
gated, because  as  prices  fell  the  liabilities  of  debtors  would 
decrease  approximately  in  the  same  ratio."  If,  however, 
over-trading  and  commercial  crises'  result  from  creating 
promises  to  pay  beyond  the  property  really  possessed  and 
available,  it  is  difficult  to  see  why  over-trading  might  not, 
by  the  usual  influences  of  sanguine  human  nature,  create  as 
dangerous  conditions  with  one  kind  of  standard  as  with 
another. 

Under  a  money  standard,  debts  remain  fixed  in  given 
monetary  units ;  while,  as  prices  fall,  goods  sell  for  less  rela-  f 
tively  to  debts.  That  is,  in  such  a  case  debts  do/ 
wd  would  not  not  shrink  with  falling  prices.  Under  a  multiple 
Btigate  ernes,  g^^jj^^^  ^  prices  fall,  the  Unit  of  indebtedness 
as  expressed  in  money  falls  with  them.  Mr.  Jevons's  idea, 
doubtless,  is  based  upon  the  fact  that,  if  prices  fall,  the 
debtor  would  always  gain  by  the  multiple  standard.  This 
standard  is  one  which  favors  debtors,  but  at  the  expense 
of  the  creditors.  It  is  not  to  be  accepted  that  a  system 
which  in  panics  would  work  damage  to  creditors,  just  to  the 

1  Op,  at,,  p.  883.  *  See  infra,  ch&p.  ir,  §§  6,  7. 


THE  STANDARD  QUESTION  58 

extent  that  it  would  save  the  debtors,  would  mitigate  the 
severity  of  crises.  If  the  careful  and  efficient  members  of 
society  are  injured,  it  may  be  true  that  the  recovery  may 
come  again  sooner  than  if  the  weaker  members  of  society 
were  hurt;  but  society  is  hit  hard  in  its  vital  parts  just  the 
same,  and  the  injustice  ought  not  to  be  overlooked. 

In  the  collapse  attending  a  commercial  crisis,  on  the  other 
hand,  prices  may  fall,  not  from  causes  due  to  the  progress  of 
the  arts,  but  from  goods  being  thrown  on  the  gmm  wb«ra 
macket  in  supply  beyond  the  demand ;  and  this  Sd^kTioUrand 
ma;  go  on  to  such  an  extent  that  the  depression  ^fo^ 
of  prices  may  be  continued  long  enough  to  have  an  effect  on 
time  contracts.    Suppose,   in    1870,  A's  current  liabilities 
amounted  to  920,000,  and  that  the  multiple  unit  which  was 
125  in  1870,  fell  to  $20  in  1875,  after  the  panic  of  1878. 
The  fall  of  prices  we  will  suppose  to  have  been  due  solely  to 
the  readjustment  of  demand  and  supply,  and  not  to  changes 
in  expenses  of  production.    If  A's  obligations  had  been  ex- 
pressed in  multiple  units,  he  would  have  owed  800  of  them 
in  1870 ;  and  in  1875  he  could  have  discharged  his  obliga- 
tions by  800  units,  or  by  $16,000  in  money.    So  far  this  looks 
merely  at  his  liabilities.    In  case  A  had  no  assets,  and  must 
now  grow  wheat  or  produce  coal  to  pay  off  his  debts  (the 
expeDses  of  production  remaining  unchanged),  the  multiple 
standard  would  afford  real  and  just  relief  to  the  debtor,  be- 
cause a  change  in  the  efficiency  of  production  has  been  left 
out  of  the  question.     But  another  situation  might  produce 
veiy  different  results :  If  A  had  on  hand  considerable  quanti- 
ties of  goods  in  storehouses,  his  means  of  paying,  under  a 
contract  expressed  in  terms  of  a  multiple  standsurd,  would 
shrink  pari  pa$su  with  the   shrinkage  of   his  debts.      As 
prices  fell  he  would  still  have  to  pay  the  same  quantity 
and  quality  of  goods  as  when  prices  were  high.     Hence  a 
debtor  would  not  be  relieved  of  a  part  of  his  burden  in  such 
a  case.    That  would  happen  only  if  his  debts  were  expressed 
in  fixed  imits  of  money,  which  might  be  discharged  by  the 
original  amount  of  goods  purchasable  at  the  beginning  of 


H 


THE  PRINCIPLES  OF  MONET 


tba  contract,  but  obtainable  at  the  maturity  of  tlia  eoui 
by  a  less  sum  of  njoney* 

However,  obligations  running  for  short  periods  are  not 
ones  for  which  merchants  are  ever  likely  to  use  the  multiple 
standard ;  but  the  maas  of  obligations  which  merchants  wil 
in  fact,  be  carrying  when  a  crisis  comes  are  likely  to  be  she 
time  obligationa.  Hence,  in  practice,  the  multiple  standi 
will  in  all  probability  never  be  applied  to  most  short-time  o1 
ligations;  and  consequently  the  favorable  results  an tictpai 
by  Mr.  Jevons  from  the  use  of  a  tabular  standard  in  the 
time  of  a  crisis  could  not  poasibly  take  place.  Its  useful^ 
ness,  whatever  it  may  be,  must  be  found  only  in  long-timd 
obligations- 

In  such  long  contracts  the  usual  problem  is  to  secure  jus- 
tico  when  prices  fall  because  of  changes  in  the  arts  and  in  the 
To  whom  productive  efficiency  of   society.     The  practi 

f?om^prlJJ?ii     question  is  to  whom  do  the  n  goods  belong,* 
^  ^  the  capital  of  $1000  which  A  owned  in  1880,  pur^ 

chased  ar  goods*  and  ^ve  forth  a  certain  industrial  result 
the  then  state  of  the  arts;  and  if  that  capital  while  in 
hands  of  B,  the  borrower,  due  solely  to  the  general  proj 
of  the  BTtE  for  which  neither  A  nor  B  is  directly  the  ca 
gave  forth  in  1900  a  greater  industrial  result  (such  as  moi 
tons  of  coal  or  more  yards  of  cotton  cloth),  does  that  addi- 
tional product— n  goods — belong  of  right  to  A  or  to  B? 
Should  the  result  of  the  efficiency  of  society  go  to  the  credi- 
tor or  to  the  debtor?    The  question  is  similar  to  that 
deciding  to  whom  should  go  the  increased  value  of  Ian- 
arising  from  the  growing  numbers  of  the  community,  —  to 
the  land-owner  or  to  the  tenant.     The  triumphs  of  chemisi 
and  physics,  the  marvels  of  invention  and  machinery,  becoj 
the  general  property  of  the  industrial  world,  and  any  oi 
debtor  or  any  one  creditor  can  claim  no  geneml  property  in 
these  results.     Therefore   neither  A  nor  B  has  any  moral 
right  to  the  additional  n  goods  which  have  issued  from 


urt-     ■ 


di^i 

strM 
oii^ 


3  See  p.  47. 


THE  STANDARD  QUESTION 


ss 


greater  efficiency  of  labor  and  capital  under  the  improved 
conditions  in  1900.* 

Tbe  mnltiple  standard,  howereri  by  its  very  nature  assumes 
tiiat  perfect  justice  ia  i^udered  throngh  the  return  by  tbe 
debtor  to  the  creditor  of  only  the  x  goods ;  that  whAit  tb« 
is^  tbe  multiple  standard  works  to  give  tbe  n  ^^^^ 
goods  (due  to  tbe  progress  of  the  arte)  to  tbe  i»^ori  debtor 
dd)(ort  ^iid  to  take  them  away  from  tbe  creditor.    And  yet 
it  baa  been  seen  that  tbe  debtor  has  no  moral  right  to  this 
exeess  of  goods.    Tbe  conolusion,  if  tbe  above  r^aoning  be 
leoepted,  is  ineTitable,  —  that  the  multiple  standard  in  a  caae 
of  falling  prices  due  to  the  progress  of  society  does  not  sub- 
fltrve  perfect  justice;  if  it  is  to  be  rejected,  it  must  be  on 
this  ground,  and  not  on  that  of  impracticability.* 

Oo  the  other  band,  the  existing  gold  standard  distinctly 
tbrows  the  n  goods  into  tbe  hands  of  the  creditor.    If  the  debtor 
is  forced  to  pay  back  the  same  sum  of  gold  in  1900   wiien  tbc^ 
wWcb  was  borrowed  in  1880,  the  fall  of  prices  in  ^^^^^ 
those  twenty  years  allows  the  $1000  to  buy  not  *re"iitor- 
only  the  %  goods,  but  the  a?  +  n  goods.     And  yet,  as  we  saw 
above,  tbe  creditor  has  no  moral  right  ftr  m  to  tliis  excess  of 

'  I  atmot  wtc^pt  Gceefttl  Wilker^*  eondwon  tFrbdplei  of  Politioil  Ecott^ 
9mj^  p.  3TS,  {463)  an  the  multipk  iUndmrd :  **  In  than,  it  b  &  meua  of  girlng 
tad  tftkiDg  (^redii  without  receitmg  ku  uneftitidd  adrsujtsge  or  suffenng  an  Dud^ 
MtTtd  injilfj  thrckngb  flactuationj  in  the  ^tdue  of  moDCj."  Ou  tbe  contrBij,  i% 
iptdiGill/  gt^CB  tbe  iQCT6iifled  increment  to  one  p&rtj  to  th«  contrw^t  who  had 
KtMnied  it. 

^  **  One  of  the  grmrmt  and  most  obTioiu  practical  def ecta  of  the  iH>ii«ii&ipti<m 
icuduti  ii  its  inadeqaicj  as  a  flaBdard  of  deferred  pajmeDts.  If  id  T'  A  hot' 
ttmn  1100  from  B  when  both  are  making  $1  a  dsj*  and  prices  are  at  a  point 
fipieitaled  bj  100,  bow  mnch  fthoald  A  repaj  in  T"'  when  both  aie  makitig  $2  a 
iaj  and  ^neee  are  at  a  point  represented  bjr  95  ^  A  ia  es  able  to  r«pa7  |200  ai 
B  wti  to  loan  $100,  and  jet  accorditig  to  tbe  coosntnption  ataodard  B  ehonld  w- 
tmm  mlj  195.  Imagine  the  i^verve  cm»,  in  which  pricea  line  and  wagei  fa!], 
ud  it  wiU  be  itill  mure  appurent  tba(  tbe  comvamption  etandaid  ie  whoUj  oii»- 
ikd',  ^rlj  eqmtable  from  the  standpoint  of  tbe  comnmer,  or  creditor^  bntcom- 
plittlf  OMTiited  to  roite  or  f  31  pre**  the  reUtive  ability  of  the  debtor  or  prodncer 
loKpaj.*'  T.  S.  Adami,  Jour.  Pol  Econ.»  Dec.  190L  p.  II.  Thii  analjiiA  drawi 
the  LiiM  btfweea  debtor  and  creditor  a«  if  it  alio  aeparatoit  the  conenmef  ftom 
Uu  pnxleci]'  with  equal  eaactneia. 


66  THE  PRINCIPLES  OF  MONEY 

goods  —  at  least  not  on  the  basis  of  our  present  reasoning. 
Therefore,  the  gold  standard  does  not,  in  a  case  of  falling 
prices  due  to  improvements,  subserve  perfect  justice  between 
debtor  and  creditor,  and,  if  it  is  to  be  justified,  it  must  be  for 
some  other  reason. 

The  ground  for  claiming  the  right  of  the  creditor  to  the  « 
goods  (as  given  by  the  gold  standard)  has  been  based  on  the 
(t^^„  q{  right  of  the  lender  to  retain  his  relative  position 

tiiecraditor.  i^  society.*  If  in  1880  $1000  gave  him,  in  the 
then  condition  of  the  arts,  a  certain  position  relatively  to  other 
men  in  general  and  to  other  productive  forces,  he  should  be 
granted  in  1900  the  additional  gains  which  would  replace  him 
in  the  same  relation  to  other  capital,  and  return  him  the  same 
advantages  which  he  would  have  retained  if  he  had  kept  his 
ilOOO  in  his  own  employ,  producing  and  reproducing  from 
1880  to  1900.  As  a  lender,  A  might  say:  ^^I  loan  this  sum 
to  B  on  condition  that  he  should  not  deprive  me  of  the  gains 
of  society  which  I  might  reap,  if  I  used  the  $1000  myself  and 
did  not  lend  it  at  all."  This  gain,  of  course,  is  different  from, 
and  in  excess  of,  normal,  or  pure  interest  on  capital. 

If  any  government  should  establish  the  machinery  of  a  mul- 
tiple standard,  enforce  contracts  drawn  in  its  terms,  and  allow 

^  Professor  Ross  supports  ibis  Tiew  as  foUows :  **  Ten  yeus  tgo  I  lent  job 
the  proceeds  of  a  coach  and  four,  which  procured  for  me  ak  that  time  m  eertaia 
•ocial  distinction.  Now  yon  retnm  me  a  coach  and  fonr,  bnt  the  objectiTe  atHitj 
Is  not  the  same,  and  I  am  the  loser.  Owing  to  the  general  industrial  prograsi 
and  the  consequent  abundance  of  coaches  and  fours,  I  must  now  have  a  ooaeh 
and  six  to  enjoj  the  same  distinction.  ...  It  would,  therefore,  seem  but  just  thai 
the  creditor  should  participate  in  the  benefits  arising  from  general  industrial 
progress  snfflcientlj  to  compensate  him  for  the  depreciation  of  that  portion  of  hia 
wealth  doToted  to  satisfying  the  needs  of  bis  social  nature."  Annals  Amar. 
Acad.,  1892,  III,  pp.  [304-305].  It  is  difficult  to  see  why  this  process  abonld  be 
confined  to  that  part  of  bis  wealth  described  as  of  a  social  nature.  Would  not  the 
reinrestment  of  any  sum  returned  by  the  debtor,  and  the  income  from  it,  tooeh 
the  creditor's  social  position  1  If  so,  the  creditor,  should  he  choose  to  go  into  maa- 
ufacturing,  would  be  quite  as  sensitire  to  his  relatire  standing  as  compared  wi^ 
that  of  other  manufacturers,  as  be  would  be  as  to  his  equipages.  If  the  debtor 
did  not  replace  bim  in  the  former  reladre  position  of  wealth  in  general,  as  com- 
pared with  his  business  rirals,  the  creditor,  on  the  same  grounds  as  thoae  given 
by  Professor  Boss,  would  bare  a  right  to  complain  of  injuitiee. 


THE  STANDARD  QUESTION  57 

a  Toluntaiy  choice  between  gold  and  the  multiple  gtandaxd, 
the  parties  to  a  contract  would  then  be  able  to  settle  the 
question  of  justice  in  a  practical  way,  through  poetical  im- 
agreement  on  the  rate  of  interest    If  the  gold  Jh^J^*"**^ 
standard  were  used  —  since  the  n  goods  would  go  ^^  intentt. 
to  the  creditor  under  such  a  standard — then  certeinly  no  more 
than  the  ordinaiy  rate  of  pure  interest  could  be  chaiged ;  that 
is,  the  rate  would  be  low.    If  the  multiple  standard  were  used 
— since  the  n  goods  would  go  to  the  debtor  under  such  a  stand- 
aid  —  then  any  demand  on  the  part  of  the  creditor  for  a  share 
of  this  gain  would  probably  result  in  raising  the  late  of  inter- 
est   In  this  way  one  standard  would  go  with  a  low  rate,  the 
o&er  with  a  high  rate,  of  interest,  and  the  choice  between  the 
two  would  be  immaterial.^ 

An  application  of  this  general  principle  might  be  made  to 
the  use  of  silver,  or  of  any  other  standard  desired  by  a  portion 
of  the  public    If  it  were  found  that  silver  had  a  gj,^^  ^  ^ 
^ue  so  different  from  that  of  gold  (with  different  "^^ 
sources  of  supply  and  different  forms  of  demand)   oro£r 
that  its  value  could  not  be  maintained,  even  by 
bunetallism,  at  a  fixed  relation  to  gold,  it  would  still  be  pos- 
sible to  use  it  as  a  standard.     By  manufacturing  silver  coins, 
which  merely  certified  their  weight  and  fineness,  and  by  en- 
forcing at  law  contracts  drawn  in  terms  of  silver  coins,  just 
as  in  units  of  a  multiple  standard,  any  persons  could  volun- 
tarily use  silver  in  long  contracts,  if  both  parties  believed  that 
metal  to  be  the  best  standard  of  deferred  payments.    It  would 
not  be  necessary  or  just  to  make  it  a  legal  tender  for  contracts 
drawn  in  terms  of  any  other  standard ;  nor  need  any  relation 
between  gold  and  silver  be  fixed  upon.'     A  distinct  name 

^  For  a  farther  detailed  study  of  the  relation  between  interest  and  the  Talne 
of  the  ]nindpal  in  inTeetmente,  see  a  rery  admirable  paper,  in  the  mathematical 
aelhod,  bj  Irving  Fiiher,  entitled  "  Appreciation  and  Interest,"  Amer.  Econ. 
AwK^  XI,  no.  4.  pp.  33I-U2,  Aug.  1896. 

*  This  idea  is  as  old  as  John  Locke,  who,  seeing  silrer  in  general  use,  said  of 
gold:  "It  is  not  necensary  that  it  should  hare  a  fixed  valae  set  on  it,  by  pnblick 
ntbority;  it  is  not  convenient  that  it  should,  in  its  varying  proportion,  have  a 
Kttkd  price.  Let  gold,  as  other  commodities,  find  its  own  rate."  Considera- 
tuns,  1691,  p.  SS9,  in  McCnUoch's  Political  Economy  (London,  1870). 


58 


THE  PRINCIPLES  OF  UONET 


«rd  along' 
side  ocb«r 
ftUadmfdi 


should  be  giveo  to  a  unit  of  silver  which  could  be  used  in  I 
actions,  and  which  should   be   unmistakably  different  tmn 
that  given  to  the  unit  of  any  other  standard. 

In  a  similar  way,  a  definite  name  being  given  to  a  cer 
weight  and  fineness  of  gold,  and  contracts  drawn  in  its  tanns 
Goidisaiund*  beuig  enforceable  by  the  courts,  there  would  b© 
no  need  (except  on  judicial  grounds)  of  legal* 
tender  laws  tor  gold.  It  is  only  wheni  onder  a 
given  name  («-^.,  a  dollar),  different  things  are  assigned  the 
same  legal  value,  or  given  a  certain  relation,  that  tTt>uble 
arises ;  in  such  cases  legal-tender  laws  are  uecessary  to  pr&« 
vent  doubt  as  to  what  the  dollar  means.  Hence  in  such  i 
experiment  gold  should  stand  by  itself,  silver  by  itself^ 
there  should  be  free  choice,  based  only  upon  commercij 
expediency.  Any  members  of  society  should  have  the  privi- 
lege of  completing  their  tiunsactions  in  the  way  moiit  ser- 
viceable to  themselves*  If,  then,  the  commercial  world  by 
universal  habit  should  choose  to  use  gold^  there  could  be 
no  objection  ;  eveiy  citizen  should  be  as  free  to  use  gold,  if  he 
prefers  it«  as  to  use  silver.  Likewise  a  silver  standard  should 
no  more  be  enforced  on  those  who  prefer  gold,  than  gold 
should  be  forced  on  those  who  prefer  silver.  But  in  the  end, 
without  doubts  silver  would  cease  to  be  used^  if  its  choice 
were  made  voluntary.^  The  duty  of  the  state  is  to  give  each 
citizen  the  largest  individual  liberty  consistent  with 
protection  of  the  rights  of  others. 

§  7.  In  view  of  the  possible  changes  in  the  value  of 
metallic  standard,  wheat  (or  ^'com'')  has  been  often  sug^ 
Acorn  gested  lu  the  past  as  an  article,  which  in  the 

fuadmrd.         course  of  good  and  bad  seasons  has  preserved  a 
remarkable  uniformity  in  its  relation  to  the  value  of  goods  in 

1  Should  txitb  gotd  ind  »ihar  be  etUblif  hed  m  itftndudf » is  tb«  mftiuier  ao^ 
gelled  &bore«  dailjr  pmes  woald  come  Co  Iw  footed  Aootier  or  ljil«r  in  ib«  una 
«t«i)daid  gcQerally  preferred  bj  Iha  cummtinit^;  because  quot&tiotifi  in  two 
iUkDdftfdA  would  be  li^gbjy  incoDveBJeot.  In  thh  wij^  hy  volimtiiFj  ActioOf  tba 
gQ\d  aundai-d  would  probftbly  be  graduallj  Adopts,  ftnd  we  dioiild  in  Ifi*  end 
li&Te  pncticftllj  tbe  lame  ajBtem  as  Ibat  now  in  nae. 


TOE  STANDARD  QUESTION 


69 


general*  This  solution  waa  offered  because  of  the  fear  of 
cbaiigies  origiBating  on  the  side  of  the  moiie;  commodity, 
such  aa  the  poesibiUty  of  a  great  fall  in  the  value  of  gold  due 
to  tbe  discoTeries  in  Australia  and  California  about  1850.  In 
the  period  from  1850  to  1860  the  durability  of  gold  had  not 
yet  created  the  stabilitj  due  to  an  immense  existing  supply 
vUch  now  obtains;  so  Uiat  the  gold  staodaid  had  not  aa 
voLBj  dements  in  its  favor  then  as  now. 

Mr.  Catmes  ^  mged  the  disadvantages  of  a  depreciating  gold 
steiidud  aa  follows ; 

«*  Means  may  be  found  In  the  framing  of  setttements  and 
leasee,  and  in  the  selection  of  investments^  to  mitigate  its 
•evenly;  the  grand  rule  being  to  avoid  as  mucb  as  possible 
purely  monetary  seeurities,  such  as  the  funds,  mortgages,  pref- 
rrtnce  shares,  and,  in  general,  investments  the  returns  on  which 
do  not  rise  with  the  advance  in  pricea  and  salaries,  Tbe  fore- 
sight of  Lord  Burleigh,  warned  by  the  ehangea  which  be  saw 
around  him,  effected  in  the  sixteenth  century  the  partial  substi* 
tatiou  of  com  for  money  rents,  and  in  this  way  the  incomes  of 
oolleges  and  other  inetitutions  have  been  preserved,  which 
but  for  this  precaution  would  have  long  einoe  dwindled  into 
iQ^gnificanoe/* 

The  phenomenal  fall  in  the  price  of  wheats  dae  to  the  com* 
petition  of  the  fertile  American  grain  fields  with  English 
wkeat  lands  —  coupled  with  the  extraordinary  reduction  in 
iBtes  of  ocean  and  land  transportation  —  baa  recently  wrought 
haTDC  with  the  income  of  English  colleges.  Such  an  experi* 
enm  has  pi'oved  how  inadequate  this  standard  is.  Indeed^ 
a  fltandaid  composed  of  a  single  article,  having  no  stability 
of  value  due  to  durability,  is  at  the  mercy  of  any  great  agri- 
ttiltuial  or  industrial  revolution. 

A  practical  example  of  wheat  as  a  standard  appears  in  the 
caae  citad  by  Mn  Giffeu,^  in  connection  with  the  study  of 
jjidex  numbers.     From  the  Corn  Betums  an  index  number 


^  littft  in  Pohtidd  Economy,  pp.  ]53-]&9^ 
t  EeonQQijc  Jcmrnd,  IS93,  (».  4S7. 


See  ftbo  Jcvani,  i^,  cit,,  p,  326. 


60  THE  PRINCIPLES  OF  MONET 

was  obtained  from  which  the  tithe  average  in  England,  and 
the  corresponding ySar#  prices^  in  Scotland,  were  fixed: 

**  Here  the  prices  are  derived  from  returns  of  actual  transao- 
tions  on  an  extensive  scale,  and,  for  fixing  the  tithe  average  in 
England,  the  prices  are  the  average  of  the  sales  of  a  year  over 
the  whole  country.  To  get  rid  of  all  inequalities  this  immense 
labor  is  undergone.  Finally,  while  the  price  for  each  year  is 
fixed  in  this  way,  a  farther  attempt  to  get  rid  of  inequality  is 
made  by  arranging  for  the  payment  of  the  tithe  on  a  septennial 
average —  the  average  in  each  year  of  the  prices  of  the  sevoi 
years  previous.'* 

Evidently  the  stability  of  this  standard  is  open  to  all  the 
objections  made  above. 

§  8.  Another  attempt  to  solve  the  standard  question  is  to 
be  found  in  the  proposal  to  adopt  as  the  unit  of  deferred  pay- 
ThtiAbor  ments  the  day's  work  of  an  average  unskilled 
standard.  workman.  By  this  plan  it  is  hoped  to  obtain  a 
measure  of  value  which  will  keep  pace  with  the  sacrifice  of 
human  effort,  and  which  cannot  greatly  vary  from  time  to 
time  in  regard  to  goods  in  general.  Of  course,  this  scheme 
originated  in  the  Marxian  idea  that  goods  depend  for  their 
value  upon  the  labor  cost. 

As  a  matter  of  economic  theory  there  are  many  and  valid 
objections  to  believing  that  the  value  of  a  commodity  is  regu- 
lated solely  by  the  quantity  of  labor  expended  upon  it.  This 
theory  pays  no  regard  to  the  fact  that  the  supply  of  any  article 
is  also  attributable  to  capital  as  well  as  to  labor.  Nor  is  this 
all :  exchange  value  is  not  due  solely  to  considerations  affect- 
ing supply.  The  capacity  of  a  thing  to  render  satisfaction 
to  human  beings  is  an  element  affecting  value.  Clearly 
enough,  labor  is  but  one  of  several  elements  combining  to 

^  In  Febmary  or  March  in  Scotland,  the  sheriff  with  a  jury,  after  haviag 
expert  teetimony,  fixes  the  prices  of  grain  for  the  current  jear,  which  role  in  aU 
grain  contracts  where  no  price  has  been  specified,  and  in  calculating  the  monsijr 
Talne  of  rents,  etc.,  pajable  in  grain.  The  procedure  is  called  ttriking  thejlan^ 
The  word  is  a  form  ot/euar,  or  fee,  in  Scottish  law. 


THE  STANDARD  QUESTION  61 

give  value  to  a  commodity.     In  fact,  the  labor  standard  falls 
with  the  failure  of  the  labor  theory  of  value. 

But  even  if  this  theory  of  value  ^  were  admitted  to  be  sound, 
there  are  insuperable  objections  to  the  use  of  labor  as  a  stand- 
ard.   The  essential  failing  is  to  be  found  in  its  indefiniteness 
and  uncertainty.    It  would  be  fatal  to  a  measure  of  length  if 
the  unit  varied  in  length.    In  the  case  of  human  effort,  it 
needs  no  expert  to  see  that  the  labor  and  sacrifices  of  work- 
ingmen  are  so  variable  as  to  remove  all  possibility  of  reference 
to  it  as  a  fit  standard.    The  sacrifices  of  the  same  laborer 
engaged  on  the  same  work  are  not  constant :  in  the  morning 
hours  the  task  may  be  easy ;  in  the  last  hours  of  the  afternoon 
his  fatigue  may  entail  heavy  sacrifice ;  one  day  he  may  be  half 
sick,  another  day  he  may  be  in  the  vigor  of  health.    In  truth, 
the  labor  of  men  on  certain  goods  is  not  comparable  with  that 
of  the  same  men  when  producing  the  same  goods  at  different 
periods  of  time,  —  to  say  nothing  of  the  fact  that  the  state  of 
the  arts  in  that  industry  may  differ  in  separate  periods  of  time 
and  may  wholly  change  the  character  of  labor  operations. 

Moreover,  the  exactions  made  of  unskilled  workmen  cannot 
be  compaied  with  those  made  of  highly  skilled  workmen ;  and 
yet  both  are  often  used  in  making  a  given  article.  A  unit  of 
the  former  kind  is  not  in  the  same  category  as  one  of  the 
latter  kind  of  labor.  Physically  speaking,  doubtless  the  sub- 
jective effort  of  the  diamond  cutter  is  infinitely  less  than  that 
of  the  coal  miner :  in  fact,  they  are  not  comparable  things. 
If  it  be  proposed  to  use  labor  as  a  standard,  which  kind  shall 
be  taken  as  the  unit?  Since  the  problem  is  to  serve  out 
justice  between  a  debtor  and  creditor,  would  the  labor  of 
the  debtor  or  of  the  creditor  ^  best  render  impartial  justice  ? 

^  Profenor  Alfred  Marshall  seems  to  regard  labor  as  a  possible  ineasare  of 
the  Talne  of  gold :  "  I  wonld  like  to  say  that  when  it  [appreciation  of  gold]  is  so 
contrasted,  and  used  as  denoting  a  rise  in  the  real  ralue  of  gold,  I  then  regard  it 
tt  measured  by  the  increase  [wrongly  printed,  **  dimination  "]  in  the  power  which 
gold  has  of  parchasing  labour  of  all  kinds  —  that  is,  not  only  manual  labour,  but 
the  labour  of  business  men  and  all  others  engaged  in  industry  of  any  kind." 
Q.  9625,  Appendix  to  Final  Report  of  the  Royal  Commission,  etc.  (1888). 

*  Cf.  Fetter,  Annals,  1895,  V,  p.  [886]. 


62 


THE  PRINCIPLES  OP  MONET 


The  difficulties  involved  in  the  labor  standard,  in  short,  ate  ^ 
evidently  so  many  and  so  damaging  as  to  make  it  proBUess  tH| 
discuss  it  seriously.*  ^ 

Since  the  attempt  to  use  subjective  effort  is  impossible,  the 
proposal  to  employ  the  quantitative  payment  for  the  subjec- 
tive labor^  in  the  form  of  wages,  is  equally  unsatisfactoiyf 
because  wages  cannot  be  claimed  to  be  an  accurate  measnre^ 
of  the  laborer's  subjective  sacrifice.  A  tabulation,  moreover^ 
would  be  inaccurate,  sinoe  one  cannot  average  units  of  dif- 
ferent kinds*^ 

§  9i  The  question  of  justice  to  debtors  and  creditors  hasle 
to  an  interesting  recent  discussion  by  American  economists,^ 

A  labor  standard  based  on  the  marginal  disutility 
of  ubor  it  ft      of  labor^  has  been  proposed  by  Professor  J.  B, 

Clark,  who  holds  that  an  ideal  standard  may  be 
secured  which  *'  will  divide  equally  between  debtor  and 
creditor  the  gains  that  come  through  industrial  progress*"* 
This  is  founded,  of  course,  on  his  theory  of  value  and  wages,* 


I  Cf-  Kielioisoir,  MoaetAfj  Froblemi,  pp.  3S3-^36,  He  e»Jls  atumtion  iko  to 
the  ftttetnptd  to  put  the  Inbof  it&Ddftrd  ioto  prflctioil  nm,  m  foUowi  ;  *'  tn  AdOod 
Socudistic  ic hemes  it  boa  been  propoted  U»  iaine  labour-tic keC«  r^osI  comniDdi* 
tiei  or  eervlces^  mnd  ererytbiiig  bemg  expreued  in  termi  of  ao  mach  labo?, 
excbangoft  miglit  be  made  on  this  baaii"  (p.  SO). 

^  For  a  fuller  discuuioii  a«  to  weighting  such  a  standutl^  eee  Tt  S.  Adamit 
Index  Kttoiben  uad  the  Standard  of  Value.    Jour*  PoUt.  Eooa.,  Dee.  1901,  p.  16. 

<  J,  B.  Cl*rk,  The  Ultimate  St&ddatd  of  Valii%  Tale  ReTiew,  Not.  1892, 1, 
358-274,  —  /^(f^.,  The  Gold  Standard  of  Cnirenej  in  the  light  of  Recent  Theory, 
Fol.  Set,  Qnar.,  Sept.  1S95,  X,  3S9-403.  —  E.  A.  Boas,  The  Btaedardof  Deferred 
Pajmeuts,  Aunala  of  the  American  Academj,  Not.  1892,  III,  293-305.  <^  1 6*4^ 
The  Total  Utility  Standard  of  Deferred  ^Aymeu%»flbid,^  NaT.  i893«lV,  425-44 L 
—  F.  Fetter,  /6iJ*,  May,  189*,  V,  682-896,  — L.  S.  MerrUm,  The  Theory  of 
Final  Utility  in  it*  Eelation  to  Money  and  the  Standard  of  Deferred  Paymenti, 
Ibid.,  Jan.  1893,  III,  483-501.  —  ffeiU*  May.  1894,  IV,  9^9-972.-0.  L  Qrmn, 
Value  and  ita  Measurement,  Yale  Revinw,  Feb.  1899,  VII,  383-404.  — A.  M. 
Hyde,  Gold,  Labor  and  Gommoditiea  as  Standards  of  Valaef  Jo  or,  PoL  EeoiL, 
Dec*  1897,  VI,  95-9S.--J.  fieacom,  A  Standard  of  Value,  Qoar.  Jom.  Eooil, 
Oct.  1895,  X,  54-66.  — 

«  Aun^,  1895,  X,  p.  398.  ■ 

*  "  The  Talue  of  a  ihiug,  then,  b  the  measure  of  the  effectlre  ierrice  that  IT 
render!  to  society  as  a  whole.    Tka  eerrice  14  suhjeetiTely  eetimat^d.     The 


THE  STANDARD  QUESTION 


By  applying  the  theory  of  maiginaJ  utility  in  a  peculiar 
way  to  labor  engaged  in  pioductioo,  ha  finds  that  the  laat 
additinnal  supply  of  goods  is  due  to  the  final  increment  of 
kbor.  •*  This  virtually  unaided  labor  is  the  only  kind  that 
fsui  meftfinre  values.  Attempts  to  use  labor  standards  have 
oome  short  of  succesa,  because  of  tiieLr  failure  to  isolate  from 
Cftpjtal  the  labor  to  which  products  are  due/'  Applying  to 
society  in  general  the  conclusion  he  has  reached  aa  to  an 
isolated  man,  the  values  of  different  complements  of  social 
goods  are  ^^  measured  by  the  mere  duration  of  the  collective 
labor  that  creates  them.**  The  disutility  of  marginal  labor, 
then,  ifl  the  proper  measure  of  the  value  of  goods* 

Impiovements  in  the  processes  of  industry  would,  in  the 
eoune  at  years,  have  the  effect  of  greatly  lessening  the  dis- 
utility of  marginal  labor.  Therefore  if,  at  any  initial  time, 
i  money  unit,  such  as  a  dollar,  should  be  selected^  which 
would  purchase  a  constant  fraction  of  a  day's  labor,  and 
which  would  represent  a  constant  amount  of  disutility  of 
tbfc  labor,  this  unit  would  command  the  amount  of  goods 
secured  by  this  part  of  a  normal  day's  labor^  and  it  would  be 
10  ideal  standard  of  deferred  payments.  For,  as  the  progress 
of  lociety  goes  oUt  a  given  disutility  of  labor  would  yield  a 
luger  amount  of  commodities,  and  require  a  less  number  of 
kors  of  labor.  Hence,  a  monetary  unit,  representing  this 
filed  disutility  of  labor,  would  buy,  aa  time  passes,  **a  con- 
tinaally  increasing  amount  of  general  commoditiea,  and  it 
would  buy  a  decreasing  numlmr  of  hours  of  labor.  ,  .  . 
Labor  that  diminishes  in  actual  amount,  as  measured  in 
iicnis,  and  that  diminishes  in  sacrifice  entailed  —  this  affords 
ft  standard  of  payment  by  which  debtor  and  creditor  may 

rtutdird  for  meuoring  it  is  the  lacHfice,  id  final  p«riofIj»  of  Labor,  eatuJ^  on 
md^tf  m  scquifing  iu  By  establigbtog  an  equalitjr  between  Ihe  gr&tificmtioii 
ccid«md  oa  itMlf  bj  article*  different  iq  kiad  and  Ibe  element  paiOf  societj  is 
tlik  to  ooinpiare  the  qoantitieB  of  gi^tifictttioQ  in  the  difFereat  caoev  with  eacb 
rtlm.  TI]G  price  of  thisge  correeponds  to  tbe  pain  of  mcqniAitioo^  of  which  the 
■uSiii  tbeBaerifice  ectaited  od  society  bj  the  work  of  the  final  minute  in  eacb 
<i  1  lefiM  of  daji/*  Tale  He  view,  1692,  1,  p.  272.  CI  Mko,  The  Diatributioii 
(A  W«»Uh  ilBWih  Chftp.  S^T. 


64  THE  PRINCIPLES  OF  MONET 

ahaie  alike  in  the  benefits  of  progress.  ...  If  the  oreditor, 
in  making  a  loan,  gave  to  the  debtor  the  power  to  get  a 
hundred  oommodities,  representing  a  hundred  hours  of  labor; 
and  if  the  debtor  at  the  end  of  fifty  years  pays  to  his  cred- 
itor money  that  will  buy  a  hundred  and  ten  similar  com- 
modities, but  was  earned  by  ninety  hours  of  labor,  the  gains 
from  progress  are  shared  in  a  way  that  is  practically  even."  ^ 

A  fatal  objection  to  this  proposal  is  that  already  urged 
against  the  plain  labor  standard :  it  is  wholly  impracticable. 
Even  if  intended  only  as  a  means  of  justifying  some  concrete 
standard,  it  is  far  from  being  applicable.  Further,  by  at- 
tempting to  set  up  a  standard  of  the  marginal  disutility  of 
labor  by  which  the  values  of  goods  are  to  be  measured, 
Professor  Clark  gives  his  critics  reason  for  assuming  that  he 
is  ignoring  the  co-operation  of  capital  with  labor  in  the  pro- 
duction of  goods ;  and  he  here  proposes  a  method  of  meas- 
urement which  shares  the  objections  to  the  labor-cost  theory 
of  value.* 

There  is  no  demonstrable  nexus  between  the  disutility,  or 
subjective  sacrifice,  of  the  laborer  and  the  exchange  value  of 
the  article  on  which  he  is  working.  This  point  is  well  ex- 
pressed by  Professor  Ross : '  If  an  Esquimau  gave  a  trapper  a 
knife  made  by  himself  with  three  months'  labor,  ought  the 
tiapper  to  give  in  repayment  the  product  of  three  months  of 

^  Pol.  Sci.  Qoar.,  1895,  p.  399. 

*  His  prooefls  of  reMoniog,  bj  sopposing  the  capital  to  be  oomtaiit,  and  then 
addini?  final  increments  of  labor  as  a  means  of  proving  that  the  additional  prod- 
uct was  dne  wholly  to  labor,  is  not  satisfactory,  nor  is  it  justifiable.  Those  last 
increments  of  labor  are  still  working  in  conjunction  with  capital,  and  it  is  impos- 
sible, in  that  case,  to  say  that  the  product  is  solely  the  result  of  labor.  Mors- 
orer,  following  the  same  method  of  reasoning,  by  supposing  the  Isbor  to  be 
constant,  and  then  adding  final  increments  of  capital,  he  ought  to  be  equally 
able  to  prore  that  the  additional  product  is  due  solely  to  capital.  In  that  erent, 
the  ideal  monetary  unit  ought  to  represent  a  certain  disutility  of  capitaL  What 
ground  is  there  for  choosing  labor  rather  than  capital  as  a  basis  for  the  unit  ? 
Cf.  Distribution  of  Wealth,  chap.  xxir. 

In  the  above  discussion,  I  have  for  reasons  of  space  —  if  for  no  other  ^as- 
sumed a  knowledge  of  the  theory  of  final  utility. 

*  Annals,  1892,  III,  p.  302. 


THE  STANDARD  QUESTION  65 

his  own  labor,  or  a  Sheffield  knife  that  he  earned  in  half  a 
day  ?  Certainly  exchange  value  (as  distinct  from  mere  im- 
portance) does  not  correspond  to  the  marginal  sacrifices  of 
the  laborer  in  such  cases.  Indeed,  in  trying  to  obtain  a  com- 
parative  estimate  of  several  kinds  of  labor,  we  must  have 
regard  not  only  of  qualitative,  but  of  quantitative  elements. 
Assuming  time  of  effort  as  quantitative,  and  intensity  and 
ddll  as  qualitative,  it  is  evident  that  no  exact  measurement 
can  be  made  between  the  sacrifice  of  different  persons  in  dif- 
ferent, or  even  in  the  same,  occupations. 

Probably  Professor  Clark  never  intended  his  ideal  unit  to 
be  a  practicable  one  for  working  purposes.  Doubtless  he  had 
in  mind  only  a  speculative  basis  (even  though  I  must  regard 
it  as  untenable)  upon  which  he  could  justify  the  gold  stand- 
aid;  for  he  concludes  ^  as  follows : 

^<  Views  wiU  vary  as  to  the  extent  to  which  the  gold  dollar  has 
lost  in  its  power  to  porohase  boors  of  labor.  If  we  think  that 
ideally  it  ought  to  lose  in  its  power  to  buy  boors  of  labor  as 
Docb  as  it  gains  in  its  power  to  boy  commodities,  we  shall  onite 
in  thinking  that  its  actoal  behavior  has  varied  comparatively 
little  from  the  ideal  reqoirements.  In  any  case  it  has  gained 
where  it  shoold  have  gained,  —  in  its  power  to  boy  commodities 
measured  in  kind ;  and  it  has  lost  where  it  shoold  have  lost, — 
in  its  power  to  boy  average  labor,  measured  by  the  hour." 

On  the  assumption  that  justice  requires  the  debtor  to  return 
to  the  creditor  the  same  valtie  as  that  which  he  borrowed,  the 
suggestion  of   marginal    utility*  as    a   common  . 

measure  of  the  value  of  goods,  has  been  made,   otiutjrasa 
Final  utility  of  goods,  or  of  labor,  is  a  subjective 
estimate  of  the  gratification  arising  from  their  use,  or  service. 
It  goes  without  saying  that  these  subjective  satisfactions  and 
sacrifices  must  vary  greatly  for  different  persons  at  the  same 

i  PoL  ScL  Qnmr.,  1S95,  X,  p.  401. 

'  L  S.  MerrUm,  Annals,  Jmn.  1893,  p.  491.  He  also  regards  the  commodity 
Mindird  as  nnjost,  because  the  restoration  of  the  same  amount  of  commodities 
by  the  debtor  is  not  a  return  of  the  same  v€Uue, 

5 


66  THE  FEINCTFLES  OF  MOKET 

time,  Ta  attempt  to  get  a  perfect  standard  of  deferred 
meats  out  of  such  elements  becomes  conspicuously  irration&l 
whea  we  attempt,  as  we  muBt^  to  express  quantitativelj  the 
subjective  feelings  of  different  peiBons  at  different  periods  of 
time.^  Such  a  scheme  is  too  elusive  for  practical  coiisidera- 
tion-  The  obJeetionB  become  still  more  grave  when  we  realize 
that  the  utility  of  some  portion  of  goods  might  be  not  lasa 
than  infinity.  Marginal  utility  of  goods  h  as  impossible  of 
pmctical  use  for  a  standard  as  is  marginal  disutility  of  labor.* 

Professor  Roas^  gives  the  cotip  d$  gtdc^  to  the  theoiy  that 
there  is  any  real  unit  of  marginal  utility  by  which  the  value 
of  the  other  and  antecedent  amounts  of  utility  can  be  meas* 
ured.  Among  several  instances  one  may  be  cited:  ^*A 
Dakota  fanner  has  provided  ten  cords  of  wood  aa  his  winter 
fuel.  Heavy  snows  come  and  a  less  provident  neighbor 
wishes  to  buy  wood  of  him.  He  will  part  with  a  cord  for 
17.  Will  any  one  say  that  the  total  value  of  the  stock  of 
wood  is  therefore  $70?  Let  him  but  offer  t70  and  see  if  he 
gets  the  wood."  That  is,  the  total  utility  is  not  got 
by  multiplying  the  unit  of  marginal  satiskction  by  the_ 
number  of  units  of  goods. 

Because  Professor  Clark  attempted  to  justify  the  goM 
standard  on  the  ground  that  it  a^ted  much  aa  an  abstraet^l 
or  ideal,  quasi-labor  standard  would,  and  because  this  latter 
theory  could  be  confuted.  Professor  Ross  was  led  to  urge 
that  the  justification  of  the  gold  standard  disappeared  wit 


1  ProteMOi  Fetter  eayi  t  **  What  meunras  the  mafgioal  ntilitieK  1  II  one" 
gives  the  answer  obviooaly  and  logically  required  by  the  iheory :  the  iuteositj  d 
lire  desire  which  tbe  creditor  wOl  wtrnf/  with  the  goods,  aud  tbii  be  meaAiued  bj 
an  ftbsolate  atandard,  sad  not  Aim  ply  m  reUtion  to  other  goodtj  prepoateroni 
conieqaencen  are  inTolred  ItkltM  applicalioD  to  deferred  pajmeDta.  The  mdivid- 
iml'a  wealth  weuld  ri&e  and  fall  with  liia  changing  moodi  from  elation  to 
melancholy.  .  .  .  Not  tiDtil  tbe  moit  of  happlnefti  or  ntility  ih  maleri aliped,  and 
IB  apptieable  to  the  meaaareioent  of  the  want-fiatiif  jiiig  power  of  goods  to 
different  penons  as  weU  as  to  tbe  same  one  at  different  timee,  conld  the  luarginal 
theory  of  Talne  aid  in  tbe  qneetion  of  the  standard  of  defemd  pajme&ti*'* 
Annals,  1895,  V,p,S9L 

^  Cf ,  Fetter,  thid,  p,  S34. 

•  A&sali.  Not,  1B93,  IV,  p.  430. 


THE  STANDARD  QUESTION  67 

it  He  insisted  that  the  gold  standard  was  supported  hy  an 
extreme  cost  of  labor  theory  of  yalue ;  and  he  very  properly 
rejected  the  latter  as  incorrect.    As  an  antithesis 


to  this  system,  he  placed  a  standard  of  deferred  ^^^^  '^^jLj. 
payments  based  on  the  retom  by  the  debtor  to 
the  creditor  of  the  same  value  of  goods ;  this,  he  claimed,  was 
the  theory  of  the  bimetaUistB.    Thus,  the  gold  standard  (on 
Professor  Clark's  assumption)  set  up  a  theoiy  of  justice 
according  to  which  the  return  of  equal  quantities  of  labor 
would   return  a  yalue  equal  to  that  borrowed;  while  the 
Umetallists  (as   in  the   tabular  standard)  asserted    that  a 
xetnm  of  equal  quantities  of  goods  would  return  a  value 
equal  to  that  borrowed.^    In  this  way  Professor  Ross  saw 
thitt  the  gold  standard  had  been  justified  only  by  a  cost  of 
production  theory  of  value  quite  easily  overthrown;  while 
the  UmetallistB  had  based  their  claims  on  the  maiginal,  util- 
ily  theory  of  value,  which  was  correct    An  antagonism  was 
thus  wrongly  set  up  by  Professor  Ross  between  the  two 
theories  of  value,  as  if  their  boundaries  were  coterminous 
with  the  differences  between  the  followers  of  the  gold  stand- 
ard and  bimetallism*     In  truth,  the  gold  standard  need  not 
be  supported  on  any  such  basis. 

Professor  Ross,  however,  having  opposed  the  theory  of  a 
standard  based  on  the  marginal  disutility  of  labor, 
as  explained  by  Professor  Clark,  set  himself  to   ouiityr 
give  a  correct  unit  of  measurement  by  propos- 

^  Annab,  Nor.  1892,  III,  p.  299.  Bimetallists,  he  sajs,  assert  that  equal 
quntities  of  goods  are  of  eqnal  value  though  separated  bj  a  period  of  time,  while 
moDometallistB  assert  that  equal  quantities  of  labor  are  of  equal  ralue  though 
npsnted  by  time.  He  claims  wrongly  for  bimetallism  the  results  of  the  multiple 
rtaodard.  Wronglj,  because,  granting  all  its  claims,  bimetallism  could  maintain 
a  fixed  relation  between  onlj  two  articles,  gold  and  silver.  It  was  never  pretended 
for  it  that  it  could  adjust  itself  to  the  progress  of  the  arts,  which  would  lower 
prices,  bj  cheapening  commodities,  relativelj  to  the  double  standard,  as  well  as 
to  the  single  gold  standard.  Therefore,  even  if  bimetallism  were  workable, 
ehio|;e8  of  price  would  ensue  relatively  to  the  double  standard,  and  the  problem 
ol  deferred  payments  would  still  remain.  If  we  were  to  grant  that  the  gains  of 
progress  should,  in  justice,  go  to  the  debtor,  we  cannot  admit  that  bimetallism 
would  bring  this  about.  But,  as  said  before,  the  discussion  of  the  logic  and 
theory  of  bimetallism  must  be  deferred  to  the  volume  on  Metallic  Money. 


68  THE  PRINCIPLES  OF  MONEY 

ing  an  objeotiye,  or  total  utility  standard  (instead  of  the 
marginal  utility  standard): 

*^  The  debtor  is  not  to  return  a  value  measured  in  2a5or,  nor 
yet  a  value  measured  in  commodUiea^  but  a  value  measured  in 
objective  utility.^  And  with  industrial  progress  this  is  secured 
by  a  slight  excess  of  commodities. 

**  During  industrial  progress,  then,  a  just  monetary  standard 
should  permit  the  alteration  in  the  ratio  (both  genetic  and 
exchange)  between  labor  and  commodities  to  appear  in  a  rising 
price  of  labor  rather  than  in  falling  prices  for  commodities. 
The  money  unit  should  not  appreciate  with  labor,  but  should 
rather  depreciate  with  conunodities.  The  circulating  medium 
should  suffice  to  maintain  prices  of  commodities  at  very  nearly 
their  former  level."  * 

This  standard,  however  satisfying  to  the  theorist,  is  cer- 
tainly as  impracticable  and  profitless  as  any  other  method  of 
measurement  based  on  varying  utilities.  As  Professor  Fetter 
justly  says:  **It  is  utterly  impossible  to  estimate  ...  the 
total  utility  of  a  sum  of  goods  of  different  kinds.  .  .  .  There 
may  be  numerous  goods  the  total  utility  of  which,  to  a  being 
loving  life,  is  infinite." '  A  standard  of  deferred  payments 
based  on  total  utility  is  another  of  those  speculative  sug- 
gestions which  make  the  theoretical  economist  an  object  of 
despair  to  the  men  of  affairs.  Its  impracticability,  moreover, 
is  emphasized  by  the  proposed  method  of  regulating  prices 
through  changes  in  the  quantity  of  the  circulating  medium. 
In  later  chapters  it  will  be  shown  that  this  method  is  impossible 
of  execution,  because  only  one  side  of  the  price  ratio  is  con- 

1  A  F  H  D  represents  Professor  Ross's  total  objectiTe 
Qtilitj,  while  the  margiDal  ntilitj  standard  would  be  repre- 
sented by  A  F  H  K.    Annals,  Nov.,  1893,  p.  426. 

2  Annals,  Nor.,  1892,  III,  p.  305. 
*  Annals,  Maj,  1895,  V,  pp.  884-885.    Professor  Fetter 

also  believes  that  Professor  Ross's  total  ntilitj  standard, 
being  based  on  the  idea  of  a  return  of  the  same  valw,  does  not  differ  much  from 
the  tabular  standard,  since  it  requires  the  return  of  the  same  amount  of  com- 
modities borrowed,  with  a  slight  excess  to  compensate  for  lessened  degree  o£ 
■ocial  esteem.    Ibid.,  pp.  883-885. 


TH£  STANDARD  QUESTION  89 

flidered;  and  that  it  is  incorrect  to  sappose  that  prices  can 
be  affected  by  altering  the  yolume  of  the  medium  of  ex- 
change*  rather  than  the  value  of  the  standard  in  which  prices 
are  expressed. 

In  this  chapter,  it  will  be  recalled,  we  have  examined  several 
different  kinds  of  standards,  apart  from  the  precious  metals : 
the  commodity,  or  tabular,  standard ;  the  labor  standard ;  a 
quftsirlabor  standard,  based  on  the  marginal  disutility  of  labor 
(leading  to  the  support  of  the  gold  standard) ;  the  marginal 
utility  of  goods;  and  the  total  utility  of  goods.  The  advan- 
tages and  defects  have  been  noted  as  clearly  as  could  be  done 
in  the  space  allotted  to  this  subject. 

It  must  be  clear  from  the  preceding  discussion  that  a  per- 
fectly just  standard  of  deferred  payments  is  not  possible.^ 
In  the  nature  of  things,  we  cannot  expect  anything  more 
than  an  approximation  to  justice.  The  solution  is  one  which 
lemaiDS  in  the  realm  of  expediency,  and  which  is  eveiy  day 
being  settled  by  a  rough  adjustment  between  debtor  and 
creditor.  As  before  observed,  the  consensus  of  .  ^^ 
oiHiuon  in  commercial  nations  in  favor  of  the  stMidard 
gold  standard  is  based  on  the  belief  that  the  ac-  ^^ 
cumolated  stock  of  it  (owing  to  its  durability)  gives  such 
stability  that  ordinary  changes  in  the  demand  and  supply  of 
gold  produce  little  or  no  change  in  prices,  at  least  through 
causes  operating  on  the  money  side  of  the  price  ratio.  But 
the  fact  remains  that  the  advantages  due  to  the  progress  of 
the  arts  go,  under  the  gold  standard,  to  the  creditor.  If  the 
multiple  standard,  which  transfers  these  gains  to  the  debtor, 
were  existent,  the  assignment  of  these  gains  might  be  accom- 

1  "A  standard  of  deferred  paymeDts  which  shall  never  work  hardship  to  anj 
iodiTidaal  mniit  be  recognized  as  unattainable.  The  most  just  and  the  most 
Bttrly  ideal  standard  to  which  society  can  remotely  hope  to  attain  is  one  where, 
coniistent  with  the  minimum  of  discouragement  to  both  debtor  and  creditor 
became  of  the  terms  of  the  contract,  the  greatest  available  foresight  is  employed 
toensore  that  the  benefits  of  industrial  advance  shall  on  the  whole  go  to  those 
daraes  in  whose  encouragement  and  economic  growth  society  has  the  greatest 
btenst''  Fetter,  ibid.,  p.  896.  On  our  analysis  of  debtors  and  creditors  the 
cnditor  class  should  be  the  one  to  be  encouraged.  On  the  general  question,  of. 
alio,Buoom,  Qnar.  Jour.  Econ.,  Oct.  1895,  54-66. 


70  THE  PRINCIPLES  OF  MONEY 

pliahed  by  the  decision  on  the  rate  of  interest,  accoidii 
as  one  or  the  other  standard  were  used*  In  that  case  a  ; 
ment  which  is  not  pure  interest  is  introduced  under  a  m 
nal  payment  of  interest  Practical  adjustments  such  as  t 
seem  to  be  the  only  solutions  of  the  problem  of  defe 
payments. 


CBEDIT  71 


CHAPTER  IV 
CREDIT 

Om  bM  onljr  to  turn  to  the  ditcimionf  on  enmncj  uid  credit  which  hnTe 
aeeompenied  the  greet  derelopment  of  England's  commerce  during  the  lait 
blknitory  to  tee  hoir  the  changing  needs  of  an  adrancing  aodetj  erolye 
aew  probleme  for  the  economist,  and  call  forth  new  growths  of  economic  doo- 
trmfr  —  Caxsubs,  Character  and  Logical  Method  o/PoliUcal  Eeonamy,  p.  39. 

A.  Wioxn,  Der  Credit  m  Schonberg's  Handboch,  8d  ad.  (1890),  I,  pp.  979-416; 
boi,  Qremdlegtmg  derpoi.  (heem.,  I  Theil  (189S),  pp.  344, 346 ;  £.  Ton  Pbilipfotioh, 
OmdnmderpoUHtdkem  Oekomomie  (1899),  I,  pp.  843-870;  A.  Held,  Qrmmdriuflr 
fmimegi*  €ber  NationaUkomomU,  8d  od.  (1878),  f  18,  pp.  61,  68;  J.  Cokkad^ 
Qmiriu  mm  Stmdimm  der  poUHtekem  (hkon<mi9,  I  Theil,  *'Nationaldkonomie'* 
(MNX  I  88,  <«  Dm  Wm«i  det  CieditM;  *'  A.  E.  F.  SohAptlb,  Dtu  guelUchafUiehe 
Bjgmder  w^entchiiehem  Wirthteha/t,  3d  od  (1873),  II,  p.  310;  W.  Roschxb,  Orumd' 
hgrn  ier  NoHomaUkommU,  aOth  ed.  (1893),  §  94,  pp.  841-844;  C.  Kmis,  GM  wtd 
Cniit, "  Der  Credit,"  8d  od.  (1876-1879),  8  vols.  O.  Cohh,  OmmdUgmng  der  National 
Hmmm  (1886),  f  416,  pp.  650-668;  W.  Lkxib,  KredU  hi  Handw.  d«r  Staattw.;  M. 
Buxx,  L§  firogri§  de  la  jaence  eeonami^ue  dejmis  Adam  Smith,  8d  od.  (1897),  I. 
pp.  481-604;  L.  Walras,  £tude9  d'iconomi*  poUtique  appliqui§  (1898),  IV,  **  CrMit," 
ppi  KM  ff.;  P.  Lbbot-Brauusu,  TSmiS  ihioriqu9  et  pratique  d'teonomie  poUtique,  8d 
ti,  111(1896);  H.  D.  MoLbod,  The  Theory  of  Credit,  8  Tolt.  (1894-1897). 

§  1.  In  discussing  the  standard  of  deferred  payments  the 
prominence  necessarily  given  to  the  time  element  is,  in  reality, 
the  very  characteristic  by  which  modem  industry  has  come 
to  be  sharply  distinguished  from  that  of  primitive  conditions. 
When  there  was  no  division  of  labor,  exchanging  of  goods 
and  the  creation  of  obligations  were  at  the  minimum ;  but 
the  changes  introduced  by  the  modem  complexity  and  inter- 
dependence of  industrial  processes,  by  the  division  of  labor, 
and  hy  the  development  of  vast  operations  merely  in  supply- 
ing law  materials  for  commodities  to  be  finished  for  the 
consumer  a  considerable  time  ahead  —  all  these  influences 
have  brought  it  about  that  most  of  the  industrial  processes  of 

to<lay  necessarily  involve  a  time  element. 
Moreover,  as  this  tendency  has  become  more  pronounced, 

the  function  performed  by  capital  has  grown  to  be  more  and 


72  THE  PRINCIPLES  OF  MONEY 

more  important.  Capital  is  used  as  a  means  of  discoonting 
the  future ;  it  bridges  the  operations,  for  example,  beginning 
with  the  planting  of  wheat  and  ending  in  the  distribution  of 
bread  to  the  consumer.  As  economic  civilization  has  ad*- 
yanced,  as  the  time  element  has  appeared  more  generallj  in 
processes  having  as  their  aim  greater  productivity,  so  capital, 
as  it  has  become  more  urgently  necessary,  has  become  moro 
efficient  Without  being  led  afield  into  a  disoussion  of 
capital,  which  would  be  alien  to  this  treatment  of  credit,  it 
is  clear  how  essential  to  the  understanding  of  credit  is  a 
grasp  of  the  fundamental  services  of  capital  to  society.  So 
far  as  it  is  a  means  of  bringing  present  goods  to  the  service 
of  producers  whose  efforts  end  in  the  future,  the  function 
of  capital  is  self-evident. 

With  the  division  of  labor,  the  marvellous  inventionB  of 
machinery,  the  prolongation  of  industrial  processes  (so  that 
Gradit  aids  *  ^"^*  ^^  product  cau  in  the  end  be  more  cheaply 
the  radi  of  sold),  the  growth  and  prodigious  increase  of  aU 
«*p«"-  forms  of  capital  have  naturally  led,  as  a  help  to 

this  movement,  to  the  evolution  by  society  of  the  practical 
means  by  which  men  of  affairs,  when  preparing  for  the  future, 
are  enabled  with  the  least  waste  of  efficiency  to  obtain  con- 
trol of  property  and  capital  in  productive  efforts.  As  a  part 
of  this  evolution,  as  a  practical  means  to  an  end  involving 
futurity,  credit  has  come  ^)ito  existence.  In  its  simplest 
terms,  it  is  a  transfer  of  commodities  involving  the  return 
of  an  equivalent  at  a  future  time ;  ^  but  subsequently  it 
developed  into  something  more^than  that  —  which  it  will  be 

1  E.  NasM  (reriewing  Knies  in  Jahrbacher  fiir  Nat.  and  Statiatik,  N.  F.,  I, 
pp.  83-105)  points  oat  that  the  moat  essential  characteristic  of  credit  is  not  the 
time  intervening  between  loan  and  repayment,  bat  the  transfer  of  the  right  to 
use  property  which  it  effects  (p.  85). 

Knies  (Der  Credit,  I,  p.  68)  defines  credit  as  an  **  exchange  in  which  one  partj 
renders  a  serrice  in  the  present,  while  the  retnm  made  by  the  other  falls  in 
the  fatare."  £.  Nasse  criticised  this  definition,  at  emphasizing  too  mnch  the 
element  of  fatnrity,  and  gare  his  own :  '*  Credit  is  the  confidence  felt  in  tbo 
fntare  solvency  [Zahlungsjahigkeii]  of  a  person,  which  enables  him  to  obtain 
the  property  of  others  for  nse  as  a  loan,  or  for  consumption  "  (op.  cit.^  p.  84). 
Jevons  regarded  credit  at  '* nothing  bat  the  deferring  of  a  payment"  {op.  eU^ 


my  purpose  to  explain  later*  Credit  is  machinery  invented 
to  aid  in  accomplishing  some  of  the  purposes  of  capital ;  if  an 
essential  function  of  capital  is  to  discount  the  future,  the 
essential  characteristic  of  credit  is  the  element  in  it  of 
futurity*     The  connection  is  not  far  to  seek. 

To  get  credit,  therefore,  is  to  obtain  a  transfer  to  one's  self 
of  commodities  under  an  obligation  (variously  expressed^ 
accoiding  to  dififerent  habits  and  circumstances)  popujur  uB*g* 
to  return  an  equivalent  amount  at  a  fixed  date  in  *'  ^^^^ 
the  future.  A  ca^reful  analysis  of  popular  uses  of  the  word 
**  credit "  brings  us,  in  almost  all  cases,  to  this  ultimate  con- 
oeption.  When  we  say  of  a  man  that  he  has  **good  credit," 
however,  we  must  not  confound  the  reasons  for  granting  credit 
with  credit  itself ;  if  he  has  the  means  of  convincing  the 
lender  tliat  he  is  sure  to  be  repaid,  the  borrower's  *'  credit " 
is  saidj  in  popular  usage,  to  be  good.  Here  we  are  entering 
upon  the  reasons  why  credit  is  given,  which  lie  beyond  the 
fitatemant  of  what  credit  is. 

p.  S3S).  L«TMieiir'A  definition  was:  ''The  ttxcbftng^  of  w»  Ktoal  reality 
^uiut  %  fiitdrs  probability  "  (cf.  Qnestian  de  Tor*  p.  S44), 

A.  Wagner's  definition  Beeme  annec^sanlj  verbose  t  '*  Credit  iA  thai  private 
•eoitomic  e^ichaage,  or  that  yolimtary  giriug  and  receiving  of  e(*onomic  goods 
^ilvrcen  different  pernons^  where  the  aorvice  rendered  by  the  fimt  is  perfonned 
&OQ1  his  eontdonc«  in  the  assarance  given  by  the  Hecond  that  he  wUl  render  & 
i«oofiip«Dse  ftt  a  future  time  "  (Schonberg^H  Handbnch,  1.  p.  BBQ). 

IfeLaod  speaks  of  "a  credit  as  the  Present  Right  to  a  Futtire  Fayisaat^' 
(^*  ai.,  I,  pp.  BB,  571). 

'*  Cfedit,*'  says  P.  Leroy-BeAnlien  (Traits  tbtoriqiie  et  pratique  d'f^coaomie 
poUtiqiie,  3d  ad.,  HI,  p.  3^)^  *'  ia  the  exchange  of  an  actual  press  tie  good  agaiast 
so  eqniTaleDt  which  one  engages  to  famierh  with  In  a  certain  period/' 

Carlo  F,  Fenaris  (Principii  di  Scienza  Bancaria^  1093,  p.  5)  regards  credit 
as  '*  the  whole  of  those  ecoaomic  and  moral  conditions  hecaose  of  whicli  men 
consent  to  make  payments  in  the  present  on  the  promise  of  repay  mem  in  the 
fittmpe/* 

t..  Walras  regards  ''  credit  at  the  lending  of  capital "  (Etudes  d'^conomie 
politiqae  appliqotfc,  tV,  p.  305). 

J.  Conrad  {Gmndrisa  §  28,  pp,  23,  24)  and  A.  Held  (Gmndriss,  J  19,  p.  61) 
ULake  credit  a  matter  of  eonfidence,  etc. 

£1  ^QQ  Philippovirh  (Grandrisa,  t,  §  104>  p.  343)  makes  credit  the  relation 
between  partiea  to  an  exchange  **  throcigh  which  the  one,  by  virtue  of  a  servke 
already  perfarmeiJ  (a  crausfer  of  goods,  a  payment,  or  work  done),  may  demand 
fowL  the  other  a  return  for  the  serrice/^ 


T4 


THE  PRINCIPLES  OF  MONEY 


In  defining  credit  as  confidence  in  the  future  solvency  of  m 
borrower,  Nasae  critdciaes  Knies  for  failing  to  diBtiiigiiiflli 
between  credit  and  credit  transactions.  But  if  credit 
regarded  as  the  transfer  of  goods,  there  is  no  such  dist 
tion ;  credit  appears  only  in  a  transaction.  What  is 
**  high  credit "  ?  It  means  that  his  reputation  for  repaj 
is  high ;  that  he  easily  gets  a  transfer  of  goods.  If  we  we 
to  accept  Nasse*8  conception^  credit  might  exist  without  e^ 
being  used;  for  we  might  have  confidence  in  a  boiroweJ 
power  to  repay  which  he  never  exercised.  Then  an  exi 
fiion  of  credit,  in  this  sense,  would  lead  us  to  the  abeti 
of  saying  that*  with  an  increase  of  confidence  in  borroii 
there  had  been  an  increase  in  a  country^s  credit*  Of  cou 
there  would  have  been  an  increase  in  the  possibility  of  usiij 
credit,  but  that  is  a  different  thing  from  saying  that  ct 
itself  has  been  increased.  From  my  point  of  view,  howeveiT 
an  expansion  of  credit  could  take  place  only  by  transfers 
goods  to  a  greater  amount.  In  any  other  sense,  credit  j 
to  be  a  metaphysical  abstraction. 

It  is  desirable,  also,  to  distinguish  between  credit  itself 
the  forms  which  arise  out  of  credit  transactions.     Econor 
Dtstinction  b«.  ^^^  h^l  conceptions  should  be  carefully  ke| 
Md*?o™  qf      *^part»     The  actual  transfer  of  goods  is  the  esse^ 
credit.  tial  economic  part  of  the  credit  operation ; 

promissoiy  notes,  drafts,  bills  of  exchange^  book  entriea,  t 
the  like  are  merely  the  evidences  of  tlie  credit  transaction 
which  have  been  used  to  facilitate,  in  a  greater  or  k 
degree,  repayment,  and  they  differ  from  each  other  great* 
in  business  convenience  and  legal  force,^  The  readei^ 
economic  treatises,  however,  will  find  credit  usually  treat 
as  if  it  could  be  covered  by  an  account  of  the  use  of  not 
checks,  and  various  forma  of  credit  This,  in  my  judgment^ 
has  led  to  some  popular  fallacies  on  credit  and  money 
which  are  difficult  to  eradicate.      The  forms  of  credit  will 

^  To  know  th0  I&w  goT«rtiing  bUli  and  notai  y  a  yerj  different  tbisg  1 
knowing  ihe  eoonooiie  priacipleii  tuidedjing  the  openli^M  ia  reg&rd  lo  wb 
the  legal  forau  hare  ariMtt* 


CBEDIT  75 

hb  tieaAed  heieafter,  when  the  monetaiy  uaes  of  credit  are 
tiken  up. 

Wheneyer  the  time  element  is  eliminated  from  a  transac- 
tion^  it  will  be  seen  at  onoe  that  credit  does  not  enter  into 
it  A  transfer  of  goods  for  which  an  equivalent  is  ^j^^^  eiemtnt, 
xendeied  on  the  spot  would  never  be  thought  of  not  confidence, 
as  a  eredit  operation.  In  foot,  buying  and  selling  oAtare  of 
for  an  immediate  consideration  (or  **cash")  is 
gonerally  understood  to  be  the  very,  opposite  of  credit.  It 
lias  been  claimed  that  confidence  and  not  the  time  element 
IB  the  primary  element  in  credit^  It  is  the  time  element, 
however,  which  is  essential;  the  matter  of  confidence,  on 
tibe  other  hand,  appears  only  because  the  repayment  is  rele- 
gated to  the  future.  It  is  only  because  futurity  is  the  cen- 
tal thing  in  credit,  that  confidence  appears  as  a  consequence. 
Tkeref ore,  confidence  cannot  be  spoken  of  as  the  pivotaJ  thing 
in  credit;  although  it  is  influential  in  deciding  whether  credit 
ihall  be  given  or  not.  The  difference  is  wide:  walking  is 
one  thing,  the  reasons  why  one  walks  —  to  one's  office  or  to 
a  fanend — are  very  different.  Hence  it  is  well  not  to  assign 
much  importance  to  the  easy  etymological  derivation  of  credit 
from  credere  (meaning  **'  to  have  confidence ''). 

I  Adolph  Wagner  ("Der  Credit,"  in  Scbdnberg*s  Handbnch,  I,  pp.  879-415) 
loOovt  Kmee  in  emphasizing  the  time  element  and  regarding  confidence  as  a 
mtemmrj  conaeqaence  of  it ;  but  Wagner  g^res  the  latter  some  proper  import- 
aaee  (pp.  880-393).  G.  Cohn  (Gmndlegnng,  pp.  551,  552)  criticises  the  emphasis 
ca  the  time  dement  because  it  "emphasizes  a  merely  secondary  phenomenon 
vhich  foUowi  from  the  nature  of  capital  as  a  durable  good ;  for,  since  dnrability 
Moags  to  the  concept  of  capital,  the  use  of  which  is  transferred,  it  is  perfectly 
evident  that  erery  transfer  of  the  right  to  use  capital  carries  with  it  the  idea 
that  the  capital  is  to  be  restored  later." 

II  Block's  (Le  Progrte  de  la  science  ^conomiqne,  I,  p.  481)  position  is:  "  We 
admit  fraely  that  confidence  plays  a  large  r51e  in  the  matter  of  credit ;  without 
eoofidence  many  transactions  could  not  be  made ;  but  in  other  cases  it  must  be 
isid  that  confidence  is  more  or  less,  or  eren  totally,  absent.  Peter  comes  to 
Pul,  and  asks  for  a  loan  of  100  francs.  Paul  has  no  confidence  in  Peter  and 
irfiisea.  Then  Peter  says :  '  My  watch  is  worth  a  good  deal  more  than  the  100 
ftaacs;  yoo  may  have  it  as  security;  besides,  I  will  pay  the  usual  interest.' 
Pnl,  who  expresses  the  yalne  of  his  capital  in  money,  lends  the  100  francs ;  but 
eonfidence  had  nothing  to  do  with  the  matter.  It  is  the  ralue  of  the  security 
wUeh  determined  his  decision." 


76  THE  PRINCIPLES  OF  MONEY 

By  general  agreement,  nsage  would  never  allow  any  obli- 
gation entered  into  for  the  future  delivery  of  personal  servioeB 
Cndit  «-«t»^  to  be  spoken  of  as  credit,  unless  there  appears  in 
to  goods.  connection  with  it  some  transfer  of  goods.    We 

may,  therefore,  agree  to  confine  credit  operations  to  goods 
or  property  of  a  transferable  kind.  And,  in  the  concep- 
tion of  credit,  with  the  transfer  goes  the  right  to  make 
any  ordinary  use  of  the  goods ;  it  carries  with  it  the  power, 
not  merely  to  keep  possession,  but  to  destroy  entirely,  —  and 
commonly  with  the  purpose  of  reproduction,  —  if  that  is 
the  best  means  of  increasing  product  and  getting  back  goodi 
for  repayment  Hence  the  lease  of  a  house  would  not  be  a 
credit  transaction.  That  is,  we  have  in  mind,  generally,  the 
transfer  of  quickly  salable  goods,  which  need  not  always 
be  returned  in  kind,  but  by  an  equivalent;  not  the  same 
wheat,  or  wool,  or  gold  which  was  borrowed,  but  the  equiva- 
lent of  them. 

Many  contracts  appear  as  results  of  credit  transactions. 
For  instance,  A  borrows  the  means  to  finish  the  building  of 
Logti  fonns  bis  house ;  he  obtains  certain  goods  which  he  in- 
tothe^IdM  ^^  ^^  ^^  structure;  and  he  gives  a  prom- 
of  credit  issory  note  to  B  for  its  repayment,  secured  by  i 

pledge  of  his  property  in  the  form  known  to  the  law  as  a 
mortgage*  The  note  and  the  mortgage  are  merely  the  legsl 
methods  adopted  to  make  repayment  more  certain ;  they  are 
not  essential  in  the  credit  itself.  The  real  importance  should 
be  put  on  the  transfer  to  A  of  means  returnable  to  B  in  the 
future.  Legal  and  customary  forms  intended  to  secure  re- 
payment have  createcT  different  devices  in  the  same  commu- 
nity ;  while  the  prevailing  habits  of  different  countries  have 
given  rise  to  varying  methods  of  obtaining  the  same  result. 
In  one  situation,  for  instance,  a  book  entry,  in  another  a 
bill  of  exchange,  in  another  a  promissory  note,  are  found 
most  suitable.  In  short,  the  conditions  of  the  loan,  the 
opinions  and  convenience  of  the  parties  to  the  contract,  and 
the  like,  may  bring  into  use  a  great  variety  of  legal  forms, 
all  resulting  from  the  primary  transfer  of  goods.    The  un- 


due  inakteiiGe  upon  legal  forma  *  arising  out  of  credit  dmwB 
attentioii  away  imm  the  economic  proceaaes  essential  and 
intrinsic  m  it  to  the  non-esBential  and  external  forms  outside 
of  it.  The fcwniliar  case  of  a  bank  loan  illustrates  this  truth: 
there  is  the  easential  element  in  the  transfer  of  capital  to 
the  borrower  on  an  obligation  to  return  an  equivalent  value 
at  a  &Ked  time  in  the  future;  but  the  evidences  of  the  trans- 
action, whether  in  the  form  of  a  book  entry  as  a  depoaitt  or 
the  passing  of  the  bank's  own  notes,  or  the  giving  of  a 
cashier  s  draft  for  the  sum,  are  secondary  matters,  or  conse- 
quences, arising  out  of  the  original  credit  operation.  As  said 
beforet  the  latter  form  merely  the  machineiy  for  obtaining 
greater  or  less  security  with  a  view  to  repayment.  Actual 
money,  in  such  cases,  will  be  found  to  perform  only  the  sec- 
ondary office  of  an  intermediary  between  different  amounts 
of  goods.  The  true  relations  of  credit  to  money,  however, 
will  appear  as  our  subject  is  developed. 

§  2.  Strip  any  credit  operation  whatever  of  its  passing  and 
superficial  marks,  and  you  will  find  that  in  its  essence  it  is  a 
transfer  of  goods  involving  futurity.  So  important  is  this 
general  proposition  that  it  needs  all  the  elucidation  which  can 
be  given  within  our  limits ;  for  the  reader  should  be  warned 
that  this  view  is  at  vaiiance  with  popular  opinion,  and  even 
with  that  of  eminent  writers.  Professor  Nicholson,  for  in- 
stance, says  that  all  credit  rests  on  money ,^ 

Here  please  recall  the  distinction  between  a  standard  in 
which  the  prices  of  goods  are  expressed,  and  a  medium  of 
exchange  by  which  the  goods  are  in  fact  trans*  credit  is  bwed 
ferredp  Forms  of  property  whose  prices  are  ex-  ^^  goods. 
pressed  in  termB  of  the  standard  may  be  actually  exchanged 
without  using  the  standard  commodity  as  a  medium  of  ex- 


t  AlthoagH  McLeod  has  mad«  mtay  Taluable  and  [tenetnUiti^  obnervaliotsi  oa 
cndll,  in  mj  juii^mcnt  he  has  f&lleti  luto  error  iti  putting  iucb  gi«al  «mj>liisU 
on  le^  fQTtna  in  hh  prolonged  dincaaalou  of  rlghtM  and  ajctionBp 

'  MoDttarj  Fro b) ems.  Fart  I,  chap.  ri.  The  full  dioctiuioD  of  the  eiffect  of 
credit  on  piicet  will  be  glveu  Jater  m  this  (^hftpter. 


78  THE  PRINCIPLES  OF  MONEY 

change.  Without  anticipating  the  exposition  of  the  practical 
aids  furnished  by  modern  banking  expedients,  it  can  be  shown 
that  credit  is,  in  effect,  a  transaction  in  goods,  although  these 
goods  are  expressed  in  terms  of  money ;  that  credit  is  granted 
only  because  the  borrower  can  give  good  grounds  for  deliver- 
ing the  proceeds  of  salable  goods  as  means  of  repayment; 
and  that  goods  form  the  basis  of  credit.  Money  plays  only  a 
secondary  and  minor  part,  auxiliary  to  the  credit  opeiationg. 
Just  as  the  amount  of  money  is  always  and  necessarily  far 
less  than  the  mass  of  salable  goods  in  the  market,  so  the 
amount  of  money  bears  a  low  ratio  to  the  sum  of  credit  trana* 
actions  which  it  helps  on.  The  real  object  of  such  operations, 
as  in  all  production  and  consumption,  is  the  possession  and  use 
of  goods  which  satisfy  wants.  When  a  man  borrows  from  a 
bank,  he  gets  the  loan  usually  in  the  form  of  a  right  to  draw 
a  given  sum  of  money ;  but  actual  money  is  of  no  use  to  him 
except  so  far  as  it  aids  him  to  get  the  coal,  or  cotton,  or  labor 
he  needs  in  his  business.  Tlie  popular  impression  that  a 
man  borrows  **  money  "  is  misleading;  it  is  no  more  than  tind 
wrapper  in  which  his  goods  come  to  him.  The  error  residea 
in  confusing  the  means  with  the  end. 

Whenever  credit  is  granted,  it  will  be  found  that,  in  letam 
for  the  present  use  of  means  of  pajrment  in  current  funds,  a 
^^^j  .^  man  has  pledged  some  property  he  owns,  or  is  be- 

of  a  credit  licvcd  to  own,  but  to  which  he  still  holds  the  title 
ope  oo.  ^  ^^^  j^^  repays  the  loan.  We  are  not  now  con- 
cerned with  the  particular  form  of  the  pledge,  whether  a 
single-name  note,  a  note  with  an  indorser,  a  note  with  collate- 
ral, a  bill  of  exchange,  or  what  not.  It  usually  happens  that 
the  borrower  has  goods,  or  securities,  or  salable  property — or 
it  may  be  only  a  legitimate  expectation  of  goods  —  which  he 
cannot  use,  in  their  present  form,  as  general  purchasing  power. 
If  the  manufacturer  could  turn  the  stock  of  harvesters  and 
mowers  in  his  warehouse  into  means  of  payment,  he  could 
buy  more  material,  employ  more  labor,. and  have  more  machines 
ready  for  the  next  selling  season;  or  if  he  has  sold  them  to 
jobbers  on  time  and  if  he  could  get  present  means  of  payment 


CREDIT  79 

for  the  8I1IIIB  due  him  in  the  f atore,  he  could  enlaige  his  busi- 
ness. At  this  point  the  development  of  credit  comes  to  his 
aid.  On  the  basis  of  property,  he  gets  a  loan;  credit  enables 
him  to  utilize  his  resources  without  parting  with  their  owner- 
ship (except  as  modified  by  the  pledge) ;  it  enables  him  to 
change  a  command  over  his  specific  kind  of  goods  into  a  com- 
mand over  goods  in  generaL  It  is  credit  which  enables  men 
to  coin  property  into  means  of  payment.  It  is  what  Sir  James 
Steuart  so  well  described  as  ^^  melting  down  of  wealth  into 
bank  money.*^ 

Naturally  there  arises  some  methodical  arrangement  for 
giving  credit^  by  those  who  have  property  and  capital  to  loan. 
Such  institutions  are  usually  called  banks;  al-  cndit 
though  lending  may  be  carried  on  by  individuals,  ""'^^ntw"- 
The  sums  to  be  loaned,  although  expressed  in  dollars,  repre- 
sent goods  which  lenders  are  willing  to  hand  over  to  borrowers 
cm  obligations  for  repayment.  Unused  funds  accumulate  in 
bink  deposits,  and  sums  owned  by  persons  unable  or  unwilling 
to  employ  them  in  production  collect  in  institutions  for  in- 
veetment.  These  goods  appear  on  the  deposit  accounts  in 
tenns  of  money ;  but  none  of  the  institutions  have  money  to 
give  out  for  the  sum  of  all  the  liabilities.  Only  specie  enough 
is  kept  to  meet  the  demands  of  those  suspicious,  or  frightened, 
peisoDS  who  may  wish  to  turn  goods  into  actual  cash.  Of 
coarse,  if  all  wished  to  do  so,  not  all  could  do  it,  and  general 
suspension  would  result.  This  conclusion  makes  it  clear  that 
the  real  object  is  to  get  from  goods  we  have  to  goods  we  have 
not ;  that  money  is  used  only  for  facilitating  this  process.  But 
credit  is  also  a  very  clever  device  for  getting  from  goods  to 
goods  without  resorting  to  the  actual  transfer  of  the  specie 
standard  (or  other  money). 

A  typical  loan  transaction,  containing  the  essentials  of  all, 
may  be  taken  by  way  of  illustration.     A  business  firm  sells 
to  jobbers  on  ninety  days'  tfine  cotton  sheetings  to 
the  amount  of  910,000.     If  confined  to  the  actual  iiuutration 
capital  owned  by  the  members  of  the  firm,  or  ®  ^™  *^' 
company,  their  operations  would  be  restricted;  but  if  they 


80  THE  PRINCIPLES  OF  MONET 

can  borrow  of  others  additional  capital,  on  the  strength  of 
the  goods  they  have  sold,  they  can  coin  the  cotton  sheetings 
held  by  jobbers  into  means  of  payment^  and  by  pnrchasing 
new  materials,  employ  additional  labor,  and  increase  their 
product.  The  sold  goods  are  used  as  the  basis  of  a  loan  at 
a  bank.  The  bank  buys  the  right  to  receive  910,000  ninety 
days  from  date ;  the  firm  gets  the  right  to  draw  910,000  (less 
discount)  on  demand.  It  should  be  kept  clearly  in  mind  that 
this  credit  operation,  so  far,  was  based  on  goods  and  not  on 
money.  Now,  whether  the  borrower  will  draw  out  his 
910,000  in  specie  (or  legal  money)  is  a  question  quite  inde- 
pendent of  the  credit  operation ;  it  is  a  question  of  the  busi- 
ness habits  of  the  community  in  which  the  firm  exists,  that 
is,  whether  actual  cash,  or  checks  on  deposit  accounts,  are  in 
general  use,  whether  it  is  a  rural  or  a  city  district^  or  whether 
there  is  a  general  commercial  distrust  and  panic.  These  latter 
conditions  do  not  have  to  do  with  the  granting  of  the  credit 
(except  indirectly),  but  only  with  the  proportions  of  reserves 
to  liabilities^  In  most  cities,  the  firm  having  910,000  (less 
discount)  to  its  credit  would  buy  cotton,  purchase  machinery, 
and  the  like  by  drawing  checks  on  its  deposit  account,  not 
using  standard  coin  at  all.  That  is,  it  has  changed  its  control 
over  sheetings  —  one  form  of  goods  —  to  cotton  and  machinery 
—  other  forms  of  goods  more  desired  at  that  time.  By  coin- 
ing the  sheetings  into  general  means  of  pajonent  at  the  bank, 
the  firm  has  been  able  to  direct  its  purchasing  power  thus 
obtained  to  any  kind  of  article  and  in  any  fractional  sums. 

The  service  thus  rendered  to  the  community  by  an  institu- 
tion of  credit  is  inestimable.  The  institution  which  thus 
Services  ren-  coius  Salable  property  into  means  of  payment 
Ku^o^to'  for  ^^^  borrower  does  so  only  after  deciding  that 
•ocietr.  the  goods  at  the  basis  of  the  transaction  are  mar- 

ketable ;  that  is,  that  notes,  or  biUs,  in  the  leather  trade  for 
instance,  are  safe  paper  to  discount.  In  brief,  the  act  of 
coining  property  into  immediate  means  of  payment  is  done  on 
the  responsibility  of  the  lender ;  since  if,  by  any  mistake  of 
judgment  or  honor,  the  goods  behind  the  paper  are  not  sal- 


CREDIT 


81 


able,  or  if  they  are  not  capable  of  being  reached  because  of 
error  or  fraud,  tbe  instltutioti  pays  the  scot^  and  stands  the 
loeer.^  The  situation  m  much  tlie  same,  if  the  collateral  — 
which  is  in  reality  simply  a  title  to  forms  of  property  — 
depreciates;  since  that  is  only  another  way  of  saying  that 
the  value  of  the  goods,  on  which  the  securities  are  based, 
have  fallen.  Hence  the  process  always  has  this  corrective, 
this  brake,  that  a  mistake  is  followed  by  loss  to  the  bank,  or 
lender.  The  lender  is,  therefore,  under  a  constant  pressure  of 
self-interest  to  see  that  the  goods  behind  the  paper  are  salable, 
and  that  the  proceeds  of  the  sale  will  appear  in  amount  suflB- 
cient  to  take  up  the  obligation  at  maturity.  The  credit  insti- 
tutions, by  thus  acting,  even  under  a  heavy  responsibility  for 
inerrancy,  enable  the  community  to  set  into  circulation  —  into 
the  free  exchange  of  goods  against  goods  — a  vast  amount  of 
property  and  commodities,  which  otherwise  must  remain  an 
inert  mass  in  the  hands  of  owners*  By  credit  operations  they 
enlarge  the  industrial  activity  of  the  very  persons  most  ready 
and  able  to  act  judiciously.  If  there  were  no  credit,  we  should 
not  see,  as  now,  individuals  and  firms  enabled  to  do  a  business 
enormously  greater  than  would  be  possible  with  only  the  capi- 
tal which  they  actually  own.  The  encouragement  of  industry 
and  the  enlargement  of  transactions  are  the  services  rendered 
to  society  by  banks  and  lenders.  They  belong  to  the  class  of 
things,  like  division  of  labor  and  progress  of  the  arts,  by 
which  the  world  has  been  helped  on  ui  its  economic  growth. 
Credit  is  a  creation  of  men  in  the  natural  evolution  of  obtain- 
ing the  largest  possible  satisfactions  consistent  with  human  in- 
telligence and  with  the  character  of  the  globe  on  which  we  live. 
Notes,  bills,  drafts,  checks,  book  credits,  or  any  form  of 
obligation  resulting  from  a  credit  transaction,  come  into  ex- 
istence, not  antecedent  to^  but  as  a  consequence  off  a  trans- 

'  Afl  Hadlej  (Ecoaotnica,  p.  ^5)  bujb.  the  bank  "may  be  said  to  tnaiiiB 
C!redHi  H  it  discounti  a  three  montKB^  note  and  allowB  the  maker  to  draw 
cii(K!k£  upon  th«  mm  with  which  it  credttB  him,  it  protects  the  public,  which 
aeteptft  such  checbi,  from  the  risk  of  aubsequent  insolTencj  on  the  part  of  the 
nmker.  It  ii  hecaiiae  this  iuBamnce  is  effecdTe  that  the  public  wiM  accept  ehecki 
whftK  il  will  not  accept  promiaaor j  notes  J* 

e 


82  THE  PRINCIPLES  OF  MONEY 

f er  of  goods  involving  futority.  Paper  is  purely  fictitious  and 
illegitimate  which  is  not  the  outcome  of  an  operation  in  goods ; 
Socmd  and  nn-  ^^^  ^^  ^^  enabled  to  tcst  whether  loans  are  l^t- 
aoand  credit,  imate,  or  not^  according  as  we  know  whether  the 
discounts  are  granted,  or  not,  for  actual  transfers  of  salable 
goods.  This  test  gives  us  the  means  of  drawing  the  line 
between  sound  and  unsound  banking.  An  increasing  amount 
of  notes  and  other  credit  instruments  may  be  a  direct  and 
legitimate  evidence  of  an  increasing  amount  of  transfers  of 
goods,  and  by  credit  the  transfer  may  be  effected  in  any  ex- 
panding quantity.  The  limit  to  the  increase  in  legitimate 
credit  operations  is  always  expansible  with  the  increase  in 
the  actual  movement  of  goods.  The  concern  excited  by  such 
expansion  is  groundless,  so  far  as  it  is  based  upon  goods  or 
restrained  within  a  safe  estimate  of  the  value  of  these  gooda^ 
Salable  goods  transfer  themselves  with  ease  and  despatch 
through  credit  operations ;  no  one,  in  &ct,  before  buying  and 
selling  ever  thinks  of  waiting  until  the  forms  of  credit  are 
sufficientiy  numerous  to  warrant  the  exchange  of  goods- 
Buying  and  selling  take  place,  first,  at  prices  voluntarily 
agreed  upon ;  and,  secondly,  forms  of  credit  arise  out  of 
these  transactions  for  an  equivalent  value,  drawn  in  terms 
of  the  monetary  denominator,  although  the  latter  may  never 
be  used  at  all  in  the  exchange  '  operation. 

Credit  being  in  its  simplest  form  a  transfer  of  goods  in- 
volving an  obligation  to  return  an  equivalent  in  the  future, 
it  will  be  found,  however,  that  in  modem  society  credit  has 
developed  in  practice  into  something  more  akin  to  money* 
Clearly  enough,  it  does  not  act  as  a  standard,  or  common 

*  The  idea  that  credit  ii  expanded  according  to  the  wiU  of  the  hanker,  and 
that  it  it  capable  of  nndae  expansion,  without  rehition  to  eonndnew  of  reeooroei, 
reflects  a  confusion  between  legitimate  and  illegitimate  credit.  Excluding  ftand- 
nlent  banking  and  abnormal  credit,  the  lender  obtains  fnll  and  snfficienft  Talne 
for  CTery  liability;  his  operations  are  based  on  salable  goods.  Cf.  Nicholson, 
op,  eit.,  p.  74  :  **  There  is  no  limit  to  the  creation  of  credit  sabetitntes  for  ooin, 
except  the  will  of  bankers,  traders,  and  merchants." 

*  "  Probably  not  one  bill  in  100,000  is  ever  paid  in  money  or  bank-notM.*' 
IfeLeod,  pp,  cit.,  I,  p.  817. 


CREDIT  88 

denominator.    Its  essential  relation  to  the  snbjeot  of  money 
18  to  be  foond  in  the  &ct  that  society  has  in  credit  created  a 
medinm  of  exchange.    Credit  is  the  natural  re-   ^^ 
snlt  of  the  premium  always  existing  in  business  BMdiam  of 
transactions  to  evolve  a  means  of  avoiding  the  *^^       ' 
risk  and  loss  attending  the  actual  transfer  of  the  valuable 
standard ;  and  it  remains  in  use  because  transactions  involving 
futurity  are  thereby  rendered  possible  and  legitimate  to  the 
immense  advantage  of  commerce  and  industry.    It  is  the 
evolution  of  a  refined  system  of  barter,  rendered  necessary  by 
division  of  labor,  the  interdependence  of  industries,  and  the 
introduction  of  the  time  element.    A  clear  understanding  that 
credit  is  based  on  goods,  that  its  service  is  that  of  a  medium  of 
exchange,  is  necessary  to  a  just  treatment  of  the  difficult 
question  of  the  effect  of  credit  upon  the  prices  of  goods,  — 
to  be  discussed  later. 

The  reason  for  the  common  belief  that  credit  is  based  upon 
and  limited  by  money,  is  evidently  to  be  found  in  the  fact 
that  all  the  evidences  of  credit  transactions  (such  . 
88  notes,  bills,  checks,  book  credits)  are  drawn  in  liquidated 
tenns  of  money ;  and  that  every  business  man  ^  '^'^•y- 
assumes  that  his  checks,  or  deposit  account,  or  bills  payable, 
can  be  liquidated  in  money.  If  this  were  not  so,  he  reasons, 
in  preparing  to  meet  his  own  obligations,  what  would  be 
their  value  to  him  ?  Paradoxical  as  it  may  seem,  it  is  abso- 
lutely true  that  the  mass  of  obligations  could  not  possibly  be, 
and  were  never  really  intended  to  be,  liquidated  in  actual 
money.  The  fundamental  truth  is  that  the  quantity  (and 
Talne)  of  goods  vastly  over-passes  the  quantity  (and  value  ) 
of  money ;  only  a  portion  of  the  wealth  of  any  community  is, 
or  ought  to  be,  invested  in  its  machinery  of  exchange.  Pro- 
Tided  that  exchanges  go  on  efficiently,  the  less  the  country's 
wealth  invested  in  this  unproductive  form  the  better.  To 
speak  as  if  a  country  were  better  off  the  greater  the  amount 
invested  in  its  money  machinery  is  to  glorify  the  fact  of  its 
backward  commercial  growth ;  such  an  attitude  would  imply 
that  a  farmer  could  turn  the  soil  better  by  a  plough  deco- 


84  THE  PRINCIPLES  OF  MONET 

lated  with  costly  precious  stones  when  one  worth  one  one- 
thoosandth  as  much  would  do  the  work  quite  as  welL 
Inasmuch  as  all  the  population  of  a  walled  city  do  not 
wish  to  pass  through  its  gates  at  once,  a  few  gates  suffice  at 
any  one  time ;  so,  likewise,  not  all  of  the  mass  of  goods  are 
seeking  exchange  at  the  same  moment.  As  a  consequence, 
the  amount  of  money  needed  for  the  purposes  of  exchange 
Ib,  of  course,  &r  less  than  flie  total  amount  of  goods.  This  is 
an  economic  commonplace. 

The  reasons  why  actual  cash  is  needed  are  not,  except  in 
small  retail  transactions,  generally  those  which  have  to  do 
with  efficiency  of  exchanges.  In  tiie  ceaseless  circuit  of  mov- 
ing goods,  men,  getting  desired  satisfactions  by  giving  one 
kind  of  surplus  goods  for  others  not  possessed,  do  not  care  for 
money  itself.  Indeed,  it  is  the  last  thing  men  really  need ; 
since  exactly  as  long  as  money  is  held  does  the  owner  lose, 
because  money  itself  is  barren.  It  can,  of  itself,  not  give  any 
satisfaction  (as,  e.  g^  in  Ladysmith  during  the  siege).  There- 
fore every  intelligent  manager  tries  to  keep  on  hand  as  little 
money  as  possible;  to  the  extent  that  he  is  obliged  to  hold  it, 
it  earns  no  interest.  Hence  the  desire  to  invest  it  at  once  — 
that  is,  to  exchange  it  for  goods,  or  to  set  it  going  in  produc- 
tion by  buying  a  share  in  some  productive  enterprise. 

The  final  and  conclusive  evidence  that  goods,  not  money, 
form  the  basis  of  credit  operations,  is  given  when,  in  times 
In  Muiict  of  distrust  and  panic,  almost  every  one,  wish- 
Uq!^ditodbj^  ing  to  anticipate  maturing  obligations,  tries  to 
v^^^'  turn  goods  into  actual  money.    Then  it  is  seen 

that  it  cannot  be  done :  an  impasse  is  met.  And  naturally ; 
if  there  were  no  fright,  no  panic,  men  would  not  think  of 
struggling  for  money.  That  effort  arises,  not  in  the  normal 
processes  of  exchange,  but  from  abnormal  conditions  of  over- 
trading, misjudgment,  and  ill-adjusted  production,  when  at 
the  same  time  legal  obligations  ^  must  be  met  (supposedly)  in 

1  On  this  point,  howeTer,  see  the  exposition  (in  chap,  sir)  that  legal  pay^ 
ments  themaeWes  are  made  in  the  forms  costomaiy  in  tiie  oommnnity,  and  not 
even  then  neoessarilj  in  lawfol  money. 


CREDIT 


86 


money*  In  brief,  not  all  transactions  caa  be  liquidated  at  once 
m  actual  money ;  and  if  it  were  possible,  that  is  not  a  process 
which  would  most  economically  provide  for  our  daily  wants. 
Tlie  best  machinery  of  exchange  is  that  which  enables  our 
own  product  to  be  most  easily  exchanged  for  the  various 
goods  which  we  desire ;  and  money  is  but  one  of  the  means 
to  the  end.  Credit,  also,  is  an  important  instrument,  or 
medium  of  exchange.  Certain  reserved  of  money  are  nee* 
easary  parts  of  the  system,  to  provide  against  lack  of  confix 
dence,  general  distrust,  and  unreasoQing  human  nature.  As 
Hcl^od  says;*  *' Though  in  every  system  of  Credit  there 
must  be  an  ultimate  reserve  of  specie,  yet  that  ultimate  re- 
serve does  not  bear  a  constant,  fixed  ratio  to  the  quantity  of 
Credit;  but  it  mainly  depends  on  the  organization  of  Credit; 
the  more  highly  organized  the  system  of  Credit  is,  the  less  is 
the  requisite  amount  of  the  ultimate  reserve  of  specie.  .  .  * 
Any  amount  of  Credit  may  be  created  and  extinguished  with- 
out any  relation  to  the  quantity  of  Money." 

§  8,  Credit  will  here  be  treated  only  in  so  far  as  it  performs 
a  function  of  money,  and  in  a  way  to  give  us  a  better  under- 
staBdipg  of  the  phenomena  of  prices.  Hence  the  history  of 
credit,  the  various  legal  distinctions,  and  a  detailed  examina- 
tion of  its  many  forms  do  not  seem  to  be  relevant  to  this 
inquiry.  Most  of  these  points  have  been  thoroughly  studied 
by  Knies  in  his  monumental  work  on  CrediL 

The  functions  performed  by  credit  should  appear  clearly 
from  the  above  discussion: 

(1)  Growing  out  of  the  evolutionary  proe^ses  of  industry^ 
whose  result  is  to  increase  the  product  of  the  community,  the 
control  of  additional  capital,  in  order  to  discount  Fu„eUoM 
the  future,  was  a  proper  desire.  Credit,  in  its  «>'«^it. 
inception,  is  not  an  increase  of  capital,  but  a  means  by  which 
capital  can  be  given  mobihty,  and  hence  greater  efficiency; 
just  as  horses,  although  they  give  to  cavalrymen  no  in- 
j&TeBm    in     actual    numbers,    allow    an    increased    activity 


THE  PBDTCl 


%B 


and  mobilitj  which  ia  equivalent  to  a  greater  foroe  of  men. 
Credit  does  not  increase  capital  in  any  material  Beoee.  If, 
Credit  do«tiat  ^  McLcod  says,  legal  rights  of  action  (origi* 
cr«A£«  cftpiui,  nating  in  a  transfer  of  goods)  are  credit^  and  if 
these  rights  can  be  bought  and  sold,  there  is  an  increase  of 
exchangeable  things,  or  wealth.  But,  even  tlien*  it  is  as  plain 
as  a  pikestaff  that  the  actual  means  of  satisfying  men*a  wants 
hare  not  been  increased  by  merely  dickering  in  the  titles 
to  such  goods  —  any  more  than  by  increasing  the  numbetr 
of  names  given  to  a  man  do  you  enlarge  his  muscles^  braiot  or 
stature.  By  credit,  capital  itself  is  not  increaaedt  any  mom 
than  a  man's  own  muscular  power  is  increased  when  be  is 
using  a  crowbar,  although  he  is,  by  such  a  devicei  mak- 
ing a  more  efficient  use  of  the  muscle  which  he  already 
possesses. 

(2)  The  quality  possessed  by  credit  of  enabling  capital  to 
become  more  efficient  (like  the  crowbar  for  the  workman) 
Cr«dit  is  tbe  thing  which  has  led  some  to  say  that  credit 

Tm"^ji>t  actually  increases  a  country*8  capital*  Clmrly 
e*pit*i-  enough,  traasferring  goods  is  not  a  creation  of     ,, 

goods;  and  credit  is  a  far  different  thing  from  produetian^^ 
But  the  increase  in  the  efficiency  of  any  agency  of  production^^ 
bears  fruit  in  a  distinct  increase  of  product.  In  every  com- 
munity there  are  some  floating  funds  awaiting  a  suitable 
investment ;  new  capital  is  constantly  coming  forward ;  some 
capital  is  turning  from  one  bmnch  of  industry  to  another, 
from  one  district  or  state  to  another  >  some  persona  aiB  retii^ 
ing  from  business ;  inheritances  may  have  been  received  by 
minors  or  women,  incapable  of  directing  the  management  of 
their  capital  —  from  such  sources  as  these  the  supply  of  loan- 
able funds  coming  forwarti  to  join  the  vast  amount  already 
engaged  in  industry  creates  a  reservoir  of  capital  which  by 
credit  institutions  or  by  private  persons  is  readily  passed  into 
the  hands  of  those  who,  either  because  of  superior  manage- 
ment or  of  special  demand  for  certain  goods,  find  pressing 
use  for  additional  means.  Automatically,  credit  allows  capi- 
tal to  go  into  those  industries  which  are  most  prosperous,  and 


C£E01T 


8T 


witlidmws  it  ffom  those  which  c&n  make  less  fit  use  of  it.i 
Tbos  cuedit  mdirectly  mcTeades  product  by  aiding  in  the 
facili^  of  employing  capital,  a  prime  agent  of  productioQ. 

(S)  By  coining  propeity  into  means  of  payment^  as  already 
described,  credit  increases  enormously  the  Yolatility  and  trans* 
ferability  of  all  kinds  of  salable  goods  for  indus^  ^^. 
tiial  ud&.    It  changes  control  over  future  gooda,  ai«m«diaia 
or  goods  in  fixed  form  or  place,  into  a  control      **^««««* 
cTer  present,  or  usable  goods*     In  this  fashion  credit  per- 
forms the  ftmction,  on  a  large  and  imposing  scale,  of  a  medium 
of  exchangep' 

(4)  When  a  person  is  enabled  by  aid  of  credit  institutions 

to  coin  an  enlarged  quantity  of  goods  into  means  of  present 

payment,  his  power  of  purchase  (supposedly)  in  cwut 

caah  at  any  one  moment  is  limited  only  by  his  ^^^^^ 

money  and  the  amount  of  salable  and  bankable   ^"tetpricw. 

goods  be  possesses.    To  be  sure,  these  grants  of  credit  de- 

mmi  inTariably  the  necessity  of  repayment ;  but  the  means 

ot  repayment  (aa  well  as  the  obtaining  of  credit)  depend  on 

there  being  enotigh  salable  goods  forthcoming  at  maturity  to 

meet  the  obligations.     If  goods  are  salable,  the  change  into 

tmm  of  money  is  an  easy  and  secondary  matter.     On  the 

(stiter  hand,  miscalculations,  accidents,  and  unforeseen  events 

may  prerent  repayment  by  stopping  the  outcome  of  goods, 

or  by  lowering  their  value  through  some  check  upon  demand* 

The  possibility  of  buying,  however,  on  an  enlarged  scale  by 

the  me  of  credit^  no  matter  what  its  perils,  exists.     It  is  a 

metss  of  throwing  a  vast  purchasing  power  into  any  one 

^iicfion ;  andt  as  we  shall  soon  see,  it  is  capable  of  abnormal 

eitamon  in  g^ieral.    The  immediate  effect  of  elation,  hope- 

1q1ii«88»  and  prosperity  is  certain  to  cause  an  extension  of 

umupported  or  false  credit,  and  to  aid  in  the  irregular  and 

'  Thii  irxfl  fallj  espMned  tr^  Bftgebc^,  Lombud  Str««t,  p,  13  ff.  CI.,  iko» 
€Mmm,  Lwdiiig  Prwiciple»,  p,  «t. 

^  Mciiod  Lb  quite  right  in  mpng  that  ''the  irne  fnnctioii  <it  eredit  ti  to  briag 
Ukb^anici«f«e  the  present  T&la«  td  Fntoie  PnsAtt'*  (ep,  eU.,  I,  p.  S8;  id,  a&fo 


88  THE  PRINCIPLES  OF  MONEY 

extreme  movements  of  market  (not  normal)  prices.  Hence 
the  cycles  of  rising  and  falling  prices  are  exaggerated  bjr  this 
possible  use  of  credit.^ 

§  4.  Various  forms  of  credit  arise  from  a  transfer  of  goodii 
—  the  idea  essential  to  all  credit,  —  but  they  differ  in  many 
ways  according  to  the  agreement  of  the  parties,  the  business 
habits  and  traditions  of  the  community,  and  especially  for 
reasons  arising  from  different  legal  methods  of  enforcing  re- 
payment. In  &ct,  the  forms  of  credit  transactions  and  their 
classification  belong  more  to  a  legal  ^  than  to  a  monetary 
study,  in  which  one  may  easily  be  led  away  from  the  funda- 
mental questions  involved. 

The  Unds  of  credit  obligations  differ  from  each  other  mainty 
as  regards  the  methods  of  securing  repayment  It  is  in  sudi 
Kindi  of  endit  ^'^7^  ^^^  ^^  business  public  has  gradually  worked 
t«nMctioiif.  Qxit  processes  of  loan  obligations  which  allow  the 
lender  to  eliminate  almost  entirely  the  question  of  personal 
confidence  in  the  borrower.  Instead  of  a  simple  promissoiy 
note  given  by  the  borrower  (and  indorsed  by  a  fellow- 
merchant),  a  note  secured  by  the  deposit  of  sufficient  collat- 
eral, made  up  of  salable  securities,  is  a  metliod  by  which  an 
estimate  of  the  personal  honesty  or  probity  of  the  borrower  is 
unnecessary.  In  such  an  operation  the  main  task  is  to  keep 
informed  as  to  the  prices  of  the  collateral,  and  to  see  that  the 
value  of  the  securities  is  always  sufficient  to  cover  the  loan. 

Notes  discounted  on  occasion  of  an  actual  sale  of  wheat» 
wool,  cotton,  or  the  like,  evidenced  by  certificates  or  bills  of 
^romiuory  lading,  afford  a  basis  of  normal  and  legitimate 
Botas.  credit.    Just  to  the  extent  that  discounted  notes 

are  based  only  on  personal  judgment  or  favoritism,  without  a 
basis  of  goods,  they  are  speculative  and  abnormaL     Such 

1  This  oonclnsion  mmy  be  ooosidered  in  connectioii  with  A.  Wagnor't  point 
{op.  cit,  pp.  394-^97)  that  credit  tends  to  steadj  prices  bj  allowing  capital  to  flow 
from  industries  in  which  businen  is  slack  and  prices  low  into  those  In  whtdi 
demand  is  brisk  and  prices  high. 

*  McLeod's  stndj,  as  before  remarked,  has  gone  to  great  extremee  in  this 
direction,  much  to  its  loss  of  usefulness  for  the  study  of  monetary  problems. 


CREDIT  89 

bvwiess  is,  no  doubt»  carried  on,  but  it  is  uncertain  and 
questionable.    Of  course,  in  case  of  a  borrower  of  means  and 
high  credit,  a  loan  may  be  made  not  ostensibly  based  on 
goods,  if  no  collateral  is  exacted ;  but,  in  reality,  it  will  always 
be  found  that  the  lender  believes  that  the  borrower  has  prop- 
erty which,  in  the  event  of  disaster,  can  be  taken  by  due 
course  of  law  as  an  equivalent  for  the  loan.    That  is,  ^  high 
cxedit ''  is  only  a  way  of  describing  the  chance  of  falling  back 
on  some  kind  of  wealth  which  lies  in  the  possession  of  the 
borrower;  this  property  is  security,  but  it  is  not  at  once  as 
easily  reaUzed  upon  as  collateral.    To  protest  a  note,  get 
judgment  of  a  court,  and  execute  by  levying  on  the  debtor's 
estate  is  a  longer  and  more  uncertain  process  than  assimiing 
possession  of  collateral  already  deposited ;  but,  in  either  case, 
the  difference  is  one  due  only  to  greater  care  as  to  repayment. 
Although  the  various  forms  of  credit  differ  in  tiie  legal 
fonnalities  to  secure  repayment,  goods  lie  behind  each  of 
tiiese  f  onus. 

Promissory  notes  of  institutions  are  usually  the  final  out^ 
oome  of  a  transfer  of  goods.  When  a  bank  makes  a  loan  and 
innes  its  own  notes  to  the  borrower,  it  receives  ^  ^ 

Bank  notot. 

in  obligation  giving  the  right  (properly  secured 
by  collateral,  or  otherwise)  to  receive  a  sum  in  the  future, 
and  Mb  obligation  becomes  a  valuable  item  in  its  resources ; 
on  the  other  side,  the  borrower  gets  the  right  to  draw  on 
denuwd  in  the  form  of  the  bank's  own  notes.  Bank  notes, 
based  on  the  security  of  such  commercial  assets,  are  an  elastic 
as  well  as  a  safe  form  of  credit  operations ;  because  salable 
goods,  in  the  process  of  getting  from  producer  to  consumer, 
are  the  final  recourse  over  and  beyond  all  securities  —  since 
coUateial  is,  after  all,  only  a  title  to  salable  property  or 


Piomissoiy  demand  notes  of  governments  have  an  entirely 
different  character.    They  are  usually  the  issues  of  a  borrower, 
and  not  of  a  lender;  they  are  evidences  of  debt 
geoeially  not  based  on  any  goods  having  a  market- 
able character ;  and  for  the  goods  received  at  the  tune  when 


90 


THE  PEINCIPLES  OF  MONET 


the  notefi  were  issued  no  equiyalent  property  ifi  teld  as  re- 
sources. Ordinarily,  such  property  is  obtained  solely  In  order 
to  be  entirely  consumed.  The  security  for  repayment  is  not 
of  a  kind  on  which  any  sums  can  be  collected  by  the  creditor, 
since  the  government  cannot  be  proceeded  against  through  the 
courts.  Consequently^  the  repayment  being  dependent  on 
the  uncertainties  of  partisan  politics,  both  the  intention  and 
the  ability  of  the  issuer  to  pay  are  clouded  with  doubt.  The 
demand  notes  of  a  state  may  thus  be  changed  iuto  promises 
whose  fulfilment  has  been  removed  into  the  indefinite  future. 

A  borrower  or  a  depositor  at  a  bank  has  a  demand  liabilityj| 
which,  although  different  in  form  from  bank  notes,  is  the  same 
Checks  ^^  kind.    The  borrower,  when  granted  a  loan, 

Aod  draft*.  ig  given  the  right  to  draw  on  demand ;  that  is,  he 
at  once  becomes  a  depositor.  This  right  to  draw  actual 
money  is,  in  ordinary  laige  transactions  and  in  normal  times, 
seldom  exercised ;  because  the  cash  may  be  lost  or  stolen,  and 
because  the  right  to  draw  is  itself  good  means  of  paymentp 
indebtedness  being  conveniently  cancelled  by  a  transfer  of 
rights  to  draw  in  the  form  of  checks  or  drafts.  The  deposit 
account  is,  in  the  main^  the  evidence  of  operations  more  or 
less  remotely  based  on  goods,  and  checks  are  the  forms  by 
which  claims  on  the  deposits  can  be  passed  to  others.  For 
instance,  a  sale  of  cattle  may  be  behind  a  $10,000  deposit; 
then  by  checks  $5000  may  be  transferred  to  others  for 
lumber,  and  $5000  for  dry-goods.  In  essence,  the  credit 
transaction  was  the  coinage  of  cattle  into  means  of  payment 
(represented  in  terms  of  the  standard  by  $10,000)  in 
deposit  account;  then  the  value  of  the  cattle  was  bartered' 
for  lumber  and  dry-goods*  At  large  institutions  in  city 
communities,  the  exercise  of  credit  is  measured  better  by 
bank  deposits  than  by  bank  notes  even^  better  than  by  the 
mass  of  checks  and  clearing-bouse  totals,  although  the  latter 
are  approximately  correct.  As  the  whole  of  the  deposit 
account  may  not  be  drawn  upon,  the  bank  deposits  show 
more  accurately  than  the  checks  actually  drawn  the  extent^ 
of  the  credit  operation. 


CREDIT 


ftl 


Continental  countries  in  Europe,  by  habit^  employ  the 
deposit  and  check  system  leas  than  the  Anglo-Saxons,  but 
instead  they  make  extended  use  of  the  bill  of  BUUof 
exchange.  The  seller  draws  on  the  buyer,  and  •*^wig«* 
QBes  the  bill  as  a  means  of  payment  to  his  creditor,  one 
bill  often  liquidating  a  score  of  transactions.  The  goods 
which  through  a  transfer  originated  the  first  employment  of 
the  bill  aiie  thus  many  times  in  succession  used  to  offset  the 
payment  for  other  goods  of  equivalent  values.  And,  even 
when  created  by  banks,  bills  are  based  on  the  transfer  of 
the  commodity  gold.  The  bill,  when  drawn  for  a  date  in 
the  future,  is  thus  only  one  form  of  accomplishing  a  credit 
operation.  When  finally  presented,  alter  its  round,  it  ia 
a  charge  against  the  drawea*s  account;  but  on  its  way  it 
has  made  many  payments. 

Simpler  methods,  without  resort  to  the  use  of  a  credit 
institution,  are  adopted  when  a  buyer  obtains  goods  on  ac^ 
count,  the  book  entrv  beins?  the  evidence  of  a 

7  j»  1  *  .  ,      .  ,  Book  ctvdki. 

transfer  of  goods,  carrying  with  it  an  under- 
standing that  the  buyer  will  pay  an  eqmvalent  at  some  date 
in  the  future.  Such  entries  may  not  be  followed  by  the 
drawing  of  bills  of  exchange,  or  by  the  signing  of  promissory 
notes,  which  could  be  discounted  by  the  seller.  These  forms 
of  credit,  therefore,  while  very  numerous^  are  not  of  a  kind 
to  be  passed  from  hand  to  hand,  and  their  power  in  ex- 
changing other  goods  is  nil  The  security  for  repayment  is 
in  the  loosest  legal  form ;  hence  it  is  one  in  which  great  risk 
resides.  In  this  respect  it  Is  more  troublesome,  in  case  of 
commercial  failure,  than  are  promissory  notes. 

While  the  above  description  gives  the  general  characteris- 
tics of  the  commonest  forms  of  credit,*  it  must  be  recalled 

1  PhiUppcmcli  («f .  ct^i  pp.  S44|  245)  4iAtiiigQiiheB  between  Ibe  followbg  kind* 
of  tt«<lit  tiausactiDDi ;  {i)  In  respect  of  the  person  of  the  debtor,  credit  maj  be 
pabUe  or  prirftte.  (2)  In  respect  of  the  dunttitm  of  tbe  traDAactioOi  credtt  m&j 
be :  (a)  sliort  or  long  credit ;  {b)  terminable  credit^  and  that  whose  limit  ia  tiot 
expreialy  it^t«4;  and  (c)  credit  terminable  on  demand.  (3)  In  respect  of  tha 
kind  of  Mecun't^j  credit  maj  be  real  or  personal.  (4)  In  reepect  of  the  u§€  made  of 
the  p^oda,  credit  maj  be  production  or  conntimption  credit. 


82  THE  PRINCIPLES  OF  MONET 

that  they  Taiy  in  many  details  of  law  and  custom,  which  lie 
outside  of  our  present  study.  It  may  be  well,  however,  to 
add  the  distinction^  between  a  credit  operation  in  which 
(1)  the  property  transferred  to  the  borrower  must  be  returned 
in  the  identical  form  loaned  (e.  ^.,  a  horse),  and  (2)  one 
which  ^ves  absolute  control  over  the  thing  loaned,  permit- 
ting its  entire  destruction,  and  demanding  only  a  return  in 
kind  (e.  ^.,  a  return  of  red  wheat  No.  2).  Ordinarily,  the 
courts  enforce  the  return  of  an  equivalent  value.^ 

Not  infrequently  ^  credit  is  classified  as  real  or  personal ; 
with  some  mixed  cases.  In  real  credit  the  chance  of  repay- 
ment is  founded  on  some  thing  given  as  security,  having 
value,  or  ease  of  conversion  into  money;  while  in  personal 
credit  faith  is  reposed  in  the  word  of  the  debtor.  The  mixed 
cases  cover  some  instances  of  ordinary  discount,  which  are 
based  partly  on  the  personal  character  of  the  borrower,  and 
partly  on  the  legal  claim  against  property  given  by  his  note* 
As  explained  above,  personal  credit  is  not,  in  my  judgment^ 
a  legitimate  business  transaction;^  only  that  which  insures 
repajrment  of  goods,  by  a  more  or  less  strictly  drawn  security, 
is  to  be  regarded  as  legitimate.  In  the  future,  doubtless, 
personal  cr^t  will  properly  become  a  diminishing  part  <tf 
the  business  of  large  and  solid  institutions. 

§  5.  Such  being  the  nature,  basis,  functions,  and  forms  of 
credit,  as  already  developed,  it  is  for  us  to  consider  next 
Normal  credit  the  important  classification  of  credit,  in  regard 
defined.  ^  '^^  effccts  and  use,  into  no/mal^  and  abnormal 

1  Cf.  McLeod,  op,  cit,  I,  pp.  U7,  148.  *  See  infra,  chap,  xii,  $  S. 

•  Cf.  P.  Leroy-Beanliea,  op.  eit.,  Ill,  pp.  856,  357. 

^  When  discussing  the  joBtification  of  a  loan  in  the  prodnctirenesi  of  the  indiw- 
trj  for  which  it  is  nsed,  Hadley  {Economict,  p.  143)  raises  this  point  when  he  emji 
the  creditor  should  "  look  to  the  inyestment  rather  than  to  the  borrower  for  hiM 
■ecuritj." 

*  Several  jrears  after  using  this  classification  in  mj  lectures,  I  found  this  ad- 
mirable statement  of  P.  Leroy-Beaulieu  {op.  eit..  Ill,  p.  358) :  "  Credit  oagfat  not 
to  be  a  simple  anticipatory  claim  on  wealth  still  in  the  future  and  uncertain ;  it 
should  be  based  upon  a  real  and  actual  thing,  —  wares  produced  and  not  jet  aold, 
^vares  sold  and  not  yet  paid  for,  even  wares  still  in  course  of  production,  if  aU  ths 


CREDIT  98 

cndit  Normal  credit  is  the  coinage  of  goods,  or  property, 
into  present  means  of  payment  (in  terms  of  the  standard, 
e.  g^  dollars  of  gold)  in  amount  no  greater  than  the  value 
of  the  marketable  goods,  or  property,  owned  by  the  borrower. 
That  is,  a  person  can  get  normal  credit  only  by  showing 
that  he  has  the  marketable  wealth,  or  a  reasonable  certainty 
of  such  wealth  in  the  future,  which  will  fully  secure  the 
lender  for  the  loan.  By  transferring  to  the  lender  the  claim 
to  his  cattle  or  grain  sold,  the  borrower  gets  in  return  pres- 
ent means  of  payment  in  the  form  of  a  deposit  account  at  a 
bank;  and  so  long  as  the  claims  held  by  the  bank  are  based 
upon  actual  and  salable  property,  the  transaction  is  sound 
and  normal.  At  time  of  maturity  the  note  is  paid,  and  the 
leserves  of  the  institution  are  freed  for  other  operations  of  the 
flune  kind.  The  means  of  payment  granted  to  the  borrower 
are  used  by  him  to  pay  for  other  goods,  or  for  services  in  pro- 
duction. In  short,  the  process,  at  the  bottom,  is  an  exchange 
of  goods  against  goods,  facilitated  by  the  exceedingly  efficient^ 
use  of  forms  of  credit  provided  by  credit  institutions.  With- 
out the  aid  of  credit,  each  person  (or  firm)  must  go  on 
producing  with  only  the  present  goods  which  he  owns, 
while  much  of  his  property  must  remain  to  him  inert,  and 
incapable  of  being  used  as  purchasing  power.  Under  the 
modem  division  of  labor  each  producer  needs  the  results  of 
others  for  present  operations  until  his  goods  are  finished.  If 
all  credit  were  abolished,  it  would  affect  all  operations  now 
leqairing  some  aid  in  present  goods  for  which  only  future 
repayment  would  be  possible. 
Normal  credit  thus  enlarges  the  purchasing  power  of  a  man 

material  hare  been  obtained,  an  enterprise  not  jet  finished,  bat  which  has 
alreadj  been  carried  to  a  certain  point  of  advancement.  .  .  .  Snch  is  normal 
credit ;  ita  function  is  not  that  of  commencing  enterprises,  bat  of  intervening 
at  a  certain  stage  of  their  derelopment  to  facilitate  completion,  and  espedallj 
nDewaL** 

McLeod  hints  not  remotelj  at  normal  credit  in  sajing :  **  Credit  always  has  to 
be  redeemed :  and  if  this  can  be  done  the  Credit  has  been  soond.  Hence  Credit 
it  nerer  excessive,  whatever  its  absolute  amount  may  be,  as  long  as  it  always 
I  into  itself"  (op.  eit.,  I,  p.  318). 


94 


THE  PEIKCIPLE8  OF  MONEY 


to  the  extent  of  all  bis  bankable  property ;  or,  m  ot^er  words^^ 
it  gets  into  the  circulatory  movement  of  exchange  of  goods 
Par«iiAEiii|c  against  goods  mora  forms  of  property  than  could 
JSIJ*by  iEIIa-  otherwise  be  put  in  motion.  Suppose,  by  way  of 
Mm  gx>«b.  illustration,  A  tcnday  sold  $10,000  of  cattle  on  sixty 
days'  time,  and  has  also  in  hand  $2000  in  cash ;  what  is  his 
present  purchasing  power?  Evidently,  by  discounting  hjs 
bin  or  note^  it  is  in  all  (less  the  discount)  $12,000,  If  he 
could  not  have  had  credit,  it  would  have  been  only  92000. 
The  same  would  be  true  of  B,  who  had  sold  flour ;  of  C,  who 
had  sold  steel ;  and  so  on  through  the  whole  industrial  com- 
munity. If  no  credit  were  possible,  in  each  case  the  purchaa- 
ing  power  would  have  been  limited  to  the  cash  in  hand ;  on 
the  other  hand,  by  a  general  resort  to  credit,  each  and  all 
would  have  purchasing  power  to  Hie  extent  of  their  bankable 
property. 

The  question  of  importance  now  raised  is;  What  is  the 
effect  of  this  enlarged  purchasing  power  on  prices?  Or, 
NcmnA]  efedit  "^^^^  ^^  ^^  influence  of  normal  credit  on  prices  f 
»MMof  g«ii-  A*s  cattle  have  been  coined  into  means  of  pay- 
•jid|E*nBrki  ment  expressed  in  dollars^  and  ix  it  is  directed 
to  the  purchase  of  B'a  flour  (which  has  also 
provided  to  B  means  of  payment  expressed  in  terms  of  the 
standard  money),  there  is  a  demand  for  B's  flour  exactly 
counterbalancing  the  demand  of  B  for  A's  cattle  (supposing 
B  to  have  that  demand).  Enlarge  the  operations  to  include 
C^  O,  and  all  others ;  then  the  transactions  will  balance  all 
around ;  and  the  phenomena  will  become  simply  an  exchajige 
against  each  other,  of  a  greater  number  than  before  of  goods 
at  relative  values  dependent  on  the  reciprocal  demand  and 
supply  for  each  commodity.  A  general  increase  of  purchaa- 
ing  power^  arising  from  normal  credit,  acts  upon  prices  in  no 
other  way  than  would  an  increased  production  of  all  goods. 
This  is  the  case  where  general  supply  is  identical  with  geneml 
demand ;  ^  an  increase  of  supply  is,  ipio  facto^  an  increase  of 

1  "  Ldl  Qji  Atippoee  a  rigim^  of  1»Tter :  under  each  tlrcumBt&iiee*  Snpplj  would 
cotuiM  in  the  commodities  offered  in  exclujige  for  othti  eommoditleA,    In  whft& 


CREDIT  AS 

dem&nd.  If  an  increased  amount  of  goods  come  forward  to 
be^^cbanged,  we  may  have  the  phenomena  of  changes  in 
«ki?e  yalues,  and  so  in  relative  prices  —  accordingly  as 
10m  goods  as  compared  with  others  are  unequally  affected 
by  leladTe  demand ;  but  it  does  not  at  all  follow  thereby  that 
there  will  be  any  change  in  the  prices  of  the  general  mass  of 
goods  relatiTely  to  gold,  that  is,  a  change  in  the  general  level 
of  prices  (unless  there  comes  in  with  the  supposed  increase 
lome  improvement  in  the  arts  which  might  lower  the  price  of 
each  unit  of  product).  And  the  same  would  be  true^  also,  of 
M  increased  activity  of  exchanges  brought  about  by  normal 
credit  Let  m  represent  all  the  goods  actually  exchanged  only 
Irj'  means  of  money,  and  let  x  represent  goods  exchangeable 
b)'  credit*  Then  the  total  mass  of  m  +  ^  would  be  exchanged 
agaimt  each  other  with  practically  the  same  resultSi  so  far  as 
jgtuBTfd  prices  go,  as  m  alone  would  have  been.  The  end 
ffoiild  be  the  same.  Credit  has  been  the  evolution  of  a 
refined  system  of  barter,  enabling  goods  to  be  exchanged 
ipiast  goods*  When  looked  at  generally,  all  bankable  goods 
hm  the  supply » and  at  the  same  time  the  demand*  In  the 
last  thirty  years,  in  fact,  we  Iiave  seen  an  enormous  enlarge- 
ment of  the  output  of  goods,  and  with  it  has  come  a  corre- 
qjoiKliDg  expansion  of  bank  deposits,  but  yet  the  prices  of 
mch  unit  (ton,  bushel ^  etc,)  of  goods  are^  in  general,  less  Uy 
(by  than  at  the  beginning  of  this  period. 

iwild  Deisind  in  such  i  dw  comiit  1  We  cua  only  giTA  th«  same  reply ;  in  tba 
eonuBoditteft  offered  in  txchmnge  for  otl&er  commoditiei.  In  other  wortla,  mider 
tiie  iitDpleiiC  ftud  most  elemeotuj  form  of  excb^nge,  Dem&iad  and  Supply,  ftsgea- 
e^ml  phenomeBtt^  as  aggregsles,  eonld  not  be  diacriininated.  Each  comiiioditj 
wq^d  be  in  tmM  Supply  snd  Demand  —  Supply  in  refereoce  lothe  persoa  seeking 
to  obtftui  It,  Demand  in  tefeteiice  lo  Ibe  persoii  who  used  it  as  the  memns  of 
obtainiiig  somettuDg  eUe  '*  (p,  24). 

"  A  e-ertaJD  nninber  of  people,  A,  Bi  C»  D,  E,  F,  etc.,  ane  engaged  in  indtistrlal 
oocmpatlonB  ~  A  prodnces  for  B,  C,  D,  E,  F  j  B  for  A,  C,  D,  E,  F ;  C  for  A,  B» 
D,  E,  F,  And  9^  on.  .  ,  .  The  producers  Are  &I&0  coosumeri ;  and  tf,  on  the 
wb0le»  leas  u  produced,  there  wonld,  on  the  whole,  be  fewer  commodities  to  be 
«schsnged.  Bnt  why  should  this  affect  the  proportions  in  whkh  they  are 
ttBchaaged  1  or  why  should  il  affect  the  rolationtt  between  commodities  in  general 
and  momvf  f*'  {p.  91.}  Ciimes,  Leading  PrineEplet  of  FolitioJ  Economy ^ 
clisi|k.  11 


96  THE  PRINCIPLES  OF  MONET 

But,  looking  at  each  transaotion  separately,  a  temporal} 
aberration  in  market  prices  may  often  be  seen.  The  appear- 
Tom   n  '^^^  ^^  ^^  ^^^  demand  may  not  be  simultaneous 

iMiturbauonf  in  all  industries;  in  those  in  which  it  appears 
^  ^"^*  first  there  is  a  new  purchasing  power  relatively  to 

goods  in  other  industries.  If,  for  example,  A's  $12,000  is  all 
offered  for  B's  flour,  a  rise  in  the  market  price  of  flour  may 
result,  without  in  any  way  changing  the  normal  expenses  of 
production  of  flour;  later,  competition  among  millers  may 
appear,  and  the  market  price  will  fall.  Likewise,  if  C  dis- 
closed a  new  demand  for  A's  cattle,  the  market  price  of  cattle, 
as  well  as  that  of  flour,  may  rise ;  but  the  supply  of  cattle 
would,  in  time,  be  affected  by  competition,  and  the  price  of 
each  animal  of  the  larger  total  in  existence  would  tend  to  fall 
toward  the  normal  price.  Thus  by  credit  operations — which 
have  the  same  general  effect  as  an  increased  product  —  there 
may  be  perturbations  of  temporary,  or  market,  prices  up  and 
down;  but  normal  prices  will  be  resumed,  if  any  competition 
exists,  under  the  working  of  a  legitimate  demand  and  supply. 
It  must  be  admitted,  theoretically,  that,  as  normal  credit  may 
produce  temporary  fluctuations  of  prices,  it  may  produce 
possible  changes  in  the  value  of  the  standard;  but  these 
changes  will  run  over  so  short  a  time,  will  be  so  slight  and  so 
numerous,  that  they  will  largely  offset  each  other  and  pro- 
duce no  appreciable  results  on  the  general  level  of  prices. 

But  the  increase  of  purchasing  power  caused  by  normal 
credit  has  led  many  to  believe  it  would  raise  general  prices. 
Normal  cndit  ^^^^  ^  ^^  increase  of  money  is  supposed  to  in- 
not  eqairairat    creasc  priccs.    In  this  instance  some  confusion 

'°*^°*^'  may  be  avoided  by  pointing  out  that,  although 
the  titles  to  the  property  exchanged  by  means  of  credit  are 
expressed  in  dollars,  the  credit  operation  is  not — and,  in  the 
nature  of  things,  cannot  be  —  the  same  as  an  offer  of  actual 
cash.  Many  wrongly  suppose  that  the  additional  purchasing 
power  created  by  credit,  and  expressed  in  terms  of  money,  is 
an  actual  offer  of  money.  A  purchase  of  flour  by  a  check 
for  $12,000  seems,  on  its  face,  to  be  paying  with  a  claim 


CREDIT  97 

(»  112,000  of  cash,  to  be  got  on  demand  at  some  bank. 
But  ft  bank  with  940,000,000  of  demand  liabilities,  and  having 
the  hij^est  standing,  may  not  have  more  than  $10,000,000  of 
cash  m  its  vaults.  That  is,  if  every  one  having  a  credit  obli- 
gation on  demand  were  to  ask  for  lawful  money,  instead  of 
going  on  normally  to  get  from  surplus  goods  to  other  goods 
desiied  as  economic  satisfactions,  no  one  could  succeed ;  and 
there  would  result  a  stoppage  of  credit  transactions  and  a 
soapension  of  payments.  As  before  remarked,  there  never 
could,  nor  should,  be  kept  on  hand  an  amount  of  the  com- 
num  denominator  equal  to  the  sum  of  all  credit  transactions 
stany  one  time;  nor  is  there  really  any  such  intention  in  the 
minds  of  the  business  community.^  Credit  transactions  are, 
in  foot,  except  to  a  very  limited  amount,  not  liquidated  by 
actaal  money.  Hence  it  does  not  follow  that  normal  credit 
eonld  act  in  the  same  way  as  an  offer  of  an  equivalent 
amount  of  standard  money.  That  it  increases  the  media  of 
exchange,  there  is  no  doubt ;  and,  of  course,  those  who  really 
belieye  that  an  increase  of  the  media  of  exchange  directly 
luses  prices,  may  see  the  direct  effect  of  normal  credit  on 
prices.  But  prices,  as  I  think  we  shall  find  out  hereafter, 
most  be  studied  in  relation  to  the  standard  and  not  in  rela- 
tion  to  the  media  of  exchange.  Consequently,  normal  credit, 
not  being  in  reality  an  offer  of  standard  money,  cannot 
change  the  value  of  the  standard  (and  thus  change  prices) 

1  McLeod  {op.  cit,,  1,  p.  316)  wmjb  :  **  BecaoM  a  Bill,  or  Note,  is  an  Obligation 
to  paj  monej,  manj  nnioformed  writers  suppose  that  they  most  always  be  paid 
io  Money  or  Bank  Notes ; "  and  he  goes  on  to  show  that  credit  bears  no  fixed 
relation  to  the  money  in  a  coontiy. 

To  repeat  what  has  been  said  before,  the  real  end  and  purpose  of  production 
and  exchange  is  not  to  get  the  common  denominator,  but  to  secure  those  goods 
which  gire  us  economic  satis^tion.  Hence  only  that  amount  of  the  standard 
is  kepi  on  hand  (that  is,  only  that  part  of  a  country's  wealth  is  invested  in  the 
machinery  of  exchange  and  money)  which  will  meet  the  special  demand  for  the 
actaal  standard  from  time  to  time.  How  much  this  will  be  will  depend  on 
eoqierieiice,  settled  conditions,  intelligence  of  business  men,  chsracter  of  the  com- 
mniuty,  and  the  conditions  of  trade.  If  there  is  no  fright  or  panic,  little  will 
be  needed.    The  demand  for  actual  money  in  a  crisis  is  a  special  case  for  later 


98 


THE  PEINCIPLES  OF  MONET 


bj  EQ  alteration  in  the  demand  of  the  commanity  for  gold. 
Some  additioD&l  demand  may  arise  because  mcTea«ed  bank 
liabilities  require  an  increase  of  neservea ;  but  of  that  later. 

It  may  be  said,  however,  by  men  of  affairs ;  **  If  A  is  not 
granted  discounta  on  the  wheat  which  he  m  baying  in  KaQBaa, 
CbAfi  e  of  ^®  must  stop  buying  and  shipping  wheat ;  and^ 
demand,  001  Consequently^  the  price  of  wheat  will  decline," 
lituf^^i!^  This  is  intended  to  show  that  credit  directly  af- 
P^'"*  fects  prices,  as  much  as  the  offer  of  actual  money. 

This  case,  however,  is  one  of  a  change  in  special  demand  and 
supply ;  it  means  only  that,  if  discounts  on  a  single  article 
like  wheat  are  refusedi  less  property  of  other  kinds,  ei- 
presaed  in  terms  of  money>  is  being,  through  banks,  offered 
for  wheat;  it  means  only  that  wheat  is  changing  in  price 
j^latively  to  other  goods,  not  that  prices  in  general  are  fall- 
ing* Such  a  change  in  the  price  of  a  special  article  could 
be  brought  about  by  a  readjustaient  of  demand^  even  if  credit 
or  money  did  not  form  any  part  of  the  means  by  which 
demand  expresses  itself. 

Normal  credit  cannot  raise  prices  in  general.  Goods,  ex- 
changing against  each  other  with  the  tags  of  prices  attached 
^      ,     ^      to  them,  do  not  act  differently  from  those  without 

NortriAl  credit  *     , 

do«a  not  ruH  such  tEgB.  In  the  casc  of  the  appearance  of  new 
'  goods,  furnishing  a  new  demand  for  other  goods^ 
—  all  being  expressed  in  terms  of  money,  —  it  may  appear  at 
first  as  i£  the  other  goods  must  rise  in  price  under  increasing 
demand.  That  depends  on  the  adjustability  of  supply.  Price 
is  as  much  influenced  through  the  supply  aa  through  the 
demand.  In  a  case  of  particular  supply  and  demand,  such  as 
this,  a  new  and  legitimate  demand  will  increase  the  prices 
of  other  goods,  and  keep  ihem  on  a  higher  level,  only  under 
the  supposition  that  the  increased  supply  is  not  immediately 
forthcoming.  But  in  many  manufacturing  Lndustxies  the 
facilities  for  increasing  the  supply^  as  aoon  as  a  possible 
demand  is  perceived,  are  such  as  to  bring  about  an  instant  re* 
sponse:  more  men  are  engaged,  mora  material  is  worked  up, 
and  needed  adjustments  of  space  and  new  machineiy  are  made 


CREDIT  99 

in  an  incredibly  short  time.    In  fact,  potential  supply  is  soffi- 
dent  in  many  cases  to  keep  down  the  price,  even  under  an 
increasing  demand.    More  than  this,  under  a  demand  for  an 
increased  supply,  it  is  quite  likely  that  the  expenses  for 
producing  each  unit  of  goods  may  be  lowered.    That  is, 
an  increased  demand,  attributable  to  normal  credit,  would 
not  in  many  instances  cause  a  rise  of  prices  in  other  goods. 
In  short,  such  an  effect  of  normal  credit,  shown  in  higher 
prices,  could  be  maintained,  only  in  the  special  industries 
in  which  the  supply  is  controlled,  by  some  sort  of  monopoly 
conditions.     Possibly  the  price  of  steel  rails,  to  illustrate, 
might  for  a  few  years  be  kept  above  normal  prices,  because 
competition  on  a  considerable  scale,  and  a  sufficiently  large 
capacity  in  the  mills  to  meet  an  exceptionally  well-sustained 
demand,  might  not  be  in  existence.     The  general  proposi- 
tion, then,  remains  clear:  in  some  industries  a  demand  aris- 
ing only  from   the  presence  of  an  increased  quantity  of 
exchangeable  goods  will  not  raise  general  prices;  in  some 
it  may  raise  prices  for  a  time,  until  supply  can  overtake 
demand ;  but  it  cannot  spread  to  all  industries,  nor  cause  a 
general  rise  of  all  prices. 

The  instance,  however,  where  the  same  goods  may  have 
been  discounted  many  times,  may  possibly  raise  some  diffi- 
culties. Suppose  that  x  goods  have  been  the  occasion  of 
separate  discounts  to  ten  persons.  The  x  goods  may  have 
been  sold  on  time  by  number  1  to  number  2,  and  number  1  may 
have  had  a  bill  drawn  on  number  2  discounted.  Then  num- 
ber 2  may  have  again  sold  the  same  x  goods  to  number  8,  and 
may  have  obtained  another  discount  based  on  the  transaction. 
And  so  on  to  the  last  person,  number  10,  —  when  ten  dis- 
counts may  have  been  made,  amounting  in  all  to  ten  times 
the  value  of  the  x  goods.  Is  this  operation  an  example  of 
normal  credit? 

On  analyzing  the  transactions  there  can  be  no  shadow 
of  doubt  that  goods  to  the  value  of  the  loans  actually 
underlay  each  discount;  a  cause  of  misunderstanding  may 
arise  only  in  deciding  which  of  two  sets  of  goods  should  be 


100  THE  PRINCIPLES  OF  MONEY 

regarded  as  the  ultimate  secority  for  each  transfer.  If  num- 
ber 10  failed  in  business,  and  did  not  have  the  x  goods  with 
which  to  repay  number  9,  then  resort  must  be  had  to  other 
goods,  or  property,  owned  by  number  10 ;  if  number  10  had 
no  such  goods,  or  property,  then  number  9  loses  entirely  the 
amount  of  his  loan.  But  number  9  is  still  holden  to  number 
8;  and  the  other  goods,  or  property,  of  number  9  must  be 
used  to  pay  number  8.  And  so  on,  back  to  the  beginning. 
If  the  one  set  of  goods,  rr,  disappeared  out  of  the  series  of 
exchanges,  another  set  of  commodities  must  have  been  intro- 
duced from  another  source  to  make  good  the  lack ;  but  goods, 
either  from  one  source  or  another,  formed  the  basis  of  the 
crodit  operation. 

Now,  how  as  to  the  effect  of  such  an  exeroise  of  credit 
upon  general  prices.  If  the  same  x  goods  have  been  dis- 
counted ten  times,  then  a  present  means  of  payment,  or  pur- 
chasing power,  to  an  amount  ten  times  groater  than  the  market 
value  of  the  x  goods  has  been  created.  If  so,  would  this  not 
seem  to  be  a  case  of  abnormal  rather  than  normal  credit? 
Yet  in  each  discount,  so  far  as  the  bank  or  lender  conUL 
know  from  evidences  such  as  bills  of  lading,  there  was 
behind  each  credit  operation  a  basis  of  goods.  If  purchas- 
ing power,  however,  to  the  amount  of  ten  times  the  value  of 
the  X  goods  has  been  provided,  would  not  prices  be  affected 
in  that  proportion?    In  the  end,  I  think  they  would  not. 

It  is  to  be  remembered  that,  in  the  ordinary  world  of  busi- 
ness, such  a  case  ought  not  to  be  regarded  as  an  isolated  one ; 
if  X  goods  are  discounted  ten  times  over,  and  if  the  consequent 
purchasing  power  has  been  offered  ten  times  as  a  demand  for 
other  goods,  we  must  believe  that  what  is  true  of  :r  is  also 
true  of  y,  and  of  a,  i  .  .  .  £.  Hence,  if  (on  a  second  loan) 
x^  is  discounted  and  its  purohasing  power  is  offered  for  y^, 
similarly  discounted,  the  meeting  of  the  two  sets  of  goods 
will  prevent  any  change  of  price,  due  to  an  excess  of  demand 
over  supply ;  for  y^  S&  demand  for  x^i  as  much  as  it  is  supply 
looked  at  from  an  opposite  point  of  view.  Likewise  x^  may 
be  offered  for  y,,  and  so  on ;  or,  in  the  multiplicity  of  actual 


CREDIT    •    -  101 

exchange,  any  of  S|,  ^ . . .  ^^  may  be*  ofiered  against  any 
of  flj . . .  io»  *i . . .  io»  •  •  •  *i . . .  10  >  *"^^  vice  ypr»a.  If  there 
vii^honafide  basis  of  g^ds  behind  each  discQOnt,  and  if  the 
hahit  of  discounting  on  the  same  goods  severaT  .times  is  gen- 
eral, there  would  be  a  general  supply,  fairly  e^^^^  to  the 
general  demand,  and  a  change  in  the  general  price.,  level 
would  not  take  place.  The  element  of  safety  throughout 
the  series  of  operations,  of  course,  depends  upon  the  actu$ijity 
of  the  value  in  each  body  of  goods  discounted.  The  dan)^a 
is  not  so  much  in  the  number  of  times  the  goods  form  a  basis 
of  credit,  but  in  the  possibility  of  granting  the  loan,  in  any 
case,  without  the  foundation  of  value  beneath  it.  Even  if 
this  last  happened,  in  any  one  instance,  the  loss  would  fall 
upon,  and  be  met  by,  only  one  in  the  series  of  exchangers ; 
and  the  others  in  the  group  would  be  unhurt,  if  the  one 
creditor  made  good  out  of  his  other  holdings  the  default  of 
this  one  debtor. 

To  the  extent  that  such  a  frequent  discounting  on  x  had 
not  spread  to  a,  &  ...  ^  then,  of  course,  there  would  result 
a  change  in  the  prices  of  x  relatively  to  a,  i  .  .  .  ar ;  since 
a  greater  demand  came  from  x  for  other  goods,  as  compared 
with  the  demand  from  other  goods  for  x.  How  long  this 
disturbance  of  relative  prices  would  continue,  must  depend 
ahnost  wholly,  as  before  explained,  upon  the  time  required  in 
the  productive  processes  to  add  to  the  supply,  and  to  reduce 
the  price  to  the  normal  level. 

A  convincing  point  in  the  inquiry  as  to  the  action  of  nor- 
mal credit  on  prices  is  to  be  found  in  a  reference  to  the  effect 
of  such  credit  on  normal  expenses  of  production.   „      ,     ^. 

TV  "1 .        1  *     1         1  .  Nonnal  credit 

Does  credit  change  any  of  the  elements  entering  hu  no  effect  on 
into  the  normal  expenses  of  production  of  any  °^""*  ^  *^* 
article  ?  If  it  does  not,  how  can  it  be  said  to  have  any  distinct 
result  on  general  prices  ?  Goods  already  produced  cannot  be 
influenced  as  to  their  expenses  of  production  by  new  means 
of  exchanging  them ;  if  it  influences  price  at  all  in  that  way,  it 
would  be  by  reducing  price  through  greater  efficiency  of  ex- 
change.    If  it  does  not  concern  the  commodity  side  of  the 


loa 


THE-PJiraCIPLES  OF  MONEY 


price  ratio,  doeayfttduch  the  money  side?    Are  normal  pri( 
of  goods  acted  :HjJbo  by  credit  through  operations  which 
or  lower  th4/^lue  of  gold?    It  can  ajGEect  the  value  of  g\ 
only  by  touoJ&ing  the  demand  for  it;  but  in  so  far  bb  normal 
credit  can* -be  said  to  change  the  demand  for  gold,  it  works  to 
lessen  the  demand  by  furnishing  another  means  of  exchanging 
gojords  yftthout  having  resort  to  the  article  chosen  aa  the  com- 
iik%^ -denominator,  or  standard. 

*  ^Theoretically,   the    gradual    introduction  of    credit  aa 
V'^edium  of  exchange,  until  its  amount  has  become  very  lai 
'/  '  ..,        has  enabled  a  work  of  exchange  to  be  done  whii 

•ffect  th«  Yftiui   otherwise  must  have  fallen  upon  some  other  foi 
of  money-    It  is  not  uncommon  to  reason  that 
this  work  were  to  fall,  for  instance^  on  gold^  it  would  enor* 
mously  increase  the  demand  for  gold,  and  so  raise  its  value ; 
€  conveno^  it  is  argued,  the  existence  of  credit  has  taken  away 
a  large  demand  from  gold,  lowered  its  value,  and,  aa  a  codb^ 
quence,  raised  the  general  price  level.     This  reasoning  ta 
sound  in  the  main,  but  not  altogether  appropriate :  no  co% 
tention  can  be  based  on  a  contrast  between  the  presence 
absence  of  credit.     It  is  as  much  a  part  of  the  gtadud  evol 
tion  of  modern  industry  as  division  of  labor  ;  without  eith 
existing  opemtions  would  be  impossible.    To-day  the  demand 
for  gold  is  a  fact  based  upon  the  existing  customs  and  meth* 
odd  of  society ;  and  one  of  them  has  long  been  the  use  of 
credit.     To  reason  on  what  would  happen  if  it  were  absent 
would  be  like  reasoning  on  a  change  in  human  nature,  or  on 
a  supposition  that  the  race  has  gone  hack  in  its  industri^J 
development  to  a  point  where    primitive   conditions    on^^ 
could  prevail    This   harking  back  to  an  impossible  point 
gives  us  no  ttoO  crm  on  which  to  reason. 

To  see  all  that  there  is  in  the  question  raised,  we  need  only 
admit  at  once  that  anything  which  lessens  the  demand  for  the 
standard,  or  gold,  will  pro  tanto  lower  its  value,  and  thus 
indirectly  raise  prices ;  since  a  lowering  of  the  value  of  the 
standard  is  equivalent  to  a  rise  in  the  goods  side  of  the  price 
ratiot  or  a  rise  of  prices  in  general.    If  the  gradual  introduc- 


^6  •* 

COl^l 


CREDIT  108 

ftm  of  credit^  therefore,  has  lowered  the  yalue  of  gold,  it  has 
affected  prices  only  through  a  change  in  the  value  of  the 
flaiidard  in  its  relation  to  goods,  and  not  through  an  increase 
in  the  quantity  of  the  media  of  exchange  relatively  to  the 
money  work  to  be  done.    At  the  best,  it  could  be  said  that 
credit,  by  its  enlarged  use,  has  saved  gold  from  being  more 
snd  more  needed  as  a  medium  to  be  passed  from  hand  to  hand 
in  the  actual  exchange  of  goods ;  but  there  is  no  reason  to  sup- 
pose that  human  intelligence  would  not  have  devised  some- 
thing else  to  serve  its  purpose  if  it  had  not  utilized  credit. 

Supposing  that  normal  credit  has  saved  gold  from  bearing 
a  harden  of  demand  which  would  otherwise  have  fallen  upon 
it,  the  more  correct  way  of  stating  the  outcome 
would  be  thus :  it  has  obviated  a  rise  in  the  value  Uercdgoid 
of  gold  which  would  otherwise  have  resulted  ®'^®^- 
from  the  expansion  of  modem  exchanges.     But  even  this 
statement  may,  by  itself,  give  a  wrong  impression.     Gold 
has  been  generally  adopted  as  a  standard  ^  because  its  supply 
has  become  so  great  that  changes  in  monetary  demand  or  sup- 
ply in  any  short  period  of  years  produce  very  slight  effects 
apon  its  world  value.     The  great  production  of  gold  has  out- 
stripped the  demand,  or  at  least  kept  pace  with  the  newly 
created  demands  arising  from  its  adoption  as  a  standard  in 
countries  formerly  using  silver ;  and  the  contemporary  growth 
of  credit  has  had  the  effect  of  making  this  supply  go  farther 
than  it  otherwise  would.     What  would  have  happened  with- 
out it,  it  would  be  absurd  to  speculate.     Men  being  what  they 
are,  they  will  always  scheme  and  devise  methods  for  diminish- 
ing the  use,  as  an  actual  medium  of  exchange,  of  a  valuable 
standard  which  may  be  easily  lost  in  passing  from  hand  to 
hand. 

In  a  very  practical  sense,  then,  in  the  periods  within  which 
the  enormous  supply  of  gold  prevents  perceptible  changes  in 
its  world  value  so  far  as  they  may  be  due  to  changes  in  de- 
mand, it  may  be  accepted  that  normal  credit  does  not,  in  its 
follest  exercise,  directly  increase  the  normal  prices  of  goods 

1  Cf.  chap,  iii,  §  3,  and  chap,  ix,  §  3. 


104  THE  PRINCIPLES  OF  MONEY 

nor  does  it  raise  the  general  price  level.  It  can  do  this  only 
through  affecting  the  world  value  of  gold,  and  thus  reaching 
Nomuicndit  prices.  On  the  other  hand,  there  is  no  logical 
^/!^Mt'*^  <^^  substantial  reason  for  supposing  that  normal 
00  gold.  credit  has  an  influence  on  general  prices  through 

increasing  the  demand  for  goods  by  a  so-called  increase  in  pur- 
chasing power,  or  by  the  increase  of  the  medium  of  exchange; 
since,  in  normal  credit,  be  it  remembered,  a  general  increase  of 
demand  ip$o  tanto  carries  with  it  an  increase  of  general  supply. 
In  brief,  although  fluctuations  in  market  price  may  be  pro- 
duced by  irregular  appearances  of  normal  credit  in  some,  and 
not  in  all,  industries,  normal  credit  can  have  no  general 
effect  on  values  and  prices,  after  a  time  long  enough  to  per- 
mit temporary  fluctuations  of  price  to  spend  their  force. 

§  6.  The  effects  of  credit  on  prices  are  not  confined  to  the 
workings  of  normal  credit.  Different  results  flow  from  ab- 
Abnormmi  normal  Credit,  which  may  be  defined  as  the  coin- 
cndit  deflnod.  ^^^  q£  goQ^g^  q^  property,  into  present  means  of 
payment  (expressed  in  dollars  or  other  units)  in  an  amount 
either  unknowingly  or  knowingly  greater  than  the  value  of 
the  marketable  goods,  or  property,  actually  owned  fay  the 
borrower.  At  once  it  will  be  asked  how  an  operation  not 
based  on  evident  requirements  can  ever  take  place.  This 
question  becomes  still  more  importunate  when  it  is  recalled 
that  the  lender,  who  coins  property  into  present  means  of 
payment,  does  so  at  his  own  risk,  knowing  full  well,  if  he  is 
mistaken  as  to  the  value  of  the  collateral,  or  as  to  the  salabil- 
ity  of  the  goods  behind  the  paper,  that  he  himself  must  meet 
the  loss.  If  such  be  the  facts,  how  does  it  happen  that  banks, 
er  any  lenders,  could  ever  be  led  to  create  abnormal  credit? 
Of  course,  the  answer  is  that  it  never  could  exist,  if  the  whole 
truth  as  to  the  present  and  future  value  of  goods  were  always 
known,  or  if  all  men  were  perfectly  reliable.  Indeed,  abnoi^ 
mal  credit  may  arise  either  unintentionally  or  intentionally. 
In  the  first  place,  with  the  best  of  purposes,  sanguine  human 
nature  may  often  see  the  possibility  of  wealth  so  vividly  as  to 


CREDIT  106 

let  as  if  it  really  existed ;  a  man  may  believe  that  his  purohafr- 
iDg  power  is  greater  than  it  actually  is,  and  he  may  be  able 
to  convince  a  lender  that  he  is  right.  More  than  this,  the 
wisest  of  men  may  be  mistaken  in  some  of  their  business 
[  judgments;  they  may  meet  with  unexpected  re-  ^^-^5. 
venes  and  accidents;  or  by  changes  in  demand  ^^^^'^'^ 
over  which  they  had  no  control  goods  which  once 
had  a  good  market  may  become  xmsalable.  On  the  other  hand, 
by  ccmscions  deception,  paper  which  was  supposed  to  be  sujy- 
ported  by  satisfactory  goods  may  become  worthless  by  fraud. 
Thus  knowingly  or  unknowingly  —  more  often  the  latter  — 
credit  may  have  been  granted  which,  in  fact,  was  not  based 
en  salable  goods  worth  enough  to  meet  the  loan  at  maturity. 
Abnormal  credit,  then,  is  built  upon  error,  delusion,  or  fraud ; 
and  sooner  or  later  its  ftJsity  is  sure  to  be  discovered.  Ab- 
normal credit  is  speculative;  and  illegitimate  speculation 
i  €on9er9o  may  be  defined  as  the  use  of  abnormal  credit. 

What  is  the  effect  of  abnormal  credit  on  prices?    How 
*  does  it  differ,  as  regards  its  influence  on  prices,  from  normal 
credit?    On  the  face  of  things,  abnormal  is  not  distinguishr 
sUe  from  normal  credit ;  the  loan  has  been  granted  on  the 
supposition  that  good  and  sufficient  property  is  behind  it, 
eTcn  though  there  may  be  —  either  on  the  part  of  the  bor- 
rower or  lender  —  a  deception  somewhere.     The  business 
may  seem  to  be  sound  when  in  fact  it  is  rotten ;  simiUntj  of 
or  an  unperceived  shift  of  demand  may  be  going  SbSSSiiU**^ 
on  which  will  wipe  out  the  value  of  the  goods  ^^'^^ 
intended  to  meet  the  loan  at  maturity.     More  often,  the  op- 
timistic temperament  of  men,  or  the  spirit  of  adventure,  may 
lead  them  to  go  beyond  their  means  and  over-trade.    Men  who 
have  received  loans  may  not  make  such  use  of  what  they 
receive  that  they  are  able  to  repay  when  forced  to  take  up  their 
paper.    This  is  a  commonplace  of  business  experience,  with 
which  every  one  is  familiar;  in  fact,  credit  men  and  banks 
are  daily  trying  to  distinguish  between  normal  and  abnormal 
credit^  the  one  being  sound,  the  other  unsound;  and  yet 
externally  they  act  alike. 


106 


THE  PRINCrPLES  OF  MONEY 


AbntinziAl 
cnsdjt  IS  pur* 
chmfting^  power. 


The  oflfer  of  credit,  moreovar,  of  any  kind  —  whether  nc 
or  abnormal  —  appears  in  terms  of  money*  and  on  its  face 

in  either  form,  purchasing  power*  In  both  casd« 
the  machinery  set  in  motion  is  the  8ame,  and  tha 
immediate  effect  of  any  special  demand  upon 
prices  is  the  same;  the  difference  will  appear  in  the  final 
efifects  upon  the  general  level  of  prices.  Normal  credit  ex- 
tends a  person's  possible  purchasing  power  to  the  full  amaun 
of  bis  bankable  goods ;  but  abnormal  credit  goes  farther  tb^ 
this:  it  gives  the  borrower  a  purchasing  power  often < 
when  the  delusion  is  widespread  —  enormously  beyond 
borrower's  actual  means.  In  the  former  case  changes 
special  demand  offset  each  other,  or  are  met  by  correspoti 
supplies^  and  do  not  affect  perceptibly  the  prices  in  ma 
industries  except  for  short  periods;  in  the  latter  case  wl 
appears  at  first  as  only  special  demand  is,  by  virtue  of 
general  character,  capable  of  extension  over  all  goods,  an 
ends  by  modifying  the  general  level  of  prices. 

If  abnormal  credit  gives  —  as  it  must  —  purchasing  poi 
expressed  nominally  in  terms  of  gold^  it  has  the  initial  effe 
of  all  demand  when  directed  toward  special  gd 
and  raises  prices.     This  would  be  true  whetb 
the  evidence  of  the  credit  transaction  emerged  i] 
the  form  of  a  book  entry,  or  in  any  otber  way.     The  pr 
of  other  goods  tends  to  rise  under  the  new  demand;  tha 
particular  supply  of  other  goods  at  once  responds  in 
industries,  certainly  in  those  in  which  no  monopoly  oond 
tions  exist     Even  though  the  new  demand  in  this  case 
false,  the  supply  comes  forward  as  if,  eventually,  the  gc 
behind  the  false  demand,  or  their  equivalent,  could  be 
in  payment    The  supply  is  increased  out  of  ail  proportiau  1 
a  true  demand ;  until  the  actual  state  of  affairs  is  dlsck 
the  real  maladjustment  of  supply  to  demand  is  unperceive 
When  the  actual  goods  (or  their  value)  which  are  suppo® 
to  create  the  demand  are  in  any  case  exacted,  and  the  falsilj 
of  tlie  situation  is  uncovered^  then  supply  is  found  to  be  I 
in  excess  of   the  demand.    That  is,  the  supply  has  becon 


Abnonn&t 


CREDIT  107 

abnormal  relatdvelj  to  any  true  demand  based  upon  goods. 
When  the  delusion  is  pricked  by  any  untoward  event,  the 
supposed  demand  collapses ;  and  the  prices  at  which  the  sup- 
ply 18  held  &11  suddenly  and  heavily. 

The  peculiarity  in  the  operations  of  abnormal  credit  is  that 
this  over-trading  can  go  on  in  all  industries,  with  the  spread 
of  a  generally  sanguine  attitude;  the  &lse  de-    .^^^ 
maud  appears  everywhere;  or,  in  other  words,  credit  mar 
the  potentially  false  demand  is  everywhere  pres-       ^^^ 
ent.    The  fictitious  purchasing  power,  as  already  said,  seems 
to  be  an  offer  of  money.    In  reality,  it  is  not  an  offer  of 
money ;  indeed  it  is  not  even  an  offer  of  salable  goods.    Yet 
so  long  as  the  bubble  was  not  pricked,  all  seemed  fair  on  the 
outside.    Prices  went  up  all  round.    It  was  not  merely  a 
change  in  relative  values  due  to  a  readjustment  of  special 
demand,  as  in  the  case  of  normal  credit ;  it  was  a  general, 
although  speculative,  rise  of  almost  all  prices. 

From  the  point  of  view  of  general  demand  and  general 
nipply,  the  enlarged  demand  due  to  abnormal  credit  combines 
both  the  real  and  a  false  demand ;  and  general  Aboomua 
sopply  is  increased  to  meet  the  combined  demand.  S^tVgenenii 
NormaUy,  general  supply  of  goods  ought  to  be  ^J^f  wppiy 
identical  with  the  general  demand,  taken  as  a  <><  gooda. 
whole ;  and  while  the  delusion  lasts  this  appears  to  be  true. 
The  goods  offered  serve  as  a  total  demand  at  the  prices 
teDdeied  for  the  supply ;  and  the  goods  forming  the  supply 
serve  as  a  total  supply  at  the  prices  exacted.     Then  comes 
the  pricking  of  the  bubble.     The  false  demand  disappears. 
The  nominal  value  of  the  general  supply  is  now  vastly 
greater  than  the  value  of  the   shrunken  general  demand; 
and  the  high  general  level  of  prices,  kept  up  by  a  false 
demand,  now  unsupported,  falls.    The  outcome  is  that  in 
many  industries  a  vast  mass  of  goods  exists  in  supply  out 
of  all  proportion  to  a  legitimate  demand  based  upon  salable 
goods.    Then  liquidation  is  forced  at  great  sacrifices.     Obli- 
gations have  been  entered  into  for  sums  of  money  based  upon 
the  high  level  of  prices;  while  goods,  by  which  liquidation 


108  THE  PRINCIPLES  OF  MONEY 

must  always  be  ultiinatelj  effected,  have  fallen  in  price,  and 
the  proceeds  from  their  sale  do  not  cover  the  amount  of  the 
obligations.  As  contrasted  with  normal  orediti  abnormal 
credit  can  cause  practically  a  general  rise  in  the  level  of 
prices,  or  at  least  a  rise  in  the  average  of  prices,  and  this  high 
level  can  be  maintained  so  long  as  general  over-trading  goes 
on  without  being  discovered ;  after  the  discovery  comes,  the 
prices  fall  even  below  the  normal  level,  because  of  the  wild 
rush  to  sell  goods  for  liquidation.  That  is,  in  the  &Ise 
adjustment  of  demand  and  supply  of  goods,  a  general  rise 
or  fall  of  prices  has  resulted  from  influences  affecting  goods 
in  general,  and  not  from  those  which  have  originated  with 
the  standard  in  which  all  prices  are  expressed. 

In  normal  credit  the  increase  of  supply  comes  forward  in 
answer  to  an  enlarged  but  legitimate  demand,  based  on  goods ; 
Why  general  ^^^  ^®  s^ppty  being  in  particular  cases  adjusted 
rappiyin*^  to  the  true  demand,  the  general  supply  and  the 
permiu  a  Hm  general  demand  would  be  identical ;  so  that  there 
o  pncei.  would  be  no  rise  in  the  general  level  of  prices. 
This  result  follows  from  the  fact  that  goods  would  be  pro- 
duced in  the  proportions  actually  needed  by  the  community. 
It  is,  however,  not  so  with  abnormal  credit ;  in  most,  if  not 
all,  industries,  there  exists  a  false  demand,  not  based  on 
goods,  which  leads  to  the  building  up  of  a  supply  which  is 
not  adjusted  to  the  true  demand.  Consequently,  the  general 
supply  —  looking  at  the  phenomena  as  a  whole  —  is  increased 
in  such  a  way  that  it  does  not  become  identical  with  general 
demand.  That  equilibrium,  therefore,  does  not  exist  which 
prevents  a  general  rise  of  prices. 

It  should  also  be  observed  that  what  was  once  normaLJ 
credit  may,  by  force  of  events  out  of  the  control  of  borrower 
Normal  mar  or  lender,  gradually  or  even  suddenly  be  changedE: 
abnofSila  ^^^  abnormal  credit.  At  the  time  of  granting 
credit.  credit,  the  security  exacted  for  repayment  may  h^m^ 

ample;  but  before  the  loan  matures,  it  is  conceivable  thi^E 
the  value  of  the  securities,  or  the  goods  on  which  the  secur-n 
ties  are  based,  may,  by  changes  in  the  industrial  situatio~s^ 


CREDIT  109 

shrink  80  much  as  to  leave  the  lender  little  or  no  protec- 
tion.   For  instance,  securities  are  valued  largely  according 
to  the  certainty  and  amount  of  dividends,  or  interest,  paid 
on  them;  and  a  commercial  reverse  which  would  cut  off 
earnings,  or  lower  dividends,  would  cause  a  serious  fall  in 
the  capitalized  value  of  the  securities,  and  leave  the  loans  for 
which  they  had  been  a  protection  uncovered.    That  is,  a 
normal  credit  becomes  by  such  events  partly  abnormal  credit. 
In  such  cases  it  might  possibly  be  supposed  that  the  disturb- 
ance and  loss  would  fall  upon  the  lender,  or  bank,  that  had 
already  granted  the  normal  credit;  that  in  this  way  the 
demand  originally  created  would  be  unaffected;  and  that 
the  influence  on  keeping  up  prices  would  remain  in  force. 
Far  from  it.    The  lender  has  various  means  of  transferring 
ike  responsibility  to  the  borrower ;  in  cases  of  demand  loans, 
tbey  can  be  called  in  at  once,  if  the  collateral  proves  in- 
sufficient; if  the  loan  is  a  time  loan  supported  by  securities, 
additional  protection  can  be  called  for,  if  shrinkage  occurs. 
In  such  ways  the  borrower,  as  a  rule,  will  be  obliged  to 
cany  the  burden  of  his  own  creation;  he  must  meet  the 
difficulty  by  turning  other  goods,  or  property,  into  means  of 
payment,  or  else  stop  payment  altogether.    This  will  limit 
his  demand,  and  force  him  to  contract  his  offers  of  purchas- 
ing power.     Had  a  bank  been  taking  paper  without  much 
intelligent  discrimination,  and,  when  it  tried  to  force  respon- 
sibility home  on  its  borrowers,  happened  to  find  them  quite 
generally  unable  to  respond  to  its  demands,  then  the  bank 
itself  would  be  obliged  to  suspend ;  it  would  be  piinished  for 
its  bod  judgment;  but  the  fictitious  purchasing  power  which 
it  had  fostered  would  be  eliminated,  and,  the  false  demand 
leing  thus  withdrawn,  prices  in  general  would  fall. 

Although  the  general  rise  of  market  prices  caused  by  abnor- 
mal credit  is  speculative  and  based  on  a  delusion,  yet  while  it 
lasts  it  is  a  fact ;  and  the  rise  of  price,  continu-  ^ 

*  '  .  Change!  of 

rng  SO  long  as  the  over-trading  exists,  does  for  a  price  not  dae 
time  produce  a  new  valuation  of  goods  relatively      ™^*y- 
to  the  money  standard.     The  rise  of  prices  is  only  a  state- 


110 


THE  PEINCrPLES  OF  MONEY 


jnent  of  the  fall  in  the  value  of  the  common  denominator  (o 
gold) ;  but  it  is  plain  that  we  have  here  a  change  in  the  price 
relation  between  goods  and  gold  not  due  to  operations  di- 
rectly affecting  the  dematid  or  supply  of  gold,  that  is,  to  those 
affecting  the  gold  side  of  the  price  ratio,*  It  is  a  general 
change  of  prices  not  attributable  to  the  abundance  or  scarc- 
ity of  the  money  material  {e,  g,^  gold)  used  m  a  standard*^ 
And  if  a  remedy  were  to  be  sought  to  prevent  such  mova^ 
ments  of  price,  it  would  be  absurd  to  begin  with  the  money 
side  of  the  ratio*  Changes  of  price  arising  from  illegitimate 
speculation  must^  of  course,  be  dealt  with  wholly  by  influ- 
ences regulating,  or  restrictive  of,  abnormal  credit  and  over- 
trading. This,  however,  m  a  study  of  human  nature  working 
under  great  tension  in  the  world  of  trade  and  commerce, 
which  is  not  within  our  present  purpose.  ^| 

Whenever,  under  normal  credit,  there  occurs  a  mistaken 
adjustment  of  production  to  effective  demand,  as  when  goods 
are  not  wanted  in  the  proportions  produced,  the 
iii-Kijiiited  outcome  will  be  much  the  same  as  under  abnormal 
p  "^  '*'^'  credit  The  demand  is  based  on  a  delusion,  or  is 
non-existent  j  so  that  an  offer  of  purchasing  power  based  on 
goods  not  in  demand  becomeB  powerless.  Even  if,  to  super- 
ficial observation,  goods  seem  to  be  behind  the  transaction,  it 
will  be  found  out  later  that  the  reality  was  not  as  the  seem- 
ing; since  the  goods  did  not  have  the  salahility  supposed* 
Hence  the  collapse  of  the  purchasing  power,  and  the  conse- 
quent drop  in  prices  of  those  goods  toward  which  the  demand 
had  been  directed* 


§  7.  The  operations  of  abnormal  credit^ — with  only  few 
exceptions  —  provide  the  materials  for  a  commercial  crisis. 

^  McL^od'fl  Jtatementa  abotit  gold  auri  credit  do  not  sMin  tnte  i  *'  Thin  Credit 
prtxlmcefl  «xActtf  the  aame  efTecU  :  mid  afTeeU  Prices  exactljr  aa  00  much  Gold  : 
Priccfl  are  estimaUd  hy  the  aggregmte  of  Money  and  Credit'*  (I,  p.  SS5).  "  AU 
Credits  pajable  in  Gold  —  whether  Bank  Notefl»  Banking  Credits,  Bllln  of  Ex- 
change, or  any  others  —  have  idonlioiJlj  the  ■ame  effect*  00  the  Valne  of  GoM 
and  on  Prices  as  an  eqaa3  quantity  of  Gojd  ittelf  "  (11,  p,  7^3). 

^  When  McLeod  fop.  «( ,  I,  p.  335)  aajs,  *'  It  is  through  the  excGstive  creation 
of  thtB  ipeciet  of  Piopert^  that  all  Commercial  Crisei  are  brought  about : 


CREDIT  111 

If  many  traders  become  optimistiCf  and  all  are  over-trading, 
prices  and  securities  rise,  until  at  the  psychological  hour  the 
dicait  is  broken  at  its  weakest  link.    Some  event.  ^ . 
of  relatively  small  importance,  brings  down  one 
person  or  institution ;  and,  when  liquidation  is  attempted,  it 
is  found  that  promises  have  been  made  quite  beyond  the 
amount  of  resources,  that  credit  obligations  existed  greater 
thsn  the  goods  actually  owned  —  that  is,  that  the  liabilities 
fur  exceed  the  resources.    Then  others  find  that  paper  due 
them  is  not  collectable,  that  is,  is  not  based  on  salable  prop- 
erty to  a  sufficient  amount ;  more  persons  fail,  and  finally  a 
general  collapse  comes.     In  proportion  to  the  extent  of  the 
over-trading  is  the  crisis  more  severe  and  ruinous.    The  effect 
is  exaggerated  by  a  rush  to  convert  all  forms  of  goods  and 
property  into  the  actual  legal  standard,  because  maturing  obli- 
gations must  be  met  (supposedly)  by  actual  cash.^    Of  course, 
as  was  said  before,  not  all  goods  can  be  converted  into  cash  at 
the  same  time,  any  more,  to  use  an  old  illustration,  than  all 
the  people  of  a  country  could  ride  on  the  railways  at  the  same 
hour;  but  the  panic-stricken  dealer  throws  over  goods  and. 
securities,  and  forces  prices  down  to  an  extreme  point  by  sell- 
ing when  no  one  is  anxious  to  buy.    It  is  in  such  circum- 
stances as  these,  we  shall  find,  that  means  of  payment  are 
created,  based  again  on  goods  such  as  clearing-house  certifi- 
cates; or,  in  England,  by  obtaining  new  reserves  of  notes 
based  on  consols  by  a  suspension  of  the  Bank  Act    In  short, 
a  panic  demonstrates  that  credit  transactions  are  really  based 
on  goods;  that  liquidation  never  can  be  forced  in  money; 
and  that  the  invariable  remedy  is  some  method  of  tiding  over 
the  emergency  by  creating  means  of  payment  based  on  goods 
C^ot  specie)  which  will  be  acceptable  by  lenders  from  bor- 
ix>wers,'  such,  for  example,  as  clearing-house  certificates. 

^luoQgh  the  mismanagement  of  these,  and  bad  Banking  legislation,  that  Com- 
^■icaercial  Crises  derelope  into  Monetazj  Panics/'  he  seems  to  describe  lairlj  well 
[credit 
^  On  this  point,  howerer,  see  chap,  sir,  {  3. 

*  In  speaking  of  the  after  effects  of  a  panic,  Nicholson  {op.  eit,,  p.  74)  de- 
what  is  reaUj  the  return  to  normal  credit :  "  As  soon,  howerer,  as  the 


112 


THE  PHINCIFLES  OF  MONET 


The  fall  of  prices  due  to  a  commercial  crisis,  and  the  so- 
called  subtraction  of  credit,  ib,  then,  due  in  most 
cases  to  a  return  f roni  abnormal  to  normal  credit ; 
it  l&  not  an  annihilation  of  credit,  but  a  forsaking 
of  credit  not  reating  upon  actual  salable  goods. 


Cruet  a 

rottii-D  to 
ponn«]  credit  H, 


§  8.  The  fuU  dlacuasion  of  the  theory  of  prices  is,  of  cour86| 
necessaiy  to  a  final  conclusion  as  to  the  effect  of  credit  on 
prices ;  but  the  present  analysis  of  credit  operations  allows  the 
influence  of  credit,  to  some  extent  at  least,  to  be  seen  by  itself. 

The  problem  may  be  clearly  presented  by  the  accompanying 
diagram^  Sections  (1)  and  (2)  together  represent  all  the 
Credit  md  wealth  of  the  community ;  while  (3)  arises  from 
prices.  dealings  in,  or  exchanges  of,  articles  in  (1)  and 

(2)t    Section  (8)  is  no  part  of  the.total  wealth  of  the  public ;  * 


I 


(I)          I 

Gennal  Weallh 

in 

Gooda 

Gold 

and 

Silver 

(3) 

J'ortni 

of 
Credit 

it  is  only  a  set  of  devices  created  in  the  later  evolution  of 
industrial  customs  by  which  (1)  and  (2)  can  be  efficiently 
set  in  motion  and  exchanged,  fl 

It  is  evident  that  (2)  plus  a  part  of  (1)  together  form  tha 
total  possible  purchasing  power  of  the  countrj%  going  and 
coming  interchangeably*     The  reason  that  not  all  of  (1)  can 


contractioEi  of  credit  aeta  ioj  the  bAnken  make  wrj  facM  <fret  credit  docametita 
not  of  the  first  clawi,  aad  there  ia  n.  saddati  dimmation  in  the  repreaentaCiTe 
money  and  a  great  fall  of  pricea/'  The  fall  of  pricea,  however^  ii  c«rtaii}ly  oot 
tQ  thLa  case  due  to  a  reduction  in  the  quantity  of  the  media  of  exchangee  other 
than  abnormal  credit. 

1  Thi0,  of  Gouniej  i«  ftt  ran&nce  wtth  McLdod,  who  makes  righti  to  xe«ei?tt 
wealth  a  part  of  wealth,  Tbi»  is  dne  to  difFerent  cotieeptiotii  as  to  the  funda- 
mentals of  «coDom]Cfl|  and  as  to  what  wealth  means.  As  a  legal  right  doee  not 
itself  yield  an  economic  lati^f action^  and  since  the  exchange  of  the  right  is  reallj 
the  exchange  of  goods  covered  by  the  fight^  a  single  piece  of  goods  behind  m 
credit  tmtisaction  should  not  be  counted  twice,  once  in  (1)  *>^d  again  in  (2),  m  a  j 
part  of  the  total  wealth  of  a  country. 


CREDIT  118 

be  included  in  general  purchasing  power  is  that  some  goods, 
like  fixed  capital,  land,  and  the  like,  may  not  be  salable,  and 
therefore  not  bankable  property.     But  (8)  is  the  machinery  by 
irhich  a  veiy  large  part  of  (1)  in  addition  to  (2)  is  converted 
into  general  purchasing  power.    That  is,  this  explanation 
8ii.ow8  how  credit  has,  in  general,  increased  the  purchasing 
power  of  the  community,  in  the  sense  that  it  can  use  as 
xMmeans  of  payment  not  only  (2)  but  also  a  part  of  (1).    It  is 
isrue  that  all  of  (8)  is  drawn  in  terms  of  (2),  or  the  standard, 
l>iit  (8)  does  not  increase  the  amount  of  economic  satisfac- 
tion per  u. 

The  difficult  question  as  to  prices  is  the  relation  of  (2),  or 
money,  to  (1),  or  goods ;  and,  also,  there  are  serious  problems 
is  discussing  the  influence  attributed  to  (8)  on  the  prices  of 
articles  in  (1);  or,  put  in  another  way,  what  is  the  effect 
produced  on  the  value  of  (1),  goods,  relatively  to  (2),  or 
money,  by  the  existence  of  (8),  or  credit  ?  As  yet,  no  dis- 
cussion has  been  given  of  the  general  theory  of  prices,  or  the 
yalues  of  goods  (1)  relatively  to  money  (2).  The  present 
study  is  concerned  with  the  effects  of  (8)  on  the  prices  of 
(1),  80  far  as  they  could  be  touched  upon  without  anticipat- 
ing the  general  theory  of  prices. 

It  has  been  found  that  modern  credit  is  a  means  of  coining 
property  into  means  of  payment,  thereby  enabling  that  prop- 
erty to  be  exchanged  against  other  property  with-  q^^^^  ^„^ 
out  the  intervention  of  money  as  a  medium  of  ^*  "twidard. 
exchange  (except  a  part  held  as  reserves  for  unexpected  emer- 
gencies). While  serving  as  a  mediiun  of  exchange,  credit  in 
no  way  dispenses  with  money  as  a  standard,  or  common  denom- 
inator. In  fact,  the  process  of  evaluation  of  goods  in  the 
standard  metal,  or  price-making,  must  necessarily  be  ante- 
cedent to  the  credit  operation,  which  follows  the  agreement  on 
price.  But  the  phenomenal  development  of  credit  only  em- 
phasizes the  truth  that  the  stability  of  the  standard,  in  which 
prices  are  expressed,  is  beyond  all  things  most  essential ;  since 
all  the  mass  of  complex  transactions,  cross-exchanges,  con- 
tracts, and  credits  are  drawn  in  terms  of  that  standard ;  and  a 

a 


114 


THE  PEINCIFLES  OF  MONET 


change  introduced  in  the  value  of  the  standard  (by  causes 
aflrecting  itself  only)  runs  through  all  the  engagements  of  the 
whole  business  world,  and  becomes  destructive  to  the  property 
relations  of  eveiy  citizen  of  the  state. 

It  has  been  seen  that  purchasing  power  in  tiie  form  of  credit 
cannot  aflfect  the  price  ratio  by  any  influence  on  gold  itself^ 
,  except  through  an  alteration  in  the  demand  for 

ti]«  dtmwid       gold.     Instead  of  increasing  the  demand  for  gold, 
^^  '  the  general  development  of  credit  lessens  the  de- 

mand for  gold ;  hence,  instead  of  making  gold  dearer,  it  works 
in  the  end  to  make  gold  less  valuable  —  or  at  least  by  doing 
work  for  it  prevents  it  from  becoming  more  valuable.  An  in- 
creasing mass  of  credit  transactions  does  not  carry  with  it  any- 
thing like  a  proportional  increase  in  demand  for  gold,  unless 
we  suppose  that  it  calls  for  an  increased  use  of  standard 
money  to  be  employed  as  a  medium  of  exchange.  Such  a 
supposition  is  contrary  to  the  history  of  the  race ;  it  assumes 
that  with  increasing  transactions  the  pennaneot  business 
habits  of  the  people  as  to  exchanging  goods  will  revert  to 
those  of  primitive  days.  How  far  increasing  credit  transac* 
tions  demand  greater  reserves,  and  thus  increase  the  demand 
for  gold,  will  be  taken  up  later ;  ^  but  it  may  be  said  here  by 
way  of  anticipation  that  the  effect  of  an  expanding  us©  of 
credit  in  demanding  more  specie  reserves  has  had  a  very 
slight  effect  upon  the  world  value  of  gold  and,  through  it| 
upon  prices, 

^  Cb«p.  Ti  §  7|  and  eluif.  x,  f  9* 


DEPOSIT  CUR&ENCr  115 


CHAPTER  V 

DEPOSIT  CURRENCY 

If  the  adrance  of  eapitel  oalj  is  considered,  as  made  to  those  who  are  readj  to 
MDplojit  in  jndicioiis  and  prodnctiTe  nndertakings,  it  is  erident  there  need 
be  no  other  limit  to  the  total  amonnt  of  adyanoes  than  what  the  means  of 
the  lender,  and  his  pmdenoe  in  the  selection  of  borrowers,  maj  impose.  — 
BtUum  Report  (1810),  p.  50. 

C.  F.  DuxnAB,  rksory  tmd  Hidory  of  Banking  (1891).  —Ibid.,  Depotiii  at  Cmr- 
mei,  Qnar.  Jour.  Eeon.,  Jolj,  1887.  —  ifeiion  of  Montiary  CommimUm  (1898), 
{§90-88. 

§  1.  In  tiie  geneial  ezpofi|}tion  of  credit  it  was  seen  that 
insdtationa  of  credit,  owning  and  collecting  capital  which 
was  loaned  on  short-time  paper»  had  most  to  do  Currencf 
with  coining  property  into  means  of  payment  for  JUJ^S^d  ^ 
the  community,  and  that  this  was  a  service  of  <i«PMits. 
large  importance  to  the  borrower.  In  this  chapter  we  have 
to  do  with  that  particular  form  of  credit  operations  aris- 
ing oat  of  the  deposit  and  discount  function  of  commercial 
banks.  Here,  we  have,  in  fact,  a  concrete  application  of  the 
forgoing  principles  of  credit.  A  commercial  bank  creates 
demand  liabilities ;  while  savings  banks,  mortgage  companies, 
agricultural  banks,  and  the  like  —  apart  from  questions  as  to 
reserves — differ  from  the  former  in  lending  on  long-time 
paper.  It  is  because  these  demand  liabilities  of  modem 
banks  perform  a  currency  function  that  they  are  necessarily 
included  in  a  treatment  of  the  principles  of  money.  In  them 
is  found  the  final  progress  in  that  evolution  of  monetary 
machinery  which  has  been  going  on  for  centuries,  under  the 
pressure  of  a  desire  to  exchange  goods  without  transferring 
the  valuable  standard  itself  as  a  medium  of  exchange. 

The  deposit  of  money  with  the  earliest  banks  for  conven- 
ience and  safe-keeping  naturally  led  to  the  establishment  of 


116 


THE  PRLNCIPLES  OF  MONEY 


methods  by  which  the  owaersliip  of  these  deposits  could  be 
transferred  without  the  actual  removal  of  the  money  itself. 
Dewiiti  ^°  modem  banka  this  tranafer  is  promptly  and 

^^'fl™*        safely   made    by  the    use   of  checks  or  drafts, 
which  are  orders  drawn  by  the  depositor  upon  the 
bank  to  credit  a  certain  sum  to  the  person  named. 

Individuals  or  firms  —  to  the  largest  extent  among  Anglo- 
Saxons —  deposit  with  banks  the  balances,  large  or  small, 
either  those  which  they  expect  to  draw  on  from  day  to  day, 
or  those  for  which  they  are  seeking  a  permanent  investment- 
Small  sums  left  by  many  depositors  form  vast  accumulations, 
capable  of  being  used  in  important  productive  operations  on 
a  great  scale.  In  the  main  these  deposits  pass  thus  from  the 
hands  of  the  small  or  inexperienced  owners  into  the  hands  of 
the  more  active  and  generally  the  more  efficient  members  of 
society.  Banks  begin  with  the  subscribed  capital  of  their  own 
shareholders,  but  they  succeed  only  by  obtaining  deposits  of 
capital  from  others. 


§  2.  Clearly  enough,  banks  cannot  make  something  out  of 
nothing;  they  cannot  create  wealth,  or  money,  out  of  an 
BA&kadoaot  intangible  thing.  The  operations  of  legitimate 
com  credit.  banking  are  always  ultimately  based  on  salable 
gooda,  or  property ;  if  they  are  not  so  based,  the  operations 
cease  to  be  legitimate  and  are  purely  speculative.  When 
banks  speculate,  they  have  left  their  own  clearly  marked 
domain.  Their  legitimate  banking  profit  arises  almost  wholly 
from  discounts.  The  greater  the  loan  item  resulting  from 
discounts,  the  greater  the  sum  yielding  profit,  or  interest, 
They  can,  of  course,  loan  their  own  capital,  and  in  addition 
whatever  amounts  are  left  with  them  by  customers  on  deposit 
accounts,  less  the  reserves  in  cash  —  which  earn  nothing  — 
necessarily  held  against  demand  liabilitiesp  Their  own  prop- 
erty, or  that  of  others  left  with  them,  forms  the  basis  of 
the  credit  operations  of  legitimate  banking.  There  is  an 
error  lurking  in  the  suggestion*  sometimes  made,  that  a  bank 
"  coins  its  credit,^'  me^ng  thereby  that  the  Lnstitution  makes 


DEPOSIT  CURBENCY  117 

lue  of  an  intangible  confidence  residing  in  tiie  bank.  On 
analysis  it  will  be  found  that  there  is,  and  must  always  be, 
goods,  or  property,  behind  every  proper  credit  transaction 
which  is  not  purely  speculative.  In  winning  the  confidence 
of  the  public  by  safe  and  conservative  management,  the  bank 
which  thus  obtains  larger  deposits  is  less  likely  to  be  called 
upon  for  cash  by  suspicious  customers;  that  is,  more  prop- 
erty of  the  public  is  left  with  it  which  can  be  loaned.  The 
larger  the  deposits,  the  larger  its  profits.  There  is  nothing 
mysterious  in  banking  operations;  tiiere  is  no  miraculous 
coining  of  anything  out  of  nothing. 

The  proportion  of  reserves  to  demand  liabilities  is  deter- 
mined only  by  experience ;  there  is  no  definite  percentage 
which  can  be  laid  down  as  necessary.    No  bank  ^mntm 
needs  cash  equal  to  all  its  deposits,  because  all 
depositors  do  not  wish  cash  for  their  claims  at  the  same  time ;  \ 
or,  because  of  business  habits,  they  may  not  use  cash  at  all,  i 
preferring  to  pay  by  checks.    Consequently,  a  bank  knows 
\ij  experience  that  twenty,  or  twenty-five,  or  thirty,  or  fifty 
per  cent  of  its  demand  liabilities  is  a  reserve  sufficient  to 
meet  all  demands  for  actual  casL    The  residue  of  deposits 
can  be  safely  loaned  on  good  short-time  commercial  paper, 
based  on  mercantile  transactions.      As  was  said,  banks  make 
their  profits  mainly  in  discounting,  —  that  is,  by  buying  a 
right  (properly  secured)  to  receive  money  in  the  future,  and 
by  giving  for  it  a  right  to  draw  on  demand  a  sum  less  than  ^ 
the  loan  by  the  amount  of  the  bank  discoiint.   Banking 
So  &r   as  its  profits    go,    the    particular  form  profit*, 
of  a  right  to  draw  on  demand  is  unimportant  to  the  bank ; 
because  the  profit  depends  on  the  discount  operation  ante- 
cedent to  the  creation  of  the  particular  demand  obligation. 
Whether  the  demand  right  is  granted  by  the  bank  in  the  form 
of  its  own  notes  which  are  promises  to  pay  on  demand,  or 
whether  in  the  form  of  a  deposit  account  (on  which  checks 
can  be  drawn  at  any  time),  does  not  affect  the  amount  of 
profit  which  the  bank  earns  by  discounting.     The  choice 
between  receiving  notes  or  a  deposit  rests  wholly  with  the 


ii8 


THE  PBIKCrPLES  OF  MONEY 


customers  of  the  bank.  Hence  we  see  the  reason  for  the  well- 
established  fact  that  the  expatiBion  of  notes  relatively  to 
deposits,  or  of  deposits  relatirelj  to  notes,  in  our  banking 
history  is  independent  of  the  control  of  the  banks,  and  is 
determined  by  the  business  habits  and  customs  of  the  public* 

§  8.  Consequently  banks  must  accommodate  themselves  to 
the  needs  of  their  customers,  or  not  do  business  at  all.  If  the 
,,  .  ,  transactions  take  place  in  rural  districts  where 
iHae  Knd  da-  um  sums  are  usually  small,  or,  if  actual  cash  is 
needed  by  borroweis,  «,  g^  m  buyuig  wheat  or 
wool,  or  in  payment  of  wages  in  factories,  where  banks  are 
not  close  by,  banks  may  find  it  necessary  to  issue  their  de- 
m^id  rights  in  the  form  of  notes  which  will  pass  from  hand 
to  hand  as  money.  But  identically  the  same  service  may  be 
rendered  by  banks  in  city  districts  without  issuing  any  notes. 
By  granting  borrowers  the  right  to  draw  on  a  deposit  account 
on  demand  in  places  where  transactions  are  large,  and  where 
resort  to  banks  is  familiar,  and  where  the  community  is  accus- 
tomed to  transfers  by  checks  and  drafts,  the  banks  do  not 
need  notes  for  local  transactions  —  although  sometimes  they 
issue  them  to  be  used  by  correspondents  in  rural  districts. 
Looking  at  the  credit  operations  from  the  point  of  view  of 
the  banks,  their  profit  can  be  equally  gained  either  by  the 
use  of  deposits  or  of  notes ;  and  they  can  e^cpand  their  opera- 
tions to  any  extent  warranted  by  actual  transactions  in  goods 
quite  as  efficiently  by  deposits  as  by  notes.  The  deposits, 
therefore,  create  a  currency  equally  efficient  with  —  and  in 
some  respects  more  efficient  than  —  that  of  bank  notes.  In 
using  the  word  "  currency,"  it  should  be  observed  that,  in  pop- 
ular usage,  it  means  practically  the  same  thing  which  we 
have  carefully  defined  as  a  medium  of  exchange ;  and  if  this 
meaning  be  kept  in  mind,  and  distinguished  from  that  of  a 
common  denominator,  it  will  let  in  a  flood  of  light  on  the  ques^ 
tion  of  prices- 

The  true  office  of  deposit  currency  was  accurately  described 
by  Hamilton  as  early  as  1790:  "Eve^  loan  which  a  bank 


I 


d 


DEPOSIT  CURRENCY 


makes,  is,  in  ita  first  Bhapet  a  credit  given  to  the  borrower  on 
its  books,  the  amount  of  which  It  stands  ready  to  pay,  either 
in  ItM  own  notes,  or  in  gold  or  silver,  at  his  option.  But,  in 
g  great  number  of  eases,  no  actual  payment  is  made  in  either, 
borrower  frequently,  by  a  cheek  or  order,  transfers  hifl 
It  to  some  other  person^  to  whom  he  has  a  payment  to 
Dike;  who,  in  his  turn,  is  as  often  content  with  a  similar 
mdiU  because  he  is  satkfied  that  he  con,  whenever  he  pleases, 
iihi  convert  it  into  cash,  or  pass  it  to  some  other  hand,  as  an 
eqiiralent  for  it  And  in  this  manner  the  credit  keeps  circu- 
bting,  performing  in  every  stage  the  office  of  money,  till  it  is 
eitinguiabed  by  a  discount  with  some  person  who  has  a  pay- 
ment to  make  to  the  bank,  to  an  equal  or  greater  amount-"  * 

Such,  then,  being  the  unusual  importance  of  the  deposit  oui^ 
reocy,  some  exact  knowledge  must  be  had  aa  to  the  two  ways 
in  wMeh  deposits  originate.     (1)  Obviously,  de-  Two  ionrcM 
positB  originated  from  carrying  money  to  the  bank,   *'  depostti^ 
the  depositor  receiving  in  return  a  credit  exactly  correspond- 
ing to  the  money  added  to  the  reserves ;  and  this  is  often 
tkoght  to  be  the  usual  manner  in  which  the  deposit  item  is 
^■pidd  up-     And  in  a  community  where  all  transactions  are 
r  perfonndd  eolely  by  passing  money,  in  all  buying  and  selling, 
depodts  would   be  created  only  in  this  way.     (2)  On  the 
otber  hand,  it  is  literally  true  that  in  these  days  most  of  the 
emifmoufl  deposits  of  hanks  in  the  United  States  and  Great 
Brildn  do  not  result  from  the  actual  deposit  of  money  in  a 
bank*    By  far  the  largest  part  of  deposits  in  a  commercial 
bank  ara  the  consequences  of  a  discount  operation.    A  loan 
is  iaevitably  followed  by  the  creation  of  a  deposit  accotmt  in 
fiTor  of  the  borrower^  as  yet  no  money  is  paid  out  or  comes 
in*    This  is  the  explanation  of  the  rough  correspondence  in 
Anglo-Saxon  countries  between  the  movement  of  the  loans 
(m  item  on  the  resources  side,  which  in  the  Bank  of  Eng- 
land is  cdled  ** Other  Securities'*}  and  private  deposits;  as 
loans  increase,  deposits  increase ;  as  loans  are  paid  off,  deposit 
creditas  are  extinguished.    Then,  if  we  recall  that  loans  are, 

1  B«porl  on  m  Nftlional  Bank,  Dee.«  1?90«  p.  2. 


120 


THE  PRINCIPLES  OF  MONEY 


after  all,  a  eoimng  of  property  into  means  of  payment,  —  that 
they  are  operations  baaed  on  goods,  —  we  see  that  the  deposit 
item,  thmi  originating,  m  a  fair  index  of  how  much  property 
is  being  moved  by  this  modem  medium  of  exchange.  It  is  a 
Deposit  car-  medium  which  arises  out  of  the  transactions  in 
wUb^roX'  goods ;  it  grows  as  fast,  and  no  faster  (in  normal 
to iM done.  credit)  than  the  exchanges  to  be  performed;  i^^ 
16  a  tnaehitie  which  expands  exactly  in  proportion  to  the  woi^H 
to  be  done,  and  contracts  as  transactions  fall  off.  This  is 
a  medium  of  exchange,  or  cnrrencyj  based  alone  on  commer- 
cial  assets,  with  that  modicum  of  cash  reserrcs  needed  to  pro- 
tact  the  normal  operations  from  distrust,  or  to  provide  that 
amount  of  cash  needed  in  cases  of  fright  or  misjudgment 

§  4.  The  perfect  elasticity  of  the  deposit  currency  is  its 
most  valuable  —  m  it  is  at  the  same  time  its  least  appreciated 
ElwUcjityo!  — characteristic.  A  vast  amount  of  dLscussion 
thh  cumtncy.  ^^j  attention  has  been  given  to  the  establishment 
of  an  elastic  bank-note  systeta;  the  nineteenth  century  has 
put  forth  libraries  of  literature  on  the  subject;  and  yet  a 
medium  of  exchange,  based  on  commercial  assets,  and  there- 
fore perfectly  elastic,  is  here  with  us,  active,  efiScient*  per- 
forming a  mass  of  exchanges  out  of  all  proportion  to  the 
work  of  bank  notes,  or  of  any  other  form  of  money*  Given 
an  unquestioned  stability  of  the  standardi  and  omitting  aUH 
discussion  as  to  the  exact  material  of  the  standard  in  which^* 
prices  are  expressed,  goods  will  more  and  more  easily  be 
transferred  by  means  of  offsets  against  each  other  without 
a  suBpiciouB  demand  for  the  standard  metal.  The  greateF 
the  stability  of  the  standard,  the  less  it  will  be  used  as  a 
medium  of  exchange ;  the  more  changes  in  the  standard  are 
discussed,  and  the  greater  the  likelihood  of  the  changes  being 
expressed  in  legislation,  the  greater  will  be  the  uncertainty  as 
to  the  means  of  payment,  and  the  greater  the  demand  for 
the  standard  metal  (gold  for  instance)  to  be  kept  in  reserves, 
or  used  in  business  as  an  actual  medium  of  exchange;  and 
hence  the  greater  the  cost  of  its  machinery  of  exchange,  and  a 


DEPOSIT  CURRENCY  121 

kssened  power  of  piodaction  to  the  community — to  saj  noth- 
iij^  of  the  pioductiye  loss  due  to  uncertainty  and  distrust. 

The  dear  presentation  of  the  function  of  the  deposit  cur- 
WDCj  is  due  to  Professor  Dunbar,^  who  describes  its  relative 
elasticity  as  follows:  "It  adapts  itself  to  the  jj^.. 
demand  of   the  moment  without  visible  effort  carrancT 
and  eitlier  by  expansion  or  contraction,  as  the 
esse  may  be;  and  it  does  this  quite  irrespective  of  legisla- 
tive purpose  or  guidance.  •  .  •  The  conclusion  is  irresistible 
that)  if   for  any  reason  the  creation  of   deposit  currency 
through  the  agency  of  the  national  banks  is  hindered  or  lim- 
ited, it  will  make  its  growth  by  means  of  State  bonks;  and, 
if  not  by  these,  then  by  a  system  of  private  banking,  which 
no  legislation  can  touch,  until  the  government  shall  assume 
the  power  of  declaring  whether  A  may  owe  B  or  not.    The 
growth  of  this  kind  of  credit  may  be  guided  and  it  may  be 
made  more  or  less  sound  according  to  the  wisdom  of  legisla- 
tion.   The  stability  of  the  standard  to  which  its  value  relates 
is  wholly  within  legislative  control,  and  the  continuity  of  the 
test  of  its  solvency  by  reference  to  that  standard  is  within 
the  scope  of  legislative  influence.    But,  whether  the  legisla- 
tion be  good  or  bad,  here  is  the  adjustable  part  of  our  system 
of  credit  currency,  and  the  part  of  it  which  will  continue  to 
adjust  itself  to  the  scale  of  the  transactions  to  which  current 
business  naturally  gives  rise. 

^  In  his  "  Theory  and  HiBtoiy  of  Banking."  Although  he  eridentlj  receiyed 
the  suggestion  from  McLeod's  inrolTed  and  somewhat  eccentric  exposition  of 
credit  and  banking,  the  idea  is  as  old  as  Hamilton  (see  infra,  {3).  In  a  general 
wij  the  identity  of  the  bank  note  and  deposit  currency  was  early  recognized 
hj  Mr.  FnUerton.  and  followed  by  Mr.  J.  S.  Mill  : 

**  The  whole  bank-note  circulation  of  this  country  might  be  turned  to-morrow 
into  a  system  of  book-credits  tran^erable  by  cheque,  or  all  our  banking  accounts 
might  be  commuted,  on  the  6ontrary,  for  promissory  notes,  and  in  neither  case 
would  the  course  of  monetary  transactions  be  essentially  disturbed  or  altered. 
.  .  .  There  is  not  a  single  object  at  present  attained  through  the  agency  of  the 
Bank  of  England  notes,  which  might  not  be  as  effectually  accomplished  by 
each  indiridual  keeping  an  account  with  the  bank,  and  transacting  all  his  pay- 
ments Off  fire  pounds  and  upwards  by  cheque."  On  the  Regulation  of  Cur- 
randea  (1S44),  p.  41.  Cf.  J.  8.  Mill,  Principles  of  PoUtical  Economy  (1848), 
Book  lU,  chap.  xii«  {  6. 


THE  PRINCIPLES  OF  MONEr 


**  And,  in  mew  of  the  extraordinary  growth  of  this  kind  ot 
credit  currency,  the  mere  question  of  the  amount  of  national 
FMf  of  con^  bank  notes  in  circulation  sinks  into  insignificance^ 
trKtionof  COT-  and  with  it  the  question  whether  their  place  muit 
tasi  if  deposit  be  made  good  by  other  descriptions  of  paper, 
curr«Dcy*i3Uiu.  ^^  ^^^  example,  by  greenbacks.  There  is  a  real 
question  as  to  the  conTenience  of  using  coin,  in  place  of  a 
part  of  the  paper  which  the  community  uaea  in  its  small 
transactions ;  there  is  a  question  as  to  the  wisdom  of  depriTing 
a  great  system  of  banks  of  the  ability  to  supply  whichever 
form  of  credit  may  be  required  by  the  public  i  and  there  is  a 
grave  question  as  to  having  any  larger  part  of  our  credit 
currency,  or  any  part  of  it,  subject  to  control  as  regards  its 
amount^  by  any  legislative  body  whatever*  But  as  regards 
the  mere  question  of  contraction^  still  sometimes  brought  for- 
ward with  respect  to  the  paper  currency*  the  grounds  for  it 
have  ceased  to  exist  For,  besides  the  fact  that  since  lesump- 
tion  [in  1879]  specie  has  come  in  and  must  continue  to  come, 
through  an  ever  open  door»  to  make  good  any  deficiency  of 
circulating  medium,  the  growth  of  deposits  has  covered  many 
times  over  all  loss  in  the  amount  of  paper  circulation.  In- 
deed^ we  may  go  farther,  and  say  that  if  the  United  States 
government  were  to  pay  off  every  legal  tender  note,  and  if 
every  bank  note  were  to  be  withdrawn,  these  changes  would 
produce  no  real  cantraction  of  the  currency.  With  specie 
thus  brought  into  common  use  for  smaller  and  e very-day 
transactions,  we  should,  it  is  true,  have  a  currency  far  lees 
convenient  for  its  minor  uses,  and  we  should  no  doubt  see  the 
use  of  the  deposit  and  check  system  thus  carried  prematurely 
into  classes  of  transactions  and  into  sections  of  country  where 
the  note  now  meets  a  popular  demand ;  but,  as  regards  the 
mass  of  exchanges  from  which  the  business  condition  of  the 
country  at  any  given  time  takes  its  tone,  we  should  find  them 
carried  on  as  now,  by  a  creation  of  bank  credits  on  whatever 
scale  the  needs  of  the  time  might  require.  In  fact,  so  soon 
as  specie  payments  were  firmly  established  and  the  value  of 
credit  currency  was  settled^  by  its  assured  conversion  at 


DEPOSIT  CURRENCY 


123 


pleafiifa  into  a  solid  medium^  coBtraction  ceased  to  be  &qj 
proper  object  of  dread.  *  .  * 

''  The  legitimate  inference  &010  these  eonaideratioiis  is  not, 
however,  that  the  disappeamDce  of  the  bank  note,  or  the  suV 
fititution  of  govemmeat  paper  for  It,  is  to  be  cho»ebei*Mo 
mwed  with  indifference.  The  business  of  a  conn*  J^^^jJyJ 
tiy  m  winch  the  banking  habit  is  firmly  seated,  ^^r 
wiUt  it  is  tm^  find  a  medium  of  exchange,  and  in  the  amotint 
seeded ;  but  it  is  of  great  consequence  that  the  medjuni  used 
aliould  be  made  np  of  the  kinds  most  conyement  for  the  use 
of  tiie  conununitjr,  and  divided  between  those  kinds  in  the 
proportions  most  convenient  Tbis  question  of  proportion  is 
one  which  no  combination  of  counsellors,  public  or  private, 
can  determine.  No  legislature  and  no  conclave  of  bankers 
cm  gay  that  the  people  of  the  United  States  require  any 
pim  amount  of  notes  for  the  management  of  their  ex- 
changes. The  amount  which  is  sufficient  this  year  may,  and 
ilmost  certainly  will,  be  either  insufficient  or  in  excess  the 
Mit ;  and  it  is  partly  from  a  sense  of  the  absolute  inability 
d  any  human  foresight  to  deal  with  this  problem,  that  we 
owe  the  multitude  of  schemes  proposed  in  years  past  '  to 
adapt  the  amount  of  the  [paper]  currency  to  the  needs  ol 
tlie  country/ 

"Left  to  itself t  the  country  settles  this  problem  of  proportion 
ia  a  nattual  way,  by  the  demand  which  each  individual  using 
i  credit  cmrency  of  any  kind  will  make  for  notes   ^ 
or  lor  a  deposit  account,  as  his  special  conditions  n^^tci  md  ii»- 
may  require.     But,   in   order  that  this   natural  £b«aid*brt^^ 
pmcees  should  go  on  easily  and  without  incon-  "™*  *^^^* 
venienee  to  the  community,  it  is  requisite  that  the  banks  or 
hankers  with  whom  individuals  deal  when  obtaining  loans  or 
receiving  payments  should  have  the  ability  to  respond  to  de- 
mand in  either  form ;  in  other  words,  that  the  creditor  of  the 
bank  or  banker  should  be  able  to  receive  the  evidence  of  his 
elaim  in  the  one  fornix  if  be  expects  to  use  it  in  large  opera- 
tions or  in  a  closely  settled  community,  or  in  the  other,  if  in 
ssoall  operations  or  where  hand-to-band  dealings  are  the  rule. 


124  THE  PRINCIPLES  OF  MONET 

and  that  the  lender  should  find  his  profit  equally  in  leaponi]^ 
ing  to  either  demand.     It  is  only  by  being  allowed  to  take  oue 
or  the  other  fonn^  as  occasion  requires,  that  a  given  mass  of 
bank  credit  can  perform  its  functions  with  the  maximnm  of 
public  adyantage.    There  may  be  sound  reasons  of  a  different 
Older  for  not  giving  the  power  of  issue  in  both  forms  to  every 
company  or  individual  carrying  on  the  business  of  banking; 
in  other  words,  the  ideal  of  a  perfectly  free  system  of  banking 
is  no  doubt  beyond  reach ;  —  but  that,  for  the  greatest  advan- 
tage of  the  public,  the  issue  of  notes  by  banks  should  be 
widely  enough  diffused  to  present  in  every  considerable  dis- 
trict which  uses  banking  facilities  at  all  the  easy  choice  be- 
tween the  two  methods  of  using  credit,  seems  to  be  beyond 
dispute.    This  choice  is  given  only  when  the  power  of  issue 
is  substantially  in  the  same  hands  which  control  the  loans  and 
the  business  of  banking  generally.    It  is,  in  fact,  one  of  the 
great  services  rendered  by  the  national  banking  system  [of  the 
United  States]  that,  for  a  most  critical  quarteivcentury,  it 
carried  note-issue  and  deposit  banking  side  by  side  throughout 
the  greater  part  of  the  countiy,  under  the  management  of  a 
class  of  remarkably  sound  institutions,  giving  to  the  commu* 
nity  many  of  the  benefits  of  free  banking,  with  the  minimum 
of  its  riska    As  a  substitute  for  this  system,  the  issue  of 
notes  by  the  Treasury  is  as  little  to  the  purpose  as  the  striking 
of  coins  by  the  mint ;  nor  is  there  any  machinery  by  which 
the  operations  of  the  Treasury  can  be  made  to  perform  the 
desired  office.    Happily,  those  operations  are  quite  distinct 
from  the  commercial  movement  of  the  country,  and  are  un- 
suited  by  their  nature  for  any  closer  connection  with  it,  even 
if  such  connection  were  expedient"  ^ 

§  5.  The  enormous  expansion  and  efficiency  of  the  deposit 
currency  properly  raise  the  question  as  to  its  soimdness  and 
possible  liquidation  both  in  ordinary  conditions  and  in  excep- 
tional emergencies.    It  is  the  particular  application  of  the 

^  C.  F.  Danbftr,  in  an  admirsbljr  effectire  exposition  of  '*  Deposits  as  Cor* 
reiicj/*  Qnar.  Jour.  Econ.,  I,  Julj,  1887,  pp.  409-413. 


DEPOSIT  CURRENCY  125 

general  question  disoussed  under  credit,  as  to  the  basis  of  the 
credit,  and  its  relation  to  the  standard  in  terms  of  which  it  is 
always  drawn.    Is  the  deposit  currency  limited  a  deposit 
bj  the  amount  of  money  in  circulation  ?    Is  it  SSt^j 
based  on  money?    How  can  the  continuity  of  its  ""on«7^ 
solvency  be  tested,  except  by  constant  readiness  to  convert 
deposit  currency  into  the  standard  coin  ?    Because  all  checks 
and  deposits  are  drawn  in  terms  of  money,  does  it  follow, 
as  Professor  Nicholson  declares,  that  ^*  the  whole  of  this  vast 
superstructure  of  credit  must  rest  on  a  metallic  basis,  and  if 
this  basis  is  cut  away,  the  whole  structure  would  fall"?' 
We  have  already  emphasized  the  fact  that  the  superstructure 
is  based  on  goods  and  not  on  money ;  that  each  credit  trans- 
action originated  more  or  less  remotely  in  a  transfer  of  goods ; 
that,  instead  of  credit  resting  like  an  inverted  pyramid  upon 
a  narrow  sum  of  money,  each  form  of  (normal)  credit  rests 
on  a  corresponding  value  of  salable  goods ;  and  that  the 
forms  of  credit  could  come  into  existence  only  because  of  a 
basic  operation  in  goods.    But  yet  it  is  evident  that  liquida- 
tion of  any  part  of  all  this  mass  of  deposit  currency  in  cash 
is  constantly  expected,  and  that  every  one  in  actual  business 
acts  upon  the  assumption  that  checks  could  be  instantly 
cashed  in  specie.     On  the  other  hand,  it  is  the  every-day  fact 
that  almost  no  merchant  or  firm,  in  the  absence  of  distrust  or 
panic,  demands  actual  specie  for  checks  or  deposit  accounts. 
Enormous  quantities  of  goods  appear  valued  in  dollars,  and 
by  credit  forms  pass  to  and  fro  in  the  exchanges.     So  long  as 
this  fundamental  and  basic  process  goes  on,  society  is  accom- 
plishing its  economic  ends  perfectly ;  it  is  getting  the  needed 
satisfactions  by  offering  and  receiving  goods.     Why,   then, 
should  any  one  break  this  circle  of  exchanging  by  inserting 
the  necessity  of  holding  actual  specie  between   any  of  the 
links  in  the  process?    If  goods  expressed  in  money  appear  in 
a  form  of  deposits  so  that  other  goods  can  be  got  by  using 
checks,  why  should  any  one  draw  out  cash  instead?    Evi- 
dently, no  reason  whatever  exists  why  specie  should  be  called 

1  Op,  eit.,  p.  74. 


126 


THE  PRIKCIPLES  OF  MONEY 


iipotii  SO  long  as  it  is  believed  that  the  depositB  are  the  crea- 
tion of  normal  credit.  It  is  only  when  abnormal  credit,  or 
oveMrading,  arises  that  a  test  of  the  solvency  of  these  traos- 
actions  is  deemed  necessary.  If  a  legitimate  loan  is  forced  tD 
liquidation,  the  salable  goods  being  forthcoming  at  matniitj, 
the  money  is  obtainable  to  cover  the  credit;  but  when 
:  credit  not  based  on  goods,  by  any  error^  becomes  frequent^ 
I  a  demand  for  liquidation  in  actual  standard  coin  discloses 
its  falsity*  It  goes  without  saying  that  bankers  are  con- 
stantly engaged  in  deciding  between  that  which  is  normal 
and  tliat  which  is  abnormal  credit;  and  that  both  kinds 
are  in  operation  at  the  same  time.  Hence  a  feeling  of 
proper  caution  demands  that  certain  sums  should 
pnttaijoo&ry  be  kept  on  hand  to  meet  all  the  tests  which 
mejiaun!.  ^^^  from  time  to  time  be  required  by  conserva- 

tive banking.  This  is  the  reason  for  reserves  to  meet  deposit 
currency  on  demand;  the  reserves  in  cash  are  used  as  a 
test  of,  not  as  a  limit  to^  the  amount  of  the  currency  which 
can  be  issued.  The  volume  of  this  currency  is  limited  only 
by  the  volume  of  legitimate  transactions  in  goods»  and 
not  by  the  difficulty  of  getting  reserves*  This  is  what  ia 
meant  by  saying  that  the  deposit  currency  is  based  on^ooda 
and  not  on  money.  The  order  of  events  is  this :  (first)  a 
transaction  in  goods,  next  the  appearance  of  credit  forms 
arising  out  of  the  transaction^  then-^the  collection  of  that 
amount  of  specie  found  by  experience  to  be  needed  to  keep 
up  a  continuous  test  of  the  solvency  of  the  credit  in  terms  of 
the  standard. 

/  On  the  surface  of  things,  however,  practical  rules  of  bank- 
'  ing  may  seem  to  give  the  lie  to  this  general  conclusion ; 
Are  itmnB  ^^J  ^^  sstid^  with  entire  truth^  that  the  loans 
limitad  by  bank  cau  make  are  limited  by  the  amount  of  it 
reserves  J  that  a  fall  m  reserves  restricts  tli 
purchasing  power  which  can  be  created  in  the  fonu  of  deposit 
currency  following  from  loans  based  on  goods.  Of  couise^  it 
is  well  understood  that  the  relation  between  the  items  of 
Bf  deposits,  and  reserves  is  such  that  an  increase  of  Ic^o^j 


DEPOSIT  CURRENCY 


127 


would  expand  the  deposits  without  adding  to  the  reserves; 
the  same  amount  of  reserves  would  bear  a  smaller  percentage 
to  enlarged  deposits.  Therefore,  it  is  said,  the  loans  must  be 
checked  iu  order  to  keep  a  proper  percentage  of  reserves  to 
demand  liabilities.  All  this,  however,  ia  only  a  description  of 
the  machinery  by  which  an  adjustment  at  any  time  is  main- 
I  tained  between  loans,  deposits,  and  reserves.  It  has  nothing 
'whatever  to  say  as  to  the  possibility  of  an  inereasa  in  aU  the 
items.  A  certain  balance  and  proportion  between  hase^ 
I  height,  and  width  is  required  of  a  shaft  fifty  feet  high ;  but 
if  tiie  same  mechanical  principles  be  observed,  a  shaft  may 
be  erected  as  high  as  the  Washington  Monument  So  of  the 
deposit  currency;  if  the  proper  proportions  of  reserve  to 
deposits  be  maintained^  the  deposits  may  rise  to  any  sum. 
In  fact^  the  increased  exchanges  of  the  multiplying  products 
of  our  country  have  brought  about  an  expansion  of  the 
deposit  currency  of  all  our  banks  from  about  $1100  millions 
in  1876  to  about  $4800  millions  in  1900,  No  one  was  ever 
beard  to  say  that  this  might  have  been  prevented  by  a  lack 
of  reserves ;  nor  is  there  any  reason  for  limiting  the  amount 
of  tie  deposit  currency,  on  the  assumption  of  an  absolute 
scarcity  of  specie  reserves.  At  one  time  any  one  country, 
like  any  one  merclmut,  may  have  a  condition  of  trade  in 
which  it  has  a  surplus,  or  a  deficiency,  of  actual  specie,  and 
there  will  be  a  give  and  take  between  different  countries, 
just  as  there  is  between  different  merchants  or  institutions. 
The  readjustment  of  a  given  supply  of  the  metal  in  the  world 
is  one  thing ;  the  absolute  amount  of  that  supply  is  quite  a 
different  thing.  In  normal  times,  when  the  banks  find  in- 
creasing quantities  of  good  paper  presented  for  discount,  do 
they  hesitate  to  increase  their  business  on  the  assumption 
that  their  reserves  are  too  small?  Not  at  all ;  an  additional 
part  of  their  resource  items  is  kept  in  cash  by  turning  some 
bonds  into  money,  or  in  other  ways  by  exchanging  property 
for  sp^ie*  Banks  can  buy  more  gold  when  they  need  it,  if 
L  they  have  anything  of  value  to  offer  for  it,  and  if  there  is 
'  any  in  the  world.    To  this  time  there  is  no  evidence  what^ 


128  THE  PRINCIPLES  OF  MONEY 

ever  to  suppose  that  the  creation  of  legitimate  deposits  and 
loans  (panic  seasons  excepted)  has  ever  been  limited  by  the 
De  it  cuiw  difficulty  experienced  by  banks  in  obtaining  specie.* 
renc7  not  It  is  not  relevant,  then,  to  the  main  question  to 
money  Say  that  the  deposit  currency  is  limited  by  money 

"'*^**'  reserves.    If,  on  true  laws  of  thermo-dynamics,  a 

standard  steam-engine  of  50  horse  power  were  built,  there  is 
a  limit  to  the  work  which  that  one  engine  can  do ;  but  that 
has  nothing  to  do  with  the  making  of  another  engine  of 
5000  horse  power,  having  a  far  greater  capacity.  Thousands 
of  the  latter  could  be  built.  And  yet  no  one  would  seriously 
say  that  the  limit  to  the  horse  power  of  all  steam-engines  is 
the  quantity  of  iron  and  steel  in  the  world,  because  such 
a  limit  is  too  remote  for  practical  common-sense.  Likewise, 
the  absolute  increase  of  demand  for  gold  arising  from  keep- 
ing the  same  percentage  of  an  increasing  quantity  of  deposits 
is  so  insignificant  compared  with  the  total  world's  supply  of 
gold  as  to  be  disregarded.'  The  possibility  of  a  test  of  the 
solvency  of  deposit  currency  in  ordinary  contingencies  may 
then  be  regarded  as  without  question  or  doubt. 

The  reasons  for  granting  loans  and  expanding  deposits  are 
connected  with  the  character  of  the  transaction  and  the 
Why  reserves  Collateral  offered ;  the  reasons  for  asking  actual^ 
are  called  upon,  ^ash  are  of  an  entirely  different  kind.  Granting 
that  the  property  pledged  and  the  standing  of  the  borrower 
are  satisfactory,  whether  cash  will  be  called  for  by  the  borrower 
depends  upon  such  different  considerations  as  these :  (1)  the 
business  habits  of  the  community ;  and  (2)  the  confidence  of 
the  community  in  the  conditions  of  business  and  in  the  sol- 
vency of  the  banks.  In  the  first  case  rural  districts  may  require 
actual  money  for  most  loans ;  but  in  that  instance  the  notes 
of  the  bank,   or  of  other  banks,  will  serve  the   purpose  of 

^  The  full  treatment  of  the  facts  behind  this  assertion  ii  necessariljr  deferred 
to  Volume  II. 

^  Even  if  twentj-fire  per  cent  reserves  in  gold  were  required  for  aU  deposits 
in  our  banks  in  1876  and  in  1900,  the  increased  demand  of  the  latter  could  be  sup- 
plied in  about  three  years  by  the  present  annual  production  of  gold  without 
drawing  on  the  accumulations  of  the  past  centuries  or  of  the  decades  since  1850. 


DEPOSIT  CURRENCY  129 

specie,  and  accomplish  what  is  effected  bj  checks  in  closely 
settled  parts  of  the  coontiy.  Hence  in  places  such  as  large 
cities  where  the  deposit  sjrstem  is  in  use,  there  would  be  no 
reason  for  demanding  legal  money  unless  we  suppose  the 
entire  business  habits  of  that  part  of  the  community  have 
been  changed  —  a  quite  unwarrantable  supposition  —  to  those 
which  prevail  in  country  districts.  In  the  second  case, 
lawful  money  might  be  called  for  because  the  conditions  of 
trade  were  approaching  a  panicky  state,  when  forced  liquida- 
tion had  become  unavoidable. 

§  6.  The  test  of  the  solvency  of  deposit  currency  is  a  most 
serious  thing  in  a  season  of  depression  or  of  actual  panic. 
The  holders  of  notes  or  deposits  who  do  not  draw  out  cash, 
bat  use  their  demand  rights  as  currency,  are  leaving  the 
equivalent  of  the  property  (on  which  the  transactions  are 
based)  in  the  hands  of  the  buik  for  a  time.  When  the  bank 
lends  the  use  of  some  of  this  property  to  others,  it,  of  course, 
increases  its  demand  liabilities  by  more  deposits;  but  it  is 
also  trae  that  for  eveiy  dollar  of  new  deposits  thus  created, 
the  bank  gets  a  pledge  of  additional  property  to  be  liquidated 
in  the  equivalent  of  money  in  the  future.  How  far  the  bank 
cw  go  on  increasing  fts  deposits  depends  at  a  given  time  on 
its  experience  as  to  the  amount  of  reserves  it  must  keep, 
considering  the  habits  of  its  customers;  but,  so  far  as  the 
future  is  concerned,  if  its  discounts  are  sound,  and  if  reserves 
are  forthcoming,  it  can  go  on  expanding  indefinitely. 

Recalling  that  banks  assume  responsibility  for  the  certainty 
that  the  goods  and  collateral  will  be  of  sufficient  value  to 
meet  the  loan  on  maturity,  then  if  the  banker  is  ^   ^. . 
in  error,  if  the  borrower  defrauds,  or  if  meanwhile  leading  to 
the  business  of  the  country  collapses,  the  bank  "*'p**"*°*** 
*    will  find    itself    caught  with    promises    to  pay  money  on 
demand ;  and  if  the  bank  has  considerable  amoimts  of  prop- 
erty in  its  resources  which  cannot  be  converted  into  lawful 
^ney,  it  may  be  obliged  to  suspend. 

In  countries  like  Great  Britain  and  the  United  States 


130 


THE  PEINCIPLES  OF  MONET 


where  the  check  and  deposit  system  is  highly  developed,  a 
commercial  crisis  works  peculiarly,  and  the  means  of  allaying 
RekLian  of  ^  pauic  must  be  adapted  to  the  originatixig  causes. 
d^^kTl  A®  frequently  said  before,  all  goods,  if  pressed 
time  oi  pwic.  fgj.  ^q  ^^  once,  could  not  possibly  be  liquidated 
in  actual  specie  or  legal  money.  Yet  men  who  have  obliga- 
tions maturing  at  an  early  date  are  in  duty  bound  to  meet 
them  in  current  funds;  if  they  do  not,  their  notes  go  to 
protest  and  they  are  ruined.  But  quite  apart  from  the  over- 
trading described  under  abnormal  credit,  it  is  an  unmistak- 
able fact  that  not  all  the  operations  legitinmtelj  baaed  on 
goods  can  issue  in  actual  specie  or  legal  money.  Knowing 
that  he  must  meet  his  own  paper  at  maturity,  a  person  having 
specie  or  legal  money  will  hold  on  to  it ;  there  consequently 
appears  to  be  a  sudden  dearth  of  the  money  in  which  all 
deposit  currency  is  drawn  and  in  which  it  is  lawfully  payable. 
Banks  find  depositors  drawing  on  their  accounts;  reserves 
decline  from  both  domestic  and  foreign  pressure ;  and  at  the 
moment  it  may  seem  that  no  more  Ic^ns  can  be  made,  because 
to  loan  means  to  increase  the  demand  deposits  just  when 
reserves  are  falling.  To  cease  to  loan,  however,  h  to  bring 
about  the  very  thing  which  every  one  wishes  to  avoid :  if  & 
mercbant,  on  good  coUateml,  cannot  get  discounts,  he  maj 
fail^  and  his  failure  will  bring  down  others,  until  the  whole 
commercial  fabric  comes  tottering  down  in  utter  collapsa< 
Then  no  one  can  pay»  and  general  bankruptcy  ensues.  To 
avoid  this,  is  the  interest  of  every  one  having  payments 
coming  in ;  and  banks  having  loans  maturing  are  especially 
interested  in  putting  off  failures  and  preventing  an  acute 
crisis.  Yet,  with  every  one  wildly  struggling  for  actual 
specie  and  legal  money>  each  looking  out  only  for  himselfi 
what  can  banks  do  to  calm  the  excitement?  Their  only 
hope  is  to  act  all  together,  and  enable  each  legitimate  bor* 
rower  to  meet  his  engagements  at  maturity.  What  is  really 
needed  is  not  merely  specie^  or  legal  money,  but  the  means 
of  payment  which  will  be  accepted  for  debts  by  creditors. 
Goods  are  almost  unsalable,  and  securitiesi  if  sold  under  pres* 


DEPOSIT  CUERENCT 


m 


soje,  most  be  unduly  sacrificed.    There  is  as  much  money  m 
tlie  country  ae  ever ;  it  has  not  been  destroyed ;  yet  It  seems 
ixDpoesible  to  get  any  of  it*     The  convergence  of  unusual 
gtocks  of  goods  on  the  market  to  be  sold  causes  a  general  fall 
of  prices,  because  buyers  am  few ;  and  market  prices  doubt- 
less fcdl  even  below  normal  expenses  of  production.     This 
fall  of  prices  is  not  due  to  a  scarcity  of  money ;  the  seeming 
K^arcity  is  due  to  a  sudden  unwillingness  to  exchange  goods 
in  the  usual  manner;  when  men,  forsaking  the  usual  media 
of  exchange,  refuse  to  part  with  goods  except  for  specie  or 
far  lawful  money,  the  amount  of  such  money  ordinarily  kept 
on  hand  is  obviously  insufficient  for  this  purpose. 

Under  such  panic  conditions,  the  true  theory  of  credit  which 
uiiderliee  the  deposit  currency  suggests  the  practical  basis  of 
relief  in  the  United  States.  At  the  moment  when  cieftfiarh^iut 
the  expanding  struggle  for  specie  or  lawful  money  *^«^^'**»' 
acts  to  prevent  loans,  a  committee  of  the  ablest  and  most  ex- 
petienced  bankers^  acting  for  aU  the  institutions  of  a  given 
6i[;j  or  district,  may  say  to  any  one  bank :  *'  We  will  iBsne  to 
yotl  a  special  means  of  payment  in  the  form  of  clearing-house 
certificates  to  seventy-five  per  cent  of  the  value  of  good  col- 
lateml  in  your  loan  item,  if  you  will  transfer  them  to  us  as 
secunty ;  and  all  the  banks  represented  agree  to  receive  these 
Geiti&cates  in  payment  of  notes  due  them  by  merchants." 
By  this  meanSf  any  single  bank,  although  unable  to  grant 
kani  and  create  deposits  payable  in  specie,  or  lawful  money, 
is  abte  to  give  aid  to  a  hard-pressed  borrower  in  the  form 
of  clearing-house  certificates  which  will  provide  the  means 
of  payment  needed  to  meet  his  maturing  engagements.  In 
reality,  by  common  action,  a  new  form  of  the  old  process  is 
resorted  to  in  this  emergency :  by  coining  the  collateral  held 
by  the  banks  into  means  of  payment,  the  property  or  goods 
on  which  that  collateral  rests  are  again  set  in  motion,  and 
giveo  exchange  power,  instead  of  being  irrevocably  locked 
up  atid  wasted,  or  sacrificed  at  ruinous  concessions  of  price. 
By  m  doing,  the  combined  institutions  create,  so  far  as  their 
?oluQtary  agreement  can  go,  a  medium  of  exchange  for  goods^ 


132 


THE  PRINCIPLES  OF  MONET 


when  by  aboormal  conditiotiB  the  uses  of  all  the  ordinafjr 
media  have  been  brought  to  a  sudden  stop*  The  clrarmg- 
house  certificates  of  associated  banks^  ultimately  analyzed, 
are  only  a  means  of  allowing  goods  (ezpiBSsed  in  terms  of 
standani  money),  instead  of  the  actual  legal  tender  it&elf,  to 
become  a  solvent  of  debt.  These  certificates  have  been  m- 
sorted  to  by  some  American  institutions  because  no  other 
means  which  would  serve  a  aimilar  purpose  have  been  ereatad 
by  our  banking  laws. 

In  Great  Britain  the  stispenBion  of  the  Bank  Act  of  1844 
is  a  device  to  aecomplieh  the  same  result  there  which  is 
.  obtained  here  by  the  clearing-house  certificates. 

the  Bank  Act  By  that  act  the  Issue  office  has  been  completely 
separated  from  the  Banking  Department^  which 
cames  on  only  the  two  functions  of  discount  and  deposit 
In  the  Issue  Department  notes  can  be  issued  by  law  on 
deposit  of  government  securities  only  to  the  amount  (at 
present)  of  about  j£16|  miUions,  and  for  eveiy  note  put 
forth  beyond  that  amount  a  pound  in  gold  must  be  behind 
every  pound  of  notes.  The  Banking  Department,  as  a  bank 
for  bankers  and  thus  the  pivotal  institution  of  England,  hj 
its  enonnous  loans,  creates  a  proportional  amount  of  deposits; 
and  the  wholesale  business  of  exchanging  in  London  is  largely 
done  by  deposit  currency,  that  is,  by  checks  and  drafts  drawa 
on  deposits  created  by  loans.  When  panic  conditions  de< 
velop,  the  pressure  for  gold  by  home  banks^  as  well  as  the 
drain  on  deposits  for  export,  draw  down  the  cash  reeerves, 
which  include  Bank  of  England  notes,  for  which  gold  can 
be  got  by  crossing  the  court  to  the  Issue  Department.  Yet 
a  great  and  increasing  amount  of  loans  may  have  to  be  met ; 
to  refuse  to  lend  would  be  to  bring  on  the  disaster  which  all 
are  stTiving  to  escape*  —  that  is,  liquidation  only  through 
bankruptcy.  The  remedy  adopted  is,  in  brief i  to  lend  freely 
to  all  who  can  offer  proper  collateral ;  the  moment  this  jxolicy 
is  decifled  upon,  the  alarm  will  be  quieted,  and  the  exchange 
of  goods  will  flow  on  normally  again.  But  how  can  loans 
be  increased  when  reserves  are  low?    This  is  accomplished 


DEPOSIT  CURRENCY 


188 


when  the  Directors  of  the  Bank  carry  government  securities 
from  the  resources  of  the  Banking  Department  over  to  the 
Issue  Department,  in  violation  of  the  law,  and  there  obtain 
notes  for  them  in  excess  of  the  amount  permitted  by  the  Act 
of  1844  to  be  issued  on  the  deposit  of  state  secnrities.  That 
i9»  the  Bank  by  this  process  —  for  which  the  Ministiy  agree 
to  bring  a  bill  of  indemnity  into  Parliament  to  protect  the 
Directors  —  coins  the  securities  of  the  realm  into  means  of 
payment  by  which  debtors  can  meet  their  indebtedness  at 
maturity.  Not  that  the  new  notes  are  actually  issued  to  any 
appreciable  amount ;  for  they  are  not  But  their  presence  in 
the  reserves,  increasing  the  percentage  of  reserves  to  depositfi, 
allows  the  deposit  item  to  be  increased  indefinitely.  Conse* 
quentJy,  at  a  time  .when  the  existing  specie  and  notes  are 
insufficient  to  do  all  the  work  of  exchange*  the  Bank  is  again 
able  to  lend,  and  thus  to  provide  by  the  deposit  currency  all 
the  means  of  payment  needed  by  the  business  pubHc  for  meet- 
ing its  obligations.  Merchants  who  get  loans  can  then  meet 
their  engagements  by  checks  on  the  Bank  of  England ;  and 
that  is  enougk  Cash  is  not  used.  The  subsidence  of  fear 
immediately  follows  the  suspension  of  the  Bank  Act*  the 
abnormal  rush  for  specie  ceases^  gold  is  not  forced  into  an 
enlarged  use  m  a  medium  of  exchange,  reserves  again  fill  up^ 
and  retur»  to  their  usual  function  of  a  partial  stop  against 
distrust. 

Reserves  never  can,  in  fact,  be  sufficient  to  meet  all  demand 
liabilities,  so  that  they  usually  serve  only  as  a  means  of  indi- 
cating a  coming  storm  when  they  decline  from  money  pi*y» « 
repeEted  withdrawals  by  depositors,  —  just  as  the  "^^onduy  part, 
drop  of  the  barometer  indicates  danger  ahead.  To  weather 
the  storm  one  must  know  thoroughly  the  nature,  function,  and 
efficiency  of  the  deposit  currency  as  a  medium  of  exchange 
and  as  a  means  of  pa^^ment.  In  a  crisis  this  deposit  cur- 
rency proves  itself  superior  to  legal  money,  since  it  is  the 
only  means  of  payment  accessible-  The  actual  specie  car- 
ried plays  but  a  secondary  part  in  the  whole  operation  of 
buying  and  selling,  of  paying  and  receiving,  of  giving  and 


THE  PRINCIPLES  OF  MONEY 


extmgTiishmg  credit  The  importance  of  specie  resides  in 
its  aerying  as  a  more  or  lesa  stable  standard  in  which  prices 
of  goods  and  forms  of  credit  are  expre^ed.  The  deposit  cut- 
reacy  expands  and  contmcts  according  to  the  transactions  in 
goods,  btit  not  in  any  correspondence  whatever  to  the  numbers 
of  the  population^  except  so  far  as  an  increase  of  nmnbeFS 
brings  with  it  an  increase  of  products  and  thus  of  exchanges. 
There  is  no  more  connection  between  the  quantity  of  the 
media  of  exchange  needed  to  do  a  countiy  s  business  and  its 
population  than  there  is  between  the  number  of  locomotiTeft 
on  our  mil  ways  and  the  supply  of  manual  labor.  The  extent 
to  which  the  deposit  currency  is  enlarged  depends  not  on  the 
bankers,  but  upon  the  public,  who  use  the  bankers  as  agents 
to  create  either  form  of  demand  liability,  either  notes  or  de-  ^ 
posits,  according  to  the  wish  of  the  customer,  ^M 

§  7.  Haying  thus  discussed  the  process  of  testing  the  sot- 
yency  of  the  deposit  currency^  both  in  normal  and  abnormal 
Effect  of  d«EM»it  ^^^^^litious,  wc  are  in  better  position  to  determine 
carrenYOD       its  effect  on  the  yalue  of  gold  and  on  prices, 

Mojfo  Remembering  that  price  is  the  exchange  ratio 
between  any  article  and  the  standard,  —  as,  for  example,  gold^ 
—  let  us,  in  the  first  place,  deal  with  the  effect  of  an  expanding 
deposit  currency  on  the  gold  side  of  the  price  ratio^  Here  is 
an  enormously  effective  medium  of  exchange,  requiring  at 
times  to  be  tested  as  to  its  solTcncy  in  the  standard.  In 
normal  conditions  of  business,  if  Icmns  were  steadily  increasing 
because  of  increasing  production  and  of  a  greater  volume  of 
transactions,  there  would,  because  of  any  inBufficiency  in  gold 
reserves,  ordinarily  be  no  permanent  check  on  this  expansion 
of  loans.  Of  course,  while,  at  any  one  moment,  the  amount 
of  reserves  actually  held  does  limit  the  then  existing  loans 
and  deposits,  yet  it  is  perfectly  clear  that,  as  more  good  loans 
are  offered  year  by  year,  the  banks  will  provide  more  gold  by 
changing  a  fractional  part  of  their  increasing  resources  —  which 
rise  j?arij?at*M  with  the  liabilities  —  for  additional  supplies  of      » 


DEPOSIT  CURRENCY  186 

This  is  the  way  in  which  the  expanding  deposit  ouirenoj 
discloses  an  increased  demand  for  gold;  that  is,  more  of  itris 
required  to  maintain  continuous  solvency  in  the  standard. 
Clearly  there  most  be  some  increase,  although  it  may  bear  no 
r^fular  proportion  to  the  growing  volume  of  transactions ; 
for  other  media  of  exchange  than  gold  are  often  made  lawful 
money,  and  are  used  in  reserves.  Moreover,  as  we  have  seen, 
a  time  of  panic  shows  that,  after  all,  ultimate  liquidation 
must  be  made  in  goods,  and  not  in  actual  specie.  The  real 
fanction  of  a  specie  test  is  to  force  an  elimination  of  the 
abnonnal  from  the  normal  credit. 

Without  entering  upon  the  international  movement  of 
money  (see  chapter  x),  it  is  enough  to  point  out  here  that  an 
increasing  deposit  currency  (in  this  country,  for  piatribatioii  of 
example),  since  it  is  based  on  increasing  trans^ic-  ^^**  «oW- 
tions  in  goods,  might  be,  in  so  &r  as  it  has  created  a  demand 
for  more  gold  in  our  reserves,  only  a  means  of  indicating  our 
daim  to  a  greater  part  of  the  world's  supply  on  the  assump- 
tion of  a  change  in  our  favor  of  the  proportion  of  our  transac- 
tions to  those  of  other  nations.  If  there  were  only  a  fixed 
amonnt  of  gold  in  the  world,  we  should,  according  to  Ricardo's 
law  of  distribution,  claim  our  share  of  it,  in  the  proportion 
that  our  transactions  might  bear  to  those  of  other  countries.  In 
such  a  case  there  might  be  only  a  re-distribution  of  the  world's 
gold,  without  any  increase  in  the  total  demand,  and  thus  no 
change  in  its  world  value  as  compared  with  goods  in  general. 

But  sup[>ose,  with  a  fixed  supply  of  gold  in  the  world,  that 
an  increase  of  transactions  based  on  an  increase  of  products, 
had  led  to  an  expausion  of  the  deposit  currency  in   Demand  for 
all  countries  aUke.    Then  the  increased  demand  for  ^^^iI^b 
gold  in  the  reserves  would  be  general,  and  there  »«»«»^«»- 
would  be  a  definite  increase  in  the  total  demand  for  gold,  and 
in  80  far  a  change  in  its  value.     The  supposition  of  a  fixed 
supply  of  g^ld,  however,  is  far  removed  from  the  facts  as 
they  have  become  known  to  us  since  1850.     The  increased 
supply  has  certainly  been  sufficient  to  provide  many  times 
over  all  the  needed  addition  to  the  reserves  (although  other 


136 


THE  PRINCIPLES  OF  MONEY 


demands  which  ought  to  be  considered  must  be  here  omitted). 
The  demand  for  reserves  as  compared  with  the  overwhelming 
supply  of  recent  yeais  is  inconaiderable-     This,  however,  is 
a  statistical  question  which  must  be  deferred  to  the  volume  on 
metallic  money*     So  far  as  reserves  are  concerned,  two  or 
three  years'  annual  product  of  gold  would  provide  all  that  am 
now  required,  for  instance,  by  Great  Britain  and  Germany 
and  the  large  production  of  gold  still  continues.     If  the  va] 
of  gold  is  seriously  affected  by  new  demands,  then  it  must 
due  to  other  requirements  than  those  originating  in  the  needs 
of  the  increasing  deposit  currency.     So  far  as  the  general  level^ 
of  gold  prices  is  concerned,  it  cannot  be  said  that  the  level 
been  sensibly  lowered  by  influences  arising  from  a  demand  f< 
gold  reserves  in  general,  which  have  affected  Uie  goM  sidi 
the  price  ratb. 

On  the  other  hand^  it  must  be  at  once  apparent  that 
increasing  deposit  currency,  growing  in  proportion  to 
-^    ,  actions  in  goods,  could  have  Uttle   or  no  effect 

f¥ncy  bu  no      ou  the  goods  sidc  of  the  price  ratio  through  m] 
moditr  aide       chauges  in  thc  uonual  expenses  of  production 
«fpnc«r»uo«    ^1^^  goods  themselvcs.     Hence  the  deposit  cur- 
rency, being  only  a  medium  of  exchange  by  which  goods  sre 
bartered  against  goods,  could  not  directly  affect  their  pricea, 
or  their  ratio  of  exchange  to  gold.     Although  drawn  in  terms 
of  gold,  the  deposit  currency  can  touch  normal  prices  only  in 
so  far  as  it  affects  the  value  of  gold ;  and  this  we  have  foi 
to  be  inconsiderable. 

To  some  it  may  appear  that  purchasing  power  equal 
money  is  created  to  the  extent  to  which  the  deposit  currency 
ejcpands,  and  that  this  purchasing  power  has  the 
same  effect  on  prices  in  general  as  an  equal 
amount  of  money  would  have  ;  that  general  prices 
are  fixed  by  the  money  demand^  made  up  of  aU 
the  actual  money  plus  aU  the  forms  of  credit  used  _j 
as  currency,  as  compared  with  the  mass  of  goods  to  be  ex^— * 
changed ;  and  that,  in  order  to  obtain  the  price  level,  the  toi 
supply  of  money  should  be  measured  against  the  transactions 


lyin. 


Error  uf  prict 
compiLriiiuuii 
betweeii  goodfl 
tjid  the  quu}- 
lliy  ai  lb« 
inedii  of 


e  totdKj 


DEPOSIT  CURRENCY  187 

be  effected  (that  is,  the  money  work  to  be  done).  We  may 
80  far  anticipate  the  discusaion  of  the  theory  of  prices  hy 
saying  here  that  the  fallacy  in  this  point  of  view  is  to  be 
foimd  in  the  contention  that  prices  are  fixed  by  comparing 
goods  with  the  medium  of  exchange  rather  than  with  the  value 
of  the  standard  or  common  denominator.  Of  course,  with  more 
goods  to  be  exchanged,  the  media  of  exchange  must  expand ; 
bat  that  may  often  have  nothing  whatever  to  do  with  the 
price  ratio  between  units  of  goods  and  gold.  Indeed,  this 
exposition  has  been  fruitless,  if  it  has  not  shown  that  in  the 
d^OBit  eonency  we  have  a  medium  of  exchange  arising  out 
of  goods,  mounting  as  transactions  rise,  and  expanding  with, 
and  exactly  in  proportion  to,  the  operations  in  goods  which 
eslled  the  medium  into  being.  To  suppose  that  ofbetting 
goods  against  each  other  raises  or  lowers  their  prices  in  gen- 
enl  is  to  suppose  that  after  the  prices  of  goods  are  stated  in 
gold  the  subsequent  exchanges  determine  the  price-making 
previously  fixed.  It  is  a  case  of  the  cart  before  the  horse. 
We  must  insist  upon  keeping  the  simple  conception  of  price 
before  our  eyes;  it  is  the  exchange  ratio  between  goods  and 
the  standard,  not  between  goods  and  the  quantity  of  the  media 
of  exchange.  The  only  way  in  which  the  quantity  of  the  vari- 
008  media  of  exchange,  which  are  not  the  stand-  onir  way  de- 
aid  metal,  can  affect  general  prices  is  by  raising  or  ^*iff JS«S^ 
lowering  the  value  of  the  standard  in  which  prices  •"*>  p"««"- 
are  expressed.  Usually  credit  devices  employed  as  currency 
save  gold  from  being  used  as  a  medium  of  exchange,  and 
thus  tend  to  lower  its  value,  and  cause  a  rise  of  prices ;  but, 
in  &ct,  the  development  of  credit  devices,  while  removing 
what  would  otherwise  be  a  gpreat  demand  for  gold  (as  a 
medium  of  exchange),  has  carried  with  it  a  sensible  but  rela- 
tively unimportant  increase  in  the  demand  for  gold.  Hence, 
80  &r  as  the  deposit  currency  can  be  said  to  have  affected 
prices  at  all,  it  has  been  by  raising  the  value  of  gold,  and  thus 
lowering  prices.  To  suppose  that  the  deposit  currency  raises 
pices  by  increasing  general  purchasing  power  in  proportion 
to  its  increase  in  volume  is  like  supposing  that  an  increase 


138 


THE  PEINCIPLE8  OF  MONEY 


of  tickets  increafles  the  nambe?  of  chairs  at  the  opeiu.  Iir^ 
deposit  currency  an  increase  of  transactions  brings  with  it,  as 
a  necessary  consequence,  the  medium  by  which  exchanges  are 
made ;  and  offsetting  goods  against  each  other  could  not  raise 
general  prices,*  Fluctuations  in  demand  and  supply,  of  course, 
change  market  prices;  but  the  deposit  currency  cannot  be 
supposed  to  change  normal  prices,  except  on  a  false  theory  of 
prices,  such  as  that  which  compares  goods  with  the  media  of 
eicchange  instead  of  with  the  standard.  ^M 

It  may  be  objected  to  the  above  reasoning  that  it  is  quits 
aside  from  the  point;  that  present  means  of  pajTuent  created 
on  the  sale  of  x  goods  could,  of  course,  not  have  had  any 
influence  upon  the  price  of  the  x  goods,  since  the  price* 
making  for  m  antedated  the  creation  of  the  discount;  but 
that  it  certainly  would  be  true  that  the  purchaslog  power 
arising  out  of  the  transfer  of  x  goods  would  have  an  effect  on 
the  price  of  other  goods,  y,  for  which  it  would  be  offered ; 
and  that  this  purchasing  power  arising  from  2;  is  a  means  of 
raising  the  price  of  y  for  which  it  is  offered.  To  this  it  is  to 
be  replied  that  any  such  partial  demand,  if  that  were  all  there 
is  to  the  practical  situation  would  certainly  affect  price ;  but 
the  demand  arising  from  the  credit  based  on  2:  is  not  the  only 
factor  in  the  situation.  It  is  also  to  be  remembered  that  the 
use  of  credit  will  doubtless  be  general ;  and  that  what  is  true 
of  X  will  be  true  of  y,  and  of  all  goods.  The  special  demand 
for  ^  is  likely  to  be  met  by  an  increased  supply  (monopoly 
being  here  left  out  of  consideration)  so  soon  as  the  processes 
of  production  will  permit.  Hence  the  purchasing  power 
arising  from  the  credit  based  on  x  is,  provided  goods  art^J 
produced  in  the  proportions  wanted,  offset  by  a  similar  and^* 
equivalent  purchasing  power  based  on  ^,  so  that  the  price  of 
y  will  be  affected,  if  at  all,  only  for  a  short  time.     In  brief 

I  General  Walker  acce]>ted  Ih1»  geaend  fact  when  he  taid :  "  MaDj  of  thei« 
goodi  [tu  be  exchanged]  maj  coDTeBieatN  be  ejc changed  directly  agaiDAt  each 
other  in  barter,  or  indirectlj  throDgh  the  interireDtioii  of  commercial  and  flnai]- 
ctal  credit,  withoat  the  lue  of  money.  Such  good^  do  not  con^litnte  a  factor  in 
the  demand  for  mont/."  The  Qttantitf  Theorj  of  Monej,  Qtmr.  Jout>  Econ.^ 
Jalj.  im&,  p.  373. 


1  884 

MIL  LIONS                                                   _,_*_*             ^_i-._*             M» 

o    i    8    i>.l    sliiilisisi 

1835 
6 

7 

s 

1S40 

1 
2 

4 
18*5 

7 
8 

1850 

1 
2 
3 
4 

e 

7 

1850 
1 

1           2 
3 
4 

ises 

5 
7 

e 

1870 

1 

2 
3 

4 

1875 

6 

7 

8 

leso 

1 

2 
3 

4 
1BBB 

B  i 
7 

a 

1090 

1 

2 

3 

4 

1BQ5 

; 

Jlj  U 

•  ^ 

1 

1 

^r 

\ 

n^' 

1 

\ 

^ 

1 

-/ 

S- 

1 

' 

\ 

-v^ 

f 

If 

} 

I^ 

1 

\ 

— 

■^ 

1 

1 

jf 

\ 

^t^ 

1 

t 

1  ' 

U 

r 

tTT 

^^ 

m 

V 

'  m  , 

- 

-1 

1 — ^  "'■ 

E -lbs,  _ 

W^%     c 

1 

-ffe-- 

1  1 

^ 

_,1  _ 

t? 

'AS 

M? 

/\ 

t  \u 

, 

1 

H. 

i 

H^ 

^-4=:: 

"^^.^ 

iX 

1  "'^ 

1    ^ 

;/ 

i\ 

P' 

, 

» 

! 

:  .   J 

[ 

^  -i  '^ 

■    K 

J 

f 

^, 

I- 

! 

1 '_r 

[ 

\ 

J    i—'.—i 

.  , 

1 

-H 

LL 

1 

, 

1 

III  rjj. 

1  ^-  r 

1    1   \    1    !    1 

/^  .  ,  .^.  ■. 

i 

1  =1 

V 

-J   - 

1 
1 

— 

1 

^- 

I    i    1  i    .    1 

K 

^" 

'        rt 

1             V 

1 

^. 

_J 

-^  \ 

1 

D^s 

,    1 

1 

j_. 

s 

'        / 

1 

1 

/^ 

□ 

1  ^1" 

J       ■  ;     1  ■  '-^ 

_|     _J 

ST 

-•        /           '           '     '           :     '     1   -^J 

rrr 

1 

-^,-h 

^-;^- 

-■' 

s 

—  ^ 

J  1 

^_,.... 

-  _^ 

1  /  1      I      111 

t^ 

,    _^. 

IS 

■  \     I 

F 

I 

\. 

I 

1    1  '  1 

1 

\ 

,  I 

1  ■ 

n  1 

— 

^ 

y> 

M 

1  1 

1 

,  _i- 

'f*^ 

-l/     ^     '        1         :        ■ 

1       T-~J 

fX'  , 

)..  .  , 

1         1 

^     '    L_ 

f\ 

1 

-1- 

[ 
1 

Ix 

1^ 

IJJLL 

■  1 

1 

r 

^^ 

7   r 

'/  ' 

J  _ 

M  \  \ 

1  \  ' 

1 

■,A- 

rri 

j1/j   I  1   I 

( 

1       \\\  \\ 

\  \ 

^^\^  WWTV^ 

1  \ 

L  .'  X|      ) 

^    \ 

T\^  ^ 

\  \  \  \  \  \  \  \  \  VT^ 

■III       I 

\    \ 

-U 

_i 

\    \    \    \    \    \    \    \    \    \    \    \ 

DEPOSIT  CURRENCY  189 

ds  the  adjustments  of  special  demand  and  supply  pro- 
changes  in  relative  values  of  goods ;  but  these  actions 
bave  but  littie,  if  any,  influence  on  the  general  level  of 
»,  and  thus  on  the  value  of  gold. 

8.  The  confirmation  of  the  above  exposition  may  be 
id  in  the  history  of  the  deposit  currency  in  the  United 
;es.  In  Diagram  I  the  two  media  of  ex-  Historjoftht 
[ige,  the  note  issues  and  the  deposit  currency,  ^ll!l£!^i^^e 
shown  in  their  comparative  development.  Uniudsuui. 
nng  the  early  decades,  when  the  whole  nation,  in  the 
n,  had  the  monetary  characteristics  of  rural  rather  than 
city  districts,  the  use  of  notes  naturally  predominated,  and 
banks  perforce  suited  themselves  to  the  needs  of  the  busi- 
B  public.  In  brief,  not  until  1856  did  the  deposit  currency 
the  United  States  exceed  the  total  issue  of  notes.  There- 
sr  the  notes  never  overtook  the  expansion  of  the  deposit 
lency.  It  is  a  striking  and  illuminating  lesson  that,  after 
3,  the  whole  increase  in  the  work  of  exchanging  goods 
)iigh  banking  devices  was  performed  by  the  deposit  cur- 
cj,  and  not  at  all  by  the  notes  of  Nationad  Banks.  Indeed, 
lay  now  be  inferred,  with  a  fair  approximation  to  accuracy, 
ti  the  general  movement  of  the  line  of  deposit  currency 
lesponds  to  the  general  growth  of  the  production  and  ex- 
ige  of  the  country's  goods.  The  case  is  really  stronger 
1  that  presented  by  this  diag^ram,  because,  as  is  well 
wn,  a  vast  amount  of  exchanging  through  banks  has  also 
I  done  by  institutions  other  than  National  Banks.  The 
t  companies  and  State  banks,  both  organized  under  the 
\  of  the  separate  states,  do  not  issue  notes,  but  carry  on 
operations  of  discounting  by  the  use  of  the  deposit  cur- 
y.  To  state  the  whole  truth,  their  operations  should  be 
Mi  to  that  indicated  by  the  line  in  the  diagram  showing 
deposit  currency  of  the  National  Banks  (although  the 
ices  of  other  paper  money,  like  greenbacks,  should  also 
onsidered). 
t  our  early  Iw^nlnng  history  the  game  of  speculation  took 


136 


THE  PEINCIPLE8  OF  MONEY 


damands  which  ought  to  be  cansidered  mnst  be  here  omitted) 
The  demand  for  reserves  as  compared  with  tJie  overwhebiiiii| 
supply  of  recent  years  is  inconsiderable.     This,  however,  U" 
a  statistical  question  which  must  be  deferred  to  the  volume  <m 
metallic  money.     So  far  as  reserves  are  concerned^  two 
three  years*  annual  product  of  gold  would  provide  all  that  i 
now  required,  for  instance,  by  Great  Britain  and  Germany; 
and  the  large  production  of  gold  still  continues.    If  the  vali] 
of  gold  is  seriously  affected  by  new  demands,  then  it  must  U] 
due  to  other  requirementa  than  those  originating  in  the  needi  I 
of  the  increasing  deposit  currency.    So  far  as  the  general  level  J 
of  gold  prices  is  conoemed^  it  cannot  be  said  that  the  level  hai J 
been  sensibly  lowered  by  influences  arising  from  a  demand  ht 
gold  reserves  in  generalj  which  have  affected  the  gold  side  of 
the  price  ratio- 

On  the  other  hand,  it  must  be  at  once  apparent  that  &a  I 
increasing  deposit  currency,  growing  in  proportion  to  trans- 
actions in  goods,  could  have  little  or  no  effect ' 
on  the  goods  side  of  the  price  ratio  through  mj 
changes  in  the  normal  expenses  of  production  of  ^ 
the  goods  themselves.  Hence  the  deposit  car^^H 
rency,  being  only  a  medium  of  eicchange  by  which  goods  are 
bartered  against  goods,  could  not  directly  affect  their  priceii 
or  their  ratio  of  exchange  to  gold.  Although  drawn  in  terms 
of  gold,  the  deposit  currency  can  touch  normal  prices  only  in 
so  far  as  it  affects  the  value  of  gold ;  and  this  we  have  found 
to  be  inconsiderable. 

To  some  it  may  appear  that  purchasing  power  equal  to 
money  is  created  to  the  extent  to  which  the  deposit  currency 
^T»rof  prici  expands,  and  that  this  purchasing  power  has  the 
same  effect  on  prices  in  general  as  an  equal 
amount  of  money  would  have  »  that  general  prices 
are  fixed  by  the  money  demand,  made  up  of  all 
the  actual  money  plus  all  the  forms  of  credit  used 
as  currency,  as  compared  with  the  mass  of  goods  to  be  ex- 
changed ;  and  that,  in  order  to  obtain  the  price  level,  the  totaL-J 
supply  of  money  should  be  measured  against  the  transactiona  I 


DfpatLt  cur- 

rvticy  b&ft  no 
effect  oa  com- 
modUr  aid* 
af  price  ntio. 


bttwteti  goodi 

and  the  quAEi' 
tity  tif  the 
media  of 
exchftiif^. 


d-9sim 


DEPOSIT  CURBENCT 


137 


te  effected  (that  is,  the  money  work  to  be  done)*  We  may 
eo  far  anticipata  the  diflcuaaioQ  ol  the  theory  of  prices  by 
ttjing  here  that  the  fallacy  in  this  point  of  view  19  to  be 
foond  in  the  contention  that  prices  are  fixed  by  comparing 
goods  with  the  medium  of  exchange  rather  than  with  the  value 
of  the  standard  or  common  denominator.  Of  course,  with  more 
goods  to  ba  exchanged,  the  media  of  exchange  maet  expand ; 
bat  that  may  often  have  nothing  whatever  to  do  with  the 
price  ratio  between  units  of  goods  and  gold.  Indeed,  this 
eipoaition  has  been  fruitless,  if  it  bas  not  shown  that  in  the 
dfcposit  currency  we  have  a  medium  of  exchange  arising  out 
of  goods,  mounting  as  transactions  rise,  and  expanding  with, 
mi  exactly  in  proportion  to,  the  operations  in  goods  which 
called  the  medium  into  being.  To  suppose  that  ofEsetting 
gpods  against  each  other  raises  or  lowers  their  prices  in  gen- 
«til  is  to  suppose  that  after  the  prices  of  goods  are  stated  in 
gold  the  subsequent  exchanges  determine  the  price- making 
pTeviously  fixed.  It  is  a  case  of  the  cart  before  the  horse. 
We  most  insist  upon  keeping  the  simple  conception  of  price 
before  our  eyes ;  it  is  the  exchange  ratio  between  goods  and 
the  standard,  not  between  goods  and  the  quantity  of  the  media 
of  exchange.  The  only  way  in  which  the  quantity  of  the  rari- 
oii  media  of  exchange,  which  are  not  the  stand-  onj.  ^^^  ^^ 
fiid  metal,  can  affect  general  prices  is  by  raising  or  ^^i^^J^^ 
lowering  the  value  of  the  standard  in  which  prices  *^  p"***- 
m  expressed.  Usually  credit  devices  employed  as  currency 
f&ve  gold  from  being  used  as  a  medium  of  exchange,  and 
&m  tend  to  lower  its  value,  and  cause  a  rise  of  prices ;  but, 
ifl  fact,  the  development  of  credit  devices,  while  removing 
wkt  would  otherwise  be  a  great  demand  for  gold  (as  a 
medium  of  exchange),  has  carried  with  it  a  sensible  but  rela- 
tively unimportant  increase  in  the  demand  for  gold.  Hence, 
so  far  as  the  deposit  currency  can  be  said  to  have  affected 
piieesat  all,  it  has  been  by  raising  the  value  of  gold,  and  thus 
Icnreiing  prices.  To  suppose  that  the  deposit  currency  raises 
prices  %  increasing  general  purchasing  power  in  proportion 
t0  iti  increase  in  volume  is  like  supposing  that  an  increase 


188  THE  PRINCIPLES  OF  MONEY 

of  tickets  increases  the  number  of  chaiis  at  the  opera, 
deposit  currency  an  increase  of  transactions  brings  with  it, 
a  necessary  consequence,  the  medium  by  which  exchanges  i 
made ;  and  offsetting  goods  against  each  other  could  not  m 
general  prices.^  Fluctuations  in  demand  and  supply,  of  coor 
change  market  prices;  but  the  deposit  currency  cannot 
supposed  to  change  normal  prices,  except  on  a  &lse  theory 
prices,  such  as  that  which  compares  goods  with  the  media 
exchange  instead  of  with  the  standard. 

It  may  be  objected  to  the  above  reasoning  that  it  is  qu 
aside  from  the  point;  that  present  means  of  payment  creai 
on  the  sale  of  x  goods  could,  of  course,  not  have  had  a 
influence  upon  the  price  of  the  x  goods,  since  the  prii 
making  for  x  antedated  the  creation  of  the  discount;  I 
that  it  certainly  would  be  true  that  the  purchasing  po^ 
arising  out  of  the  transfer  of  x  goods  would  have  an  effect 
the  price  of  other  goods,  y,  for  which  it  would  be  offere 
and  that  this  purchasing  power  arising  from  a;  is  a  means 
raising  the  price  of  y  for  which  it  is  offered.  To  this  it  is 
be  replied  that  any  such  partial  demand,  if  that  were  aU  th< 
is  to  the  practical  situation  would  certainly  affect  price;  I 
the  demand  arising  from  the  credit  based  on  2;  is  not  the  01 
factor  in  the  situation.  It  is  also  to  be  remembered  that  t 
use  of  credit  will  doubtless  be  general ;  and  that  what  is  ti 
of  z  will  be  true  of  y,  and  of  all  goods.  The  special  denu 
for  y  is  likely  to  be  met  by  an  increased  supply  (monop 
being  here  left  out  of  consideration)  so  soon  as  the  proces 
of  production  will  permit.  Hence  the  purchasing  po\ 
arising  from  the  credit  based  on  x  is,  provided  goods  ; 
produced  in  the  proportions  wanted,  offset  by  a  similar  s 
equivalent  purchasing  power  based  on  y,  so  that  the  price 
y  will  be  affected,  if  at  all,  only  for  a  short  time.     In  bi 

^  General  Walker  accepted  this  general  fact  when  he  said:  *'  Manj  of  tl 
goods  [to  be  exchanged]  may  conreniently  be  exchanged  directlj  against  < 
other  in  barter,  or  indirectly  through  the  interrention  of  commercial  and  fi 
cial  credit,  without  the  ose  of  money.  Such  goods  do  not  constitute  a  facu 
the  demand  for  money."  The  Qiumtity  Theoiy  of  Money,  Qnar.  Jour.  £( 
July,  1895,  p.  373. 


18»4 
183* 

7 

e 

2 
3 

4 

7 

e 

1B0O 

1 

3 
4 

6 
7 
8 

t 

2 
3 
4 

e 

7 
B 

IBTO 

1 

a 

4 
1B76 

7 
B 

leso 

2 
3 

4 

1665 

e 

7 
8 
9 
1B5D 
1 
2 
3 
4 

ie9S 


»      M      U 


O    O 


8  .g:-.8   3Si8Sl38g83S 


;_'  I 

-l-i  •,- 


g 


+± 


ra 


i-tI-J  ' 


DEPOSIT  CURRENCY  189 

eriods  the  adjustments  of  special  demand  and  supply  pro- 
luce  changes  in  relative  values  of  goods ;  but  these  actions 
an  have  but  little,  if  any,  influence  on  the  general  level  of 
urices,  and  thus  on  the  value  of  gold. 

§  8.  The  confirmation  of  the  above  exposition  may  be 
Eound  in  the  history  of  the  deposit  currency  in  the  United 
States.  In  Diagram  I  the  two  media  of  ex-  Historjoftht 
change,  the  note  issues  and  the  deposit  currency,  ^l!£|^i^e 
are  shown  in  their  comparative  development.  Uniudsuut. 
Daring  the  early  decades,  when  the  whole  nation,  in  the 
main,  had  the  monetary  characteristics  of  rural  rather  than 
of  city  districts,  the  use  of  notes  naturally  predominated,  and 
the  banks  perforce  suited  themselves  to  the  needs  of  the  busi- 
nesB  pahUc.  In  brief,  not  until  1856  did  the  deposit  currency 
of  the  United  States  exceed  the  total  issue  of  notes.  There- 
after the  notes  never  overtook  the  expansion  of  the  deposit 
emrency.  It  is  a  striking  and  illuminating  lesson  that,  after 
1878,  the  whole  increase  in  the  work  of  exchanging  goods 
through  banking  devices  was  performed  by  the  deposit  cur- 
rency, and  not  at  all  by  the  notes  of  National  Banks.  Indeed, 
it  may  now  be  inferred,  with  a  fair  approximation  to  accuracy, 
that  the  general  movement  of  the  line  of  deposit  currency 
corresponds  to  the  general  growth  of  the  production  and  ex- 
change of  the  country's  goods.  The  case  is  really  stronger 
than  that  presented  by  this  diagram,  becausct  as  is  well 
known,  a  vast  amount  of  exchanging  through  banks  has  also 
been  done  by  institutions  other  than  National  Banks.  The 
trust  companies  and  State  banks,  both  organized  under  the 
laws  of  the  separate  states,  do  not  issue  notes,  but  carry  on 
the  operations  of  discounting  by  the  use  of  the  deposit  cur- 
rency. To  state  the  whole  truth,  their  operations  should  be 
added  to  that  indicated  by  the  line  in  the  diagram  showing 
the  deposit  currency  of  the  National  Banks  (although  the 
services  of  other  paper  money,  like  greenbacks,  should  also 
be  considered). 

In  our  early  banking  history  the  game  of  speculation  took 


110 


THE  PRINCIPLES  OF  MONET 


the  form  of  a  banking  craze ;  but,  the  conditiona  being  niral^ 
notes  were  in  general  use,  because  that  form  of  demand 
liability  was  preferred  by  the  pubUc.  The  abuse 
ftiid  depoiiiti  of  banking  led,  of  course^  to  a  condemnation  of 
compk  ,  ^^  forms  most  in  evidence ;  this  accounts  for 
the  fact  that  down  to  the  Civil  War  statutes  regulating  the 
excesses  of  banking  related  chiefly  to  note  issueSf  as  if  they 
were  the  only  forms  of  currency  created  by  banks ;  while  the 
deposit  currency  has  been  wholly  ignored  In  fact,  to  the 
present  day  in  our  country^  there  is  a  pi^evalent  belief  — 
which  has  come  down  to  us  from  the  earlier  decades  and 
from  radically  different  conditions  —  that  the  operations  of  a 
bank  can  be  effectively  controlled  by  regulations  applied  to 
the  note  issues.  The  diagram  shows  at  once  how  foolish  such 
an  attitude  now  is,  and  how  inconsistent  it  is  with  the  facts  of 
our  present  system.  Fortunately,  no  attempt  has  ever  been 
made  by  statute  to  hmit  the  deposit  liabilities  of  a  bank,  and 
hence  this  form  of  currency  has  been  able  to  operate  untram- 
melled by  ignorant  interference,  and  has  been  left  free  to  rise 
exactly  in  proportion  to  the  increased  work  to  be  done.  When 
we  once  realize  the  fact  that  the  notes  do  an  insignificantly 
small  amount  of  the  money  work  of  exchanging  as  compared 
with  the  deposit  currency,  we  can  understand  why  the  prac- 
tical infiuence  of  legislation  on  bank  issues  is  a  question 
subordinate  in  importance  to  the  unmistakable  elasticity  of 
the  deposit  currency.  In  the  American  discussions  of  to-day 
as  to  the  safety  and  efficiency  of  a  note  issue  based  on  com- 
mercial assets,  it  should  be  borne  in  mind  that  the  public  are 
already  using  a  deposit  currency  based  wholly  on  assets, 
whose  efficiency  is  taken  as  a  matter  of  course,  and  whose 
safety  in  normal  credit  is  never  questioned. 

Kor  should  there  be  any  mistake  as  to  the  actual  results  pro- 
duced by  the  several  factors  in  operation.  The  diagram  shows 
B&nk  notM  ^^7  ^^^  relative  amounts  at  the  same  time  of  the 
itt  ciMmiE^  ^^  media  of  exchange  created  by  the  national 
b«uti  fistunii.  banks ;  no  data  are  there  given  as  to  the  actual 
achievements  aceomplialied  by  each  of  these  m^iia.     The 


DEPOSIT  CURRENCY  141 


^ 


actiTiiy  of  a  given  amonnt  of  depoaits,  in  exchanging  goods 
ij  checks,  is  much  greater  than  the  same  amount  of  bank 
notes.    But,  however  that  may  be,  we  have  an  actual  record  — 
as  near  as  can  be  expected — of  the  extent  of  the  exchai^es 
performed  by  the  deposit  currency  in  the  daily,  weekly,  and 
annual  clearings  of  the  country.    In  1901,  with  deposits  of 
alout  95602  millions  in  all  the  commercial  banks  of  the  United 
States,  the  work  performed  by  those  deposits  —  remembering, 
of  course,  that  balances  were  paid  in  money  —  is  approxi- 
mately represented  by  the  total  annual  clearings  of  about 
1114,190  millions.    In  the  city  of  New  York  alone,  the 
deposits  of  the  Clearing  House  Banks  were,  in  1901,  about 
1^  millions,  and  the  annual  clearings  in  New  York  City 
were  977,020  millions.    To  do  this  work  the  balances  paid 
in  money  aggregated,  during  the  year  1901,  98515  millions ; 
of  this  sum  gold  certificates  amounted  to  98509  millions ; 
paper  money  was  used,  at  the  outside,  to  only  ^  of  1  per 
cent,  or  less  than  914  millions.    The  national  bank  notes 
need  could  have  been  but  an  insignificant  part  of  this  sum  of 
tl4  miUions ;  while  the  major  part  of  the  clearings  of  977,020 
millions  was  effected  by  the  deposit  currency,  amounting  to 
9950  miUions.^    Nothing  more  need  be  added,  in  a  practical 
way,  to  show  the  enormous  preponderance  in  importance  of 
the  deposit  currency  over  the  note  issues  of  the  banks  in 
doing  the  present  work  of  exchanging  goods. 

1  Cl  R«port  of  the  Comptroller  of  Cnmacj,  1901, 1,  pp.  436, 567,  568,  579. 
The  deponti  of  non-memben  clearing  through  the  New  York  Clearing  Hoose 
weie  about  $80  miUioni. 


142  THE  PRINCIPLES  OF  MONEY 


CHAPTER  VI 
TABLES  OF  PRICES 

A«  to  the  Chapter  of  Prices,  it  will  be  in  Eyety  Body's  Power,  to  make  it  i 
oompleat,  bj  reading  the  old  Compntns's,  that  he  shall  chance  to  light  npo«», 
and  inserting  what  he  finds  wanting,  or  differing  from  the  Acconnts,  that  I 
haye  giren.  —  Bishop  Flbbtwood,  Chromcon  Predotum  (1707),  Pre&oe. 

C.  M.  Walsh,  TKt  Meamwemmi  of  General  Eaxkangt-VoLm*  (1901).  —  A.  L 
BowuiT,  Tke  EUmente  of  StaHetia  (1901).— F.  T.  Edobwobth,  JKqpoKr  ofBritiik 
Aitoaation,  1887  (pp.  SM-«)1),  1888  <pp.  188-219),  1890  (pp.  183-164).—  lam.,  srtidei 
"AytragM"  and  **  Index-nnmbers  *'  in  PALOEAya's  JHctumary.  —  R.  P.  Palkvib, 
Miport  by  Mr.  AUrieh  from  tke  CommiUee  on  Finance  of  U.  8,  8enaU  on  WkoUteU 
Prieee  (1893).  —J.  S.  Kioholsov,  The  Meaturemant  of  Vanadon  in  the  Valme  of  tke 
Monetary  Standard,  Monetary  Problems,  pp.  31S-841.  —  E.  Laspbtbxs,  Hamknrger 
Waarenpreiee  Jahrb,f  NaL  und  Stat.  (1864),  B.  Ill,  pp.  81-118.  —  lam.,  DiaBenA- 
mm^  etiMr  mMerein  Waarenpreimteigemng,  Ibid.  (1871),  B.  XYI,  pp.  996-314.— 
W.  S.  Jayoirs,  Invettigttiione  in  Currency  and  Finance,  pp.  18-1S9. — L.  Walbai, 
£lemenUd*icon<miepoliiip^epure  (1889),  pp.  431-432,  457-468.  —  H.  WaSTHaoAAaa, 
Die  GrundMOge  dor  Tkeorie  der  Statittik  (1890),  pp.  218-920.— F.  W.  Taussto, 
ResuUe  nf  Becent  InveeHgations  on  Price*  m  the  United  States,  Tale  Beyiew,  Noy., 
1893.— N.  O.  Pnasov,  Fnrtker  Connderationt  on  Index  Nmmbon,  Econ.  Joan., 
March,  1896.  —  B.  S.  Padah,  Prices  and  Index  Numbere,  Joam.  Pol.  Boon.,  Maidi, 
1900.  — T.  a  Adams,  Index  Nnmbore  and  the  Standard  qf  Vaina^  Ibid.,  Dec  1901« 
March,  1902. 

§  1.  In  all  cases  a  given  price  quotation  is  a  statement  of 
the  quantity  of  a  specified  money  standard  for  which  a  com- 
modity  will  exchange.    Even  when  a  depreciated 
prices  not         paper  is  the  actual  standard,  so  long  as  its  value 
smpe.  ^  above  zero,  this  paper  bears  some  ratio  to  a 

money  metal ;  hence  a  price  records  the  relationship  of  value 
(although  sometimes  through  the  indirect  process  of  a  de- 
preciated paper)  between  any  one  article  and  some  money 
commodity.  Out  of  such  individual  quotations  existing 
price  tables  are  made.  On  the  same  day  or  at  different  dates 
the  same  article  may  bring  widely  different  prices.  The  prac- 
tical question  for  statisticians  is  to  determine  how  to  record 
truthfully  the  actual  facts  of  price,  and  to  indicate  clearly 


TABLES  OF  PRICES  148 

the  Erection  in  the  changes  of  price  from  any  given  starting- 
point  In  practice,  this  is  not  so  simple  a  matter  as  it  seems. 
For  instance,  it  would  not  be  truthful  to  say  that  the  price 
of  wheat  during  any  one  year  was  correctiy  represented  by 
the  price  on  any  date  taken  at  random,  such  as  the  first  of 
January.  Moreover,  if  there  are  several  quotations  on  any 
day,  which  of  these  shall  be  taken  as  correct?  Or,  if  all 
be  included,  how  shall  the  average  of  these  figures  be  found? 
Or,  even  if  the  method  of  computing  the  average  be  settled, 
shall  each  quotation  be  given  equal  value  in  constructing 
the  average,  irrespective  of  the  fact  that  only  five  units  of 
the  commodity  were  sold  at  one  price  and  five  thousand  at 
another?  That  is,  shall  the  coefficient  of  the  quantity  sold 
be  allowed  to  have  any  influence  on  the  average  price  ? 

If  these  questions  may  be  properly  raised  in  regard  to  the 
tabulation  of  any  single  article  during  a  given  period  of  time, 
we  are  not  likely  to  escape  other  difficulties  when  p^^ 
we  attempt  to  combine  the  price  data  of  two  or  ubiMof  priew 
more  commodities  in  a  common  average,  so  that 
we  may  get  an  expression  in  one  series  of  numbers,  or 
averages,  for  the  movement  of  the  prices  of  many  goods. 
To  some  minds  such  an  attempt  has  seemed  useless  and 
impossible.     Mr.  F.  D.  Longe  (who  began  the  controversy 
on  the  Wages  Fund),  for  example,  thought  that  a  concept 
of  the  average  prices  of  cloth  and  ships  was  absurd ;  aud 
Mr.  Mulhall  ^  regarded  the  results  of  index  numbers  as  wholly 
Macious.     More  recentiy,  a  high  authority,  Mr.  N.  G.  Pier^ 
son,*  has  gone  so  far  as  to  throw  discredit  on  all  attempts  at 
recording  movements  of  prices.     The  average  obtained  from 
the  quotations  of  individual  articles  has  been  characterized 
as  a  purely  fictitious  thing,  as  something  which  gives  a  con- 
crete expression  to  a  thing  which  never  existed.    Conceding, 
however,  that  an  average  of  the  prices  of  several  commod- 
ities may  not  be  the  actual  price  at  which  any  one  of  the 

1  History  of  Prices  (1885),  p.  7. 

*  Economic  Jonmsl  (March,  1896),  pp.  127-181.    Answered  hj  Edgeworth, 
tM.^  ppi  18S-US. 


144 


THE  PRINCIPLES  OF  MONEY 


goods  was  sold  in  the  market  on  any  dai] 
sense  it  is  a  "^  fictitioua  "  aeries  of  numbers, 
the  computation  must  be  kept  in  mind-  Tl 
to  get  a  quantitative  statement  of  the  aveiBge  of  the  changes 
in  the  purchasing  power  of  a  money  commodity ;  the  sum  ^ 
all  the  prices  of  certain  units  of  goods  at  any  one  time  repre- 
sents accurately  how  much  of  the  money  met^  is  of  a  value 
equal  to  a  certain  collection  of  commodities;  and  the  com- 
parison of  these  sums  at  different  times  certainly  shows  the 
actTial  exchange  relationB  in  the  market  between  the  commod- 
ity, chosen  as  the  standard  in  which  prices  are  to  be  eipr^sed, 
and  that  particular  quantity  of  goods  bought  and  sold.  M 

Also,  a  series  of  average  numbers  for  the  prices  of  gooda  iff 
general  cannot,  in  any  true  sense,  be  regarded  as  *'  fictitious*** 
.  -    The  number  obtained  from  avera^ng  nnmeroufi 

A&  average  of  ,  .  , .  ■  i  i  - 

bficm  ncvt         quotations  IS  a  reabty,  as  much  as  other  things  m 


ficUUoEtg. 


life.  It  is  a  true  statement  of  a  mathematical 
relationship  between  certain  accepted  facts ;  the  average  is  ■ 
reality  because  the  things  out  of  which  it  is  constructed  ar^ 
realities ;  it  is  restricted  from  being  other  than  what  it  is  by 
the  actuaUty  of  the  elements  out  of  which  it  is  made;  it  1 
a  truthftil  record  exactly  because  it  cannot  be  "artificial, 
and  because  it  is  limited  in  its  natwre  by  the  nature  of  i1^ 
constituents*  f 

If,  as  has  been  sometimeB  assumed  In  discussing  the  theory 
of  prices,  the  average  level  of  prices  is  arrived  at,  not  from  a 
Why  ftii  KTer-    computation  of  actual  quotations  of  single  arti- 
eles,   but  by  tiying  the  chimerical  proeeas  lM 
comparing  an  abstraction  called  ^  money  work^^ 
(whatever  that  may  be,  and  however  that  may  be  quantita^ 
tively  stated)  with  another  statistical  impossibility,  the  totH 
quantity  of  the  media  of  exchange,  then  there  may  be  some 
reason  for  regarding  an  average  level  of  prices  as   **fict 
tious,"     Such  a  characterization  of  a  long-used  theory  of  pric 
is  not  wholly  unjust,  because,  according  to  it,  the  level 
prices  as  a  whole  is  supposed  to  be  affected  by  the  forces 
stated,  and,  through  this  general  iuffuence  on  the  a 


■ge  might  hmv« 
been  re  girded 


TABLES  OF  PRICES  145 

(me  mngt  suppose  that  the  effects  of  changes  on  the  general 
ievel  will  pass  down  to  single  articles.    But  such  an  inter- 
pretation  of  this  theory  ought  not  to  be  pressed,  since  its 
sixpporters  vary  so  much  between  themselves  in  their  state- 
n^ents  of  it    It  is  referred  to  here  only  as  bearing  on  the 
concept  of  an  average  level  of  prices,  and  its  reality. 

Unmistakably,  each  single  quotation  is  made  in  terms  of 
s^  given  standard  commodity  (or  indirectly  so  in  the  case 
of  inconvertible  paper),  and  not  in  terms  of  the  ^ 
irarious  media  of  exchange,  since  these  media  may  torma  of  th« 
or  may  not  be  the  same  as  the  standard  commod- 
ity.   A  list  of  prices  continued  through  a  suitable  period  of 
time  is  a  record  of  the  value  relationship  existing  between 
goods  and  the  money  commodity.    Such  a  table  says  nothing 
as  to  causes,  but  its  changes  are  records  of  actual  changes  in 
the  exchange  values  of  the  two  terms  of  the  price  ratio. 

A  table  of  prices,  again,  is  invariably  made  up  of  the  quota- 
ti(ms  of  certain  customary  units  of  goods,  such  as  bushels* 
jaids,  tons,  etc.  This  is  frequently  overlooked  by  Qnoutioiii 
the  social  philosopher.  A  rise  or  fall  in  prices,  for  cuttonutfy 
clearly  enough,  is  the  outcome  of  a  rise  or  fall  in 
the  selling  price  of  separate  units  of  the  goods,  and  it  con- 
veys no  direct  information  whatever  as  to  the  total  value  of 
the  product  arising  from  a  given  industry.  It  is  important, 
in  using  price  tables,  to  remember  that  they  contain  no  state- 
ments whatever  as  to  the  number  of  units  of  goods  produced 
by  a  given  amount  of  labor  and  capital.  If  a  fall  of  price 
per  unit  be  accompanied  by  a  disproportionate  rise  in  the 
number  of  units  produced  by  the  existing  plant,  due  to  in- 
creased efficiency,  the  fall  of  price  may  go  with  prosperity  and 
greater  profits  rather  than  with  industrial  depression  and 
lower  profits.  By  not  regarding  a  general  fall  of  prices  as 
an  evidence  of  the  diminished  total  value  of  the  product,  but 
&s  a  record  of  the  changes  only  in  the  prices  of  units  of  those 
goods,  many  errors  may  be  avoided.^    Tables  of  prices  throw 

'  GiTen  the  number  of  onits  prodaced  as  &  coniUnt,  of  conne  the  Tftlne  of 
tbt  wbole  prodact  ii  affected  bj  changea  in  the  price  of  each  onit ;  bnt,  in  actual 

10 


146 


THE  PRINCIPLES  OF  MONET 


no  light  on  the  forces  affecting  the  value  of  the  money  com- 
modity, or  on  the  elements,  such  as  industrial  efficiency, 
entering  into  the  changes  of  price  per  unit. 

The  averages  obtained  from  quotations  of  single  commodi- 
ties, when  combined  for  any  number  of  goods,  are  conven- 
iQ^2  iently  reduced  to  percentages.    Starting  from  some 

nombwB.  base,  the  number  100  is  used  to  represent  either 

the  average  of  a  given  year  or  that  of  several  years,  and  the 
higher  or  lower  quotation  in  subsequent  years  relatively  to 
the  initial  price  can  be  expressed  by  the  relation  this  bears  to 
100,  the  base.  The  series  of  figures  thus  obtained  are  known 
as  index  numbers.  For  instance,  suppose  that  in  1860  and 
in  1870  prices  stood  as  follows : 


WllMt. 

BtML 

Wool 

Com. 

125 

80 

120 

JO 

4)375 

93.75 

I860 
1870 

$0.80  »  100 
$1.00  »  125 

$30  »  100 
$24«    80 

$0.30  »  100 
$0.36  »  120 

$0.40  »  100 
$0.20  »    50 

If  the  price  of  each  article  in  1860  be  taken  as  100,  or  the 
base,  the  price  in  1870  can  be  reduced  to  a  percentage  of  the 
price  in  1860,  as  above,  wherein  wheat  in  1870  is  125  per 
cent  of  its  price  in  1860,  steel  80  per  cent,  wool  120  per 
cent,  and  com  60  per  cent.  Then,  to  find  the  index  number 
of  1870,  we  may  take  the  average  of  the  percentages  of  all 
the  articles  quoted  in  that  year.  Hence  we  may  be  able  to  say 
that,  on  an  average,  the  prices  in  1870  of  all  the  articles 
quoted  are  93.75  per  cent  of  those  in  1860. 

Lists  of  prices,  in  addition,  have  been  used  not  only  for 
monetary  but  for  social  purposes.  In  the  former  use  the 
Social  par.  tables  are  desired  in  order  to  ascertain  the  pur- 
poM8  of  prices,  chasing  power  of  a  given  money  standard  over 
goods  in  general ;  but  very  seldom,  or  never,  do  existing  price 

indastrj,  the  namber  of  units  produced  is  not  a  constant,  and  arguments  should 
not  be  based  on  that  assumption.  The  price  per  nnit  often  Taries  becaose  the 
number  of  nnits  produced  is  rarying. 


TABLES  OF  PRICES 


tables  include  quotations  of  labor,  or  renta  of  bouaea.  If 
goods  and  labor  are  priced  in  the  same  standard,  a  means  is  at 
hand  to  determine  accurately  the  changes  in  the  real  wages  of 
labor ;  since  the  actual  quotations  of  money  wages  paid  are 
of  little  purpose  without  a  means  of  comparison  with  what  the 
wages  will  buy.  The  relation  between  the  money  commodity 
and  human  effort,  as  recorded  in  prices  of  labor,  is  a  matter  of 
the  first  economic  importance.  If  wages  in  gold  rise,  and  yet 
gooda  fall  relatively  to  gold,  real  wages  have  riaeii  doubly, 

I  2.  The  different  methods  of  computing  averages  are  con- 
cerned mainly  with  finding  a  correct  average  of  the  several 
price  quotations.  The  three  principal  ones  are  thus  described 
byMr.  R,  S.  PadanrJ 

*^  We  have  thus  to  consider  three  kinds  of  mean  in  relation  to 
average  —  arithmetic,  geocpetric,  and  harmonic*  An  arithmetic 
series,  as  Ib  well  known,  ie  one  that  has  a  constant  j^rithmetic 
difference  between  the  Bucces@ive  members,  as  5,  8,  geometric,  aad 
11,  li,  etc*  with  the  conetant  difference  3.  A  geo-  mgt»  di»tm- 
metric  series  has  a  constant  ratio  between  successiTe  <^^^*^^ 
members,  as  2,  4|  8,  16^  etc*,  with  the  constant  ratio  2.  The  har- 
tnonic  serieB  is  not  so  simply  stated  as  either  of  the  aboye.  .  ,  * 
If  we  express  an  arithmetic  series  In  the  fonn  of  fractions  (f ,  f ,  f , 
f ,  etc*)  and  invert  the  Tarious  fractions,  we  have  a  harmonic 
series^  as  ^,  ^,  f ,  |,  etc.  In  any  of  these  series,  any  member  is 
a  mean  between  its  left-hand  and  its  right-hand  neighbors*  For 
instance,  in  the  harmonic  series  above,  |  is  the  mean  between  | 
and  }.  It  needs  only  to  be  added  here  that  between  the  same 
two  quantities  the  arithmetic  mean  is  nnmerically  greater  than 
the  geometric,  and  the  geometric  is  greater  than  the  harmonic. 
For  instance,  between  4  and  25  the  arithmetic  mean  is  14 1;  the 
geometric  10  ;  the  harmonic  63 g/' 

It  is  doubtless  true  that  one  method  of  computing  an 
'^average'*  may  be  correct  for  one  and  unsatisfactory  for 
another  purpose.  In  short,  much  depends  upon  what  it  ia 
sought  to  accomplish  before  we  can  say  that  this  or  that 


^  Fricaa  and  Indes  Numben,  Jour*  PoL  Econ^j  M^ich,  1900,  p.  172. 


148 


THE  PRINCIPLES  OF  MONET 


metbod  is  tbe  onl;  right  one.  Assaming  a  certdn  thing  to 
be  aCGompEsbed,  it  is  wholly  possible  tbat  the  barmonic 
PurpoM  of  mean  might  be  the  right  one  to  use.  For  in* 
d^r^eJ  111*  fiUnce,  suppose  that  a  majority  of  tbe  artieles 
«f  mean.  quoted  as  falling  in  price  were  low-priced  goods, 

while  a  very  few,  which  had  risen  quite  exceptionally  m  price, 
were  very  valuable  commodities,  tbe  real  significance  of  the 
general  change  of  pri«^es  might  conceivably  be  more  accurately 
espressed  by  a  number  which  stands  nearer  to  the  snmller 
than  to  the  larger  amounts  in  the  series  of  quotations ;  tiien, 
given  the  economic  purpose,  tbe  mathematical  inHtmment  ^ 
chosen  might  properly  be  the  harmonic  mean.  ^M 

Although  emphasis  may  be  laid  on  the  word  "  average,**  ^1 
and  its  unconscious  use  by  the  human  kind ;  and  although 
this  concept  of  average  may  be  synonymous  only  with  the 
result  obtained  by  an  arithmetic  mean^  —  even  then  it  may  be 
open  to  the  statistician  or  economist  to  use  some  other  meao, 
provided  the  purpose  of  the  investigatiou  does  not  necessitate 
acceptance  of  an  instrument  which  always  conveys  the  quali- 
ties thus  associated  with  *^  average/'  It  is  poiisible  that  an 
end  to  be  attained  may  not  be  gained  by  using  an  '*  average,"' 
if  tbe  word  be  regarded  as  belonging  to  only  one  kind  of 
mean.  Mr,  Padan  urges  with  much  force  the  view  ^  that  the 
concept  of  average  necessaiiiy  cames  with  it  the  arithmetic 
mean: 


The  wofd 
tverog«  uaod- 
ftted  vitb 
^tfuoetk 


'^Tbe  conception  of  average  is  so  wrought  into  the  conscious* 
oess  from  early  life  that  it  scarcely  needs  elucidation.  .  ^  . 
One  or  two  examples  of  averages  ,  .  .  will  suffice 
for  our  purpose.  If  two  boys  are  aged,  respeo- 
tiveiy,  6  and  10  years ^  their  average  age  is  d  yeard^ 
™^'  the  arithmetie  mean.     6  -f  10  =  16,  and  8  +  ^  = 

16.  That  is,  the  eonceptton  of  an  average  is  such  that  if  the 
number  of  an  its  in  it  be  substituted  in  each  term  of  tbe  series 
to  be  averaged,  the  aggregate  number  of  units  is  not  changed. 
•  «  .  If  two  clocks  vary  from  the  true  time,  respectively ^^  by 
20  and  30  miouteB,  their  average  variation  is  25  minutes «  the 

^  Prioat  and  hid^x  Kmntwri,  Jonr^  Pol.  Ecoa.,  March,  1900^  pp.  73,  74. 


TABLES  OF  PRICES  149 

arithmetic  meao.  Why  Bhonld  we  not  say  of  two  prices.  Bay  of 
wheat,  if  the  price  of  one  bushel  is  $1.50  and  the  price  of 
another  bushel  is  $2.00,  the  average  price  for  the  two  bushels 
is  $1.75,  the  arithmetic  mean  ? '' 

Therefore,  if  our  problem  in  an  economic  sense  demands 
that  the  average  obtained,  when  substituted  in  place  of  each 
term  of  the  series,  will  yield  an  unchanged  aggregate  of  units, 
then  the  arithmetic,  and  no  other  kind  of  mean,  should  be 
employed.  The  choice  between  the  different  mathematical 
instruments  must  really  be  decided  by  the  nature  and  purpose 
of  the  inquiry.  Hence,  when  Professor  Jevons  argued  in 
&yor  of  the  geometric  mean  on  the  ground  that  it  lay  between 
the  arithmetic  and  the  haimonic  means,  he  was  justified  in  his 
choice,  provided  he  showed  that  the  problem  of  expressing 
the  purchasing  power  of  gold  rightiy  demanded  a  lower 
series  of  ^  averages,"  or  index  numbers,  than  that  obtained  by 
the  arithmetic  mean. 

Therefore,  in  discussing  the  value  of  money  and  the  changes 
in  its  purchasing  power,  as  evidenced  by  fluctuations  in 
general  prices,  we  must  first  decide  what  it  is  that  we  are 
seeking  for.  If  that  be  first  settied,  then  we  can  easily  enough 
select  the  proper  mathematical  instrument  suited  to  the  pur- 
pose. The  point  to  be  always  kept  in  mind  is  that  this  is  an 
economic,  and  not  a  mathematical,  problem. 

The  price  of  a  bushel  of  wheat  or  of  a  ton  of  steel  is  the 
number  of  grains  of  gold  for  which  it  will  exchange.  The 
problem  of  the  exchange  value  of  money  is  to  ^  ^,     . 

.       ,  ,     .  .        -  ,  ,  Problem  m 

ascertam  the  relative  amounts  of  goods  exchange-  yaiae  of 
able  for  a  given  amount  of  gold  (or  other  money,  ^^^^^' 
as  the  case  may  be).  We  wish  to  be  able  to  say  whether 
a  given  amount  of  gold  buys  more  or  less  of  goods  in  certain 
pioportions  at  one  time  as  compared  with  another,  taking  into 
accoont  not  merely  the  quantitative  mass  of  goods,  but  the 
satisfactions  yielded  by  these  goods  as  affected  by  the  changes 
of  price.  If  a  statement  of  the  prices  of  certain  articles, 
expressed  in  percentages  of  their  respective  prices  in  1860, 
be  arranged  as  follov^,  the  total  outcome  will  show  whether 


150 


THE  PKraCIPLES  OF  MONEY 


more  or  less  money  is  made  equal  to  the  same  qaaatit^  and 
aame  quality  of  commodities; 


WlMUt 

8t«L 

Wool 

0<H% 

0^ 

AT«X«fft, 

ISGO 

100 

100 

100 

100 

100 

100 

1870 

eo 

70 

90 

60 

ISO 

90 

18S0 

no 

50 

70 

55 

ISO 

81 

If  gold  be  the  money  commodity ;  if  we  are  lookiiig  at  these 
goods  objectively  from  the  point  of  view  of  gold  ;  and  if  wa 
wish  to  know  whether  a  given  sum  of  gold  obtains  in  eicbange 
more  or  less  of  the  above  articles,  and  in  the  same  relative 
proportions,  it  is  quite  clear  that  we  ought  to  know  the  total 
outlay  of  gold  which  is  equal  in  value  to  the  sum  of  all  of  the 
same  quantities  of  goods  at  the  different  periods. 

Without  clearly  giving  us  an  analysis  of  the  economic  prob- 
lem to  be  solved,  Professor  Jevons  advocated  the  use  of  the 
geometric  mean,  and  in  cases  where  the  arithmetic  mean  had 
been  generally  used  as  the  most  convenient  instrument*  His 
reasons  are  briefly  these  ; 

*^  Thus  the  price  of  cocoa  has  nearly  doubled  since  1845-18^. 
It  has  increased  by  100  per  cent.,  eo  that  its  variatioa  is  qow 

expressed  by  the  number  200,  Cloves,  on  the  eon- 
mattn^h!^'  traty,  have  fallen  50  per  cent.*  and  are  now  at 
<»fth«gei>         5Q_     i^tie   arithmetic  mean  of  these  ratios  would 

be  i  (200 +  M)  or  125,  The  average  rise  of 
Goooa  and  cloves  would  then  appear  to  be  25  per  cent  But  this 
is  totally  erroneous.  The  geometric  mean  of  the  ratios  ex- 
pressed by  the  numbers  200  and  50  ib  100*  On  the  average 
of  cocoa  and  cloves  there  has  been  no  alteration  of  price  what- 
ever* In  other  words,  the  price  of  one  is  doubled^  of  the  other 
halved  —  one  is  multiplied  by  two,  one  divided  by  two  —  on  the 
average,  then»  the  prices  of  these  articles  remain  as  they  werei 
instead  of  rising  25  per  cent "  ^ 

*  loTe^tigatiooa  in  Carreocj  and  Finance,  p.  23.  Laspejre'i  Argument  In 
&vor  ol  the  arithtnetic  average  agaiost  Jerons  is  ihown  not  io  be  wbollj  adequate 
by  Wal&h  {p.  363).  La^peyre'a  position  is  commended  hj  Majo-Smtth,  Science 
of  Statifldca,  II,  p.  492, 


The  sdeqiiacy  of  thlB  reasoning  has  been  attacked  on  tbe 
following  grounds.  *^  Multiplying  by  2  and  dividing  by  2  are 
mutually  neutralizing  operations,  but  it  depends  entirely  on 
the  quantities  operated  on/*  says  Mr<  Padan.*  "If  100  be 
multiplied  by  2,  and  then  the  product  200  be  divided  by  2, 
the  original  quantity  100  is  regained  ;  but  it  we  perform  the 
two  operations  on  the  same  quantity,  as  does  Mr,  Jevons,  the 
result  is  not  so  simple.  He  multiplies  100  by  2  and  divides 
100  by  2,  and  then  by  dwelling  on  the  identity  of  multiplier 
and  divisor,  and  ignoring  the  remaining  elements  of  the  prob- 
lem, he  reaches  a  chimerical  conclusion.  ...  If  a  man  should 
make  two  investments  of  $100  each,  and  realize  200  per  cent 
on  one  investment  and  50  per  cent  on  the  other,  Mr.  Jevons'a 
style  of  reasoning  would  figure  out  no  reward  for  the  invest- 
or's pains.  Modem  book-keeping  shows  no  such  sterility  in 
real  transactions.  The  investor  makes  $100  on  one  transaction 
and  loses  $50  on  the  other,  showing  a  net  gain  of  $50.'*  ^ 

Jevons's  reason  for  using  the  geometric  mean  seems  in 
reality  to  have  been  that  variations  of  prices  are  variationB  of 


1  Op.dL,-p.  175. 

>  If  aa  exproeiion  of  the  changts  In  tke  pnfehasing  power  of  gold  bs  iotigbt 

foiv  then  it  ifl  dflimed  ttiat  the  geometric  me3Ja  ia  oD«uited  foi  tbU  pEirj>oie.    On 

this  gTOQXid  Mr*  Pmlan  aiguos  thiu  r 

**  Tbe  nbanrdity  o£  the  geometric  method  will  be  m^nifeitt  if  we  conijder 
CUM  of  esitreme  Tari&tion.  To  begin  with  Mr^  Jovotii'i  iUiLstT»tio»t  m  Hie 
^■[Hiiwiid  bj  the  ratio  S  in  off  get  by  a  doclltie  expresstsd  hy  ^.  In  the  pftme 
waj  ft  riae  expressed  by  4  is  offset  by  a  decline  expressed  by  J  ;  or,  which  ii 
the  iftme  thiog,  if  Iwo  commoditie*  eiich  doable  in  price*  their  variation  ie 
ofbct  bj  tbttt  of  a  single  commodily  declining  to  J  its  standard  price.  By  the 
i&me  logic  1 00  commodities  donbliog  in  price  would  be  offset  by  one  com* 

modity  dediniiig  to  ~icia  ^^  ■toudard  price.   Thai  is  to  saj^  one  commodity 

by  declining  in  price  can  offset  any  rise  la  all  other  oommoditi^  combinedp 
and  tbe  resak  will  be  ao  average  of  ao  Tariation. 

*'  We  can  brin^  ont  tbe  absurdity  in  a  still  bolder  form.  Let  im  take  the 
case  of  a  commodity  that  may  hare  a  comjmu  of  price,  lacludmg  zerOf  such 
ai  water.  By  the  geometric  method  what  is  the  aTorage  price  of  water  be- 
tweeu  its  extreme  rates^  taking  the  maximum  rate,  2.  and  the  minimum  rate 
Of  The  true  arerage  is  the  arithmetic  mean,  1.  The  geometric  oieaD  ie 
j^S  X  0  =  0.  That  is,  the  average  price  of  water  by  the  geometric  method 
would  be  its  mimmom  price.*'     Ihid.,  pp.  130-18L 


162 


THE  PRINCIPLES  OF  MONET 


ratios^  a^nd  that,  hencej  the  proper  method  of  averaging  ratios 
was  the  geometrie,*  But  this  throws  very  little  light  on  the 
economic  end  to  be  Bought  by  the  index  numbers.* 

Recently,  however,  a  remarkable,  painstaking,  and  elaborate 
study  of  the  whole  question  of  averages  and  weighting  has 
been  made  by  Mr.  Wal^h^^  After  eome  preliminary  study  of 
the  meaning  of  value,  he  seta  out  to  find  a  measurement  for  the 
average  variation  of  prices  in  the  actual  market.  In  the  dis- 
Waiivh  fAiton  ^^^^^^  ^^  ^^^  proper  method  of  computing  aver- 
geontvtdG  ages,  he  comes  to  a  concluaion  in  favor  of  the 
geometric  mean.  The  end  to  be  gained  is  to 
ascertain  the  vaiyiug  exchange  value  of  money  as  expressed 
in  goods.  To  accomplish  this  purpose,  from  strictly  mathe- 
matical reasons  (keeping  in  mind  that  the  harmonic  is  a  ro- 
ciprocal  of  the  aritlimetic  mean),  he  holds  that  neither  the 
arithmetic  nor  the  harmonic  mean  is  correct: 

**  It  is  plam  that  when  a  is  becoming  equal  to  b  it  mast  pass 
through  the  mean  between  them,  that  is^  it  must  fall  first  to  the 

1  Bowie  J  (ElemoDti  of  Statistics,  p.  13S)  Aaji  i  **  The  tnRatDce  of  largt  nuni- 
bflzi  ii  dimmUhed  and  of  em^U  nnmbar»  h  iDcrcwted^  when  the  geomeiTte  ine»ii 

11  emplojed  iDtrtead  of  the  aimple  KTerMge.''  (Cf.  alfto  Edgeworthi  Report  Britiih 
AMOciation,  l&gT,  p.  283-)  Bow]ey  also  (p.  223)  enforcefl  Edge  worth 'i  vi«w  that 
the  geometric  mean  has  the  special  advantage  that  iia  reanlta  are  tndepeodeut  af 
the  jear  choeen  ai  the  baae. 

^  **  Sappoie  thAt  we  had  to  tAcertain  the  weight  of  a  rerf  htrge  mad  heafj 
masa  hj  meatis  of  a  balance  which  was  difficult  to  operate  and  known  to  be  erratic 
ftnd  miiccar&te.  Two  methoda  of  procedure  might  be  followed^  We  might 
divide  the  mass  int^:}  a  Large  number  of  particlea,  weigh  theae,  and  obtaLn  our 
answer  bj  adding  the  weights  of  the  eeTeral  particles  antbineticaUy.  Thia 
method  woald  he  Bomewhat  analogons  to  th«  coiQiumption  index  number.  Oa 
the  other  ha^d^  if  the  error  of  the  ncale  was  not  kDOwn  to  be  of  a  specific  kiiid» 
we  might  weigh  the  whole  ma^s  a  large  tminber  of  timee  aod  take  as  our  answer 
the  aTerage  of  the  feveral  readings  of  the  scale.  In  the  latter  case  each  reading 
would  be  an  indepepdetit  aoRwer  in  iiwlf ,  no  weights  would  he  employed*  and 
the  geometrical  meauj  in  accordance  with  preTioos  experience  in  such  work  and 
with  certain  accepted  acieQtific  priueiplea^  would  be  preferable  to  the  artthmetic 
mean.  The  latter  opemtioo  is  more  closelj  anaJogons  to  the  index  number  of 
JeToni  and  indicates  clearly  the  different  role  of  the  price  Tariationa  in  the  two 
methods/'    T.  S,  Adams,  Jour  PoL  Ecou.,  Det%,  1901,  p.  23. 

■  C.  M.  Walsh,  The  MeasnremeDt  ot  General  Exchange  Value  ( 1 901 ).  The  gen- 
era!  argnmeul  for  the  geometric  mean  is  given  id  chap.  riit.    TMe  rolame  it  u 


TABLES  OF  PRICES  153 

mean  and  then  from  the  mean;  and  when  h  is  becoming  equal 
to  a,  it  mnst  pass  through  the  mean  between  them,  that  is,  it 
must  rise  first  to  the  mean  and  then  from  the  mean. 

**  Therefore,  if  the  mean  be  the  arithmetic,  the  approaches  of 
a  and  h  to  this  mean  are  harmonic  variations,  and  tiieir  depar- 
taieafrom  it  are  arithmetic  variations. 

**  If  the  mean  be  the  harmonic,  the  approaches  of  a  and  b  to 
tttis  mean  are  arithmetic  variations,  and  their  departures  from  it 
are  harmonic  variations. 

^*  But  if  the  mean  be  the  geometric,  both  the  approaches  to  it 
and  the  departures /rom  it  are  geometric  variations.**  ^ 

Mr.  Walsh  insists  that  our  problem  has  two  aspects:  (1) 
piice  variations  of  goods  in  gold,  and  (2)  variations  of  the 
exchange  value  of  gold  in  goods.  If  we  use  the  arithmetic 
average  for  (1),  then  we  must  use  the  harmonic  average  for 
(2),  which  is  its  reciprocal ;  if  we  use  the  arithmetic  aver- 
age for  (2),  then  we  must  likewise  use  the  harmonic  average 
for  (1).  It  is,  however,  only  the  geometric  average  which 
cm  be  used  with  the  same  arguments  on  both  sides  of  the 
problem.' 

This  author  concludes  that,  because  of  a  deficiency  of 
metiiods  hitherto  used,  the  great  problem  of  measuring  the 
average  variation  of  prices  in  the  actual  market,  where  the 
movement  of  prices  and  the  volume  of  business  is  haphaz- 
aid,  cannot  be  regarded  as  yet  satis&ctorily  solved.  The 
end  to  be  attained  is  a  real  one,  but  the  means  applied  are 
not  yet  perfect.  The  variation  in  the  exchange  value  of 
money  is  a  true  one,  but  it  has  not  yet  been  accurately  meas- 
i3ied  by  existing  methods  of  averaging. 


1  and  thorough  examination  of  the  qnestiont  of  arenget  and  weighting  by 
•iMlhwnatirian.    It  is  not»  howerer,  always  comprehensible  by  the  lay  reader. 

1  Op.  dU  p.  531. 

*  hid^  chapw  Tiii,  especially  p.  S45,  §  8.  Also,  exchange  Talnes  and  prices,  he 
tUaka,  tie  kinds  of  things  which  cannot  sink  below  0,  bnt  which  can  rise  in- 
fiaitdy.  Therefore  the  geometric  mean  b  the  only  one  applicable  to  snch  cases, 
WuMmthem  there  oonld  be  no  arithmetic  or  harmonic  compensation.    See 

p.  Ma 


154 


THE  PRINCIPLES  OP  MONEY 


] 


Laspejre's  defencd^  of  the  arithmetic  ayerage  as  againi 
Jevons  has  received  considerable  support: 

M  The  geometric  meaa  expresiea  D^lther  the  depreciation 
commodltied  or  appreciatioa  of  monej,  Eior  the  appreciation  of 
Liipeyraa^iAr-  Commodities  or  depreciation  of  money  —  that  is, 
STg^^i^rir*  according  to  Jeirons,  increaae  or  decreaie  to  its 
mean,  ^potency  in   pnrchafiing  other  articles/     Let   ua 

retain  the  example  nsed  by  Jevons.  Here,  after  the  change  in 
price  of  cocoa  and  cloreSf  the  tame  sum  of  money  has  not  the 
flame  porchaaing  power  ae  before,  but  a  smaller  one^  and  exactly 
so  much  smaller  as  tfl  indicated  by  the  arithmetic  mean.  If  a 
certain  weight  of  cocoa  (say  1  cwt.)  previously  cost  lOOthalers, 
and  a  certain  weight  of  cloves  (say  1  cwt.)  also  cost  100  thalers, 
and  the  price  of  this  amount  of  cocoa  rises  from  100  to  200 
tbalers,  and  that  of  the  cloves  falls  from  100  to  50,  then  200 
thalers  no  longer  have  the  same  potency  in  purchasing  cocoa 
and  cloves.  For  this  sum  the  purchaser  procures  only  |  cwt. 
cocoa  (^150  th.),  and  1  cwt.  cloves  (=  60  th.),  or  he  procures 
1  cwt.  cocoa  {=s.  200  th.)  and  no  cloves  at  alL  The  purchasing 
power  is  now  ^  less,  that  is,  the  purchaser  must  add  ^  in  order 
to  get  the  same  quantity ;  or  the  250  thalers  are  now  by  J 
(50  tb.)  less  worth  than  formerly,     ExacUy  this  is  expressed  by 

the  arithmetic  mean  — — - —  =  125 ;  125  thalers  have  only  the 

same  purchasing  power  as  100  before,  or  250  only  the  same  as 
200  before.  Money  has  depreciated  20  per  cent ;  commodities 
have  risen  25  per  cent*  What  is  true  of  the  average  of  two 
commodities,  is  tme  also  for  any  number  of  commodities. " 

In  answer  to  Laspejrr^s,  Walflh'  insists  that  one  can  bny 
the  same  mass  (i.  e.,  weight,  in  this  case)  of  cocoa  and  clovea 
combined,  al though  in  different  combinational  with  the  same 
sum  of  gold; 

*^  Laspejrres  thus  found  fault  with  the  geometric  average  for 
indicating  constancy  in  the  ^  potency  in  purchasing '  nnder  the 

t  Hambiirgvr  Waarenpreifte,  ISSC-ISItS,  ttc,  in  Jnhrbucher  fiir  NationiJ 
O^koAomiB  UDd  Statistik,  1S64,  B.  Ill,  pp,  81-118,  C(.  tbid,^  1S7L  B.  Jt?]. 
pp.  29&^1 4.    Tke  quotatioQ  abave  h  a  trauslaSton  bj  WalaUt  p*  367. 

*  Pp.  2G7-26S- 


TABLES  OF  PRICES  155 

given  oonditioDS,  because  these  oonditionB  permit  ns  with  one 
wbole  earn,  200  thalero,  to  get  at  the  second  period  only  1  owl 
ooooa  and  no  dores,  that  is,  a  smaller  quantity  than  waUh  annren 
before,  which  fact  he  took  for  an  indication  that  I^PV"*- 
the  *  potency  in  purchasing*  was  smaller,  to  which  came  the 
idded  evidence  that  more  money  is  reqnued  at  the  second 
period  to  boy  the  1  cwt  of  each  article.  He  omitted  to  state 
that  these  conditions  permit  ns  at  the  later  period  to  buy  4  cwts. 
doves  and  no  cocoa,  that  is,  this  time  a  larger  quantity  than  at 
Ifafst,  and  one  Just  doubles,  as  the  other  was  half.  Had  he  done 
to,  the  indication  of  depreciation  would  have  been  no  stronger 
than  that  of  appreciation.  And  he  probably  failed  to  see  that 
under  these  conditions  we  could  at  the  first  period  purchase  with 
6e.66}  thalers  }  cwt.  cocoa  and  with  188.83^  thalers  1^  cwts. 
cloves,  or  2  cwts.  with  200  thalers;  and  that  at  the  second 
period  we  could  purchase  with  188.88^  thalers  }  cwt  cocoa  and 
with  66.66]  thalers  1^  cwts.  cloves,  that  is,  exactly  the  same 
quantities  of  cocoa  and  cloves,  amounting  to  2  cwts.,  with  the 
same  total  sum  of  money,  200  thalers.'* 

When  Walsh  adds,^  in  conclusion,  that,  *^  tiie  price  of  at 
least  one  class  rising  and  the  price  of  at  least  one  class  fall- 
ing,  no  matter  how  large  or  small  these  variations 
he,  it  is  possible  by  spending  constant  sums  of  WiUsh'a 
money  on  the  different  classes,  with  the  same  p^*''**'^' 
total  sum  to  purchase  at  both  periods  the  same  total  quantity 
of  goods,"  he  must  admit,  of  course,  that  the  purchaser,  be- 
cause of  the  changes  in  price,  does  not  obtain  the  same  satis- 
&ctioQs  or  utilities  in  the  second  period  as  in  the  first.     If, 
initially,  the  purchaser  with  200  thalers  bought  1  cwt.  of 
cocoa  plus  1  cwt  of  cloves,  then  if,  after  the  change  in  price, 
the  purchaser  can  buy  only  1  cwt  of  cocoa  (supposing  the 
same  amount  of  cocoa  to  give  still  the  same  satisfactions),  he 
cannot  obtain  any  satisfaction  at  all  from  cloves,  because  the 
1  cwt  of  cocoa  took  up  all  his  money.     Under  the  circum- 
stances, it  is  evident  that  the  purchasing  power  of  money  over 
satis&ctions,  at  least  in  their  former  relations,  has  diminished. 

1  P.  269. 


156 


THE  PRINCIPLES  OF  MONEY 


It  certainly  is  not  the  same.  The  geometric  avemge  does  not 
express  the  whole  truth  of  the  economic  situation.  And  if 
the  economic  purpose  be  kept  in  view,  it  does  not  seem  that 
Mr*  Walsh  has  shown  that  the  geometric  mean  is  the  right 
instrument  to  be  used  for  the  given  purpose.  A  change  in  the 
relative  quantities  of  gooda  obtainable  for  the  same  sum  of 
gold,  when  implying  a  change  in  satisfactions,  is  evidently  a 
part  of  the  concept  we  have  in  mind  when  speaking  of  a 
change  in  **  purchasing  power."  d 

A  change  of  prices,  where  many  goods  are  affected,  shows, 
in  fact,  only  a  great  variablencas  in  the  general  purchasing 
Change  IP  vftiue  power  ot  monflj*  It  follows  that  the  general 
^Mrti  MUafill?  exchange  value  of  money  should  not  be  meas- 
Uoaa,  -m^d  by  the  mere  quantity  («•  g.^  the  same  aggre- 

gate weight)  of  several  goods  that  a  given  sum  can  piHcha^ 
at  each  period ;  for  a  great  variety  of  the  elements  making 
up  the  same  total  mass  quantity  can  be  purchased  at  the  two 
periods  with  the  same  sum  of  money.  Regard  should  be 
had  to  the  change  in  the  satisfactions  obtainable  at  the  two 
periods  with  the  same  sum  of  money. 

For  certain  purposes  —  provided  these  are  clearly  indicated 
by  the  statistician  *  —  no  doubt  a  geometric  mean  may  be 
wholly  legitimate ;  but,  for  our  study  of  the  changing  value 
of  money  as  shown  by  prices,  the  open  question  is,  whether 
the  object  to  be  attained  by  the  tables  is  not  practically 
accomplished  by  the  simple  arithmetic,  rather  than  by  any 
other  mean.  On  the  whole,  the  preponderance  of  experience 
in  the  past  has  led  to  a  general  use  of  the  arithmetic  mean.^ 


1  Cf,  WalBh,  0p.  tit.,  p.  244. 

3  To  dad  the  "  median/*  the  ilimfl  of  thi  pxinp  ara  &rraug«d  in  aacendmg 
ord«r  ol  mngtiitiide,  and  Iha  iteoQ  haJf-waj  up  tho  Hat  iatbo  mcdiati.  Of  the  fir« 
itema,  75»  90,  95,  115^  135^  thfi  median  ii  95.  It  ii  not  aEected  bj  tbe  tindii« 
weight  Qf  exceptional  entrjas  ;  caxi  be  foand  when  information  is  not  exact ;  and 
ia  applicable  %q  ca»ea  (like  the  arerage  intelligence  of  boys)  in  which  the  quaatj* 
tlea  are  not  capable  of  de^nite  meaaurement  at  all.  On  the  other  hand,  Ihe 
median  maj  be  totally  retnDved  from  the  type.  Bowley  mj^geata  (p.  S34}  that 
if  tbe  median  had  been  em  ployed  in  the  Economiat  table  the  stolen  I  floctna- 
lioai  in  the  indax  nnmbera  due  lo  cotton  would  hare  been  avoided.    Of.  Boirl«j| 


TABLES  OF  PRICES  167 

§  8.  Many  writen  have  seen,  however,  that  the  aesignment 
of  eqaal  importance  in  a  list  of  prices  to  articles  which  greatly 
my  in  the  amount  of  money  laid  ont  on  them, 
most  lead  to  error.    Abstract  reasoning  by  the  aco^rat 
mathematician  has  in  addition  shown  this  to  be     ^°^  ^' 
trae.    Undoubtedly  some  coefficient  of  quantity  ought  theo- 
retically to  be  introduced  in  making  up  the  index  number  in 
order  to  give  different  articles  the  weights  which  conform  to 
their  relative  importance  in  the  actual  transactions  of  the 
maiket. 

In  tables  containing  a  limited  number  bt  commodities,  the 
theoretical  requirement  of  a  coefficient  of  quantity  is  easily 
apparent.  For  instance,  the  average  price  of  wheat  alone, 
even  at  the  same  time,  will  vary  according  as  we  include  all 
the  quantities  sold  at  different  prices.  If  6  bushels  are  sold 
at  60  cents,  and  20  bushels  at  50  cents,  the  average  price  is 
not  correctly  expressed  by  simply  averaging  one  bushel  at  60 
and  one  at  50  cents,  or  55  cents ;  because 

5  bnahelB  X  .60  =  $8.00 
M  "  X  .50  =  10.00 
26      "        X  .52  =  $13.00 

In  this  case  50  cent  wheat  appeared  20  times,  and  had  more 
weight  in  fixing  the  average  price  than  the  5  bushels  of  60 
cent  wheat. 

In  quoting  varying  prices  of  the  same  article  at  different 
periods,  the  same  principle  holds  when  we  propose  to  cast  up 
the  average  which  includes  all  these  periods.  If  more  wheat 
is  sold  in  October  than  in  March,  then  the  October  prices  will 
have  more  weight  than  the  March  prices  in  determining  the 
average  price  for  the  year.  Suppose  wheat  sold  in  January 
at  80  cents,  in  February  at  85,  in  March  at  90,  in  April  at 
86,  in  May  at  82,  in  June  at  81,  in  July  at  83,  in  August 


\  of  Statistics,  pp.  124-126 ;  Edgeworth,  Reports  of  the  British  Associa- 
tioo  for  the  Adyanoemeiit  of  Science,  1888,  1889,  and  Journal  of  the  Royal 
Staaistieal  Sodelj,  June,  1888,  etc. ;  and  Padan,  op,  cit.,  p.  130. 

For  the  ''mode,"  cf.  Bowley,  pp.  118-124.    For  a  general  summaij  of  the 
fnnctioii  of  arerages,  cf .  ibid,,  p.  130. 


168  TH£  PRINCIPLES  OF  MONET 

at  80,  in  September  at  74,  in  October  at  60,  in  November 
at  65,  in  December  at  70;  the  simple  unweighted  annual^ 
average  is  78  cents.    But  if  ten  times  as  much  wheat  was  solit^ 
in  October  as  in  other  months,  the  weighted  average,  giving 
October  ten  times  its  former  importance,  would  be  only  70.S 
cents.^ 

Passing  to  the  relative  importance  of  different  commodities, 
it  is  apparent  that  indigo  does  not  enter  into  the  total  transac- 
tions  of  a  countiy  in  the  same  pecuniaiy  proportion  as  wheat 
or  cotton.  But  an  unweighted  average  would  allow  changes 
in  the  price  of  indigo  the  same  importance  on  the  annual 
index  number  as  wheat  or  cotton.  This,  of  course,  wonll 
not  record  correctly  the  true  state  of  affairs  in  the  average  of 
prices, — at  least  not  absolutely.  If  wheat  sells  at  70  cents  a 
bushel,  and  indigo  at  $1  a  pound,  the  unweighted  avenge 
is  85  cents.  But  if  100,000,000  bushels  of  wheat,  and  100,000 
pounds  of  indigo  are  sold,  the  average  is  changed  as  follows: 

100,000,000  ba.  X     .70        =  97,000,000 

100,0001b.   X  1.00        =       100,000 

100,100,000        X    .7092+=    7,100,000 

and  the  weighted  average  is  near  the  lower  price,  or  .7092 
cents. 

Bowley  gives  a  mechanical  analogy'  which  states  the 
problem  in  another  form : 

'^  Suppose  a  aniform  weightless  rigid  rod  graduated  in  100 
equal  divisions,  and  equal  weights  hung  at  the  77th,  60th,  90th, 
40th  and  85th  divisions*  from  one  end;  the  rod  will  then 
balance  at  a  point  corresponding  to  the  unweighted  average, 
70.4  intervals  from  the  same  end.  Now,  suppose  the  equal 
weights  replaced  by  weights  of  7,  1,  8,  2,  4  lbs.  respec- 
tively,^ and  the  rod  will  balance  at  a  point  corresponding 
to  the  weighted  averages  75.8  intervals  from  the  same  end. 

1  Cf.  Padan,  op.  cit,  p.  183. 
«  Ojp.  «>.,  p.  112. 

*  To  correspond  with  the  index  nambers  of  five  commodities  Esed  in  an  illus- 
tration by  Mr.  Bowley. 

*  Corresponding  to  the  relatiye  importance  assigned  to  each  commodity. 


TABLES  OF  PRICES  169 

The  farther  any  particular  mass  is  moved,  or  the  heavier  it 
iB,  the  more  the  centre  of  gravity  will  be  shifted ;  and  this 
deaily  corresponds  to  the  influence  we  should  wish  the  various 
prices  to  have  in  the  statistical  problem." 

§  4.  Based  on  these  general  considerations,  the  weighting 
of  price  tables  has  been  given  no  little  discussion  in  the 
HiBi&tare  of  prices.    Theoretically,  the  argument  Pnustioe  mod 
in  hvoT  of  the  accuracy  obtained  by  weighted  ^7ti!^ 
index  numbers  seems  unanswerable,  but  we  shall  ^^^^ 
later  ^  see   that   they  are  not   only  impracticable,  in  any 
extended  list  of  prices,  but  that  they  are  of  no  appreciable 
pnctical  importance,  if  a  sufficientiy  large  number  of  articles 
are  quoted. 

The  various  proposals  for  weighting  the  prices  of  different 
articles  in  tables  of  prices,  according  to  their  relative  import- 
ance, are  not  based  on  the  same  test  of  importance ;  they 
asaome  different  coefficients  of  quantity,  supposedly  based  on 
tbe  different  purposes  to  be  obtained.  Here,  as  in  the  case  of 
computing  averages,  the  question  is  not  one  to  be  settled 
mathematically;  since,  given  the  end  in  view,  a  coefficient  of 
quantity  for  one  end  may  be  different  from  that  adopted  for 
another  end.  Therefore  a  method  adjusted  to  one  purpose 
may  be  correct ;  but  it  may  have  no  value  for  another  purpose, 
and  certainly  no  general  significance. 

In  some  of  the  tables  of  American  wholesale  prices,^  com- 
piled under  the  direction  of  Professor  R.  P.  Falkner,  he  has 
employed  a  method  of  assigning  a    coefficient  F&ikoer's 
to  different  articles  in  proportion  to  their  im-  budget  method, 
portance  in  the  budget  of  expenditures  of  families  in  moderate 
circumstances.    This  budget  method  was  built  on  statistics  of 
family  expenditures  collected  in  the  Seventh  Annual  Report 
of  the  Bureau  of  Labor,  and  in  the  contemporary  report  of 
Professor  Falkner  on  Retail  Prices  (1893).     Food,  clothing, 
rent,  and  even  some  details  of  each  head  were  furnished.    On 
this  information  articles  in  a  table  of  prices  were  given  an 

1  See  infra,  p.  161.  *  Aldrich  Beport  VI. 


160 


THE  PRINCrPLES  OF  MONEY 


6km 


importance  by  a  coefficient  of  quantity  in  proportion  to  the 
expenditure  on  each  article  in  the  budgets.  Even  with  the 
greatest  shill  and  industry,  dealing  with  m  large  a  number  o£fl 
families  as  232,  and  having  the  details  for  each  item  o^^ 
expenditure,  the  practical  results  were  far  from  aatisfactory. 
It  was  found  to  be  necessary  to  make  arbitraiy  assignmenta 
to  certain  prices  which  militated  against  the  validity  of 
the  result.*  By  this  weighting  process,  however,  although 
largely  artifictaU  68.6  per  cent  of  the  expenditure  waa 
included,  and  a  weighted  list  of  prices  was  made  outjj  whictj 
was  compared  with  one  computed  hy  a  simple  unweighted 
arithmetical  average. 

Apart  from  the  pi"acticability  of  the  budget  method,  its  pur- 
pose must  be  taken  into  account     On  this  point  I  cannot  do^_ 
better  than  quote  Professor  Taussig ;  ■ 

'*  If  we  wish  to  know  whether  any  particular  class  in  the  com- 
Pureotaof         ni unity  is  better  off  or  worse  in  consequeDce  of 
changes  and   prices,  we   must  make  the  inquiry 
with  reference  to  the  distribution  of  the  e^tpendi- 
tures  of  its  members*    More  particularly,  if  we  wish  to  know  bow 

1  On  thii  point  Prof«stor  Tftuuig  amjv:  ^| 

"  Keot  U  ft  large  iUm  in  eKpeDditara  ;  but  how  xnuch  of  tbii  w«i  for  brickie 
wood^  glai0^  It  is  tinpo$iiib]«  to  «aj.  A  coQtidarabte  expenditure  among  tb» 
a0]«ct«d  fkinjltev  bftd  Bot  been  tiemlzed  al  all,  bnt  aim  ply  set  down  ws  mi«4^U- 
DVOQB  in  tbe  bndgeta.  This  was  taketj  into  af^ounv  nevertbelets*  in  making  tip 
the  weighted  average,  bj  aaaaniLag  tbaton^-balf  of  this  miscellaneous  expendi- 
ture was  t&t  the  direct  purchase  of  commodities ;  and  hy  assnmlng  Xurther  thai 
Iheae  commodttieB,  already  aasnmed  to  be  directly  pnrchased^  eoniiiited  of  at]  the 
articles  in  the  list  which  had  not  already  found  a  place  in  thei^peciflcaUy  itemized 
artieles  of  the  budget.  The  price  of  all  these  arttc^lee  not  tnu.-eable  in  the  bad* 
get's  statements  were  yet  giren  an  importatice  in  forming  the  general  are  rage, 
determined  bj  the  proportion  which  one-h^f  of  tlie  miBFellaneoDs  expenditUFC 
had  in  the  total  expenditure  of  the  family.  These  other  articles,  it  may  be 
noticed,  included  aU  the  metul»  aod  implemeuts  whose  prices  were  quoted,  all 
the  drugs  and  chemicaln.  aU  the  lumber  aud  build  tug  matenats.  Here  again 
we  hare  hq  artificial  elemeut  of  considerable  importance^  a  siippoeition  and  not 
a  fact,  in  the  distribntiou  of  expenditure  and  the  consequent  weighting  of  com* 
moditiest  which  sbows  bow  difficult  it  is  to  carry  out  into  practice  the  budget 
principle  of  weighting  commoditios  according  to  their  importance/*  Tolt 
Heriew,  Kov.,  1693. 


thfl  budget 
method. 


'  TABLES  OF  PRICES  161 

tiioee  in  the  oommnnity  who  earn  their  bread  by  mannal  labor 
are  affected  by  the  moyement  of  prices,  we  most  inquire  whether 
their  money  income,  as  distribnted  in  one  direction  or  another, 
yields  them  more  at  one  time  than  at  another.  Proceeding  from 
the  social  point  of  yiew,  it  might  be  possible,  from  a  given  set 
of  figores,  to  condnde  that  the  expenses  of  living  for  the  work- 
ingman  had  risen ;  while  yet,  from  the  simple  monetary  point 
of  view,  the  same  figures  might  make  it  clear  that  prices  bad 
fallen.  Food,  for  example,  forms  a  large  part — 40  per  cent  — 
of  the  total  expenditure  of  the  workingmen's  families  whose 
budgets  were  chiefly  used  by  Professor  Falkner.  A  rise  in  the 
price  of  food,  measured  by  its  importance  in  their  budget,  might 
cause  their  expenses  of  living  to  rise.  Among  the  well  to  do 
and  leisured  classes,  however,  a  rise  in  the  price  of  food  would 
be  of  less  importance,  and  might  easily  be  overbalanced  by  a 
fall  in  the  price  of  other  things.  The  well  to  do  class  might  be 
t  comparatively  large  part  of  the  population,  and  might  expend 
two-thirds  of  the  total  income.  Under  such  conditions,  the 
method  of  total  expenditure  would  rightly  show  that  general 
prices^  considered  with  reference  to  the  importance  of  different 
commodities,  had  fallen.  Tet  the  budget  method  would  show 
that  the  expense  of  living  of  that  class  in  the  community  whose 
welfare  most  enlists  the  interest  of  the  social  philosopher,  had 
not  fallen,  but  risen."  ^ 

Another  method  of  weighting  by  a  coefficient  expressing 
respectiTely  the  proportion  which   the   total    money  value 
of  each  article  in  the  table  bears  to  the  total  ex-  French  tTstem 
penditure  of  the  country  has  been  used  by  the  2L;o?^ng  tf 
French  Commission  des  Valours  de  Douane  since  S^ned  m^d""" 
1846.     This   method   has  been   associated  with  exported, 
the  name  of  R.  H.  Inglis  Palgraye,  by  whom  attention  was 
called  to  it.'    The  description  of  it  was  given  by  M.  Say  as 
follows : 

1  Tale  Beriew,  Not.,  1S93. 

*  In  a  masfcerlj  stody  prepared  for  the  Royal  Commiaeioii  on  Depression  of 
Trade  and  Industry,  Third  Report,  Appendix  B,  p.  361.  The  whole  memoran- 
dum oorera  pp.  S12-S90.  Mr.  Palgraye  also  applied  this  system  of  weighting  to 
the  '*  Sconomist "  table  of  twenty-two  articles.    Cf .  pp.  328-^330, 337. 

n 


162  THE  PRINCIPLES  OF  MONEY 

^'The  dnty  assigned  to  the  Commission  was  that  of  redacing 
the  weights  or  the  quantities  of  the  goods  included  on  the  regis- 
ters of  the  customs  to  values,  and  this  is  still  its  dnty.  This  m 
now  more  important  even  than  it  ever  has  been  since  the  systen^ 
of  specific  duties  has  become  more  generally  applied.  But 
the  articles  specified  on  the  registers  of  the  customs  are  sub> 
divided  into  different  qualities,  and  each  quality  has  a  value 
proper  to  it. 

*^  There  are,  for  example,  woven  goods  which  are  lumped  to- 
gether under  the  same  heading,  and  the  values  of  which,  reckoned 
by  the  kilogramme,  vary  sometimes  from  unity  up  to  five  thnes 
as  much. 

'^  There  are  a  great  many  other  conunodities  in  the  same 
position.  What,  for  instance,  is  the  value  of  tea?  This  is  to 
be  had  at  aU  prices. 

**  As  late  as  1846  the  unities  or  kilogrammes  were  reduced 
into  values  by  giving  almost  always  the  average  price,  no  refer- 
ence being  made  to  the  quantities.  If  woven  goods  at  2  francs 
the  kilogramme  were  included  in  the  same  lot  with  woven  goods 
at  4  francs  the  kilogramme,  they  were  registered  as  forming  an 

2  +  4 
average  price  of  woven  goods  at  the  figure  of  8  francs  ss  — -— . 

*^But,  after  1846,  at  the  recommendation  of  M.  Legoutet, 
F^sident  of  the  Chamber  of  Paris,  and  of  M.  Natales  Bondot, 
the  true  averages  have  been  calculated  by  taking  account  of  the 
quantities. 

*^  An  import,  I  will  suppose,  for  example,  having  taken  place 
of  1000  kilogrammes  of  woven  goods,  it  has  been  endeavored  to 
ascertain  how  much  of  this  was  at  2  francs,  how  much  at  3 
francs,  how  much  at  5  francs,  &c. 

Supposing  500  kilogrammes  at  2  francs 
800  "  8      " 

200  "  6      *' 

an  average   was   struck   at  2.90  francs  the  kilogramme  of 
goods. 

^'  Tou  see  that  the  average  values  vary  accordingly,  as  the 
import  consisted  of  this  or  of  that  article. 

''  The  following  year  there  might  be  a  rise,  I  will  suppose,  of 
10  per  cent  on  each  description,  — 


TABLES  OF  PRICES  168 

There  being  800  Idlograininee  at  2.20  francs 
100  **  8.80      ** 

100  **  6.60      ** 

and  the  average  price  woold  come  oat  lower  at  2.64  francs,  a 
drop  of  10  per  cent,  on  the  average  price,  corresponding  to  a 
nse  of  10  per  cent,  on  the  real  price  (the  division  of  the  qoan- 
tities  being  made  approximately  according  to  the  opinion  of  the 
Ck>mmi8sioners).'' 

The  theoretical  soundness  of  this  method  of  weighting  de- 
pends upon  the  object  in  view.  It  has  been  claimed  that  it  is 
perfect  for  the  purpose  of  discovering  changes  in  ^^ 
the  purchasing  power  of  money.  But  when  we  weighting  ae- 
folly  comprehend  what  is  meant  by  the  purchas-  tnde'mipor- 
ing  power  of  money,  this  does  not  necessarily  *"**' 
follow.  The  assignment  of  weight  in  proportion  to  the  quan- 
tity of  transactions  unconsciously  assumes  the  truth  of  the 
theorem  that  the  value  of  money  is  directly  in  proportion  to 
the  money  work  created.  If,  however,  the  uniform  exchange 
Talue  of  money  carries  with  it  an  idea  of '  its  ability  to  pur- 
chase the  same  quantity  of  the  same  goods  (so  that  the  pro- 
portion of  satisfactions  is  undisturbed),  then  a  change  in  the 
proportions  in  which  a  given  article  enters  into  the  trade 
of  the  countiy  as  a  whole  may  not  be  at  all  the  same  as  the 
proportions  of  actual  consumption  as  between  different  classes. 
For  instance,  if  the  price  of  meat  is  such  that  class  A  can 
buy  it  once  a  week ;  then,  if  that  class  increases  in  number 
by  5,000,000  (without  affecting  the  price  of  meat),  the  total 
trade  of  the  country  in  meat  is  larger,  but  the  members  of 
the  class  individually  will  not  have  found  any  difference  in 
the  value  of  money.  In  fact,  the  purchasing  power  of  money 
differs  for  classes  having  a  different  order  of  consumption,  and 
changes  in  price  will  affect  them  unequally. 

The  practical  difficulties,  however,  in  the  way  of  applying 
this  method  are  such  as  to  put  it  out  of  the  run- 
ning.   No  satisfactory  data  exist  by  which  the  c^fiilt^r  of 
total  expenditure  of  a  country  on  many  separate      "  ™* 
articles  can  be  ascertained  with  anything  like  the  accuracy 


164  THE  PRINCIPLES  OF  MONEY 

needed  for  price  tables.  Possibly  the  expenditure  on  a  fei^ 
staple  articles  could  be  found,  but  their  number  would  b^ 
so  few  that  no  table  of  importance  could  be  accurately  con* 
structed  on  this  principle. 

In  f act,  the  attempt  to  discover  a  correct  means  of  weight- 
ing according  to  the  relative  quantities  consumed  is  generally 
impossible,  because  these  amounts  are  constantly  changiDg 
from  time  to  time.  Indeed,  as  has  been  well  said,  **  the  famil- 
iar weighted  index  number  is  merely  the  old  ^  tabular  standard  * 
in  operation."  ^ 

Another  method  of  weighting  was  adopted  by  Mr.  Giffen,* 
in  order  to  determine  changes  in  the  exchange  value  of  money. 
Mr.Giffen't  ^^  index  numbers  are  ratios  between  (1)  the 
method.  quantities  of  each  article  consumed  in  the  initial 

year,  taken  at  the  prices  of  later  current  years,  to  (2)  the 
same  quantities  of  each  article,  taken  at  the  prices  of  the 
initial  year.  This  was  a  method  of  comparing  the  relative 
values  of  goods  at  different  times  with  the  values  of  the  cor- 
responding goods  in  the  initial  year.  The  same  practical 
objections  would  obtain  against  this  as  against  the  previous 
method. 

§  6.  Mr.  Edge  worth'  indicates  the  various  purposes  for 
which  tables  of  prices  and  index  numbers  are  to  be  con- 
structed as  follows: 

1.  For  the  just  discharge  of  deferred  payments,  or  rents, 
running  over  long  periods  of  time. 

2.  As  a  measurement  of  money  incomes  in  different  places, 
either  for  individuals  or  nations. 

3.  To  enable  the  historian  to  compare  the  value  of  money 
in  the  past  with  the  present. 

1  Cf.  T.  8.  Adams,  op.  cit.,  p.  8,  who  finds  the  weighted  index  nnmber  and  the 
tabolar  standard  defective  as  a  measure  of  the  purchasing  power  of  monej,  and 
for  the  same  reasons. 

3  Report  on  Imports  and  Exports,  1885,  Table  V.  This  method  has  long  been 
adopted  in  other  price  tables.    See  infra,  p.  190. 

*  Reports  of  British  Association,  1887,  1888,  1890,  and  article  on  '*Indftx 
Nnmbers'*  in  Palgrare's  Dictionary. 


TABLES  OF  PRICES  166 

4.  To  measure  the  injuries  to  industry  caused  by  varia- 
tioDS  of  price,  and  to  obtain  the  correction  to  be  applied  to 
the  currency.^ 

Necessarily,  the  constituents  of  the  index  num-  yarioas 
bers  depend  upon  the  answers  to  the  following  S^dS^^bm, 

(a)  What  articles  should  be  selected? 

(i)  How  should  the  prices  be  ascertained? 

(e)  How  should  we  combine  the  ratios  between  prices  at 
cureDt  dates  with  those  of  the  initial  date  ? 

Mr.  Edgeworth  points  out  that  the  answers  to  be  given  to 
these  questions  would  differ  according  to  the  purpose  in 
mind.  If  a  multiple  standard  for  deferred  payments  be  de- 
sired, then  the  quotations  should  cover  articles  of  personal 
consumption  rather  than  of  materials  or  implements;  should 
include  personal  services,  but  not  labor  in  general;  should 
be  retail  prices ;  and  should  be  weighted  according  to  their 
importance  in  consumption*  If  a  labor  standard  be  proposed, 
—although  he  admits  that  there  are  no  suitable  statistics  for 
tbat  purpose  in  existence,  —  it  should  include  quotations  of 
all  the  principal  kinds  of  services  rendered  to  the  community 
daring  the  initial  and  current  years. 

In  truth,  the  actual  method  of  weighting  does  not  seem  to 
so  good  a  mathematician  as  Mr.  Edgeworth^  to  be  of  much 
practical  importance,  and  he  quotes  with  approval  Giffen  mnd 
Mr.  Giffen's  conclusion'  of  the  whole  matter:         SSSd^n'**' 

weighting. 

''The  articles  as  to  which  records  of  prices  are  obtainable 
being  themselves  only  a  portion  of  the  whole,  nearly  as  good  a 
final  result  may  apparently  be  arrived  at  by  a  selection  without 

^  This  pnrpoBe  MemB  to  depend  wholly  upon  the  acceptance  of  the  quantity 
theory ;  for  it  presupposes  that  Tariations  of  price  can  be  regulated  by  working 
upon  the  currency,  supposedly  on  the  quantity  of  it,  or  on  the  forces  solely  affect- 
iDg  the  Talue  of  the  standard. 

>  £dgeworth  concludes :  "  In  fact,  the  index  number  for  1885,  as  determined 
from  the  same  data  by  seven  different  methods,  proyed  to  be  70,  70.6,  73,  69, 
7S,  72,  69.5."  Report  British  Association,  1888,  p.  SU.  Cf.  article  "Index 
Kumbers,"  F^Ugrave's  Dictionary. 

s  Beport  of  the  British  AsMciation,  1888,  p.  184. 


166  THE  PRINCIPLES  OF  MONEY 

bias,  according  to  no  better  principle  than  aoceBsibility  of  recoti^ 
as  by  a  carefal  attention  to  weighting." 

In  general,  the  theoretical  discussion  on  the  proper  method 
of  weighting  receives  a  quietus  by  the  practical  results  drawn 
from  both  weighted  and  unweighted  numbers;  and  inci- 
dentally the  arithmetic  average  also  receives  a  support  from 
the  same  experiments.  By  describing  a  line  based  on  arith- 
metic unweighted  index  numbers,  it  is  found,  curiondj 
enough,  that  it  shows  very  little  deviation,  on  the  whole, 
from  one  based  on  numbers  weighted  for  certain  purposes.^ 

It  is  probable  that  any  real  errors  due  to  giving  an  article 
more  than  its  real  importance  in  an  unweighted  arithmetic 
Number  average  is  overbalanced,  and  compensated  for,  by 

mowimportont  including  a  Sufficiently  large  number  of  articlei. 
thanweightiDg.  j^  is  morc  important  to  have  a  large  number  of 
goods  quoted  in  the  price  tables  than  to  attempt  accurate  cal- 
culations of  the  proper  weights  to  be  attached  to  each  article.* 
So  that  it  may  be  concluded  with  some  security  that  in  tables 
containing  as  large  a  number  of  articles  as  Soetbeer's  and 
Falkner's  the  unweighted  averages  give  us  practical  results  as 
near  to  accuracy  as  is  obtainable.'    Moreover,  it  is  to  be  le- 

1  See  Diagram  XVI,  infra.  Cf.  Taoasig,  op,  eit.,  p.  27.  Alto,  T.  S.  Adami 
says :  '*  Indeed,  this  result  might  be  expected  a  priori.  As  we  know  of  no  con- 
nection between  the  price  Tariation  and  the  importance  of  a  commodity — the 
prices  which  rise  are  as  likely  to  pertain  to  important  commodities  as  those  which 
fall,  and  vice  versa — it  is  to  be  expected  that  the  weights  given  to  price  Tariations 
below  the  arithmetical  mean  will  about  offset  those  given  to  price  variatioDB  above 
that  mean,  and  that  the  weighted  average  will  be  substantially  the  same  as  the 
arithmetical  average."     Jour.  Pol.  Econ.,  Dec.  1901,  p.  7. 

'  There  is  a  consensus  among  statisticians  upon  this  point,  as  expressed  by 
Bowley :  "  The  precision  of  an  average  increases  with  the  number  of  like  quan- 
tities averaged."    Op  cit.,  p.  219. 

*  Professor  Falkner  holds  that  **  where  the  price  movement  is  downward  the 
weighted  average  is  apt  to  record  a  higher  price  than  the  simple  average,  and 
that  where  the  price  movement  is  upward  the  weighted  average  records,  in  the 
main,  lower  prices  than  the  simple  average.  This  is  due  to  the  fact  that  in  all 
weighted  averages  food  products  assume  a  larger  influence  than  in  the  simple 
averages,  and  that  food  products,  taken  in  the  aggregate,  fluctuate  In  price  from 
year  to  year  less  noticeably  than  other  commodities."  Bulletin  of  Labor  Depait- 
ment,  March,  1900,  p.  268. 


TABLES  OF  PRICES 


167 


membered  that  such  tables  of  prices  aim  not  at  absolute  but 
at  reiatiye  results,  and  that  at  the  best  a  list  of  prices  can 
L  provide  mfortoation  mainly  as  to  the  movement  in  the  price 
rlevel  relatively  to  a  given  starting-point.  Hence  any  fairly 
Bound  method  of  weighting,  consistently  carried  out  through 
the  whole  period,  would  show  the  same  relative  changes  of 
price*  These  considerations  doubtless  account  for  the  un- 
expected coincidence  of  weighted  and  unweighted  lines  in  the 
same  period  based  on  the  same  data. 

The  proper  selection  of  the  articles  to  be  included  in  the 
tables,  also,  is  really  of  more  importance  than  the  weights 
attached  to  each  commodity.     It  goes  without  say-  Stieetion 
ing  that  the  prices  of  different  groups  of  commod-  ^'^uv  " 
ities  are  affected  by  different  sets  of  forces :  the   ™F>rt*nL 
product  of  extractive  industries  would  doubtless  give  a  series 
of  index  numbers  having  a  different  tendency  from  that  of 
manufajctured  goods.     How  true  this  is  may  be  seen  by  exam- 
aing  the  lines  for  the  different  groups  in  Soetbeer's  Hamburg 
tables  (see  Diagram  XII).     Hence  index  numbers,  like  Sauer- 
beck's^  made  up  largely  of  materials  (see  in/ra^  p,  185),  would 
not  ordinarily  give  the  same  general  movement  as  those  made 
up  mainly  from  manufactured  goods,  much  less  would  they 
give  a  true  record  of  the  changes  of  prices  in  general. 

§  6p   A  rise  or  fall  of  prices  is,  of  course,  never  felt  equally 
by  all  goods.     One  article  may  fall  or  rise  in  greater  propor* 
tion  than  another ;  or  one  may  fall  and  another   chaDjna  &t 
may  rise.    From  the  point  of  view  of  the  pur-  purehi»ing 

t        -  f  1  1 P        ^  T  frower  With 

-chasmg  power  of  money,  several  seli-eviaent  chimgcBof 
'  things  must  be  kept  in  mind.  It  cannot  be  said 
tliat  the  purchasing  power  of  money  remains  the  same,  even 
if  the  given  amount  of  money  buys  the  same  total  number 
of  quantitative  units  of  several  goods  as  before,  whenever 
this  total  number  is  distributed  in  different  proportions.  For 
instance,  to  repeat  a  former  illustration,  if  wheat  and  oats 
had  each  formerly  sold  at  50  cents,  and  if  wheat  then  rose 
100  per  cent,  and  oats  fell  50  per  cent,  then  $100,  which 


168 


THE  PRINCIPLES  OF  MONEt 


formerly  bought  100  bushels  each  of  wheat  and  of 
would  not,  after  the  supposed  change  of  price,  buy  tiie 
relative  number  of  bushels  of  each.  Since  $100  would  bn 
only  100  bushels  of  wheat  at  the  new  price,  nothing  wou 
be  left  for  oats.  But  it  is  also  true  that  the  same  $lfl 
would  buy,  in  all,  200  bushels  of  wheat  and  oats  take 
together^  at  the  new  prices:  for  exaoiple,  66}  bushels 
wheat  at  tl.  per  bushel  (*66,66|)  and  133^  bushels  of 
at  26  cents  a  bushel  ($33.33^).  By  reason  of  the  change 
price,  less  wheat  but  more  oats  could  be  bought,  and  yet  i 
buyer  could  get  a  total  of  200  bushels,  as  before,  of  botIi_ 
wheat  and  oats.  But  it  is  not  necessary  to  argue  that^ 
such  a  case,  the  purchasing  power  of  money  remains 
same  as  before ;  because,  after  the  change^  the  money  bn; 
a  different  allotment  of  satisfactions :  tbe  utility  coming  from 
the  consumption  of  wheat  is  lessened  by  one-third;  and 
utility  coming  from  the  consumption  of  oats  is  (other  tfiiE 
being  equal)  possibly  increased  by  one-third.  To  asBi3 
thatj  in  this  case,  the  purchaaing  power  of  money  rei 
the  same  is  to  assume  that  the  utility  of  wheat  is  an  exa 
equivalent  to  the  consumer  of  the  utility  of  oats  —  an  eviden 
falsity.  To  the  class  mainly  using  wheat,  money  has  lost  in 
purchasing  power ;  to  the  class  mainly  using  oats,  money 
gained  in  purchasing  power.  It  would  not  be  correct  in  sue 
a  case,  with  Walsh,  to  decide  that  **  the  indication  of  eon* 
stancy  is  as  strong  as  the  indication  of  depreciation."  * 

And  if  we  mean  by  the  purchasing  power  of  money  a  con* 
trol  over  the  same  quantity  of  the  same  quality  of  goods,  then 
__      .  the  exchange  value  of  money  is  constantly  under- 

vadue  of  ttornej  going  change.     For  seldom  or  never  is  there  a 
time  when  there  is  no  change  m  relative  prices, 
and  consequently  in  the  relative  proportion  of  satisfa^^tions  for 
which  a  given  sum  of  money  will  exchange,*    Such  a  change^ 


1  WskUh.  op.  cit,  p.  26a 

*  Of  Fftlkner'i  99  Americftit  aiticlM  (1890-1900).  13  leO  b«low  70;  90l  b«]oir 
SO  ;  2«t  below  90  :  21 ,  below  100 ;  It  ro«e  under  110;  und  S  ro*€  nhore  110.  Bo]- 
M\Uf  tt€i.,  p.  264.    In  tb«  Aldrif^h  Report  (ia&0-1891},  of  223  commoditiet,  17  f«Il 


TABLES  OF  PRICES  169 

therefore,  in  lelative  prices  is  equivalent  to  an  alteration  in 
fhe  exchange  value  of  money,  whether  the  general  movement 
be  np  or  down.    On  the  whole,  however,  if  at  any  time  a 
given  weight  of  the  money  metal  buys  more  or  less  units  than 
before  of  the  same  kinds  of  things  (and  in  the  same  propor^ 
turn),  then  it  niay  be  said  that  the  value  of  that  money  has 
lisen  or  fallen  to  the  group  of  consumers  concerned;  if  a 
given  weight  of  the  metal  secures  more  or  less  of  accus- 
tomed satis&ctions  in  certain  proportions  than  before,  then 
only  can  we  say  that  its  value  has  risen  or  fallen.^    The 
gaieral  purcha^ng  power  of  money  carries  with  it  the  idea 
of  the  same  relative  proportions  of  expenditure  for  consump- 
tion to  be  obtained  by  the  same  sum  of  money.    Looked  at 
from  the  point  of  view  of  the  purchasing  power  of  the  com- 
immity's  income,  a  rise  of  1  per  cent  in  the  price  of  bread 
may  be  much  more  important  than  a  fall  of  60  per  cent  in  the 
price  of  pepper.     A  series  of  index  numbers  constructed  on 
the  basLB  of  an  unweighted  arithmetic  average  pay  no  heed  to 
such  relative  importance.    They  certainly  cannot  express  ac- 
curately alterations  in  the  general  purcha^Lng  power  of  money, 
ance  changes  in  relative  prices  inevitably  cause  changes  in 
relative   proportion    of  expenditure.     If,   how-  ei„u,g^in 
ever,  it  were  once  granted  that  changes  in  price  j^i"*?|"?"y 
were  natural  and  healthy  phenomena  and  gen-  imporunt  ex- 
erally  quite  independent  of  changes  in  the  quan-  dXonw^ 
titjr  of  the  media  of  exchange,  less  disquiet  would  *^*'®"- 
doubtless  be  caused  by  a  fail  of  prices  expressed  in  index 
numbers  on  the  ground  that  they  measure  changes  in  the 
exchange  value  of  money.'    The  significance  of  this  whole 

50  per  omt  or  more;  64  feU  from  85  to  50  per  cent ;  48feUfrom  10  to  25  per  cent; 
S4  feU  loRB  than  10  per  cent ;  9  were  nniform ;  10  roee  less  than  10  per  cent^  16 
from  10  to  25  percent;  19  from  25  to  50  per  cent;  11  from  50  to  100  per  cent; 
2  from  100  to  200  per  cent ;  and  3, 200  per  cent  or  more.    Aldrich  Report,  I,  p.  56. 

1  Cf.  with  this  the  definition  of  T.  S.  Adams  {ibid.,  p.  10) :  "  The  purchasing 
power  of  monej  is  determined  by  its  command  over  a  certain  commodity-list, 
eompoaed  of  different  quantities  of  different  commodities." 

*  For  the  discnnioa  of  the  adyantagee  and  disadTantages  of  rising  and  idling 
pricm,  SM  infrOf  ch^;>.  zi,  f  4. 


170  THE  PRINCIPLES  OF  MONEY 

discussion,  in  my  judgment,  is  related  to  the  operation  of  a 
standard  of  deferred  payments  when  changes  of  price  have 
originated  mainly  from  influences  affecting  goods. 

Many  of  the  suggestions  as  to  the  measurement  of  prices 
have  a  squint  toward  some  means  of  arriving  at  changes  in  the 
Erroneous  valuc  of  money,  — and  the  causes  thereof,  — and 
to  pnce*^^"**  they  seem  to  imply  the  acceptance  of  the  quantity 
record*.  theory  of  money.    That  is,  the  aim  seems  to  be  to 

ascertain  how  much  *^  money  "  is  laid  out  on  any  one  article^ 
or  group  of  articles,  in  relation,  for  instance,  to  the  total 
expenditure  of  a  country,  and  in  this  way  to  modify  (by 
various  weighting  devices)  the  index  numbers  which  express  J 
changes  in  the  purchasing  power  of  money.  Unconsciouslyy 
in  the  arraying  of  facts,  an  assumption  as  to  the  cause  of 
changes  has  crept  in;  because,  if  prices  of  goods  are  re- 
lated by  the  amount  of  money  offered  for  goods,  then  it 
wx)uld  be  important  that  the  index  number  should  show  how 
far  articles  are  making  a  generally  increased  or  decreased  de- 
mand upon  the  money  supply.  As  an  expression  of  the  pur- 
chasing power  of  the  money  metal,  as  will  be  shown  later, 
the  amount  of  the  media  of  exchange  given  for  goods  has 
little  or  nothing  to  do  with  causes  of  price.  In  merely  record- 
ing data,  we  should  beware  of  entangling  the  simple  facts 
with  a  priori  explanations  of  causes  affecting  price. 

In  conclusion,  while  unwilling  to  admit  that  the  budget 
method  employed  by  Mr.  Falkner  is,  for  any  other  class  than 
No  general  re-  the  ouc  from  which  the  budgets  were  supplied,  a 
abi^to  move-  propcr  means  of  measuring  the  exchange  value 
mentof  prices,  ^f  money,  it  must  be  seen  that  it  has  a  more  scien- 
tific basis  than  is  usually  assigned  to  it  by  some  critics.  A 
change  in  general  prices  may  affect  some  articles  differently 
from  others ;  the  prices  of  goods  consumed  by  the  rich  may 
not  be  changed,  but  those  of  the  working-class  may  be  laigely 
affected;  hence  it  follows  that  money  incomes  may  have 
changed  in  purchasing  power  for  the  latter,  but  not  for  the 
former.  In  short,  it  is  not  possible  to  predicate  anything 
veiy  practical  from  a  general  movement  of  prices,  unless  we 


i^ 

1^5 

S 

li 

^ 

§ 

m 

8 

s 

i 

3? 

Sil 

e 

1 

8 

,-  ■ 

i 

s 

s 

ll 

1 

1 

ii 

S 

S 

it 
11 

-111 

9 

s 

1 

8 

i 

•  • 

,-. 

s 

t 

S 

1 

8 

1 

at 

s 

•  • 

■■  5 

m  jnoqtrr 

o 

00 

o 

o 

o 

o 

3f 

O 

o 

t- 

o 

o 

P 

o 

o 

Ol 

jr.  ' 

•?f.i. 

5- 

3? 

o 

04 

CO 

•4 
OJ 

o 

CO 

o< 

CO 

wuj  noiiSf.i 

5 

S 

8 

I 

^ 

♦ 

CM 

c« 

'   ':■ 

Tj 

-1 

OJ 

94 

u 

« 

?9 

"i 

"1 

•Mm 

-6 

o 

•^ 
^ 

*8 
o* 

2 
o 

O 

:§ 

y 

S5 

20fi  ^0081 

1^^ 

-6 

«l 

"1 

S£ 

Ss 

-I 

hi 

•d 

•«§ 

5« 

<»8 

SI 

aS 

96T^    06il 
ISt    08iX 

5 

•d 

5 

O 

o^ 

:§ 

CO 

!? 

o 

eo 

y 

t9€     OUT 
CtfJ     0911 
tX€     OCIT 

18^   o^:t 

l^Z     OZll 

X 

[5 

=3 

■3 

o 

o 

09 

S 

o 

J' 

o 

"s 

CO 
CO 

CO 

1. 

3 

o 

^ 

^ 

o 

o 

°l 

o 

91 

:« 

CO 

:s 

S 
1 

1? 

a 

c 

I 

1 

-do 

G40 

o 
« 

o 

o 

o 

CO 

o 

o 
o 

o 
2  s 

o 
12  2 

o 

o 

s?,z   oo:x 

0X2     CiOX 
88X    0e9X 

;5 

1 

■deo 

«IO 

00 

o 

o 

o 

o 

-'I 

o 

o 

o 

o 

o 

o 

rH  ee 

ttX     009X 

oox   occx 

6 

do 
««o 

o 

o 

o 

CO 

o 

o 

SI 

o 

o 

OJ 

o 

o 

O 

oo§ 

VQ      00€X 
88      OCX-X 

?s    ootx 

>4 

o 

d® 

"HO 

3 

o 

o 

00 

13 

r- 

o 

coS 

n 

o 

o 
SI 

o 

3 

::     ossx 

89      008X 

1 

d« 

10 

a 

o 

o 

O 

o 

m8 

©1 

o 

o 
o 

o 
og 

O 

2 

09      OCCX 
XG       OOCX 

^t-     ocxx 

'5 

rfO 

o 

f- 

o 

o 

o 

.     r-l 

CO 

CO 

00 

cc 

cc 

o 
1- 

t-s     ooxx 

9^       OCOX 

orjjno      1 

1 

#///#/ 

i[i[il^JH'i 

*-• 

1  '^ 

itU\i 

TABLES  OF  PRICES  171 

bsTe  a  definite  class  of  articles  in  mind,  such  as  food,  manu- 
hctaies,  etc.,  or  the  consumption  of  special  classes.  Again, 
in  dealing  with  changes  in  the  exchange  value  of  money,  we 
must  insist  on  the  point,  that  all  depends  upon  what  special 
purpose  we  have  in  mind.  One  cannot  dogmatize  without 
discrimination  upon  the  welfare  of  all  classes  of  society, 
merely  from  reference  to  general  averages  expressed  in  index 
numbers. 

§  7. .  Having  thus,  in  a  general  way,  presented  the  problems 
q{  the  measurement  of  prices,  we  may  now  pass  to  a  brief 
lecapitulation  of  the  tables  of  prices  which  have  in  fact  been 
collected.  It  may  be  thought  useless  to  pause  over  the  earli- 
est historical  attempts  of  this  kind,  since  they  were  necessarily 
brief  and  incomplete ;  but,  on  the  other  hand,  an  account  of 
early  tables  of  prices  will  at  least  show,  without  possibility 
of  doubt,  how  impracticable  it  would  be  to  base  any  impor- 
tant conclusions  as  to  the  value  of  money  in  the  periods 
before  1850  on  any  tables  of  prices  which  had  appeared  before 


RICE  VAUGHAN 


Donbtless  the  first  attempt  to  measure  the  exchange  value 

of  money  in  goods  and  labor  was  that  of  Rice  Vaughan  ^ 

(1675).    He  took  25  Edward  III.  (1852)  as  the  basic  year, 

and  prices  about  1650  were  compared  with  those  of  the 

former.    When  the  prices  of  com,  cattle,  fish,  cloth,  linen, 

leather,  etc.,  were  considered,  he  argued  that  their  prices 

Would  be  so  largely  affected  by  causes  with  which  money  had 

Hodiing  to  do,  such  as  seasons,  imposts,  inventions,  and  the 

Ule,  that  no  conclusions  could  be  drawn  from  them.     But 

ccmmon  wages,  he  believed,  bore  a  necessary  relationship  to 

^e  prices  of  goods ;  he  thus  arrived  at  the  change  in  price 

1  A  Duconne  of  Coin  and  Coinage,  chap,  id,  pp.  101-136. 


172 


THE  PRINCIPLES  OF  MONEY 


tiirough  the  change  in  wages-  By  Btatistics  he  found  that 
wages  for  common  labor  had  risen  in  this  period  to  six  or 
eight  times  the  basic  rate.  Next,  having  established  the  de- 
basement of  the  coinage^  in  which  prices  and  wages  were 
espressedp  at  about  one-third,  he  computed  that  prices  had 
doubled  and  almost  trebled : 


*'  Now  if  the  Rate  of  things  valued  by  Money  be  six  timfis 
great  as  it  was  in  25  of  Edvxird  th€  Third,  allowing  the  values 
of  Moneys  to  be  raised  to  ti"ebble  what  they  than  were  by  the 
same  names,  yet  there  will  be  a  real  Increase  of  a  double  Pro- 
portion, to  what  then  was  of  Gold  and  Silver  in  weight  and 
Oneness,  to  things  valued  by  them;  and  if  the  rate  be  raised 
to  eight  times  what  it  then  was,  the  real  increase  of  the  Fropor- 
tiou  will  he  almost  trebble  to  what  it  then  was"  (p.  127), 


les^n 


The  cause  of  tins  rise  in  prices  he  explains  as  follows : 


I 


**  The  different  Proportion  which  is  really  grown  between 
Gold  and  Silver,  and  the  things  valued  by  them,  doth  princi- 
pally and  indeed  solely  arise  of  the  great  quantities  of  the  said 
Mettals,  which  in  these  hundred  years  was  brought  out  of  the 
Eoitt  and  WtM  Indies,  Now,  although  there  may  be  many  other 
causes  which  may  produce  this  effect,  as  Scarcity  or  Abundance 
of  the  things  valued  by  Money,  War,  Depoptdation^  and  all 
other  Accidents,  by  which,  either  these  Mettals  are  exhausted 
or  the  things  valued  by  them  are  consumed  or  made  less  useful ; 
jet,  as  before  shewed,  all  these  are  temporary  and  subject  to 
continual  variety  up  and  down,  and  therefore  cannot  be  thtj 
causes  of  a  constant  effect  as  this  is ''  (pp.  124-125). 


BISHOF  FLEETWOOD 


Bishop  Fleetwood,  in  his  Chronieon  preciomim  of  1707, 
out  to  find  how  much  corn,  meat^  drink^  and  cloth  could 
be  purchased  by  a  perpetual  income  of  five  pounds  in  the 
years  1440-1460,  as  compared  with  the  sum  needed  to  pur- 


TABLES  OF  FRIGES  178 

ebase  the  same  goods  in  the  later  time  when  he  was  writing, 
b  bis  chapter  iv  he  gave  the  prices  from  time  to  time  over 
fix  hundred  years  of  the  following  thirty-nine  articles : 

flax,  wool,  hides,  doth,  shoes,  ploughs,  hay,  carts,  land,  sheep, 
hones,  mnles,  cattle,  swine,  goats;  fowls,  rahhits,  pigeons; 
wheat,  hariey,  rye,  oats,  heans,  peas;  ?rine,  malt,  ale,  heer, 
spioe,  wax,  almonds,  salt,  eggs,  cheese,  milk,  figs,  raisins,  fish 
ud  charooaL 

For  obyioos  reasons,  wheat  is  given  the  most  quotations. 
He  fmnished  a  yearly  table  of  wheat  from  1647  to  1705 
(pp.  125-128),  usually  two  prices  being  added  and  halved 
(p.  129).  Moreover,  there  was  provided  an  average  of  the 
price  of  wheat  for  twenty-year  periods,  and  also  the  average 
for  nzty  years. 

Realizing  that  the  changing  content  of  the  coins  would 
affect  prices,  he  went  carefully  into  a  statement  as  to  both 
gold  and  silver  coins,  tabulating  the  gold  coins  since  Edward 
ID.  (pp.  20-25)  and  the  silver  coins  since  Edward  I.  (pp. 
52-54),  both  coming  down  to  Anne. 

His  conception  of  the  problem,  and  his  method,  are  con- 
tained in  the  following  extracts : 

^^  For,  your  Business  is  to  know  (as  near  as  you  can)  what 
Estate  or  Samm  of  Money  will  nottHOrdays  be  equal,  or  equiva- 
lent to  Jive  Pounds  (let  that  be  the  supposed  Summ  in  this 
Discourse)  in  the  reign  of  King  H.  VI.  and  to  this  End,  your 
Care  will  be,  to  find  out  how  much  MecU^  Drink,  or  Clotk^ 
might  be  purchased  in  H.  VI  Reign,  with  V  L  and  then  to  find 
out,  how  much  of  the  Money  now  current,  will  be  required  to 
parchase  the  same  quantity  of  Meat,  Drink^  and  Cloth.  For, 
since  Money  is  of  no  other  use,  than  as  it  is  the  Thing  with 
which  we  purchase  the  Necessaries  and  Conveniences  of  Life, 
'tis  evident,  that  if  Y  l.  in  H.  VI.  Days,  would  purchase  5 
Quarter  of  Wheats  4  Hogsheads  of  Beer^  and  6  Yards  of  Cloth^ 
he  who  then  had  V  /.  in  his  Pocket,  was  full  as  rich  a  Man  as 
he  who  has  now  XX  I.  if  with  that  XX  /.  he  can  purchase  no 
mem  Wheats  Beer^  or  Cloth^  than  the  other"  (pp.  60-61). 


174  THE  PRINCIPLES  OF  MONEY 

^^  Tou  must  take  the  Price  of  every  particular  Commodity, 
for  as  many  Years  as  you  can  (20,  if  you  have  them)  and  put 
them  all  t(^ether ;  and  then  find  out  tiie  common  Price  [i.  e., 
the  arithmetical  average] ;  and  afterwards  take  the  same  Course 
with  the  Price  of  Things,  for  these  last  20  Years ;  and  see  what 
Proportion  they  will  bear  to  one  another ;  for  that  Proportion 
is  to  be  your  Rule  and  Guide  "  (p.  167). 

His  conclusion  showed  that  ^^  £5  two  hundred  and  sixty 
years  ago  was  equivalent  to  X28  or  X80  now."  His  investi- 
gation covered  all  the  information  he  could  find  on  the  value 
of  money  and  prices  of  commodities  during  the  Middle  Ag^ 
in  England,  as  found  in  the  chronicles.  He  thus  opened  the 
field  afterwards  cultivated  by  Thorold  Rogers. 

SIR  GEORGE  8HUCKBURG  EVELYN 

m 

In  the  Transactions  of  the  Royal  Society,  Sir  Greoige 
Shuckburg  Evelyn,^  in  1798,  devoted  two  pages  to 

^'  A  Table  exhibiting  the  Prices  of  various  Necessaries  of  Life, 
together  with  that  of  Day  Labour,  in  sterling  Money,  and  also 
in  Decimals,  at  different  Periods,  from  the  Conquest  to  the 
present  Time,  derived  from  Respectable  Authorities ;  with  the 
Depreciation  of  the  Value  of  Money  inferred  from  them.  To 
which  is  added,  the  Mean  Appreciation  of  Money,  according  to 
a  Series  of  Intervals  of  50  Years,  for  the  first  600  Tears ;  and, 
during  the  present  Century,  at  shorter  Periods,  deduced  by 
Interpolation." 

His  general  results  were 

^^  .  .  deduced  from  taking  a  mean  rate  of  the  price  of  eadi 
article,  at  the  particular  periods,  and  afterwards  combining  these 
means,  to  obtain  a  general  medium  for  the  depreciation  at  that 
period;  and  lastly,  by  interpolation,  reducing  the  whole  into 
more  regular  periods,  from  the  Conquest  to  the  present  time." 

1  Of  Some  Endeavon  to  Ascertain  a  Standard  of  Weight  and  Mearan, 
pp.  30S^09. 


■  L 

g     i 

5 

' 

5 

1 

t 

\ 

5 

< 

^ 

^ 

i 

1 

^ 

1 
t 

1 

I 

\ 

5 

1 

i 

( 

' 

■■ 

* 

m 

>          1 

'• 

1 

z 

'  ' 

>' 

n 

D 

3D 

— 

> 

1 

\ 

V 

\ 

\ 

V 

\ 

\ 

\ 

V 

\ 

' 

\ 

s 

1 

^^ 

14 

"^■^ 

L 

L 

\ 

\ 

V 

Ti  1 !  1 1  U=th 

l^^^^m^ 

TABLES  OF  PRICES 

By  inserting  in  one  group  twelve  miscelkneoti^  articles 
having  weight  equally  %?ith  wheat,  meat,  and  day  labor, 
Evelyn  unconsciously  introduced  a  method  of  weighting. 

In  the  early  part  of  the  nineteenth  centmy  several  other 
English  writers  discussed  the  question  of  the  measurement 
of  the  value  of  money,  but  I  have  not  introduced  the  actual 
results  of  this  work  here,  because  either  their  tables  ran  over 
a  very  few  years,  or  their  lists  of  prices  have  been  better 
covered  by  later  tables  such  as  those  of  Jevons,  These 
writers  are;  Arthur  Young  (An  Enquiry  into  the  Progres- 
sive Value  of  Money  in  England,  1812),  Joseph  Lowe  (The 
Present  State  of  England  in  regard  to  Agriculture,  Trade, 
and  Finance,  1822),  G.  Foulett  Scrope  (Principles  of  Politi- 
cal Economy,  1833),  Henry  James  (The  State  of  the  Nation, 
1835),  and  G.  R.  Porter  (The  Progress  of  the  Nation,  1838).i 


ECONOMIST  TABLES 

§  8.  The  first  table  of  index  numbers,  and  one  which  has 
become  celebrated,  was  that  begun  by  Mr.  Newmarch  for 
the  "  Annual  Commercial  HiBtory  and  Review  **  of  the  Lon- 
don Economist^  The  reason  for  the  importance  assigned  to 
it  is  that  it  was  for  a  long  time  the  only  accessible  table* 
and  has  been  continued  annually  to  date  (except  for  1852 
and  1854-1856),  Adopting  the  average  price  of  each  article 
in  1845-1850  as  100,  the  prices  in  following  years  were  re- 
duced without  weighting  to  percentages  of  the  initial  prices. 
The  sum  of  these  percentages  in  each  year  forms  the  index 
number  for  that  year.  Twenty-two  articles  being  quoted, 
the  basic  index  number  for  all  is  2200  *  but  division  by  22 
wUl  reduce  the  series  for  subsequent  years  to  average  per- 
centages*    The  articles  chosen  are; 

1  For  %  brief  r^ium^  of  ibo  metbodi  of  eiw^b,  see  Walaht  op.  ci>.,  pp.  5M-66fi. 
*  CI  Aldncb,  Sen.  B«port  on  WboleaaUe  Fnceif  I,  pp.  20(K2S7« 


176 


THE  PRINCIPLES  OF  MONEY 


Coffee,  sugar,  tea,  tobacco,  wheat,  butcher's  meat,  Surat 
cotton,  raw  silk,  flax  and  hemp,  wool,  indigo,  oUs,  timber, 
tallow,  leather,  copper,  iron,  lead,  tin,  Pemambuco  cotton, 
cotton  yam,  cotton  cloth. 

Serious  objections  have  been  urged  against  this  table: 
(1)  being  composed  of  only  a  few  articles,  the  assignment 


— "-•■ 

Tihto. 

PdgT»T»*t1U»lM. 

BMilOf 

1872-77. 

bMisofiaf 

1860. 

PvMediac 
oomctodlar 
nlatiT*i». 

pOftMIM. 

^1 

M 

M 

M 

n 

II 

1] 

1 

J! 

ll 

1845-50 

2200 

100 

1851  Jan.  1 

2293 

104 

103 

1853  July  1 

2451 

111 

114 

1857  "  1 

2996 

136 

140 

1858  Jan.  1 

2612 

119 

123 

1859  "  1 

2543 

115 

118 

1860  "  1 

2692 

122 

123 

94 

1861  "  1 

2727 

124 

124 

94 

113 

1862  "  1 

2878 

131 

125 

95 

116 

1863  «•  1 

3492 

159 

144 

109 

143 

1864  "  1 

3787 

172 

151 

115 

170 

1865  "     I 

3575 

162 

138 

105 

175^1 

2366 

108 

1866  "  1 

3564 

162 

141 

107 

132 

2434 

111 

1867  "  1 

3024 

137 

128 

98 

120  ■ 

2200 

100 

2179 

99 

1868  '*     1 

2682 

122 

122 

93 

116 

2058 

93 

1869  "  1 

2666 

121 

118 

90 

Hi; 

.1963 

89 

1870  «  1 

2689 

122 

119 

91 

111 

1995 

91 

1975 

90 

1871  "  I 

2590 

118 

118 

90 

105 

1981 

90 

2046 

93 

1872  "  I 

2835 

129 

133 

125 

101 

108 

2132 

97 

2197 

100 

1873  "  1 

2947 

134 

142 

132 

108 

107 

2237 

102 

2298 

104 

1874  "  1 

2891 

131 

136 

127 

103 

99 

2207 

100 

2378 

108 

1875  •*  1 

2778 

126 

130 

124 

99 

94 

2098 

95 

2125 

97 

1876  **  1 

2711 

123 

123 

94 

95 

2044 

93 

2186 

99 

1877  "  1 

2715 

123 

126 

96 

97 

2064 

94 

2205 

100 

1878  "  1 

2554 

116 

118 

90 

1910 

87 

2081 

95 

1879  "  I 

2225 

100 

106 

80 

1676 

76 

1805 

82 

1880  "  I 

2538 

115 

1918 

87 

1967 

89 

1881  "  I 

2376 

108 

1782 

81 

2054 

93 

1882  "  1 

2435 

111 

1830 

83 

1908 

87 

1883  "  1 

2342 

106 

1755 

80 

1924 

88 

1883  July  1 

2220 

101 

1884  Jan.  1 

2221 

101 

1660 

75 

1750 

80 

1884  July  1  2170 

98 

TOCO 

S 

S 

* « 

•  *  ■ ' 

I.V.       5            8            8           « 

i 

s 

lasi 

3 

3 

4 

issa 

7 

e 

iseo 

1 

2 

3 

4 

1Q0A 

:s 

.-^ 

v^ 

"-, 

< 

•  -^ 

N 

*  ■• 

'^ — 

•  m 

<^ 

^ 

I 

/ 

>%., 

N 

^^ 

'^ 

■"■s.^ 

»*  *  * 

^ 

"v. 

'••.. 

^^^^ 

.-- — ■ 

^— "^ 

-:*. 

/< 

^y' 

* 
* 

"  k 

^ 

^.1, 

; 

I 

•.. 

V 
\ 

^ 

i. 

-"^ 

rir: 

~  '  ^ 

*  * 

"-., 

- 

' 

^ 

^^fj 

e 

*a7o 

1 

£ 

3 
4 
1S75 
0 
7 
t 

1880 

1 

3 

4 

G 
7 

e 

9 

1BS0 

1 

2 

3 

4 

less 

7 

a 

, 

V 

> 

\ 

/ 

\ 

^— 

-^ 

.— ^ 

^^ 

.-^ 

-^ 

_^*!' 

^-^ 

" 

/ 

f 

,■ 

/ 

\ 

\ 

\ 

^ 

/ 

\^ 

•^ 

51,. 

\ 

>*<. 

>. 

/ 

-^^ 

V 

,y 

^^' 

A 

n; 

% 

^ 

\ 

r^^ 

X 

^ 

^- 

'■^ 

01  Cfl                CDV 

■*^ 

■ — 

'''' 

_iiw 

5JPT                    30 

^ 

^ 

\ 

^ 

\ 

,^' 

y 

*3;         ^2 

/ 

^ 

i 

^ " 

.-*■ 

"0 

-^ 

/ 

/ 

< 

( 

^ 

< 

\ 

>i»^ 

> 

1 

I 

y 

^ 

< 

^ 

^ 

i 

? 

/■ 

k 

? 

r^ 

s 

i 

L 

I 

^ 

\ 

^ 

TABLES   OF  PRICES 


1T7 


of  equal  importance  to  each  permits  extraordinary  iofluenoa 
on  the  tahle  by  changes  in  one  commodity ;  (2)  the  quotations 
are  those  of  a  given  day  (January  1  or  July  1)  and  not  the 
averages  for  the  year;  (3)  the  list  is  not  large  enough  to 
show  the  general  movement  of  prices;  and  (4)  the  com- 
modities are  badly  chosen,  there  being  four  articles  of 
cotton  (by  which  a  great  distortion  in  prices  was  cau&ed  in 


BonnM'ft 

Pilfnn'i  TkbliL 

fia^Df 

18IV77. 

■cxnurmirtoB 

bMla  flf  1865- 

1569. 

Fnpeiidhw 
comctud  for 
nUUn  im- 

porUuM. 

'^1 

M 

H 

h 

'll 

II 

i 

"^to 

1 

& 

7« 

1885  Jan.  1 

2098 

95 

1562 

70 

1669 

leSSJnljl 

SOiS 

93 

1886  Jan,  I 

2023 

92 

1509 

69 

lS86JiiJyI 

2023 
2059 

92 

1&S7  Jan,  I 

1887  July  1 

2116 

96 

l88»Jaji.  1 

2230 

101 

1888  July  1 

2121 

96 

1889  Jan.  1 

2187 

99 

1889  July  1 

2161 

98 

1890  Jan.  1 

2238 

102 

1890  July  1 

2259 

103 

189  E  Jan,  1 

2224 

101 

1891  JqIv  1 

2190 

99 

'  Thm  7«n  of  iht  MamsmM  TftM«  to  1800  him        1 

1892  Jan.  1 

2133 

97 

htm  thiu  worked  out  by  PtofeMor  Falhnar  (of,  JUdrioh 

189S  Jttlv  I 

2081 

95 

B«poft,I,^2:M): 

1893  J&dI  1  ' 

2120 

96 

1146-60 

9900                 100 

1893  JnlT  1 

2105 

96 

lB6t 
18&2 

1863                    93 

1894  Jan.  1 

2082 

95 

1853 

SlffT                   108 

1894  Jdyl 

1974 

90 

1854 

2445                  m 

1895  Jnn,  1 
1895  Joly  1 

1923 
1931 

87 
88 

1S55 

1856 
1S5T 

23S7             na 

2459                   123 
2)C4fi                    1^ 

1S9S  Jan.  1 

1999 

91 

18SB 

3«12                   119 

1S9S  July  1 
1897  Jan,  1 

1947 

88 

liW 

2304                   llfi 

1950 

88 

mo 

2428                   121 

1897  July  1 

1885 

86 

1698  Jan.  1 

1890 

86 

1898  Jtily  1 

1915 

87 

1899  Jan.  1 

19)8 

87 

1899  Jnly  1 

2028 

92 

1900  Jaq.  1 

2145 

97 

1!100  JqIv  1 

2211 

101 

1901  Jan.  1 

21 2S 

97 

12 


178 


THE  FRINCIPLES  OF  MONEY 


1862^1867),  and  there  being  a  disproportioiiate  number  of 
materiailB. 

Mr.  Boumo  corrected  the  figures  of  the  Stsofwmut  by 
inserting  only  one  quotation  of  cotton  goods  (an  average  of 
the  four)  and  by  adding  coal,  thus  using  the  prices  of  only 
twenty  articles ;  but  he  ended  with  1879. 

He  also  constructed  a  table  of  his  own  including  only  seven 
articles  (wheat,  cotton,  wine,  silk,  rice,  opium,  and  tea)  taken 
from  the  prices  of  goods  in  the  country  of  their  production. 
The  quotations  were  taken  from  the  British  "Statistical 
Abstract  for  Foreign  Countries  and  for  Colonial  Possessions/* 
running  from  1860  to  1879,  the  average  prices  of  1872-1877 
being  used  as  the  base. 

Mr*  R.  H*  I*  Palgrave^  in  order  to  get  a  comparison  with 
0ome  Indian  prices  which  began  in  1865,  rearranged  the  fig^ 
nres  of  the  Economut^  choosing  the  years  1865-1869  as  a 
basis. 

Mr.  Palgrave  at  the  same  time  reorganized  the  Eamomut 
Table  by  introducing  into  it  a  system  of  weighting,  each  arti- 
cle being  assigned  an  importance  based  on  the  proportion  of 
the  home  trade  in  it  to  the  total  home  trade  in  all  the  twenty- 
two  articles  (taking  into  account  both  quantities  and  values). 
For  instance,  in  the  year  1873,  the  home  trade  in  raw  cotton 
was  X48,000,000,  and  in  indigo  JE  800,000,  out  of  a  total  home 
trade  of  £306,450,000  for  the  twenty-two  articles;  hence 
cotton  is  given  an  importance  of  346,  and  indigo  of  only  6, 
out  of  2200.  The  com^rison  between  a  weighted  and  an 
unweighted  table,  even  though  for  so  small  a  number  of 
articles,  can  be  made  in  the  tables  on  pages  176, 177,  and  in 
Diagram  III* 

JEVONS 


An  epoch-making  study  of  prices  was  begun  in  1863  by 
Professor  W-  Stanley  Jevons  in  a  pamphlet  entitled  "  A 
Serious  FiQl  in  the  Value  of  Gold  ascertained,  and  its  Social 


TABLES  OF   PRICES 


179 


Effects  Bet  fortht*'  In  1865  there  appeared  an  article  by 
him  in  the  Journal  of  the  Royal  Statutical  Societ^^  XXVIII, 
pp.  294-320^  on  *'  The  Variation  of  Prices  and  the  Value  of  the 
Currency  since  1792,"  followed  by  a  letter  to  the  Eeonomut^ 
May  8,  1869,  pp.  530-^32,  on  "The  Depreciation  of  Gold." » 

In  the  first  study  Mn  Jevons  used  pricea  taken  mainly 
from  the  Economist  covering  the  following  thirty-nine 
^iicles : 

l.t  silTBr,  tin,  copper,  lead^  bar  iron,  pig  iroHp  tin  plates  \  II., 
palm  oU,  lineeed  oil,  tallow,  hldea,  Leather,  timber,  Jogwood, 
iDdigo;  III.,  cotton  (three  grades),  woo!,  silk,  flax,  bemp;  IV,, 
wheat,  barley,  oats,  rye,  beans,  peas ;  V*,  hay,  clover,  straw, 
b€ef,  toatton,  pork,  butter;  VI,  sugar,  sprits,  tea,  pepper. 


No  weighting  was  adopted,  hut  he  first  introduced  the 
geometric  average,  although  not  in  all  his  computationB. 
For  the  initial  quotation  of  a  certain  commodity  he  took  the 
aritlimetic  average  of  the  prices  of  the  highest  and  lowest 
quality,  obtaining  thereby  the  average  price  of  the  medium 
quality.  While  admitting  this  not  to  be  rigorously  correct, 
he  thought  it  satisfactory  enough ;  and  it  also  saved  a  vast 
amount  of  labor.  From  the  monthly  prices  thus  obtained, 
tlie  simple  arithmetic  mean  pric^  for  each  year  were  drawn.* 
As  a  base,  the  simple  aritJimetic  average  of  the  price  of  each 
article  for  the  six  years,  1845-1850,  was  first  found.  Then 
this  was  divided  into  the  average  price  of  each  separate  year 
from  1845  to  1862.  The  ratios  thus  obtained  for  the  years 
845-1850  represent  the  proportional  variations  due  to  specu- 
lation or  to  other  ordinary  fiuctuations ;  for  the  years  since 
1850,  the  percentages  express  the  rise  of  prices  above  their 
former  ordinary  level.     Finally,  he  grouped  together  those 


^  The  latter  wftn  t«|»rmted  in  the  Joaroftl  of  ibe  Rojal  Statistic&l  Societf , 
Dec.,  18S9«  pp.  445^49,  Also,  all  tht^^bove  artidra^  with  tables  and  ilJograms, 
wer&  pobliahed  tn  hit  '' Dire^igationi  in  CurrencY  tuid  FlnaiKe."  The  dtscus- 
iloti  waA  preceded  b^r  Chevalier's  **  Oa  the  Pt*obable  Fall  iu  the  Value  of  Gold  ** 
(1859). 

'  Of.  InTMtigationB  in  CirT^ncj  antl  Finance,  pp.  SB,  41^  43,  i&. 


180 


THE  PRINCIPLES  OF  MONET 


L 

S. 

1. 

Tmt. 

AmaftoC 

1816-00  tekMM 

100. 

Lofariihm. 

178S 

100 

.000 

1783 

100 

.001 

1784 

93 

T.966 

1785 

90 

T.956 

1786 

85 

1.927 

1787 

87 

1.941 

1788 

87 

T.941 

1789 

85 

T.930 

1790 

87 

T.937 

1791 

89 

1.947 

179S 

93 

1.969 

1793 

99 

1.994 

1794 

98 

1.989 

1795 

117 

.067 

1796 

125 

X>97 

1797 

no 

.043 

1798 

118 

.070 

1799 

130 

.113 

1800 

141 

.148 

1801 

140 

.147 

1809 

110 

.042 

1803 

125 

.096 

1804 

119 

J074 

1805 

132 

.120 

1806 

130 

.113 

1807 

129 

.110 

1808 

145 

.160 

1809 

157 

.195 

1810 

142 

.152 

1811 

136 

.132 

1819 

121 

.081 

1813 

115 

.060 

1814 

114 

.058 

1815 

109 

.039 

1816 

91 

1.959 

1817 

117 

.067 

1818 

132 

.119 

1819 

112 

.048 

1820 

103 

.013 

1821 

94 

1.975 

1822 

88 

1.946 

1823 

89 

1.948 

— [ — 1 — ! — 1    -i.-p     1 — 1 — 1 — 1 — 1 — I — 1 — 1 — I — T — 1 — I — 1 — r— 1 — 1 — 1 — 1 — ; — r 

ZZ 

zz 

—7-* 

zz 

— 

^ 

^ 

^ 

zz 

_^ 

— 

2Z 

^ 

— 

1.  ! 

t= 

"ZZ 

iz: 

^: 

— 

— 

— - 

— , 



— 

"■*■ 

^*»^ 

IZ 

— 

— 

^, 

—^ 

— 

^" 

' 



~^ 



1 

-f— 



— 

— 

— ' 

' — 

— 

-1- 

■*' 

'  ■ 

s 

i# 

^ 

^t^, 

— . 

-^^ 

— 

—^ 

--_ 

— " 

— 

; 3 

r^ 

=^ 

— 

— 

— 

-- 

E 

^- 

— 

•v*. 

^ 

' — - 

— 

= 

^ 

^ 

s-^ 

ZZ 

^ 

-^ 



z: 

IIKKJ 
IMP 

^ 

.^ 

—^ 

zz 

^ 

zz 

^ 

zz 

— 

f^ 

-- 

, 

-Ti 



, 



^ . 



r^ 

, , 

_  _ 

Z2 

' 

-•-1 



— ^ 

' — 

^-^ 

-^^ 

^ 

—^ 

— , 

. 

zz 

■ 

-*■— 

^I 

^ 

zr 

HZ 

zz 

^ 

2= 

^ 

z: 

^ 

~ 

z£ 

^ 

= 

^ 

ZJ 

^ 

^ 

^ 

^fl 

~i 

1 

H^ 

^ 

■ 

^ 

^ 

^ 

^ 

IZ 

— 

z: 

IK  JO 
IMO 

.-.  _ 

= 

^ 

3 

— 1 

~ 

^ 

^ 

^ 

^ 

^■^" 

■""^ 

— ^ 

—  « 

r—   ' 

\ 

■ 

,* 

' 

t 

> t. 

I 

. 

b^! 

?= 

1 — 

. 

^^ 

— 1 

L_* 

— 

■ 

— -1 

-^^ 

F^" 

^^ 

— ■ 

— 

n 

"~1 





_l 

, 

. 

,_ , 

, 





^ 

—  T 

^ 



— 

— 

— ' 

^ 



1 — 

— " 

— 

— ' 

"! 

i 

¥ 

^ 

5 

- 

^ 

c 

'"  » 

>> 

1 

■ — . 



— 

1 

5?5fc 

— 

. — . 

— 

— 

— 

S 

' 

' 

-( 

■ 

' 

' 

a 

"} 

' 

ip^ 

'? 

f 

1 , 





. . 

^       ■ 

, 



— ' 

__ 



—  6 

-? 

1 

3 

] 

s 

■ 

7 
H  . 

1 

4 

— 



— 

— 

^ 

■ 

— ■ 

— 

■  — 

-  ^ 

— 

1 — 



—  ^ 

k^i 

■  -, 

— 

^^ 

,_ 

- 

c 

r 

1^ 

-1 

'4 

1 — ' 



^ 

rlTk 

, 

^— J 

_  _ 



K , 

; 1 

^  I 

— 



-  ■ 

—M 

S^ 

■ 

^ .. 

HI, 

— 

-  ■ 

■ 

^t 

■ 

■— 

f^  J, 

-^ 

"'\ 

\i 

1 

'  — 

— 

I 

s 

t 

^ 

*^ 

7 

" 

— 

, 

-A^ 

**y 

=^ 

, 

, 



__ 

, 

, 

_  . 

^ 

^ 

— 

' — 

— 

^— 

" — ■ 

- 

'" 

^^ 

^^ 

r^ 

— 



— 

....■ 

t 

r  ^, 

— 

1 

^ 

l. 

. 

V 

3r 

T* 

V 

1\ 

■ 
— 

F 

^^-i 

^ 

i 

--*' 

A 

, 



--  . 



, 

,     _ 

_  ,. 

~ 

'     ' 

~"    " 

r_ 

~ 

._^, 

■ — • ' ' — 



-  — 

1-^ 

— ^1 

^     — 

' 

-^  - 

— 

^. 

— 

" 

, 

■^ 

. 

J 

t 

L^ 

~: 

^ 

'— 

h 

-I    .^. 

--J 

— ' 

'~ 

] 

- 

'^^■~ 

-  ^ 

--ri 

^ 

-   - 

~ 

— 

^ 

^ 

J_ 

1 

_i_ 

'—\- 

- 

r.     :    -. 







-^ 

— - 

— - 

—= 

— 



— r- 



t 

H 

H 

— 

1           L- 

•J 

T         1 

I 

f           H 

g             g             8             1             g             g       6CALF  rOH  LINE  G 

TABLES  OF  PRICES 


181 


L 

t 

t 

Tmt. 

_Af«nM0f 

1815-60  tekMM 

1824 

88 

1.946 

18i5 

103 

JOU 

18S6 

90 

T.953 

18S7 

90 

1.956 

18S8 

81 

T.909 

1829 

79 

T.899 

1830 

81 

1.906 

1881 

82 

T.915 

1832 

78 

I. 893 

1883 

75 

T.877 

1834 

78 

T.891 

1835 

80 

T.905 

1836 

86 

1.935 

1837 

84 

1.922 

1838 

84 

T.924 

1839 

92 

T.965 

1840 

87 

T.940 

1841 

85 

T.92R 

1848 

75 

T.875 

1848 

71 

T.851 

18U 

69 

T.840 

1845 

104.4  > 

74 

T.867 

1846 

105.4 

74 

T.871 

1847 

110.8 

78 

1.894 

1848 

94.1 

•100 

68 

T.831 

1849 

89.6 

64 

T.806 

1850 

92.1  J 

64 

TJJ08 

1851 

92.4 

66 

T.817 

1858 

93.8 

65 

T.810 

1858 

111.3 

74 

T.871 

1854 

120.7 

83 

T.919 

1855 

117.6 

80 

T.903 

1856 

122.5 

82 

1.916 

1857 

128.8 

85 

T.928 

1858 

114.2 

76 

T.878 

1859 

116.0 

77 

T.884 

1860 

117.9 

79 

T.898 

1861 

115.1 

78 

T.894 

1862 

113.4 

79 

T.900 

1863 

78 

T.894 

1864 

78 

1.894 

1865 

78 

1.890 

ISS 


THE  PRINCIPLES  OF  MONEY 


commodities  which  seemed  to  have  something  in  conunon, 
and  calculated  their  average  ratios,  or  percentages,  by  the 
geometric  mean.  Also^  he  deduced  by  the  same  method  the 
general-average  variation  from  year  to  year  of  the  whole 
thirty- nine  commodities*  These  figures  are  given  above  in 
column  1. 

In  1865  Professor  Jevons  presented*  a  table  of  about  forty 
articles  running  over  the  long  period  from  1782  to  1865. 
The  quotations  were  taken  mainly  from  Tooke  and  New- 
march's  Hktortf  of  FriceB,  but  after  1844  they  were  the  same, 
in  general^  as  those  used  in  his  former  table  (1845-1862). 
For  each  commodity  a  single  quotation  for  each  year  was 
obtained.  In  some  cases  this  was  a  yearly  average,  but  gen- 
e^lly  it  was  the  medium  of  the  highest  and  lowest  prices  in 
the  March  quotations  of  Tooke*8  tables.  **The  method  of 
reduction  used  consists  in  calculating  the  ratios  of  change  of 
prices  year  after  year,  and  then  taking,  by  die  aid  of  loga- 
rithmSf  the  geometric  mean  ratio  of  change  of  prices  for  each 
year/*  The  ratio  of  each  yearly  price  to  that  of  the  preced- 
ing year  is  calculated  by  means  of  logarithms.  After  the 
logarithmic  ratios  have  been  copied  and  grouped  those  of  the 
several  groups  are  added  and  averaged.  The  addition  of 
those  for  the  groups  gives  the  final  aggregates  of  ratios  for 
all  articles  in  the  list.  To  this  point,  only  the  ratio  of  prices 
each  year  to  those  of  the  preceding  year  have  been  obtained. 
Next,  he  joined  the  separate  yearly  ratios  to  each  other  year 
after  year  by  adding  the  logarithms.  By  retaining  the  loga- 
rithms, Mr.  Jevons  was  able,  in  his  judgment,  to  represent 
the  ratios  of  variations  more  equitably  than  by  the  natural 
numbers  derived  from  the  logarithms.  The  upper  line  in 
Diagram  V  is  hosed  on  the  logarithms.  These  results  ars 
given  in  columns  2  and  3  in  the  tables  on  pages  180 ,  18L 


1  luTeatigatiotii  iu  Carr«iicj  asd  Finance,  ppi.  IIE^ISC. 
pp.  ISO,  124-13Q,  142-H3, 


Am  to  metliod,  tw 


W.  S.  JEVONS'S  PRICES 


PROPORTIONAL  VARIATION  OF  PRICES 
(Corrected  for  Depreciation  of  Paper  1797-1820) 


100 


METALS*  Comparatively  to  the  whole 


WHEAT  Comparatively  to  the  whole 


I 


%     I      I 


1864 
6 
6 

7 
8 
0 
1860 
1 
2 

3', 

•    • 

*•  •    * 

-.6 

6 
7 
8 

9 

1870 

1 

2 
3 

4 
6 
6 
7 
8 
9 
1880 
1 
2 
3 
4 

s          j 

8CALE  FOR  LINE  A 

1       1        1 

V 

• 

»  • 

1 

\ 

•• 

•  • 

1 

.  •;•. 

^: 

1 

4 
• 
• 

• 

• 
• 

\ 

:•.; 

\\ 

\ 

• 

••  • 

• 

i-;. 

• 

\ 

\ 

• 

••• 

>•■ 

****^, 

'**^ 

^ 

,/ 

< 

J 

,--**' 

,-*- 

,--- 

^-^ 

/ 

/ 
1 

/^ 

1 
1 
1 

y 

o>  1 

\ 

u 

•\ 

X 

< 

OS 

5f 

1    \ 

\ 

ii 



/ 

x" 

.-' 

^'' 

/^ 

(^ 

j  O     PI     1 

-        ^5.! 

1 

\     \ 

^ 

<' 

1 

V 

1 

1 

1 

1 

1 
i 

- 

i 

1 

/f 

1 

v^  1 

[/  / 

1 

!       ! 

— 

1 

! 
1 

1 
1 

1 
1 

! 

I 

1 

1 1 


>^  ^^KV^^<^^  UHE  B 


TABLES  OF  PBIC£S 


MULHALL 


188 


VI 

Mr.  Mnlhall,  in  1885,  in  his  Huiary  of  Prices  nnee  the 
Year  1850,  declared  that  for  the  purpose  of  ascertaining  the 
▼ariationB  in  the  value  of  gold,  index  numbers  were  ^an  un- 
eertain  and  deceptive  method,^^  chiefly  because  they   were 
not  corrected  by  proper  weighting.    Instead,  he  proposed  to 
!:  eompare  ^  the  actual  total  of  trade  with  the  sums  which  the 
Hune  volume  of  merchandise  would  have  amounted  to  at 
;  pievioas  periods  according  to  the  prices  then  ruling.'*  ^    This 
ii  his  **  trade-level ''  method.    In  the  following  Table  of  the 
British  price  level  the  amounts  of  50  articles'  imported  and 
r  exported  (taken  from  the  Board  of  Trade  returns)  are  com- 
puted at  the  prices  of  1841-1850 ;  then  the  <^  ratios  of  values  " 
c  for   the  thirty-one  years  to  1884  are  summed  up  in  per- 
f  centages,  in  which  die  price  level  of  1841-1850  is  taken  as 
100  CpP-  153-154): 


T«M. 

Tew. 

Tew. 

1854 

108 

ATenge 

129 

1876 

102 

1855 

104 

186? 

139 

1877 

103 

1856 

105 

1867 

126 

1878 

96 

1857 

111 

1868 

121 

1879 

92 

185S 

103 

1869 

121 

1880 

96 

1859 

104 

1870 

110 

Arerage 

97 

1860 

107 

Arenge 

123 

1881 

94 

ATenge 

105 

1871 

no 

1882 

94 

1861 

107 

1872 

116 

1883 

91 

1862 

114 

1873 

121 

1884 

87 

1863 

133 

1874 

115 

Average 

91* 

1864 

152 

1875 

109 

1861-70 

126 

1865 

138 

Arerage 

114 

1871-80 
1854-84 

106 
110 

His  price  levels  for  the  world  are  as  follows  in  millions 
sterling  (pp.  155-156) : 


ip.i. 


«  Pp.  179-183. 


THE  PRINXIPLES  OF  MONEY 


T«r. 

AiWriomatimi-eS- 

Ratio  ^YUnw. 

l860-6a 

722 

100 

ta63 

76S 

899 

109 

Iii4 

8tS 

877      1 

ISO 

18S5 

82t 

732 

113 

1866 

9^ 

791 

116 

18«7 

i»09 

891 

102 

ISM 

939 

MS 

101 

im 

973 

960 

101 

t870 

lOCk 

1057 

95 

Arenige 

847 

&4i 

10? 

IB71 

IISS 

1187 

97 

ms 

1X84 

tS59 

102 

1873 

I3S6 

1285 

103 

1874 

1295 

1332 

97 

1875 

I26a 

1388 

22 

ii7e 

1263 

1413 

89 

1877 

126€ 

1389 

91 

187i 

126S 

1*07 

84 

1879 

1306 

1528 

as 

1880 

um 

1700 

86 

ATerag^ 

1291 

1396 

92 

1881 

1495 

1740 

86 

1882 

1503 

1775 

as 

1883 

1524 

1883 

81 

Arerog^ 

1798 

84 

It  will  be  noticed  that  in  the  British  trade  level  the  prices 
of  1841-1850  are  taken  as  a  h^isia,  while  in  the  world  level 
the  prices  of  1860-1862  are  used;  so  that  the  ** ratio  of 
values  ^*  in  the  two  tables  cannot  be  accurately  compared. 

Mr«  Mulhall  also  prepared  a  price  level  of  the  world  since 
1782,  the  quantities  of  goods  in  1881-1864  being  computed  at 
the  prices  of  previous  years ;  ^  but  the  inaufficient  data  used 
do  not  warrant  their  appearance  here- 


BAOERBECK 

VII 

The  table  of  English  prices  now  most  frequently  consulted, 

because  it  begins  with  1846  and  comes  down  to  the  present 

day,  is  one  compiled  by  Mr,  Augustus  Sauerbeck^  and  first 

published  in  the  Journal  of  the  Royal  Siatutical  Sacuiy  for 

^  Pp.  177*178.    Ttie  qDMtianable  character  of  his  da£&  appearB  whea  ooo 
fijodi  thati  before  I840j  the  pricM  M^  British  oilIj. 


TABLE  OF  PRICES 

September,  1886.  His  index  numbers  are  computed  by  a 
simple,  unweighted  arithmetic  average*  "  With  but  few 
exceptions  the  prices  given  are  the  average  prices  in  each 
year,  either  those  officially  returned  or  the  averages  of  the 
twelve  quotations  at  the  end  of  each  month,  partly  received 
from  private  firms,  partly  collected  from  the  Economist  and 
other  publications.  Where  a  range  of  prices  is  given,  the 
mean  has  been  taken  between  the  highest  and  lowest  quota- 
tions,'* ^  The  average  prices  of  the  years  1867-1877  are  taken 
Bs  the  base  line*  or  100.     Although  there  are  only  thirty- 


1. 

1 

s. 

1. 

5, 

«, 

7. 

8L 

9, 

m 

T^. 

Food, 

(Cflju, 

Ooffwt 

Total 
Food. 

U1«H. 

8u»df7 
rUlL 

Total 
rUOL 

anad 

R«Iuc«d 

by 
Filkiieri 

18£0ul00. 

imG-imh 

Ii4< 

lOfi 

81 

98 

95 

92 

77 

86 

85 

89 

92J 

1847 

139 

88 

67 

105 

94 

78 

86 

86 

95 

97.9 

1848 

92 

83 

89 

84 

78 

64 

77 

73 

78 

79.9 

1849 

79 

71 

77 

76 

77 

67 

75 

73 

74 

76.4 

1850 

74 

67 

87 

75 

77 

78 

80 

78 

77 

79.0 

1851 

73 

68 

84 

74 

75 

75 

79 

76 

75 

774 

1853 

80 

69 

75 

75 

80 

78 

84 

81 

78 

80.8 

1853 

100 

82 

87 

91 

105 

87 

101 

97 

95 

96.9 

1854 

ISO 

87 

85 

101 

115 

88 

109 

104 

102 

106.2 

1855 

120 

87 

89 

101 

109 

84 

109 

ioi 

101 

103.1 

1856 

109 

68 

97 

99 

110 

89 

109 

102 

101 

I03.S 

1857 

105 

89 

119 

102 

108 

92 

119 

107 

105 

106.9 

tB58 

87 

83 

97 

88 

98 

84 

102 

94 

91 

93.3 

1859 

65 

85 

102 

89 

98 

88 

107 

96 

94 

95.2 

11160 

99 

91 

107 

98 

97 

90 

111 

100 

99 

100,0 

1861 

103 

91 

96 

97 

91 

92 

109 

99 

98 

99X*  ; 

1862 

98 

86 

98 

94 

91 

las 

106 

107 

101 

105.5 

1863 

87 

85 

99 

89 

93 

149 

101 

115 

103 

109.3 

1864 

79 

89 

106 

88 

96 

162 

98 

119 

105 

112.3 

1865 

84 

97 

97 

91 

91 

134 

97 

108 

lOL 

105.8 

1866 

95 

96 

94 

95 

91 

130 

99 

107 

102 

106.5 

1867 

115 

89 

94 

101 

87 

110 

100 

100 

100 

103.9 

1868 

113 

88 

96 

100 

85 

106 

102 

99 

99 

103.1 

18A9 

91 

96 

98 

94 

89 

109 

100 

100 

98 

10L9  , 

1870 

8S 

98 

95 

93 

89 

106 

99 

99 

96 

100.3 

1871 

94 

10O 

100 

96 

93 

103 

105 

101 

100 

102.6 

1872 

101 

101 

104 

102 

127 

114 

tos 

115 

109 

112.5 

1  P,  638, 


^  Aldrich  H«poit,  I,  p.  255. 


186 


THE  PRINCIPLES  OF  MONET 


L 

2. 

8. 

4. 

6. 

6. 

7. 

8. 

t. 

1 

Tew. 

Food, 

ABlBil 

Tbtal 

rbod. 

mam- 
•Is. 

Tbs- 

tilM. 

Snndiy 
Ksto- 

fials. 

Tbtal 
lisls. 

TMd. 

1873 

106 

109 

106 

107 

141 

103 

106 

114 

Ill 

■ 

1874 

105 

103 

105 

104 

116 

92 

96 

100 

lot 

1875 

93 

108 

100 

100 

101 

88 

92 

93 

M 

1876 

92 

108 

98 

99 

90 

85 

95 

91 

96 

s 

1877 

100 

101 

103 

101 

84 

85 

94 

89 

94 

1878 

95 

101 

90 

96 

74 

78 

88 

81 

87 

1879 

87 

94 

87 

90 

73 

74 

85 

78 

8S 

! 

1880 

89 

101 

88 

94 

79 

81 

89 

84 

8S 

; 

1881 

84 

101 

84 

91 

77 

77 

86 

80 

86 

1882 

84 

104 

76 

89 

79 

73 

85 

80 

M 

1888 

82 

103 

77 

89 

76 

70 

84 

77 

82 

1884 

71 

97 

63 

79 

68 

68 

81 

73 

76 

1885 

68 

88 

63 

74 

66 

65 

76 

70 

7t 

1886 

65 

87 

60 

72 

67 

63 

69 

67 

60 

1887 

64 

79 

67 

70 

69 

65 

67 

67 

6S 

1888 

67 

82 

65 

72 

78 

64 

67 

69 

70 

: 

1889 

65 

86 

75 

75 

75 

70 

68 

70 

7S 

1 

1890 

65 

82 

70 

73 

80 

66 

69 

71 

7t 

■ 

1891 

75 

81 

71 

77 

76 

59 

69 

68 

7S 

189S 

65 

84 

69 

73 

71 

57 

67 

65 

68 

1893 

59 

85 

75 

72 

68 

59 

68 

65 

66 

1894 

55 

80 

65 

66 

64 

53 

64 

60 

68 

1895 

54 

78 

62 

64 

62 

52 

65 

60 

68 

1896 

53 

73 

59 

62 

63 

54 

63 

60 

61 

1897 

60 

79 

52 

65 

66 

51 

62 

59 

68 

1898 

67 

77 

51 

68 

70 

51 

63 

61 

64 

1899 

60 

79 

53 

65 

92 

58 

65 

70 

68 

1900 

62 

85 

54 

69 

108 

66 

71 

80 

75 

1901 

seven  different  articles  in  the  table,  an  inspection  of  Ui 
lowing  list  discloses  that  the  introduction  of  a  fixed  m 
of  grades  under  certain  articles  is  really  a  form  of  wi^ 
according  to  an  irregular  system  of  importance : 

I.  Wheat  (two  grades),  flour,  barley,  oats,  maize,  pol 
rice;  II.,  beef  (two  grades),  mutton  (two  grades),  pcxk,  t 
butter;  III.,  sugar  (three  grades),  coffee  (two  grades] 
(two  grades) ;  IV.,  pig  iron,  bar  iron,  copper  (two  gradei 


IQftB                     ie0O                      iBoe                      ifiOO                     ygo5 

225 

ISO 

12a               j 

78 

V 

00 
35 

1 

* 
• 

1  • 

* 

■ 

■ 

. 

. . 

'". 

■■A 

^ 

V* 

* 

\/ 

' ' 

*. 

*. 

; 

1 

^ 

V 

"^ 

\ 

/■ 

1 

j  ■ 

%' 

ts^ 

^ 

Li 

u 

— 

P 

n 

■M 

s^ 

^ 

<^ 

— 

5i> 

\ 

^ 

:/ 

f 

^ 

N 

^ 

i^ 

I 

— 

— 

— 

— 

1Bao                          1800                          1S96                         IflOO                          !» 

06 

L 

TABLES  OF  PRICES 


18T 


lead,  coaU  (two  grftdee);  V,^  cotton  (two  grades),  flax  (two 
grades)^  hemp  (two  grades),  jute,  wool  (thre^  grades)^  silk; 
VI*,  hides  (two  grades),  leather,  tallow,  (two  grades),  palm  oil, 
olive  oil,  liDseed  oil.  Unseed,  petroleum  (since  1872),  soda 
crystals,   nitrate  of  soda,  indigo,  timber  (two  grades). 

Several  objections  appear  against  this  table:  (1)  not  all 
the  prices  are  averages,  some  being  onlj  quotations  on  one 
day  in  a  yeax;  (2)  the  compiler  admits  that  "it  was  im- 
possible to  retain  exactly  the  same  standard  for  this  long 
period  (1846-1886),  owing  to  the  frequent  alterations  of 
descriptions ;  and  the  old  quotations  for  a  few  articles  snch 
aJB  sugar,  coffee,  and  flax,  must  be  considered  as  only  approx- 
imately showing  the  course  of  prices;'**  (3)  the  sources 
from  which  prices  were  taken  are  not  fully  given ;  (4)  the 
system  of  relative  importance  is  not  carefuUy  adjusted  ;  (5) 
the  commodities  included  are  all  raw  produce,  thus  allowing 
only  tlie  forces  affecting  special  groups  to  be  represented, 
and,  most  important  of  all,  (6)  the  small  number  of  articles, 
being  only  of  raw  produce,  forbids  it^  being  taken  as  typical 
of  goods  in  generd  and  is  not  lai^e  enough  to  secure  the 
elimination  of  errors  in  weighting*  Hence  in  regard  to 
sources  of  infommtion,  reliability,  the  number  of  commodities 
chosen,  and  the  continuity  of  quotations  on  the  same  sjrstem, 
this  table  of  prices  falls  in  general  value  much  below  the 
Hamburg  tables  of  Gennan  prices  collected  by  Soetbeer. 


R  J,  ATKINSOl^ 

Mr.  F.  J.  Atkinson,  in  the  Journal  qf  the  Eoyal  Statist  wai 
Society^  March,  1897,  pp*  84-147,  has  made  a  valuable  table 
of  Indian  prices  expressed  in  terms  of  the  silver  rupee. 
This  is  the  only  fairiy  extensive  list  now  available  which 
will  enable  us  to  ascertain  whether  silver  fell  relatively  to 
goods  of  common  use  and  production  in  silver-using  countries 

»  P.  632. 


188  THE  PRINCIPLES  OF  MONEY 

like  India.  The  qaotations  were  taken  partly  from 
prices  current  of  the  Chambers  of  Commerce  in  Calcutd::^^ 
Bombay,  and  Madras;  partly  from  Priees  and  Wages  ^^^ 
India^  issued  by  the  Government;  and  partly  from  priva^*^ 
sources.  Sauerbeck's  methods  were  followed  in  general;  aor^ 
evidently  the  arithmetic  average  was  used.  Allowance  ha^'" 
to  be  made,  however,  for  the  peculiarities  arising  from  th^  ^ 
great  variation  of  prices  in  different  markets  and  province^^' 
of  India.  Since  prices  differed  widely  in  different  provinces,  ^ 
the  quotations  for  certain  articles  were  taken  from  those  ^ 
provinces  in  which  the  production  of  a  particular  commodity  ^ 
was  the  greatest.  The  prices  for  1871  were  taken  as  the  base 
of  100  for  the  index  number. 

Some  articles  entering  more  largely  than  others  into  the 
total  trade  of  the  country,  Mr.  Atkinson  was  led  to  adopt  a 
system  of  weighting.  The  coefficient  of  importance  for  forty- 
five  kinds  of  goods  was  found  by  obtaining  the  percentage 
which  the  total  money  value  of  the  product  of  each  article 
bore  to  the  grand  total  of  the  value  of  all  the  articles  in  die 
table  (see  Journal  of  the  Boyal  Statutieal  Society^  pp.  124- 
125).  The  list  of  commodities,  with  the  importance  given  to 
each,  so  that  the  whole  number  of  points  amounts  to  100,  is 
as  follows : 

Rice  (30),  wheat  (5),  jawar  (8),  ragi  (2),  gram  (2),  fajra  (2), 
maize,  barley,  other  grains  (5),  potatoes,  sugar  (4),  ginger, 
ghee,  mutton,  beef,  tea,  coffee,  cotton  (3),  jute  (2)  indigo  (2), 
opium  (2),  tobacco  (2),  linseed,  til,  rapeseed,  castor  seed,  salt- 
petre, cutch,  myrabolams,  bone-manure,  coal,  rawsilk,  wool, 
rawhides  (3),  timber  (2),  cotton  goods  (2),  jute  goods  (2), 
oils  (2),  silk  goods,  tanned  hides  (3),  shellac. 

The  general  results  of  the  investigation  are  given  in  the 
following  table,  of  which  columns  5,  6,  and  7  are  shown  in 
Diagram  VIII.  It  will  be  observed  that  goods  expressed  in 
silver  have  risen,  as  silver  fell  relatively  to  goods,  by  per- 
centages rising  as  high  as  50 ;  while  the  same  goods  have 
fallen  relatively  to  gold  26  per  cent. 


L 


^ 

^ 

I9IH 

'T 

1 

^ 

.^ 

4 

/ 

7" 

"^ 

^. 

y 

y 

*»"' 

.---^ 

.^-1 

^^ 

"^ 

r 

"/ 

*^ 

■-^ 

^^ 

/ 

\ 

/' 

J 

n 

N« 

\ 

A 

V 

s^ 

\ 

/ 

^ 

3 

/ 

/ 

s 

^ 

\ 

^ 

i 

s 

r 

£ 

X-" 

*** 

,y 

^^ 

-^ 

.M^ 

--'■ 

<■'" 

-1 

^*^ 

^^ 

< 

,^^- 

•^ 

in 
z 

o 

s 

"-V 

,^ 

\ 

»--^ 

m. 

E/1 

^ 

p= 

~N 

\ 

'--. 

< 

^^ 

*" 

,**"" 

■^ 

> 

\! 

-N^l 

E? 
M 

^ 

N 

1 

Oh 

5 

V 

Z 

rt3 

]  1 

< 

n 

,^ 

^ 

U 

LU  111 

3 

^ 

r^ 

2!i 

\ 

■^ 

3C 

iP 

1 

^ 

I 

y 

y^ 

4 

OiU 

' 

-^ 

■^» 

^ 

'ib 

^5; 

^N 

s 

a^ 

t 

f 

4 

■ 

c 

0 

\ 

1 

a 

Q 

< 

& 

< 

^ 

n 

% 

o 

c 

t 

dl 

TABLES  OF  PRICES 


189 


- 

% 

ai 

4. 

K. 

6. 

7. 

6. 

9. 

10. 

IL 

Indn 

Horn- 
bvin 

tlODtO 
tiM 

bdn 

Hum- 

IMT 
BMW 

P»o- 

dOM 

«te. 

iBdn 

'Mai 
iBdn 
Hum. 
Iwriii 
rain- 
tionto 
BnpM. 

»_ji__ 

Illd«S 

ttonto 

Illd«S 

Hum. 
bwof 
Wood 

GoU 
PriM 

of 
Com- 
modl- 

GoU 
PrkM 

BOfot. 

GoU 
PrkM 
Bnpot. 

Tmt. 

Hum- 
bw 

tWM 

•to. 

UMMK 

Hum. 
bwin 

tloato 

%? 

BUtw. 

Oold. 

tionto 
Gold. 

tiM. 

isei 

105 

87 

93. 

99 

99 

98.9 

104.9 

98 

99.9 

1862 

100 

99 

96 

99 

99 

99.9 

100.9 

101 

100.9 

1863 

102 

111 

99 

104 

104 

105.1 

103.1 

103 

101.1 

1884 

114 

113 

100 

118 

118 

113.0 

115.0 

105 

100.9 

1885 

188 

100 

93 

117 

117 

117.4 

188.4 

101 

100.3 

1866 

15S 

108 

94 

133 

138 

133.7 

153.8 

108 

100.5 

1867 

145 

96 

91 

186 

186 

185.6 

143.6 

100 

99.7 

1868 

186 

98 

90 

114 

114 

113.3 

185.5 

99 

99.6 

1869 

148 

104 

89 

186 

186 

185.5 

14M 

98 

99.6 

1870 

188 

104 

100 

116 

116 

114.6 

inA 

96 

99.6 

1871 

100 

100 

100 

100 

100 

99.7 

99.7 

100 

99.7 

187S 

106 

104 

99 

105 

105 

104.1 

105.1 

109 

99.8 

1873 

118 

100 

94 

107 

107 

104.8 

109.1 

111 

97.4 

1874 

125 

104 

99 

116 

116 

111.1 

119.8 

108 

95.8 

1875 

106 

97 

94 

103 

103 

96.0 

100.8 

96 

93.3 

1878 

115 

99 

83 

107 

107 

98.8 

99.7 

95 

86.7 

1877 

166 

103 

85 

138 

138 

184.5 

149.7 

94 

90.8 

1878 

181 

103 

87 

148 

148 

187.9 

156.4 

87 

86.4 

1879 

160 

105 

89 

135 

135 

113.7 

134.7 

83 

84J 

1880 

186 

109 

97 

117 

117 

100.5 

108.8 

88 

85.9 

1881 

109 

104 

96 

106 

106 

90.1 

92.6 

85 

85.0 

1882 

109 

101 

91 

105 

105 

89.1 

92.5 

84 

84.9 

1883 

118 

101 

91 

106 

106 

88.1 

93.1 

82 

83.1 

1884 

125 

101 

86 

114 

114 

95.0 

104.1 

76 

83.3 

1885 

125 

99 

80 

113 

113 

90.3 

99.9 

72 

79.9 

1886 

120 

100 

85 

110 

110 

88.1 

89.5 

69 

74.6 

1887 

120 

102 

90 

HI 

111 

81.4 

88.0 

68 

73.3 

1888 

ISO 

107 

94 

119 

119 

83.8 

91.5 

70 

70.4 

1889 

136 

118 

108 

185 

125 

87.8 

95.5 

72 

70.2 

1890 

138 

109 

96 

125 

125 

98.0 

108.2 

72 

78.4 

1891 

144 

107 

94 

128 

127 

94.8 

106.0 

72 

74.3 

73.6 

1892 

161 

116 

97 

141 

141 

98.1 

105.1 

68 

65  5 

65.3 

1893 

153 

118 

106 

138 

151 

88.6 

98.2 

68 

58.5 

64.2 

1894 

141 

119 

109 

131 

158 

75.3 

81.1 

63 

47.7 

57.5 

1     1895 

138 

186 

111 

128 

149 

78.8 

75.1 

62 

49.0 

56.9 

190 


THE  PRINCIPLES  OF  MONET 


GERMAN  PRICES— LASPETRES 
IX 

§  9.  Professor  E.  Laspeyies  in  1864  made  a  study  ^  of  Ham- 
boig  prices  from  1881  to  1868.  The  prices  to  the  end  of 
1857  were  borrowed  from  Soetbeer's  BeitrUge  zur  Statistik  der 
PreUe  (1858) ;  the  otheis  have  been  computed  after  Soetbeer's 
method  from  the  Hamburger  Bffnen  PreucaurafU.  The  quo- 
tations given  for  the  first  Friday  of  each  month  were  averaged 
for  the  year  by  the  arithmetical  mean.  Each  annual  price  is 
the  average  of  from  twelve  to  twenty-four  quotations.  The 
general  average  of  the  years  1881  to  1840  was  taken  as 
100;  but  if  this  could  not  be  ascertained,  the  average  for 
1841-1850  was  adopted ;  and  if  this  last  foiled,  resort  was  had 
to  the  average  of  1851-1858.  For  his  list  of  forty-eight  arti- 
cles see  the  table  given  below,  which  also  contains  the  lists  of 
Paasche,  Van  der  Borght,  and  Conrad. 

It  is  to  be  noticed  that  the  table  includes  practically  no 
manu&ctured  articles,  being  in  the  main  materials  or  ex- 
tractive goods.  Also  coffee  is  given  an  importance  of  three 
entries. 

The  results  of  the  study  aro  as  follows : 


FBTlodB. 

ATmgePrieei. 

FaiiodA. 

ATenffaPrioM. 

Decade  1881-1840 

100 

Tear  1857 

137.8 

"       1841-1850 

95.4 

"     1858 

118.6 

"     1859 

119.2 

Tear  1851 

93.1 

"     1860 

125.4 

«     1852 

94.3 

"     1861 

125.7 

'*     1853 

11S.9 

"     1862 

125.4 

«     1854 

125.8 

•*     1863 

122.2 

<«     ig55 

132  2 

"     1856 

134.2 

Decade  1854-1863 

126.4 

1  Hamburger  Waarenpreise,  1851-1863,  nod  die  califomisch-auatraliflcheii 
Goldendeckniigen  seit  1848,  in  the  Jahrbticher  fiir  Nationalokonomie  nnd  Statistik, 
m.  (old  series),  1864,  pp.  81-118,  209-236. 


8                i                i                1                1                 8 

■ 

; 

1 

1 

! 

D 

/ 

71 

3S 

\ 

I 

no 
m 

^ 

% 

--< 

m 

iXs 

o 

! 

1 

^ 

a> 

1 

1 

j 

.   ^^^ 



, — -^ 

I 

1 



/ 

1 

/ 

\ 

1 

\ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

M  \  \ 

^ 

^^H 

^S^^^^^^^^^^^^^^^^^^^^^^^^H^^^^M^^^^^^^H 

r 

TABLES  OF  PRICES                                 191 

tti 

m 

c«/ 

(4) 

0J 

UmatUmptrn^ 

0IWWI-LI4, 

COEir>d'l  fjrmpii  <if 

LFUx 

l-fltt 

%  Rum 

A.Bic« 

Z  lUce 

1.  Bin. 

LRice(l> 

LBloeCa) 

4.  Cotton 

3.  Galtoo 

%.  Cottoa 

2.  Cotlm  (2) 

2.  Cofctou  {4) 

6.  IiCv4rocd 

OlAbDinHU 

C  Almodwi* 

7.  Wool 

3.  W<»1 

a.  Wool  (4) 

8.i™i(pif) 
9.  Tu 

5.  Iron  (pig) 

6,  Te* 

4.  Ifta  (pig) 

Jg«^^,(4, 

4.Inmtptg)C2) 

10.  Coffee  (Bio) 

11,  Biigv  (n«) 

7.  Coffw  (RJo) 

B.  eoff«  (Biol 
0.  8u|tu  ^nwj 
7.  6ii«w  (reflnfld) 

&OoSBeCBioV(l) 
a8Q«Br(rair)(|) 

BCofleeiBio)^) 

«.  Bogmr  (rm»> 

12.  aofu-  (rflfloM) 
13.C«Cfmkiii 

9.  CAlfiklia 

14  Currmnt* 

10.  Cwnott 

m.  Berop 

11.  Hemp 

&Hamp 

IBempH) 

liWlsdigo 

12.  iDdJgO 

7.  IhdlfoiS) 

IT.  TDbue« 

9.  TolMoeotKf.) 

18.Bodii 

1>.  Fapp«r 

13.  ^ppeT 

10.  Pbpfwr 

8.  Pepper  (1) 

7.  Fepp*r(2j 

20.  HsTTing 

11  HeiTlug 

11.  HefTbif 

21.  CmJ 

15  Coal  ^  Coke 

12.  Go^ 

aOoil(IP) 

23.  Copper 
23,  TkUow 

16,  Copper 

17.  Tifiow 

13.  Copper 

10.Copt«r(4> 

a  Copper  m 

ai  Floor 

14.  Flour 

9.  FlcMirU) 

2fi^Leia 

laLead 

t&.hm4 

U.tvd(4> 

10.  LemA  (5J 

11.  B*pei*dOU(3> 

2e  fUpAHiflM  Otl 

27.  auie^wed 
2&Hi£. 

20.  JUpiMad 

39.  Clorer-eeed 

21.  CloTBMeed 

me^jipein 

22.  giJtpetn 

1Z8ft]tpetre($) 

Stain  ' 
35.  T4r 

23^  Zliic  (onsde) 

17.  21iw  (onidc} 

mzascicToiteX^) 

12.ZIisc(cnideK3y 

a&CJiewe               1 

S7.  Bottvr 

M.  Butter 

S8.  ft*i*fa* 

41.  Wl»»t 

2£.  Rje 

ii.Bj« 

14.  Ej.  m 

11.  By*  (5) 

27,  Wh«e 

19.  WlMstt 

15.  WlM»t  <6 

16.  Barkr  (C} 

17.  Tin  (4) 

14.  Wheftt  (1) 

43,  Buli^ 

2&.  BAtlftf 

aa.  Barlej 

15.  EMloyU) 
10.  Tin  iS] 

43,  Ha 

29.  TiD 

21.1111 

44Goc<P« 

30.  Coc«* 

18.  Goco»  m 

M,  Wl» 

47.C0ff«{Jmn) 
iS.  Oolfee  (Donua- 

Sl.iMa 

22.  (M** 

19.  0«ta(6) 

17.  OiU(0 

23.  OoffM  (C^totD) 

lg,Coit«{Pliiiti. 

t*<m)(3J 

r») 

32.  CocmOQ 

33.rwmcm 

aOiBiiImOilCS) 

35.  Silk 

24.BiUt 

21.  Bilk  (2> 

19.BQk(4> 

^^UJ 

36.  Hopfl 

^^^^H 

37.  Linked  00 

^^■. 

3«.  Bri-*a« 

^H, 

39.  HofAdliAir 

40.  W« 

■ 

41,  Tj»ln  Oil 
4S.Lud 

22.1^^11  CHI  (^) 

4S,Qiiiekrilrer 

^^^M* 

44.Bternm 

4A.  Cotton  Tijn 

{^JTwop»l» 

«&.  Woollen    ud 

hAlf-wooUen 

Ymb 

47.  lioati  Tmni 

2f7.  lififli  Yam 
as.  Rye  Flour 
29  Potato  Whiiker 
3a  TotMcco(Bruif) 

aO.  Rjre  Flour  (1) 
21.  Pot*tcp  WhiBn 

key  (2) 

31.  Ct^Sco 

92.  Petrolemn 

33.  CkJin 

22.Coro<l) 

1 

192 


THE  PRINCIPLES  OF  MONEY 


PAASCHE 
X 

TABLE  L 


18«7-417. 

1868. 

1869. 

1870. 

1871. 

1872 

1888^. 

1 

Coffee  (Rio) 

100 

90 

94 

100 

116 

149 

109 

2 

Cocoa 

100 

99 

96 

97 

102 

lis 

101 

3 

4 

Tea 

too 

100 

111 

100 

101 
114 

91 
101 

90 
110 

97 
112 

98 
107 

Sugar  (raw  Brazil)      .    .    . 

5 

CorraotB  (dried) 

100 

60 

63 

89 

90 

89 

78 

6 

RaisiDt 

100 

94 

83 

108 

100 

96 

96 

7 

Almooda 

100 

119 

111 

116 

107 

94 

109 

8 

Pepper 

100 

73 

114 

131 

149 

178 

129 

9 

CocoaoQ 

100 

117 

97 

92 

96 

89 

82 

10 

Palmoa 

100 

112 

113 

108 

140 

104 

98 

11 

lodigo 

100 

131 

144 

146 

136 

1S5 

115 

12 

Mahogany  wood      .... 

100 

65 

61 

91 

84 

111 

138 

13 

Cotton 

100 

97 

120 

108 

92 

104 

82 

14 
15 
16 

8ilk 

100 
100 
100 

139 
137 
105 

134 
132 
109 

123 
124 

97 

123 
107 
112 

135 
105 
107 

104 
ISO 
121 

Flax 

Hemp 

17 
18 

Kice 

100 
100 

88 
126 

72 
96 

82 
92 

84 
109 

86 
114 

106 
107 

Wheat 

19 
20 

Rye 

100 
100 

134 
130 

112 
128 

100 
100 

120 
114 

101 
136 

lis 

122 

Barlej 

21 
22 

Oats. 

100 
100 

118 
95 

113 
84 

94 
95 

100 
147 

96 
143 

104 

Hops 

113     \ 

23 

100 

114 

98 

114 

ISO 

121 

115 

24 

100 

91 

104 

116 

122 

106 

108 

25 

Rape-seed  oil 

100 

83 

88 

112 

102 

94 

96 

26 

Linseedoil 

100 

100 

93 

97 

101 

104 

99 

27 

Calf-skin 

100 

118 

114 

114 

122 

137 

121 

28 

Bristles 

100 

92 

96 

120 

123 

159 

118 

29 

Horsehair 

100 

110 

131 

122 

162 

135 

13i 

30 

Wax 

100 

102 

108 

103 

106 

110 

106 

31 

Tallow 

100 

97 

97 

96 

95 

94 

96 

32 

Train  oU 

100 

92 

94 

102 

93 

96 

185 

33 

Bntter 

100 

120 

128 

125 

124 

127 

106 

34 
35 

Lard 

100 
100 

117 
115 

122 
96 

118 
96 

96 
112 

76 
109 

95 

Herring 

106 

36 

Pig  iron 

100 

90 

89 

94 

97 

169 

108 

37 

Pie  zinc 

100 

101 

104 

98 

90 

116 

102 

38 
39 

Tin 

100 
100 

88 
84 

111 
85 

118 

82 

127 
85 

143 
103 

117 

Copper 

Lea< 

88 

40 

100 

99 

97 

100 

95 

131 

104 

41 

Quicksilver 

100 

88 

94 

104 

127 

152 

lis 

42 

Coal  and  coke 

100 

97 

93 

93 

97 

138 

104 

43 

Saltpetre 

100 

85 

106 

no 

109 

104 

103 

44 

Bar  iron  (Engl.)      .... 

100 

88 

88 

92 

104 

141 

103 

45 

Cotton  yarn         

100 

114 

137 

125 

124 

125 

125 

46 

Woollen  &  half-woollen  jam 

100 

102 

95 

88 

106 

119 

10! 

47 

Linen  yarn 

100 

98 

85 

84 

87 

107 

9S 

TABLES  OF  PRICES  198 

The  work  of  LaspeyieB  was  continaed  to  1872  by  H. 
Paasche,  in  the  JahrbUeher  far  Ndtionaldkonomie  und  Sta- 
tittikr  XXIII,  1874^  pp.  168-178y  who  used  the  same  sources. 
The  forty-seven  articles,  however,  chosen  by  Paasche  are  not 
the  same  as  those  used  by  Laspeyres,  as  may  be  seen  in  column 
two  of  the  joint  table  already  given,  sixteen  commodities  not 
being  in  botii  lists.  Only  those  are  included  which  Paasche 
legarded  as  of  importance  in  general  consumption,  those 
whose  quotations  were  satis&ctory,  and  those  whose  quality 
changed  least. 

The  average  prices  of  the  twenty-one  years  from  1847 
to  1867  were  taken  as  100.  Table  I  (page  192)  was  com- 
puted by  the  unweighted,  arithmetical  average. 

Then  a  system  of  weighting  was  tried.  He  took  the  quan- 
tity consumed  in  the  later  of  two  periods  under  consideration, 
and  multiplied  this  quantity  by  the  price  in  the  first  period; 
then  compared  this  result  with  the  same  quantity  multiplied 

by  the  price  in  the  second  period,  ^ — ~  (Drobisch  wished 

to  compare  the  quantity  consumed  in  the  first  period  multi- 
plied by  the  price  of  the  first  period,  with  the  quantity 
coDsmned  in  the  second  period  multiplied  by  the  price  of 

the  second  period,  ^ — ^).    Paasche  found   he  could  get 

such  data  for  only  a  limited  number  of  commodities  (colonial 
wares,  sugar,  mineral  and  mining  products,  grains,  indigo, 
saltpetre,  train  oil,  and  palm  oil),  or  about  twenty -two  in  all. 
Their  total  value  was  about  one-third  of  the  total  imports. 
The  twenty-two  articles  were  arranged  in  the  following 
groups: 

L,  coffee,  cocoa,  tea,  pepper,  rice,  sugar;  II.,  cotton,  silk; 
IIL,  indigo,  saltpetre,  train  oil,  palm  oil;  IV.,  pig  iron,  zinc, 
tin, copper,  lead;  V.,  coal;  YI.^  wheat,  rye,  barley,  oats. 

The  result  of  this  method  was  as  follows : 


194 


THE  FBtNCIPLES  OP  MONEY 


OnwpL 

l8*7-eT. 

laea. 

wm. 

IflO. 

lOTl, 

ISWL 

imB^n,  1 

L  ,    ,    .    . 

100 

94.5 

102.2 

104.0 

110.30 

125.6 

106.77 

n.  ,  .  .  . 

100 

107.0 

125.0 

tlO.3 

100.60 

1U.2 

113.05 

m.  ,  .  ,  , 

100 

U9.5 

126.6 

133.1 

128.20 

105.4 

118.50 

IV 

100 

91.3 

90.5 

93.6 

96.02 

152.6 

105.00 

V 

100 

97.0 

9S0 

93.0 

97.00 

138.0 

104.00 

V7 

100 

127.8 

110.9 

95.3 

112.00 

107.0 

110.40 

8nM ,    ,    i    . 

100 

118.5 

107.7 

98.0 

103.00 

116.6 

109*17 

Tb^mrithmetic 

ojean  of  the 

price  ratios 

wit  hoot  refer- 

ence to  quan- 

tities gire  ft 

riee  of 

100:104 

100:106 

100 r 103 

100:109 

100^121 

100:108.1 

1847-67  =  100. 

I 


R.  VAN  DER  BORGHT 
XI 
R.  van  der  Borghtj  in  the  Jahrhueher  fUr  NatiofuiUkonmnU^ 
und  Smutik,  XXXIX  (new  Beiies  5),  1882,  pp.  177*185, 
continued  the  work  of  Paa»ehe»  using  the  same  twenty-two 
article,  in  the  same  groups,  employing  the  same  methodB, 
and  extending  the  tables  to  1880.  Hie  results,  incorporating 
those  of  Paaschef  are  as  follows :  ■ 


Tew. 

Weighted 

Ind»x  NuQil>«r 

According  tu 

QuMtJty. 

4rithmiitlc*l 

T«ff. 

WeEgbt«d 
|Dd«^  Kiuobsr 
■ceoMluf  to 

Aritbiutii*! 

1647-67 
1666 
1669 
1870 
1671 
1872 

1873         , 
1874 

100.00 
118.50 
107.70 

98.00 
108.00 
116.60 
120.13 

114.12 

100 
104 
106 
103 

109 
121 

124 
113 

1875 

1876 
1877 

ia7s 

1B79 
1880 

103.22 
102.94 
104.08 

92.06 
90.35 
96.88 

106 
106 

105 
96 
98 
87 

186B-S0 

105.85 

106 

AlsOf  he  compared  the  prices  of  1868-1872,  and  each  suc- 
ceeding period  of  three  years,  with  those  of  1847-1867  as 
a  base  (or  100) ;  and,  again,  taking  1847-1875  as  a  base,  he 
calculated  the  consumption  of  1880  at  the  average  prices  of 
1876-1880,     The  results  are  as  foUows : 


TABLES  OF  PBICE8 


195 


Tmt. 

WtMited 
IndttHoabtr. 

Bimpla 
AritlmMkHMl 

1847-67 
186»-72 
1872-74 
1875-77 
1878-80 

100.00 
109.17 
117.21 
110.17 
93.76 

100.00 
108.10 
119.00 
106.00 
94.00 

1847-75 
1880 

100.00 
94.62 

100.00 
95.67 

The  coirespondence  in  the  outcome  of  both  weighted  and 
unweighted  methods  is  striking  confirmation  of  what  has 
already  been  said  on  that  point.  In  Diagram  X,  where 
Conrad's  one  hundred  and  sixiy-three  articles  are  intro- 
daced  in  contrast  with  the  weighted  average  for  twenty- 
two  articles,  the  correspondence  very  properly  disappeared; 
because  the  influence  of  a  large  number  of  quotations  might, 
while  otherwise  similar,  give  a  different  general  level  of 
prices  than  that  obtained  by  a  small  list. 

CONRAD 

xn 

Professor  J.  Conrad   has  added   to  the  work  of   those 

just  mentioned  by  studies  published  in  the  Jahrbiicher  fUr 

NationcU&konomie  und  Statutik,  XV,  N.  F.,  1887,  pp.  822-831, 

XVII,  III  F.,  1899,  pp.  642-660,  and  XIX,  III  F^  1900, 

pp.  525-589.    Using  the  Hamburg  sources,  he  first  gave  a 

^ble  of  prices  in  marks  per  centner  for  each  of  forty-seven 

Articles  (as  given  in  column  2  of  the  joint  table,  p.  191, 

the  same  as  that  used  by  Paasche)  for  the  following  periods 

(see  XIX,  pp.  526-527) :  1847^0, 1851-60, 1861-70, 1847-70, 

1871-80, 1881-90, 1891-95, 1896, 1897, 1898 ;  but  no  general 

ii^ex  numbers  were  computed  for  the  list  as  a  whole.    After 

i^^ving  given  these  separate  prices,  he  reduced  the  relative 

Percentages  of  each  price  to  the  average  of  1847-70  as  100, 

for  the  following  periods:  1871-80,  1881-90, 1891-95, 1896, 


196 


THE  PBINCIFLES  OF  MONET 


g 

& 

s 

s 

1 

3 

i 

IS 

00 

7 

i 

2 

1 

»4 

?3 


s 


I 


^ 
s 


li 


;:SS  ,9SSS;SSSS8S  ,  ,ss;s3;;s, 

S'eood  I0ttet^0tioo«>c6co  I    la»'^e6Vei6  I 
e»  ^      lO  1^  t«  r*  lO  tf>  r*  r*  9  t^  toiataiat* 

•-*  A  t«      M  Op  n  lO  r*  M  0t  00  O  AQ»t«0«O9 

gg!g  '!8S885iggS  '  'g^SSiSS' 

8^SSSSSSS8.SSSS^^SSS2SSS 

8S«t«SSrZaoSt^SS<oi^SS«i«SS88 

^;iSS^SS3Sr:^=8SSSSs;;S;3S 
"a^S28g?g^sa22SS88is5?8 

«^0ttooet<oe««>p-««<ipp0>e9««>o9ooiee^«ii 
aoioiAeotoao0»«o^r«SAi^O«oio»iO0»O»«io 

S^Ss;S;:3S3S3;^S8S'Si3S8Si;^S 

^aotp^-^-^r»o«p;^,  OMeoooaocor^t^O^Mt* 

OkO4<0«<iQOaOO-*<oSaOl»tO«OaO<0<0tDO)«O 

-•»n^ao9»tor«<<ieoetp<0«'O»««o»r2O^9«2S 
o>cotoaoaoo»^»^i^aooootoaDOaDi^aoo»OC»i« 

eoeoro<oe  —  ^•ftcOK)^<otpMt«-««ao«po»t«'« 
iAp-aooaoo>«««<iooo^o»aoooo»aoOOOiOn 

g    .    .^  ....:=..  ^ 

lis  III  B  lil'tll-  S  i  si  tiaS* 


*    |Wi^«    j   Mr-»^    I   B^apoi    .  c^C^iAt^vii^'^SO        (Dirt 
0309   \  wtiok    leir^Q    lr-:«iiA    li^c4iNit^iQ,-»«ifi      ^m 


S'q   |flD»(H    le>r>0    lr-:«iii- 
t^       Aillt^       A^A       ^Or- 


10  —  «*if»       ^  m 

i>.  4Q  t^  O.         00 


n-«      ^cO^      toiHtto      '-^rfs      0>O0i0>-¥oo9(P      meg 
Win    |0"P3    jinrji--    .^voir^    .iv-ie^cod&oc^kO       Oie 


9:4      iei»'#      o«o^      3fP» 

n  ^     ilOi|->CP     lOr-^C^     |V^«^     tvgvrt'vr^ 

91^       (DA^       intfi<^       ixdfi-*      r^4o4>«9}t&0DdS       w^ 


«i^i0i0^»iV^tetf^QOcca^rocQaokrtaj»f^i&i>--<d  wO 

e^acit^ccS<iP>^4vtf>t^t^ma&ioaOm-»Oi»(£t-i-^  *C^ 

ebr^tiPiOtn9Qi|?|4f)if)r>*r^st^tf>iAOit^»?iwtoi»  <c« 

KO^A0»QD9^QCdt<3Dv79io6(Dr->nr-i/)^^a^ioe4t^  4D^ 

K  -^  ^  C4  «4  irt  00  Q  6  ^  «4  ^  (S  q&  ^  -^  d  r^  t^  l;->^  t^  A  43  10  9 

r3Q*^ind^JAe>^wa;^^AH^a5t^H^^d^^'tc^'i0  ^d  ei 

t^dr-^^ic^c^i^d^dcnr-trta!i-4'ii^cca)e<^t^e4d'cd  -^^n 

OaDe0t^p9l™Qkl^>p^P^9ii7>WI'^C^O^tOVI^^U}  'T*'^ 

i«)r4irtd«9ifl^«JgJd!^w-«ii^pi^»^mgjtcco*n  *-^d 

*wm!aDQAOiAiOi^(^acic?q0'(7«^^^aQ^04OQ»  —  ^  0« 

ilyii||ilii|ii.hli|-|i|lj 


3 


3 


I- 

■r 
a 

I 


^ 


^ 


35  g 

111 


198 


THE  PRINCIPLES  OF  MONEY 


1897y  1898.  Here  again  no  general  index  numbers  weiQ 
given  which  could  be  reproduced  here.  There  are  no  meana 
of  getting  comparisons  £rom  year  to  year,  as  a  whole,  in  this 
table  of  separate  prices. 

The  same  twenty-two  articles  chosen  by  Paasche  and  VaA 
der  Borght  (see  joint  list  p.  191,  column  4)  were  used  by 
Conrad  in  the  same  groups  in  a  table  extended  to  1898. 
These  index  numbers  were  obtained  by  weighting  each  reL&- 
tire  price  according  to  the  quantity  consumed  (in  Germany^^ 
in  1880  (see  p.  645,  XIX,  1900).    For  comparison,  Conia^i 
giv^  an  index  number  computed  by  the  arithmetic  mean  fox 
one  hundred  and  sixty-three  articles  imported  at  Hamburg*. 
The  number  of   articles  quoted   in  the  Hamburg  records 
fell  from  three  hundred  and  twenty  to  one  hundred  aixd 
sixty-three,  in  1888,  when  Hamburg  entered  the  Germaui 
**  Zollverband,"  since  only  those  articles  passed  through  tt^ 
customs-house  which  came  in  by  sea.    There  are  some  strid- 
ing discrepancies  ^  in  the  percentages  of  his  Table  I  c.  (p.  52S, 
Vol.  XIX)  as    compared  with  earlier  tables,  but  I  gi^ve 
Conrad's  latest  figures,  as  follows: 


Awaga  of  IMT-ino  M 100. 

AT«ac«ofl8n-ia80Ml00. 

/ 

Tem. 

Weiglitad 

AvanMof  22 

ArSdas. 

Arifhinetiu  Mmu 

of  163  HunbarK 

ArtiolM. 

Weighted 

ATon«ol22 

AittdM. 

ArlthiiMtio  Men 

oClGSHambuig 

Aitldee. 

f 

1881-85 
1886 
1887 
1888 
1889 
1890 

1886-90 
1891 

1891-95 
1893 
1894 
1895 
1896 
1897 
1898 

84.66 
70.73 
66.27 
64.05 
70.43 
77.01 
70.19 
86.45 
71.08 
67.78 
60.70 
59.51 
59.09 
62.22 
66.18 

83.98 
75.43 
75.57 
70.48 
74.79 
74.83 
74.25 
74.19 
88.28 
89.42 
84.32 
84.40 
80.55 
83.10 
81.64 

81.83 
68.66 
64.33 
62.17 
68.38 
74.76 
67.88 
83.93 
68.74 
65.55 
58.71 
57.55 
57.14 
60.17 
64.01 

87.30 
73.38 
73.52 
68.57 
72.76 
72.80 
83.36 
70.61 
82.00 
83.06 
78.35 
78.40 
74.86 
77.19 
75.84 

1  Cf.  p.  529,  XIX,  1900,  with  p.  329,  XV,  1887,  for  ditcrapandeB. 


1609 

IfiTO 

187? 

1^72 

1B73 

1674 

1875 

1B70  1 

1877 

li7B 

1870 

1BS0 

1881 

1882 

1883 

1884 

1885 

18ec 

1887 

;B8B 

1089 

^890 

1B5J1 

"1893 

1803 

1894 

18^5 

1898 

1897 

t             t     ;:'"     i              §              8              i 

* 

bN 

\^A 

>^- 

3^ 

.'■.:■•' 

^^ 

-^ 

\^ 

-^ 

^ 

^^ 

k^ 

! 

*  ^ 

'*■..'- 

* 
*••; 

71^^ 

^; 

• 

I 

. 

■- 

*»c 

» 

-t 

** 
*- 

_> 

■■ 

4 

• 

4 
* 

r^ 

=**^ 

1 

■-?-, 

r 

f. 

1 

p 



A 

1 

^ 

^ 

*,/ 

^l^ 

5*»*- 

Ij 

■ 

*     m* 

• 

•/ 

\ 

11 

1 

•  * 

>c--*' 

^ 

1 

V 

^ 

1 

T 

m 

> 

X 

1* 

1 

>     «a 

1    ** 

1 

>4 

St 

"^ 

V'' 

ii 

1 

s 
3- 

i 

30, 

y 

/ 

j 

B 

/ 

,^" 

1 

\ 

\ 

V 

-1 

1*1 

^S, 

CI 

O 

D 

m 

^ 

9 

[5 

.-'*^ 

""^ 

,-.-' 

L'''" 

^, 

-->., 

o 

-1 
o 

m 

^.l,--'^ 

. 

K 

& 

I 

/ 

O  ' 

JD 
d 
P 

at 

/ 

/ 

5 

ki 

\, 

s. 

8" 

/ 

> 

k 

/ 

\ 

\ 

\ 

\ 

\ 

v 

L,_a 

/ 

m9j^ 

\       \'    ^ 

\ 

\ 

\ 

_\ 

\ 

!s 

TABLES  OF  PRICES 


199 


Also,  taking  1847-1867  as  100,  the  weighted  averse  for 
1871-1880  of  the  twenty-two  articles  is  110.68  as  against 
104.00,  the  simple  average  of  three  hundred  and  eighteen 
Hamburg  articles.^ 

Nowhere  does  Conrad  give  an  index  number  for  the  years 
aeparately  from  1880  to  1893,  even  for  the  twenty-two  articles 
continued  from  Van  der  Borght,  nor  does  he  use  the  same  base 
^  100.  He  thus  furnishes  no  record  of  the  yearly  price  move- 
ment from  1868  to  1899.  He  is  chiefly  interested  in  showing 
the  changes  between  different  periods  as  a  whole. 

In  addition,  £rom  Imperial  German  statistics,  Conrad  gave 
a  table  of  thirty-three  articles,  whose  relative  prices^  are  as 
follows,  computed  by  the  arithmetical  mean : 


Twr. 

Awaga  of  1879-88  M 100. 

Awaga  of  1879-06  M 100. 

/                1884-88 

91.73 

1                 1889-93 

95.14 

91.52 

/                 1894-98 

79.4S 

83.44 

f                     1896 

78.87 

81.82 

1                     1897 

78.78 

82.65 

1                     1898 

80.13 

84.04 

1                      1899 

90.55 

99.60 

Finally,  choosing  another  list  of  twenty-two  commodities 
[see  column  5  in  joint  table),  he  gave  the  arithmetical  mean  as 
follows : 


Tom. 

1879-83 

MlOO. 

1879-88 

MlOO. 

1884-89 
1889-93 
1894-98 
1896 
1897 
1898 
1899 

92.34 
96.65 
80.52 
80.17 
79.59 
80.12 
90.99 

101.26 
84.35 
83.99 
83.23 
83.79 
99.53 

^  Thete  il(piiw,  and  those  abore  for  1886,  1887,  1888,  1889,  1890,  and  1891, 
imre  been  taken  from  Falkner'a  material,  Aldrich  Report,  I,  pp.  300-301. 

*  The  tables  of  1900  and  1899  do  not  agree.    The  latest  bare  been  taken 


200 


TH£  PRINCIPLES  OF  MONEY 


The  general  result  of  the  combined  work  of  Paasche,  Van 
der  Borght,  and  Conrad  is  shown,  so  &r  as  it  can  be  done 
with  the  figures,  in  Diagram  X.  When  only  an  average 
is  given  for  a  period  of  years,  the  line  is  parallel  to  the  base, 
and  does  not  show  the  actual  fluctuations  in  each  year. 


KRAL 
XIII 

Franz  Kral,  in  his  Geldtvert  und  PreMewegung  im  deuUehm 
Reiehe  (1877),  has  given  the  Hamburg  prices  of  two  hundred 
and  sixty-five  articles  from  1846-1850  to  1884,  taking  1871 
as  100.  The  method  of  the  Eeonomist*9  table  was  used. 
The  following  results  have  been  reduced  to  a  percentage 
by  Falkner:* 


Htif 

Taan. 

IS 

Food. 

Animal 
Food. 

Tdtel 
Food. 

Tiriilo 
Laza. 
liei. 

•ST 

Modi, 
oiaes. 

Rftw 
lUto- 

liAb. 

Prod- 
noUof 

tUTM. 

taML 

^7T 

Frieea. 

(M) 

(8) 

(29) 

(W) 

(5) 

(W2) 

(7) 

(14) 

(265) 

1845-50 

81.22 

82.85 

81.67 

80.84 

89.58 

94  24 

92.75 

122.90 

91.38 

1851-55 

97.24 

82.72 

93.23 

96.92 

99.00 

100.08 

97.40 

128.99 

99.95 

1856-60 

96.58 

93.17 

95.64 

107.42 

96.13 

104.07 

107.33 

120.69 

104.39 

1861-65 

89.89 

87.13 

89.13 

99.76 

112.06 

88.74 

108.99 

112.12 

95.42 

1866-70 

101.39 

98.97 

100.73 

95.90 

106.44 

100.48 

99.42 

105.20 

100.47 

1871 

100.00 

100.00 

100.00 

100.00 

100.00 

100.00 

100.00 

100.00 

100.00 

1872 

100.27 

98.78 

99.86 

110.70 

99.39 

110.30 

119.69 

107.66 

108.82 

1873 

101.51 

107.21 

103.10 

117.35 

98.72 

113.23 

125.85 

116.66 

112.85 

1874 

107.10 

116.61 

109.73 

122  96 

108.05 

108.92 

109.07 

110.04 

112.14 

1875 

100.96 

116.36 

105.21 

114.91 

104.67 

107.13 

103.03 

112.02 

108.54 

1876 

100.09 

116.36 

104.58 

111.03 

95.86 

102.94 

9442 

108.68 

104.33 

1877 

101.85 

108.16 

103.59 

113.34 

97.06 

97.97 

88.00 

100.66 

101.60 

1878 

96.92 

96.25 

96.73 

111.07 

89.02 

95.14 

86.12 

96.87 

98.09 

1879 

97.28 

98.57 

97.63 

109.57 

91.45 

91.04 

77.98 

94.03 

95.43 

1880 

101.24 

115^9 

105.14 

112.53 

89.56 

94.73 

78.23 

99.26 

98.91 

1881 

103.03 

13800 

112.68 

110.36 

94.49 

92.77 

78.88 

96.12 

98.48 

1882 

100.01 

122.77 

106.29 

103.50 

91.46 

94.50 

77.62 

98.19 

96.95 

1883 

93.93 

123.13 

101.99 

101.53 

87.14 

92.65 

77.79 

101.75 

95.00 

1884 

86.83 

112.09 

93.80 

94.34 

91.61 

88.56 

78.61 

96.99 

90.57 

i 

1  Aldrich  Report,  I,  p.  296. 


s 

S        I 

1     i 

1* 

s 

o 

8 

' 

s 

o 

--?^ 

S 

9>^ 

i 

O 

J 

.1 

> 

^  ^ 

1 

>  ^ 

^ 

^ 

. 

i 

1 

» 

• 

—I  ^ 

1 

^,.;::<5?=^f^^ 

XX^ 

■ 

3  : 

o' 

B 

\ 

;  ■ 

> 

1 

OOlB>     ^ 

II  I 

-1   ri      — 
m   <~      ra 

Jf 

^. 

^ 

^ 

1 

c 

1       C 

A 

|qi 

r 

> 

L- 

J 

' 

P**^s^o 

\.  ^ 

Srl- 

^- 

'^y' 

O 

^ 

n 

J 

1 

y 

^ 

--^^ 

jr- 

^ 

V 

D^^ 

"■^>^, 

>-, 

s 

,," 

m^ 

j^/^A 

^ 

^ 

?/ 

\^^ 

I     I     \     ' 

^ 

J. 

/ 

7 

-/ 

°  / 

\ 

\         1 

■    ■'    \   \  ^ 

TABLES  OF  PRICES 


201 


SOETBEEE 


XIV 

From  Hamburg  quotations^  Dr.  A.  Soetbeer,  m  his  Mate^ 
rialien  zur  JBrldut^rung  und  Benrtheilur^  der  mrihschift- 
lichen  EdelmetaUmrhdltniMse  und  der  Wahrungsfrage  (2d  ed*, 
1886),  collected  one  of  the  most  important  tables  of  prices  in 
recent  times,  beginning  in  1847,  The  source  of  nearly  one 
hundred  l^iug  articles  was  the  HanddmtatuehMM  Bureau 
at  Hamburg;  a  few  others,  such  as  potatoes,  butter,  meat, 
etc.,  from  the  Jaknmbrecknunffen  ffamburffucher  Verwalt^ 
ungen;  and  fourteen  articles  of  British  manufacture,  from 
the  official  Trade  Reports  of  Great  Britain,  —  in  all  one  hun- 
dred and  fourteen  commodities.  From  the  Hamburg  Bureau, 
the  total  quantity  and  total  value  of  each  article  imported 
were  obtained,  and  the  average  price  was  computed  by  a 
simple  arithmetical  process. 

The  weight  and  kind  of  each  article  imported  into  Ham- 
burg, and  the  price  of  each  on  the  Hamburg  exchange  on  the 
day  of  importation^  were  recorded  by  the  Bureau  of  Trade 
Statistics,  From  the  total  quantity  and  total  value  of  each 
commodity  for  the  year,  the  annual  average  was  obtaiiied  by 
the  simple  arithmetical  process.  The  statistical  records  do 
not  exist  previous  to  1847 ;  but  from  that  date  to  1888  they 
cover  over  three  hundred  articles,  during  the  period  when 
Hamburg  was  a  free  port.  In  1888  Hamburg  entered  the 
German  Customs  Union ;  and  since  then  only  those  articles 
entering  by  sea  are  subjected  to  inspection  and  record  in  the 
Statistical  Bureau  -  for  goods  arriving  by  land  quotations  in 
the  former  method  have  not  since  been  kept.  Hence  the 
material  for  a  perfect  continuance  of  Dr.  Soetbeer^s  table 
since  1888  is  not  obtainable.  The  addition  of  the  period, 
1886^1890,  was  made  by  Soetbeer  in  the  Jakr.  filr  Nat,  ii, 
Stai,,  III  F.,  B.  m  (1892),  pp,  588-696,i 


1  For  1891,  M«  AHricli  Repon,  I,  p.  358. 


^k«k    m 

P^BS 

m 

m 

H 

^^^^   202 

THE 

PRINCrPLES  OF 

MONEY 

^ 

SoiTaasM'i  Taulv  of  Rkli^tiyx  Fkicks. 

^ 

18*7-1860=100. 

] 

TABLE  L 

1 

1. 

o. 

nt 

IV. 

T, 

TL 

TIL 

ruL 

a-rns.} 

Tmt. 

ciiltu- 

AgfJsat 

Tft.pl- 

Kut 
tDdl* 

«U3. 

T^Ttilfl 

MKt«- 

IMy«». 

BHUiH 
porta. 

Tcital  of 

114 
Artielm 

1847-1860 

ioo.oa 

100.00 

100.60 

100.09 

100.00 

100  00 

100.00 

100.09 

100.00 

1S51 

mm 

110.88 

90.60 

99M 

96.70 

104.38 

103.98 

97.9i 

lOLSI 

imt 

11071 

ioa*» 

95,33 

99.96 

96.76 

106.01 

96,60 

]ai.fl» 

Ilea 

18848 

114,94 

1M78 

116.28 

100.34 

101.43 

106.17 

160.61 

imw 

IW4 

150.40 

leijs 

112,91 

nan 

115.96 

11U&4 

119.44 

90.63 

mm 

1865 

168.82 

123ii4 

142.03 

121.02 

119.19 

103.68 

100.63 

98^ 

124.33 

iasi-i«S6 

m.flo 

U4,7B 

110.43 

110  97 

107.03 

105.20 

106.65 

98.47 

112.22 

isse 

na.c9 

127.61 

15696 

123,96 

n6.fi5 

100,0-2 

tOOJO 

90.09 

123.27 

1857 

138.11 

I40J6 

169.^ 

140.32 

124.58 

112.18 

108.01 

191.36 

130.11 

1§58 

lia.ft2 

127.02 

im69 

llii.76 

in©.(>4 

103.00 

99.70 

100.91 

113u63 

1859 

n&*{ 

130,69 

113^40 

lia74 

16a57 

104.69 

116.67 

i06.n 

116.34 

leeo 

m.75 

133.75 

130-36 

129.28 

108166 

108.74 

116.83 

UML69 

m,9S 

iflse-iseo 

191  .s« 

131.31 

134.73 

1^61 

11369 

107.12 

J08.il 

102,41 

120.91 

1861 

13146 

124J9 

122.08 

11719 

102.40 

110.86 

119.66 

10684 

118.10 

18fi2 

I26.8(t 

127  19 

113.93 

117.28 

161.88 

1^31 

166.99 

114.22 

i2a,fi5 

isea     1 

120  12 

124.12 

114.BT 

116.87 

102.92 

1G1.84 

161.38 

13145 

126.49 

1B64 

11TS9 

r^.2i 

10941 

126.74 

104.53 

164.26 

16159 

14i.» 

129.2S 

1566 

126w4S 

135.23 

114.01 

116-11 

98,^ 

117.80 

121.06 

137.80 

122.63 

1861-1866 

124.46 

128  21 

114,13 

118.64 

102.11 

131.83 

144.33 

127.66 

123.^ 

186e 

137.64 

135,64 

126,30 

117.90 

96.64 

134.M 

111.30 

140.38 

13S.® 

18«i7 

146.38 

iyi.68 

1^,44 

114,35 

93,28 

130.31 

106.13 

1^91 

134.44 

^^^H 

iae@ 

141.59 

133.48 

120.75 

116.75 

91.76 

127.18 

101.26 

137.56 

13199 

18£9 

132*40 

1^.26 

11Q.68 

122.10 

96.33 

130.62 

98.17 

128.15 

123.38 

mo 

m.23 

13S.33S 

118,57 

120.56 

^M 

122.87 

111,21 

t22.es 

122.87 

1886-1870 

137*74 

136,36 

121.54 

118.32 

96.47 

129.17 

106.90 

130.56 

123.6T 

ISTl 

144J6 

144.14 

122.90 

120,22 

101.86 

119.'23 

117.48 

122.64 

137.(S 

m-i 

144.17 

taB.n 

126  J6 

130.26 

131.63 

122.70 

128.64 

130.67 

135.62 

ms 

146^1 

156.72 

132.15 

1M.32 

140.00 

110.58 

110.14 

128.62 

13S.28 

m* 

150.99 

157.75 

146.02 

136.74 

116.70 

112.80 

112.31 

126.06 

136.» 

m& 

138,16 

158.59 

131.36 

13^.11 

107.40 

111.47 

98.74 

124.96 

I20.a6 

ISTl-imS 

144.90 

154.W 

131.50 

laoja 

116.90 

117.17 

114.98 

126w44 

133.29 

1876 

141.06 

156  79 

128.69 

129  74 

106.27 

105.54 

101 .7S 

119.23 

12A.33 

1817 

14Cl34 

16'2.51 

140.56 

130.29 

9R.87 

10(H35 

99.80 

114.04 

127  TO 

ms 

1^60 

141JS3 

134^ 

1*25.61 

94.14 

10'>.33 

97,-24 

111.03 

120,00 

lt|9 

132.92 

137.60 

139.10 

123.34 

84,28 

98.76 

90,21 

105,93 

117.10 

1880 

138.11 

147.30 

154.  G5 

mm 

88.33 

96.72 

95.23 

108.16 

121.89 

18T6-1880 

138.12 

146J6 

138.91 

126.38 

94.33 

102.33 

96.79 

111.70 

123  JI7 

IflSl 

meo 

151.21 

146  J^ 

122.60 

84.87 

99.29 

94.89 

105.08 

121.07 

1882 

138.45 

155JT 

maa 

122.47 

Bfi.99 

96.10 

99  10 

1M.72 

122.14 

1SS3 

1^.33 

156.40 

142.38 

120.17 

82.93 

96.93 

95, 3M 

10*73 

122,  »4 

1884           : 

123  85 

150.26  ; 

120  J  6 

in.99 

78,60 

97.02 

M.,^2 

1U3.36 

114.26 

1S86       1 

110.76 

140.45 

123,78 

110,39 

74.23 

96.89 

ai.a.'J 

100.48 

108.73 

1881-1885 

130.77 

150.65 

134.41 

119.91 

81.66 

96.65 

91.11 

103.28 

117.68 

1886 

101.31 

133.53 

122.44 

115  46 

70.52 

89.76 

78.76 

97.05 

103.99 

1887 

96,^28 

129.93 

mBJ 

116.09 

72150 

81.43 

77.30 

96.96 

102  02 

1888 

S8.1i 

11^  J7 

120,09 

116.41 

75.67 

8217 

74.31 

W.91 

103  M 

1889 

im,m 

tm06 

127^7 

118.82 

78  56 

89.06 

8fi.41 

9^.60 

106,13 

1899 

107,53 

129.85 

138.61 

11^35 

83,W 

81,92 

91.70 

91.90 

1W.I3 

1886-1890 

101.07 

130  54 

126.10 

117.32 

76.13 

84.86 

81.09 

^.88 

104.46 

18^ 

119.88 

131.06 

139.99 

113.56 

84.72 

mm 

ftsoe 

96,11 

109.19 

^M 

■ 

P 

WiiPiV 

■ 

^ 

^^^H 

^H 

■ 

1 

TABLES  OF  PRICES 

^^M 

^H 

V 

P 

SOETRKEH'S   FeICCB. 

^H 

^^1 

■ 

Eedaced  by  Falkner  *  to  i860  as  100. 

^^1 

■ 

^ 

p 

TABLE  IL 

^H 

L 

XL 

in* 

rr,         T* 

VI, 

vn. 

TUL 

r-vm. 

^H 

Twf, 

AalaiL 

Tropi- 

C4l,ftC. 

EMt 

iBdlft 
etc. 

Mlitftid 

T^a^ilfl 
Hale. 

fiAla 

Divert. 

BrtUib 

Totaof 

114 
AitJclet. 

H 

(30) 

(23) 

CD 

(19) 

(14) 

ay 

(10) 

W 

H 

IMl 

74.0 

82^6 

748 

83.1 

€8,1 

96,0 

89.0 

028 

82.8 

ina 

83.8 

ma 

79.2 

83.1 

88.1 

96.6 

81.4 

90,9 

84.1 

^^^^^^^1 

IffiS 

8a.8 

8ft.9 

ioa.7 

9&.a 

100.5 

93.3 

90.0 

95.3 

94.0 

^^^^^^^1 

ISM 

iiza 

0O.« 

9S.S 

98.2 

106.7 

102.7 

ioa.2 

913 

100.2 

^^^^^^^1 

ties 

ys.t 

92,4 

116.0 

100,6 

100.6 

95.3 

93.8 

98.1 

102.7 

^^^H 

ISSfi 

111.4 

9S.4 

1206 

103.1 

107.4 

92.0 

86.0 

S3L3 

10J.9 

^^^H 

1007 

ioa.3 

104.8 

140.7 

116.7 

114.7 

103.2 

02.5 

95.9 

107.5 

^^^^^^^H 

IBSi 

S»;7 

9&.0 

ioa.3 

aa;7 

100.3 

96.3 

85,3 

96.6 

99.8 

^^^^^^^H 

tsm 

8e.3 

97.7 

94.2 

96.2 

99.9 

96.3 

98.9 

100J 

96.2 

^^^^^^^M 

iseo 

100.0 

109.0 

100.0 

10O.O 

100.0 

100.0 

160.0 

10O4» 

100.0 

^^^M 

ISGt 

flS^ 

mM 

101.4 

97.4 

94.2 

101,9 

102.4 

100,2 

97.6 

^^^H 

lase 

M.S 

9Bl1 

M,7 

07.a 

98,8 

114.3 

134.4 

10§,2 

101.4 

^^^^^^^1 

1863 

eas 

n.a 

9E.S 

97.3 

94.7 

lfflj,6 

138.1 

128.4 

108,7 

^^^^^^^1 

ISGI 

ifl.1 

96.8 

60l9 

104  JS 

96.2 

141.9 

139-3 

138.8 

106.9 

^^^^^^^1 

lies 

M.8 

191.1 

9*7 

90.5 

91.0 

ioe,s 

103,6 

130.5 

101,4 

^^^H 

1«6« 

102.9 

101.4 

104.9 

98.0 

ms 

1?4.1 

05  3 

132  9 

101.0 

^^^H 

iflei 

109.4 

90.2 

105.1 

9&.1 

85.8 

119.8 

92.6 

r26.8 

ioa.9 

^^^^^^^1 

im 

10&.9 

99.8 

loo.a 

9TA 

84.4 

117.0 

86.7 

1208 

100.8 

^^^^^^^M 

i«e9 

99.0 

IffT.l 

90.0 

1015 

88,7 

120.0 

84.0 

121.4 

103.0 

^^^^^^^M 

wia 

Sft^l 

101.2 

mj^ 

100.2 

91.7 

113.0 

96.2 

116.2 

101.6 

^^^^^^^^^1 

isn 

10&2 

ior.8 

102.3 

100.0 

93,7 

109.6 

100.6 

iiai 

106.0 

^^^^^^^^^H 

1872 

i07.a 

UlkS 

1M.2 

108.3 

111.9 

1J2.9 

110.0 

123.2 

112,1 

^^^^^^^H 

isn 

i09.a 

117.2 

100.8 

lll.t 

129  4 

110.0 

102.0 

121.7 

114.3 

^^^^^^^H 

l«74 

iizt 

llB.0 

iao.5 

113.7 

107.4 

1^.7 

96,0 

1194 

IIZO 

^^^^^^^1 

lf76 

1Q3.3 

118,6 

109.1 

109,8 

98.9 

102.5 

843 

118.3 

107.3 

^^^H 

ISTfi 

106^ 

118.5 

106.9 

107.9 

Bf7.8 

97.1 

87.1 

112.9 

106.1 

^^^H 

IfiTT 

IIW.7 

IH.O 

ne.8 

I0«t3 

91.0 

99.0 

m.4 

108O 

106.6 

^^^^^^^1 

iSJ8 

m.i 

105.g 

iiue 

lOt.4 

8e.G 

94.1 

S3.2 

106.1 

99.7 

^^^^^^^1 

i»ra 

99.4 

10S.9 

n&.^ 

102.G 

77.0 

00.8 

77.2 

lOOJ 

86.8 

^^^^^^1 

i«dO 

10S.S 

110. 1 

12S.6 

103.3 

81.3 

88.9 

81.5 

102.4 

100.8 

^^^H 

1M1 

102,8 

lia.l 

121.8 

10V9 

78.1 

91.3 

81.2 

97  6 

100,1 

^^^H 

1992 

103.6 

llfi.O 

116.7 

101.8 

80.1 

87,5 

84,8 

99.2 

101.0 

^^^^^^^1 

1SB3 

107.3 

11&9 

lli.3 

99  9 

76.3 

68.2 

81.6 

99.2 

101.0 

^^^^^^^1 

16S4 

92,8 

112,3 

B0.8 

98.0 

72.4 

89.2 

72,6 

67.9 

94.4 

^^^^^^^1 

1806 

82^8 

106.0 

102.8 

96.8 

68.3 

8Bu2 

69.6 

95.2 

88.9 

^^^1 

1  IBM 

7ft,7 

99,8 

1017 

96.0 

64.9 

82.5 

e7.4 

91.9 

86.0 

^^^^1 

1887 

TC.0 

97.1 

101.2 

96.9 

66.7 

74.9 

66.3 

909 

84.3 

^^^^^^^H 

18S8 

73.4 

98.4 

99.8 

96.8 

69^ 

75.6 

63.6 

89.9 

84.3 

^^^^^^^M 

isa» 

78.3 

Bfr.9 

106.0 

98.8 

72.3 

819 

74.0 

91,5 

87.7 

^^^^^^^1 

18S0 

fiO.4 

97.1 

lUt.2 

99.2 

TOO 

76.3 

78.6 

89.9 

89.4 

^^^H 

1S91 

ms 

98.4 

116J 

94.4 

78.0 

73L9 

71S 

90il 

90.8 

^H 

1 

1 

1  Aldnch  Report,  I,  p.  295. 

J 

204  THE  PRINCIPLES  OF  MONEY 

Dr.  Soetbeer  used  the  simple  unweighted  arithmetical  aver- 
age. That  of  the  years  1847-1850  was  taken  as  100.  The 
articles  chosen  by  him  were : 

L,  wheat,  floor,  rye,  rye-meal,  oats,  barley,  malt,  buckwheat, 
peas,  white  beans,  potatoes,  hops,  clover  seed,  rape-seed,  rape- 
seed  oil,  linseed  oil,  oil-cake,  raw  sugar,  reQned  sugar,  spirits; 
IL,  beef,  veal,  matton,  pork,  milk,  batter,  cheese,  tallow,  lard, 
hides,  calf -skins,  leather,  horsehair,  bristles,  bed-feathers,  bones, 
baffalo  horns,  glae,  eggs,  herring,  dried  fish,  train  oil;  III., 
raisins,  currants,  almonds,  dried  prones,  olive  oil,  wine  (Frendi), 
champagne;  IV.,  coffee,  cocoa,  tea,  pepper,  allspice,  cassia 
bark,  rice,  sago,  arrack,  mm,  tobacco,  indigo,  cochineal,  log- 
wood, rosewood,  mahogany,  rattan,  palm  oil,  ivory ;  V.,  coal, 
iron  ore,  bar  iron,  steel,  lead,  zinc,  tin,  copper,  quicksilver, 
solphar,  saltpetre  (Chili),  salt,  lime,  cement;  VL,  cotton, 
wool,  flax,  hemp,  silk,  cordage,  rags;  VU.,  goano^  gum  elastic, 
gatta-percha,  resin,  pearl  ash,  pitch,  potash,  soda,  siearine 
candles,  tar,  wax;  Vlli.,  cotton  yam,  plain  piece-goods,  printed 
cotton  piece-goods,  cotton  stockings  and  socks,  sewing  thread, 
common  glass  bottles,  linen  yam,  plain  linen,  sail-cloth,  woollen 
and  worsted  yam,  woollen  cloth,  flannels,  worsteds,  carpets. 

HEINZ 
XV 

After  Dr.  Soetbeer's  death  (1892),  a  very  important  attempt 
was  made  by  the  Director  of  the  HandehstatUehe^BureaUy  Mr. 
Heinz,  in  view  of  the  changes  instituted  in  1888,  to  collect  the 
data  for  commodities  previous  to  1888  which  could  also  be 
quoted  after  1888.     By  examining  the  old  records,  articles 
imported  by  sea  were  separated  from  others,  and  a  list  of  one 
hundred  and  eighty  articles  was  formed,  the  quotations  of 
which  were  continued  from  1860  to  1891,  when  the  manu-^ 
script  figures  were  sent  to  Falkner  for  use  in  his  report^ 
The  importance  of  this  material  has  not  been  sufficientljr 
recognized.      Since   the    tables  comprise  actual  quotations, 
without  reduction  to   relative   percentages,  or  total  inde^ 

1  Aldrich  Report,  I,  pp.  338-373. 


TABLES  OF  PRICES  205 

numbeis,  they  await  the  computations  of  some  future  statifi- 
ticiaiL  The  list  contains  seventy  out  of  Soetbeer's  one  hun- 
dred and  fourteen  articles,  and  adds  one  hundred  and  ten  new 
quotations  not  included  in  Soetbeer*s  list 

PRUSSIAN  TABLES 

XVI 

The  Prussian  statistical  publications^  provide  a  carefully 
prepared  taUe  of  wholesale  prices — some  of  which  run  back 
to  1840 — for  seventeen  articles,  exclusively  food  products. 
The  quotations  are  furnished  from  as  many  as  one  hundred 
and  sixty-five  markets;  the  qualities  and,  if  possible,  the 
quantities  sold  are  recorded.  The  reports  are  made  monthly, 
and  the  arithmetic  mean  is  used.  A  mean  price  for  each 
province,  and  a  final  mean  for  Prussia,  are  computed  for  each 
article.  No  index  number  showing  the  total  outcome  of  all 
the  prices  is  given.  The  articles  chosen  are  as  follows: 
wheat,  rye,  barley,  oats,  peas,  beans,  lentils,  potatoes,  straw, 
hay,  beef,  pork,  veal,  mutton,  bacon,  butter,  eggs. 

IMPERIAL  STATISTICS 

xvn 

The  Statistical  Bureau  of  the  German  Empire,'  also,  has 
fumisbed  tables  of  thirtynseven  articles,  since  1879.  The 
prices  are  furnished  by  Chambers  of  Commerce,  or  similar 
bodies,  in  thirty  leading  markets  of  the  empire.  Quotations 
for  each  of  the  articles  are  unf orttmately  not  given  for  the 
entiTe  period,  although  a  list  of  about  fifteen  can  be  obtained 
throughout  These  fifteen  are  as  follows :  wheat,  barley,  oats, 
wheat  flour,  rape-seed  oil,  raw  sugar,  refined  sugar,  Rio  coffee, 

^  To  1891  these  tables  in  marks  and  dollars  are  given  by  Falkner,  Aldrich 
Beport,  I,  pp.  301-305. 

*  To  1891  the  prices  of  the  fifteen  articles  hare  been  published  bj  Falkner, 
*^i  I,  pp.  306-^07.  Conrad  used  the  same  fifteen  to  obtain  ayeraf^  for  1884- 
i889  and  1890.    See  t6i(/.,  p.  307. 


206  THE  PRINCIPLES  OF  MONEY 

Rangoon  rice,  pepper,  Scotch  herring,  cotton,  tin,  English 
copper,  English  coal.  No  index  numbers  for  the  total  are 
given. 

AUSTRIA-HUNGARY 

xvm 

In  the  volume  prepared  by  the  Austrian  Ministiy  of  Finance, 
in  connection  with  the  reform  of  their  monetary  system,  lists 
of  wages  and  prices  have  been  given  from  1830  to  1890,  based 
upon  the  quotations  of  thirty-three  cities  or  districts.^  The 
tables  are  not  of  general  importance,  because  they  include 
only  the  following  nine  articles:  wheat,  rye,  barley,  com, 
oats,  potatoes,  beef,  hay,  straw. 

FRENCH  PRICES— lyAVENEL 
XIX 

A  very  extended  study  of  French  prices  has  been  made 
by  Vicomte  G.  d'Avenel  in  his  Histaire  ieonomique  de  la  pro- 
prUtij  des  salaires^  des  denrSeSy  et  taus  le$  prix  en  gtn^al^ 
depuis  Van  1200 /t^jt^'^n  Van  1800  (1898),  in  four  large  vol- 
umes. He  has  provided  the  quotations  with  authorities, 
localities,  etc.,  in  elaborate  tables,  but  the  materials  have  not 
been  reduced  to  index  niunbers.  In  VoL  IV  (pp.  585-598) 
he  tabulates,  in  half-century  periods,  the  average  prices  ol 
cattle,  meat,  liquors,  fruits,  game,  fowl,  fish,  vegetables,  buttei 
and  eggs,  clothing,  and  tropical  products,  each  separate  articlfl 
in  its  own  column.     In  Vol.  II  (appendix)  a  diagram  of  th« 

prices  of  wheat  from  1200  to  1550  is  given ;  and,  most  impor -^ 

tant  of  all,  a  diagram  prepared  by  Levasseur  of  the  averag —  e 
prices  of  wheat  from  1550  to  1891.    The  materials  here  co^S- 
lected  have  not  yet  been  reduced  to  a  form  in  which  valuabft^  « 
comparisons  can  be  made. 

^  For  four  cities  Falkner  has  given  thoue  prices  to  1891.    Aldrich  Report,    X  \ 

pp.  308-317.  i 


3 

S            S            8            i            s 

1 

- 

J-'-- 

^ 

-^ 

— 

— 

\ 

^^ 

-\ 

te4o 

-^ 

,       1 

letto 

/ 

1892 
18RS 
1864 

\ 

-^. 

^:^^_^ 

i^s. 

\ 

s 

i 

-  Jf' 

; 

r^'^ 

^>^ 

[ 

18CB 

1 

^       ^ 

1Sfi8 

^^' 

1 

\ 

\ 

> 

iBfl* 

\ 

l/ 

* 

**1 

\ 

r'" 

*   1  : 

i 

leoi 

1862 

\ 

r       : 
1 

K 

n 

..    .. 

._:"'  W 

'.i 

>« 

18(14 

" 

1      ,-'V^ 

5^ 

s 

1880 

i 

1860 

leflT 

>/^     I     _ 

-  - 

: 

i 

■  //-  ' 

— 

\    f'  1  ..-1 



1600 

-f'\' 

-- 

1870 

-       - 

1 

-  - 

L  >>  ■■ 

^ 

[> 

^ 

1- 

_/ 

/- 

1874 

/ 

iB70 
1876 

! 

-    - 

-- 

\ 

J 

/ 

1H7T 

^ 

k 

— 

K  -- ' 

'* 

ri" 

I 

\ 

""in  1 

1  I  \  \  \  \  \  \ 

v  - 

\     . 

n-^ 

J^hM 

!       \       \       \      \ 

\ 

\ 

\ 

\ 

V 

V 

DE  FOVILLE 


In  France  the  sources  of  materia  for  prices  are  the 
records  of  the  imports  and  exports  at  the  customs  offices. 
The  total  values  of  exports  and  imports  since  1827  had  been 
computed  bj  taking  tiie  quantities  each  year  at  the  average 
prices  of  1827,  as  obtained  by  a  special  enqtiite.  By  1847  the 
discrepancies  between  the  real  values  and  the  oflBcial  values 
became  very  marked.  Then  there  was  established  the  Com* 
mimon  Permanente  des  Vaieiirs  de  Douane^  charged  with  the 
duty  of  ascertaining  each  year  the  average  prices  of  the  pre- 
ceding year.  This  commission  consists  of  over  one  hundred 
members,  who,  as  experts,  fix  upon  the  actual  prices  of  goods 
irrespective  of  the  invoices.  The  quantities  and  descriptiona 
are  taken  from  the  declarations  at  the  customs  offices.  Up  to 
1862  the  commission  recorded,  not  only  the  actual  but  the 
qffidal  values  (the  latter  being  computed  according  to  the 
method  in  use  before  1847),  A-  de  Foville^  found  that  by 
comparing  both  these  total  values,  it  would  be  possible  to  get 
for  each  year  a  value  relative  to  that  of  1827,  Id  1862  began 
the  Documents  9tutistique»t  which  give  monthly  returns  of  in- 
ternational trade.  In  each  January  these  papers  give  the 
totals  for  the  preceding  twelve  months*  Each  January  (e-^., 
1881)  a  provisional  total  value  is  obtained  by  computing  the 
quantities  of  the  preceding  year  (e»  ^„  1880)  at  the  prices  of 
the  year  before  (e»^.,  1879);  then  a  few  months  later,  the 
definitive  average  prices  (e.^,,  of  1880)  are  obtained,  and  the 
correct  total  value  is  published.  The  proportional  variations 
between  these  two  sets  of  valuations  provide  a  means  of 
obtaining  the  change  in  the  level  of  prices  in  each  year*  On 
this  basis  De  Foville  has  prepared  a  table  showing  the  changes 
in  French  prices  for  imports  and  exports  since  1847  (and  a 
comparison  with  1827)  to  1880,  using  1862  as  a  basis  of  1(K): 

1  L'^conomitte  fran^  (April  S9, 188S),  pp,  503-505. 


i 


208 


THE  PRINCIPLES  OF  MONEY 


"DU  FoTILLB's   AhHUAL  VABIATIOira    OF    THB    Qmn^kL    JjETML 

OF  Fbingh  Psiom,  1847-1880. 


T«r. 

Importa. 

iKpoite. 

18S7 

81 

96 

1847 

80 

7B{MbL) 

1848 

69  (M!n.) 

80 

1849 

76 

87.5 

1850 

88 

91 

1851 

80 

90 

1858 

81 

98 

1853 

88 

109 

1854 

91 

108 

1855 

95 

104 

1856 

106.5  (Max.) 

111.5  (llftx.) 

1857 

105 

110 

1858 

98(MiiL) 

108 

1859 

95 

109 

1860 

98 

105 

1861 

99 

99  (Min.) 

1868 

100 

100 

1863 

109.5 

100.8 

1864 

104.5 

101.3  (Max.) 

1865 

99.8 

97  8 

1866 

93.5 

91.5 

1867 

89.7 

87 

1868 

87.8 

83.5 

1869 

86.6  (Min.) 

82.9 

1870 

89.3 

81.8 

1871 

93.9 

81.4 

1878 

97.3  (Mftx.) 

83.3 

1873 

96.1 

80.3 

1874 

89.9 

76.6 

1875 

86.7 

73.8 

1876 

87.5 

73.9 

1877 

85.5 

72.9 

1878 

80  (Min.) 

68.8  (Min.) 

1879 

60 

70.3 

1880 

82 

71.7 

PALGRAVE'S  FRENCH  PRICES 
XXI 

In  the  Third  Report  of  the  Royal  Commisnon  on 
Depression  of  Trade  and  Industry,  Appendix,  pp.  854- 
Mr.  R.  H.  Inglis  Palgrave  has  collected,  from  informi 
given  him  by  M.  L^on  Say  and  M.  de  Foville,  and  from 
figures  of  the  Commission  Permanente  des  Vdleurs  de  Dot 
two  tables  of  French  prices  for  the  period  from  1865  to 


TABLES  OF  PRICES 

for  twenty-two  articles.  The  indeic  number  of  2200  (or  100) 
is  takeo  to  repi-esent  the  average  price  of  the  years  1865- 
1869.    The  articles  chosen  and  the  method  of  computing  the 


TiJUoBS 

T*bl«  29 

TB*r. 

lyrfflSS. 

nduo«d  to  Kile 
of  100. 

TAb1«20. 

nduMd  u>  Hslii 
ollOO. 

1865 

8,367 

103 

%m\ 

106 

laee 

S,3|4 

lOS 

2^80 

10» 

1867 

2.207 

100 

2,144 

97 

i8sa 

2,126 

97 

2,110 

96 

1869 
1870 

2,087 

95 

2,045 

93 

!,2O0 

loa 

2,200 

100 

2,1S7 

97 

2,000 

91 

1871 

s;i83 

104 

2,250 

102 

1873 

2,4M 

111 

2,310 

105 

1873 

2.423 

110 

2,300 

105 

1 874 

2,223 

101 

2,125 

97             ' 

1875 

2,24^ 

103 

2,085 

95 

1876 

2,196 

100 

2,090 

95 

1877 

2^41 

103 

2,107 

96 

1878 

1,950 

89 

3,010 

91 

1879 

1,896 

66 

1,915 

87 

1880 

1,94] 

66 

1,937 

88 

1881 

1,880 

85 

1,900 

86 

1862 

IJU& 

64 

1,855 

84 

1883 

1,807 

82 

1,756 

80 

1864 

1,679 

76 

index  numbers  in  Table  28  are  as  nearly  as  possible  like  those 
of  the  HconomieL  Table  29,  however,  introduces  a  method 
of  ascertaining  the  relative  importance  of  articles  by  finding 
the  value  of  the  actual  imports  into  France  of  each  com- 
modity, as  compared  with  the  total  value  of  the  imports  of  all 
the  twenty -two  articles ;  p,  (/,»  in  1871 1  the  importance  of 
whmt  was  expressed  by  330,  and  of  butter  by  6,  out  of  the 
total  2200;  but,  in  1877,  wheat  was  expressed  by  166,  and 
butter  by  11-  The  final  results  of  both  methods  are  here 
given  in  parallel  columns.     In  Table  28  the  articles  are: 

Coffee,  sugar,  wheat,  beef,  batter,  rice,  tobacco,  oil-seed,  olive 
oil,  tallow^  raw  silk,  silk  Btuffs,  gloves,  raw  cotton,  raw  wool, 
woollens,  hides,  coal,  iron  ore,  copper  ore,  lead  ore,  and  ^anc 

u 


210 


THE  PRINCIPLES  OF  MONEY 


FALKKEB»S  FRENCH  PRICES 


XXH 

In  the  Aldrich  Report  Falkner^  published  tables  of  separate 
prices  for  each  of  thirty-eight  coraniodities  from  1861  to 
1891,  taken  from  the  materials  provided  by  the  French  com- 
mission  above  mentioned  But  no  reduction  of  these  iigures 
to  the  convenient  form  of  index  numbers  has  been  made. 
The  articles  chosen  are : 

Beeves,  cows,  calveB,  sheep,  hogs,  hatter,  wheat,  rice,  sesa- 
mum,  linseed,  olive  oU,  sugar  (brown,  native),  tobacco  (leaf), 
eoflfee,  skias  Qarge,  raw),  skins  (sheep,  raw),  skins  (lamb, 
raw),  skins  (kid,  raw),  coal,  iron  ore,  copper  ore,  lead  ore,  Einc* 
eottoD^  cotton  batting,  wool^  silk  (in  cocoons),  silk  (unbleached, 
raw),  silk  (unbleached,  thrown),  cotton  thread  (simple,  un- 
bleached), woollen  yarn,  silk  goods  (pare,  figured),  silk  goods 
(mixed),  merinos,  blankets,  carpets,  tapestry,  gloves. 


ITALIAN  PRICES 


xxin 

The  Royal  Bni^au  of  Statistics  published  *  a  detailed  studj 
of  the  prices  of  six  articles  of  food  from  1862  to  1885,  The 
quotations  were  taken  from  weekly  prices  of  several  markets 
in  Italy,  The  articles  chosen  were :  wheat,  com,  rice,  wine, 
olive  oil,  and  beef*  No  index  numbers  for  the  combined 
result  were  computed. 

Also  in  the  Animario  Statletim  Italiano  (1900),  pp.  SSB— 
548,  the  prices  of  numerous  exports  and  imports  are  given 
since  1879,  the  year  of  the  establishment  of  a  special  com- 
mission. These  figures  are  published  by  the  Ministry  of 
Agriculture,  Industry,  and  Commerce. 

1  Aldrich  Report,  I,  pp,  318-322. 

'  Novimetito  dei  preid  di  alcaiii  gtensri  ^im^ntari  dal  ISfiS  mJ   1 885  e  mcmr 

waento  delle  mercedi*  cantftTelo  graSebe,  Ronm,  1SS6.    Cf.  ftlio  Aldrich  Eeport,  I, 


I 


I 


I 


1870 
•• 

1871 

•  < 

••• 
••* 

>  ••  • 

v  ® 

7 

8 

9 

1880 

1 
2 
3 
4 

^'TTf 

■:.v-s     8     8     S 

• 

• 

\ 

\ 

\, 

r  o 

> 

^? 

2  X 

y^ 

/ 

00 

/ 

/ 

\ 

\ 

1 

1 

J 

/ 

/ 

SWISS  PRICES -WALRAS 


L£oii  Walraa  (^Mude^  d'iconomie  palitiqfie  appUquSe^  ed. 
1898,  pp*  51-65)  has  published  the  prices  of  twenty  articles 
at  Berne  for  the  years  1871-1884,  The  figures  were  taken 
from  the  Siatiitwheg  Jahrbuckfur  d$n  Kanton  Berne^  or  from 
materials  in  the  hands  of  that  bureau  of  statistics.  Using 
1871-1878  as  the  base,  he  flnda  that  in  the  period  1879-1884 
there  was  a  relative  fall  of  gold  prices  of  6J3  per  cent. 
The  aniiual  averages  have  been  computed  by  the  geometric 
mean.  The  articles  chosen  are :  German  wheat,  wheat,  bar- 
ley, rye,  oats,  bread  (white)*  bread  (half  white),  beef,  mutton, 
veal,  butter,  lard,  bacon,  eggs,  potatoes  (white),  potatoes 
(red),  hay,  straw,  firewood  (beech),  firewood  (fir).  The 
general  results  are  as  follows: 


TMf. 

len-isiB  =  100. 

Ti*r. 

laii-ma  -  loo. 

Ymr. 

ie71-18Ti  =  lOK 

1873 

mi 

O.MS 
0.9» 

iKvea 

0.OT7 

0.?7B 

im 

1871 
18S0 

1.0f74 
0.982 

0J58 

I8S1 

ISS3 

U84 

0.93&              1 
O.iSK 
0.i90 
0.i«2 

AMERICAN   PRICES-* BFRCHAED 

xxy 

§  10.  Mr,  H,  C*  Burchard,  in  his  report  as  Director  of  the 
Mint  for  1881,  gave  the  results  of  calculations  of  average  prices 
in  New  York  for  the  fifty-six  years  from  1825  to  1880.  The 
figures  are  printed  in  the  Report  on  the  Finances,  1881, 
pp,  312-321*  They  are  continued  for  the  year  1881  in  the 
Report  m  the  Finances,  1882,  pp,  252-254 ;  for  the  year  1882 
in  ibid.,  1833,  pp.  316-518;  and  for  the  years  1883  and  1884 
in  the  Report  of  the  Director  of  the  Mint  on  the  Production  of 
the  Freciout  Metah,  1884,  pp.  499,  500*  Mr.  Burchaid's 
first  table,  for  the  yeara  1825-1880,  is  reprinted  without 
change  in  the  Quarterly  Reports  of  the  Bureau  of  Stati$ticB, 


212  THE  PRINCIPLES  OF  MONEY 

188S-1884,  No.  3,  pp.  328-887,  and  is  again  reprinted,  still 
without  change,  in  the  Quarterly  BeporU^  etc.,  1885-1886,  No.  8, 
pp.  566-566.  Mr.  Burchard  wrote  in  1881 :  **  The  prices 
quoted  were  obtained  for  the  years  1826  to  1874,  inclusiYe, 
from  the  tables  of  their  average  prices  in  New  York,  found  in 
the  Finance  Reports  of  1863, 1878,  and  1874.  [See  Fiimoe 
Report,  1863,  pp.  284-861 ;  ibid.,  1873,  pp.  602-541 ;  iMi, 
1874,  pp.  667-661.]  For  the  succeeding  six  years  they  mm 
compiled  in  this  office  from  the  published  semi-weekly  quota-  V  -  -^^ 
tions  in  the  New  York  Shipping  and  Oommereial  LiMt,  from 
which  paper,  it  is  understood,  the  quotations  were  taken  in 
compiling  the  tables  found  in  the  Finance  ReportiJ*  An  ex- 
amination of  the  Finance  Report  tables  indicates  that  they 
were  not  compiled  with  great  care.  The  price  of  an  article 
will  run  along  without  change  from  month  to  month ;  then, 
suddenly,  it  will  rise  or  fall  sharply.  The  prices  of  articles 
that  normally  would  fluctuate  together  (pig  and  bar  iron, 
butter  and  cheese)  show  a  very  loose  correspondence.  More- 
over, the  same  articles  do  not  appear  from  year  to  year.  An 
article  will  be  quoted  for  a  number  of  years,  will  then  disap- 
pear, and  later,  perhaps,  will  reappear.  Thus,  flax  does  not 
appear  till  1864,  is  quoted  till  1878,  and  drops  out  thereafter. 
Again,  all  the  Finance  Report  prices  are  not  used  in  Mr.  ^ 

Burchaid's  tables.  His  averages,  as  finally  given,  are  ob-  — - 
tained  from  the  prices  of  eighty-two  articles  in  1825,  eighty-  — -». 
one  in  1862,  sixty-eight  in  1864,  sixty-five  in  1880,  and  ninety  -^y 
in  1884.  Pork  is  quoted  in  ten  forms  for  1884,  in  only  three  ^^^e 
forms  in  1880  ;  and  it  does  not  appear  whether  each  form  of  i^i^of 
pork  was  used  as  an  independent  factor  in  calculating  the^^^^e 
final  result,  or  whether  all  were  averaged  in  order  to  give  one^^a:^ae 
figure  for  pork.  For  the  years  1862-1878,  the  prices  are  re- ^^-3^. 
duced  to  a  gold  basis ;  but  it  is  not  indicated  in  what  manner^^^er 
this  reduction  was  effected. 

For  good  reasons,  therefore,  it  has  not  seemed  desirable  ttifS"  to 
present  this  table.  It  can  be  found  in  the  Quarterly  Jour^.^^r" 
nal  of  EconomicBy  April,  1887,  p.  398. 


( 


TABLES  OF  PRICES  218 

ALDBICH  REPORT  TABLE 

XXVI 

The  only  important  taUe  of  American  prices  is  that  pub- 
lished in  the  Aldrich  Senate  Report^  in    1898,  compiled 
under  the  direction  of  Professor  Roland  P.  Falkner.    The 
laige  nomber  of  articles  quoted  would  alone  give  it  prece- 
dence.   Continuous  lists  of  prices  for  ninety  commodities 
have  been  gathered  from  1840  to  1891 ;  and  for  the  period 
from  1860  to  1891,  for  the  extraordinaiy  number  of  two  hun- 
dred and  twenty-three  commodities.    In  this  respect  it  sur- 
passes any  European  table,  and  of  course  any  other  for  the 
United  States. 

The  prices  for  the  year  1860  were  selected  as  the  base,  or 

100,  because  it  afforded  the  earliest  date  from  which  the  con- 

tinnous  list  of  two  hundred  and  twenty-three  articles  could 

be  had,  and  because  the  conditions  of  that  year  were  normal.* 

The  sources  were  the  books  of  merchants  and  manufacturers 

opened  to  assistants  of    the  Committee.     The  quotations, 

however,  are  usually  those  of  a  single  date  in  the  year,  such 

as  January  Ist,  although  the  prices  of  other  times  in  the  year 

'^Bie  taken  for  articles  whose  winter  prices  would  be  abnor- 

'QaL    In  this  feature  the  table  is  far  less  satisfactory  than  the 

fi%mburg  and  some  other  lists  of  prices. 

The  results  are  presented  in  both  the  weighted  and  the  un- 

"^"^ighted  form.    An  attempt  was  made  to  apply  Palgrave's 

^^xggestion  of  weighting,  but  it  proved,  as  was  to  be  expected, 

^^*practicable ;  •  Mr.  Falkner  then  introduced  the  method  of 

1  Report  by  Mr.  Aldrich  from  the  Committee  on  Finance,  March  3,  1893, 
^^dnate  Doe^  52d  Cong.,  2d  Sees.,  No.  1394.  Wholesale  Prices,  Wages,  and 
^^^>>anBportation,  Part  I,  Vol.  I. 

*  Mr.  Falkner  urged  that  it  was  impossible  to  take  the  arerage  of  a  series  of 

^a^^ars  as  a  atarting-point,  because  the  years  before  and  after  1860  had  been 

^^aarked  by  great  disturbances  within  the  country ;  and  yet  he  adds  that  the  prices 

^^r{  18S0  Taried  little  from  those  of  1858, 1859,  or  1861  (p.  28).    He  urges  this 

^^4  a  reason  for  taking  the  single  year  1860.    If  so,  why  not  hare  taken  the 

'V^ioiage  of  the  lour  yearn  1858-1861 1    But,  doubtless,  the  result  would  not  haye 

I  different. 

*  Cf.  Aldrich  Beport,  I,  pp.  88-90. 


214 


THE  PRINCIPLES  OF  MONEY 


weighting  according  to  the  importance  of  articles  in  the 
consumption  of  2661  family  budgets  obtained  from  the 
United  States  Commissioner  of  Labor.  The  difSculties  in 
finding  the  expenditure  on  separate  articles  in  each  group  of 
food,  clothing,  fuel,  etc.,  do  not  seem  to  have  been  wholly 
surmounted ;  and,  in  all,  only  68*6  per  cent  of  the  expendi- 
ture was  supposed  to  be  affected.^ 

The  two  hundred  and  twenty-three  articles  separated  into 
the  groups  are  as  follows:^  ^P 

L,  Food;  Beans,  ehipbread  (S),  Boston  crackers  (2),  oyster 
crackers,  ship  biscuitB,  soda  crackers,  butt;er,  cheese,  coffee ^H 
(Kio,  fair),  eggs,  cod,  mackerel  (3),  wheat  flour,  rye  flour,  dried  V 
apples,  currants,  raisins,  lard  (2),  corn  meal,  bacon^  beef  (d)» 
ham,  Iamb,  mutton,  salt  pork,  milk,  molasses  (2),  ncei  salt  (5),^H 
nutmegs,  pepper,  cornstarch  (2),  sugar  (4),  tallow,  potatoes  (2)  ;  H 
IL,  Cloths  asi>  Clothinc^  :  blankets  (2),  broadcloths  (2),  ealleo, 
carpets  (3),  cassimeres  (all  wool)  (4),  checks  (all  wool)^  cotton, 
deiiiiiiB,  drillings,  bides,  horse- blankets,  leather  (harness),  print 
cloths  (2),  ibawls  (wool),  sbeetiugs,  shirtings,  sole-leather,  tick- 
ings, wool  (2) ;  If  I*j  Ft  EL  AKD  LtGHTiNG  I  candlcs,  anthracite  coal 
(7),  bitummoua  coal,  matches;  rv',,  Metals  and  Implemkkts: 
anvils,  bar-iron,  bntts,  copper  (2),  door-knobs,  iron  rods,  iroa 
wire,  lead  shot^  lead  (2),  locks  (2),  meat-cutters,  cut  naOs,  pig- 
iron,  pocket-knives  (25),  quicksilver,  rope  (3),  saws  (4),  scythes, 
shovels,  spelter,  wood  screws ;  V.,  Lumber  ani>  ButLDrtio 
Materials;  brick,  carbonate  of  lead,  cement,  chestnut,  pine 
doors,  hemlock  (2),  lime,  maple,  oak,  oxide  of  zinc,  pine  (8), 
plate  glass  (G),  putty,  shingles  (pine)  (3),  spruce,  tar,  turpen- 
tine, window  glass  (3)  ;  VI.,  Drugs  and  Chemicals  :  alcohol, 
alum,  potash,  vitriol,  brimstone,  calomel,  copperas,  flait-seed, 
glycerine,  linseed  oil,  mercury,  muriatic  acid,  opium,  quinine, 
soda  ash,  sugar  of  lead  (2),  sulphuric  aeidj  VI I.,  House  Fub-  ^ 

'  Se«  i^pt  80-4S>    Far  a  cHtieiam,  see  F,  W.  Tatissig,  Tale  Review,  Nov.,^! 
1893.    Aliu  publiihed  iti  Balletiti  llnstititt  tnt«m.  de  Sutisqne,  Vtll,  ]8$S, 
See  tupra,  pr  155. 

^  Not  all  artjd<?«  whos(?  prices  are  given  in  Table  I  are  inelJided  in  the  two 
hundTsd  atid  tw^tj'-tliree ;  thews  eKcluded  are :  Eoaton  cr^ckeiiB  {one  grade) ^ 
iugar  {one  grade),  iron  raila,  sheet  zinc^  puae  flhinglea  (oae  grade )»  window  gUM 
(one  grade). 


F 

TABLES  OF  PEICES                              215    ^^^H 

^         Nisarao  Goods  :  furniture  (3),  glassware  (5),  psUs  3,  tabs  (4) ; 

^H    Vni.,  MiscEiiAtfEOus:  powder  (2),  rubber  (Pwa),  soap  (Cas- 

r     tile) 

,  starch  (6). 

L 

Au>&i€B  PiLicxs  {1862-1879  in  Faper). 

T4BLE  L 

Clo^hi 

Fufll 

MrtaU 

BttUd- 

"1^ 

Botufl 

Tttt. 

Food. 

And 

ud 

uid 

Furolalir 

MlioiV 

All 

lmpl*»- 
mfinU. 

ClMml. 

GwL 

IpSWOqU. 

Artid« 

IMO 

96.S 

110.7 

396.8 

t^B 

no.o 

145,8 

IIM 

147.1 

116.8 

1141 

M.4 

iia.4  1 

208.0 

123.7 

1118 

141.3 

116.4 

147.1 

115.8 

tm 

SS.9 

100.9 

202.0 

ns.7 

lOBJ* 

131.5 

U0.4 

170.6 

101.8 

im 

79.3 

99.9 

187.6 

114.7 

106.4 

121.4 

100.3 

123.5 

lOlii 

IBM 

ms 

106,0 

119.7 

133,3 

103.0 

119  7 

102,3 

129.6 

101.9 

1845 

S7.3 

WIA 

^^.0 

110.8 

106,7 

121.0 

loa^ 

114.8 

102.8 

i9m 

M.e 

9ft.3 

143.6 

116.9 

106.2 

123.9 

111,0 

1U.0 

100  4 

IBiT 

W.7 

97.6 

110,1 

m.6 

108.a 

112.6 

ims  1 

121,7 

106.5 

is4a 

13.6 

»J.6 

IWkl 

119.7 

105.3 

113  0 

121J 

126.0 

1014 

1M0 

79,0 

82.2 

100,0 

124.9 

9T.6 

1110 

120.6 

109.8 

987 

]»S0 

BBJS 

91^ 

10^.0 

1H.8 

102.2 

123,6 

125,6 

10T.7 

102,3 

1851 

90.0 

04.7 

OT.B 

119.2 

97.2 

126.8 

130.0 

102.7 

106.9 

1  lase 

«,7 

sa.7 

93-6 

in. 7 

100.4 

111.8 

1119 

100.6 

103.7 

1«S3 

101.2 

9B.0 

101.6 

122.8 

103.2 

107,0 

118.7 

tOO.2 

109.1 

l»t 

I06.& 

97.4 

106.8 

125.6 

114,1 

110.7 

121,2 

108.4 

112.9    , 

1856 

tlK8 

W.7 

m.i 

117.8 

103.4 

129.2 

121.2 

116.3 

113,1 

isse 

110.4 

lOft.e 

126.4 

116.3 

102.6 

135JS 

115.5 

121.6 

113.2 

law 

117.5 

100.0 

113.3 

110.4 

100.O 

126.8 

116.8 

110,0 

1125 

lasK 

M.6 

98,0 

111.4 

I0L3 

103.8 

116.0 

108.7 

97.1 

lOlJ 

lase 

98.8 

101.1 

^.0 

100.1 

98.7 

104.2 

io3.a 

1008 

1G0.2 

tseD 

imi* 

100,0 

100.0 

too.o 

100  0 

lOO.O 

loao 

100,0 

100,0 

Ui€t 

saa 

94.» 

lOSJS 

1C2.6 

108.9 

101,3 

9ej 

100.7 

100,6 

^K 

iaa2 

U0.4 

1M.1 

97.2 

117.2 

149.2 

110,4 

89  JS 

103.7 

117,8 

1B63 

133.Q 

191.6 

107.1 

140  0 

177.1 

14*1.5 

123.1 

129.1 

148.6 

^^^^H 

ii«t 

166.i 

2fif>.7 

1S0.2 

179.8 

2213 

170.3 

164,6 

154.4 

190,5 

^^H 

IMS 

316^ 

29».2 

237.8 

191.4 

182.1 

2n.6 

ISl.l 

202.8 

216.8 

me 

173.8 

326.0 

280,5 

171.1 

186.9 

2302 

186  J 

171.0 

1910 

IBSTT 

I6a.g 

179.0 

196.3 

101.3 

176.8 

211.2 

169.1 

161.4 

172.2 

1«6S 

164.2 

140.S 

218.7 

150^ 

174.3 

177.9 

134.9 

164.1 

160.5 

ISOi 

1(^9 

147.§ 

206.8 

141.3 

165.9 

160,9 

120,7 

362.3 

1634 

1S70 

usa.8 

130.4 

106JS 

137.8 

1483 

U96 

121,0 

148.7 

142.3 

len 

16».3 

133.3 

144.1 

122.2 

161.4 

130.4 

129J5 

148.8 

136.0 

IST2 

133.3 

143.0 

140.2 

128.0 

166.9 

J3i.O 

133,2 

132.7 

i:K,a 

iei3 

]2D.» 

130.9 

134.0 

129.8 

171,9 

141.6 

109  1 

132,4 

137.5 

1»?4 

131-5 

127 .9 

140.0 

1214 

154.9 

146.8 

-mj^ 

129.8 

133.0 

liis 

laois 

imi 

160.5 

injs 

1437 

144,2 

B5.0 

122.9 

127,6 

isfie 

m.i 

107.5 

144.6 

108.4 

137.3 

121.8 

m.% 

114.2 

118.2 

larrr 

120^ 

101. a 

loao 

100,0 

125.S 

122.3 

79.0 

118.2 

110,9 

l»7f> 

im.G 

03.2 

S^O 

92.1 

116.8 

114.2 

74.3 

111.7 

1013 

iprre 

WIM 

91.1 

95.3 

80.4 

115.1 

110.9 

68.6 

102.1 

96  6 

imi 

107,0 

1M.S 

100.2 

96.3 

130  9 

1131 

85.2 

109.8 

106.9 

ig§i 

110.9 

99.9 

113.7 

91.1 

131,3 

110  4 

77.6 

108  8 

106.7 

IS82 

lias 

mn 

110.1 

91.2 

137* 

107.6 

78.1 

114  6 

108.6 

1S83 

118,8 

M.« 

114.2 

87 .6 

134.3 

08.1 

77.5 

117,3 

loao 

1S84 

106,® 

8&» 

102.4 

RIO 

1205 

ART 

76J 

1U.9 

00.4 

isec 

98.7 

#1.8 

89.6 

77.4 

126,0 

86.9 

70.1 

97.6 

930 

^Hl  wm 

m,^ 

8S.1 

86.2 

75,8 

128,6 

83.9 

88.4 

9L3 

91.9 

^Hr  '^ 

104.2 

&4.T 

88,6 

74.9 

136,5 

^6 

66.4 

88.6 

92.6 

18M 

\mA 

84,7 

94.9 

74.9 

124.8 

00.0 

85.9 

89.3 

94.3 

18^ 

ilL0 

83.0 

96.3 

72,9 

124  0 

88.8 

70.0 

as.s 

94.2 

1890 

104.0 

fi2.4 

9^5 

73.2 

123.7 

819 

C9.5 

88,7 

93.3 

1^91 

1019 

811 

9t.O 

74.9 

m^ 

86.3 

70.1 

96.1 

93.3 

1 

216 


THE  PRINCIPLES  OF  MONEY 


Table  I  gives  the  index  numbers  of  two  hundred  and 
twenty-three  quotations  computed  on  the  principle  of  &  simple 
arithmetical  avemge.  Moreover,  this  primary  table,  being 
based  on  actual  quotations,  gives  for  the  years  1862-1878 
prices  in  tenns  of  tlie  depreciated  pa|)er  standard  existent  in 
that  period.  At  one  time  the  paper  had  depreciated  to  35 
centa  on  the  gold  dollar. 

In  order  to  make  comparisons  with  tables  of  prices  in  other 
countines  expressed  in  gold,  the  paper  prices  of  Table  I  for 
the  years  1862-1878  were  reduced  to  the  gold  standard,  by 
using  the  premium  on  gold  as  the  measure  of  the  depreciation 
of  the  paper  This  method  was  the  only  one  available ;  but 
it  could  not  be  exact,  since  the  paper  prices  evidently  rose  at 
times  to  compensate  for  the  uncertainty  in  the  standard,  con- 
sequently actual  gold  prices,  had  we  maintained  a  gold  standard 
throughout  these  seventeen  years,  would  not  have  shown 
vaiiations  due  to  such  influences-  The  computations  for  the 
same  groups  of  Table  I,  reduced  to  gold  in  1862-1878,  when 
inserted  instead  of  the  paper  prices  for  the  same  period,  give 
a  continuous  list  from  1840  to  1891,  in  gold*  The  figures 
be  inserted  are  as  f oUows : 


Gold  Pmicbb,  1B62-1678. 


Lumber 

ClmlM 

Fuel 

UiiUlA 

Uld 

ChBUl- 

EoUBD 

Tnr. 

Pood. 

Ana 
Imple- 

Ens 

Fur- 

AH 

w. 

h^. 

Bseutt. 

mIl 

ChXKlL 

^9QQMt 

lam 

m.i 

131,1 

M.ft 

114.3 

145,0 

113.6 

»r3 

im.% 

114,9 

lara 

m.T 

132  JO 

ra,s 

96,5 

12St.! 

101-0 

»li 

».a 

102-4 

IBM 

ifle.6 

167.7 

115« 

115.0 

1423 

100.5 

lORP 

0B.3 

122.5 

ISfiO 

100  J 

13&4 

IJOO 

8S.6 

S4.3 

1256 

S3.S 

m.s 

100.3 

ises 

124.1 

IrtlJ 

2no.2 

122.1 

133.4 

104.3 

132.3 

122.1 

136.3 

im 

121* 

133.7 

I4JSS 

lias 

ms 

1G0.9 

U«.2 

U0.i 

1117 .9 

1S68 

nm 

10(^.0 

157  9 

108.7 

125.8 

12a.4 

97.4 

118J5 

ltS.9 

ISGfl 

1^.1 

lOfl.8 

tr^i.!^ 

1042 

ins 

iia.7 

S9.0 

U0.T 

113.2 

1870 

126.S 

1149 

162  0 

105.4 

122.3 

123,3 

100.2 

122.8 

117  J> 

im 

152.9 

130.4 

130.2 

U0.4 

136  8 

m.9 

Iltll 

134,4 

122.9 

1873 

122/i 

131.1 

136.8 

1173 

153.0 

12-2.8 

11Z9 

121.fi 

127.2 

1873 

115,2 

121.5 

XWA 

115,2 

152.5 

r25J 

m.$ 

117.6 

122.0 

1874 

ll&O 

IHJ 

134  3 

108.7 

139  0 

131.8 

98  3 

110,6 

119.4 

ia7fi      1 

IICO 

1008 

13SJ 

]&4,4 

1^.7 

12S.2 

84.4 

109  2 

113  4 

1870 

100,1 

9©^ 

128.3 

90.1 

m.7 

100.0 

77J 

1012 

104J 

iwn 

113,H 

96.» 

101.7 

M.2 

118.5 

U52 

74.4 

111,3 

104.4 

1      liTi 

100.6 

91.B 

M.7 

»0^ 

115.2 

112.0 

73.3 

110^ 

mM 

I 


1S40                      i^s                    leao                     is.^s 

I^OO 

TM5 

T~ 

<      f     1 

r 

I 

1 

2i5 

2.25 

M^ 

1 

J 

Jl' 

u 

H' 

H 

V 

\ 

t 

1 

^^ 

H^ 

1 

> 

l^B 

2  DO 

^.oo 

^p 

1 

\ 

11 

^1 

\ 

^Li 

Wf 

"l- 

~r . , 

H 

[  "" 

"T 

■  : 

■<- 

: 

. 

* 

l        1 

'.; 

J" 

: 

■ 

4 

^  ^ 

1  75 

1-75 

1 

" 

.  ,^ 

t  ^ 

r  ^ 

n  1 

J 

_r    ^ 

tut 

1 

' 

h 

^' 

^ 

?/ 

1 

~!  ^ 

^FUf 

■L 

f 

^ 

^ 

t 
t 

1 

-     1- 

1 

1^5 

l.HO 

"  ■ 

1 

1  * 

^  " 

\ 
\ 

o^ 

1 

1 

i 

\ 

g 

' 

1 

/. 

^ 

s 

1 

' 

1.25 

l.as 

1 

n'^^V^" 

.-< 

v 

— 

S^ 

'■^ 

'^h 

^    i^ 

^^-^1l^^ 

V 

•  J^r^ 

:^ 

^.. 

L 

1 

5^ 

—i — 1 

'*'>/ V  i  * 

^ 

/- 

\ 

it^ 

*iiK^ 

3 

^^ 

^^ 

/ 

■4\ 

/J 

te 

1 

1.00 

vKi  r  J 

^~ 

n 

^v'i    ^ 

Vifck 

_,^ 

\ 

/^\ 

A 

/ 

\  t/ 

^ 

- , 

K 

^ 

/ 

\ 

^y 

^^^y'. 

: 

! 

> 

^ 

' 

' 

N 

--^ 

■ 

^» 

75 

^^ 

- 

- 

— L- 

.    _ 

' 

\ 

\ 



-[ 

L. 

n^ 

■BO 

1 

i 

1^ 

~| 

1 

— 

1 

^ 

: 

' 

'5 

*i5 

1 

— 

.            .^. 

-- 

1 

_\     ' 

}— j 

1 

0 

^ 

lOOO                             1303 

7^40 


h 


TABLES  OF  PRICES 


217 


To  cany  out  the  theory  of  weighting  each  article  according 
to  its  importance  for  the  consumption  in  the  budgets  of  a 
number  of  families,^  the  weighted  averages  are  given  along- 
side the  arithmetieal  averages-  In  one  col\nnn  certain  ex- 
penditures are  coDsidered  uniform,  in  another  the  importance 
is  based  on  68,6  per  cent  of  the  total  expenditure-  These 
results  should  he  taken  with  the  cautions  advised  by  Pro- 
fessor Falkner  (p.  93). 


AuiftK^  PUGSi,  1840-1891,  A&iTaxsTiCAL  iom  WmmmT^n  ATSRAass. 

TABLE  n. 


1 

IL 

m. 

IV. 

I. 

n. 

m. 

IT, 

Ti^. 

eimfilfl 

Avsnwtt. 
AUArtt- 

All  Artklf» 

Accarding 
to  [Jiipor- 
luce,  cw- 

dituraatHiuf 

AUArticlfli 

ArermfTGM] 
MCi^rJlng  to 
lirhportEDCQi 

Of  Total  Ei- 

pBUditUfB. 

Tmt. 

Aritb* 

AY«nffei. 

AUAitl^ 

ulu. 

All  Attlc1«t 
Airiir««d 
Aceardliif 
to  tmpor- 

IWUM,  Bc> 

pnadltun* 
UkOfona, 

AU  ArUelM 
ArenigAd 

according  to 
Importuice, 

of  TijtU  Ki- 
peiHiaun. 

imo 

118.8 

ns 

97.7 

1888 

191,0 

160  2 

187.7 

1841 

115.8 

98.7      , 

98.1 

18G7 

172,2 

145.3 

165,8 

1S42 

107.8 

932 

90.1 

1868 

160.5 

150,7 

!73,9 

1843 

101.5 

89.3 

84.3 

1869 

153,5 

135.9 

153.3 

1844 

101.9 

89,8 

85.0 

1870 

142.3 

130.4 

144.4 

IS4& 

109.8 

93,1 

88.2 

1871 

136,0 

134.8 

136.1 

1846 

106.4 

96.7 

95.2 

1872 

138J 

122.2 

132  4 

1B47 

106,5 

96.7 

95,2 

1873 

137,5 

119.9 

1390 

1S4S 

1014 

92.0 

88,3 

1874 

1S3.0 

120.5 

129.9 

1849 

98.7 

88.9 

83.5    ; 

1875 

127,8 

119.8 

128.9 

1BA0 

lOO 

936 

89.3 

1876 

118.2 

115,5 

122,6 

1851 

105  9 

991 

98,6 

1877 

110.9 

109.4 

11. T6 

isas 

ioa.7 

985 

97,9 

1878 

101.3 

103.1 

104,6 

1853 

109,1 

103.4 

105  0 

1879 

96.6 

m6 

95.0 

1854 

no 

103,4 

105.0 

1880 

106.9 

103.4 

104J 

1855 

113.1 

106.3 

109.2 

1881 

105.7 

105.8 

108.4 

1856 

113,2 

108.5 

113.3 

1882 

loas 

106.3 

109,1 

1857 

113,5 

109.6 

114.0 

1883 

106.0 

104,5 

106.6 

1658 

10K8 

109  J 

113.2 

1684 

994 

lOLS 

1036 

1859 

100  2 

\0±Q 

102  9 

1885 

93.0 

95.4 

933 

1860 

lOOO 

100.0 

1000 

1886 

91,9 

95,5 

93.4 

1861 

100.6 

95.9 

94.1 

1887 

92,6 

96.3 

94,5 

1863 

1178 

lose 

104.1 

1888 

94.2 

974 

96.3 

1863 

148,6 

122.1 

132.2 

1889 

94,2 

99.0 

985 

1864 

190,5 

149.4 

172.1 

1890 

923 

95.7 

93.7 

1865 

216,8 

1907 

232.2 

1891 

93.2 

96.3 

94.4 

1  Aldficb  Report,  I,  pp.  92*93. 


^^^       218                       THE  PRINCIPLES  OF  MONEY                    ^^H 

^^^^          Table  II  having  been  made  up  from  Table  I,  the  figures  for^ 

^H            the  years  1862-1878   are   based  on  paper  prices.     In  the 

^H            following  table  the  figures  based  on  the  reduction  to  gold 

^H            can  be  inserted  in  the  table  last  given>  and  the  series  from 

^^^^      1840  to  1891  in  gold  mil  be  continuous;                                  ^^ 

Gold  Ixvkx  Kuiibkrs,  1Sfi2-lS7S.                          ^1 

1 

All  ArtielM 

Al]  AiticUa 

Arsnged  mccii^rdlag 

ATflng«d  ucofdiag 

T«iir. 

AllArfeklH 

to  IrMportance^ 

betii«  ct3ii*ldaf*d 

Bxpeuditun. 

leet 

Ilea 

100.3 

ims 

18«3 

103.4 

84.1 

9hl 

ie«4 

ISS.S 

98.1 

110.7 

186$ 

100^ 

8S.2 

107.4 

lS6d 

136.3 

114.3 

134.0 

1847 

137.9 

107.9 

123.3 

ts«s 

115.9 

108.8 

125.8 

ise» 

113.2 

100.2 

US  J 

IB70 

117.3 

107.& 

119.0 

M 

1871 

123.9 

11B.7 

122.9 

187S 

127.2 

112.0 

121.4 

1873 

122.0 

106.4 

114.5 

1874 

119.4 

106.2 

118.8 

187ft 

113.4 

106.5 

114.6 

1875 

154.8 

102.4 

108.7 

1877 

104.4 

103.0 

107.0 

^ 

1878 

99.9 

10L7 

10S.S 

4 

^^H           ^ — 

^^^^                                     FALKNER'S  LATER  PRICES                             ^B 

^^B                                                         XXYU                                           flj^l 

^H               TTie  lists  of  prices  in  the  Aldrich  Report  ended  in  1891 ; 

^^1            but  Professor  Falkner^  under  whose  supervision  tlie  tables 

^H            were  preparedp  was  recently  commissioned  by  the  National^ 
^H            Department  of  Labor  *  to  prepare  a  series  of  wholesale  pricesfl 
^H            from   1890  to   1900.     Naturally,  the  attempt  was   made  bo™ 

^^M            continue  as  far  as  practicable   the  results  of  the  Aldrich 

^^M            Keport;  but  the  progress  of  industry  has  eliminated  many 

^^H                    1  Bulletin  of  the  Depattment  of  Labor,  Na  S7,  Blvch^  1900,  Waabitigtan^ 

^^H               GOTvmmeDt  Frmtiog  Office.                                                                                   ^_ 

^^^^^^F             TABLES  OF  PRICES                              219       ^^M 

' 

1 

F4Ls:EfiK^»  Wholehilb  Pnicxi,  Jan,,  1890,  to  Jult^  1899* 

H 

maXb» 

WutA 

M«Uli 

lAunbar 

bid 

Bmg* 

Houn 

^W 

lUiiL 

Vood- 

Wl4 

mod 

bid 

Uld 

rtmUuli' 

Mt»e). 

AU 

^^^^^^M 

Clothe 

U$ht- 

Imp]*- 

01i«3ilU- 

oi^. 

tufldcu. 

Artklu 

■ 

Jmn.    18K> 

».2 

101.9 

99.(1 

106.S 

IMJ 

104.6 

ioo,o 

94.1 

102.0 

April  1890 

9T.8 

102.2 

99.5 

103  Ji 

10*.2 

IVU 

lOO.O 

97.6 

10L9 

^^^^^^H 

Jaly    183D 

96.  S 

1021 

ino.7 

106.3 

98.8 

104,6 

1000 

ioa.8 

100.4 

^^^^^^H 

Oct.    1^ 

less 

102.4 

lOO.fi 

105,7 

101. 1 

105,4 

100.0 

104.6 

103,1 

^^^^^^H 

jja  lan 

loao 

100,3 

100.© 

88.1 

109.5 

91.4 

102.2 

100.4 

100.6 

^^^^^^H 

April  tm 

lOil 

98,5 

997 

97.6 

99.3 

100.1 

100.0 

104.0 

100.7 

^^^^^^1 

JiU;   im\ 

»9.e 

97:9 

100.7 

9G.1 

9?.l 

92.0 

100.0 

101,& 

9J.7 

^^^^^^H 

Ool.    1891 

101^ 

fl7.6 

99.9 

94.0 

97.7 

92.2 

100.0 

OT.S 

97,9 

^^^^^^H 

1 

/uu  tmi 

9B.I 

97.0 

99.0 

MA 

9r.i 

QL2 

9aj 

96,8 

9&6 

^^^^^^H 

1 

AtM^lie92 

n^ 

Sfi.O 

m.9 

92.3 

96.9 

B5.7 

96,8 

99.3 

94,3 

^^^^^^H 

July    JS&2 

94.S 

96.2 

98  9 

ftL3 

96.0 

««,3 

964» 

96,9 

MJi 

^^^^^^H 

1 

Oct.    IS92 

9T.7   ' 

9*3 

99,3 

90.7 

94.6 

87.6 

96,9 

90,9 

94,7 

^^^^^^H 

j 

Jan.    1BS3 

108.*  , 

9§.9 

J04a 

88.9 

97.T 

68.3 

92.7 

89.9 

97.2 

^^^^^^H 

1 

April  18S3 

102.G 

9ej 

103  3 

89.4 

94.6 

91,4 

90.7 

92.7 

96.0 

^^^^^^H 

July   l^oa 

9e.i 

96.fi 

105.2 

S7.C 

92.6 

tT.O 

98.9 

86.9 

93.1 

^^^^^^H 

Oct.    JKW 

IOIjO 

98.0 

105.2 

84.4 

93.1 

81,9 

87.9 

87.1 

93.0 

^^^^^^H 

Jftw.  iwrvi 

U.2 

90.0 

105  8 

80.6 

91.2 

63.1 

84.2 

87.0 

89.6 

I^^^^^^H 

Ifiri]  t§M 

ar.a 

«7.a 

100» 

79.0 

88.7 

86.8 

830 

86.1 

86.7 

^^^^^^H 

July    I89i 

fT,B 

96.2 

10±0 

79.4 

ff7,4 

B3.6 

83v3 

86,2 

86.0 

^^^^^^H 

Oct.    1894 

!0,3 

80.4 

101.9 

78.2 

0S.9 

BS.1 

82.7 

SIG 

86.9 

^^^^^^H 

Jto,    1B96 

90.3 

90.0 

100.9 

7<i,l 

er.8 

83.7 

7S.6 

84.3 

S4.T 

^^^^^^H 

April  \m&       »1.5 

79.* 

9e.4 

75.9 

98.4 

82.0 

79.5 

83v3 

84.T 

^^^^^^H 

Jnly    laOfl 

81.9 

83.3 

96.4 

S4.7 

80.4 

78.9 

7G.2 

83.1 

ai2 

^^^^^^H 

Oct,  irtae 

SS^ 

88.3 

98.6 

891 

86.4 

76.7 

81.8 

83.9 

a6w3 

^^^^^^H 

Jmi^     1B96 

Bi.* 

87.3 

97,5 

»a7 

86.6 

81,9 

79.2 

84.2 

86.2 

^^^^^^H 

April  1896 

ao.a 

813 

97.7 

80.0 

33.1 

«L0 

7T.8 

8213 

SSJJ 

^^^^^^H 

July    1886 

ms 

81.4 

100,1 

85.4 

81.8 

mA 

78.1 

8SJS 

gl.fi 

^^^^^^H 

Oct:    1886 

76.9 

«a.8 

100.9 

83.7 

«l.4 

80.1 

79.2 

SS.6 

82.4 

^^^^^^H 

Jw.    1837 

79.fl 

82.S 

99.3 

§0.1 

83.1 

81.9 

76.7 

88.4 

82.0 

^^^^^^1 

Apf{1180? 

Ta2 

81.4 

97,8 

78.8 

83,0 

77.9 

78,7 

89.2 

B0.9 

^^^^^^1 

July   1897 

76.0 

81.4 

97.8 

77.4 

82.6 

7T.0 

78.4 

89.6 

79.9 

^^^^^^1 

Oct.    1^ 

«3a 

S3.0 

97.S 

60.6 

85,7 

81.6 

76.4 

91.6 

S3.6 

^^^^^^H 

Un^   ism 

^4 

m.& 

W^l 

79.4 

8G.5 

80,3 

14.1 

90.5 

83.3 

^^^^^^M 

Apinim& 

82.9 

m^ 

94.4 

79.7 

80.7 

S6.4 

74.9 

9t.l 

83.3 

^^^^^^H 

July  lase 

saj 

80  9 

95.6 

81.4 

8G.D 

92.1 

73.8 

94.6 

84.2 

^^^^^^1 

om.  m» 

8t.^ 

80.3 

93vS 

81.6 

88 .3 

88,0 

74,9 

99.6 

84.4 

^^^^^^H 

/u.    ]»B9 

W.0 

goj 

90,8 

S3.2 

94.1 

m7 

79.  B 

94.3 

se,s 

^^^^^^M 

April  I89& 

87.1 

S2^ 

91.2 

98.1 

97.1 

97.8 

86,5 

90.6 

90.8 

^^^^^^1 

July    1899 

859 

94.6 

*«,8 

107.9 

99.9 

95.9 

92.1 

96.7 

92.9 

^^1 

1             1 

irticles  and  introduced  new  ones ;  nor  could  the  same  sources 

^^^1 

of  information  be  used.      In  the   Aldrich  tables  separate        ^^H 

quotatioBtf  of  two  hundred  and   twenty-thiee  articles  were       ^^H 

given;  but  if  the  prices  of  different  varieties  of  the  same       ^^H 

commodity  were  merged,  there  would  be  only  on©  hundred        ^^H 

and   forty-two   series  of  actual  prices*     Additions,  as  well        ^^^| 

as  omissions,  were  made  by  Mr.  Falkner  in  the  new  table,        ^^^| 

finally   obtaining  ninety-nine  series   of  relative   prices    for        ^^^| 

1890-1900,    Ninety  articles  are  quoted  in  both  tables.     In        ^^H 

1      the  Aldrich  Report  each  quotation^  even  for  each  variety  of  a        ^^^| 

commodity,  had  equal  importance  in  compating  the  average        ^^^| 

220 


THE  PRINCIPLES  OF  MONEY 


for  the  group;  but  in  the  new  tables  where  relative  pricea^ 
are  given  for  two  or  more  articles  of  the  same  kind*  their 
average  is  taken,  and  this  represents  onlj  a  single  item  in 
calculating  the  average  for  the  group,  ^ 

In  the  Aldrich  Report  the  figures  for  January^  1860,^ — or^ 
one  single  date* —  were  used  as  the  basis  for  100 ;  in  the  new 
tables  the  average  ^  of  the  nine  quarterly  prices  from  Januar)% 
1890,  to  January,  1892  (of  which  January,  1891,  the  conclu- 
sion of  the  Aldrich  Report  was  the  exact  centre)  was  taken 
as  100.  Ako^  prices  at  each  quarter  of  the  year  were  used, 
instead  of  using  (as  in  the  Aldrich  Report)  the  quotations  on  ^ 
only  one  date  in  the  year.  H 

The  method  of  weighting  the  index  numbers  according  to 
the  importance  of  the  articles  in  the  conaumption  of  family 
budgets  was  also  applied  to  this  list  of  prices^  with  the  fol-     h 
lowing  results :  ^M 


AUAjtlclM 

All  Artidw 

Areraifi^  Kjeorflag 

Dtfei 

. 

AU  AfttetM 
liaplr  Avinigvd. 

td  iMbortuicii, 
CfTtelf)  JcxpffiuUttmi 

%o  lEuporutitie, 
per  «ol  of To4al 

UDJfom* 

JaniuiT, 

1890 

102,0 

100,1 

100.2 

K 

IS91 

lOO.G 

I02J 

103  J 

ir 

1893 

96.5 

loao 

100.1 

1                     ** 

1893 

97,2 

103^ 

105,0 

tt 

1894 

89.e 

97.6 

96.4 

M 

189a 

S4.7 

933 

90.5 

ii 

189S 

S5.3 

93J 

89.5 

H 

1897 

82.0 

90.3 

85,9 

it 

109S 

833 

§1.0 

S&.S 

If 

1899 

86.S 

9L0 

S6.& 

To  obtain  an  approximate  continuation  of  the  series  of  the 
Aldrich  Reports  down  to  1900,  the  average  relative  prices  of, 
the  ninety  articles  common  to  both  investigations  have  been 
separated,  and  compared  as  follows  * 

^  The  ftver!^;Q«t  of  the  relative  price»  of  Dmet^-Dtne  Rrtidas  for  these  datei  ii 
tOO,6,  while  if  Janu&rjf  1891^  had  been  takes  as  the  bape,  the  relatire  prico 
wonld  have  been  100.    Tbe  dlrergence  ii,  therofore,  verj  iltglit. 


I 
4 


^^ 

%i 

^                                    laoo                               IBM                                1000 

1 

2.2  B 

a, 00 
use 

.73 
.50 
.35 

*" 

1 

\-\W^~' 

1 

'  f   ■ 

\ — \~ — \\~*^' 

1    \    lZ— L 

"i  1 

~  '    1 

-.^ 

^ 

L  ^ 

"^ 

i 

w 

— j 

■ 

^  ^ 

J 

^ 

■ 

*s^T 

f  iL 

< 

f//' 

V  ,   |—  - 

^  y  < 

~  — =1 

J 

* 

>y 

^ 

^r  _ 

l^. 

,A 

-.>.^ 

-- 

^ 

k 

fv^ 

^^ 

rATE 

iV 

T^  ,A^^ 

'  a 

?^ 

•*^ 

— ^ 

/ 

p^ 

— 

V 

^ 

r— 

N 

r-^ 

-- 

^ 

. 

^  r 

- 

1 

^ 

1 

1 

so  

1     '      ' 

: 

1 

i 

- 

_j^^ 

\' 

' 

- ^ 

\ 

1 

-- 

-r  -'  -' 

1       f 
1       1 

lafti 

I 

IB 

<)0 

Ti 

l*B 

19 

00 

1 


TABLES  OF  PRICES 


221 


Articlflt. 

DBte. 

Aiscordtnr  to  Tn*- 

lu  Tenni  of 

ISOOPriwL 

Jannary,  1890 

10K7 

97.5 

1&91 

100.8 

96.6 

1§92 

96A 

93.4 

*'           1893 

97*3 

«3J 

1894 

89.8 

66.1 

1895         1 

BhA 

81.5 

1896 

85J 

81.5 

1897 

820 

78.e 

1898 

mM 

80.4 

1699 

B1.2 

8d.6 

A  MORE  COMPLETE  BIBLIOGRAPHY  ON  PRICES » 

EabLY  Pebiou  :  Rice  ITauqhan,  Du^wrse  qf  Cm»  and  Coinage  (ie75>i  pp. 
101 '1B6,  (Uaea  WAjt^J  aa  teit  of  prices,  «nd  Uflcrta  prlcw,  id  1^50-1650,  have  nearljr 
tf«bL«d,  and  be  nee  coinfi  hare  depreciated  nenHy  one -third  ai  compared  with  goods  >) 

—  Wt  FLmETWooo,  CAfimic^Jit  />r€dbiu*»  {1707)*  (-^  would  buy  in  1440  as  much  at 
£2S  ot  £30  ia  J 700,  as  dedticed  from  pricca.)^  Dutot^  RtJItxiimt  potUtquet  tur  lei 
^iH]iif«i  fi  ffl  eamnur^ff  (1T38X  h  FP-  36^-377.  (Compare  pfjcea  ttt  Loujj  XIL  and 
Loui*  XIV.  with  arilbmetkal  aTeimjreO^G.  R*  Carli,  Dtl  Valort  e  dtUa  prQporzifmA 
<f«*  uMidfli  flianeiaff  e^n  i  gentH  in.  ItniiHf  etc,  (1764)»  ed.  Cuitodl  I,  pp.  ^9-^6. 
(U»«a  prices  of  graiii|  oil,  and  wine  about  l&OO  a<  ba^ic  unlU  and  reduces  those  of  about 
IT&O  to  proporUoatof  lormen  with  arithmetiea]  average.) —  Sm  ^^  SKt^CKfitiRan  Evm- 
l*TN,  Q/mmtt  Endeavort  to  A^ctriain  a  Standard  of  WtigHi  and  Mtagurt  {179$J,  Pbiloa* 
Tratii.  Royal  Soc  (1798),  pp*  30&-30&.  (From  twelve  ajfricultural  irtjclei,  meal,  and 
labor,  he  computes  mean  depreci^tioa  of  money  from  1(^50  to  tSOO,  taking  1&^  as  base, 
with  unweighted  aritbiwetkil  average*)—  Arthih  Yoifwo^  An  £mg*i»Vy  imo  tht  Pro- 
girttdvt  l^fve  of  Mons^  in  England  at  marktd  by  the  Price  of  Agricultural  Froducti 
(1812)*  { Introdiiee*  weighting  into  Evelyn* s  prices*)  —  Iftift.^  Inquiry  into  the  Riu.  of 
Price t  in  Suropt.  (First  use  of  family  budget*  in  weighting-)  —  Joseph  Lowr,  Tk* 
PreMtnt  State  of  Enginnd  in  rt^ard  to  Agricviturty  Trade ,  and  Finance  (1823),  pp. 
261-291.  (First  suggestion  of  tabular  standard  for  debts  ^  lued  weighting  with  arith- 
metical average.)  ^^^  Poulbtt  Sceofk,  Prindpiu  o/  Folitiml  Economy  (ISM), 
pp.  4O&-108.  (EmphasitEes  tabular  standard  of  100  ankles  weighted  according  to 
itnportance  in  consumption  as  measure  of  exchange-value  of  gold.)  —  Thohab  Tookb, 
Thimphu  and  DttaUt  vn  tht  Bigk  and  Low  Price*  of  the  Thirty  Y tan  J  rem  1793  (0 
1822  (1323).  (Mokes  no  use  of  rnde^  numbeTi,  or  systematic  table*  of  prices*)  — 
lutti^T  ffiiforjf  of  Pricee,  1793- 1856,  6  voh.  (A  valuable  collection  of  material s^  not 
leduCTd  tu  hnUn  numbers.)  --  G.  R*  PoBTEEt,  The  Progrtu  of  the  Nation  (1839)  (ed, 
1847),  pp.  439-140,  444-445.  (Tikat  prices  of  tifty  articles  in  London,  January,  1883, 
as  "index-price,*^  and  reduces  prices  until  December,  1837,  e a  prt>port ions  of  former.) 

—  W.  Ciu)««f  Standard  Pound  Pi,  Pound  Steriing  (18&U)^  (Proposes  a  change  in  the 
atandard  as  often  as  the  iodex:  number  changes  by  a  per  esnt.) 

1  Compiled  with  the  help  of  Walsh's  bibliography;  but  some  of  hli  titlei  ara 
omitted,  and  olhers  are  added* 


THE  FRINCIPLES  OF  MONEY 


Ml  tDEiiN  PxRiOD  :  W.  NEvrUABCB,  Comraereifli  Mui&fy  and  Remtm  nf  l$t^ 
London  Econombt,  Feb,  30, 1864*  (Begftit  innual  Mriea  of  E^onomiit  tftbtet  of  pnc^ 
cf,  Juur.  Koy,  Stntltt.  Soc.«  XXf.  la^d,  ft^d  XXIFI;  1860.)  — W.  S^  JE%'uKfi.  4  Striatt 
fnll  in  lA«  rrtlij*  of  Goid  Atctrtnined  i\M^).  9ee  JnmMitjniifmM  in  Currtne^  itud Fimiku 
(1884)  ftir  «11  tiis  »iudie4.  (List  of  tbirty-nJae  iLtliaJes^  1 845-1 S62.  SuIba  iheeu«  forthi 
geomfetric  m»ii).  —  IwiO.,  TA*  Variation  of  Prit^At  and  (A*  Valut  q/  ikt  Cmrwiij 
tine*  1182,  Jour.  Hor-  Stut.  &oc.  June,  ]d6&,  (R«pti»  to  Laiptyreti,  lail^EletHliiAbleaf 
piiceflto  indud*  1 78*2^1  »65,)  —  E,  LAapsTREs,  BtfmhHrfftr  IFflflW»/sr«Mi  (ISdO^liW)^ 
Jalif*  L  Kit  und  SUu  (1864),  B.  Ill,  pp.  81-118,  %f^2Sn.  (AtUcki  Jev^'i  pi^ 
nietrjc  averagi,  Knd  argrues  for  the^  ftTlthm£:tje.  Giv^s  Ikt  of  foitj-cii^ht  uticlu^  \ui^ 
1831- ) 840  »A  bute,  «nd  comet  to   1863, }  —  1  am,,  /K«  SerecAitt**^  daer  ni/ff(!rr» 

ITtuirefiprvuftet^eruff^t  ibid.  (1871  ^^  B.  XVI,  pp.  3&6-^l4.    tDe(eiid»  hiumM  M^^mn 
Dmbiscb    and    Geyef,    Accepts    wtightitigf,)  —  Imn.,    Wi/dit    Wtmrm  w*f<dm  m 

Vertiufe  xer  Zrifen  immer  ihturtnf    Zeit^ch.  1  Gcnani^  St««taw.  (1872),  pp^  1-^.- 
H.  W,  DwtaBMSCWf  Uther  dif  B^rechnung  d^r  Vtrandenmgen  der   Waarei^nm  mi 
da  OiUmtrth^M,  J»lir.  f.  Nat,  nM  Stat.  (1871),  B.  XVl,  pp,  U3^l5d,  41S-42T.    (Ofl 
Bo«ehcr*i  appeal  he  solvet  problem  by  rejecting  both   irithmeticaL  and  gmmHtM 
average  of  t^peyref  aod  Je^onj,  oa  ground  Ib4t  quiniitjes  of  goods  ibouhl  be  t4la 
Into  aecount  at  each  pcHod,     Clatms  to  use  tinlr  mlo^f-tbrec.)  — ^  H.  pAAaCBE^  €tbtf 
die  Prri$intmckiiMn§  dtr  UlzUn  Jahtt,  JtbV,  f.  Nat-  und  Stat.  (I874)i  B.  XIIII, 
pp,  168-178.  —  tfittJ.f  Studitn  fiber  dia  Neitur  der  Geldentwertkuikg^  etc  (1878),   {1a 
these  two  titles  he  opposes  both  (be  aHtbmetJc  andgoometdc  average.     Giveii  vei^blid 
price*  of  twenty-two  artklcB  on  banu  of  1847^1867  for  the  years  1868-1872.)  —  R.  t,  i 
Bought,  Die  Pretxentwickeking  wahrend  der  hitten  i>eeeimieR,  etc.*  Jahr,  f.  Sii 
ttad  Stat.  (1882K  N.  F.^  B.  Y,  pp.  177-185.     (Coaliiiuea  FaMcbe'a  tJible  (o  188<».)-i 
SoETBfiHH,  D(u  Gtld^  in  DU  Ge^enwartt  Leipzig  08*6),  pp.  5S7-fifl8.  (Prioie  gin 
for   18.^1-1840,  1841-1850,   1S54,  1S&&.)  — Ibid,«    Ueber  die  ErmiUdun^  wmtrtftfid^ 
Dwxhtchnittipt'iiiae.     Viertjhr,  f.  Vuikswi«fl,  und  £tiUurgescb.  (1864),  B,  111,  pp^  8*?L 
(Discnsses  aritbmetkal  ttvtnge.)  —  Matcrialien  ctir  ErhiUeruny  nmf  Beurthfilmf 
der  wiritckiij''dichen   EdeimetaiivfrhaUnitMe   und  dtr    Wnhrungijrat^e   {1886)»    Alio 
translated  by  F.  W.  Taussig  in  Report  of  Edw.  Atkinson  to  U.  3.  De|iartm«iii  of  Siale^ 
BimeiaUhm  in  Europe  (Oct.,  1S87).     (Gives  most  important  table  of  pricei  Ibeo  pti^ 
Imbed.     Taking  1847-1850  aa  ba^e,  give^  unweighted  arilbmetfcal  arerage  for  one  bnB^ 
dnd  Hamburg  pnoea  and  fourteen  Britinb  artiileB*  to  1S85,  in  eight  clatnef  )  — Istifl 
IMt  Ntvtauder  WtM^renpreUf  in  denJfthren  1886-1 S9Q,  Jab r.  f.  Nat.  nod  Srat^t  III  V^ 
B.  Ill  (1892K  pp-  688^96.  (Qiittmued  the  above  table?  to  IS&O.)  —  F.  Emu^  GeMwwri 
%nd  PreidfeKifftaiff  im  deuttchin  Eeiche  (1887).    (Givea  Hamburg  prk^i  of  3£&  art^ 
clea  rrom  1 345-1 850  to  1884.)  —  A.  Etxte,  The  Jfone^  Vaiut  o/  F^od  and  Raw  . 
rin£*»  Ijondon  Statift  (June  8, 1878).     (Took  ISfiB  n*  basb,  and  gave  twenty -live  anid 
for  18Gd,  1869,  1873,  1S76,  and  Qrst  quarter  of  1S78,  weigbced  according  to  w^h 
importauce  in  1869.)  —  R.  Giffen,  Report  la  Board  of  Trode  on  .  . .  Prieu  qf  E^ 
nnd  Imports^  Pari.  Doc.  (1835)>  c  44543.  (Gives  thirty-dve  quotations  of  export*  ^^ 
1840-1883^  and  of  imports  for  1864-1883,  weigh  tad  according  to  relative  imponancte  of 
consumption  in  1875}  and  each  year  compared  with  1361.) — Ibid.,  vanona  artkle»  in 
£«»*^j  in  Finance  (1880),  and  ditto,  Second   Series  (iSSfl).  —  S.  Bourne,  Qm  Stfmt 
Fhmt$  of  the  Sihttr  Qutition^  Jour.  Roy.  Stat.  Soc.  (June,  1879)  (Unweighted  tables, 
tame  as  thoie  of  Economist,  witb  only  one  kind  of  cotton  gtHtdt  Itistead  of  four},  — 
Isii>.,  On  Index  Numbers,  Reports  British  Aaaociatkin  (1S86),  pp.  $59-87S^   (1889), 
pp.  5^^540^  (1890),  pp^  690-701.     (Furpoae  to  meaaure  foreign  trada  by  bidex  nuot- 
bera  of  prices  and  volume.)  —  A.  t>E  Fovillk,  La  Mo^em^ni  du  prix  dam  ie 
mfrce  extenrur  dt  la  France  ^  L'Economiste  fran^ais  (July  B,  Jnly  J  9^  Mo  v.  1.  18 
Ibid.    (April  29,  June  17,  1882),     (List  of  pricea,  April  29,  1882,  from  1 847  t* 
whose  averages  take  account  of  quantities  told  at  different  prices.)  —  A*     M*aaB- 
i>AOLlA,  II  Calcolo  dei  Valitri  media  €  k  me  Afpiieaiioni  MaiiUiehe  (1S89)}  pp>  i 


TABLES  OF  PRICES 


223 


(To  mcsmre  fiiiPDtLftilrrg  power  ol  money  over  goodn,  concludes  tor  the  *nthi!i«tic 

irenftof  Tirtjitiatit  nf  quftntUJei  and  the  hmrmciiiiG  kverags  of  Yariittoni  of  price;  to 

B)«ifiut  purchiiAuig  power  of  goodt  over  luoaey,  the  adtbmetic  ATermgv  of  vBriatiortft 

of  (jflcfli  and  rej^eti  fSomHric  avprjige  ^nd  weigh iing.)  —  F.  Y.  EonEwoKTHj  Oa 

tki  Mttfhod  ft^  Ati'Mriainio^  o  Chttrtt/*  iu  Mf   Koine  of  Gold,  Jonr,  Roy,  Sta**  Soc. 

(Urc.,  ISS3);  BiporUv/BHiuk  4wciMu£ttjfi(lSSa)»  pp,  E5i-;I0U  (1889)  pp,  18»-919? 

(left)},  pp.  iaa-104;  Jftur.  Km--  Sut.  Sot.  (Juo«,  1888);  Apprtciation  of  GoU,  Qutr, 

Jour,  Eeoii,  (Jmi*»  18S9);  i?crf»f  H'ri/nv^*  <«  It^dtx  Aumbert,  Econ,  Jour,  (18^4); 

AHr»pi§  iitfi   /iK/f^  Number tt  in   Palcjuavis's   i^cftonary ;   ^  Defence  of  Imitx 

ifmliir§n  Eeoti,  Joyr,  (MA^dii  ]3£l6)«^     (Devoted  to  niBlhcinitical  aludj  of  averages 

lad  ii»d«ji  numben^    FinaHj  mgrvti  on  unweighted  Antbinetie  ATerij^  m  g^nermll^ 

iTiikble^  hut  hmw  choice  of  artides  and  m^thoda  on  objeet  s&oghL)  —  J.  Lkhk, 

Biiirdge  tar  SkUUtik  der  Prtiit  (I8S5).     (tn  general  follows  i»  weighting  DrobiBCh, 

irillb  idditlon  of  a  ''pleajfure  unit/*)  —  L.  WAt^KAS,  TnStwii  d*  tu  monnait  (1S8S>. 

(Ft«po«ei  lo  regalete  the  currene^r  hy  a  proper  indeat  number,)  ^  lBit>,,  ^7«nwHli 

itmomi*  p^ditjque  pure  (l$S9)i  pp>  431-43^,  4S7-46S,     (Favora  unweighted  geometric 

•ttfvgt  and  multiple  ttjiudard.)     A.  Simcin  and  L.  Walras,  Cfmlributivn  d /*duff« 

,  it*  tarvtUoni  deJ  prix  depnu  U  tu$p*tmon  dt  la  frapp»  dt$  eau  d^argtnt  (1885). 

^  (PHc«*  of  tweniy  «rticle»  at  Bcme,  1871^1884,  with  the  arithmetic  averajp  of  period 

lArl-JSTi  as  the  base.)     In  Walriifi'a  ^l^e$  d*ieoiMmi€  politiptt  apf^Hqu^*  {ed.  1808), 

ppi   51-^,  — M-  G.  Uejlhall,  (ht  thfi  VartAttim*  oj  Price  LevtiM  tinct  1850,  Eeport 

Brit>    A«s.  (188&),  pp,    1167-n&8;    Hittor^  af  Prictt  Hntt  the    Ttflr  1850  (18S&), 

fOppoMi  index  nutnber*  for  pHc«,  and  adopt*  '*  trade-level  *'  method.    Taking  1841- 

Xfi&0  «»  baM,  oontinneeUal  to  1884')«--'R.  H,  1ngl»  Palokavk,  Curr^nttf  and  Stamd^ 

*rf  <jf  Vaitt4  im  England^  /Wwr,  (tml  Induit  and  the  Rait*  ef  Ext hanfft.  hiiu^ttn  ih€9^ 

C&mtn^tM^  Third  BepoTt  Koyal  ComnntRioR  on  Depression  of  Trade  and  Industry  (ISSS), 

Appendix  B,  pp.  S12-S90.     (Adapted    Freoch  weighting  nysktem  to  KcmomUt  Uhte, 

itoordiug  to  relative  imponance  in  amsuraption  of  the  country.)  —  A.  Saubkhkck, 

Pr-i^f9  of  C^frnmodititt  and  tht  Predma  MttaU,  Jonr,  Roy.  BUL  Soc.  (Sept.,  1888; 

OftimiJnned  in  March  number  of  aatnc  journal  to  date).     Using  1867*1877  ai  a  ba«e« 

ff'w«£3<  unweighted  arithmetical  list  from  IS40  to  dftte.) —  I&IP,,  Econ^  Jour.  (June  and 

Sfepl.f  1B9&).    tRepliei  to  objections  by  N*  G-  Pieraon.J— A.  Maaaham^  Memtditt 

/«^T*     FliufuntiGm  of  Prica,  Contemp.  Her.  (MAichi  1887).     (Suggests  index  number 

liai»rf!  on  oonAumption,    Accepts  arithtDettc  iTcrigtt-)  —  J.  S.  NtCHOLSO^f,  Tkt  Mta»~ 

It^W'^Mnt  nf  Variatian  in  cAe  Vaiue  of  the  Monsiary  Standard,  Jour.  Roy.  Stat.  Soc. 

(IffsTChp  1887).    (Propofies  new  index  numbf^r  based  on  change*  in  the  ^alne  of  property 

vr    <*pi^t*IJ  —  W,  SCHABUJiG,  Dtr  DtiaithandeJ  und  du   WarinprmM,  Jahn  f.  NaL 

iaxs^StaU(1886),I9.  F.f  B.  XIII,  pp.  285-325.   (Throwft  doubt  on  the  apparent  change 

itt     fmrahaJing  power  of  tnoiiey.)  —  J.   Coj«BAPt    Btitrd^t  tur  B€Urthtihnff  m  der 

f>r-^iMfsditktion  tn  den  80  «r  Jahren,  JaJir.  f.  Nat.  nnd  Stal.,  N.  F.,  B.  XV,1887;  pp. 

fSSMSl.    {Continues  Paasehe'e  and  Von  der  Borght's  tables  to  1885).  —  IniD.^  ibid,,  B. 

X^H,  1890,  pp.  642-660.  (Continues  same  to  1897.)  — lBtt>,,  ibid,.  III  F..  B,  XIX, 

l^OOi  pp*  ^S&-^i1k  —  E,  HAaaE,  Da*  Giid  und  MH/mt^ucn^  Schonberg'a   Handbuch, 

\W0,  h  pp'  881-^3.     (Reviews  methods  of  measurement.)  —  H.  WESTEROAAitDf 

Dm  Gmndia^  der  Tkeona  der  Sttitiidk  (1890),  pp.  218-220.     (Offers  new  argument 

for  ftometric  average.)  —  H.  P.  FALii3JEit«  Btpirtt  qf  Finanet  CommitUt  o/"  Sfnaie, 

m  Cong^  lit  Sesa.,  No.  980,  on  Ketait  iViee*  (181*3);  Report  on  Wholesale  Price*, 

AM  Ooi^.,  2d  Sesa.,  No   1394  (1893).     (The  most  impuitaiit  table  of  AmericAu  price* 

eriroo/)«ct«d  was  compiled  under  his  supervision,  using  1860  sis  a  biu<e^  und  extend- 

%  /rum  181^  to  1891.     Give  index  numbers  weighted  according  in  tmpi>rtance  in 

litRiSr  tuadget*^  and  also  simple  unweighted  arithtnetic  average.     Collected  223  quota- 

iioaa  *iiice  1860) —Ibio,,  IVJioUmh  Prictx,  1890-18tKI;  Bullftin  of  the  Depnvtmtnt 

¥La^&f^  Ko.  37  (March^  1000).    (Table  of  99  articlei,  using  quarterly  quotations  from 

^«-i  ^Sd€,  to  Jao.,  1892,  u  a  baae.)^  G*  o'ATljrAli,  HtMimr^v&momiqut  dt  taprepneU^ 


224  THE  PRINCIFLES  OF  MONEY 

d€$  salairei,  du  tkwrifei,  d  de  t<m$  Utprix  m  general  depms  fan  1900 Jnaqu'em  Pa*  Uoo 
(4  rob^  1894-1808),  I,  pp.  6-18,  87,  88,  187.  (UtM  w«igbtiiiif  of  impoitaiMt  ia 
budgets  of  three  clasMe,  and  arithmetie  Average  of  amounts  of  goods  bonglit  bj  ^ 
sun  of  silver.)  —  F.  W.  Taussig,  JUtuUt  of  Recent  IwitttigatUmM  <m  Prieamikt 
UmUdatatti,  Balletin  de  rinstitut  InteniaUonal  de  Statistique  (1895),  pp.  88-88,  ibo 
in  Tale  Rev.,  Nov.,  1898.  (Gondades  thst  weighted  and  onweighted  index  mmbni 
have  about  same  practical  result)  —  N.  O.  Puckson,  Index  Numbere  and  ike  Affru 
eiation  of  Gold,  Econ.  Jour.  (Sept.,  1895).  (Accepts  arithmetic  average  and  Utm 
list  having  laigest  number  of  articles.) — Ibid.,  Further  Connderatiant  on  hdu 
Nwmheire  (March,  1896).  (Practically  rejects  whole  system  of  index  nnmben.)^6. 
WiBBB,  Znr  Getckickte  der  Preitrepolmtion  det  XVI  und  XVIlJakrknmderU  (IttI). 
(Approves  Lehr's  method,  and  covers  prices  in  Europe  fVom  1451  to  1700.)  — F.J. 
Atkinson,  Siltfer  Prieee  in  India,  Jour.  Roy.  Sut.  Soc.  (March,  1887).  (Using  ISTl 
as  base,  he  gives  prices  of  100  articles  from  1861  to  1895,  and  weights  the  ioda 
numbers.)  —  R.  Mato-Smith,  Statittia  and  Eeonotnice  (1899).  (Reviews  ths  pnb* 
lem,  and  generally  favors  the  arithmetic  average.)  ^  R.  S.  Padan,  Prieef  oad /sdn 
Numbere,  Jour.  Pol.  Econ.  (March,  1900).  (Attacks  Jevons's  geometric  sTvige. 
Favors  withmetio  average  and  weighting  according  to  quantity  sold.  Defends  iodtx 
numbers  against  Pierson.)— A.  L.  Bowlet,  ElemenU  of  Btatietiee  (1901).  (A  good 
nnodem  discussion  of  averages,  pp.  107-188,  and  of  Index  Numbers,  pp.  817-SIS.)- 
C.  A.  Walsh,  Tke  Meaeurement  of  General  Exckange-Value  (1901).  (QaSHe  tin 
most  thorough  and  systematic  discussion  of  the  whole  problem  yet  made.  Fitwi 
geometric  average  and  weighting.  Examines  critically  all  preceding  literaton  vhh 
rigorous  mathematical  processes.  Gives  an  exhaustive  bibliography.)  —  T.  8.  Adahi, 
Index  Numbere  and  tke  SUtndard  of  Value,  Jour.  Pol.  Econ.  (Dec.,  1901 ;  March,  19QI). 
(Asserts  inadequacy  of  consumption  and  labor  standards  and  of  index  numbtn  t» 
measure  value  of  money.  Argues  for  one  intermediate  between  cftnswneii'  aid  |x»- 
docen'  standards.) 


THE  QUANTITY  THEORY  OF  MONET 


22S 


CHAPTER  Vn 


L 


HISTORY  AND  LITEEATURE  OF  THE  QUA^TXTT  THEORY 

OF  MONEY 

The  «aigm&t1c  phenomeDdn  of  moner  h  eren  at  tbti  daj  without  ui  explani^ 
tion  tbAi  a^ti^B^  ;  nor  is  there  ^et  a^ectn«nt  on  the  mmt  fiiDdamental  qoes- 
tiooa  of  ic«  n&ture  and  fuoctioni.  Even  at  thin  day  we  hare  oo  eatiif actor j 
theorj  of  mouej.  — -KaeL  MBKOERr  Eton.  Joum.  (1892)  p.  340. 

Tbe  hbtoncaJ  viadltn  of  thii  dofifma  Kte  hwiK.  P.  WiLUi,  ffitttfry  o/  tkA  Qunniit^ 
riforf,  Jour.  Pol,  Econ.,  Stpt,  1896?  W.  A.  Soott,  TAe  Q*iaiHi(y  Tkeorf,  Atinals 
i»r  Amtr.  Ac»d,t  Htrch  £3,  lSd7;  W,  AoscnfRR,  /'crf^feuf  Econmi^^  \^  \  10];  R. 
ZucCEKSAJfDi^  Z^r  Th^tfritdtt  FreiMu  mit  btmnd^rer  Str^€lmchtignngdt!r  GetdUcht- 
^Atn  EntmcMung  der  Lihrt  (1389)^  mminlj  &  hiitonr  of  theoriei  of  tiJiit. 

§  1.  Out  of  the  ocean  of  literature  on  money  —  which  is 
far  beyond  the  power  of  any  one  man  even  to  read  —  it  may 
be  possible  to  present  the  thinking  of  the  most  influential 
writers  from  the  first  beginnings  about  the  sixteenth  century 
(without  hoping  to  name  all  those  who  are  worthy  of  men* 
tion),  and  to  draw  the  historical  setting  of  the  quantity 
theory  in  large  outlines,  A  critical  study  of  ita  validity  is 
not  possible  until  the  theory  has  been  followed  from  its  origin 
into  its  later  development. 

Assuming  the  general  results  of  scholarship  in  regard  to 
mercantilism^  it  is  evident  that  the  importation  of  specie  — 
which  was  mainly  silver  —  from  the  New  World 
created  perturbations  of  a  serious  nature  m  the  Am«rJc«  miMd 
value  of  sUver^  and  consequently  in  the  prices  of  p""^" 
all  goods»  wageSf  and  rents  expressed  in  that  standard  The 
belief  that  money  and  capital  were  nearly  synonymous  was 
widespread,  and  as  a  consequence,  nations  tried  to  encourage 
the  inflow,  and  discourage  the  outflow,  of  specie*  Out  of  the 
general  beliefs  thus  current  the  idea  that  an  increased  quan- 
tity of  money  led  to  a  higher  level  of  prices  was  natund  and 

16 


226 


THE  PRINCIPLES  OF  MONEY 


just  Without  doubt,  an  influence  such  as  the  opening  of 
rich  mines  in  America  must  have  had  a  direct  effect  on 
lowering  the  exchange  value  of  the  existing  stock  of  silver 
in  Europe-  The  supply  was  so  large  compared  with  the 
previously  collected  stock  that  the  world  value  was  with- 
out doubt  violently  changed.  Any  operation  by  which 
the  standard  of  prices  should  itself  be  lowered  in  value 
would  bring  about  a  rise  of  prices;  and  the  proportion  be- 
tween the  world's  stock  of  a  durable  metal  and  its  world 
supply  was  then  nothing  like  what  it  ia  to-day  after  centuriM 
of  accumulation  of  the  imperishable  precious  metals  has 
gone  on. 

Jean  Bodin^  (1568)  is  thought  to  have  been  the  first 
writer  to  ascribe  the  prevailing  high  prices  to  the  new  gold 
and  silver  from  America.  ^*  W*  S."  (probably 
John  Hales),  in  1581,  corroborated  this  view.* 
This  was,  however,  by  no  means  a  statement  of  the  quantity 
theory' ;  it  was  a  simple  explanation  of  a  rise  of 
prices  because  of  a  fall  in  the  value  of  the  stand- 
ard, quite  irrespective  of  any  comparison  between  the  quan- 
tity of  specie  in  circulation  in  the  world  (or  even  in  any 
one  country)  and  the  amount  of  ei£changing  to  be  done* 
Then  '*  W.  S."  made  an  observation  ^  worth  recording  here ; 
*'Thoughe  Gould  and  Silver  be  the  Mettalles  commonly 
whearin  the  coine  is  striken  to  be  tokens  in  exchange  of 
thinges  betewne  man  and  man,  yet  is  it  the  wares  tJiat  be 
necessarie  for  mans  nse  tliat  are  exchanged  in  dede  for  the 
outward  name  of  the  coyne,  and  yt  is  the  varietie  and  plentie 
&erof  that  maketh  the  price  therof  base  or  higher*'* 


Bodin. 


'*  W*  S." 


^  B^ponse  anx  para^loxfff  de  M.  de  Maleatrok  tonclmit  rench^rLSB«m«Dt  de 
toQt^  lei  ehoi^a  et  des  tnotitmiea  (Parid,  1558).  Cf.  alao,  B.  DavanzAti,  Leziotte 
deUe  moQeta  (1S8B},  who  nuggesta  Mont^qnien'a  exposition  that  aU  goods  Are 
ftqual  ID  value  to  aU  mooey. 

^  Alt«r  fiodiDg  that  a  reitomtioti  of  the  coinage  remOTed  tbe  aurgtunent  that 
Hgh  prices  might  have  been  doe  to  a  dehsLsenietLt  of  the  standard  coin. 

'  A  Diacoune  of  the  Commoa  Weal  of  this  K«alm  of  Blnglattd.  Ed.  bj 
Elixabeth  L&tnondp  Cambridge,  I^fig**  1693.  ItB  editor  believes  the  book  wu 
written  in  1549^  ftllhough  not  poUithed  until  I&8L    P.  7K 


i 


THE  QUANTITY  THEORY  OF  MONEY      227 

Paasing  by  Rice  Vaughan,^  the  first  definite  enunciation  of 
the  modem  quantity  theory  came  not  from  a  man 
of  afhirs,  but  from  John  Locke'  (1691),     He     •°*"^ 
starts  with  an  evidently  false  assumption  that  the  value  of 
money  is  imaginary:' 

^^  For  mankind,  having  consented  to  put  an  imaginary  value 
upon  gold  and  silver,  by  reason  of  their  durableness,  scarcity, 
and  not  being  very  liable  to  be  counterfeited ;  have  made  them, 
by  general  consent,  the  common  pledges,  whereby  men  are 
assured,  in  exchange  for  them,  to  receive  equally  valuable 
things,  to  those  they  parted  with,  for  any  quantity  of  these 
metals  .  .  .  they  having,  as  money,  no  other  value,  but 
as  pledges  to  procure  what  one  wants,  or  desires;  and  they 
procuring  what  we  want,  or  desire,  only  by  their  quantity,  it  is 
evident,  that  the  intrinsic  value  of  silver,  and  gold,  used  in 
commerce,  is  nothing  but  their  quantity."  ^ 

After  having  in  general  determined  the  necessary  **  propor- 
tion of  money  to  trade,"  and  recognizing  that  it  depends  not 
merely  on  the  quantity,  but  also  on  the  rapidity  of  circulation, 

^  Bioe  Vanghan  (1675)  gare  a  somewhat  sjitematic  treatment  of  money, 
bat  he  18  filled  with  the  mercantilist  opinion  that  much  money  leads  to  Inxnrions 
Unng.  After  eliminating  the  effects  of  debasement,  he  ascribes  the  high  prices 
then  still  evident  to  American  silver.  His  book,  it  should  be  added,  gives  one  of 
the  earliest  attempts  to  measure  the  average  variation  in  prices.  See  n^pra, 
p.  171. 

6.  Montenari,  Breve  Trattato  del  valore  delle  Moneta  in  tntti  gli  Stati 
(1683),  found  that  the  price  of  an  article  was  based  on  the  quantity  of  money  in 
drculation.    Roscher  (I,  §  101)  speaks  of  this  as  an  excellent  theory. 

^  Some  Considerations  of  the  Consequences  of  the  Lowering  of  Interest,  re- 
printed with  McCuUoch's  Principles  of  Political  Economy,  in  1870.  In  this  dis- 
coasion  Locke  rambles  over  nearly  the  whole  field  of  economics,  touching  upon  such 
diverse  topics  as  value,  rent,  the  justification  of  interest,  bimetallism,  the  balance 
of  trade,  the  value  of  land,  the  incidence  of  taxation,  and  in  an  appendix  **  Of 
Baiaing  our  Coin."    The  treatment  of  money  is  only  incidental. 

*  CI  Bonar,  Philosophy  and  Political  Economy,  p.  97.  Exchange  value 
would  not  exist  without  utility. 

Even  John  Law  could  not  conceive  how  different  nations  could  have  given  an 
imaginary  value  to  anything — least  of  all  to  money,  in  terms  of  which  all  their 
other  goods  are  valued  (Considerations  sur  le  numeraire  et  le  commerce,  ed. 
Daire,  pp.  467^71). 

*  P.  283. 


Quantity 
tneoiy. 


228  THE  PRINCIPLES  OF  MONET 

he  goes  on  to  the  central  idea  of  his  theory  by  pointing  oat 
that  the  demaDd  for  money  does  not  vary,  so  that  floctuatioos 
in  its  value  arise  only  from  changes  in  supply : 

^^Bat,  because  the  desire  of  money  is  constantly  almost 
everywhere  the  same,   its  vent  varies  very  little  ...  the 
,  lessening  its  quantity,  therefore,  always  increases  its 

price,  and  makes  an  equal  portion  of  it  exchange  for 
a  greater  of  any  other  thing.^ 
**  But,  everybody  being  ready  to  receive  money  without  bounds, 
and  keep  it  by  him,  because  it  answers  all  things :  therefore  the 
vent  of  money  is  always  sufficient,  or  more  than  enough.  This 
being  so,  its  quantity  alone  is  enough  to  regulate  and  determme 
its  value,  without  considering  any  proportion  between  its  quantity 
and  vent,  as  in  other  commodities.''  * 

That  is,  as  **  the  price  of  any  commodity  rises  or  &118,  b^ 
the  proportion  of  the  number  of  buyers  and  sellers  "  (p.  289), 
Locke's  the  value  of  money  is  a  peculiar  case  of  value— 

•rror».  ^j^^   ^  which  its  demand    never  varies.     His 

position  was  untenable ;  his  error  arose  at  bottom  from  con- 
fusing money  and  loanable  capital.'  Men  do  not  wish  money 
itself,  because  just  so  long  as  it  is  held  it  earns  nothing. 
Locke's  confusion  on  this  point  is  the  result  of  his  mercantilist 
belief  that  "  Gold  and  silver,  though  they  serve  for  few,  yet 
they  command  all  the  conveniences  of  life,  and  therefore  in  a 
plenty  of  them  consists  riches."  *  The  value  of  money  being 
imaginary,  but  money  being  always  in  demand,  and  having  its 
value  determined  solely  by  quantity,  is  not  a  very  logical  or 
serious  statement ;  it  borders  on  absurdity.*    And  yet  he  was 

1  P.  245.  a  p.  249. 

»  P.  223.  *  P.  226. 

*  "  The  idea  that  goods  might  be  stated  in  terms  of  one  another,  and  that 
when  so  stated  they  could  be  referred  to  money  as  a  common  denominator,  seems 
entirely  to  have  escaped  Locke,  and  the  cost  of  production  of  the  money  metal 
be  consciously  neglected.  .  .  .  The  Quantity  Theory  then,  as  Locke  stated  it,_ 
assumed  certain  invariable  elements.  Granted  that  commodities  are  onaltered. 
in  amount  or  in  conditions  of  production,  that  exchanges  are  constant  in  number, 
that  the  mechanism  of  exchange  is  the  same  in  its  general  character,  that  popu- 
lation and  the  rapidity  of  circulation  are  essentially  unchanged  —  prices  will 


THE  QUANTITY  THEORY  OF  MONEY  229 

not  unaware  of  the  effect  of  changes  in  methods  of  production 
on  prices ;  ^  but  even  this  cause,  in  Ms  opinion,  could  have  no 
result  except  through  an  actual  offer  for  sale,  thus  changing 
the  proportion  between  money  and  goods. 

John  Law*  (1705),  by   confusing  money  with  capital, 
exaggerated  the  work  of  money ;  by  an  increase  of  money  the 
.      idle  and  poor  are  employed,  more  land  is  culti-  j  j^t^ 
f      Yated,  and  manufactures  and  trade  are  developed.^ 
[      To  his  mind  it  was  money  that  gave  employment  to  labor. 
Without  directly  ascribing  the  level  of  prices  to  the  quantity 
o£  money,  he  took  the  &r  more  extreme  ground  that  every- 
thing depended  on  it : 

«« Commerce  and  population,  which  make  the  wealth  and 
power  of  a  state,  depend  on  the  quantity  and  the  r^ulation  of 
money.  ...  A  state  requires  a  certain  quantity  of  money 
proportioned  to  the  nambers  of  its  people.  •  .  .  The  balance 
of  trade  between  states  depends  on  the  quantity  and  management 
of  money*'  [meaning  by  money,  capital,  in  this  passage]. 

*^  It  is  the  great  quantity  of  money  and  the  low  interest  due 
to  it  that  enables  the  Datch  to  trade  cheaper  than  other 
nations." « 

Montesquieu^  (1748)  added  his  great  authority  to  the 
quantity  theory.  A  reminiscence  of  Locke  is  found  in  his 
defining  money  as  **a  token  (signe)   which  represents  the 

iep«nd  npon  the  quantity  of  the  money  mpplj."     H.  P.  Willis,  Hiitory  of  the 
(^nantitj  Theory,  Jonr.  Pol.  Econ.,  Sept.,  1896,  p.  419. 

^  **  Money,  whilst  the  same  quantity  of  it  is  passing  np  and  down  the  kingdom 
in  trade,  is  really  a  standing  measure  of  the  falling  and  rising  ralne  of  other 
tbizigs  in  reference  to  one  another ;  and  the  alteration  of  price  is  truly  in  them 
onlj^lp-iSS). 

^  "  Considerations,"  etc.,  first  appeared  under  tlie  title  "  Money  and  Trade 
coiMddered,  with  a  proposal  for  supplying  the  Nation  with  Money/'  in  Bdinhurgh 
in   1706  (London,  Sd  ed.,  1720,  and  Somers'  Tracts,  London,  1809,  pp.  775-817). 
•  £d.Daire,p.  471. 

'  Jtf^oire  snr  lee  banqnes,  pp.  549-550. 

*  "  L'Esprit  dee  lois  *'  (references  abore  given  being  to  the  Paris  edition,  1893) 
^^»»  first  published  at  Genera  in  1748.  Book  XXI  treats  of  laws  in  their 
'^^•^■on  to  the  use  of  money. 


280  TH£  PRINCIPLES  OF  MONEY 

value  of  all  commodities."  ^    All  goods  are  compared  wQi  ill  | 
money :  I 

*^  An  increase  in  the  quantity  of  gold  and  silver  is  tim 
advantageous  when  one  regards  the  metals  as  articles  of  nM^ 
Montes-  chandlse,  but  not  when  one  regards  them  as  tokeUf 
qoiaa.  because  their  value  as  tokens,  being  laigely  dependot 
on  their  scareity,  is  decreased  by  abundance."  ' 

<^  Money  is  the  price  of  merehandise  or  commodities.  Hot, 
then,  are  prices  determined  ?  That  is,  by  what  share  of  money 
is  each  thing  represented? 

^*  If  one  compares  the  amount  of  gold  and  silver  in  the  worid 
with  the  total  of  existing  commodities,  it  is  clear  that  t$A 
individnal  commodity  may  be  compared  with  a  certain  part  of  the 
entire  amount  of  gold  and  silver.  As  the  total  of  the  one  is  to 
the  total  of  the  other,  so  a  part  of  the  one  will  be  to  a  pari 
of  the  other.  .  .  .  Bat,  since  neither  all  property,  nor  the 
metals  or  money,  which  are  the  symbols  of  property,  arealwije 
o£Pered  for  sale,  pncea  arejlxed  by  the  ratio  between  the  totaiof 
things  and  of  tokens  actually  brought  to  market  Since  goods 
which  are  not  on  the  market  to-day  may  be  there  to-morrow,  tod 
the  tokens  which  are  not  offered  to-day  may  be  to-morrow,  prices 
are  always  ultimately  determined  by  the  ratio  between  the  total 
amount  of  goods  and  of  tokens.*  .  .  . 

'^  If,  since  the  discovery  of  the  Indies,  gold  and  silver  in 
Europe  have  increased  in  the  ratio  of  one  to  twenty,  prices  of 
commodities  must  have  risen  in  the  ratio  of  one  to  twenty. 
But  if,  on  the  other  band,  the  amount  of  commodities  has 
increased  in  the  ratio  of  one  to  two,  it  must  be  that  prices  hiTC 
on  the  one  side  risen  in  the  ratio  of  one  to  twenty,  and  that,  on 
the  other,  they  have  fallen  in  the  ratio  of  one  to  two,  so  that 
they  actually  stand,  in  consequence,  at  the  ratio  of  only  one  tc 
ten."* 

Bishop  Berkeley  (1735)  queries  "  whether,  *  ccBteris  paribvu 

it  be  not  true,  that  the  prices  of  things  increaa 

^  ^  ^'         as  the  quantity  of  money  increaselii,  and  sl 

1  Chap,  ii,  p.  321.  *  Chap,  t,  p.  324. 

*  Chap.  Til,  p.  325.    The  italics  are  mine.  *  Chap.  Tiii,  p.  326. 


THE  QUANTITY  THEORY  OF  MONEY      281 

diminished  as  that  is  diminished?"^    But  he  does  not  go 
into  proof.* 

The  mercantilist  writers,  who  looked  to  an  abundance  of 
&»  precious  metals  as  the  measure  of  a  country's  richness, 
easily  fell  into  a  belief  in  the  quantity  theory.  Although, 
even  here,  one  must  separate  the  statements  showing  a  fall  in 
the  yalue  of  the  metals  due  to  an  increase  of  the  quantity 
coming  from  the  New  World  from  the  statements,  like  those 
of  Locke  and  Montesquieu,  which  ascribe  changes  of  price 
to  a  changed  proportion  between  the  goods  to  be  exchanged 
md  the  quantity  of  the  metallic  circulation.  Men  like  Sir 
Uatthew  Decker  '  (1744)  saw : 

«<  That  the  Quantities  of  Gold  and  Silver  brought  to  Europe 
since  the  Progress  made  by  the  Spaniards  and  Portuguese  in 
America  have  made  those  Metals  more  common  and 
of  less  Value  than  formerly,  so  that  20«.  will  hardly  ^^**"'- 
purchase  what  1«.  would  before  the  Discovery  of  the  West 
Indies." 

tut  he  passes  this  point  of  view,  and  slides  into  the  quantity 
heory,  when  he  says : 

**  So  that  the  present  natural  Price  of  Land,  and  its  Produce, 
is  the  Proportion  of  Gold  and  Silver  that  Foreign  Trade  hath 
brought  into,  and  left  in  the  Nation :  If  the  present  Quantity 
was  to  be  doubled  by  Foreign  Trade,  the  natural  price  of  Land, 
and  its  Produce,  must  be  so  too;  ...  If  our  Foreign  Trade 
decays  until  the  present  Money  in  the  Nation  be  half  swept 
away,  the  Produce  of  Land  must  sell  for  half  the  natural  Price  ^ 

^  The  Qaerist,  No.  465,  p.  63. 

'  But,  on  the  contrary,  he  asks :  *'  Whether  the  ralne  or  price  of  things,  be 
DOt  a  compoond  proportion,  directly  as  the  demand,  and  reciprocally  as  the 
plenty?'*    No.  24.  p.  3. 

>  An  Essay  on  the  Causes  of  the  Decline  of  the  Foreign  Trade,  etc.  (4th 
mL,  Dnblin,  1751),  p.  71,  and  Part  II,  pp.  71-72. 

*  Bot,  as  a  merchant,  discassing  prices  from  a  practical  point  of  riew,  he 
ropped  his  theory,  and  recognized  the  influence  upon  prices  of  the  factors 
iteriog  into  expenses  of  production. 

Speaking  of  a  tax  on  coal,  he  says  it  must  raise  the  wages  of  labor  **  and  the 
-ioe  of  manufactored  goods''   (p.  12);  also,  he  says:  "  Whaterer  raises  the 


282  THE  PRINCIPLES  OF  MONET 

it  does  now,  and  Land  must  let  at  half  the  Rent  it  natonDj 
bears  now/' 

The  other  writers  of  Decker's  kind,  Gee,^  Child,'  and  tfae 
like,  held  similar  views,  adding  nothing  to  the  development 
of  the  theory. 

David  Hume  '  (1752)  modified  the  quantity  theory  as  ex- 
pounded by  Montesquieu,  by  confining  it  to  the  money  ia 
circulation  and  to  the  goods  in  the  market. 

^^It  seems  a  maxim  almost  self-evident,  that  the  prioee  of 
everything  depend  on  the  proportion  between  ooomMxlities  and 
money,  and  that  any  considerable  alteration  on  either 
has  the  same  e£Pect  either  of  heightenmg  or  lowcriog 
the  price.  Encrease  the  commodities,  they  become  cheaper; 
encrease  the  money,  they  rise  in  their  value.  As,  on  the  other 
hand,  a  diminution  of  the  former,  and  that  of  the  latter,  hafe 
contrary  tendencies. 

^^  It  is  also  evident,  that  the  prices  do  not  so  much  depend  oq 
the  absolute  quantity  of  commodities  and  that  of  money,  whiofa 
are  in  a  nation,  as  on  that  of  the  commodities,  which  come  or 
may  come  to  market,  and  of  the  money  which  drculatei. 
If  the  coin  be  locked  up  in  chests,  it  is  the  same  thii^  with 
regard  to  prices,  as  if  it  were  annihilated ;  if  the  commodities  be 
hoarded  in  magazines  and  granaries,  a  like  effect  follows.  Ab 
the  money  and  commodities,  in  these  cases,  never  meet,  tbey 
cannot  affect  each  other.  ...  It  is  the  proportion  between  tbe 
circulating  money,  and  the  commodities  in  the  market,  which 
determines  the  prices."  * 

Hume,  therefore,  gave  the  theory  its  modem  form,  even  in 
its  detailed  application  to  the  movement  of  exports  and  im- 

Neceraaries  of  Life,  raises  Labour,  and  of  course  the  Price  of  ererj  Thug  thift 
is  produced  by  Labour"  (p.  15 ;  cf.  pp.  92,  97,  160). 

1  Trade  and  Narigation  of  Great  Britain  (1729). 

^  Obserrations  concerning  Trade  and  Interest  of  Money  (1688).  A  new  Dit* 
course  on  Trade  (1690). 

"  Essays,  Moral,  Political,  and  Literary  (Economic  Essays  first  published  ia 
1752).  References  are  to  the  Edition  of  Essays  by  Green  and  Groese^  Londoii. 
1889,  L 

*  Pp.  316-318. 


THE  QUAKTITY  THEORY  OF  MONEY 

ports.  He  pointed  out  that  when  England's  specie  la  drawn 
off,  prices  fall,  exports  increase,  imports  diminish,  exchange 
ttims  in  favor  of  England,  and  specie  flows  in ;  and  vice  versa. 
Moreover,  he  formulated  the  law  of  the  distribution  of  the 
precious  metals  among  nations  (usually  aseiibed  to  Ricardo) 
in  showing  that  the  natural  operations  of  trade  '^must  for 
ever,  in  all  neighbouring  nations,  preserve  money  nearly  pro- 
portionable, to  the  art  and  industry  of  each  nation,"  * 

Joseph  Harris^  (1757)  gave  the  beat  general  discussion  of 
money  then  published.  On  moat  of  the  fundamentals  he  is 
clear  and  consistent ;  but  be  displays  the  common  disposition 
to  theorize  on  prices,  and  yet  abandon  his  theory  in  practical 
use.  His  escposition  of  the  quantity  theory  is  a  careful  de- 
velopment of  previous  writing  on  prices ; 

**  Money^  exchanging  universally  for  all  commodilteg,  the 
dem&nd  for  it  is  without  any  limits ;  it  is  e?erywhere  coveted, 
and  never  out  of  fashion  :  And  therefore,  on  the  one  side,  the 
whole  qaaotity  of  money,  cannot  exceed  the  whole  demand ;  and 
on  the  other  Bide,  the  whole  demand  must  not  exceed,  or  It 
mnst  rest  satiafled  with,  the  whole  quantity «  ,  ,  . 

'^Therefore,  as  soon  as  money  becomea  properly  diffnaed 
thronghoot  any  community  ;  Hie  valae  of  the  mm  total  of  it  in 

^  P.  S3S.  Hit  Tiewi  on  the  eifect  of  p«.per  monej  on  pricM  u«  woiib 
qaotfng :  Bttnkft  "  r«ndef  paper  eqni talent  to  monej*  circnlaia  it  throng hont  tba 
wbole  i!tat«f  make  It  tnpplj  the  plftc«  of  gold  aad  silrer,  raiia  proportioDablj  the 
prieB  of  liibonf  ftud  comixioditiefl,  snd  b^  tbat  meknft  «]tber  ban i ah  a  great  part 
of  those  pfeciotis  metal »,  or  prevent  their  farther  euereaac  "  (p.  337). 

He  thought^  too,  that  public  secarities,  being  a  kind  of  paper  credit,  raiaed 
pHce*  (p.  S&Sj. 

High  pnce5  were,  to  Hnioe,  an  eril,  becanae  thej  made  il  poaiible  for  otJm 
n«iioni  to  undersell  Eugland  in  foreign  market*. 

FinalljF,  Hnme  gave  an  admirable  accoent  of  How  a  riae  of  pricee  oemea 
about,  bj  steps  moiring  (torn  one  article  to  auotherp  until  ali  bare  riieu  (pp. 
313^14), 

*  Au  Eaiaj  upon  Money  aud  CoiuB.  Part  I,  The  Tbeoriet  ol  Commer«e, 
Monej  and  Eschangea.  London,  1757.  .  .  .  Part  I  J,  Wberctn  i»  Shewed  That 
the  Establiabed  Standard  of  Monej  ahould  not  be  mUaiid  or  olurtd  under  any 
pretence  whateoeTer.    London,  17 58. 

He  wu  penetrating  enough  to  discard  the  balance  of  trade  tbeotj ;  but  he 
applied  the  qttantlty  theory  to  intemati<mal  trade  (pp*  39-95). 


2S4  THE  PRINCIPLES  OF  MONEY 

circulation,  will  be  equal  to  the  whole  quantity  of  commoditiii 
in  traffic,  in  that  country:  For  bo  much  money  and  goods ai 
lie  dormant,  or  are  out  of  currency  and  traffic,  fall  not  witUi 
the  present  consideration.  And  so  far  as  gold  and  sily»,iiiiki 
the  money  of  the  world ;  so  far,  the  whole  quantity  of  tiMH 
metals  in  circulation,  may  be  said  to  be  equal  in  iniJoe  to  al 
the  commodities  of  the  world,  exchangeable  by  them:  Andai 
the  total  of  the  one,  is  to  the  total  of  the  otiier;  so  will  tuj 
given  part  of  the  one,  be  to  a  like  part  or  proportion  (^  tts 
other. 

^^  And  hence,  the  value  of  a  given  quantity  or  sum  of  oonej, 
in  any  country,  will  be  less  or  more,  according  as  the  sum  totd, 
JoMph  Of  ^^  whole  quantity  of  money  in  currency,  is  greater 
^'f^*  or  less,  in  proportion  to  the  whole  of  the  oommoditiei 
of  that  country,  exchangeable  for  money :  Or,  the  value  of  a 
given  sum  of  money  will  be  alwaySy  preUy  eoDocUyj  in  a  rec^^roed 
proportion  to  the  sum  toted,  or  the  whole  quantity  in  drcidatim; 
that  is,  the  more  money  there  is  in  currency,  the  less  will  be  the 
value  of  a  given  sum  in  proportion  to  other  things ;  and  fnoi 
versd.  Hence  again,  it  naturally  follows,  that,  (f,  in  aay 
country,  the  wliole  quantity  of  money  in  circulation,  be  eSher 
increased,  or  diminished;  the  value  of  a  given  sum  wiU  be  a^ 
cordingly  lessened  or  increased;  and  that  in  proportion,  as  Un 
said  sum  becomes  thereby,  a  lesser  or  greater  partj  of  the  uMi 
stock  in  currency.**  ^ 

Although  he  extended  his  view  to  the  ^'  money  of  the 
world,"  he  ended  by  limiting  his  argument  to  the  quantity 
of  money  in  any  one  country  as  controlling  prices 
of  Hmrris'i  there.  In  short,  he  reasoned  that,  as  all  goods 
mrgumen  .  exchanged  were  transferred  by  money  as  a  medium 
of  exchange,  the  price  ratio  between  silver  and  g^ods  was  de- 
termined by  the  comparison  of  the  sum  total  of  goods  with 
the  total  money  in  use  as  a  medium  of  exchange,  —  without 
seeming  to  realize  that  the  price  appraisal  between  goods  and 
money  as  a  standard  may  possibly  be  determined  before  ex- 
change takes  place,  and  is  influenced  by  many  considerations 
affecting  both  money  and  goods.     Therefore  the  actual  quan- 

1  Pp.  67-69. 


THE  QUANTITY  THEORY  OF  MONEY      235 

tity  of  the  medium  offered  in  exchange  for  commodities  must, 
of  course,  in  any  event,  equal  the  value  of  the  commodities 
as  expressed  in  money:  it  b  a  statement  of  the  results  of  the 
price  appraisal,  saying  nothing  as  to  the  cause  of  prices.  The 
difficulty  of  Harris's  position  is  the  same  as  Uiat  of  some 
recent  writers,  who  think  that  demand  for  goods  is  measured 
by  the  media  of  exchange  actually  used  to  transfer  them. 

But  in  practical  questions  Harris  sees  clearly  (what  is 
inconsistent  with  the  strict  quantity  theory)  that  conditions 
affecting  the  production  of  goods  influence  their  price : 

Is  diseuesiug  "  why  the  prices  of  commodities^  have  not  rose 
in  proportion  to  the  increase  of  money,'*  be  points  out  that  there 
has  been  a  great  Increase  in  the  supply  of  goods  as  well  as  of 
money.  ^*  For,  the  improvements  of  arts,  lessen  the  values  or 
prices  of  particular  commodities;  and  the  improvements  of 
bnsbandjy,  in  particular^  lessen  the  prices  of  corn  and  cattle.'*  * 

f  2.  The  statement  of  the  quantity  theory  received  practi- 
cally no  dissent  until  Sir  James  Steuart*  wrote  (1767)*  It 
will  have  heen  noticed  that  in  obiter  dicta  previous  writers 
had  referred  to  demand  and  supply  of  goods  aa  regulating 
their  prices,  while  they  regarded  the  quantity  theory,  so  to 
speakf  as  the  official  dogma.  But  Sir  James  Steuart  datly 
denied  that  prices  were  governed  by  the  quantity  of  money 
in  circulation,  and  directed  aU  his  argument  to  show  that 
t^ey  depended  upon :  ' 

'*  First,  the  ahun dance  of  the  thiniTB  to  be  valued  ;    Sir  Jiioii 
Secondly,  the  demand  which  mankind  make  for  them ;    oppofl«i 
Thirdly,  The  Competition  between  the  demanders ;      "  ^      *  * , 
and,  Fourthly,  The  Extent  of  the  faculties  of  the  demanders*'* 


In  stating  that  prices  ara  regulated  by  the  **  relative  pro- 
portion between  conmiodities  and  the  wants  of  mankind '' 

1  p,  78. 

3  All  Inquiry  into  the  Frrodplefl  of  Political  E&momj  (17S7),  3  toU.     The 
TwUnDcen  miB  to  WotJiA  (ISO&),  I-IV. 
*  Ht  pp.  371-37^ 


286  THE  PBINCIPL£S  OF  MONET 

he  practically  referred  the  question  to  the  general  relation 
between  the  supply  of  goods  and  the  demand  for  them ;  lad 
he  does  not  make  clear  what  he  means  by  demand  in  ttii 
connection : 

*^  As  far  therefore,  as  an  increase  of  the  metals  andooiDi 
shall  produce  an  increase  of  demand,  and  a  greater  competitioa 
than  before,  so  far  will  this  circumstance  influence  the  rise  of 
prices,  and  no  farther."  ^ 

He  saw,  also,  that  ^  gold  and  silyer  are  commodities  merely 
like  every  other  thing/'* 

In  short,  he  belieyed  the  prevailing  theory  of  prices  to  be 
wrong,,  but  he  was  unable  to  give  much  more  than  a  hazy 
guess  at  a  sound  theory : 

**  It  is  impossible  to  lay  down  a  distinct  theory  for  the  rise 
and  fall  of  the  prices  of  all  sorts  of  commodities  in  a  natioQ 
such  as  Great  Britain.  All  that  can  be  said  with  certainty,  is, 
that  competition  on  the  part  of  the  consumers  wiU  make  them 
rise,  and  that  competition  on  the  part  of  the  furnishers  wiU 
make  them  fall"  * 

His  progress  was  sensible ;  but  while  the  older  writers  piv- 
oted the  theory  of  prices  on  a  demand  for  goods  defined  by 
the  quantity  of  money  in  circulation,  Steuart  regarded  prices 
as  practically  regulated  by  a  demand  on  the  part  of  consumers. 
This  advance  was  not  great,  but  he  clearly  directed  thinking 
into  aimew  channel^  by  insisting  that  gold  and  silver  were 

1  n,  p.  273.  «  III,  p.  2.  •  m,  p.  15. 

*  Arthur  Yonng'fl  defence  of  the  quantity  theory,  Political  Arithmetic  (1774), 
against  Steuart  was  exceedingly  lame,  because  he  regarded  money  as  synonymous 
with  income,  and  so  with  demand : 

**  I  never  understood  either  M.  de  Montesquieu  or  Mr.  Hume  to  assert  or 
mean,  that  very  great  variations  would  not  be  frequent,  independently  of  the 
quantity  of  money.  .  .  .  All  such  variations  are  perfectly  consistent  with  the 
idea  that  the  price  of  commodities  will  depend  on  the  quantity  of  specie ;  be- 
cause this  idea  is  not  relative  to  certain  days,  weeks,  months,  or  markets,  but 
to  general  periods  in  which  money  has  increased  or  decreased ;  .  .  .  one  50 
years  with  another  50,"  etc.  (pp.  113-114). 

"Let  us  take  Sir  James*t  supposition;  suppose  our  national  wealth  to  be 
increased  to  ten  times  the  present  amount.  .  .  .  Thus  every  man  possessing 


THE  QUANTITY  THEORY  OF  MONEY 


SSI 


Adtm  Smith. 


h  commodities  Eke  any  other,  and  that  influences  acting  on  the 
rcommoditj  side  of  the  price  ratio  were  of  decisive  importance. 
It  is  to  Adam  Smith  that  we  are  indebted  for  a  broader  and 
Lmore  illuminating  discussion  of  prices  than  any  furnished  by 
Iprevious  writers.  The  principles  he  worked  out 
Imnderlying  the  value  of  goods,  helped  him  in 
ascertaining  the  relative  values  of  money  and  goods,  that  is, 
prices.  He  discarded  altogether  the  limited  view  which  re- 
garded prices  as  regulated  by  a  demand  for  goods  which  was 
expressed  by  the  quantity  of  money  in  circulation.  On  the 
contrary,  he  elaborated  a  view  of  price  which  depended  on 
the  various  elements  entering  into  cost  of  production.  Labor 
being  shown  to  be  the  primary  cause  of  value,  he  found  that 
the  value  of  any  article  of  merchandise,  as  well  as  gold  and 
silver,  was  governed  by  its  cost  of  production  (measured  by 
the  quantity  of  labor  it  could  command).  If  the  precious 
metals  could  be  obtained  by  a  diminished  quantity  of  labor, 
they  would  exchange  for  less  of  other  goods,  and  vice  ver»a. 
Hence  prices  might  change  for  reasons  affecting  the  quantity 
of  labor  require  in  the  production  of  the  precious  metab,  as 
well  as  of  any  other  articles*  Anything  which  affected  the 
marginal  expenses  of  production  at  the  mines  would,  in  the 
end,  affect  the  values  of  the  precious  metals,  and  thus  prices : 

*^  Gold  and  Silver,  like  every  other  commodity,  vary  in  their 
value ;  .  .  .  are  sometimes  cheaper  and  sometimes  dearer, 
sometimes  of  easier  and  Bometimes  of  more  difficult  fMrchase. 

ten  t!m6A  hU  present  wealth  and  JDCome,  immediately  increanefl  hte  expencei* 
.  .  .  AU  this  forms  a  fresh  demand  lor  erory  article ;  and  aa  the  wealth  of 
otbets  haa  the  eame  effect  with  tbem^  here  la  competition ;  if  prices  in  conae- 
quence  of  thia  demand  luxd  oompetitioB  should  not  riae,  sural j  it  would  be 
miracoloua  "  (pp.  117-1  IS). 

Young  refers  to  the  point  raided  hy  Sleuart  touching  an  increafled  demand  for 
Mm^baKtar  goods  at  unchanged  expenses  of  prodncdun,  and  admits  that  it  ia  a 
itrong  objection;  but  he  cavalierly  disroijs#e»  It  aa  unimportant  (pp,  US- 1 20). 

Jobn  WbeaCtey  (Remarks  on  Currency  and  Commerce,  London*  1B03),  repHed 
to  Stenart'ft  attaek  on  tbe  qaantity  theory :  "  Demand  is  alwuys  regolated  by  the 
general  ability  te  psy,  and  not  by  the  desire  to  have.  .  .  .  The  price  of  prod- 
uce therefore,  must  ever  be  regulated  by  the  quantity  of  money  in  circulation 
for  Its  purcbaaej  and  its  own  quantity  at  tbe  time  lo  anawer  the  demand  "  (p.  35), 


238 


THE  PRINCIPLES  OF  MONET 


The  quantity  of  labour  wbieh  any  particular  quantity  of  them  caa^ 
purchase  or  coiDmaod,  or  the  quantity  of  otber  goods  which  it 
will  exchange  for^  depends  always  upon  tbe  fertility  or  barren- 
D€se  of  the  mines  which  happen  to  be  known  about  the  time 
when  such  exchanges  are  made.  The  discovery  of  the  abundant 
mines  of  America  re<luced,  in  the  sixteenth  century,  the  value 
of  gold  and  silver  in  Europe  to  about  a  third  of  what  it  bad 
been  before.  As  it  cost  less  labour  to  bring  those  metals  from 
tbe  mine  to  tlie  market,  so,  when  they  were  brought  thither,  they 
could  purchase  or  command  less  labour."  * 

In  bis  treatment  of  metallic  and  paper  money  Smith*  ex* 
plained  that  an  addition  of  convertible  paper  would  not  raise 
. ,     ^  .  ^      prices,  because  it  would  drive  out  an  equal  quan- 

Adtm  Smith       \  ,        -  ,     ,  ,  j>  i  ,  •  i 

an  p»i»f  tity  of  com ;  and  tbe  exchange  of  goods  wmeh 

'""°*^'  had    been   formerly  perfonned    solely   by   coin, 

would  now  be  effected  by  the  same  quantity  of  a  mixed  circu- 
lation of  paper  and  coin.  Any  addition  of  coin  or  conYertible 
paper,  beyond  the  amount  already  indicated  as  needed  by  the 
community,  would  overflow ;  the  paper  could  not  go  abroad  i 
the  surplus  coin,  being  too  valuable  to  lie  idle,  would  be  ex* 
ported.  Thus  changes  of  this  sort,  which  did  not  change  the 
value  of  the  metal  used  in  the  coLu^  would  not  affect  prices* 
This  is  an  immense  progress  beyond  previous  writers;  and  bufl 
neatly  gave  the  coup  de  grdce  to  Hume  in  the  following  char^ 
acteristic  passage,  combining  reasoning  and  fact: 

"The  increase  of  paper  money,  it  has  been  said,  by  aug-V 
men  ting  the  quantity,  and  consequently  diminishing  the  value 
of  the  whole  currency,  necessarily  augments  the  money  price  of 
com  modi  ties*  But  as  the  quantity  of  gold  and  silver  which  is 
taken  from  the  currency,  is  always  equal  to  the  quantity  of 
paper  which  is  added  to  it,  paper  money  does  not  neeessarily 
increase  the  quantity  of  the  whole  currency.  From  the  begin- 
ning of  the  last  century  to  the  present  time,  provisions  never 
were  cheaper  in  Scotland  than  in  176$,  though,  from  the  eircu> 
lation  of  ten  and  five  Bhilling  bank  notes,  there  was  t^en  more 

1  Wealth  of  NstbuB  (McCnlloch's  ed.)  p.  14  (Book  I,  chap.  r). 
3  Ibid,f  Book  n,  chap,  ii,  p.  127. 


THE  QUANTITY  THEORY  OF  MONEY      289 

paper  tnoaey  in  tbe  coatitry  thaa  at  present  The  proportion 
between  tbe  price  of  provisiona  in  Scotland  aud  that  in  England, 
IB  the  same  now  as  before  the  great  multiplioatioD  of  banking 
companies  in  Scotland,  Corn  is,  upon  moBt  occasions,  fully  aa 
cheap  in  England  as  in  France;  though  there  is  a  great  deal  of 
paper  money  in  England,  and  scarce  any  in  France.  In  1751 
and  in  1752,  when  Mr*  Hutne^  published  his  PoUtical  DiscourBes, 
and  soon  after  the  great  to ulti plication  of  paper  money  in  Scot- 
land,  there  waa  a  very  sensible  rise  in  the  price  of  provisions* 
owing^  probably,  to  the  badness  of  tbe  seasons,  and  not  to  the 
multiplication  of  paper  money,"  ^ 

The  greatness  of  Adani  Smith  is  seen  not  only  in  his  pene- 
^trating  treatment  of  the  fallacies  underlying  mercantilism, 
and  its  confusion  of  money  and  wealth,  but  also  in  his  outline 
for  comiDg  time  of  the  essential  elements  of  the  price  ques- 
tion, resting  on  a  consideration  of  the  comparative  values 
of  goods  and  money,  and  not  on  a  comparison  of  goods  with 
the  amount  of  the  media  of  exchange  (or  circulation).  Mak- 
ing due  allowance  for  the  meagre  expression,  **  quantity  of 
labour,"  a  return  to  the  following  analysis®  of  Smith,  unmis- 
takably gives  the  direction  in  which  we  may  look  for  the 
solution  of  the  price  problem: 

*  *  A  paper  currency  which  falls  below  the  valne  of  gold  and 
sOver  coin,  does  not  thereby  sink  the  value  of  those  metals,  or 
occasion  equal  quantities  of  them  to  exchange  for  a   /^^f^jj^  Sm'ith 
smaller  quantity  of  goods  of  any  other  kind.     The   "^f  J^^*^Jy* 
proportion  between  the  value  of  gold  and  silver  and    of  price, 
that  of  goods  of  any  other  kind,  depends  in  all  cases,  not 
upon  the  nature  or  quantity  of  any  particular  paper  money 

^  Cf'  H  nine's  stalemcnt^  auto,  p.  S33,  nota  1. 

3  Smith  &I110  hit  the  ceo  ire  of  the  target  in  mentioning  phpet^  A  rednctfon  in 
the  value  of  the  fltandard  he  saw  woald  lead  Us  a  rise  of  priee«}  irreepectire  of 
the  qmintjiy  in  circnlatioti.  "  Such  a  paper  moaey  wonld^  no  doabti  fall  more  or 
lesfl  below  the  value  of  gold  uid  eOver,  ac4:4>rdiDg  aa  the  difficulty  or  an  certainty 
of  ohtaioin^  rmmediato  paymetit  wa»  supposed  to  ha  greater  or  leaa  ;  or  a^icord- 
ing  to  the  greater  or  le^s  distance  of  tiiiie  at  which  pajnient  waa  e^gible  '^ 
(p.  143).    Cf.  infra,  chap,  aev,  §  7* 

«  Ibid,,  p.  145. 


240  THE  PRINCIPLES  OF  MONET 

which  may  be  current  in  any  portdcalar  coontryy  bat  apon  the 
richness  or  poverty  of  the  mines,  which  happen  at  any  particolar 
time  to  supply  the  great  market  of  the  commercial  world  with 
those  metals.  It  depends  upon  the  proportion  between  the 
quantity  of  labour  which  is  necessary  in  order  to  bring  a  certain 
quantity  of  gold  and  silver  to  market,  and  that  which  is  neces- 
sary in  order  to  bring  thither  a  certain  quantity  of  any  other 
sort  of  goods." 

He  escaped  the  pitfall  of  assigning  the  detenniiiation  of 
prices  to  a  vague  idea  of  general  demand,  or  poichasing  power, 
be  it  measured  by  the  quantity  of  money  in  circulation  (i.  €., 
by  the  media  of  exchange)  or  by  the  circulation  together  with 
credit,  as  often  put  by  later  writers. 

§  8.  Without  drawing  too  strict  a  line  between  what  is 
historical  and  what  is  modem,  it  may  be  well  to  regard  the 
writers  from  (and  including)  Ricardo,  as  famishing  the  state- 
ment according  to  which  the  modem  quantity  theory  muster 
stand  or  fall.    Very  recent  writers,  like  Greneral  Walker^^ 
recur  to  Ricardo  as  giving  the  best  present  formulation  of  th^^ 
doctrine.    It  shall  be  our  next  object,  then,  to  obtain  as  exac^Mt 
a  statement  as  possible  of  the  economic  processes  by  whicl=ai 
prices  are  thought  to  be  regulated  according  to  the  generaUi*     y 
accepted  quantity  theory  of  the  present  day. 

While   Ricardo    undoubtedly  formulated  this  theory,  h-   ^r 

disclosed  alongside  it,  in  his  general  discussion,  so  many  evf — i- 

dences  of  a  very  different  conception  of  price  tfaa^^t 

of  price  by        it  is  uot  casy  for  him  to  escape  the  charge  of 

**^  **'  consistency.     The  explanation,  however,  is  prot 

ably  to  be  found  in  his  making  no  real  distinction  betwe^^3n 
money  as  a  common  denominator  (or  standard)  and  as  a 
medium  of  exchange.  As  between  goods  and  a  metallic  col 
age  he  found  a  fairly  just  theory  of  price ;  but  when  he  < 
cussed  the  value  of  depreciated  paper  money  he  applied  a 
rigid  quantity  theory,  —  with,  however,  many  an  insig^»ht 
into  other  and  truer  principles.  First,  following  Ricard____o'8 
fundamental  views  on  value,  we  shall  find  in  them  the 


THE  QUANTITY  THEORY  OF  MONEY      241 

of  a  view  of  price,  which  stands  out  in  clear  contrast  to  his 
quantity  theory. 

(A)  The  precious  metals,  he  points  out  in  a  passage 
quoted  from  Adam  Smith,  are  primarily  valuable  for  their 
intrinsic  qualities,  and  conditions  of  production : 

'^^The  quality  of  utility,  beauty,  and  scarcity,'  says  Dr. 
Smith,  '  are  the  original  foundation  of  the  high  price  of  those 
metals,  or  of  the  great  quantity  of  other  goods  for  which  they 
can  everywhere  be  exchanged.' "  ^ 

There  is  thus  no  difference  between  the  precious  metals  in 
which  prices  are  expressed  and  other  commodities  as  regards 
the  causes  which  determine  their  respectiye  values,  for  he  says : 

*^  Grold  and  silver,  like  all  other  commodities,  are  valuable  only 
in  proportion  to  the  quantity  of  labour  necessary  to  produce 
them  and  bring  them  to  market"  * 

'^  If  I  found  ...  a  given  quantity  of  gold  could  be  obtained 
with  a  less  quantity  of  labour,  I  should  be  Justified  in  saying 
that  the  cause  of  the  alteration  in  the  value  of  gold  rekoiv^y  to 
other  commodUiea^  was  the  greater  facility  of  its  production,  or 
the  smaller  quantity  of  labour  necessary  to  obtain  it"^ 

If,  then,  there  can  be  a  change  ^^in  the  value  of  gold  rela- 
tively to  other  conmiodities,'*  that  is  exactly  the  same  thing  as 
a  change  of  prices  of  those  goods,  and  it  has  been 
caused  by  an  alteration  in  the  cost  of  acquisition  md  silver 
of  the  conunon  denominator.     Here  we  have  an      *^  p  **• 
admission  that  prices  can  be  influenced  without  regard  to  a 
variation  in  the  quantity  of  the  media  of  exchange,  and  arising 
directly  from  a  change  in  the  value  of  the  standard.     Ricardo 
even  points  out  in  detail  how  gold  and  silver  are  subject  to 
fluctuations  because  of  discoveries  and  improvements,  or  by 
decreasing  production  from  the  mines.^ 

1  Works,  McCnUoch's  ed.  (London,  1888),  p.  263. 
s  Ibid,,  p.  fil3. 

*  Ihid.,  p.  13.    The  italics  are  mine. 

*  "  Gold  and  silver  are  no  doabt  subject  to  flactoations,  from  the  discorerj  of 
new  and  more  abundant  mines ;  but  snch  discoveries  are  rare,  and  their  effects, 

16 


242  THE  PRINCIPLES  OF  MONEY 

Since  price  arises  from  comparing  the  values  of  goods  with 
the  value  of  the  standard,  we  may  now  seek  to  find  in 
Ricardo's  words  how  prices  may  be  influenced  by  changes  on 
the  goods  side  of  the  price  ratio : 

^^  Some  commodities  are  rising  in  valae,  from  the  effects  of 
taxation,  from  the  scarcity  of  the  raw  material  of  which  tiiey 
How  Chan  "*  made,  or  from  any  other  caose  which  increases 

on  goods  udo      the  difficulty  of   production.      Others  again  am 
t  price.        falling,  from  improvements  in  machinery,  from  tlift 
better  division  of  labour,  and  the  improved  skill  of  the  work-^ 
man;   from  the  greater  abnndance  of  the  raw  material,  snA. 
generally  from  greater  facility  of  production."  ^ 

The  fundamental  forces  affecting  prices,  both  on  the  sid^s 
of  the  common  denominator  and  on  the  side  of   goods, 
thus  fairly  stated.    But  he  goes  farther  than  this,  and  seen 
to  clinch  this  theory  of  prices  by  the  following  passages : 

'^  It  is  the  cost  of  production  which  must  ultimately  i 
the  price  of  commodities.  .  .  . 

''  The  opinion  that  the  price  of  commodities  depends  solely  < 
the  proportion  of  supply  to  demand,  or  demand  to  supply, ! 
become  almost  an  axiom  in  political  economy,  and  has  been  i 
source  of  much  error  in  that  science.  .  .  . 

^^  The  demand  for  a  commodity  cannot  be  said  to  increase,  ^Smt 
no  additional  quantity  of  it  be  purchased  or  consumed ;  and  ye"  I, 
Error  in  ap-  under  such  circumstsuces,  its  money  value  mn  ^y 
Deiiing  to  rise.    Thus,  if  the  value  of  money  were  to  fal — Ml, 

demand  and        ^,  .  .  j.^  u       • 

supply  accord-    the  pnce  of  every  commodity  would  nse.  .  . 
ingtoRicardo.    j^  natural  price,  its  money  cost  of   producticz^DD 
would  be  really  altered  by  the  altered  value  of  money;  ai      -id 
without  any  increase  of  demand,  the  price  of  the  oommodi~       ty 
would  be  naturally  adjusted  to  that  new  value.'** 

thoogb  powerM,  are  limited  to  periods  of  comparatively  abort  daration.    Tk^^ay 
are  anbject  also  to  flnctoations,  from  improvements  in  the  skill  and  mmcbin^^Biy 
witb  which  the  mines  may  be  worked ;  as  in  consequence  of  sach  improyemec^^ 
a  greater  quantity  may  be  obtained  with  the  same  labour.    They  are  fort^lEMr 
subject  to  fluctuation  from  the  decreasing  produoe  of  the  mines,  after  they  hs^re 
yielded  a  supply  to  the  world,  for  a  succession  of  ages."    Works,  p.  11. 
^  Ibid.,  pp.  400-401.  <  Ibid.,  p.  2SS. 


THE  QUANTITY  THEORY  OF  MONEY      248 

That  is,  while  some  writers  ^  insist  that  the  quantity  theory 

U  only  an  application  of  the  general  principle  of  demand  and 

supply  (and,  therefore,  incapable  of  disproof  by  inductive 

verijBcation),  Ricardo  is  here  urging  that  demand  and  supply 

cannot  alone'  regulate  price.    Indeed,  as  above  quoted,  he 

i^marks  that  this  point  of  view  is  productive  of  ^^much 

emor."    This  indictment  ought  to  cover  that  theory  which 

loakes  price  the  outcome  of  a  comparison  between  the  supply 

of   money  in  circulation  (including,  of  course,  rapidity  of 

^circulation)  and  the  money  work,  which  is  the  supposed 

demand  for  money. 

It  does  not  seem  necessary  to  enter  into  any  discussion  of 
Rdcaido's  theory  of  value  as  dependent  on  **  cost  of  produc- 
tion "  to  see  the  working  of  the  theory  of  prices.  priceqoMtioa 
^Tmtever  be  the  causes  of  value  —  whether  ac-  S*  diSwlSo 
oording  to  the  subjective  or  mechanical  theories  «*▼»*»* 
of  value,  as  applied  to  the  metals  on  one  side,  and  to  goods  on 
tlie  other  side,  of  the  comparison, — it  must  be  clear  that  the 
ehanges  in  exchange  value  on  either  side  of  the  price  ratio 
produce  changes  in  the  price  comparison.    Hence  those  who 
dleny  Ricardo's  theory  of  value  (as  dependent  on  cost  of 
production)  should  not  be  unable  to  see  that  causes,  other 
than  the  quantity  of  money,  affect  the  exchange  value  of  the 
precious  metals  as  compared  with  gold. 

Indeed,  Ricardo  so  nearly  reached  a  modem  explanation  of 
price,  which  required  no  reference  at  all  to  the  quantity 
theory,  that  one  is  set  to  marvel.  He  quoted*  approvingly, 
with  one  correction,  the  Earl  of  Lauderdale's  summary'  of 
the  principles  regulating  price  which  is  amazingly  near  the 
truth.  If  the  value  of  an  article  be  regarded  as  fixed  and 
intrinsic,  the  latter  thought  it  would  vary  according  to: 

1.  A  diminution  of  its  quantity. 

2.  An  increase  of  its  quantity. 

1  E.g^  F.  A.  Walker,  Qnar.  Joar.  Eoon.,  July,  1895;  c£.  alio  his  Political 
Economj,  {  199,  p.  148. 
s  Works,  pp.  2SS-234. 
•  An  Inquiry  into  the  Natore  and  Origin  of  Public  Wealth,  p.  13. 


244  THE  PRINCIPLES  OF  MONEY 

8.  An  increase  of  its  demand* 
4.  A  failure  of  demand. 

**  *  As  it  willy  however,  clearly  appear  that  no  commodity  can 
possess  fixed  aod  intrinsic  valae,  so  as  to  qualify  it  for  i 
m^^^^^  measure  of  the  value  of  other  commodities,  nuuh 

f  pprovM   ^      kind  are  induced  to  select,  as  a  practical  measnie 
miiaijsis  of  value,  that  which  appears  the  least  liable  to  any  . 

of  priM.  ^£  these  four  sources  of  variational  which  are  (k 

sole  causes  of  aJteraJtion  of  value. 

^^'When,  in  common  language,  therefore,  we  express  tbe 
value  of  any  commodity,  it  may  vary  at  one  period  from  what 
it  is  at  another,  in  consequence  of  eight  differ  encontingenciet: 

1.  ^'  ^  From  the  four  circumstances  above  stated  in  lelatkm 
to  the  commodity  of  which  we  mean  to  express  the  value. 

2.  *^  ^  From  the  same  four  circumstances,  in  relation  to  the 
commodity  we  have  adopted  as  a  measure  of  value.'  ** 

Ricardo  accepted  this,  by  amending  2  (above  the  quota* 
tion)  to  mean  lowered  cost,  not  merely  change  of  quantity: 
*^The  prices  of  commodities  which  are  subject  to  competi- 
tion, and  whose  quantity  may  be  increased  in  any  moderate 
degree,  will  ultimately  depend,  not  on  the  state  of  demand 
and  supply,  but  on  the  increased  or  diminished  cost  of  their 
production.**  ^ 

However,  nothing  could  be  more  penetrating  as  to  a  theoiy 
of  price,  quite  independent  of  the  quantity  of  the  circulation, 
than  this  conclusive  sentence  : 

*'  In  stating  the  principles  which  regulate  exchangeable  value 
and  price,  we  should  carefully  distinguish  between  those  varia- 
tions which  belong  to  the  commodity  itself,  and  those  which 
are  occasioned  by  a  variation  in  the  medium  [t.  e.,  the  stand- 
ard] in  which  the  value  is  estimated,  or  price  expressed."  * 

If,  with  General  Walker,*  we  should  "  follow  Mr.  Ricardo 
without  deviation,  believing  that  he  was  the  economist  who 

1  Work*,  p.  234. 

a  Ibid.,  p.  31. 

*  Political  Economy  (adv.  coane),  §  197. 


THE  QUANTITY  THEORY  OF  MONEY 


245 


most  fullj  and  justly  apprehended  the  relations  of  money 
to  price;  and  that  departure  from  the  principles  laid  down 
by  the  great  thinker  leads  to  confusion,  mii^con-  q^^^^^^  tht^rr 
ceptions,  and  needless  controversy/'  we  might  of  price  ims-' 
stop  here  without  asking  for  any  further  grounds  auaniity 
upon  which  to  construct  a  theory  of  prices  having  *"'^' 
no  reference  whatever  to  the  quantity  of  the  circulation** 

(B)  That  Ricardo,  however,  did  state  an  unqualified  quan- 
tity theory,  there  can  be  no  doubt,  even  if  it  should  prove  to 
be  inconisLstent  with  his  previouB  reasoning.  Out  of  his 
phUogopby  of  the  seigniorage,  he  developed  this  view: 

*'  While  the  State  coins  money,  and  charges  no  Beignorage^ 
money  will  be  of  the  same  value  as  aoy  other  piece  of  the  same 
metal  of  equal  weight  and  fineDeas ;  but  if  the  State   _ 
charges  a  seignorage  for  coinage,  the  coined  piece    theorv  m 
of  money  will  generally  exceed  the  value  of  the  ud-    »**i°i^™^* 
coined  piece  of  metal  by  the  whole  seignorage  chargedT  because 
it  will  require  a  greater  quantity  of  labour,  or,  which  is  the 
same  thing,  the  value  of  the  produce  of  a  greater  quantity  of 
labour,  to  procure  it. 

*^  While  the  Btate  alone  coins,  there  can  be  no  limit  to  this 
charge  of  seignorage ;  for  by  limiting  the  quantity  of  coin,  it  can 
be  raised  to  any  conceivable  value. 

*'It  is  on  this  principle  that  paper  money  circulates:  the 
whole  charge  for  paper  money  may  be  con  aider  ed  as  seignorage. 
Though  it  has  no  intriosic  value,  yet,  by  limiting  its  quantity, 
its  value  in  exchange  is  as  great  as  an  equal  denomination  of 
coin,  or  of  bullion  in  that  coin.  On  the  same  principle,  too^ 
namely*  by  a  limitation  of  its  quantity,  a  debased  coin  would 
circulate  at  the  value  it  should  bear,  if  it  were  of  the  legal 
weight  and  fineness,  and  not  at  the  value  of  the  quantity  of 
.  metal  which  it  actually  contained.* 

^*  There  can  exist  no  depreciation  of  money  but  from  excess. 


^  In  the  last  quotfttion  obfterve  Bicardo's  use  of  "  medinm/'  where  he  DQcei- 
nrily  intended  fttandard*  The  failure  tu  make  Ihts  dtstinctiou  Chroughont  hui 
naaoning  baa  much  to  do  with  the  theor/  that  prices  depend  mainlj  on  Ihe 
qtiantity  of  Ihe  media  of  exchange  In  circulation. 

*  Worka,  pp.  213-214. 


246  THE  PRINCIPLES  OF  MONEY 

However  debased  a  coinage  may  become,  it  will  preserve  id 
Mint  valae,  that  is  to  say,  it  will  pass  in  circolalaon  for  tbe  in- 
trinsic valae  of  the  bullion  which  it  ooght  to  contain,  provided 
it  be  not  in  too  great  abundance.^ 

^*  Sarely  by  a  diminution  of  the  quantity  of  the  currency,  tbe 
whole  that  remains  can  be  elevated  to  the  value  of  the  beet 
pieces.* 

^^The  silver  currency  was  [previous  to  1797]  very  madi  de- 
based ;  but  it  existed  in  a  d^ree  of  scarcity,  and  therefore,  on 
the  principle  which  I  have  before  explained,  it  never  sunk  m 
its  current  value."  * 

Ricardo  seenois  to  have  been  convinced  of  an  impeiatiTe 
demand  for  coins,  or  money,  as  a  medium  of  exchange,  to 
utUity  of         be  used  in  effecting  the  necessary  transfer  of 
SSmrn"*       g^>od8»  in  which  actual  money  vvas  passed  from 
•zebuige.         hand  to  hand ;  that  this  money  must  be  in  VEdiKf 
of  course,  equal  to  the  goods  for  which  it  was  exchanged. 
Granting  this  imperative  demand,  the  value  of  the  monej^ 
varied  exactly  in  proportion  to  its  quantity  in  use  (including^ 
also,  rapidity  of  circulation).    The  theory  was  thus  a  state- 
ment of  demand  and  supply ;  demand  being  the  money  work, 
and  supply  being  the  amount  of  money  (coin,  or  paper,  mediik 
of  exchange)  in  circulation.    The  doctrine,  however,  is  open  to 
serious  criticism  for  emphasizing  only  the  utility  of  money,  as 
a  medium  of  exchange,  as  well  as  for  the  omission  to  include 
other  factors  (on  the  side  of  goods)  affecting  price ;  and,  also^ 
because  he  disregards  the  other  factors  directly  affecting  tb^ 
value  of  the  particular  commodity  chosen  as  the  standanL. 
As  Ricardo  has  elsewhere  shown,^  the  value  of  the  gold  cooidL 
be  influenced  by  any  causes  affecting  its  "cost  of  produc- 
tion ; "  and  prices  of  goods  expressed  in  gold  could  be  like- 
wise affected  by  changes  in  the  "  cost  of  production  "  eith^^ 
of  goods  or  of  gold. 

That  is,  by  this  set  of  Ricardo's  statements,  the  value  o:f 
the  money  used  in  exchanging  goods  is  not  dependent  oxi 

1  Work*,  p.  347.  «  Ibid.,  p.  215.  »  Ibid,,  p.  2S3 

«  Supra,  p.  244.    Ricardo,  Works,  p.  31. 


THE  QUANTITY  THEORY  OF  MONEY 


24T 


anything  which  might  affect  the  value  of  the  material  out 
of  which  it  is  made.  By  his  suppoBition,  only  the  state 
Bupplies  the  money,  and  there  is  no  free  coin-  the  theory 
age.  So  that  the  forces,  in  this  ease,  governing  its  ^^"^^"^ 
value,  are  entirely  detached  from  those  touching  «^'s*»' 
the  material  of  which  the  coins  may  be  composed.  There- 
fore, under  a  modem  system  of  free  coinage,  by  which  the 
value  of  coins  is  made  to  depend  (often  with  gratuitous  coin' 
age)  on  the  value  of  the  bullion,  the  state  could  not  monopo- 
lize the  coinage,  or  fix  its  quantity ;  hence  the  level  of  prices 
would  not,  when  expressed  in  such  a  standard,  be  regulated 
by  the  quantity  of  the  coin  in  circulation.  In  fact,  the  value 
of  the  coin^  being  conformable  to  the  metal,  would  vary  with 
any  causes  affecting  the  value  of  that  metaL  In  short, 
Ricardo's  quantity  theory  expressed  chiefly  in  regard  to  paper 
(although  also  including  coin)  would  not  be  true,  if  the  quan- 
tity of  the  circulation  were  not  monopolized  by  the  state; 
that  is,  it  would  not  be  true  where  free  coinage  of  a  metal 
existed,  or  where  the  paper  circulation  were  supplied  by  an 
elastic  system  of  private  bank  issues. 

Ricardo's  quantity  theory  is,  then,  true  only  if  we  have  the 
conditions  on  which  it  is  baaed :  (1)  no  free  coinage,  but  a 
monopoly  of  issues  by  the  state ;  and  (2)  tiie  ac-  „  , 

,  ..     ,  ^,1*1^  -        False  jwomp- 

tual  passage  of  that  particular  kind  of  money  m  tion*  of  qaun- 
aU  exchanges  of  goods  (so  far  as  money  work  is  *°^' 

regarded).  In  modem  times  the  general  existence  of  free 
coinage  among  commercial  nations  requires  us  to  abandon 
the  quantity  theory,  so  far  as  to  deny  that  prices  are  regulated 
by  the  quantity  of  coin  in  circulation^ — the  value  of  the  coin 
rather  being  regulated  by  the  general  causes  governing  the 
value  of  gold  and  silver  bullion.  Since  prices  expressed  in 
coin  cannot  be  explained  by  this  theory  of  Ricardo^  and  since 
convertible  paper  must  have  the  same  value  as  the  coin  by 
wliich  it  is  redeemed,  we  are  finally  led  to  suppose  that  the 
quantity  theory  can  logically  be  applied  only  to  inconvertible 
paper,  of  whose  quantity  the  state  has  absolute  control,  or  to 
token  (or  debased)  coins  issued  only  by,  and  at  the  expense  of^ 


248  THE  PRINCIPLES  OF  MONEY 

the  state  (there  being  no  free  coinage).  And  even  then  we 
are  obliged  to  remember  the  supposition  that,  in  the  face  of  ex- 
changes to  be  made,  money  must  be  passed  at  each  transaction, 
and  that,  without  money,  no  exchanging  could  take  plaoei 
Only  in  this  way  do  we  comprehend  the  imperative  necesailj 
of  a  demand  for  money  of  some  kind,  so  urgent  that  its  absence 
will  practically  cause  a  cessation  of  production,  or  a  resort  to 
barter.^  If,  however,  even  inconvertible  paper  money  is  not 
in  fact  used  in  every  exchange  of  goods  (some  exchangee 
being  performed,  e.  ff.j  by  a  deposit  currency)  to  Ricaido^s 
followers  that  only  means  that  there  is  less  money  work,  or 
demand  for  money ;  and  that  the  level  of  prices  is  neverthe- 
less obtained  by  a  comparison  of  the  existing  supply  of  money 
in  circulation  with  those  exchanges  (be  they  large  or  Bmall) 
which  still  require  the  actual  passage  of  money  in  eveiy 
transaction.  Hence  we  find  Ricardo  expressing  his  quantity 
theory  most  strongly  in  its  connection  with  inconvertible 
paper  (or  debased  coinage): 

**  It  will  be  seen  that  it  is  not  necessary  that  paper  money 

should  be  payable  in  specie  to  secure  its  value;  it 

theory  applied    iB  Only  necessary  that  its  quantity  should  be  reg- 

ibll°S^rr"      ^^**^  according  to  the  value  of  the  metal  which 

is  declared  to  be  the  standard.' 

'^  It  is  evident,  then,  that  a  depreciation  of  the  circulating 
medium  is  the  necessary  consequence  of  its  redundance.* 

'^  A  bank  note  is  of  no  more  intrinsic  value  than  the  piece  of 
paper  on  which  it  is  made.  It  may  be  considered  as  a  piece  of 
money  on  which  the  seignorage  is  enormous,  amounting  to  all  its 
value.  .  •  •  Whilst  such  money  is  kept  within  certain  limits, 
any  value  may  be  given  to  it  as  currency.  .  •  .  The  value  of 
such  money  must  depend  wholly  upon  its  quantity.^ 

' '  If  the  Bank  were  restricted  from  paying  their  notes  in 
specie,  and  all  the  coin  had  been  exported,  any  excess  of  their 
notes  would  depreciate  the  value  of  the  circulating  mediom  in 
proportion  to  the  excess.    If  20  millions  had  been  the  circulation 

1  Cf.  F.  A.  Walker,  Political  Economy  (ady.  coarae),  §  201,  pp.  U9-150. 
>  Works,  p.  2U.  »  Ibid.,  p.  270.  *  Ibid,,  pp.  345-M. 


THE  QUANTITY  THEORY  OF  MONEY 


249 


of  England  before  the  reetriction,  and  4  millioDg  were  added  to 
it,  the  24  millions  would  be  of  no  more  value  than  the  20  were 
before^  provided  com tnodi ties  h&d  remained  the  same,  and  there 
had  been  no  corresponding  exportation  of  coins;  and  if  the 
Bank  were  enccessively  to  increase  it  to  50  or  100  millionfl,  the 
increased  quantity  would  all  be  absorbed  in  the  circnlation  of 
Ercrland,  but  would  be,  in  all  cases,  depreciated  to  the  value  of 
the  20  millions.^ 

**If  a  mine  of  gold  were  dificovered,  .  .  .  the  corrency  of 
that  oountry  would  be  lowered  in  yatue  in  consequence  of 
the  increased  quantity  of  the  precious  metals  brought  into 
drenlatioQ.  .  ,  . 

**lf,  instead  of  a  mine  being  discovered  in  any  country,  a 
bank  were  established^  such  as  the  Bank  of  England,  with  the 
power  of  issuing  its  notes  for  a  circulating  medium;  after  a 
large  amount  had  been  issued,  either  by  way  of  loan  to  mer- 
chants, or  by  advances  to  Government,  thereby  adding  consid- 
erably to  the  snm  of  the  cnrrency,  the  same  effect  would  follow 
as  in  the  case  of  the  mine.  The  circulating  medium  would  be 
lowered  in  value,  and  goods  would  experience  a  proportionate 
rise/'  * 

*'  When  the  circulation  eousists  wholly  of  paper,  any  increaae 
in  its  quantity  will  raise  the  money  price  of  bullion,  without 
lowering  its  vaiue^  in  the  same  manner,  and  in  the  same  pro- 
portion, BB  it  will  raise  the  prices  of  other  commodities/'  '  .   .  . 

*^The  issuers  of  paper  money  should  regulate  their  issues 
fiolely  by  the  price  of  buUion,  and  never  by  the  quantity  of  their 
paper  in  circulation.  The  quantity  can  never  be  too  great  nor 
too  little  while  it  preserves  the  same  value  as  the  standard/'  * 

If  a  demand  satisfiable  only  by  money  be  presupposed, 
and  if  the  state  alone  be  permitted  to  supply  tiie  medium  to 
meet  that  demand  (€,  g*^  as  in  fractional  coinage).  Quantity,  not 
Ricardo  would  hold  that  inconvertible  paper,  or  re^fu^^^i^viiot 
a  debased  coinage,  could  be  kept  at  par  (with,  corSt^^Jo"" 
€.  g,^  gold),  simply  by  regulation  of  its  quantity,   Hic*rdo, 
and  without  a  system  of  redemption.     This  is  the  gist  of  Ri- 
cardo^a  quantity  theory.     And  yet  the  necessity  of  the  process 

1  Workg,  p.  285,        »  Ibid*,  p.  264»        *  Ibid.,  p-  270,  utrte.        *  Ibid.,  p.  405. 


250  THE  PRINCIPLES  OF  MONET 

of  redemption  to  the  value  of  the  paper  (that  i8»  tmmiiiM$ 
redemption  on  demand,  as  distinguished  from  ultimate  le- 
demption  in  the  future,  which  latter  is  associated  widi  fte 
solvency  of  the  issuer),  is  practically  admitted  by  the  following 
passages  from  Ricardo : 

**  And  if  an  oance  of  standard  gold  in  goineas  wodd adk 
the  market,  as  standard  bars  do  now,  at  4/.  10#.  per  oc,  or,  ai 
they  have  lately  done,  at  4/.  ISs.  per  os.,  what  shopkeepw 
woold  sell  his  goods  at  the  same  price  either  for  gold  or  buk 
notes  indifferently?  If  the  price  of  a  coat  were  31.  17«.  10)4., 
or  an  ounce  of  gold  [coin],  and  if  at  the  same  tune  an  ounoeof 
gold  would  sell  for  4^  18«.,  is  it  conceivable  that  it  would  be  % 
matter  of  indifference  to  the  tailor  whether  he  were  paid  In  gold 
or  in  bank  notes? ''  ^ 

'^  The  same  check  which  compelled  the  Bank  of  Englaod  to 
withdraw  part  of  their  notes  from  circulation  when  they  used  to 
pay  them  on  demand  in  specie,  would  oblige  the  country  bub 
to  adopt  the  same  course."  ' 

**>  If,  whilst  the  Bank  paid  their  notes  on  demand  in  spede, 
they  were  to  increase  their  quantity,  they  would  produce  little 
permanent  effect  on  the  value  of  the  currency."  ' 

Moreover,  the  theory  that  paper  money  can  have  a  seign- 
iorage of  one  hundred  per  cent  is  indefensible.  The  lowest 
Seigniorage  of  li^iit  of  its  value  cannot  be  found  by  consideriDg 
paper  money.  ^^  ^^^  ^f  ^jj^  p^per  and  printing.  Its  value,  if 
it  ever  has  any,  is  the  value  of  the  promise  to  pay,  or  (as  in 
the  case  of  inconvertible  paper)  the  value  sometimes  imparted 
to  it  by  the  association  of  custom  or  name,  such  as  the  blind 
attribute  of  value  to  anything  called  a  dollar  or  a  pound. 
Its  seigniorage  is  the  difference  between  its  face  value  and 
the  value  given  it  by  the  estimate  of  the  community  as  to  the 
chances  of  its  being  redeemed  in  the  thing  it  promises  to  pay. 

§  4.  The  suspension  of  specie  payments,  or  the  Restric- 
tion from  paying  specie,  as  it  was  technically  known,  by  thd 

1  Works,  p.  280.  <  Ibid.,  p.  283.  *  Ibid,,  p.  285. 


THE  QUANTITY  THEORY  OF  MONEY 


251 


Bank  of  England  in  1797  gare  rise  to  a  celebrated  discussion 
on  money*  one  which  brought  forth  a  vast  litemture,  euding 
not  even  with  the  Bank  Act  of  1844, 

From  1795  to  1801  many  goods  were  very  high  in  price, 
but  the  greatest  rise  of  prices  took  place  about  the  end  of  the 
first  half  of  1809,'     Both  Tooke  and  Senior  agreed  B«ik  of 
tbat  there  wafi  no  depreciation  of  the  Iwmk  notes  Keftri"tion, 
until  180a     In  1810  prices  were  falling  heavily,  it^^^i^^i: 
as  contrasted  with  1808  and  1809.^    From  1808  to  1811  there 
was  a  riot  of  speculatioD  and  disturbance  in  the  markets.* 
Of  course,  the  large  shipments  of  specie  to  the  continent  for 
the  war  chest,  and  the  heavy  importations  of  breadstuffs,  at 
different  times  affected  the  rate  of  foreign  exchange.     More- 
over, the  decrees  of  Napoleon,*  the  Orders  in  Council,*^  and 
the  American  Embargo,*  added  to  the  complexity  of  the  forces 
affecting  prices. 

On  December  1,  1809,  appeared  Ricardo's  Migh  Price 
of  Bullion  a  Praof  of  the  Depreciation  of  Bank  Notes  ;  and 
June  8,  1810,  tiiat  most  celebrated  of  aU  re-  Buuimi 
ports  on  money,  The  Bullion  Report  (prepared  by  ^p*"^ 
Messrs.  Homer,  Thornton,  and  Huskisson).  The  date  later 
fixed  by  Parliament  for  resumption  of  specie  pajnments,  July 
5,  1818,  was  postponed,  and  a  result  of  an  inqniiy  by  a  Com- 
mittee led  to  the  Act  of  1819,  under  which  (before  the  final 
date  of  May  1,  1823^  set  by  the  Act}  specie  payments  were 
resumed  at  the  Bank's  own  instance  on  May  1,  1821.  Thus 
the  Restriction  Period,  or  the  inconvertibility  of  the  notes, 
continued  from  1797  to  1821, 

Henry  Thornton's  Enquiry  into  the  Nature  and  Effects  of 
the  Paper  Credit  of  Q-reat  Britain  (1802)  ehows 
a  remarkable  grasp  of  the  operations  of  banking, 
credit,  and  paper  money  —  not  the  necessaty  conaeqnence  of 


ThorotoQ. 


1  Tooke,  HistoiT  of  Prices,  TV,  p.  93, 

s  Ibid, J  p.  110;  although  the  Ballion  Report  said  prices  were  aristng. 

»  Ibid.,  p.  126. 

*  BerJln  Decree,  Not.  21,  1803  ^  MOas  Decree,  Dec.  17,  1807. 

*  Maiulf  Not,  ll  and  21, 1807.  >  Dq^,  22,  1807. 


252  THE  PRINCIPLES  OF  MONET 

"being  an  important  merchant  and  a  director  of  the  Bank  of    { 
England.    Although  his  views  on  the  theory  of  prices  are  not    { 
always  consistent,  they  belong  to  the  general  conceptions 
associated  with  Ricardo: 

^*  The  ^rice  of  commodities  in  the  market  is  formed  by  means 
of  a  certain  struggle  which  takes  place  between  the  boyen  and 
the  sellers.^ 

**The  principle  which  has  been  laid  down  as  goyerningtbe 
price  of  goods,  most  be  considered  as  also  regolating  that  of  the 
Tnw  ini*  ht  P*P®^  f^""  ^hich  they  are  sold.  .  .  .  The  price  at 
iDto  ivioe  which  the  exchange  (or  sale)  takes  place  depends  on 

quM  on.  ^^  tticta :  on  the  proportion  between  the  supply 

of  the  particular  conmiodity  and  the  demand  for  it,  which  is 
one  question;  and  on  the  proportion,  also,  between  the  state  of 
the  general  supply  of  the  circulating  medium  and  that  of  the 
demand  for  it,  which  is  another."' 

This  declaration  does  not  jump  well  with  the  quantity 
theory ;  indeed  he  seems  to  see  nothing  in  it,  as  the  f oUowiDg 
passage  indicates : 

*'I  believe  the  fact  to  be,  that  very  little  correspondence  has 
subsisted  between  the  fluctuations  in  the  amount  of  Bank  of 
England  notes  in  circulation  at  different  times,  and  the  variations 
in  the  general  price  of  articles."  • 

The  world  value  of  gold,  moreover,  is  clearly  seen  as  that 
to  which  prices  in  any  country  must  sooner  or  later  conform: 

*'  The  general  and  permanent  value  of  bank  notes  moat  be 
the  same  as  the  general  and  permanent  value  of  that  gold  for 
which  they  are  exchangeable,  and  the  value  of  gold  in  England 
is  regulated  by  the  general  and  permanent  value  of  it  all  over 
the  world ;  and,  therefore,  although  it  is  admitted  that  a  great 
and  sudden  reduction  of  bank  notes  may  produce  a  great  local 
and  temporary  fall  in  the  price  of  articles  (a  fall,  that  is  to  say, 

1  P.  193.  «  P.  194. 

•  P.  240.  ThiB  coincides  with  the  facts  in  the  "  American  Experience  with 
Paper  Money  "  (1862-1879).  Cf.  S.  M.  Hard/,  The  Quantity  of  Money  and  Price*, 
Joor.  Pol.  Econ.,  March,  1695. 


THE  QUANTITY  THEORY  OF  MONEY      268 

even  in  their  gold  price,  for  we  are  here  Buppoeing  gold  and 
paper  to  be  interchanged),  the  gold  price  mast,  in  a  short  time, 
find  its  level  with  the  gold  price  over  the  rest  of  the  world."  ^ 

The  writer,  in  short,  seems  to  see  that  price  is  a  comparison 
between  goods  and  the  standard  metal ;  and  that  the  value  of 
the  standard  is  determined  not  merely  by  forces  working 
within  one  country,  but  by  all  those  in  operation  throughout 
the  world.  Moreover,  forces  affecting  prices  through  com- 
modities themselves  are  incidentally  admitted: 

^'That  the  Bullion  price  of  some  British  articles  has  lately 
been  much  increased,  and  that  the  Bullion  price  of  all,  or  of 
ahnost  all,  has  in  some  degree  risen,  are  facts  which  cannot  be 
doubted.  But  that  this  enhancement  is  to  be  chaiged  to  an  en- 
crease  of  paper,  is  not  equally  to  be  admitted;  for  it  is  plain 
that  other  causes  have  powerfully  operated,  namely,  a  state  of 
war,  new  taxes,  and  two  bad  harvests,  which,  by  raising  the 
price  of  bread,  have  in  some  degree  lifted  up  that  of  labour,  and 
of  all  commoditieB."  ' 

And  yet,  in  spite  of  so  much  clear  thinking,  Mr.  Thornton 
felt  the  general  tilt  of  the  period  towards  a  belief  in  the 
quantity  theory: 

'^  But  for  all  that  there  is  no  reason  to  doubt  the  truth  of  the 
general  principle  that  an  increase  of  bank  issues  tends  to  enhance 
prices  and  vice  versa.' 

^^  A  too  great  amount  of  notes  put  into  circulation  would  raise 
prices,  check  exports,  stimulate  imports,  produce  an  unfavorable 
balance  of  trade  and  drain  off  the  country's  stock  of  gold."  ^ 

By  all  odds  the  most  notable  monetary  document  of  the 
time  was  the  famous  Report  from  the  Select  Committee  of  the 

1  Joar.  Pol  Econ.,  March,  1895,  note,  pp.  82-83. 

«  Ibid.,  p.  301.  •  Ibid,,  p.  242. 

^  Ihid^  pp.  278-295.  If  there  had  been  a  depreciation  of  the  standard  in 
which  prices  were  expressed,  and  if  the  increase  of  the  bank  notes  had  been  a 
conseqnence  of  this  depreciation,  then  Mr.  Thornton  was  not  following  the 
qnantity  theory.  And,  also,  one  of  sereral  factors  inflnencing  price  would  be 
the  qnantitj  (or  sapplj)  of  the  standard  commoditj,  as  distinct  from  the  quan- 
tity of  the  media  of  exchange. 


254  TH£  PRINCIPLES  OF  MONEY 

JSouBe  of  Commons  on  the  Eigh  Price  of  Gold  BtiUion  (June  8^ 
1810),  commonly  called  The  BuUian  BqporO  Although  its 
Bullion  Report  chicf  purposo  was  to  bring  about  the  xesnmptiQii 
r/^^  o^  specie  payments,  yet  as  to  the  principles  on 

^^^7'  which  the  process  was  to  be  carried  oat»  the 

Report  in  the  main  expressed  the  doctrines  of  Bicardo  (see 
*^pr€L^  §  8)9  ftnd  its  views  were  adopted  by  the  Select  Com- 
mittee on  Resumption  in  1819. 

The  main  recommendation  was,  of  course,  '*  the  restoiatkm 
of  the  Currency  of  the  country  to  a  state  of  regulation  by  its 
DepnekUon  ancicut  metallic  standard.**  At  times  gold  had 
toreSi**^  borne  a  premium  of  10  per  cent,  and  silver  0! 
exchange.  £^0^  \Q  to  15  per  ccut.  The  depreciation  of  the 
paper  showed  itself  in  the  smaller  quantity  of  foreign  gold 
that  it  would  buy  in  the  foreign  exchanges;  the  &11  in 
exchange  was,  then,  the  form  in  which  the  depreciation  of 
the  bank  notes  attracted  most  attention.  The  amount  of 
depreciation  was  estimated  by  the  course  of  foreign  exchange, 
since  that  gave  a  comparison  between  the  value  of  the  paper 
and  that  of  gold.    Hence  it  was  concluded  by  the  Report  that: 

*^  The  price  of  Gold  Ballion  and  the  general  CkMirse  of  Ex- 
change with  Foreign  Countries,  taken  for  any  considerable 
period  of  time,  form  the  best  general  criterion  from  which  any 
inference  can  be  drawn,  as  to  the  sufficiency  or  excess  of  pi^ 
currency  in  circulation."  * 

It  was  believed  by  the  authors  of  the  Report  that  an  excess 
of  paper  caused  the  depreciation  of  the  notes,  and  that  this 
excess  was  the  reason  for  higher  paper  prices  of  goods  within 
the  country : 

*'  An  increase  in  the  quantity  of  the  local  currency  of  a  par- 
ticular country,  will  raise  prices  in  that  country  exactly  in  the 

^  See  "  Select  Collection  of  Scarce  mnd  Valuable  Tracts,  etc.,  on  Cnrrencj  and 
Banking/'  bj  J.  R.  McCulloch,  pp.  403-474.  The  Ballion  Beport  was  also  re- 
printed in  W.  G.  Sammer's  "  History  of  American  Currency/'  pp.  335-391. 

^  P.  447.  Of  coarse,  Malthas  was  quite  right  in  holding  that  the  course  of  ex- 
change would  be  affected  by  the  relation  of  exports  and  imports  of  goods,  and 
not  solely  by  the  depreciation  of  the  paper.    Cf.  Tooke,  IV,  p.  101. 


b- 


THE  QUANTITY  THEORY  OF  MONEY 


255 


same  manner  as  an  Increaae  io  the  geneml  supply  of  precious 
metals  raises  prices  all  ovar  the  world.    By  means  of  the  increase 
of  quantity,  the  value  of  a  given  portion  of  that  cir-    Qy^jfi^d 
cnlatiug  medium,  in  exchange  for  other  oommodi-    ^u*ntity 
ties,  is  lowered,    ...  In  this  manner,  an  excess  of   \n  Buiibn 
the  local  currency  of  a  particular  country  will  oc-   ^^^ 
casion  a  rise  of  the  market  priee  of  gold  above  its  Mint  price. 
It  is  no  less  evident^  that,  in  the  event  of  the  prices  of  commodities 
being  raised  in  one  country  bj  an  augmentation  of  its  circulating 
medium,  while  no  similar  augmeDtatiou  in  the  circulating  medium 
of  a  neighbonng  country  has  led  to  a  similar  rise  in  prices,  the 
eurrendea  of  those  two  countries  will  no  longer  contiuue  to  bear 
the  same  relative  value   to  each  other  as   before.  *  ,  ,  The 
exchange  will  be  computed  between  these  two  couDlries  to  the 
disadvantage  of  the  former. 

''  In  this  mauuerf  a  general  rise  of  all  prices,  a  rise  in  the 
market  price  of  Gold,  and  a  fall  of  the  Foreign  Exchanges,  will 
be  the  eGfeet  of  an  excessive  quantity  of  circulating  medium 
in  a  couutry  which  has  adopted  a  currency  not  exportable  to 
other  countries,  or  not  convertible  at  will  into  Cain  which  is 
exportable,"* 

•     On  their  side,  the  directors  of  the  Bank  of  England  held 
that  there  could  be  no  excess  in  notes,  if  the  issues  arose 
from  discounts  for  short  periods  Imsed  on  actual   ^  ^  , 
transactions.'    Their  error  existed  m  not  realiz-  of  Bank 
ing  tlie  necessity  of    testing  the  solvency  of  the 
deposit  currency  in  coin  itself  an  demand.    A^uming  a  system 
of  immediate   redemption,  then,  if  notes  were  outstanding 
in  excess  of  the  needs  of  the  community  for  a  medium  of 
exchange,  it  was  ineyitable  that  they  must  come  in  to  be 
redeemed.     Such  a   system   would  automatically  test  how 
much  the  country  needed ;  because  no  more  than  that  could 
possibly  be  kept  out.    If  the  notes  were  immediately  con- 
rertible,  discounts  could  not  be  increased  '^ao  as  thereby 

^  P|^.  418-119^  The  Eepoft  wtongly  jUfignH  tti«  d^preeiatioQ  of  the  houhi  of 
the  Scotch  banki  lo  art  excess  of  ieaii^,  when  it  was  reaUy  due  to  ma  bteHeT«nc« 
with  their  Immediate  couvertibilltj.    Cf.  p.  439 » 

*  F.44& 


256 


THE  PRINCIPLES  OF  MONET 


to  produce  an  excess  of  their  paper  in  cireuktioiif  without  1 
quickly  finding  that  the  surplus  returned  upon  tfaemfieives  in  * 
demand  for  specie."  * 

In  conclusion,  the  Report  declared : 

"  Your  Committee  are  of  opinion,  that  no  safe,  certain, 
eoDBtautly  adequate  provisioQ  agaioBt  an  excess  of  paper  \ 
rencj,  either  occasional  or  permaneiit^  can  be  found,  except  ial 
the  convertibOity  of  all  such  paper  into  specie."* 

That  is,  while  admitting  the  evident  force  of  convertibilityi ' 
the  Bullion  Report,  so  far  as  it  entered  into  the  general  theory 
of  prices,  practically  enforced  the  general  principles  of  the 
quantity  theory. 

§  5-  After  the  resumption  of  specie  payments  in  Great 
Britain  a  long-continued  discussion,  dealing  with  the  excep* 
tional  experiences  of  the  Restriction  Period,  ensued,  and 
resulted  finally  in  the  Bank  Charter  Act  of  1844*  Two 
different  theories  of  prices  were  championed  in  this  con- 
troversy, and  were  at  that  time  known  as  the  Currency,  as 
distinct  from  the  Banking,  Principle. 

The  currency  principle,*  so  called,  was  the  legitimate  ont-1 
come  of  Ricardo's  qtmntity  theory.     Indeed,  the  real  point 
Garrencf         of  difference   was    the   acceptance    or   rejection  | 
^e^JiStuy*    of  *^he  quantity  theory,  although  the   fight  was  i 
thwDTj.  ostensibly  waged  upon  many  detailed  topics,  such' 

as  the  exchanges,  country  bank  issues,  etc.     The  ^uiance 

1  p.  451.  «  P,  iS8. 

*  The  tenn  "  cnrrenej  principle  "  hsa  little  di«tlu|^tibahle  m«fttiing  in  itaelt- 

It  wAJi  first  oBed  bv  Mr  G.  W.  Norman,  a  director  of  tbe  Baok  of  Eaglwid 
before  a  Cmn mitten  on  Banks  of  Issue  In  1S40,  Q^  SOIS,  Before  the  same  conn 
toitteet  Mr,  Gilhurt  (an  opponent  of  the  currency  principle),  in  1841^  said,  Q.  93S: 
**  I  mean  bv  the  phrane  *  ctirrencT  prineiplo '  a  bnnk  vrbith  shall  do  nothing  ebe 
but  iMQC  notes  for  gold,  ftnd  gold  for  notes.  '\  .  ,  By  banking  principles  he 
meant,  by  contrast,  '*  notes  that  are  issued  in  the  repiirment  of  deposits^  or  in  the 
dlitconnt  of  bills,  or  in  the  inakinf^  of  loans."  Poisiblr  the  cbotce  of  the  phrue 
was  due  to  the  idei^  that  prices,  the  exchangee,  etc.*  were  dependent  on  the 
qnantity  of  money^  i.  r.,  on  the  qnaniity  of  the  "  currency/'  as  the  wonl  was 
then  nied  ;  and  the  school  of  writers  who  followed  this  principle  ohvioiulj 
ikT'oredj  in  general ^  the  «iime  legislative  programme. 


THE  QUANTITY  THEORY  OF  MONEY 


267 


between  the  two  parties  did  not  lie  ia  any  disagreement  as  to 
maintainiiig  specie  payments;  both  sides  were  strenuous  in 
insisting  on  the  strictest  convertibility  of  the  bank  notes 
into  gold.  So  that  both  parties  approved  the  general  con- 
clusions of  the  Bullion  Report. 

The  fundamental  assumption  of  the  currency  Bchool  was 
that  prices  varied  with  an  increase,  or  decrease,  of  the  quantity^ 
of  money  in  circulation,  be  it  coin  or  paper  money-   CiTCuUibo,     i 
With  them   the  ideal  cuiTency  would  be  one  of  Foreign"'*     ^ 
epecie  alone.    The  important  part  of  the  monetaiy   •»cbAng«. 
machinery  in  their  belief  was  the  foreign  exchanges*     When-' 
evefj  for  any  reason,  the  specie  circulation  became  redundant 
prices  would  rise,  imports  of  goods  would  be  encouraged,  and 
coin  would  soon  l*e  exported  to  pay  for  the  increased  imports. 
The  outflow  of  bullion  would  bring  down  prices;  and  if  there 
were  exceptional  reasons,  in  addition,  for  exporting  specie,  such 
as  demands  for  tnaintaining  troops  abroad,  prices  would  fall  still 
lower.     Then  exports  of  goods  would  begin,  and  specie  would\ 
tend  to  return.    In  this  way  an  equable  distribution  of  specie 
would  be  occasioned  between  the  countries  trading  tc»gether- 
That  is,  a  specie  circulation  would  automatically  regulate 
itself  through  the  level  of  prices  and  the  foreign  exchanges, 

Theuj  when  paper  money  was  injected  into  the  system, 
an  increase  of  the  quantity  of  the  circulation  would  affect  k 
prices  directly  and  disturb  the  relation  of  exports  Ejtch^nge  to  ' 
and  imports,  and  the  exchanges.  If  a  paper  money  ^^^Jj'*^^/  ^  J 
were  allowed,*  the  ideal  principle  of  regulation  «irciii*tioii*  ^ 
would  be  one  such  that  it  would  cause  the  paper  to  act , 
exactly  as  would  a  metallic  circulation.  An  excess  of  paper | 
money  would  raise  prices  in  the  same  way  that  an  excess  of 

^  "It  Is  not  fliifflcSent  merelj  %o  ordfttn,  aa  VeeVs  Etll  (1610)  did,  the  conTerti* 
bilitj^  of  the  notes.  .  .  ,  It  ia  now  difCOTertMJ  th&t  thetti  is  a  liability  to  excedRive 
itmea  of  paper,  CTtin  while  that  paper  ia  convertibU  ^  wilt ;  and  that  tapreAerve 
the  valuo  of  m  paper  circolatioii,  aot  on!/  muAt  that  paper  be  coovertible  wto 
metallic  motiej,  hut  the  whole  of  ite  aectllations  most  be  made  to  oorrespood 
exactljf  both  m  time  and  amoant,  with  what  woald  be  the  oeeillAtions  of  a 
metallic  cnrrency,  «■  indicated  bf  the  slate  of  tba  bmUtou/'  hozd  Overatone^ 
Tiveti,  p.  13S. 

17 


258 


THE  PRLVCIPLES  OF  MONEY 


specie  would.     Therefore  its  quantity  must  be  kept  uoder^ 
strict    eontrol,  bo  tiiat    the   exchanges  would  act  jost  dio ' 
same  as  under  a  specie  system^  and  so  that  prices  should  not 
be  disturbed. 

Then,  alsOj    it   was   urged   that    convertibility  of   paper 
money    into    coin   was  not   a    sufficient  protection   againist 
excessive  issues^   against    a   change  of  prices^  or  n^ainat  a 
derangement  of  the  exchanges.*    The  claim  was  put  foi^ 
ward  that  conyertible  paper  could  be  issued  m  excess  ajid 
cause  a  rise  of  prices.     Bankers  were  able  to  inctBase,  cr 
decreaaet   their  notes  at  pleasure;  and,  even  if  couvertibfe, 
such  issues,  it  was  believed,  would  raise  or  depress  the  level  1 
of  prices.    Hence,  if  banks  were  permitted  to  issue  notes  at 
all,  the  notes  must  be  obligatorily  issued  for  gold,  or  gold  far 
notes;    by  such  a  process  the  aggregate  quantity  of  tbt 
circulation  could  not  be  altered  by  the  bankers,  but  would 
necessarily  vary  in  relation  to  the  foreign  exchanges  just  as  if 
there  were  only  specie  in  use-    The  mixed  circulation  of  com 
and  paper  might  thus  work  without  injuiy.    The  presumptioi^  I 
however,  was  that  a  disturbance  of  the  exchanges  was  prima 
fade  evidence  of  irregularities  in  the  quantity  of  the  currency ; 
and  legislative  reforms  should  have  for  their  aim  to  regulate  the 
amount  of  the  circulation  so  as  to  control  these  irregularities* 
The   currency  school  tried  to  show  thali  the  issues  of  the  | 
Bank  of  England  had  depreciated  In  consequence  of  excedsive  I 
quantity ;  that  the  extent  of  this  depreciation  was  measured  1 
by  the  price  of  bullion  ;  and  that  the  price  of  bullion  wasi 
shown  by  the  price  of  foreign  exchange*^ 

The  claim  of  the  currency  school  that  a  convertible  cui^ 
rency  could  be  issned  to  excess  and  could  depreciate  was 

^  Tbe  cnrreDCT  ecl^ool  erred  m  inppoidjag  thttt  foFsIgn  €xch&iig^  conU  t« 
iuflttenced  solely  by  the  depreciation  of  the  bank  notes.  It  forag^u  gold  mtn 
pntichaacd  by  theae  noteB^  there  would  be  two  eiementa  in  the  computAtioii : 
(1)  the  depreciation  of  the  iseues  relativelj  to  Brltifih  gold  eoia  »t  home;  and  (S) 
til©  chaogee  in  the  amotmt  of  forei^  gold  given  for  Britieh  coin  dependunt  t»n 
tlie  flttctnattons  in  the  exchanges  (between  the  sbipping  pointo)  ariiing  £na  l 
tarifttionfl  in  the  relations  of  importa  and  exporte  of  merchandiia,  buUios,  «f 
■eeoridet. 


THE  QUANTITY  THEORY  OF  MONEY      269 

based,  in  my  opinion,  on  a  failure  to  recognize  the  distinction 
between  immediate  and  ultimate  redemption  of  the  notes. 
Mr.  G.  W.  Norman  says :  ^ 

'^  It  is  very  tnie  that  convertible  paper  cannot  permanently  be 
depreciated,  that  it  most  at  length  become  equivalent  to  the 
specie  it  represents ;  bat  ander  certain  drcamstances  the  adjust- 
ment may  be  long  deferred.'' 

**  Under  certain  circumstances  "  is  but  a  paraphrase  of  the 
absence  of  proper  reserves  to  secure  immediate  redemption. 
If  a  demand  obligation,  like  a  note,  is  not  redeem-        ^^ 
able  on  presentation,  it  is  a  confession  of  inability  and  ultimate 
and  aissumes  suspension;   of  course,  it  cannot  ^^^' 

remain  at  par  with  the  coin  for  which  it  cannot  be  exchanged. 

Much  attention  was  in  this  period  (as  well  as  later)  given  |  / 
to  the  definition  of  money,  because  if  definite  conclusions! 
were  reached  as  to  what  constituted  money,  then  y^^,^,^  ^ 
all  such  constituent  forms  of  money  should  be  monejim- 
regulated  so  that  no  action  different  from  that  . 

produced  by  a  specie  currency  could  be  possible ;  for  all  thesel 
forms,  being  money,  could  affect  prices  through  the  quantity^ 
issued.    Therefore  reg^ulate  their  quantity.' 

1  Baouurks,  etc,  on  Correncjr  and  Banking  (1838),  p.  89. 

*  "  A  great  part  of  the  examination  of  witneaaee  bj  the  Committee  of  the 
Hooae  of  Commons  on  Banks  of  Issne  in  1840,  was  directed  to  the  eliciting  of 
opinions  as  to  the  terms  bj  which  the  yarions  kinds  of  instroments  of  exchange 
iboold  be  designated  and  classified.  .  .  . 

"  The  in^K>rtance  which  was  attached  to  the  attempt  at  settling  those  defini^ 
tions  seems  to  hare  arisen  from  an  opinion  which  prerailed  eridentlj  among  the 
members  of  the  Committee,  that,  bj  arriving  at  a  conclusion  as  to  what  part  of 
the  Tarions  forms  of  paper  credit  should  be  considered  exclnsivelj  as  monej  or  I 
carrencj,  conferring  t^  power  of  purchase,  some  criterion  or  test  might  be  fonnd  of! 
the  inflaence  of  one  of  the  principal  elements  upon  which  not  onlj  the  state  of. 
trade  and  credit,  bnt  also  general  prices  depend ;  it  being  assumed  that  commod- 
itiea,  although  liable  in  each  particular  instance  to  be  influenced  by  circum- 
stances affecting  the  supplj  and  demand,  are  more  or  less  under  a  direct  influence 
from  Tariations  in  the  quantity  of  money  or  currency.  And  the  same  assumption 
ef  a  direct  agency  of  the  quantity  of  money,  according  to  the  assumed  definition 
of  it,  on  prices,  will  be  found  to  be  either  expressed  or  implied  in  the  vast  major- 
ity of  the  nnmberleas  publications  to  which  the  currency  question  has  given 
rise."    Tooke,  History  of  Prices,  IV,  pp.  173-174. 


260  THE  FRINCIFLES  OF  MONET 

The  leader  of  the  currency  school  was  undoubtedly  Lord 
Overstone  (Mr.  S.  Jones  Lloyd),  who  was  supported  by  Mr. 
G.  W,  Norman,  Colonel  Torrens,  and  by  Sir  Robert  Peel  (who 
carried  through  the  Bank  Charter  Act  of  1844).  In  the 
United  States  his  followers  were,  among  others,  William  M. 
Gouge,  Condy  Raguet,  and  Amasa  Walker.  That  Lord 
Overstone  was  distinctly  guided  by  the  quantify  theory,  may 
be  seen  from  the  following  statements : 

«« The  convertibility  of  the  paper  issues  can  only  be  maintaiDed 
by  a  due  regulation  of  the  amount  of  them.''  ^ 

^* .  .  .  That  paper  money  ought  to  be  regulated  in  amount  by 
the  state  of  the  exchanges,  and  that,  other  things  remaining  the 
same,  its  value  increases  as  the  quantity  diminishes,  and  dimiD- 
ishes  as  the  quantity  increases."  ' 

That  is,  by  regulating  the  amount  of  its  issues.  Lord  Ove^ 
stone  held  that  the  Bank  of  England  could  influence  the  ratd 
Lord  of  foreign  exchange,  and  protect  herself  agaioat 

Ovtnum..       ^  unUmited  demand  for  gold.»    The  fallacy  of 
this  is  now  too  patent  to  need  discussion.     Tet  his  method 
of  maintaining  paper  money  at  par  was  only  an  application 
of  the  quantity  theory.     By  constantly  comparing  the  value  of 
notes  with  the  price  of  gold  (in  notes,  of  course),  and  by  a 
cautious  reduction  of  the  paper  issues,  he  thought  that  the 
Bank  of  England  could  maintain  their  notes  at  par>    It  will  I 
be  observed  that  par  was  to  be  maintained,  not  primarily  byn 
redemption,  but  by  a  regulation  of  the  quantity  outstanding.*  I 
^  It  did  not  seem  to  occur  to  him  that  reserves  sufficient  to  I 
secure  immediate  convertibility  could  keep  almost  any  amount 
of  paper  at  par  (and  if  by  **  excess  "  it  was  meant  that  some  of 
it  was  not  needed  as  a  medium  of  exchange  that  excess  wouH 
be  returned  for  redemption). 

Yet,  when  face  to  face  with  the  theory  of  prices.  Lord 
Overstone  was  not  free  from  doubt : 

1  Tracts,  etc.  (ed.  McCulloch),  1857,  p.  134. 

«  Ibid.,  p.  137.  »  Ihid.,  pp.  53-54.  *  Ibid^  p.  55. 

'  *'  I  anderatand  by  excessive  issues,  issues  which  render  the  mmoont  of  the 
paper  circulation  at  any  moment  greater  than  would  be  the  amoont  of  a  metallic 
circulation."    Ibid.,  p.  189. 


THE  QUASTiTY  THEORY  OF  MONEY 


261 


*'The   connexion  again   between  fluctuations  in  prices  and 
irariations  in  tbe  amount  of  the  circulating  medium  u  a  question 
of  extremely  difficult  solution  in  its  detail;    and^    OTctitnne'i 
probably,  after  the  most  laborious  investigation  of   ^o  ""^iuiiUv 
it.  we  can  only  come  to  tbe  conclueiou,  that  the    thnory. 
immediate  effect  upon  price b  of  any  variation  in  the  amount  of 
the  circulation  may  be  over-estimated,  whilst  there  undoubtedly 
exists  a  very  intimate  connexion  between  them/'  ^ 

**  It  IB  not  unnatural  that  a  tendency  should  arise  to  conclude, 
with  too  much  haste  -  .  .  that  fluctuatione  ia  the  amount  of 
the  circulation  are  the  immediate  and  only  cause  of  all  fluetua- 
tiona  which  may  occur  in  priceB.'** 

If,  in  this  last  pafisage,  he  had  meant  that  prices  were  deter- 
mined  by  the  value  of  the  standard  in  which  those  prices  are 
meaaured,  and  that  ehangeB  in  the  supply  of  the  standard  com- 
modity would  have  some  effect  (on  the  money  tide  of  the 
price  ratio)  upon  the  general  level  of  prices,  then  Lord  Over- 
stone  was  very  near  the  truth ;  but  at  the  same  time  he  would 
have  been  at  some  distance  from  the  quantity  theory. 

The  advocacy  of  the  currency  principle^  being  in  truth  a 
fonn  of  the  quantity  theory  which  long  dominated  public  think- 
ing, led  directly  to  the  enactment  of  the  Bank  ^ 
Charter  Act  of  1844,  In  the  requirement  that  workofcar- 
the  Bank  notes  should  vary  **  in  amount  exactly  "°*^  ^ ' 
as  the  circulation  would  have  varied  had  it  been  metallic/* 
we  have  the  reason  (of  the  currency  school)  for  the  familiar 
and  important  provision  of  the  Act  wliicb  separated  entirely 
the  Issue  Department  from  the  Banking  Department  of  the 
Bank  of  England,  The  arrangement  whereby  the  Issue 
Department  was  obliged  to  hold  about  two-thirdB  of  the 
amount  of  a  full  circulation  in  securities  and  keep  the  re- 
maining one-third  in  coin  and  bullion  was  the  practical 
meam  suggested  in  order  to  secure  the  convertibility  of 
the  Bank  notes;  and  yet  it  was  so  contrived  that  the  tot^ 
quantity  of  notes  and  coin  would  be  the  same  as  if  there 

1  Tracti.  etc,  (ed.  McCnUocb),  18S7,  p.  120. 
*  Ibid.,  p,  »5. 


262 


THE  PRINCIPLES  OF  MONET 


were  only  a  specie  circulation.     Hence  **  the  convertibiHty  i 
the  notes  of  the  Bank  was  to  be  secured,  by  regulating 
amount  of  the  issues  with  reference  to  the  state  of  the  Fo 
eign  Exchanges/'^    The  object  and  purpose  of  the  Act 
1844  w^as  the  limitation  of  the  amount  of  the  cireuktioaj^ 
hence  there  Faulted  the  removal  of  the  issues  f Jt>m  the  i 
trol  of  the  Banking  Department,  and  the  provisions  for  1 
restriction  and  eventual  retirement  of  the  country  bank  Imi^ 
Sir  Robert  Peel  Jn{erred»  says  Mr.  Took©**  "  that  the  Bank  of| 
Engknd  and  the  country  banks^  in  modem  piactioe  and 
a  strictly  convertible  state  of  the  paper,  have  alao  a 
power  over  the  amount  of  tiieir  circulation,  and  thenee  tnl 
influence  on  the  total  quantity  of  monty;  and,  conaeqoendy,] 
on  pricesj  and  on  tRide  and  credit." 

The  separation  of  the  Issue  from  the  Banking  DepartDieiiti  I 
and  the  accompanying  provisions,  certainly  did  an  importiDi  | 
service  in  securing  absolutely  the  convertibility  of  the  notea; 
but  it  did  a  still  greater  service  than  that,  and  one  not  intended, 
or  even  suspected,  by  the  school  which  pushed  the  scheme  to 
enactmenti  It  gave  a  practical  object  lesson  to  the  world  of 
the  distinction  between  the  monetary  functions  of  the  staad* 
ard^  and  of  the  media  of  exchange ;  it  not  only  secuiied  the 
stability  of  the  standard,  but  it  disclosed  the  actual  procea 
by  which  a  deposit  currency  (of  checks  and  deposits),  under 
the  sole  management  of  the  Banking  Department  —  and  witb 
only  a  minimum  use  of  the  standard  commodity  as  a  medium 
of  exchange,—  provided  the  greatest  commercial  ©entm  of 
the  world  with  the  medium  of  exchange  by  which  practicalljr 
all  of  its  wholesale  transactions  were  efficiently  and  chesplj 
Act  oi  1844  carried  on.  It  showed  in  its  operation  —  what 
^oali^i^nl^  th&  framers  of  the  Act  had  evidently  never  sai- 
l^mZ^im^i  p«cted  — that  otiier  things  than  coin,  or  mm 
«xch«Bg«.  tjj^n  convertible  notes,  were  competent  to  pro- 
vide almost  the  whole  of  the  country*s  media  of  eichaoge 

*  Lord  Orwiitatiep  Tracts,  etc,  p.  S9. 

*  €t  Speeches  of  Sir  Robert  Peel  Ma/  6  and  SO,  1844* 

*  Uli^tf  i^t  Fri<^,  IV,  p.  165.    Cf.  a  W.  Horman,  &p.  c&,  p.  III. 


THE  QUANTITY  THEORY  OF  MONEY 

(or  "currency ")>  while  the  value  of  the  standard  clearly 
enotigh  was  independently  determined  by  the  world  value 
of  gold-  Moreover,  the  greatest  possible  flexibility  in  the 
media  of  exchange  was  provided  by  the  items  of  securities 
(i,  e,,  loans)  and  deposits  in  the  Banking  Department;  so 
tiiat  an  enla^ment  of  operations  by  the  business  public 
was  instantly  reflected  in  these  accounts  which  provided  the 
medium  of  exchange.  Above  all  —  to  repeat  —  it  disclosed, 
as  never  before,  the  separation  of  the  workings  of  the  func- 
tion of  money  as  a  medium  of  exchange  from  tlmt  as  a  stand* 
ard  of  prices.  Prices  were  expressed  in  gold,  not  in  deposit 
currency;  prices  had  to  do  with  the  relative  values  of  goods 
and  gold,  and  not  with  the  fluctuations  in  amount  of  the 
media  of  exchange,  by  which  in  fact  the  goods  were  trans- 
ferred. The  absolute  separation  of  all  connection  of  prices 
with  the  media  of  exchange  of  a  country  has  been  shown 
as  if  under  a  magnifying-glass  by  the  htstory  of  the  Act  since 
1844p  Prices  have  fluctuated  up  and  down  after  usjonsof  Act 
the  Act  of  1844  quite  as  they  bad  before;  ex-  ^J.^^^"^^ 
pansion  of  credit  has  been  as  possible  through  the  ^^^^ 
creation  of  deposit  cuirency  as  it  was  through  the  issue  of 
notes  to  the  borrower  (since  both  were  demand  liabilities  of 
the  Bank) ;  and  the  usual  cycle  of  overtrading,  panic,  and 
depression  has  gone  on  after  the  Act  as  well  as  before  (as, 
e,  g.,  in  1847,  1857,  1866,  1873,  1890,  and  1900).  No  one 
who  understands  the  workings  of  the  Act  could  for  a  moment 
believe  that,  in  Great  Britain  at  least,  the  general  level  of 
prices  is  dependent  on  the  quantity  of  the  media  of  exchange 
(no  matter  of  what  it  is  composed) ;  but  that  price  must  be 
dependent  on  the  comparison  between  goods  and  the  standard, 
to  which  not  only  notes,  but  all  media  of  exchange,  are  re- 
ferred for  teste  of  their  solvency.  For  these  great  lessons  we 
are  indebted  to  the  Act  of  1844. 

§  6,  In  the  doctrines  known  as  the  Banking  Principles, 
we  find  the  body  of  thinking  which  had  grown  up  opposed 
to  the  general  tenets  of  the  quantity  theory,  and  which  is 


264  THE  PRINCIPLES  OF  MONEY 

properly  assooiated  with  the  name  of  Thomas  Tooke.  Of  tti 
same  way  of  thinking,  in  geneial,  were  John  FvHefiUmf 
James  Wilson,'  Bonamy  Price,'  and  (m  France)  CouroeDa^ 
Seneuil.* 

Since  the  banking  principle  was  opposed  to  the  cvmasf 
principle,  the  former  may  be  best  understood  by  a  faiifif  oon- 
trast'with  the  latter.     According  to  the  currency  school: 
Banking  1*  Priccs  risc  and  fall  with  the  increase  or 

prineipB.         diminution  of  the  amount  of  the  ciroulatioiL 

2.  Banks  have  it  in  their  power  to  increase  at  pleasure  tb 
quantity  of  paper  money. 

8.  Tlie  efflux  and  influx  of  gold  are  to  be  regulated  by  1^ 
ulating  the  issues  of  the  banks.* 

As  opposed  to  these  declarations,  the  banking  princsqik 
included  the  ideas  that: 

1.  Prices  do  not  depend  upon  the  quantify  of  tbe 
circulation. 

2.  Banks  cannot  increase  their  issues  at  pleasure ;  sinfie^if 
convertible,  any  excess  will  be  returned  for  redemptioDL 
Banks  only  follow  the  attitude  of  their  customers. 

8.  Consequently,  the  issues  of  banks  need  not  be  lega- 
lated  according  to  the  price  of  bullion  in  the  foreign  ex- 
changes. 

Some  writers  have  assumed  that  the  two  schools  differed 
principally  on  the  second  proposition,  and  that  the  contaroveisy 
pivoted  on  the  question  whether  convertible  paper  could  be 
issued  to  excess.^  It  will  be  found,  I  think,  that  the  fondA- 
mental  difference  existed  in  regard  to  the  first  propontion. 

The  leader  of  the  banking  school,  Thomas  Tooke,  in  his 
earlier  writings,  had  adhered  to  the  view^  of  the  currency 

1  On  the  Regulation  of  Carrencies  and  the  Working  of  the  New  Bank  Cbvtv 
Act.  etc.  (London,  1844.  2d  ed.,  1845). 

'  Capital.  Currency,  and  Banking  (London,  1847),  8to,  pp.  xxTi  +  294. 
'  Principles  of  Currency  (New  York,  1875). 

*  Traits  theorique  et  practique  des  operations  de  banqne  (Paris,  0th  ad, 
1876). 

*  See  Tooke,  History  of  Prices,  IV,  pp.  xi-xiL 

*  Cf.  P.  A.  Walker,  Money,  pp.  420-421. 


sdiool  I  *  but  in  Volume  III  of  his  ffiitory  of  Prices  (1840) 
he  broke  completely  mth  the  currency  doctrines**  As  a  mer- 
chant,  it  waa  natural  that  Tooke's  methods  should 
b©  mainly  inductiva  Although  he  collected 
much  material  on  prices,  he  employed  no  index  numbers  or 
elaborate  tables  in  his  proot^  Indeed,  he  wrote  before  the 
existence  of  any  extensive  tables  of  prices  by  which  only  a 
proper  examination  of  the  quantity  theory  could  be  made. 
His  habit  of  inquiring  into  the  particular  causes  affecting  the 
prices  of  each  article  from  year  to  year  led  him  to  ascribe 
little  importance  to  fluctuations  of  the  currency  as  an  influ- 
ence on  prices.  In  summing  up  his  study  of  prices  from  1793 
to  1837*  he  said: 

'*  The  whole  tenour  of  the  facts  and  reasoniaga  adduced  has 
been  to  establish  the  conclusion  that  the  great  alterations  of 
prices  originated,  and  mainly  proceeded,  from  alteratious  m 
circamstances  distinctly  afTeotiDg  the  commodities,  and  not  in 
the  quantity  of  money,  in  relation  to  its  functions/*  * 

This  statement  is  strongly  reinforced  by  his  later  studies : 

**  As  far  as  trustworthy  evidence  can  be  obtained,  there  are 
no  facta  in  the  expert etice  of  the  loBt  Nine  Years  (1346-1856) 
wMch  justify  the  conclusion,  that  in  this  country  « 
the  flnetuations  of  Prices  .  *  .  were  immediately  against  qasa- 
preceded  by,  or  connected  with,  ebanges  in  the   ^^^     *°^" 
amount   of   the  aggregate  outstanding    circulation   of    Bank 
Note«*"* 

1  ParticnUrlf  in  hia  *' Though U  on  High  and  Low  Prices''  (1823) ;  in  hia 
volume  **  On  the  Cnrreacjr  in  conDexion  with  the  Com  Trade  "  (1SS9) ;  and  m 
the  first  two  irolnmM  of  hift  "  Histoiy  of  Pricea''(ll23^. 

^  His  change  of  front  ia  dencribed  in  the  preface  to  Vol  IV,  pp.  x-%u  j  and 
in  Part  III  of  Vol.  IV,  pp.  84-406  are  giTen  to  a  rtview  of  the  controversy* 

*  See  the  criticism  of  Tooke  bj  Jevons,  **  Investigattons  in  Curreacj  and 
Finance"  {London,  iaB4)jpp.  57-59^  ISO. 

*  Hifitoij  of  prices,  It,  pp.  350.  Of  conrse  he  adnaitft  that  during  the  papers 
iDonef  period  tha  price  level  wmi  raided  to  the  extent  uf  ita  depf^M^iatJun  tm  com- 
pared with  gold  {if.  Q.  349) ;  hnt  ihis  is  the  iDeiitable  consequence  of  a  fall  in 
the  TaJne  of  the  i^tandard  in  which  pricea  are  expressed,  and  not  neoessarilj  of 
the  increased  quantity  of  the  paper  monej. 

*  iiia,,  V,  p.  344- 


266  THE  PRINCIPLES  OF  MONET 

Tooke  and  Newmaroh  together  even  went  so  for  as  to  deof 
that  the  new  gold  had  advanced  prices  up  to  1857 : 

*<  As  far  as  can  be  ascertained  by  a  careful  examination  of  tb 
Coarse  of  Prices  in  this  country  as  regards  a  oonslderaUe  ■» 
ber  of  leading  Commodities,  it  does  not  appear  that  the  Flrioei  |» 
vailing  in  the  early  part  of  1857,  when  compared  with  the  Mm . 
prevailing  in  1851,  Jnstify  the  inference  that,  in  any  manifeital ' 
appreciable  d^ree,  the  increase  in  the  quantity  of  Metiii 
Money,  by  means  of  the  New  Gtold,  has  raised  tbePkioeirf 
Commodities ;  —  in  other  words,  in  every  instance  of  a  nil^ 
tion  of  Price,  a  fall  explanation  of  the  change  is  appuwt^ 
afforded  by  circan^stances  affecting  the  Sapply  or  the  demanl*' 

This  passage,  however,  may  not  be  construed  as  an  opimoa 
against  the  quantity  theory,  because  events  which  may  hafB 
cheapened  gold  after  1848  may  have  lowered  the  world  vite 
of  gold,  and  thus  caused  a  general  rise  of  prices,  without  tb 
necessity  of  attributing  this  rise  to  an  increase  in  the  ciicoli- 
tion,  even  of  gold.  Since  price  is  a  comparison  of  goodi 
with  gold,  a  fall  in  the  value  of  gold,  for  causes  affectinggoid 
itself  and  not  goods,  is  tanteunount  to  a  rise  in  the  prices  of 
goods. 

Among  the  circumstances  affecting  prices  on  the  side  of 
commodities,  such  as  supply  and  demand,  Tooke  laid  great 
stress  on  the  importance  of  good  and  bad  seasons.'  As  to 
other  matters  affecting  the  supply  of  commodities,  Tooke 
particularly  noticed  the  importance  of  commercial  regulatioiUi 
shipping  freights,  cost  of  insurance,  and  improvements  in 
machinery.® 

The  discussion  of  the  second  point  of  difference  between 

1  History  of  Pricea,  VI,  p.  232. 

«  Thoughts  on  High  and  Low  Prices,  Part  III,  and  History  of  Prices,  I,  FtetL. 
While  he  denied  the  accuracy  of  Gregory  King's  rale  as  to  the  propoitiooifce 
effect  of  a  decline  in  the  supply  on  the  price  of  grain,  he  held  that  "  a  decided 
deficiency  of  supply  is  commonly  attended  in  the  case  of  com,  more  than  in  that  of 
most  other  articles,  with  an  advance  in  price  very  much  beyond  the  degree  of 
the  deficiency."    Vol.  I,  p.  13.    Cf.  Thoughts,  etc.,  p.  286. 

<  Thoughts  on  High  and  Low  Prices  (2d  ed.),  pp.  376-377,  and  also  Hiitoiy 
of  Prices,  II,  pp.  348-349. 


THE  QUANTITY  THEOEY  OF  MONEY  267 

the  cmrency  and  banking  schools  has  little  concern  with  the 
essential  purpose  of  tlus  chapter,  and  properly  belongs  to  a 
discussion  of  paper  money*  Our  present  purpose  m  to  tmce 
the  history  and  development  of  theories  of  price* 

The  contention,  however,  that  convertible  notes  could  not 
be  isaued  in  excess,  depends  upon  what  "excess*'  means. 
Protebly  no  one  would  deny  the  correctness  of  cowid  con. 
this  position,  if  it  were  understood  that  conver-  JebMied"*'** 
tibiUty  carried  with  it  efficient  and  ready  means  *^  «^c»8  ? 
for  immediate  as  well  as  for  ultimate  redemption.  Instant 
convertibility,  on  demand,  at  various  points  throughout  the 
districts  wherein  the  notes  are  circulating,  must,  in  the  light 
of  modem  banking  experience,  permit  to  circulate  no  more  of 
the  medium  of  exchange  than  is  required  by  the  needs  of 
business.  But  this  should  not  be  taken  to  imply  that  such 
notes,  on  entering  the  circulation,  would  not  drive  out  a 
portion  of  the  specie  currency.  To  the  extent  that  gold 
might  have  been  used  as  a  medium  of  exchange  in  aiding 
the  movement  of  goods*  a  new  issue  of  convertible  notes 
would  certainly  take  the  place  of  this  quantity  of  coin,  and 
save  to  the  community  that  amount  of  the  cost  of  the  machin- 
ery of  exchange.  The  convertible  paper  and  coin  together 
might  equal  the  sum  of  the  original  coin  required;  but  it 
might  veiy  properly  result  that  almost  the  whole  of  this 
medium  might  be  made  up  of  paper,  coin  being  almost  en- 
tirely retired  to  reserves.  This  is  consistent  with  modem 
devices  for  saving  the  use  of  the  valuable  standard  com- 
modity from  being  passed  about  as  a  medium  of  exchange. 
In  Gtieat  Britain,  above  the  strata  of  small  denominations  of 
gold  and  silver  coins,  the  Bank  of  England  notes  der\'e  all  the 
purposes  of  a  medium  of  exchange  instead  of  gold ;  while 
the  deposit  currency  since  1844  appears  also,  as  a  medium  of 
exchange,  to  have  cl^rly  relieved  even  the  bank  notes  of 
such  duty  in  the  YBSt  mass  of  transactions. 

Therefore,  when  the  currency  school  contended  that  by 
excess  they  meant  that  "  the  whole  money  of  the  countiy, 
paper  and  gold,  undistinguishahly,  is  depreciated  in  com* 


268  THE  PRINCIPLES  OF  MONEY 

parison  with  the  money  of  other  countrieSi"  ^  they  could  hgn 
lefeired  only  to  the  temporary  processes,  while  in  opeit- 
^^  tion,  by  which  the  superfluous  specie,  made  sod 

school  bad  by  economizing  devices  like  bank  notes,  was  d»* 
toi^raiy  poscd  of  in  the  international  distnbution  of  ^ 
con  Uont.  precious  metals.  But,  assuming  by  **  excess  "  thtt 
they  meant  they  did  not  wish  gold  to  be  displaced  by  bank 
notes,  and  hence  that  bank  notes  should  not  be  issued  be- 
cause, even  if  convertible,  they  would  drive  out  gold  (a 
evidenced  by  the  course  of  the  exchanges)  they  were  conBct 
in  their  analysis  of  the  operations ;  but  their  assumption  vm 
against  the  interests  of  the  commercial  public,  because  the 
substitution  of  an  expensive  gold  circulation  by  paper  wast 
saving  to  the  community,  and  the  objection  to  it  has  bee& 
disallowed  by  the  quiet  logic  of  events  in  the  banking  expeii- 
ence  of  Great  Britain  itself.  On  the  other  hand,  so  &r  as  tb 
banking  school  thought  that  bank  notes,  if  convertible,  ooold 
not  be  issued  in  excess,'  to  the  extent  that  the  notes  wonU 
take  the  place  of  coin  as  a  medium  of  exchange,  they  were  in 
error. 

The  kernel  of  truth  in  the  discussion  on  this  point  is  to 

be  sought  in  the  belief,  strongly  supported  by  Mr.  Tooke's 

citation  of  facts,  that  the  issue  of  convertible 

Gonyertible  ' 

notes  did  not  notcs  Seemed  to  nave  had  no  direct  effect  upon 
prices,  priogg  That  is,  the  adjustment  of  specie  and 
convertible  notes  went  on  without  sensibly  affecting  the  com- 
parison between  goods  and  the  specie  standard  by  which 
alone  prices  are  made.  In  my  opinion,  the  currency  school 
were  wrong  in  arguing  that  the  issue  of  convertible  notes 

1  Cf.  F.  A.  Walker,  Money,  pp.  430-431. 

<  The  banking  school  pointed  out  correctly  that  in  making  loans  the 
borrower  has  the  option  of  taking  gold,  or  a  book  credit  (in  the  form  of  a 
deposit),  or  notes,  as  best  suits  his  convenience  (cf.  Tooke,  History  of  Prices, 
IV,  p.  184).  Therefore  it  was  the  borrowing  merchant,  and  not  the  hank,  who 
controlled  the  amount  of  the  note  isHues.  The  identity  of  the  note  and  de> 
posit  function  as  currency  from  the  point  of  view  of  the  bank  (cf.  Danbar'i 
Tlieory  and  History  of  Banking,  and  chap,  v,  supra)  had  not  then  been  ckvl; 
seen  by  the  currency  school. 


THE  QUANTITY  THEORY  OF  MONEY      269 

iiiaed  a  rise  of  prices,  and  thereby  led  to  the  exportation  of 
)ld;  the  gold  may  have  been  exported,  but  not  through  the 
peiatLon  of  a  rise  of  prices.^  The  gold  went  out  simply 
doause  economizing  devices  had  made  it  superfluous  and 
eoause  it  was,  therefore,  not  needed  in  the  currency. 

Tooke  and  his  friends  noticed  that  a  rise  of  prices  and  an 
ncreased  issue  of  bank  notes  often  went  together.     The 
lequence  of  events  to  them  was  this :  a  rise  of  Beiatioii  of 
prices  due  more  or  less  to  speculative  activity,  ^i^^S^ 
eansed  greater  demands  to  be  made  upon  the  banks  ®'  °^'^* 
for  loans,  and  additional  notes  might  be  issued  for  some  of  the 
new  loans.    They  saw  that  an  increase  of  bank  notes  could 
not  increase  prices,  because,  being  convertible,  they  must 
always  conform  in  value  to  the  coin  for  which  they  could 
be  exchanged;  hence  changes  of  prices  must  necessarily  be 
lefeiaUe  only  to  changes  in  the  demand  for  and  the  supply  of 
the  standard  coin  —  so  far  as  influences  affecting  the  money 
aide  of  the  price  comparison  are  concerned. 

§  7.  During  the  period  of  the  preceding  discussion,  there 
WB8  much  writing  on  money.  It  has  been  my  purpose,  how- 
ever, to  try  to  give  a  sufficiently  clear  statement 
of  the  theory  of  prices  through  a  presentation  of  writers  mre 
the  views  of  the  prominent  economists.  With-  ^^^^  *"* 
out  disparagement  to  those  omitted,  it  has  been  thought  that 
the  doctrines  can  be  typically  represented  by  a  few  as  well 
^  by  many  quotations.  And  it  is  believed  that  enough 
writers  have  been  chosen  to  give  the  prevailing  tendency  of 
thought  during  the  various  historical  periods.  It  was,  also, 
regarded  as  unnecessary  to  load  down  a  critical  and  construc- 
tive study — for  such  is  the  aim  of  this  volume  —  by  a  mass 
>f  material  obtained  in  following  the  detailed  history  of  the 
[uantity  theory  in  France,  Germany,  and  Italy.  It  seemed 
0  me  that  the  views  of  the  early  writers  already  given,  al- 
bough  mainly  English,  were  sufficient  to  show  the  evolution 
f  the  doctrine.     The  history  of  all  the  literature  on  this 

1  Cf .  infra,  chap,  x,  §  10. 


270  THE  PRINCIPLES  OF  MONEY 

theory  in  each  country  could,  after  all,  throw  no  new  light  on 
the  outcome  of  the  discussion  as  to  the  truth  of  the  quantitj 
theory.  Possibly  I  have  already  given  too  much  space  to  iti 
histoiy ;  since  disce  omnes  ab  uno  might  be  true.  This  nrait 
be  my  reason  for  quoting  hereafter  only  a  few  of  the  eminent 
writers  on  money. 

Senior^  gave  his  attention  to  the  cost  of  production  of  tte 
precious  metals,  and  held  that  a  change  in  the  cost  of  prodoctun 
of  gold  would  affect  prices  in  direct  proportion  to  this  change: 

'<  If  the  cost  of  obtaining  gold  should  increase  five  per  oent^ . . . 
com  would  fall  from  three  guineas  to  three  pounds  a  quarter."* 

Of  course,  if  the  value  of  the  standard  in  which  prioei 
were  expressed  were  changed  by  a  variation  in  its  cost  of 
Senior  u  et  production  (accepting  that  theory  of  value),  then, 
both  cost  of  other  things  remaining  the  same,  prices  would 
quantity^of  certainly  fluctuate  as  Senior  asserted ;  but  in  aoj 
monej.  modem  period  the  value  of  gold  is  affected  more 

directiy  by  demand  and  supply  than  by  cost  of  producticm,  and, 
also,  '^  other  things '*  on  the  side  of  conmiodities  seldom  le- 
main  the  same.  But  if  the  cost  of  production  of  commodities 
remained  the  same,  according  to  Senior,'  the  sole  regulator  of 
prices  was  the  quantity  of  money  (including  notes  as  well  as 
coin)  in  circulation. 

Without  distinguishing  between  the  functions  of  a  standard 
and  those  of  a  medium  of  exchange,  Senior  regarded  eyeiy-j 
thing  included  under  money  as  having  an  effect  on  prices^ 
He  did  not  seem  to  understand  that  in  the  quantity  of  so- 
called  money  in  use,  which  served  only  as  media  of  exchange, 
there  might  be  great  fluctuations  without  there  being  practi- 
Senior  intro-  cally  any  variations  in  the  value  of  the  standard. 
mnTn'flwncJiS  Senior  introduced  the  subject  of  credit  as  an  in- 
prices.  fluence  affecting  prices,  credit  instruments  being 

substitutes  for  money.  In  a  country  having  no  specie  circu- 
lation, a  more  extensive  use  of  credit,  a  greater  rapidity  of 

1  On  the  Cost  of  Obtaining  Money  (1830). 

«  Ibid.,  p.  54.  »  Ibid,,  p.  55. 


THE  QUANTITY  THEORY  OF  MONEY      271 

eircnlation  of  ite  paper  money,  or  an  enlarged  use  of  book 
eredits  would  affect  prices  exactly  as  an  increase  in  the  quan- 
tity of  the  inconvertible  notes.    This  was  essentially  the  quan- 
tity liieory,  forms  of  credit  being  included  as  a  part  of  money. 
The  economist  ^  who,  more  than  any  other,  connects  the 
earlier  with  the  recent  writers,  was,  of  course,  John  Stuart 
llill,^  who  reasoned  out  a  fairly  complete  theoiy  j^^^  g^^^^^ 
of  prices.    Nominally  he  denied  the  second  prop-  ^lu. 
osition  of  the  currency  school  (as  classified  in  the  last  sec- 
tion), but  in  reality  he  was  so  much  under  the  domination  of 
the  quantity  theory  of  prices,  that  he  could  not  follow  the 
banking  school  in  all  their  doctrines.    Like  other  writers  of 
his  time,  he  used  money  in  a  general  sense,  without  distin- 
gaishing  between  its  use  as  a  standard  and  ^^  ^^  distinction 
medium  of  exchange.*    And  while  plainly  dis-  ^tre^  stand- 
aYOwing  his  belief  in  the  old  form  of  the  quantity  dinm  of  ex- 
theory,  he  constantly  reasons  upon  a  causal  con-       "*** 
section  between  prices  and  the  amount  of  money  in  circulation 
(using  the  word  in  a  comprehensive  and  unscientific  fashion) : 

**  Money  [t.  6.,  he  can  only  mean  the  standard  commodity]  is 
a  commodity,  and  its  value  is  determined  like  that  of  other  com- 
modities, temporarily  by  demand  and  supply,  permanently  and 
on  the  average  by  cost  of  production.^ 

*^The  supply  of  money,  in  short,  is  all  the  money  in  circular' 
tion  at  the  time.    The  demand  for  money,  again,  consists  of  all 

1  His  father,  Jamas  Mill,  in  hia  **  Elements  of  Political  Economy/'  1821,  fol- 
lowed the  quantity  theory :  Prices  will  change,  other  things  being  equal,  if  there 
'»  an  alteration  in  (1)  the  amount  of  money,  (2)  in  the  rapidity  of  circulation, 
or  (3)  in  the  quantity  of  goods  to  be  exchanged.  CI  pp.  131-135.  Cf.  also 
pp.  171-173. 

*  Principles  of  Political  Economy,  with  some  of  their  Applications  to  Social  Phi- 
losophy (2  vols.,  London,  1848).    References  are  to  the  New  York  edition,  1868. 

'  Book  III,  chap.  rii.  Also,  he  says  pointedly :  "  There  are  other  things,  such 
BB  bank  notes,  bills  of  exchange,  and  checques,  which  circulate  as  money,  and  per- 
form aU  the  functions  of  it'*  (toI.  ii,  p.  65,  Book  III,  chap,  xi,  §  1).  A 
writer  who  assumes  that  checks  and  bills  perform  all  the  functions  of  money, 
necessarily  including  the  standard  function,  is  certain  to  run  into  difficulties  in 
the  further  derelopment  of  his  theory  of  prices. 

«  IbitL,  p.  24  (Book  III,  chap.  rii). 


272  THE  PRINCIPLES  OF  MONEY 

the  goods  offered  for  sale.  ...  As  the  whole  of  the  goods  in  the 
market  compose  the  demand  for  money,  so  the  whole  of  the 
money  constitutes  the  demand  for  goods.  The  money  ind 
the  goods  are  seeking  each  other  for  the  pnrpoee  of  being  ex- 
changed.  They  are  reciprocally  supply  and  demand  to  one  so- 
other. It  is  indifferent  whether^  in  characterizing  the  phenomeni, 
we  speak  of  the  demand  and  snpply  of  goods,  or  the  supply  and 
demand  of  money.    They  are  equivalent  expressions."  ^ 

Here  is  to  be  found  a  fundamental  error:  if  gold,  for 
instance,  were  the  standard  money,  Mr.  Mill  was  confused 
Confusion  ts  ^  ^  ^®  demand  for  and  supply  of  gold.  The 
to  demand  and  demand  for  it  is  any  demand,  non-monetaiy  as 
■upp  7  o  go  ^^jj  ^  monetary ;  and  it  is  possible  that  the 
standard  metal  may  scarcely  be  used  at  all  as  a  medium  of 
exchange, — as  in  England  or  the  United  States  to-day,— 
and  thus  the  quantity  of  it  in  the  circulation  offered  for 
goods  may  very  inadequately  state  the  supply  of  gold;  nor 
are  we  thus  able  to  determine  the  demand  for  it.  As  irill 
be  seen  later,  also,  the  offer  of  gold  for  goods  (certainly 
where  the  deposit  currency  is  generally  used)  is  not,  moie- 
over,  a  true  statement  of  the  demand  for  goods. 

From  his  exposition  of  demand  and  supply,  Mr.  Mill  ar- 
rived at  this  result: 

*^  The  value  of  money,  other  things  being  the  same,  varies 
inversely  as  its  quantity."  * 

^^  The  amount  of  goods  and  of  transactions  being  the  same, 
the  value  of  money  is  inversely  as  its  quantity  multiplied  by 
what  is  called  the  rapidity  of  circulation."* 

He  follows  this  by  explaining  that  while  other  commodi- 
ties do  not  vary  in  value  precisely  with  the  changes  in  de- 
mand and  supply,  money  does  so  vary.     Because 

States  a  strict         ...  f     '^  .       ,  /      i.  n     •  i. 

Quantity  01  his  usc  of  moucy  in  two  senses,  he  falls  into 

^^^^''  error.     If  he  had  thought  of  gold  as  a  standard, 

and  of  its  world  value,  he  would  have  seen  that  an  increase 

1  Principles  of  Political  Economy,  p.  27  (Book  III,  chap,  viii,  $  a). 
•  Ibid,,  II.  p.  30.  »  Ibid.,  IL  p.  31. 


THE  QUANTITY  THEORY  OF  MONEY      278 

in  the  quantity  of  gold  from  the  mines  might  not  have 
changed  its  world  value  in  the  precise  proportion  of  the  in- 
crease in  its  supply.  His  mistake  in  contrasting  the  goods 
actually  exchanged  with  the  media  of  exchange,  by  which 
I  the  process  was  necessarily  carried  out^  leads  him  to  this 
identical  proposition: 

**  The  whole  of  the  goods  being  in  any  case  exchanged  for  the 
whole  of  the  money  which  comes  into  the  market  to  be  laid  out, 
they  will  sell  for  less  or  more  of  it,  exactly  according  as  less  or 
more  is  brought."  ^ 

This  is  as  much  as  to  say  that  this  quantity  of  money  is 
required  because  this  is  the  quantity  required :  a  bucket  is 
full  of  water,  because  the  water  fills  the  bucket,  identical 
The  actual  result  is  taken  as  the  means  by  which  P«>P<»*ti<«- 
the  result  is  obtained.  The  media  of  exchange  actually  used, 
as  shown  by  the  transactions,  are  taken  as  the  reason  why 
such  and  such  a  quantity  must  be  given  in  exchange  for  the 
goods  in  question.  An  event,  a  fait  aceomplh  is  used  as  the 
explanation  of  itself. 

While  this  is  his  basic  reasoning,  yet  Mr.  Mill  properly 
goes  on  to  introduce  **  the  other  things,"  which  do  not  always 
lemain  the  same : 

'^  The  proposition  which  we  have  laid  down  respecting  the 
dependence  of  general  prices  upon  the  quantity  of  money  in 
circulation,  must  be  understood  as  applying  only  to  a  Credit  and 
state  of  things  in  which  money,  that  is,  gold  or  IhfngT" 
silver,  is  the  exclusive  instrument  of  exchange,  and  introduced, 
actually  passes  from  hand  to  hand  at  every  purchase,  credit  in 
any  of  its  shapes  being  unknown.  When  credit  comes  into 
play  as  a  means  of  purchasing,  distinct  from  money  in  hand,  we 
shall  hereafter  find  that  the  connexion  between  prices  and  the 
amount  of  the  circulating  medium  is  much  less  direct  and  inti- 
mate, and  that  such  connexion  as  does  exist,  no  longer  admits 
of  so  simple  a  mode  of  expression.  .  .  . 

'^  That  an  increase  of  the  quantity  of  money  raises  prices, 

1  Principles  of  Political  Economj,  II,  pp.  30-^1. 
18 


274  THE  PRINCIPLES  OF  MONEY 

and  a  dimination  lowers  them,  is  the  most  elementary  proposi- 
tion in  the  theory  of  currency,  and  without  it  we  shoold  ha?e 
no  key  to  any  of  the  others.  In  any  state  of  things,  howe?er, 
except  the  simple  and  primitive  one  which  we  have  sappofled, 
the  proposition  is  only  tme,  other  things  being  the  same."  ^ 

In  the  first  quotation  Mr.  Mill  has  in  mind  a  sitnation  in 
which  the  standard  metal  is  also  the  only  instroment  of 
Credit  acts  as  ©^changing  goods,  there  being  a  demand  for 
purchasing  the  Standard  commodity  as  a  medium  of  exchange. 
The  reason,  therefore,  why  the  introduction  of 
credit  would  change  the  result  is  because  credit  would  act  as 
a  medium  of  exchange, — certainly  not  as  a  standard,  —  and 
would  thereby  relieve  the  standard  metal  from  some,  or  eyen 
the  largest  part,  of  the  demand  for  it  as  a  medium  of  exchange. 
In  that  event  the  value  of  the  standard  would  decline,  ajid 
consequently  prices  would  tend  to  rise.  But  Mr.  Mill  sees 
that  the  effect  of  credit  on  prices  is  not  through  its  effect  on 
the  value  of  the  standard,  but  directly  through  its  service  as 
a  medium  of  exchange  in  being  offered  as  purchasing  power 
(wherein  lies  his  error,  in  my  judgment). 

In  the  second  of  the  two  quotations  above,  everything  depends 
upon  what  is  meant  by  "money."  If  Mr.  Mill  includes 
Value  of  gold  Under  money  anything  or  ever3rthing,  like  bills 
wppfy  atVeTi  *^^  chccks,  which  are  used  only,  or  partly,  as  a 
aa  by  demand,  medium  of  exchange,  then  it  is  very  far  from 
being  an  **  elementary  proposition  "  to  say  that  a  change  in 
the  quantity  of  the  media  of  exchange  would  directly  affect 
the  value  of  the  standard  metal,  and  thus  raise  or  lower 
prices.  Mr.  Mill  can,  of  course,  have  in  mind  only  that  state 
of  things  where  the  sole  medium  of  exchange  is  the  same 
commodity  which  forms  the  standard  of  prices.  Assuming, 
for  instance,  an  increase  in  the  quantity  of  gold,  we  are  asked 
to  regard  every  other  force  affecting  the  value  of  gold  as 
constant ;  but,  since  gold  is  a  commodity  like  any  other,  its 
value  is  influenced  not  only  by  all  the  demands  for  gold  (non- 

1  Principles  of  Political  Economy,  II,  p.  S3. 


THE  QUAJfTITY  THEOET  OF  MONET 


2T5 


monetary  as  well  as  monetary),  but  also  by  its  world  supply. 
To  take  as  basic  one  of  several  co-ordinate  factors  like  the 
supply  18  misleading.  It  would  be  equally  an  "  elementary 
proposition ''  to  say  that  an  increase  in  the  demand  for  gold 
lowers  prices  and  a  diminution  raises  them,  other  tilings  being 
the  same. 

Clearly  enough,  Mr.  Mill  does  not  hold  Uiat  prices   are 
reached  through  a  comparison  between  goods  and  the  standard 
article,  but  by  a  comparison  between  goods  and  ^^^^^ 
the  media  of  exchange  by  which  they  are  in  feet  prict  urat^d 
exchanged.     Yet  he  believes  that  the  introduction    "'*^"°"*  *°  J^* 
of  money  does  not  interfere  with  the  general  laws  of  value : 


*^  The  relations  of  commoditleB  to  one  another  remain  nnaU 
tered  by  DQoney:  the  only  new  relation  introduce  is  their 
relation  to  money  itself."  ^ 

That  is,  our  problem  is  the  value  of  goods  as  related  to  the 
standard  money.  Price,  then,  should  be  a  statement  of  value 
between  goods  and  the  standard.  The  problem  of  the  relation 
between  a  commodity  and  gold  is  no  different  in  kind  than 
between  two  commodities  of  any  sort.  Hence  the  problem  of 
price  is  to  be  reached  only  by  this  method*  Is  there  not 
some  confusion  of  thought  by  Mr.  Mill  as  to  the  demand  for 
and  supply  of  gold  (using  gold  as  the  type  of  a  standard 
money)  ?  As  to  supply  and  cost  of  production  he  cannot  be 
misunderstood ;  but  is  he  clear  as  to  demand  ?  It  is  obvious 
that  the  demand  for  gold  includes  all  demands  for  its  use, 
monetary  and  non- monetary ;  the  monetary  demand  for  gold 
is  for  an  amount  (very  slight  in  these  days)  needed  as  a 
medium  of  exchange  in  being  passed  from  hand  to  hand,  and 
also  for  reserves  to  secure  from  time  to  time  tests  in  the 
standard  metal  of  the  solvency  of  tlie  various  media  of  ex- 
change otlier  than  the  standard  commodity.  Instead  of  using 
demand  in  this  sense,  Mr.  Mill  regards  it  as  "  all  goods  offered 
for  sale ; "  in  short,  the  goods  which  in  fact  ar^  offered  for 

^  Frinciplefl  of  Political  Economy,  II,  p>  34. 


276  THE  PRINCIPLES  OF  MONEY 

only  that  part  of  the  standard  metal  which  is  used  as  a 
medium  of  exchange.  In  this  way  he  arrives  at  a  theoiy 
of  ^^  purchasing  power,"  —  which  holds  that  tie 
«*  parchMiDg'*  Supply  of  goods  brought  to  market  is  compared 
^^^'  with  an  offer  of  purchasing  power,  through  which 

prices  are  fixed.  But  Mr.  Mill,  at  other  times,  is  well  aware 
that  ^  it  is  not  with  money  that  things  are  really  purchased."  ^ 
Purchasing  power,  we  can  see,  is  a  thing  different  from  the 
media  of  exchange ;  the  latter  are  brought  into  existenoe  to 
ease  the  circulating  path  of  marketable  goods,  while  it  is  the 
goods  which  really  constitute  the  purchasing  power.  Mr. 
Mill's  conception  of  a  demand  for  goods — in  the  air,  so  to 
speak  —  quite  separate  from  other  goods,  but  measured  hj 
the  quantity  of  money  (used  as  a  medium  of  exchange)  [dus 
credit,  is  the  centre  of  Mr.  Mill's  theory  of  price.  His  great 
reputation,  to  this  day,  makes  no  apology  necessary  for  a  foil 
and  careful  statement  of  his  views. 

He  tried  to  avoid  the  difficulty  to  which  I  have  jutt 
adverted,  but  he  seems  to  be  far  from  conclusive  in  the 
following  quotations : 

''  Since,  however,  the  value  of  money  really  oonfomis,  like 

that  of  other  things,  though  more  slowly,  to  its  cost  of  produo- 

tion,  some  political  economists  have  objected  alto-   _ 

Claim  that 
gether  to  the  statement  that  the  value  of  money   qoanUtj 

depends  on  its  quantity  combined  with  the  rapidity   if^^StemeS^ 
of  circulation ;  which,  they  think,  is  assuming  a  law   of  dem*Dd 
for  money  that  does  not  exist  for  any  other  com- 
modity, when  the  truth  is  that  it  is  governed  by  the  very  same 
laws.     To  this  we  may  answer,  in  the  first  place,  that  the  state- 
ment in  question  assumes  no  peculiar  law.     It  is  simply  the  law 
of  demand  and  supply,  which  is  acknowledged  to  be  applicable 
to  all  commodities,  and  which,  in  the  case  of  money  as  of  most 

^  Principles  of  Political  Economy,  II,  p.  22.  He  adds :  "  There  cannot,  in 
short,  be  intrinsically  a  more  insignificant  thing  in  the  economy  of  society  than 
money ;  except  in  the  character  of  a  contrivance  for  sparing  time  and  labor.  It 
is  a  machine  for  doing  qaickly  and  commodiously  what  would  be  done,  tboogb 
less  qaickly  and  commodioasly,  without  it"  (p. 23). 


THE  QUANTirr  THEORY  OF  MONEY      277 

other  things,  is  controlled,  bat  not  set  aside,  by  the  law  of  cost 
of  prodaction,  since  cost  of  production  would  have  no  effect  on 
yalne  if  it  could  have  none  on  supply.  But,  secondly,  there 
really  is,  in  one  respect,  a  closer  connexion  between  the  value 
of  money  and  its  quantity,  than  between  the  values  of  other 
tilings  and  their  quantity.  The  value  of  other  things  conforms 
to  the  changes  in  the  cost  of  production,  without  requiring,  as  a 
condition,  that  there  should  be  any  actual  alteration  of  the  sup- 
ply :  the  potential  alteration  is  sufficient  .  .  .  Now  this  is  also 
true  of  gold  and  silver,  considered  as  articles  of  expenditure  for 
ornament  and  luxury;  but  it  is  not  true  of  money.  .  .  .  That 
portion  could  not  fall  in  value  one-fourth,  unless  actually  in- 
creased one-fourth.  .  .  .  Alterations,  therefore,  in  the  cost  of 
production  of  the  precious  metals,  do  not  act  upon  the  value  of 
money  except  Just  in  proportion  as  they  increase  or  diminish  its 
quantity." » 

This  defence  of  the  quantity  theory  has  been  used  by 
others,'  but  it  is  aside  from  the  point  Oranting  that  the 
relative  values  of  two  articles  are  determined  by  ^  ^  ^ 
demand  and  supply  (including  expenses  of  pro-  mppij  not 
duction),  may  it  not  be  permitted  to  question  p~P"^ 
whether  demand  and  supply,  in  this  case,  are  properly  de- 
fined, or  are  used  in  more  senses  than  one  ?  Is  the  supply  of 
gold  only  the  amount  of  it  in  circulation  (t.  e.,  as  a  medium 
of  exchange)  directly  offered  for  goods  ?  If  gold  is  not,  in 
fact,  used  as  a  medium  of  exchange  directly  offered  for  goods, 
is  there,  then,  no  demand  for  it,  and  does  it  have  no  value  at 
all?  And  is  the  quantity  of  gold  in  use  as  a  mediiun  of  ex- 
change, when  credit  is  added  to  it,  the  true  measure  of  pur- 
chasing power  for  goods  ?  I  think  not ;  and  the  reader  of  the 
forthcoming  argument  must  decide.  Mr.  Mill's  exposition  of 
the  effect  of  credit  as  purchasing  power  is  worth  quoting : 

'*  In  a  state  of  commerce  in  which  much  credit  is  habitually 
given,  general  prices  at  any  moment  depend  much  more  upon 
the  state  of  credit  than  upon  the  quantity  of  money.    For 

^  Principlafl  of  Political  Economy,  U,  pp.  42-44  (Book  III,  chap,  ix,  1 3). 
*  F.  A.  Walker,  Qoar.  Jour.  £con.,  July,  1895,  p.  374. 


278  THE  PRINCIPLES  OF  MONEY 

credit  ...  is  purchasing  power;  and  a  person  who,  bsmg 
credit,  avails  himself  of  it  in  the  purchase  of  goods,  crealei 
Effect  of  ^^^^  ^  much  demand  for  the  goods,  and  tends 

credit  on  quite  as  much  to  raise  their  price,  as  if  he  made  aa 

^"^^'  equal  amount  of  purchases  with  ready  money.  .  .  . 

<^The  forms  of  credit  which  create  purchasing  power,  m 
those  in  which  no  money  passes  at  the  time,  and  very  offeea 
none  passes  at  all,  the  transactions  being  included  with  a  maai 
of  other  transactions  in  an  account,  and  nothing  paid  hut  i 
balance."^ 

^^  I  apprehend  that  bank  notes,  bills,  or  cheques,  as  such,  do 
not  act  on  prices  at  all.  What  does  act  on  prices  is  Credit, 
in  whatever  shape  given,  and  whether  it  gives  rise  to  any  trtni- 
ferable  instruments  capable  of  passing  into  circulation,  or 
not"> 

^^  The  amount  of  purchasing  power  which  a  person  can  exa> 
else  is  composed  of  all  the  money  in  his  possession  or  due  to 
him,  and  all  of  his  credit"  ' 

^^The  fluctuations  in  the  value  of  the  currency  are  determined, 
not  by  its  quantity,  whether  it  consists  of  gold  or  paper,  but  by 
the  expansions  and  contractions  of  credit."  ^ 

To  this  point  one  would  have  supposed  that  Mr.  Mill  had 
reference  to  normal  prices,  since  he  was  laying  down  elemen- 

^  Principles  of  Political  Economy,  II,  pp.  53-54  (Book  III,  chap,  zi,  §  3). 

3  Ibid.,  p.  65  (Book  m,  chap,  xii,  §  1 ).  See  also :  *'  One  single  exertioo  of  the 
credit-power  in  the  form  of  book-credit,  is  only  the  foundation  of  a  single  par- 
chase  :  but  if  a  bill  is  drawn,  that  same  portion  of  credit  may  serre  for  as  manj 
porchases  as  the  namber  of  times  the  bill  changes  hands :  while  every  bank  doc« 
issued,  renders  the  credit  of  the  banker  a  purchasing  power  to  that  amount  in  the 
hands  of  all  the  successiye  holders,  ¥rithout  impairing  any  power  they  may  possw 
of  effecting  purchases  on  their  own  credit.  Credit,  in  short,  has  exactly  the  nme 
purchasing  power  with  money ;  and  as  money  tells  upon  prices  not  simply  ia 
proportion  to  its  amount,  but  to  its  amount  multiplied  by  the  namber  of  timet  it 
changes  hands,  so  also  does  credit ;  and  credit  transferable  from  hand  to  hand  is  i& 
that  proportion  more  potent  than  credit,  which  only  performs  one  puichase." 
Ibid.,  p.  75  (Book  III,  chap,  xii,  §  4). 

s  Ibid.,  p.  66  (Book  III,  chap,  xii,  §  2). 

*  Ibid.,  p.  224  (Book  III,  chap,  xxiv,  §  3).  The  identity  of  the  issue  and  deposit 
functions  of  banks  in  granting  loans,  Mr.  Mill  did  not  understand.  Cf.  Ibid., 
p.  227.  And  he  speaks  as  if  an  article  paid  for  by  a  check  were  bought  by 
**  money  not  in  the  banker's  possession.'*    Cf.  pp.  65-66  (Book  III,  chap,  xii,  §  2). 


THE  QUANTITY  THEORY  OF  MONEY      279 

taiy  propositions  from  which  to  proceed  to  final  conclusions. 
One  is,  therefore,  considerably  taken  aback  to  find  that  the 
preceding  exposition  of  the  quantity  theoiy  was 
intended  to  apply  only  to  the  fluctuations  of  mar-  traatt  only  of 
ket  price.    In  the  first  of  the  following  passages  "^' 

he  seems  to  admit  that  the  exchange  of  goods  and  gold 
would  take  place  at  the  prices  fixed  by  the  general  princi- 
ples of  value  holding  between  any  two  articles  (as  I  have 
contended  in  my  criticisms) : 

*'  It  is  hardly  necessary  to  say  that  the  permanent  value  of 
money  —  the  natural  and  average  prices  of  commodities  —  are 
not  in  question  here.  These  are  determined  by  the  cost  of  pro- 
ducing or  of  obtaining  the  precious  metals.  An  ounce  of  gold 
or  silver  will  in  the  long  run  exchange  for  as  much  of  every 
other  commodity,  as  can  be  produced  or  imported  at  the  same 
cost  with  itself.  .  .  . 

**  It  is  not,  however,  with  ultimate  or  average,  but  with  imme- 
diate and  temporary  prices,  that  we  are  now  concerned.  These, 
as  we  have  seen,  may  deviate  very  widely  from  the  standard  of 
oost  of  production.  Among  other  causes  of  fluctuation,  one  we 
have  found  to  be,  the  quantity  of  money  in  circulation. '  Other 
things  being  the  same,  an  increase  of  the  money  in  circulation 
raises  prices,  a  diminution  lowers  them.  If  more  money  is 
thrown  into  circulation  than  the  quantity  which  can  circulate  at 
a  value  conformable  to  its  cost  of  production,  the  value  of 
money,  so  long  as  the  excess  lasts,  will  remain  below  the  stand- 
ard of  cost  of  production,  and  general  prices  will  be  sustained 
above  the  natural  rate."  ^ 

From  this  statement,  one  must  infer  that  the  *^  natural 
rate  "  of  prices  is  determined  by  the  permanent,  or  average 
value  of  the  standard  metal ;  and  that  the  quantity  ^^^^  ^^ 
of  money  in  circulation  only  affects  the  fluctua-  m*rket  prices, 
tions  of  market  prices.  This  certainly  gives  an  entirely  new 
twist  to  the  quantity  theory,  quite  inconsistent  with  the  effi- 
cacy usually  attributed  to  it  by  other  writers,  and  by  Mr.  Mill 

^  Principle  of  Political  Economj,  II,  pp.  64-65  (Book  m,  chap,  xii,  §  1). 


280  THE  PRINCIPLES  OF  MONEY 

himself.  If  we  are  to  take  him  literally,  we  most  conclude 
that  gold  (or  money),  through  the  quantity  in  circulatunii 
in  the  long  run  adjusts  its  value  to  goods  (in  prices)  in  sudi 
a  way  that  the  cost  of  production  of  gold  tends  to  equal  the 
cost  of  production  of  the  article  against  which  it  exchangei. 
And  there  are  passages  which  almost  lead  us  to  think  that  tUi 
is  his  fundamental  theory  of  price,  and  one  with  which  one  miufc, 
with  some  exceptions,  substantially  agree.^  But  it  is  impoesibb 
to  believe  that,  after  all,  Mr.  Mill  did  not  accept  the  qnantitjr 
theory,  for,  in  his  mind,  the  price-making  process  could  onfy 
go  on  between  goods  and  the  standard  by  the  actual  offer  of 
the  standard  metal  for  goods ;  and,  to  him,  a  great  fall  in  the 
cost  of  production  of  gold  could  only  have  its  effect  in  a 
rise  of  prices  through  an  actual  offer  of  gold  against  goods, 
that  is,  by  increasing  the  supply  of  gold  in  circulation.*  And 
yet  what  view  could  he  have  had  in  mind  when  he  uttered 
the  following  sarcasm  on  the  quantity  theory? — 

**  There  has  been  a  great  amount  of  dlBcnssion  and  aigDment 
on  the  question  whether  several  of  these  forms  of  credit,  and  in 
Pouibie  dia-  particular  whether  bank  notes,  ought  to  be  connd- 
aaantitf  ^^^^  ^  money.    The  question  is  bo  purely  vobil 

thtory.  as  to  be  scarcely  worth  raising,  and  one  wonld 

have  some  difficulty  in  comprehending  why  so  much  importtnoe 
is  attached  to  it,  if  there  were  not  some  authorities  who,  still 
adhering  to  the  doctrine  of  the  infancy  of  society  and  of  political 
economy y  that  the  quantity  of  money ^  compared  tDith  that  of 
commodities^  determines  general  prices^  think  it  important  to 
prove  that  bank  notes  and  no  other  forms  of  credit  are  money, 

^  "  The  valae  of  money,  then,  conforms  permanentlj,  and,  in  a  state  of  frae- 
dom  Qand  ¥nth  no  seigniorage^,  almost  immediately,  to  the  ralae  of  the  metal  of 
which  it  is  made."  Principles  of  Political  Economy,  II,  p.  40  (Book  m,  chap, 
ix,  §  2). 

^  This  jamps  with  his  erroneous  view  (Tbid.^  p.  29),  that  a  potential  increase  of 
the  precious  metals,  dne,  for  instance,  to  new  discoveries,  coold  not  have  an  effeet 
on  its  value  nntil  the  supply  in  nse  as  money  had  been  actually  increased.  And 
yet  the  great  fall  in  the  value  of  silver  in  1876  lowered  its  market  valoe  because 
of  a  potential  increase.  Cf.  also :  "  Money  acts  upon  prices  in  no  other  way 
than  by  being  tendered  in  exchange  for  commodities.  The  demand  which  in- 
fluences the  prices  of  commodities  consists  of  the  money  offered  for  them."  Ibid. 
p.  65  (Book  III,  chap,  xii,  §  2). 


THE  QUANTITY  THEORY  OF  MONEY      281 

in  order  to  support  the  inference  that  notes  and  no  other  forms 
of  credit  inflaence  prices."  ^ 

§  8.  Coming  to  the  writers  of  the  present  day,  we  may 
•elect  certain  ones  from  each  country  as  typical  of  the  differ- 
ent points  of  view  regarding  the  value  of  money  BimeuiHam 
or  the  theory  of  prices.  In  all  countries,  how-  thT^JlUlJiJ^**' 
erer,  we  shall  find  a  certain  class  of  writing  in  ^^U' 
considerable  abundance  which  emphasizes  the  quantity  theory 
of  money,  because  that  is  the  essential  basis  of  bimetallism.^ 
Inasmuch  as  the  concurrent  use  of  silver  with  gold  has  been 
urged  primarily,  because  of  the  insu£Scient  amount  of  gold  to 
do  the  increasing  money  work  of  the  world,  wherever  we  fijid 
discussions  in  favor  of  bimetallism,  there  we  shall  fij:ul  the 
quantity  theory  of  money. 

In  the  United  States  the  most  ardent  supporter  both  of 
bimetallism  and  of  the  quantity  theory  of  money  was  Francis 
A.  Walker.'     In  treating  of  the  functions  of   -^^^  * 
money,  he  denied  that  there  is  any  separate  and  in-  Waiker  em- 
depei^ent  function  of  a  value  denominator,  since  &e  medku/of 
any  money  can  serve  as  a  value  denominator  •***•"«•• 
only  through  its  use  as  a  medium  of  exchange.^    To  be  sure, 
money  may,  according  to  him,  serve  as  a  standard  of  deferred 
payments ;  but  he  holds  that  a  measure  of  value  at  a  given 
time  and  place  is  not  needed ;  ^  with  him  prices  are  not  ob- 

1  Prindples  of  Political  Eoonomj,  H,  p.  83  (Book  m,  chap,  xii,  §  7).  Cf.  also 
p.  216  (Book  m,  chap,  xxiv,  §  1). 

*  *'  Mott  people*  for  example,  who  in  recent  years  have  called  attention  to  the 
sppreciation  of  gold  hare  given  an  explanation  which  implies  that  there  is  a 
Tery  direct  relation  between  the  quantity  of  metallic  money  and  the  general 
level  of  prices.  They  have  argued  that  the  supplies  of  gold  have  fallen  off,  that 
gold  is  hoarded  by  governments  and  banks,  that  silver  has  been  demonetised, 
whilst  on  the  other  hand  the  volume  of  trade  or  the  itmount  of  exchanges  to  be 
effected  has  increased.  This  explanation  really  rests  on  the  quantity  theory  in 
iu  simple  form."    J.  8.  Nicholson,  A  Treatise  on  Money  (3d  ed.,  1895),  p.  143. 

*  Money  (New  Tork«  1878).  Political  Economy  (advanced  course).  New 
York  (3d  ed.,  1888). 

«  Political  Economy,  p.  137  (Sec.  182). 

*  Money,  pp.  281-288  ff.  He  distinguishes  between  a  common  denominator 
tad  the  common  measure  of  value  (p.  10). 


282  THE  PRINCIPLES  OF  HONEY 

tained  hy  a  comparison  between  goods  and  a  standaid,  bnl 
solely  bj  being  offered  against  the  medimn  of  exchai]^ : 

**  The  need  of  money  arises  solely  oat  of  the  fact  of  ei- 
change,  and  the  economic  efficiency  of  money  is  limited  strietfy 
to  the  occasion  for  exchange.**  ^  .  .  . 

^^  Money  is  the  mediom  of  exchange.  Wiiateyer  perfomi 
this  fonctionf  does  this  work,  is  money,  no  matter  what  it  ii 
made  of,  and  no  matter  how  it  came  to  be  a  medium  at  first,  or 
why  it  continues  to  be  such.  So  long  as,  in  any  oommomtj, 
there  is  an  article  which  all  producers  take  freely  and  at  a 
matter  of  course,  in  exchange  for  whatever  they  haye  to  sell, 
.  .  .  that  article  is  money.  .  .  .  There  is  no  other  test  of  mooej 
than  this.  That  which  does  the  money-work  is  the  monef- 
thing."* 

Logically  the  value  of  money  and  the  level  of  prices,  aftsr 
such  a  definition  of  money,  are  related  directly  to  tihe  amount 
of  the  medium  of  exchange: 

*^  The  value  of  money,  like  the  value  of  anything  else,  Is 
purely  a  question  of  demand  and  supply.  .  •  .  The  demuid 
Holdiextrame  '^'  money  is  the  occasion  for  the  use  of  money 
aaantitj  in   effecting    exchanges.'   .  .  .  The  demand  for 

^^'  money  varies  with  the  amount  of  money-work  to 

be  done,  which,  in  turn,  varies  with  the  industrial  organization  of 
communities,  with  seasons,  and  with  circumstances  inname^ 
able.  .  .  .  [The  supply  of  money]  is  the  money-force  avail- 
able to  do  the  money-work  required  to  be  done,  in  the  given 
community,  at  the  given  time,  .  .  .  but  is  composed  of  two 
factors  —  the  amount  of  money  and  the  rapidity  of  drcola- 
tion."  * 

1  Political  Economj,  p.  121  (Sec.  160). 

*  Idid.,  p.  123  (Sec.  162).  But  bank  checks,  in  bis  opinion,  are  not  mooej 
because  they  do  not  bave  nuiveraal  acceptability. 

•  [bid.,  pp.  128-129  (Sees.  169-170).  Elsewbere  (Money,  p.  AS,  note)  he 
says:  "  Tbe  value  of  money  (with  a  given  supply)  is  governed  by  tbe  aggregate 
demand  for  it  from  all  sourcen,  both  for  use  in  tbe  arts  and  for  service  as  mooej." 
Cf.  Ibid.,  pp.  57,  63. 

«  Political  Economy,  pp.  130-131  (Sees.  172-174). 


THE  QUANTITY  THEORY  OF  HONEY      288 

Hence  with  a  given  supply  of  money,  if  moie  goods  are 
offered,  prices  will  fall;  also,  if  fewer  goods  are  offered, 
prices  will  rise.  With  a  given  money  work,  a  decrease  of  the 
supply  of  money  will  lower  prices ;  and  an  increase  in  the 
giq>ply  wiU  raise  prices.  What  money  is,  then,  acquires  su- 
preme importance ;  but,  according  to  (xeneral  Walker,  only 
fiiat  medium  of  exchange  which  has  ^*  universal  acceptability  '* 
18  money,  a  definition  which  rules  out  bank  checks,  deposit 
eunency,  and  devices  which  by  most  writers  are  now  recog- 
nised as  performing  the  function  of  a  medium  of  exchange.^ 
Tet  he  regards  an  inconvertible  paper  money  of  the  Oovem- 
ment  as  money.*  He  certainly  leaves  us  with  no  very  exact 
knowledge  of  what  constitutes  the  supply  of  money  as  a  &ctor 
in  price. 

The  essential  part  of  (General  Walker's  theory  of  the  value 
of  money  is  contained  in  his  discussion  of  seigniorage.  He 
follows,  he  says,  **Mr.  Ricardo  without  deviar  p,,j|^«j^ 
tion,''  believing  that  he  was  **  the  economist  who  dian  theory  of 
most  fully  and  justly  apprehended  the  relations  of  ■•**"'*^*'*^ 
money  to  price." '  He  quotes  from  Ricardo,  however,  only 
tliose  passages  which  support  the  quantity  theory :  ^ 

**  Let  us  suppose  that  a  certain  country  requires  for  the  pur- 
poses of  domestic  trade,  1,000,000  pieces,  each  containing  100 
grains  of  fine  gold.  This  would  involve  the  use  of  100,000,000 
grains  of  gold  as  money ;  and  a  certain  average  level  of  prices 
would  result  from  the  relation  between  this  amount  (its  rate  of 
circulation  being  assumed  constant,  for  the  purposes  of  the 

^  Cf .  Monej,  p.  405 :  "  The  bank-deposit  system  allows  the  matnal  cancella- 
tion of  vast  bodies  of  indebtedness  which  woold,  without  this  agencj,  require  the 
inteirention  of  an  actoal  medium  of  exchange;  bat  deposits  are  not  snch  a 
mediam.  In  a  word,  deposits,  like  every  other  form  of  credit,  save  the  use  of 
money ;  they  do  not  perform  the  f onctions  of  money." 

If  a  deposit  currency  enables  goods  to  be  exchanged  which  would  otherwiae  re- 
quire a  mediam  of  exchange,  it  is  difficult  to  believe  that  it  doet  not  do  money 
work. 

*  Money,  pp.  275-276. 

*  Political  Economy,  p.  146  (Sec  197). 
«  Cf.  tupfxi,  §  3,  p.  244. 


284  THE  PRINCIPLES  OF  MONET 

following  illastration),  and  the  demand  for  money  arising  fioa 
the  exchanges  actually  reqairing  to  be  affected  by  the  nae  of 
money. 

**'  Now,  suppose  the  principle  of  seigniorage  to  be  introdooedy 
the  sovereign,  oat  pf  every  hundred  grains  brought  to  the  miot, 
taking  one  to  repay  the  actual  cost  of  coinage,  patting  into 
circulation  1,000,000  pieces  of  99  grains  each,  and  pUMing 
1,000,000  grains  in  his  storehouse  as  treasure,  or  causing  it 
to  be  manufactured  into  plate  or  ornament.  •  •  • 

^^  Will  each  piece  now  purchase  as  much  of  other  commodities 
as  before,  or  less? 

**  I  answer,  as  much.  There  is  the  same  demand  for  pieces 
for  the  purpose  of  exchange ;  there  is  the  same  supply ;  the  stme 
prices  must  result 

'*'  But  suppose  the  sovereign  proceeds  further,  and  takes,  not 
one  grain,  but  ten,  from  every  hundred,  issuing  1,000,000  pieces 
of  only  90  grains  each.  Will  the  purchasing  power  of  each 
piece  be  affected?  Not  in  the  least.  There  is  the  same  demaod 
for  pieces,  the  same  supply.  People  still  want  pieces  of  money ;  ^ 
can  only  get  them  by  giving  commodities  for  them;  have  as  many 
commodities  and  no  fewer  to  give ;  and  there  are  just  as  many 
pieces  and  no  more  to  be  obtained  in  this  way.  .  •  • 

^'  But  let  us  take  a  step  in  a  different  direction.  Let  us  sap- 
pose  that  the  sovereign,  instead  of  placing  in  his  treasury  the 
10,000,000  grains  which  he  took  under  his  right  of  seigniorage, 
coins  this  gold  also  into  pieces  of  90  grains  each,  and  pays  ^em 
out  for  personal  or  public  expenses.  What  will  be  the  result? 
Depreciation  will  at  once  begin.  The  90,000,000  grains,  when 
coined  into  the  same  number  of  pieces  of  the  same  official 
(mint)  denomination  as  the  100,000,000  had  been,  retained  the 
same  purchasing  power  ;  but  when  the  100,000,000  are  coined 
into  a  larger  number  of  pieces,  the  purchasing  power  of  each 
piece  at  once  falls."* 

This  theory  of  seigniorage,  or  the  quantity  theory,  as  ap- 
plied to  metallic  money  has  been  already  examined  when 

^  As  if  money  were  wanted  for  its  own  sake,  when  goods  are  the  real 
objective. 

2  Political  Economj,  pp.  14G-147  (Sees.  197-198). 


THE  QUANTITY  THEORY  OF  MONEY      285 

Ricaido  was  under  discussion,^  and  it  was  shown  to  apply  at 
the  best  only  to  inconvertible  paper  and  token  money ;  *  and 
that  it  does  not  hold  as  a  theory  of  prices  in  regard  to  any 
metal  whose  coinage  is  free.  A  general  theory  of  prices  based 
on  that  which  is  apparently  true  only  of  token  money  and 
inconvertible  paper,  does  not  seem  logically  sound  for  present 
use,  when  there  has  been  a  general  adoption  of  the  free  coin- 
age of  gold. 

General  Walker,  however,  says:  **  That  Mr.  Ricardo  failed 
himself  thus  to  qualify  his  proposition  *  that  however  debased 
a  coinage  may  become,  it  will  preserve  its  mint  ^^1^^,  ragu 
value,'  has  caused  much  misapprehension  of  his  gMtoimproTt- 
views."  •    He  then  proceeds  to  perfect  the  chain  RicardUn 
of  aif^ument  by  adding  a  proviso  (based  on  his  ' 

universal  acceptability  of  money)  : 

'^  If  debasement  of  the  coin  be  carried  so  far  and  carried  on 
so  long  that  a  popular  reluctance  to  receive  the  money  pieces  be 
generated,  suflScient  to  cause  men  to  modify  or  limit  their 
production  in  order  to  avoid  exchanges,  or  to  cause  them  to 
encounter  the  inconveniences  of  bai*ter  rather  than  handle  the 
distrusted  coin,  then  depreciation  may  result.  That  is,  the 
supply  of  money  will  become  excessive  through  the  blow  in- 
flicted upon  the  demand  for  money.  .  •  .  Men  take  money  be- 
cause they  believe  others  will,  in  turn,  take  it  from  them.  If  a 
man  be  only  assured  of  this,  he  has  no  reason  to  care,  in  fact 
he  does  not  care,  what  the  coin  contains." 

The  pivotal  obligation,  of  course,  in  case  the  value  of  the 
debased  coin  is  questioned,  is  to  carry  such  conviction  to  the 
public  that  men  will  take  it  willingly  at  its  face  Teaches  no 
value.  The  only  certain  way  is  to  be  ready  to  {^R^^^rthJ 
give  full  value  for  it  on  demand.  By  redemption  coin  contains." 
in  gold,  the  paper,  or  debased  coin,  can  always  be  automati- 
cally regulated  so  that  the  quantity  in  circulation  can  never 

1  Supra^  §  8. 

*  That  it  does  not  even  hold  of  token  money,  see  chap,  xv,  §  2,  nor  of  incon- 
▼ertible  paper  monej,  ibid,,  §  7.  <  Op.  dt.,  p.  149  (Sec  200). 


286  THE  PRINCIPLES  OF  MONET 

surpass  the  demand  for  it  as  a  mediam  of  exchange.  There 
is  no  surer  way  of  showing  the  public  that  the  debased  cdn 
(or  inconvertible  paper)  should  be  willingly  taken,  than  for 
liie  state  to  be  ready  to  take  it  itself  at  par  and  to  give 
gold  for  it  when  demanded.  It  is  not  safe  to  teach  that  it 
makes  no  difference  **  what  the  coin  contains,"  provided  men 
will  only  attribute  a  value  to  coins  which  the  coins  do  not 
possess.^  The  fact  is  that  in  the  past  debased  coins  and  in- 
convertible paper  have  depreciated  in  value,  without  changes 
in  their  quantity,  without  any  evidence  of  a  decreasing  money 
work  to  be  done,  and  without  such  reluctance  to  receive  the 
money  that  resort  was  had  to  barter.  The  proviso  introdnoed 
by  General  Walker  is  not  one  which  gives  the  quantity  theoiy 
logical  or  historical  support. 

In  accordance  with  this  extreme  quantity  theory,  GenenI 
Walker  holds  that  the  process  of  evaluation  between  goods 
and  a  money  metal  can  take  place  only  thronj^ 
only  bj  actual  the  direct  comparison  of  goods  with  that  metil 
ezchangM.  ^  ^  medium  of  exchange.*  He  boldly  denies  that 
cost  of  production  operates  in  fixing  prices;  and  instances 
cases  where  things  exchange  at  rates  quite  different  from  their 
costs  of  production.  Prices  can  be  made  only  thirou^  a 
market  comparison  of  the  supply  and  demand.  The  modem 
world  of  business,  however,  can  hardly  accept  this;  since 
every  one  knows  that  manufacturers  of  steel,  or  similar  goods, 
under  the  force  of  improvements  in  their  processes,  do  not 
wait  until  the  market  is  actually  overstocked  before  lowering 
their  prices  conformably  to  the  lowered  expenses  of  produc- 
tion; the  potential  supply  is  sufficient  Nor  do  men,  in  a 
time  of  prosperity,  wait  until  the  quantity  of  the  currency  is 
duly  increased  before  they  raise  the  prices  of  steel.  It  must 
be  a  demand  for  steel,  arising  from  the  offer  of  other  goods 
(often  only  nominally  expressed  in  terms  of  the  standard 
money)  which  raises  the  value  of  steel  to  a  different  relation 
with  other  goods.     To  General  Walker  a  lowered  cost  of 

^  See  also  infra,  chap.  xv.  on  The  Laws  of  Token  Money. 

*  Political  Economy,  p.  137  (Sec.  183).   Cf.  Money,  pp.  284-287. 


THE  QUANTITY  THEORY  OF  MONEY 


28T 


obtaining  gold  could  affect  prices  only  through  its  iiBe  as  a 
medium  of  exchange : 

*^  It  requires  tbe  actual  use  of  money ^  for  a  longer  or  sborter 
spftoe  of  time,  to  effect  tboae  double  excbanges  which  we  call 
buying  and  selling;  but  tbe  prices  resultiug  from  eucb  exchanges 
may  be  appUcd  to  far  greater  bodies  of  wealtb,  without  the  use 
of  money* 

**lt  i»  lU  uee  as  a  medium  of  excbauge  which  determines  its 
value ;  yet  its  value,  so  determined  becomes  the  means  of  esti- 
mating  values^  without  reference  to  actual  exchanges*"  ^ 

In  shorty  he  believes  that  the  prices  resulting  from  one,  or  a 
few,  sales  in  which  the  money  is  actually  passed  from  hand 
to  hand  as  a  medium  of  exchange  give  the  prices  Modem  credit 
at  which  vast  masses  of  goods  exchanged  by  credit  ^^^^'t^^lT 
are  bought  and  &old>  That  is,  the  prices  obtained  P^=«** 
by  one  kind  of  a  medium  of  exchange  are  those  which  must 
hold  in  transactions  performed  by  other  means.  This  seems 
highly  absurd ;  but  it  is  certainly  General  Walker's  view  that 
goods  exchanged  by  credit  have  no  effect  on  prices;  that 
prices  can  be  set  only  by  the  actual  transfer  of  money-  This 
is  almost  equivalent  to  saying  that  there  can  be  no  wholesale 
prices ;  since  wholesale  tTansactiona  are  effected,  in  the  main, 

1  Money t  p.  64.    General  Walker  explainji  tm  follows  the  effect  which  is  pnK 
dii€c4  wheel  ^oods  are  exch&Eiged  by  credit  {Ibid^^  p.  65) : 

*'  It  wiU  be  observed  tbttt  every  titn<5  a  barter  ttanftacticin  [or  by  credit] 
ii  Aubititiited  lor  buying  and  selling,  the  demand  for  money  is  therebj 
dimiDiBhed  and  iti  T&lne  thereby  lowered  (the  iupply  remaining  the  same], '' 

Aa  if  barter  were  not  buying  and  selling  \  And  m  not  the  laf gfst  pitrt  of  oar 
modem  exchangee  performed  by  a  refined  iystem  of  barter  devised  by  banking 
infltitntions  ? 

In  such  cases,  it  ieems  to  me,  the  corre<!t  operation  is  thiJ :  Tbe  introduction 
of  credit  lessens  the  demand  for  gold  »s  a  medinm  of  exchange:  the  world  vatue 
of  gold  tends  to  faU ;  gold^  as  a  commodity,  falls  in  valne  relatively  to  other 
^ooda  whose  expenses  of  production  have  remained  the  dame;  then  foHows  a 
neceseary  adjustment  of  prices  to  correspond  to  the  change  in  tetati^e  valnea ; 
the  change  in  prices  is  a  resnlt  of  the  change  in  tbe  relative  valnen  of  goods 
and  gold.  Tbe  change  in  pricea.  cben,  is  not  brought  ahgnt  through  tbe  i 
cf  an  actnal  increase  in  the  qnantity  of  gold  offered  for  goods, 

*  Tte  Quantity  Theory  of  Money,  Quar.  Jour.  Econ.  (July,  ISSfr),  p.  373, 


288  THE  PRINCIPLES  OF  MONEY 

by  deposit  cunencyf  and  not  by  the  use  of  actual  monej. 
It  is  now  only  in  retail  trade  that  money  is,  generally  spak" 
ingf  passed  from  hand  to  hand ;  and  hence  retail  prices  uaui 
be  the  gauge  for  wholesale  prices,  —  an  obvious  absurdity. 

To  inconvertible  paper  money  General  Walker  applied  the 
theory  of  a  seigniorage  of  one  hundred  per  cent,  and  lieU 
Seipiioragt  thsit  its  valuc  was  regulated  by  its  quantity.^  To 
tofn^nvertibie  ^^  ^®  qucstiou  may  be  asked»  Is  the  value  of 
paper  monej.  inconvertible  paper  regulated  in  the  end  by  any 
different  principle  than  that  which  determines  the  value  of 
private  promises  to  pay,  whose  performance  is  delayed?  If 
the  issuer  has  funds  enough  to  secure  immediate  redemption, 
does  it  make  any  difference  to  its  value  how  much  of  the  de- 
mand paper  is  outstanding  ?  If  there  is  an  excess,  it  comes  in 
for  redemption.  But  if  inconvertible,  may  not  its  value  fluo- 
tuate  with  the  estimate  as  to  the  possibilities  of  redemption? 
Non-dividend  paying  stocks  have  a  market  value,  chiefly  baeed 
on  the  various  considerations  bearing  on  the  earnings  of  the 
company,  and  the  possibility  of  future  dividends.  Given  the 
total  issues,  the  common  stock  has  a  value  not  dependent  di- 
rectly on  the  quantity  of  it,  but  on  the  amount  of  the  earn- 
ings. In  the  case  of  United  States  notes,  their  value  has 
fluctuated  without  relation  to  the  quantity,  but  according  to 
the  ability  and  willingness  of  the  Treasury  to  redeem,  as  evi- 
denced by  any  event  (like  victory  or  defeat  in  the  field) 
touching  its  chances  of  redemption. 

A  recent  writer,  Professor  J.  S.  Nicholson,'  has  in  an  open- 
minded  way  advocated  the  quantity  theory,  as  a  bimetallist, 
but  he  finds  that  theory  beset  by  serious  difficul- 
ties.   His  reasoning  and  English  experience  show 
that  the  standard  function  may  be  performed  by  one  article  like 
gold,  while  the  media  of  exchange  may  be  provided  by  entirely 

^  Of.  Money,  chap.  xvii.  Inconvertible  paper  can  Berve,  as  the  anthor  decUra, 
not  only  as  a  standard  of  deferred  payments,  but  also  as  a  standard  of  prices,  in 
which  goods  are  expressed,  at  any  given  time  and  place.    Pol.  Econ.,  p.  157. 

^  A  Treatise  on  Money  and  Essays  on  Monetary  Problems  (London,  1888, 
3d  ed.,  1895). 


THE  QUANTITY  THEORY  OF  MONEY      289 

diffet^nt  things  -}  still  in  general  he  states  the  familitir  quantity 
theory,^     Hia  historical  illustrations  of   the   action  of  the 
quantity  theory  are  not,  in  my  opinion^  apposite,® 
He  suggests  that  the  rise  of  prices  between  1850   (umnuty 
and  1864  was  due  to  the  increased  quantity  of      ^°^^ 
metallic  money.*     His  admiBsion  of  a  standard  function  for 
gold,  however,  allows  this  phenomena  to  be  explained  by  other 
reaaons  than  an  increased  quantity  of  the  media   niiutntioDi 
of  exchange.     Any  great  discovery  of  gold  must   '****^^*''*' 
have  an  effect  in  lowering  its  value  as  a  standard,  quite  in- 
dependent of  other  things;  and,  unless  the  demand  for  gold 
were  correspondingly  increased,  general  gold  prices  ought  to 
rise.     This,  however,  is  nothing  more  than  saying  that  as 
price  is  the  ratio  of  goods  to  gold,  a  change  on  the  money 
side  of  the  price  ratio  will  (if  other  things  remain  the  same) 
raise  prices.     But  this  does  not  require  the  resort  to  any 
theory  which   bases  prices  upon  the  quantity  of  the  gold 
actually  passed  from  hand  to  hand  as  a  medium  of  exchange. 
Likewise,  hia  other  illustrations  *  are  quite  capable  of  another 
bearing  than  that  given  them  by  the  author. 

»  R  le. 

»  Pp,  14,  57^B. 

■  Ho  ujb:  *'  The  dedbe  of  the  Roman  Etnpite  wa&  largely  dtie  to  a  de0ciendj 
ol  the  cLrcalatiDg  mediuni,  which  wm  remitted  in  payment  of  taices  in  large 
qimat]tie«  to  Home  and  the  ceotral  citi«i!  of  the  empire.  Ar%  conKequeace^  whilst 
in  the  provinces  prices  niled  low,  and  the  miverable  t«:Kpajer  would  give  anj 
amoaitt  of  wealth  for  coins,  in  the  centre  of  the  empire,  where  money  was  ah  tin- 
dantf  pricee  were  high'^  {p.  &I).  As  well  saj  that  low  prices  of  eggs  in  the  eountij 
u  contrasted  with  the  city  markets  are  dne  to  a  deficient  mediom  of  exchange. 
May  not  a  tji'onnical  taxation  hare  been  more  potent  than  a  deficient  medinoi 
ol  ei£ change  in  prodaciog  miiiery  ? 

*  /Airf..  p,  e2. 

*  E.g.,  the  silver  of  PotosI  had  an  effect  on  prices,  becanse  the  standard  of 
prices  had  been  lowered  tn  value  (p,  62). 

Mr.  Nicholson  might  pofc^ibly  refuse  the  abovs  esqilanation  bj  virtue  of  Mi 
statement  (p.  118):  *' Money  is  not  simply  a  commodity  like  other  commodities, 
with  Its  rnloe  dependent  nnerely  on  the  value  of  ite  material/^  If  by  money  he 
refers  to  a  standard  article,  then  certainly  its  value  mast  be  affected  after  thft 
manner  of  other  commoditieB;  but  if  by  money  he  refers  to  some  media  of  ex- 
change, then,  of  coDTse,  its  "  TaJoe  "  Ia  not  dependant  on  "  tts  matenaL*'  His 
tllnst ration  of  bank  notes  and  of  banking  devices  seems  to  show  that  the  latter 

19 


290  THE  PRINCIPLES  OF  MONEY 

In  luB  last  edition  (1895)  Professor  Nicholson  seems  to  hsn 
boldly  faced  the  obvious  weakness  of  the  quantity  thecnj 
SeM  wMkiMM  arising  from  the  lack  of  agreement  as  to  whu 
^wTm^  constitutes  the  "  money  '*  which,  by  its  changes  rf 
ntoijiy  tutod.  quantity,  can  affect  the  general  leyel  of  prices. 
There  is  the  statistical  difficulty  that  the  movement  of  prices 
does  not,  in  fact,  correspond  to  changes  in  the  quantity  of 
the  metallic  circulation.  To  meet  this  difficulty,  he  quenes 
whether  **  money  "  should  include  all  media  of  exchange  (crediti 
bank  notes,  etc.)*  This  conforms  to  the  ordinary  statement!, 
**  because  the  essence  of  the  quantity  theoiy,**  he  adds,^  "is 
that  money  determines  prices  by  being  actoallj 
Wmiker'B  uscd.''  This  cxposcs  the  faulty  logic  of  F.  A. 
^^^'  Walker.    If  we  follow  the  latter's  definition  of 

money  as  ^'  money  is  that  money  does,'*  then  we  ought  to 
include  all  media  of  exchange ;  but  he  rules  out  deposit  co^ 
rency,  and  the  like.  To  Mr.  Nicholson,  however,  an  inter- 
pretation which  includes  checks  is  really  fatal  to  the  quantity 
theory ; "  *  and  he  is  finally  led,  in  speaking  of  the  so-called 
appreciation  of  gold,  to  confine  *^  money  "  to  gold : ' 

*^  Grold  is  the  wind  of  commerce  and  the  tide  of  trade,  and  Us 
abundance  or  scarcity  raises  and  lowers  general  prices  Jnst  ss 
the  wind  or  tide  raises  or  lowers  the  speed  of  vessels.''^ 

was  his  meaning ;  bat  in  the  case  of  token  coins  (including  the  mpee)  there  if 
qnite  another  explanation  of  their  value  (see  tn/ro,  chap,  xv,  §  6). 

1  P. 144. 

s  Pp.  145,  148,  149.  He  says  (p.  144) :  "  Again,  probably  the  rery  best  in- 
stance of  the  theory  is  the  case  of  inconvertible  paper.  There  erery  one  admiti 
that  the  valae  depends  on  the  qnantity."  In  my  opinion,  the  case  of  incQnTe^ 
tible  paper  is  the  very  last  one  coald  accept  as  showing  the  quantity  theorj.  A 
cursory  study  of  the  United  States  notes,  1862-1879,  would  show  tiiat  there  mi 
apparently  no  connection  whatever  between  the  actual  movement  of  prices  iztd 
the  quantity  of  the  paper.  Cf.  S.  M.  Hardy,  Prices  and  the  Quantity  Theoij  of 
Money,  Jour.  Polit.  Econ.,  March,  1895. 

«  P.  146. 

^  P.  343.  The  quantity  theory  is  still* adhered  to  by  Mr.  Nicholson  because  (pp. 
74,  146)  he  finds  a  limit  on  prices  in  the  limit  to  the  quantity  of  metallic  resonrcei 
on  which  all  credit,  as  he  insists,  is  based.  (Cf.  »upra,  chap,  iv,  §  8.)  And  jet 
one  is  unable  to  reconcile  this  theory  with  the  facts  specifically  mentioned  by  the 
author  (p.  150),  when  speaking  of  the  fall  of  prices  during  the  twenty  years  lince 


THE  QUANTITY  THEORY  OF  MONEY 


291 


This  author  denireB  to  apptt>ach  the  general  level  of  prices 
apart  from  ehangeB  in  particular  commodities : 

"  Our  problem  is  the  determination  of  gefieral  priceB,  and  not 
.  .  .  the  cbaogee  in  the  rekUive  Talues  of  eommodlties  reck* 
oned  in  prices*  It  m  easy  to  see  how,  from  eauges  affecting 
eome  particnlar  article,  that  article  may  have  fallea  or  risen  in 
value ;  and  similarly,  through  the  whole  range  of  commodities, 
we  may  discover  causes  which  have  made  some  to  rise  and  others 
to  fall*  If,  however,  we  find  that,  apart  from  these  relative 
changes^  a  general  cbaoge  in  the  level  baa  occurred,  it  is  natural 
to  conclude  that  this  is  due  either  to  causes  primarily  affecting 
the  standard  by  which  prices  are  determined,  or  to  causes  of  a 
very  wide-reaching  character  affecting  commodities/'  ^ 

Such  a  penetrating  characterization  of  the  problem  leadE^  id 
my  opinion,  directly  away  from  the  quantity  theoiy.   That  ist  it 
centres  attention  on  the  principle  that  changes   .  .,      . 
important  enough  to  influence  the  world  value  of  u?  true  tiieory 
the  standard  would,  of  course,  aEfect  its  exchange  *"  ^"*^' 
relation  to  other  commodities,  and  thereby  cause  a  genend 
change  in  tJie  level  of  prices,  —  without  relying  for  explana- 
tion^ in  any  way  whatever,  upon  a  change  in  the  quantity  of 
the  media  of  exchange  in  relation  to  the  money  work,'    As  to 
the  last  alternative  in  the  above   quotation,  namely,  wide- 

]  873-1874 1  **  But  orer  the  tweotj  years  we  can  hardlj  say  iha£  the  effective  canw 
oi  the  fall  ts  to  be  fousd  in  the  contraction  of  credit  due  to  the  amoimt  of  gold 
being  inaufHclent  to  Hupport  a  greater  iupGratmctnre  of  '  representattre  montj»' " 
If*  as  he  B&y»t  there  was  aa  abundance  of  golil,  and  no  restrictioEi  on  er^it,  hoir 
coiild  the  fan  of  prices  be  explaioed  according  to  atty  fonn  ol  the  quantity  Iheory  t 

I  P.  se. 

•  Indeed  he  hit*  the  target  attaight  when  in  refemng  to  one  iide  of  the  price 
ratio,  he  Bays  empbatieally  :  *'  If,  th^^t  it  be  gmnted  that  ia  gold-nfling  coantriei 
I  gold  is  n<»t  only  nominally,  bnt  really  the  standard  of  valae,  and  that  it  is  not 
'  merely  a  convenient  mediam*  directij  and  indirect  I j  (throngh  the  banks),  for 
exchanging  commodttieSj  the  values  of  which  are  determined  in  relation  to 
some  other  standard,  it  mnst  follow  that  movements  In  general  prices  can  only 
'  be  explained  bj  taking  into  nccoimt  the  canses  which  hM^t  the  demand  for^  and 
I  the  snppl/  of  gold  "  (pp,  347-S48},  If  he  had  applied  tli«  same  proce^n  of  reason* 
I  ing  to  the  commodities  side  of  the  price  ratio,  he  wonld  hare  had  th«  trae  prin- 
I        cipte  in  its  entiretj. 


J 


292  THE  PRINCIPLES  OF  MONEY     . 

reaching  causes  affecting  goods,  he  seems  to  imply  that  they, 
also,  would  affect  the  general  price  level  (independent  of 
changes  in  relative  values  of  goods),  and  yet,  strangely 
enough,  he  holds  that  improvements  have  little,  or  no  effect, 
on  prices : 

«« We  are  constantly  told  that  the  fall  is  due  to  a  fall  in 
freights,  which  is  a  cause  only  adequate  ^retiO;^  to  explain  tbe 
goQ^^  fall  of  sea-home  produce  relatively  to  oommodities 

errors.  produced  at  home  (e.  g.  unskilled  labour)';  or  that  it 

is   due  to  improvements  in  production  by   the  adoptioo  of 
particular    processes    which,   as    stated,  is  only  adequate  to 
explain  directly  the  relative  fall  compared  with  things  to  which 
the  processes  do  not  apply.  ^    Tet  no  one  would  be  so  foolish, 
in    the    case    of  the    American  greenbacks    and  the   French 
a»9iignaX9^  as  to  attempt  to  explain  the  rise  of  prices  by  ahoii- 
ness  of  supply  of,  or  increase  of  demand  for,  commodities,  or 
a  falling  off  in  mechanical  ingenuity.'    Everyone  can  see,  when 
it  is  magnified,  that  the  quantity  of  the  circulating  mediom 
compared  with  the  transactions  to  be  effected  is  fundamental 
Yet  when  gold  and  silver  money  are  the  basis  of  circulation,  it 
is  thought  that  the  quantity  is  of  no  importance.     Prices  fall,  it 
is  said,  because  of  the  greater  power  of  man  over  nature,  with  the 
fact  striking  us  in  tbe  face  that  the  Dacotah    farmers,  with 
prairie  soil  and  American  machinery,  cannot  raise  wheat  at  so 
low  a  price  as  in  England  in  the  Middle  Ages.'*  • 

1  Bat  if  gold  were  sapposed  stationary,  would  not  such  changes  in  the  expenaw 
of  prodaction  alter  the  exchange  value  of  these  goods  relatirelj  to  gold  ?  And 
if  the  extension  of  improvements  covered  nearly  all  goods,  woold  that  not  caiitt 
a  fall  in  the  average  of  gold  prices  ?  If  gold  happened  (as  was  the  fact),  ilso, 
to  be  affected  bj  a  lowered  cost,  then  it  woald  be  a  question  aa  to  which  feO 
most ;  if  wages  rose,  and  goods  fell,  in  gold,  the  assumption  would  be  that  goods 
fell  farthest,  —  not  that  improvements  had  had  no  influence  at  all. 

'  No ;  because  one  would  at  once  argue  that  the  standard  itself  had  depre- 
ciated (no  matter  for  what  cause)  and  that,  of  course,  prices  would  rise,  whether 
more  or  less  of  the  paper  were  issued  (although  the  quantity  issued  might  gire 
some  hint  as  to  the  postponement  of  immediate  convertibility). 

*  Pp.  344-345.  If  the  purchasing  power  of  the  coin  for  which  the  Daootah 
wheat  is  sold  be  compared  with  that  of  the  coin  paid  to  English  farmers  in  tiw 
Middle  Ages,  it  would  hardly  be  said  that  the  expenses  of  prodaction  of  tbe 
former  were  greater  than  the  latter.  A  comparison  of  prices  five  hondred 
jeais  apart  is  difficult. 


THE  QUANTITY  THEORY  OF  MONEY  298 

Mr,  Kicholflon  concludes  that  improvements  in  general 
have  very  little  infiuence  on  prices;*  hence  the  causes  of 
serious  changes  in  the  level  of  prices  must  be  found  in  tliose 
affecting  the  money  side  of  the  price  ratio*® 

The  attitude  of  Professor  Alfred  Marshall,  foremost  of 
living  English  economista^  is  shown  in  his  testimony  before 
a  parliamentary  committee :  ® 

**1  accept  the  common  doctrine  that  prices  generally  rise, 
other  things  being  equal,  in  proportion  to  the  volume  of  the 
metals  which  are  used  as  currency*     I  think  that     Alfred  MarshAll 
changes  m  the  other  things  which  are  taken  as     Jlf^7be?ry"''*" 
equal  are  very  often  ^  perhaps  generally,    more     ^  Will, 
important    than  the   changes  in  the  volume  of  the   precious 
metals.  .  *  . 

^'  I  think  that  we  have  not  the  statistics,  and  that  we  shall 
no%  in  this  generation^  be  able  to  get  the  statistics^  which  would 
eoabte  us  to  trace  any  statistical  connection  between  the  amount 
of  the  precious  metals,  or,  aa  I  would  prefer  to  say,  between 
the  amount  of  currency  and  the  average  level  of  prices;  because, 
supposing  that  the  volume  of  the  currency  remains  the  same, 

1  See  hia  discTtsaion,  pp.  35S-353.  Hit  reference  to  extracitire  products  ought 
to  ha^e  ^len  him  p&U8«  :  **  A^imlturtd  prtiduce  and  the  produce  0/  mi'n^i  follow  in 
general  the  tftw  of  dtmitiifihiDg  retnru.  Cou»eqaetitlj  any  permntiatit  f^l  lu  the 
telatiue  value  and  price  of  »tich  produce  ,  .  ■  mujit  be  Hitifi  to  imp  rove  meDta  in  pro- 
duction or  freight.  But  if  there  w  a  fall  in  pric«  in  theae  things,  which  if  nol 
mere] J  iodicative  of  a  fall  in  relative  vaJne,  the  foil  mnat  be  attributed  to  goneml 
currenc/  catueB^  hecftoie  the  natural  ten  dene j  ia  for  the  relative  value  of  each 
produce  to  rive  '*  (pp,  354-355)^  Sauerbeck's  tablea,  which  are  made  up  mainlj 
of  e^Etractive  prod  acta  ahow  a  marked  fall  of  price  (although  not  all  thiuga  have 
fallen) ;  bat  if  the  decline  in  land  and  ocean  freights^  the  opening  up  of  new 
r^onrcea  have  brought  a  phenomenal  general  progreaa  of  improvemetita,  alao. 
Into  the  extractive  induatriea,  so  that  their  expenaea  of  production  hare  therebj 
been  lowered  relatively  to  gold,  then  there  ia  no  reaaon  for  ascribing  their  fall 
solely  to  curreucj  causes.  To  one  conversant  with  the  iufluencea  affecting  Ibe 
pricea  of  extractive  cotnmoditiea  auch  an  e^Eplanation  muat  aeem  nnneccsaarj^ 

^  Cf^  pp.  357,  358.  Hence  bli  introdnction  of  a  theorj  of  thi  uiteraction  of 
goM  and  ailver  pricea. 

«  Q.  9629  in  Appendix  to  the  Final  Report  of  the  Royal  ComTnisaion  appointed 
to  inquire  into  the  Recent  Changea  in  the  Relative  Vatneaof  the  Precious  Metals 
(I^ndon,  ims).  Vol.  1  of  his  *' Frinciplea  of  Economies"  does  not  i^ter  thA 
iuhjeet  of  m&nep 


294  THE  PRINCIPLES  OF  MONET 

the  height  of  the  average  prices  may  yet  yaiy  in  conaeqaeDoe  of 
several  causes/* 

These  causes  are:  (1)  a  change  in  the  Yolome  of  die 
things  on  sale;  (2)  changes  in  the  average  number  of  tiiiiei 
Uck  of  each  of  these  things  changes  hands  during  die 
futifticf.  y^^.  ^3^  changes  in  the  number  of  tames  tint 
each  coin  or  each  element  of  the  currency  changes  hands 
during  the  year;  (4)  the  proportion  which  purchases  otbeN 
wise  than  by  currency  bear  to  purchases  by  means  of  cunency. 
On  all  except  the  first  statistics  are  wanting.     Hence  he addi: 

^'  It  seems  to  me  that  ft  Is  an  Insufficient  account  to  si^  that 
average  prices  depend  on  the  amount  of  the  currency  combiiNd 
with  the  amount  of  credit.  For  without  any  change  in  tin 
amount  of  the  currency  ^  the  average  level  of  prices  mighl  be 
altered,  not  only  by  a  change  in  the  proportion  of  credit  to  olber 
means  of  purchasing,  but  also  by  any  other  change  io  tin 
methods  of  business,  as  for  instance  the  growth  of  intermedi- 
aries. "  * 

He  believes,  aLso,  that  the  level  of   prices  is  not  mainly 
affected  by  changes  on  the  money  side  of  the  price  ratio: 

^'  I  do  not  consider  that  the  main  causes  of  fluctuations  of 
prices  have  been  fluctuations  in  the  supplies  of  the  precioos 
metals.  I  believe  that  changes  in  the  methods  of  business  and 
the  amounts  of  the  commodities,  or,  as  we  may  say,  changes  in 
environmenU  have  much  greater  effects  in  disturbing  prioee 
than  changes  in  these  supplies  of  the  precious  metals."  * 

His  theory  of  prices,  it  will  be  observed,  however,  demands 
a  comparison  between  the  quantity  of  money  in  use  and  the 
money  work  to  be  done.     His  general  position  is  expressed  as 

follows : 

^  He  Indades  gold  and  silTer  and  paper  money,  bot  not  checks. 

*  He  emphasizes  this  in  Questions  9645-9648.  He  thinks  gains  in  methods  of 
basiness  have  enabled  twenty  or  thirty  times  as  mach  badness  to  be  done  with 
only  two  or  three  times  as  mnch  gold  and  silyer  as  they  had  before.  If  ihk 
process  goes  on  he  thinks  prices  woold  rise. 

•  Q.  9696. 


THE  QUANTITY  THEORY  OF  MONEY      295 

**I  hold  Bubstantially  the  old-fashioned  opinion  that  was 
expressed  by  Mill.  I  think  that  there  was  some  evidence  given 
before  the  Commission,  with  which  I  do  not  at  all  agree,  to  the 
effect  that  Mill  overlooked  the  influence  of  credit  in  helping 
earrency  to  support  prices.  I  think  it  is  relevant  to  point  out 
tiiat  in  the  chapter  on  the  subject  .  .  .  credit  is  stated  dis- 
tinctly to  be  ^  a  purchasing  power  similar  to  money/  **  ^ 

Pablic  men,  like  Mr.  Goschen'  and  Mr.  Giffen,'in  England 
onoe  strongly  urged  the  quantity  theory  in  tiying  to  show 
lliat  the  £edl  of  prices  since  1878  was  due  to  a  scarcity  of  gold. 
More  leoently,^  however,  Mr.  Giffen  has  dropped  the  quantity 
theory.  Noting  that  prices  must  be  expressed  in  the  stand- 
azd,  and  were  not  governed  by  the  quantity  of  the  media  of 
exchange,  he  still  believed,  however,  in  some  peculiar  force 
operating  on  prices  from  the  money  side  of  the  price  ratio : 

^^  There  are  many  facts  to  show  that  if  prices  are  not  exactly 
a  function  of  the  quantity  of  some  kinds  of  money  in  proportion 
to  the  commodities  circulated,  yet  the  quantity  of  money  is 
intimately  associated  with  the  range  of  prices ;  and  fluctuations 
in  prices,  appear  to  be  occasioned  by  fluctuations  in  the  quantity 
of  money."  • 

Pointing  out  correctly  that  a  change  in  the  value  of  the 
standard  would  have  a  direct  effect  on  the  general  level  of 
prices,  and  that  a  scarcity  or  abundance  of  the  standard 
metal  would  affect  its  value,  he  ai*gued  that  the  quantity  of 
money  («.«.,  the  standard  metal)  would  have  a  direct  in- 
fluence on  prices.  But  by  not  recognizing  the  practical 
operation  of  the  immense  existing  stock  in  steadying  the 
value  of  gold  he  erred  in  believing  that  considerable  changes 
in  demand  for  gold  in  certain  countries  were  ^'intimately 
associated "  with,  the  level  of  prices.    He  clung  to  the  idea 

1  Q.  10,124. 

*  Joomal  of  the  Ttifltitate  of  Bankers,  April  18, 1883. 
'  .Tonma]  of  the  Royal  Statistical  Society,  March,  1879. 
«  The  Case  against  BimetaUism  (1892),  pp.  216-224. 
i  IM,,  p.  211 


296  THE  PRINCIPLES  OF  MONEY 

that  the  fall  of  prices  in  recent  years  was  due  to  the  scaicitjr 
of  the  standard  money,  speaking  of 

^^the  facts,  staring  everyone  in  the  face,  that  money,  in  tin 
sense  of  the  standard  monetary  substance  gold,  is  relatively 
scarcer  than  it  was."^ 

Mr.  Giffen,  failing  here  to  realize  folly  that  forces  on  the 
goods  side  of  the  price  ratio  might  be  equally  powerful  with 
those  on  the  money  side,  was  obliged  to  explain  the  &I1  of 
prices  by  a  supposed  scarcity  of  the  standard.  In  the  face  of 
the  enormous  increase  in  the  supply  of  gold,  he  must  giaoe- 
fnlly  abandon  even  this  last  line  of  defence. 

In  the  United  States  Horace  White  *  strongly  opposes  the 
quantity  theory,  expounded  by  General  Walker,  as  ^bairea 
and  inconsequential,*'  while  not  disputing  the  soundness  of 
the  reasoning.  He  rejects  the  theory  as  based  on  indeter- 
minate factors,  and  accepts  the  statistical  disproof  of  it  is 
decisive. 

Professor  F.  W.  Taussig,*  on  the  other  hand,  accepts  the 
quantity  theory: 

^'  That  the  general  range  of  prices  depends  on  ihe  qnsntity 
of  money,  and  that  an  increase  in  the  quantity  of  money  will 
bring  about  a  general  rise  in  prices,  has  become  one  of  the 
commonplaces  of  economic  theory.  In  this  simple  form  of 
statement,  *  money '  means  what  we  usually  denote  by  that  term, 
—  coin,  government  notes,  bank-notes.  Five  hundred  years 
ago,  even  a  hundred  years  ago,  when  almost  all  purchases  were 
made  with  actual  coin  or  notes,  the  proposition  in  all  essentials 
was  true.  But  the  enormous  development  of  credit  in  modern 
times  compels  a  modification.  .  .  . 

*^  The  true  way  to  state  the  conditions  on  which,  in  our  day, 
the  general  range  of  prices  depends,  is  to  compare  the  quantity 
of  commodities  offered  for  sale  with  the  total  volume  of  pur- 

^  The  Case  against  Bimetallism,  p.  222.  His  accoant  of  Ricardo's  qoaotttj 
theory  does  not  square  with  the  qaotations  given  above  {supra,  §  3,  B).  The 
himetallists  were  quite  justified  in  using  Ricardo's  seigniorage  theory  in  rap- 
port of  their  erroneous  dogma. 

3  Money  and  Banking  (1895),  pp.  419-426. 

*  The  Silver  Situation  in  the  United  States  (1893),  pp.  73-7S. 


THE  QUANTITY  THEOBT  OF  MONEY      297 

Aaaing  power  in  terms  of  money.  In  this  volame  of  porchasiDg 
power  the  largest  item  consists  in  onr  day  not  of  actual  money, 
Imt  of  credit  in  various  forms.  In  countries  like  England  and 
tlie  United  States  it  consists  in  the  form  of  credit  supplied  by 
deposit  banks.  ...  At  any  one  time,  and  for  considerable 
lengths  of  time,  the  general  range  of  prices,  with  a  given 
volume  of  transactions,  depends  not  on  the  quantity  of  money 
iimplyi  but  on  the  volume  of  credit  used  as  purchasing  power.'' 

§  9.  Without  attempting  to  exhaust  the  German  literar 
tore  on  prices,  a  few  typical  writers  will  give  the  modem 
points  of  view  in  Germany. 

Wilhelm  Roscher  ^  regaided  the  general  law  of  price  to  be 
demand  and  supply  of  the  money  commodity: 

'<  In  the  long  run  the  supply  depends  chiefly  upon  the  cost 
of  production.    Since  the  costs  of  production  of  RoMherdo«t 
the  metals  are  different  in  different  mines,  their  ^^j^^^ 
exchange  value  follows  the  cost  in  the  worst  mine  UMoiy. 
which  must  nevertheless  be  worked  in   order  to  supply  the 
total  need.'' 

The  demand  for  money,  not  being  determined  by  the 
population  or  the  wealth  of  a  country,  is  dependent  on  the 
following  circumstances: 

1.  The  number  and  amount  of  transfers  to  be  effected  at 
any  given  time  by  money ; 

2.  The  rapidity  of  circulation  of  money ; 

8.  The  amount  and  rapidity  of  circulation  of  substitutes 
for  money. 
A.  £.  F.  Schaffle  '  holds  much  the  same  opinion : 

^'The   value  of  all  goods,  even  money,  changes  with  the 
social  conjunction  of  their  individual  cost-values    Nor  does 
on  the  side  of  supply,  and  their  individual  use     Schaffle. 
values  on  the  side  of  demand."  * 

1  Sjitem  der  Volkwirthschaft,  I  Band,  Grundlagen  der  Nationalokonomie 
(SOth  ed.,  Stattgart,  1892),  §$  122, 123.  Roficher  in  note  2  (§  123)  difipoees  of 
Locke  and  Montesqniea. 

*  Das  Oeeellfichaftliche  System  der  menschlichen  Wirthschaft,  Sd  ed.,  Vol  I, 
Tubingen  (1873).  >  P.  236. 


298  THE  PRINCIPLES  OF  MONEY 

Changes  in  the  value  of  money,  in  his  opinion,  may  be  pro- 
duced by  causes  working  either  upon  the  side  of  demand  or 
upon  that  of  supply: 

L  On  the  side  of  supply  there  are : 

1.  Changes  in  the    cost  of    producing  the  rnsoBf 

metals; 

2.  The  dissipation  of  hoarded  money ;  or  the  with- 

drawal of  money  by  hoarding; 
n.  On  the  side  of  demand  there  are : 

1.  Decreased  need  of  money  due  to : 

(1)  Slowness  of  business; 

(2)  Greater  rapidity  of  circulation  of  money; 
(8)  Increased  use  of  substitutes  for  money; 

2.  Increased  need  for  money  due  to : 

(1)  Crop  failures  which  increase  purchases  from 

abroad; 

(2)  Rapid  investment  of  capital  loaned  in  torn 

of  money ; 
(8)   War  indemnities,  etc.^ 

Eugen  von  Philippovich,'  of  Vienna,  makes  some  pene- 
trating explanations  of  the  causes  affecting  prices: 

^^  There  are  two  classes  of  causes  producing  changes  in  the 
exchange  value  of  mouey  :  1)  the  change  of  money-prices  may 
Phiiippo-  ^  ^^®  ^  ^°  alteration  upon  the  side  of  commodities, 
vich  ^yes  e.  g.  alterations  in  the  cost  of  production,  or  trane- 
theoiy  of  portation,  or  in  the  conditions  of  demand  and  supply, 
pnce.  ^^  ggg  prices  rise  and  fall  every  day  for  such  reasons, 

and  these  are  the  only  reasons  commonly  thought  of.  2)  There 
may  also  be  causes  of  a  change  in  price  operating  on  the  side  of 
money,  since  money  is  made  of  a  substance  which,  like  every 
other  product,  is  subject  to  changes  in  the  conditions  of  prodoc- 
tion,  and  to  changes  of  demand,  not  only  for  monetary  uses,  but 
also  for  use  in  the  arts  and  as  an  article  of  ornament."  * 

1  §  147. 

3  Grondrifls  der  Politischen  Oekonomie,  I  Band,  Freibnrg  L  B.  (1S93). 

»  Pp.  185-186. 


THE  QUANTITY  THEORY  OF  MONEY  299 

It  would  be  difficult  to  better  express  the  piinciples  which 
lentally  govern  prices,  and  which  consequently  avoid 
^d  necessity  of  following  the  dogma  of  comparing  money 
F;1rork  with  the  media  by  which  that  work  is  necessarily 
r  leeomplished.  In  discussing  further  the  causes  afiPecting 
the  money  side  of  the  price  ratio,  he  finds  them,  in  brief,  in 
0)  the  supply  and  in  (2)  the  demand  for  the  metal  used  in 
tiie  circulation : 

(1)  **The  cost  of  producing  the  precious  metals  .  .  .  does 
not  have,  as  is  frequently  asserted,  an  immediate  influence  upon 
the  exchange  value  of  money.  Since  the  cost  of  production  is 
reckoned  in  money,  L  e.  in  the  coined  form  of  the  precious 
metals,  it  follows  that:  1)  the  production  of  the  precious  metals 
cannot  be  extended  beyond  the  point  where  the  cost  of  produc- 
ing a  certain  weight  expressed  in  money  exceeds  the  sum  of 
money  which  can  be  coined  from  that  weight  of  metal ;  2)  on 
tiie  other  hand,  the  money-price  of  the  precious  metals,  which 
are  used  as  the  standard,  cannot  fall  below  its  coining  value, 
since  the  right  of  free  coinage  goes  with  the  recognition  of  a 
metal  as  the  legal  standard.  ...  It  follows  t?uU  the  cost  of 
production  of  the  preeiouB  meiaXs  can  have  no  influence  upon  the 
exchange  value  of  money ^  but  only  upon  the  amount  of  money 
coined.'*^ 

Other  variations  in  the  supply  of  money  may  be  produced 
by  international  payments,  by  use  in  the  arts,  and  by  hoarding. 
The  above  statements  would  possibly  lead  one  to   infl„^^j^ 
suppose  that  alterations  in  price  due  to  changes  ^  quantitj 
in  tiie  cost  of  obtaining  gold  could  not  be  effected      ^^' 
except  by  actual  changes  in  the  quantity  of  money  in  circu- 
lation (that  is,  only  in  so  far  as  it  is  used  as  a  medium  of 
exchange).    This  is  a  partial  form  of  the  quantity  theory,  — 
although  far  from  its  usual  application.     As  to  the  demand 
for  money,  he  says'  that  it  depends  upon  the  sums  used: 

1.  To  store  up  value  in  hoards,  etc. 

2.  To  effect  payments. 

IfQS.  <  {93,  pp.  183-184. 


300  THE  PRINCIPLES  OF  MONEY 

The  latter  is  the  amount  needed  to  enable  private  peracMUi 
banks,  etc.,  to  meet  the  demands  for  money  made  upon  tiiem. 
Since  this  sum  depend9  upon  the  level  of  prices,  and  the  leTd 
of  prices  upon  the  exchange  value  of  money,  the  amount 
required  in  this  way  is  affected  by  its  value  in  exchange.  It 
is  also  dependent  upon  the  rapidity  of  circulation,  but  is 
decreased  by  the  use  of  credit  and  banking  facilities  in  making 
transfers  of  goods.^ 

Otto  Arendt,'  well  known  in  Germany  as  an  ardent  lunet^ 
allist,  has  not  been  able  to  accept  the  quantity  theoiy : 

'^  It  is  as  false  to  suppose  that  there  is  a  mathematical  agree- 
ment between  the  general  state  of  prices  and  the  amount  of 
Arendt  money  in  circulation  as  it  is  to  deny  entirely  the 
quantity  Connection  between  these  two  things.  Slight  fliKStai- 
uieoiy.  tions  in  the  quantity  of  money  will  have  no  effect 
Great  fluctuations,  on  the  other  hand,  for  instance,  a  great 
increase  in  the  quantity  of  paper  money,  will  certainly  have 
their  effect  on  prices.  But  this  factor  is  not  an  all-important 
one.  In  modern  times  most  prices  are  governed,  not  by  the 
industry  of  a  single  country,  but  by  that  of  the  worid  at  large. 
Here  it  is,  in  our  opinion,  that  the  gold  standard,  whatever  be 
our  general  theories,  has  undoubtedly  been  of  practical  effect  in 
bringing  about  the  fall  in  prices.  Within  any  one  country  the 
development  of  credit  has  made  it  certain  that  the  amount  of 
money  in  circulation  will  accommodate  itself  to  the  demand. 
Scarcity  of  If  the  demand  increases,  the  quantity  of  uncovered 
rate  ^  notes  increases,  the  bank  reserve  declines,  the  rate 
intereat.  of  discount  rises,  and  a  higher  rate  of  discount 
attracts  the  precious  metals  from  abroad.     If,   on  the  other 

1  Althoagh  he  identifies  the  doctrines  of  the  currency  school  with  the  qois- 
tity  theory,  in  speaking  of  it  he  says:  "  The  increase  or  decrease  of  money  has  the 
tendency  to  produce  a  rise  or  fall  of  prices.  .  .  .  Bat  the  effect  of  a  chan^  in  the 
money  supply  is  not  direct."  The  use  of  credit  relieves  money  from  some  demand ; 
but,  he  holds,  credit  affects  prices  directly,  as  is  shown  in  commercial  specnlatioiis. 
"  Credit  does  not  light  the  fire  of  speculation,  but  it  feeds  the  blaze,  or  fans  the 
glimmering  sparks  into  an  all-consuming  blaze"  (op.  cit.,  §  108). 

2  The  extract  is  taken  from  a  translation  by  F.  W.  Taussig,  of  Soetbeer'g 
Materialien,  p.  207  (in  Atkinson's  Report  to  State  Department).  But  cf.  also, 
Arendt's  Die  Vertragsmiissige  Doppelwahrung,  I,  chap,  xvii  (Berlin,  1880). 


THE  QUANTITY  THEORY  OF  MONEY      301 

hand,  the  amount  of  money  in  circulation  exceeds  the  demand, 
coin  accumulates  in  the  banks,  the  rate  of  discount  falls,  and 
coin  flows  to  places  where  it  is  more  in  demand.  This  healthy 
deyelopment  of  trade  is  checked  nowadays  only  by  the  scarcity 
of  gold,  which  causes  every  country  to  watch  jealously  its  hold- 
ing of  gold,  since  no  one  knows  whence  gold,  once  lost,  may  be 
reobtained.  In  a  sense,  therefore,  the  amount  of  money  in 
circulation  depends  on  prices,  and  not  prices  on  the  amount  of 
money.  But  this  principle  holds  good  only  for  a  single  country, 
not  for  the  world  at  large,  and  it  is  in  the  world  at  large  that 
general  prices  are  fixed. 

^*  It  is  not  to  be  denied  that  the  production  of  the  precious 
metals  has  always  exercised  an  extraordinary  effect  on  general 
prices.  This  fact,  hardly  to  be  doubted,  may  have  led  to  undue 
emphasis  in  stating  the  connection  between  the  quantity  of 
money  and  prices.  For  ourselves,  we  deduce  an  indirect  Q^an'' 
tiM^Theorie.  A  single  country,  by  means  of  the  rate  of  dis- 
count, regulates  its  circulation  according  to  its  needs.  If  an 
abundant  supply  of  the  precious  metals  sets  in,  a  low  rate  of 
discount  will  prevail  on  all  hands,  and  thereby  a  stimulus  wUl 
be  given  to  production ;  on  the  other  hand,  a  scant  supply  of 
the  precious  metals  will  lead  to  an  insufficiency  in  the  circulating 
medium,  and  then  the  attempt  must  be  made,  as  it  is  now  made 
in  England,  to  attract  precious  metals  by  means  of  high  rates 
of  discount  Other  countries,  which  can  afford  to  lose  no  pre- 
cious metals,  are  affected  by  such  action,  so  that  the  rise  in  the 
rate  of  discount  becomes  general,  as  is  seen,  for  instance,  in  the 
rise  in  the  rate  of  discount  at  our  Imperial  Bank.  Such  a  state 
of  things  necessarily  impedes  production." 

In  a  recent  study  Dr.  Knut  Wicksell  ^  throws  overboard  as 
nsufficient  all  previous  theories  of  price,  including  the  quan- 
ity  theory,  and  proposes  one  based  on  the  rate 

/    •    X         i.    •       xif  1     X        XT      J      •        Wicksell 

)i   interest  in  the  money  market.     He  denies  denies  quan- 
;hat  the  general  price  level  is  altered  by  changes  ^^^  ^^^' 
n  the  supply  of,  or  demand  for,  commodities ;  and  declares 
ihat  the  value  of  money  does  not  depend  on  the  cost  of  produc- 

^  GeldziiiB  and  Giiterpreise :  Eine  Stadie  iiber  die  den  Tanschwert  dee  Geldes 
lestimmenden  Unachen  (Jena,  1898). 


302  THE  PRINCIPLES  OF  MONEY 

ing  the  precious  metals.  As  to  the  quantity  theoiy,  he  hoUb 
that  it  might  be  theoretically  valid,  if  one  were  strictly  to 
accept  the  clause  ^  other  things  being  eqoaL"  It  depcsMh, 
he  thinks,  on  the  following  suppositions: 

1.  That  each  person  keeps  by  him  constantly  the  samesom 
of  money. 

2.  That  the  rapidity  of  circulation  does  not  change. 
8.  That  all,  or  at  least  an  invariable  proportion  of  all 

transactions  are  performed  by  the  use  of  money. 

4.  That  the  supplies  of  metal  used  for  money  and  for 
industrial  purposes  are  distinct  from  each  other. 

None  of  these  suppositions  being  in  conformity  with  the    | 
facts,  he  thinks  the  opponents  of  the  quantity  theoiy  hiTe 
had  an  easy  victory.^ 

As  to  his  own  hypothesis,  while  it  throws  light  upon  the 
detailed  processes  by  which  the  rate  of  interest  in  the  loan 
market  is  made  to  conform  to  the  rate  of  production  interest 
in  actual  industrial  operations,  it  does  not,  in  my  opinion, 
explain  the  movements  of  price : 

*'A  lowering  of  the  rate  of  interest  on  the  part  of  credit 
institutions  .  .  .  wUl  produce  ...  a  rise  of  the  genenl 
price-level.  ...  A  rise  in  the  rate  of  interest  .  •  •  will  cause 
a  fall  in  the  price  of  all  commodities."  * 

The  important  defect  in  this  theory,  without  going  into 
details,  is  that  it  does  not  deal  with  the  relations  of  goods 
to  the  precious  metals ;  that  it  has  to  do  solely 
lated  by  rate  With  the  increase  or  decrease  of  goods  as  affected 
by  the  increase  or  diminution  of  credit  by  the 
banks.  So  long  as  price  is  used  as  the  exchange  relation 
between  a  money  metal  and  goods,  the  price  problem  cannot 
be  settled  by  a  study  of  only  one  side  of  the  price  ratio. 

§  10.  A  selection  of  a  few  from  the  many  eminent  writers 
of  France  *  and  Italy  will  serve  to  convey  their  attitude  on 
the  theory  of  prices. 

1  Pp.  34-39.  «  p.  92.    Cf.  infra,  chap,  x,  §  8. 

*  Louis  Saj  (Principalee  causes  de  la  richease  oa  de  la  mia^re  des  peaples  ct 


THE  QUANTITY  THEORY  OF  MONEY      808 

It  will  be  interesting  to  choose  from  the  mathematical 
school  L&>n  Walias,^  who  favors  the  quantity  theory.  After 
an  intricate  mathematical  demonstration  he  concludes  as 
follows : 

**A11  other  things  remaining  the  same,  if  the  quantity  of 
money  increases,  or  if  the  sum  of  ready  money  which  men  find 
it  expedient  to  keep  on  hand  decreases,  prices  will   wairms,  of 
rise  in  proportion.     If  the  quantity  of  money  is  di-  nMAhematical 
minished,  or  if  the  sum  of  ready  money  which  men  aoantitjr 
find  it  expedient  to  keep  on  hand  is  increased,  prices      ^^* 
wiU  fall  in  proportion.    This  law  extends  to  money  the  principle 
according  to  which  value  increases  as  utility,  and  diminishes  as 
tiie  quantity  becomes  greater.     It  is  plausible  enough  in  itself; 
and  many  economists  have  formulated  it  before,  at  least  so  far 
as  concerns  the  relation  between  changes  in  prices  and  changes 
in   the  quantity  of  money;  but  I  have  added  something  in 
proving  it  mathematically  by  means  of  all  the  preceding  princi- 
ples of  pure  political  economy." 

If  it  should  turn  out  that  the  quantity  theory  did  not 
explain  the  facts,  it  might  be  said  to  be  evidence  that  an 
abstract  mathematical  method  of  discovery  is  incapable  of 
adjustment  to  practical  economic  data. 

Maurice  Block  '  is  somewhat  inconsistent  on  the  quantity 
theory: 

**  The  material  of  which  they  [money]  are  made  is  subject  to  • 
the  same  influences  as  other  commodities,  viz.  1,  those  of  cost 
of  production,  and  2,  those  of  supply  and  demand." 

des  pATticnlien,  Paris,  1818)  thooght  that  money  and  goods  wonld  exchange  in 
]»roportion  to  their  costs  of  production  (p.  31);  hnt  added:  "If  one  oonid 
increase  indefinitely  the  world's  stock  of  sUver  money,  as  one  can  the  supply  of 
paper  money,  the  siWer,  like  the  paper,  would  lose  utility  in  proportion  to  its 
abundance'*  (p.  37).  This  might  be  interpreted  to  mean  that  the  standard  of 
prices  would  fall  in  value,  thus  affecting  prices ;  for  he  says :  "  The  supply  from 
the  mines  of  the  new  world  has  produced  this  effect  in  part." 

^  Elements  d'^oonomie  politique  pure  on  th^rie  de  la  richesae  sociale,  3d 
ed.,  Lnsanne  (1896),  p.  383. 

'  Le  Progrte  de  la  science  ^bonomique  depuis  Adam  Smith,  2d  ed.,  n  (Paris, 
1S97). 


804  THE  PRINCIPLES  OF  MONET 

<'It  appears  at  once  that  the  supply  or  demand  for  coin 
depends  upon  the  relation  between  the  total  sam  of  conuDoditks 
Block  doabt-  offered  for  sale  in  the  whole  ooantry,  and  the  money 
quintfuJ*^'^  (specie  or  its  sabstitntes)  which  serves  as  a  mediam 
tbeoiy.  of  exchange.    The  commodities  are,  in  a  way,  pot 

in  one  scale  of  a  balance,  the  coin  in  the  other.  Some  writen 
put  in  the  latter  the  entire  stock  of  metallic  money  in  the  ooim- 
try.  (The  Germans  call  this  the  Qoantitats-Theorie,  the  theory 
of  the  supply  of  money •^)  But  most  economists  set  oyer 
against  commodities  only  the  money  actually  in  drcuUtkm, 
leaving  out  of  the  account  coin  lying  idle  or  boarded."' 

'^  There  is  a  necessary  relation  between  the  supply  of  money 
(in  circulation)  and  the  supply  of  commodities  (offered  for  sale), 
although  the  results  are  not  so  mathematically  exact  in  practioe 
as  the  absolute  formula  of  the  theory  would  lead  one  to  expect, 
for  the  reason  that  there  are  disturbing  causes."  * 

Having  thus  accepted  the  quantity  theory,  Block  promptly 
states  other  ways  by  which  prices  are  affected : 

^<Thus  the  increasing  abundance  of  the  preckms  metals  is 
not  the  chief  cause  of  the  fall  of  prices.  For,  to  say  nothing 
of  wages,  the  value  of  food  and  stuffs  actually  increases,  and 
the  decline  of  manufactured  goods  should  be  attributed  in  large 
part  to  improvements  in  the  methods  of  production."  * 

Paul  Leroy-Beaulieu,  one  of  the  most  eminent  of  French 
economists,  accepts  the  classical  quantity  theory : 

^'  The  value  of  money  is  determined  by  demand  and  supply. 
.  .  .  The  supply  of  money  should  be  understood  as  all  the  money 

^  Block  himself  adopts  the  qnantitj  theory,  bat  fails  to  define  it  rightlj. 
**  Most  writers/'  he  says,  "  understand  by  ...  the  *  qnantity-theory/  the  relation 
between  the  quantity  of  the  precioos  metals  and  the  quantity  of  commodities  in 
existence  either  in  a  single  country,  or  in  the  whole  world.  The  larger  the  supplj 
of  the  metals,  the  more  will  their  relative  value  fall.  In  general,  this  is  true,  bat 
there  are  opposing  causes  which  often  counteract  this  effect,  at  least  in  pait  ** 
(p.  42,  note  2).  The  essence  of  the  quantity  theory  seems  to  be  that  prices  ctn 
be  determined  only  by  the  relation  between  the  money  tn  ctrctc^'on  and  the 
goods  offered  for  sale. 

a  Pp.  41-44.  «  P.  46.  *  P.  136. 


THE  QUANTITY  THEORY  OF  MONEY      805 

in  circulation  at  a  given  moment,  that  is,  all  the  money  in  the 
oonntry  not  hoarded.  The  demand  for  money  is  all  the  goods 
destined  for  sale.  Every  bnyer  is  a  seller  of  money;  every 
seller  is  a  buyer  of  money.  .  .  .  The  total  of  goods  for  sale  and 
the  total  of  money  (excluding  hoards  and  reserves)  are  mutually 
ezdianged ;  they  are  reciprocally,  one  to  the  other,  supply  and 
demand. 

'^  In  normal  and  customary  conditions  of  credit,  every  change 
in  the  quantity  of  money  should  produce  a  proportional  rise  or 
fall  of  prices.  .  .  .  The  quantity  of  goods  for  sale,  and  the  state 
of  credit,  being  supposed  constant,  the  value  of  money  will 
depend  upon  its  quantity  and  upon  the  importance  of  the  trans- 
actions which  are  effected  by  it.  The  value  of  money  is 
then  inversely  as  its  quantity  multiplied  by  its  rapidity  of 
circulation. 

'*  Thus,  the  cost  of  production  of  the  precious  metals  used  as 
money  exercises  upon  the  value  of  money  itself  a  considerable 
influence ;  but  this  influence  works  only  by  an  increase  of  the 
quantity  of  money  in  circulation,  or  by  a  reduction  in  the 
increase  of  the  monetary  stock.  The  influence  of  the  cost  of 
production  is,  then,  not  immediate.^ 

**  It  is  not  alone  effective  money,  however,  its  abundance  or 
its  rarity,  the  rapidity  or  slowness  of  its  circulation,  it  is  not 
only  the  substitutes  for  money,  such  as  bank-notes  uncovered 
by  a  metallic  reserve,  —  it  is,  also,  in  a  general  way,  the  state  of 
credit,  which  influeuces  prices.^ 

^^  Credit  has  a  great  influence  upon  prices,  because  it  creates 
a  demand  for  goods  without  an  immediate  equivalent"  * 

A.  de  Viti  de  Marco  ^  has  made  a  special  study  on  the 
quantity  theory  with  a  view  to  giving  a  statement  De  Viu 
of  it  which  would  free  the  doctrine  from  the  strong  rehJSliStei 
objections  urged  against  it.     Starting  with  the  tf™|^ 
assumption  that  the  quantity  is  based  upon  — 

1  Traits  d'^conomie  politique,  III,  pp.  147-152. 
«  Ibid.,  IV,  p.  3. 
«  Ihid,,  IV,  p.  436. 

*  Moneta  e  Prezzi  oasia  il  Principio  Qnantitatiyo  in  Rapporto  slU  Qaestiona 
Monetaria  (Roma,  1885). 

ao 


806  THE  PRINCIPLES  OP  MONET 

<*an  almost  self-evideDt  maxim  .  .  .  that  the  prioes  of 
commodities  depend  upon  the  ratio  between  the  amount  of  com- 
modities and  the  amount  of  metallic  money  in  ciroolation,"  ^ 

he  goes  on  to  point  out  the  conditions  only  under  which  the 
theory  holds : 

1.  It  applies  only  to  a  state  of  things  in  which  metallic 
money  is  the  exclusive  instrument  of  exchange,  credit 
being  unknown. 

2.  There  must  be  such  free  communication  between  the 
bullion  market  and  coinage  that  an  increase  of  gold  and 
silver  will  act  as  an  increase  of  money  (t .  e.j  free  coinage). 

8.  The  supply  of  commodities  is  supposed  to  be  un- 
changed. 

4.  The  amount  of  increase  in  the  supply  of  money  must 
be  considered,  not  absolutely,  but  in  relation  to  the  existing 
supply. 

The  author  finds  support  for  the  theory  in  phenomena  which 
really  have  another  explanation.'  In  answering  a  statement 
of  Hildebrand^  that  not  the  quantity  of  the  circulation,  but 
the  desires  of  purchasers,  affects  prices,  De  Viti^  finds  in 
the  very  fact  that  more  money  is  put  in  circulation  a  proof 
that  the  owners  had  inci-eased  desires  and  increased  means 
with  which  to  buy ;  and,  hence,  that  they  would  pay  higher 
prices.  This  is  as  much  as  to  say  that  if  one  has  more 
strength  one  will  lift  a  heavier  weight;  but  the  real  ques- 
tion is,  Why  should  one  care  to  lift  a  heavier  weight?  What 
is  the  reason  why  more  money  is  offered?    An  increased 

1  P.  1. 

*  E.  g.,  he  holds  that  the  high  prices  after  1851,  dne  to  the  increased  sapplj 
•f  gold,  furnish  a  proof  of  the  quantity  theory,  adding  that  the  general  average 
price  level  is  the  hest  index  of  the  value  of  money  (chap,  ii,  5  !)•  I'  «>.  ^^^ 
why  has  not  the  unparalleled  production  of  gold  of  recent  years  (donhled  and 
trebled  since  he  wrote)  been  followed  by  a  rise  of  gold  prices  ?  Indeed,  the  facts 
after  1851,  or  since,  do  not  allow  the  inference  of  a  direct  connection  between  the 
quantity  of  gold  and  the  level  of  prices.     Cf .  supra^  p.  284. 

'  R.  Hildebrand,  Die  Theorie  des  Geldes  (1883),  chap,  t,  Geldmenge  toA 
Waarenpreise. 

*  Chap,  ii,  S  4. 


THE  QUANTITY  THEORY  OF  MONEY      807 

means  of  purchase,  of  course,  arises  from  the  possession  of 
more  marketable  goods.  Their  value,  expressed  in  terms  of 
the  standard  commodity,  is  offset  against  similar  goods  of  a 
seller  —  who,  from  his  own  point  of  view,  is  a  buyer  with  his 
goods  as  purchasing  power.  The  mere  media  by 
which  these  goods  are  offset  against  each  other  are 
the  most  insignificant  parts  of  the  affair.  They  are  the  result, 
not  the  cause,  of  the  rates  of  exchange.  Indeed,  instead  of 
raising  general  prices,  the  case  cited  by  the  author  is  only  the 
process  by  which  the  relative  values  of  different  goods  are 
determined  (and  not  the  relation  of  goods  in  general  to  gold). 
If  increased  desires  and  increased  means  of  purchase  inevitably 
lead  to  higher  prices,  then  we  reach  the  reductio  ad  abwrdum 
that  with  growing  wealth  and  a  greater  abundance  of  satis- 
factions prices  will  rise, — a  result  contradicted  by  the  obser- 
vation of  all  mankind. 

In  speaking  of  the  fact  that  by  speculation  a  sudden  rise 
of  prices  may  result,  without  a  change  in  the  quantity  of 
money,  he  thinks  that  the  rise  is  due  to  an  increase  cradit 
of  credit  instruments,  and  that  their  increase  •°<*P'**^ 
depends  upon  the  metallic  reserves  of  the  banks.^  And  yet 
he  holds  '  that  in  a  perfectiy  organized  system  of  credit,  where 
debits  and  credits  offset  each  other,  there  is  no  reason  in  the 
nature  of  things  why  an  extension  of  transactions  should  re- 
quire larger  bank  reserves.*  Moreover,  if,  as  he  says,  credit 
economizes  the  use  of  specie,  and  indirectiy  raises  prices,  does 
he  not  admit  that  there  are  other  ways  of  changing  prices 
than  through  the  direct  offer  of  goods  against  money  which 
the  quantity  theory  demands?  The  effect  on  the  value  of 
the  standard  is  one  of  the  effective,  although  remote,  ways  of 
touching  prices.^ 

1  Chap,  ii,  S6. 

s  Ibid,,  §5. 

*  May  he  not  find  an  explanation  in  my  distinction  between  normal  and 
abnormal  credit  ?    (See  tupra,  chap,  iv.) 

^  In  chap,  ii,  J  9,  he  thinks  that  a  general  fall  in  cost  of  prodncdon  of  goods 
would  not  canse  a  fall  of  prices,  unless  there  were  an  actual  increase  of  produe- 
tion.    CI  infra,  chap,  ix,  {  6. 


808  THE  PRINCIPLES  OP  MONET 

In  the  discussion  of  the  movement  of  gold  in  international 
trade,  he  believes  that  the  rise  of  prices  in  the  gold-prodacing 
BiMoforicM  ^o^^^®8  is  "a  necessary  consequence  of  the 
in  mining  quantity  principle."  ^  On  the  contrarVf  a  rise  of 
prices  near  the  mmes  is  only  an  evidence  that  the 
gold  has  changed  in  value  there  for  reasons  connected  mtii  its 
ease  of  acquisition. ,  This  change  of  value  is  itself  a  chai^ 
of  prices :  that  is  what  a  change  in  the  value  of  gold  neces- 
sarily implies.  Hence  it  is  not  necessary  to  hunt  for  a  second 
step  to  explain  the  rise  of  prices,  such  as  an  increased  offer  of 
money  in  circulation  against  a  given  supply  of  goods.' 

The  distinguished  Italian  economist,  Achille  Lioria,*  made 
a  special  examination  of  the  value  of  money.  He  regarded 
AcbiiieLork  the  peculiar  difficulties  in  applying  the  law  of 
quADtUy^*  cost  of  productiou  to  the  precious  metals  as  the 
«eoiy-  reason  why  some  writers  were  led  to  support  the 

old  quantity  theory  of  Locke,  Montesquieu,  and  Hume. 
Loria  devotes  his  pages  to  showing  how  cost  of  production 
does  regulate  the  value  of  the  metals.  If  money  is  a  com- 
modity, he  holds,  it  will  not  be  brought  to  market  unless  the 
producers  obtain  the  normal  return  which  will  cover  their 
expenses  of  production: 

^^  The  cost  of  the  metal  determines  the  valne  of  money,  and 
Effect  the  value  determines  the  quantity  which  can  circulate ; 

of  precioas     ^^  ^^  ^^^^  ^^^  ^^^^  ^^^^  determines  the  quantity,  not  the 
meuls.         quantity  which  determines  the  cost  and  the  value.  "^ 

1  Chap.  vi.  p.  150. 

*  For  a  farther  discaasion  of  this  point,  see  infra,  chap.  ix»  §  2. 

s  Stadi  sal  valore  della  Moneta  (Tarin,  1891). 

«  P.  6.  To  the  objection  that  cost  is  largely  a  matter  of  chance  in  diflcoreries 
of  deposits,  Loria  replies  that  accidental  phenomena  do  not  establish  the  nnireml 
laws  of  economics ;  that  the  law  of  cost  applies  only  to  mining  countries,  as  is 
shown  by  the  abandonment  of  European  mines  when  the  value  of  the  metal 
obtained  fell  below  the  expenses  of  production  there ;  while,  in  non-mining  coun- 
tries, the  value  may  not  fluctuate  closely  with  expenses  of  production  (pp.  11-13). 
•*  Every  exportation  or  importation  of  metal  is  merely  the  result  of  an  increase 
or  a  decline  in  its  cost  of  importation,  and  .  .  .  this  remains  the  exclusive  regu- 
lator of  the  value  of  money  in  countries  which  have  no  mines  "  (p.  34). 


THE  QUANTITY  THEORY  OF  MONEY      309 

The  quantity  of  money  required  in  a  commonity  is  a  func- 
tion of  three  variables : 

1.  The  sum  of  the  costs,  or  of  the  values,  of  all  the  goods 
to  be  exchanged  by  the  use  of  money. 

2.  The  rapidity  of  circulation. 

8.  The  cost  of  producing  money  (specie). 

The  amount  of  money  needed  is  theoretically  equal  to  the 
quantity  of  labor  (typifying  the  cost  of  production)  contained 
in  the  goods  to  be  exchanged  (V),  divided  by 

JT  DeoBAnd  for 

the  rapidity  of  circulation  (v).    Hence  -  =  ©,  "^^■•y- 

the  amount  of  labor  which  must  be  contained  in  the  total 
quantity  of  money  in  circulation.^  In  short,  including  under 
rapidity  of  circulation  banking  expedients  serving  as  media 
of  exchange,  Loria's  theory  of  prices  is  that  the  quantity 
of  money  metal  used  as  a  medium  of  exchange  is  deter- 
mined by  the  value  of  the  goods  to  be  exchanged;  and  that 
the  value  of  the  standard  itself  is  determined,  in  the  long 
run,  l^  expenses  of  production.  The  influence  of  the  dura- 
Ulity  of  the  precious  metals  on  the  existing  supply,  however, 
does  not  seem  to  be  given  its  due  importance. 

The  quantity  theory,  on  the  other  hand,  receives  sup- 
port from  one  of  the  ablest  of  Italian  economists,  Maffeo 
Pantaleoni :  ^ 

*'But  if  we  sappose  a  commodity  which  is  exclasively  a  me- 
dium of  exchange,  we  are  confronted  by  the  fact  that  the  utility 
of  the  entire  mass  of  the  commodity  set  apart  for   p      . 
such  use,  be  it  great  or  little,  never  varies.      In   favors  quan- 
fact,  supposing  a  regime  of  divided  labor,  so  per-    ^'^    ^^' 
feet  that  each  person  prodaces  only  with  a  view  to  the  market, 
that  is,  to  exchanges,  and  supposing  that  no  barter  be  effected, 

00  the  wares  wiU  exchange  against  aU  the  money^  be  it  much 

1  This  is  on  the  sQpfXNiition  that  the  metal  is  used  onljr  as  money.  If  the  de- 
mand for  the  arts  be  added,  poorer  mines  will  be  worked  and  less  money  will 
represent  the  same  labor  expenditure  as  before. 

*  Pure  Economics,  translated  by  T.  Boston  Bmce  (London,  1898).  See  espe- 
dally  FUrt  m,  chap.  U,  §  4  (pp.  227-231). 


810  THE  PRINCIPLES  OP  MONET 

or  little.  The  total  value  of  the  mass  of  money,  that  is,  tiie  in- 
tegral value  of  the  mass,  or  yet  again  the  value  of  the  aggregate 
amount  of  money,  will,  therefore,  be  constant."  ^ 

Changing  the  supposition  so  that  only  goods  sold  for  mone^ 
are  compared  with  the  money  in  circulation,  it  still  remains 
true  that  (money  work  being  constant)  the  value  of  the  total 
mass  of  money  used  in  the  exchanges  will  be  independent  of 
its  quantity:* 

**  But,  if  the  integral  value  of  money  is  constant,  the  value  of 
each  piece  of  money,  that  is,  the  unitary  value  of  money,  most 
necessarily  vary  inversely  as  its  quantity.  Supposing  the  yd- 
ume  of  business  transactions  to  remain  the  same,  and  the  quan- 
tity of  available  money  to  be  doubled  or  halved,  then  since  the 
whole  amount  of  money  will  be  exchanged  against  the  whole 
amount  of  commodities,  pricea  u;i2^  be  doubled  or  hcUved,  that  is, 
the  unitary  values  will  he  halved  or  doubled. 

*^The  unitary  values  of  money  are  thus  determined  directlj 
as  the  demaThd  for  money ^  and  inversely  as  the  supply.  The 
requirements  of  circulation^  however,  or  the  volume  of  businew 
transactions,  which  is  the  demand  for  money,  resolves  itself  into 
two  elements,  viz. :  the  quantity  of  commodities  offered  for  sak, 
and  the  number  of  times  tJuU  the  same  commodity  is  bought  and 
sold  for  money.  .  .  .  The  available  amount  of  money  .  .  . 
comes  to  be  likewise  the  product  of  its  quantity  and  the  rapidity 
of  circulation.     The  value  of  the  monetary  unit  will  therefore  be 

expressed  by  the  formula  v  =  —  ;   in  which  the    volume  of 

qr 

business  transactions^  i.  e.,  the  demand  for  money,  is  represented 

by  m,  and  the  supply  of  money  by  the  product  of  its  quantity, 

g,  multiplied  by  the  rapidity  of  its  circulation,  r."' 

In  assuming  a  money  commodity  which  is  solely  a  medium 
of  exchange,  and  not  introducing  its  function  as  a  standard,  I 

find  the  error  which,  in  my  judgment,  vitiates 
thesundard       Pantalconi's  conclusions.     Then,  arguing  fi-oma 

constant  utility  in  the  whole  mass  of  money,  —as 
if  it  must  of  necessity  be  used  solely  as  a  medium  of  exchange^ 

1  Pp.  228-229.  «  p.  229.  »  Pp.  230-231. 


THE  QUANTITY  THEORY  OF  MONEY      811 

—  he  perpetaates  the  error  of  the  original  supposition,  reach- 
iog  a  result  which  seems  to  me  to  be  quite  wide  from  the 
facts.  If  the  offer  of  more  money,  when  its  quantity  has 
been  doubled  or  halved,  is  obligatory,  then  his  conclusion 
follows;  but  in  the  world  of  business  there  is  no  practical 
reason  why  more  should  be  offered.  It  is  to  be  kept  in  mind 
that  in  the  price  evaluation  we  have  to  do  with  the  exchange 
value  of  money  in  its  function  as  a  standard. 

Karl  Marx  makes  the  quantity  of  money  depend  on  its 
value,  not  the  value  on  its  quantity.  The  value  of  money, 
he  says,  depends  on  the  quantity  of  labor  in  it. 
When  this  changes,  the  value  of  money  changes, 
and  then  prices  are  affected.  When  prices  rise,  more  money 
comes  into  circulation,  and  when  prices  fall,  the  quantity 
decreases.^ 

De  Yiti  replies  (1)  that  the  value  of  gold  or  silver  is  not 
determined  by  the  amount  of  labor  necessary  to  produce 
them ;  (2)  that  the  quantity  of  the  circulation  does  not  de- 
pend on  prices,  since  that  would  imply  the  possibility  of 
increasing  the  supply  of  gold  or  silver  at  will.^ 

^  Caitol,  Ftet  I,  chi^  iii,  §  S.  *  Op.  eU.,  chap,  ii,  SS  S,  3. 


812  THE  PRINCIPLES  OF  MONEY 


CHAPTER  Vra 
CRITICAL  EXAMINATION  OF  THE  QUANTITY  THEORY 

Thonghe  Gould  and  SiWer  be  the  Mettalles  commonlj  wheftrin  the  eoiiie  ii  rtriebi 
to  be  tokens  in  exchange  of  thinges  betewne  man  and  man,  yet  it  ii  the  mm 


that  be  necessarie  for  mans  ose  that  are  exchanged  in  dede  for  the  < 
name  of  the  cojme,  and  yt  is  the  varietie  and  plentie  therof  that  makethtb 
price  therof  base  or  higher.  —  W.  S.  (probabl/  John  Halee),  1581. 

S.  M.  Hardy,  The  QuantUff  of  Money  and  Prices,  lMO-1891,  Joor.  FbL  Im^ 
March,  1895.  —W.  C.  Mitorbll,  The  QtumtUy  Theory  of  the  KaIm  ff  Money,  km, 
Pol.  Econ.,  March,  1896.  — W.  A.  Soott,  The  QnaniUy  Theory,  Annak  of  Am, 
Acad.,  Bfarch,  1897.  —  LoaD  Fabbbb,  The  Qitanliiatioe  Theory  of  Money  ami  Prim, 
Gold  Standard  Defence  Association,  No.  29. 

§  1.  The  study  of  the  laws  of  money  to  this  point 
has  been  preliminaiy  to  the  central  and  crucial  discufldim 
Nature  of  ^f  the  principles  regulating  prices.  It  is  Aa 
the  task.  pivotal  subjcct  in  the  whole  exposition  of  money. 

Unless  our  examination  into  this  theme  should  give  us  a 
clearer  understanding  of  the  problem  of  prices,  and  some 
material  aid  in  its  solution,  it  would  better  not  have  been 
attempted  at  all.  For  on  no  other  topic  in  the  whole  histoiy 
of  economics  from  Nicole  Or^me  to  the  present  time  has 
there  been  more  extended  controversy,  with  less  practical 
results,  than  on  the  theory  of  prices.  One  must,  therefoie, 
approach  so  difficult  a  task  in  a  proper  and  judicial  spirit 

In  trying  to  expound  the  principles  regulating  the  geneial 
level  of  prices,  one  is  met  by  the  reiterated  statement  of  a 
theory  of  prices  so  long  embedded  in  economic  literature,  so 
well  supported  by  high  authority,  and  with  which  economic 
treatises  of  to-day  are  so  thoroughly  impregnated  —  not  only 
in  the  topic  of  money,  but  also  of  international  trade — that 
it  requires  no  ordinary  sense  of  conviction  to  question  its 
soundness.  I  refer,  of  course,  to  the  theory  that  general 
prices  are  determined  by  a  comparison  between  the  quantity 
of  money  in  circulation  and  the  amoimt  of  the  transactions 


EXAMQTATION  OF  THE  QUAl^miT  THEORY       318 

in  goods.  The  literature  on  this  theory  given  in  the  last 
chapter,  although  it  does  not  ioclude  all  even  of  important 
writers,  is  enough  to  enable  the  reader  to  learn  of  its  origin, 
and  to  grasp  its  meaning  and  scope^  without  an}'  possible 
danger  of  its  being  misinterpreted  in  the  critical  examination 
about  to  be  given  to  it. 

At  the  outset  one  is  obliged  to  raise  the  question  of 
method,  —  and  the  one  to  be  adopted  can  be  none  other 
than  that  laid  down  by  Cairaes  and  earnestly  Kconomio 
supported  by  General  Walker,  If  any  priu-  ^^^°^^ 
ciple,  no  matter  how  generally  accepted  in  the  past,  fails 
to  explain  the  facts  of  modern  society,  it  is  to  be  supposed 
either  that  it  is  based  on  false  premises,  or  else  that  the 
reasoning  by  which  it  was  established  is  erroneous.  In- 
ductive study  is  a  means  of  ascertaining  whether  the  princi- 
ple is  a  correct  statement  of  the  relations  between  cause  and 
effect  Certainly  one  cannot  sympathize  with  the  unscientific 
spirit  shown  by  partisans  of  any  one  theory  who  deny  the 
right  of  the  investigator  to  apply  such  economic  tests  as  an 
inductive  study  to  ascertain  its  validity,*  The  age  of  a 
dogma  should  be  no  protection  from  critical  inquiry.  If 
the  basic  assumptions  of  the  quantity  theory  are  shown  to 
be  unsound^  if  the  reasoning  is  found  to  be  defective,  and 
If  it  can  be  plainly  proved  that  the  doctrine  does  not  satis- 
factorily  explain  the  admitted  facts ^  —  if  all  these  points 
can  be  established,  then  it  is  evident  that  it  must  be  given 
up.  Finally,  in  addition  to  all  this,  if  another  theory  of 
price  regulation  can  be  given  which  will  explain  the  avail- 
able statistical  datai  there  will  be  confirmation  of  the  destruc- 
tive criticism.  The  present  chapter,  accordingly,  will  be 
concerned  with  this  latter  task;  the  constructive  theory  of 
prices,  which  will,  better  than  the  quantity  theory,  explain 
the  facte,  will  be  reserved  to  the  following  chapter. 


1  General  Walker^^  attitude  in  asnertiitg  that  the  quantity  theory  o!  iiion«j 
was  only  a  gtat*m©rit  iif  th©  principle  of  demand  and  »ppply,  and  therefore  uoi  to 
be  teated  by  inductive  atndy,  cannot  be  accepted.  C£.  Quar  Jonr.  Econ.,  Jtilj, 
1895,  p.  a74. 


814  THE  PRINCIPLES  OF  MONET 

§  2.  The  essence  of  the  quantity  theoiy  is  onquestioiubly 
this:  (1)  price-making  can  go  on  only  through  an  actual  ex- 
change of  ^  money  "  against  goods ;  (2)  and  the  level  of  prioei 
is  fixed  by  a  comparison  between  the  amount  of  exchan^ng 
to  be  effected  (taking  into  account  the  number  of  times  each 
commodity  changes  hands)  and  the  quantity  of  *^monej" 
(however  defined)  in  circulation  (taking  into  account  the 
rapidity  of  circulation). 

The  conditions  only  under  which  the  theory  can  be  re- 
garded as  operative  are  the  following: 

1.  A  monopoly  of  the  coinage,  or  of  the  issaea  of  piper 
money,  by  the  central  authority.  In  the  case  of  metals  do 
Conditions  free  Coinage  can  be  allowed;^  otherwise  the  cam 
"^^quH^i^  would  have  the  value  of  the  bullion  from  which  they 
theoo'  holds,  are  made  (cost  of  manufacturing  the  ooins  aput). 
Under  the  modem  regime  of  free  coinage  of  gold,  in  moit 
commercial  countries,  —  since  there  is  no  limit  to  the  qoaotitj 
coined,  —  the  only  forms  of  money  having  the  characteristic  of 
government  monopoly  are  token  coins  and  inconvertible  paper 
money.  If,  however,  the  theory  be  interpreted  as  true  erea 
under  free  coinage  of  the  money  metal,  it  must  be  urged  by  its 
supporters  that  the  value  of  the  bullion  is  fixed  by  the  nine 
of  the  coins  which  are  in  actual  circulation  as  a  medium  of 
exchange ;  that  only  through  its  use  as  a  medium  of  exchange 
can  its  value  both  as  bullion  and  coin  be  determined;  and  that 
the  demand  for  money  is  exclusively  or  mainly  a  demand  for 
the  medium  of  exchange. 

2.  The  second  condition  follows  from  this:  the  theory  holds 
true  only  in  that  state  of  things  (cf.  Mill)  in  which  **  money " 
is  the  only  instrument  of  exchange,  and  is  actually  passed  from 
hand  to  hand.  Exchanges  performed  by  barter,  or  by  those 
refined  methods  of  barter  devised  by  banks,  can  have  no  in- 
fluence on  prices.^    Credit  is  supposed  to  be  non-existent. 

1  This  is  clearly  the  basis  of  Ricardo's  and  Walker's  belief  ;  bat  De  Viti  {cp. 
cit.f  chap.  1,  §  3,  2)  thinks  there  must  be  free  communication  between  bullion  ind 
the  coinage.  Then,  certainly,  in  fixing  prices,  the  latter  muat  admit  any  ctme 
which  affects  the  value  of  the  bnllion. 

*  So  holds  General  Walker,  as  already  qaoted :  "  Many  .  .  .  goods  maj 
commercially  be  exchanged  directly  against  each  other  in  barter,  or  indirecdj 


EXAMINATION  OF  THE  QUANTITY  THEORY   315 

3.  If  applied  to  modem  conditioDs,  when  free  coinage  and 
credit  (with  other  forms  of  media  of  exchange)  exist  unhin- 
dered, the  attempt  has  been  made  by  those  supporters  of  the 
theory  (such  as  Mill),  who  differ  from  General  Walker,  to  give  it 
nniversality  by  explaining  that  credit  baa  exactly  the  same  effect 
Qtk  prices  as  *^  money." 

The  exposition  and  proof  of  the  theory  quite  invariably 
hark  back  to  a  supposition  of  monopoly  and  of  the  use  of 
**  money  "  alone  in  all  exchanges.  What  is  true,  given  the 
bjpothesis,  is  applied  as  true  of  the  modem  world  of  facts 
which  are  not  included  in  the  hypothesis.  The  transplanta- 
tion of  the  "axiomatic  principle  "  from  its  hypotlietical  soil 
to  the  conditions  of  actual  life  presentfi  serious  logical  diffi- 
culties, and  a  necessity  arises  for  stretching  both  the  theory 
and  the  facts  to  meet  the  situation.  This  is  the  explanation^ 
in  mj  opinion,  of  the  curious  want  of  consensus  in  regard  to 
what  is  "  money  "  in  the  qiiantity  theory,  and  to  the  variety 
of  ways  in  which  prices  are  supposed  to  be  determined. 
The  fact  is,  the  fundamental  assumption  is  false,  and  the 
wrong  theory  can  never  be  made  to  fit  t^e  phenomena  of 
price. 

§  3.   The  central  error  of  the  quantity  theory  lies,  in  my 
5udgment|  m  the  asauuitjJ  prymtn*3  Uml  piioes  Are  fiieed  by  a 
comparij!^on  between  the  goods  to  be  exchanged 
{{-  e.y  the  money  work)  and  the   media  of  ex-  error  of  qyao* 
change  by  which  the  work  is  done^     This  prac- 
tically amounts  to  saying  that  the  force  regulating  the  price 
is  ttie  price,   or  the  amount  of  money,  actually  obtain ed, 
whatever  that  may  be.      What,  for  instancCi  regulates  the 
price  of  wheat?    Why,  of  course^  the  amount  of  the  medium 
of  exchange  for  which  it  is  in  fact  exchanged.     How  much 
wood  can  a  man  chop  ?    Why,  great  discovery !  the  wood  that 
he  chops  I    Such  a  process  of  price-making  (speaking  now  of 

through  the  iDterreation  of  commercial  and  fiEtaQclal  et^dit,  withont  the  use  of 
monef.  Such  goods  do  not  eofij$t!tiite  a  factor  in  the  domand  for  moocy." 
Qaar^  Jour.  Ecod.,  July,  1895^  pi  373. 


816  TU£  PRINCIPLES  OF  MONET 

all  goods  and  of  all  the  money  in  circulation)  seems  to  be 
nothing  more  than  comparing  llie  goods  with  the  outcome  of 
the  comparison;  comparing  the  thing  to  be  done  with  die 
thing  done.  It  confuses  the  effect  with  the  cause  piodQcing 
the  effect.  It  gives  us  no  clue  to  the  causes  affectiog  gen. 
eral  prices.  What  fixes  the  price  of  goods?  Why,  the 
prices  which  are  fixed. 

The  offer  of  a  certain  amount  of  a  medium  of  exchange 
for  goods  merely  records  the  result  of  the  antecedent  price- 
Pri«Mnmk-  niaking  process.  In  the  case  of  book  entries,  or 
precedes  book  Credits  of  any  form,  this  can  be  seen  it 

exchange.        ^^^^^     rj^^  ^^^^  ^^^  l^  g^^  bofope  any  such 

entiy  is  possible.^  Or,  if  we  rulb  out  credit,  are  farmers,  for 
instance,  really  uninfluenced  in  fixing  the  prices  of  eggs  in 
gold  by  any  other  considerations  than  the  total  amount  of 
money  work  and  the  total  media  of  exchange?  But  if  lam 
answered  by  a  statement  that  this  is  a  case  of  the  price  of  a 
single  commodity,  while  the  quantity  theory  has  to  do  with 
the  general  price  level,  I  must  reply  that  there  is  no  abstract 
level  of  prices  independent  of  particular  prices;  that  a  gen- 
eral level  of  prices  is  nothing  but  an  average  made  up  of  the 
actual  quotations  of  single  articles;  that  the  conditions  wider 
which  the  price  of  a  particular  commodity  is  fixed  must,  in 
the  nature  of  things,  appear  in  the  conglomerate  average  of 
separate  quotations. 

How  insignificant  is  the  real  influence  of  a  medium  of 
exchange  upon  the  relative  values  of  goods  and  gold  may, 
Illustrations  of  p^rhaps,  be  illustrated  in  the  following  mamier: 
the  fallacy.  During  our  Civil  War  a  Northern  officer,  A, 
was  negotiating  an  exchange  of  prisoners  with  a  Southern 
officer,  B.  A  presented  cartels,  or  paper,  containing  duly 
certified  names,  etc.,  to  B,  at  Richmond,  showing  that  he 
had  delivered  10,000  Southern  prisoners  at  Memphis,  as  an 
order  for  10,000  Northern  prisoners  held  by  B  at  Ricliniond. 

1  Here  General  Walker  might  have  said  that  thia  price  raugt  he  that  fixed  bj 
some  actual  exchange  against  money  elsewhere ;  bat  as  to  this  I  shaU  hare  lom^ 
thing  to  say  later. 


EXAMINATION  OF  THE  QUANTITY  THEORY       317 

Tliis  basis  for  A*s  demand  on  B  had  no  other  force  than 
arose  from  the  possession  of  10,000  Southern  prisoners;  the 
''purchasing  power "  of  the  paper,  so  to  speak,  was  nothing 
in  itself;  the  quantity  of  the  paper  intermediary  was  a  con- 
flequence  of  the  number  of  prisoners  already  taken,  dependent 
on  the  results  of  previous  operations  of  the  army,  the  skill  of 
generals,  the  eflBciency  of  troops,  etc.,  — in  short,  on  the  pro- 
ductive process  of  capturing  as  measured  against  the  obstacles 
presented  by  the  enemy.  Likewise,  the  exchange  could  not 
take  place  if  there  were  no  Northern  prisoners  held  by  B  to 
offset  those  offered  by  A. 

The  quantity  of  these  personal  vouchers  was  only  a  fact, 
the  outcome  of  all  the  previous  negotiations  between  A  and 
B  (or  their  respective  governments)  as  to  the  valuation  of 
privates  for  one  captain,  the  number  of  corporals  to  be  given 
for  one  major,  etc.  The  paper  demands  offered  at  the  point 
of  actual  exchange  by  A  and  B  were  merely  the  resultant,  or 
outcome,  of  the  whole  operations  of  exchange  which  lay 
behind  the  actual  transfer  at  that  moment.  It  was  not  the 
quantity  of  those  personal  vouchers  that  determined  how 
many  men  could  be  exchanged,  or  even  the  rate  of  ex- 
change. On  the  contrary,  the  number  of  captured  men  in 
Northern  prisons,  the  number  of  such  men  in  Southern 
prisons,  the  d^eements  (t.  e.y  the  price-making  pi*ocess) 
between  the  officials  as  to  the  value  of  officers  expressed  in 
those  of  other  ranks,  determined  the  nature  of  the  interme- 
diary paper. 

In  brief,  to  change  the  figure,  the  quantity  of  money  used 
as  the  actual  media  of  exchange  no  more  determines  price 
than  the  entries  of  deeds  and  conveyances  in  the   p^^^  ^^^ 
county  records  determine  the  prices  of  the  land  related  to  the 

--,,,,,  *  -     -        rnr.       »tiindard,  not 

whose  sale  is  stated  in  the  papers  recorded.     Ihe  to  the  media 
circulating  medium  is  not  a  cause  of  prices ;  it  is   ^  ***^  *"**' 
only  a  convenient  means  of  exchanging  goods  after  the  price 
has  been  already  fixed ;  and  the  medium  may,  or  may  not,  be 
the  material  of  which  the  standard   of  prices  is  composed. 
Price  is  an  exchange  relation  between  goods  and  the  standard 


818  THE  PRINCIPLES  OF  MONEY 

money  commodity,  whether  that  money  commodity  he  used 
as  a  medium  of  exchange  or  not.  A  wide  distinction  existi 
between  the  standard  in  which  prices  of  goods  are  expressed 
and  the  media  of  exchange  by  which  the  goods  are  actoallj 
transferred.  Earlier  writers  gave  no  attention  to  the  evoh- 
tionaiy  process  by  which  media  of  exchange,  different  from 
the  standard  commodity,  have  been  brought  into  the  com- 
mercial world.  ^  Some  forms  of  money  serve  only  as  media 
of  exchange,  and  have  no  influence  whatever  on  price.  One 
would  suppose  that  this  distinction  between  the  standard  in 
*  which  prices  are  expressed  and  the  medium  by  which  goods 
are  exchanged  is  so  elementary  that  its  truth  needs  no 
explanation.  But  General  Walker  regarded  the  medium 
of  exchange  as  the  chief,  if  not  the  whole,  function  of 
money : 

^'  This  f anction  [Measure  of  Valae]  is  not  a  separate  and 
independent  function  of  money,  bat  a  parely  incidental  and 
subordinate  function ;  that  not  only  is  anything  which  is  com- 
petent to  serve  as  the  general  medium  of  exchange,  adequate 
also  te  serve  as  the  common  denominator  of  values;  bat  that 
anything  which  does,  in  fact,  serve  as  the  medium  of  exchangei 
mast,  in  the  very  act  and  part  of  doing  so,  create  the  price- 
current."  ^ 

Such  a  conception  of  money  carried  with  it,  of  course, 
quite  arbitrary  discriminations  as  to  devices  which  most  men 
regard  as  media  of  exchange,  and  it  also  carried  with  it  their 
dogmatic  exclusion  from  the  category  of  money.*  It  is  irrec- 
oncilable with  the  facts  of  the  day. 

In  speaking  of  the  demand  for,  and  the  supply  of,  money, 
Mr.  Mill  believed  that  an  increase  in  the  quantity  of  money 

^  See  supra,  chap,  i,  §  4. 

3  Political  Economjr,  p.  156.  It  would  be  a  matter  of  interest  to  know  what 
interpretation  Greneral  Walker  gave  to  several  principles  of  banking.  He  denied 
that  checks,  etc.  were  money ;  and  hence  that  they  could  not  be  a  mediam  of 
exchange !  If  he  excluded  them  on  the  ground  that  they  did  not  hare  "  uniTer 
sality/'  that  would  not  change  the  fact  that  they  have  serred  as  a  medium  of 
exchangei  to  an  astonishing  extent 


EXAMINATION  OF  THE  QUANTITT  THEORY       319 

offered  for  goods  would  raise  their  prices  pro  tanto  (other 
things  being  the  same).  But  an  offer  of  an  increased  amount 
of  money  for  other  things  is  in  itself  a  change  of  price  —  the 
Tery  thing  to  be  explained.  If  one  admits  the  rise  of  price, 
of  course  more  money  would  be  offered*  But  the  point  is: 
Why  ie  more  money  offered?  That  is.  Why  have  prices 
risen?  Certainly  the  exchange  value^  for  instance^  of  gold 
in  goods  can  be  changed  only  by  something  affecting  gold 
itself,  or  by  something  affecting  the  goods^  each  side  com- 
pared with  the  other.  ^ 

If^    with   Mr.    Mill,    we    interpret   purchasing    power  as 
including  credit,  and  regard  the  quantity  of  money,  which 
is  compared  with  the  money  work,  as  made  up  of  ^^  ^dditioa 
all  money  in  circulation  plus  all  credit,  this  form  «*  credit  daw 

-,  .         t  »  11. 1  not  *ave  the 

of  the  quantity  theory  is  no  more  acceptable  than  quantity 
the  other.  Its  fundamenial  error  still  exiBts  in  *  *°^^^ 
the  determination  of  price  by  reference,  on  the  money  side 
of  the  price  ratio,  mainly  to  the  media  of  exchange.  If  this 
be  tiie  assumption,  —  that  eYerything  which  acts  as  a  medium 
of  exchange  is  a  part  of  the  quantity  of  money,  —  then  Mr, 
Mill  is  logically  compelled  to  include  credit  as  a  medium  of 
exchange  (which  Walker  illogically  rejects).  But  logical 
reasoning  horn  a  false  premise  will  result  in  a  false  conclu- 
sion. For  it  is  liot  even  true  that  the  price  level  changes 
according  to  the  united  quantity^f  ** money'*  an(}  credit. 
The  working  of  normal  credit  as  Mn^nra  ofjsx-change,  pro- 
ducing no  effect  on  price,  has  been  alre3dydescribed*®  But 
a  brief  appeal  to  facts  will  show  the  insufficiency  of  Mr« 
Mill's  conclusion.      The  enormous  growth   of  the  deposit 


^  The  idea  thftt»  tdlez  1850,  the  iDcreaeed  supply  of  gold  r»l»ed  prjcesp  nececi- 
miilj  carried  with  it  the  belief  {m  t^e  miDd  of  the  quantity  theomt^  that  it  iniuit 
hare  passed  into  drcalalion.  Yet,  of  latep  tbe  annual  productioQ  of  gold  has  beeu 
trebled^  but  prices  do  not  rise  accordingly.  Wbj  does  the  gold  not  go  Into  cir^ 
dilation  ?  In  fa4.t,  the  tiew  gold  baa  acted  on  tbeoriea  of  prices  much  as  did  the 
deluge  of  silver  from  the  New  World  in  the  sixteenth  cetitnry.  Then,  as  tater^ 
iome  writers  failed  to  see  that  oul/  so  far  as  it  lowered  the  value  of  Ihe  standardt 
did  it  affect  prices,  whether  it  entered  Into  circnlatiou  or  not. 

^  Supra,  chap.  iTj  §  5* 


320  THE  PRINCIPLES  OF  MONEY 

currency  furnished  by  the  banks  of  the  United  States  in  die 
last  thirty  years  has  gone  on  with  a  pronounced  tendencj 
toward  lowered  prices  of  goods.  From  year  to  year,  directly 
with  the  increase  of  production  and  of  goods  to  be  exchanged, 
this  medium  of  exchange,  based  upon  goods  and  not  upoo 
money,  has  grown  in  proportion  to  the  work  to  be  done. 
This  is  a  perfectly  elastic  medium  of  exchange  ^  which  can 
come  into  existence  —  apart  from  over-trading  and  afaDonnal 
credit  —  only  because  of  transactions  in  goods.  Here  is  a 
phenomenal  increase  of  **bank  credits,"  a  very  real  addition 
to  the  media  of  exchange,  which  does  not  raise  —  has  not,  in 
fact,  raised  —  the  price  level.  The  reason  for  it  is  not  far  to 
seek.  Price  tables  give  the  quotations  for  given  units  of 
goods  (a  3rard,  a  bushel,  etc.);  but  with  the  progress  of  in- 
dustry a  given  capital  and  labor  have  produced  more  units 
than  before,  so  that  while  there  are  more  useful  goods  in 
existence,  each  unit  can  be  sold  at  a  lower  price.  If  a  j 
cotton-mill  doubles  its  product  issuing  from  the  same  oapita^lP 
and  labor,  and  halves  the  price  per  yard,  the  money  toi^fot  i 
the  doubled  product  is  no  more  than  before,  and  requires  no 
more  media  of  exchange  to  transfer  it.  But  if  the  increased 
mass  of  goods  did  have  an  increased  value,  if  the  total  aggre- 
gate wealth  of  the  community  did  increase,  as  is  well  known, 
even  then  the  increased  trade  would,  b^  modem  credit- 
devices,  create  the  needed  media  of  exchange  (which  to 
Walker  is  not  "  money  ")  exactly  in  proportion  to  legitimate 
transactions.  Therefore,  while  Mr.  Mill  is  logically  com- 
pelled to  say  that,  since  credit  is  a  medium  of  exchange,  the 
quantity  of  money  must  include  credit  in  order  to  make  the 
quantity  theory  modern,  yet  his  whole  argument  is  aside  from 
the  facts  of  our  present  commercial  life.  The  refined  system 
of  barter  created  by  modern  bankiag  has  no  more  effect  on  the 
normal  prices  of  goods  as  expressed  in  the  standard  metal 
than  primitive  barter  had.^    It  is  impossible,in  my  judgment, 

1  Cf.  C.  F.  Danbar   Deposits  as  Currency,  Qoar.  Jour.  Econ.  (1887),  pp. 
401  ff. 

2  It  will  Dot  do  to  meet  the  above  point  bj  saying  that  the  increase  of  trans- 


EXAMINATION  OF  THE  QUANTITY  THEORY       821 

to  explain  the  movement  of  prices  by  any  theory  based  on  the 
quantity  of  the  media  of  exchange, 
i^ 
§  4.  The  prices  of  goods  are,  of  course,  the  quantities  of 
the  standard  metal  for  which  they  exchange.  In  trying  to 
arrive  at  the  price  level,  or  the  evaluation  of  Enwinne- 
goods  in  the  money  metal,  by  regarding  the  gi^^oliiS^ 
money  factor  as  the  actual  media  of  exchange,  denMnd. 
thejauantity  theorist|_iiave .  boldly  dismissed  other  factors 
which  aflFect  the  value,  pf  the  money  metal.  The  bimetallic 
supporters  of  the  quantity  theory  very  strongly  urged  that 
the  demand  for  gold  in  the  arts  and  for  jewelry  and  orna- 
ments had  incre^ised  the  demand  for  gold,  increased  its 
value,  and  hence  tended  to  lower  gold  prices.  Whatever 
the  statistical  data  may  be  worth,  the  principle  on  which 
their  argument  is  based  was  valid;  they  were  right  in  claim- 
ing that  anything  which  affected  the  demand  (or  supply)  of 
gold  would,  theoretically,  have  an  influence  on  the  value  of 
the  standard  and  hence  on  prices.  Of  course,  it  admits  that 
other  things  than  the  quantity  of  money  in  circulation  affect 
price,  and  is  a  tacit  surrender  of  the  quantity  theory.  The 
non-monetary  demand  for  the  money  metal  (e.  ^.,  gold)  is 
an  essential  pMk  of  the  demand,  and  it  can  affect  the  value 
of  gold  and  ^R-prices  in  the  same  way  that  any  other  de- 
mand —  such  as  a  monetary  demand  —  can.  Whether  it  will 
perceptibly  change  prices  or  not  depends  upon  the  amount 
and  strength  of  this  demand  relatively  to  the  total  existing 
stock  (or  the  supply)  of  gold.  If  tiie  quantity  theory  be 
described  as  but  the  rigorous  application  of  the  general 
theory  of  demand  and  supply,  it  ought  to  take  account  of 

the  non-monetary  demand  for  the  money  metal. 

• 

acdoDS  has  been  so  mnch  greater  than  the  increase  of  the  circulation  that  prices 
have  fallen.  That  is  attempting  to  prore  the  quantity  theory  by  assuming  its 
raliditj.  There  are,  moreorer,  no  statistics  to  prove  that  prices  have  fallen 
because  the  "  monejr "  (whatever  that  may  mean)  in  circulation  has  been  insuffi- 
cient. If  gold  is  meant,  the  quantity  of  it  has  not  been  insufficient,  so  far  as  new 
prodoction  goes. 

21 


822  THE  PRINCIPLES  OF  MONEY 

§  5.  It  has  been  asserted  with  much  dogmatic  asperitjr 
that  the  quantity  theory  should  not  be  attacked  statisti- 
The  qiuuititj  cally,  to  scc  if  it  will  explain  the  facts,  because 
correctstott  ^^  ^  ^^7  ^  Statement  of  the  general  principle 
mmnd  wilr  ^^  demand  and  supply  in  its  particular  applka- 
suppijr.  tion  to  money  and  prices.^    While  inclined  to 

admit  the  undesirability  of  an  attempt  to  disprove  the  law 
of  demand  and  supply  by  statistics,  I  may  yet  be  permitted 
to  show  that  what  is  called  a  demand  for  goods  is  n&t  a 
demand  at  all,  when  made  synonymous  with  the  quantity  of 
money  in  circulation;  and  that  such  a  ^demand*'  does  not 
have  the  effect  attributed  to  it  by  the  quantity  theory  of  an 
influence  decisive  on  prices.  What  is  the  demand  for  goods 
which  compared  with  the  supply  of  goods  affects  tbeir 
prices?  According  to  the  quantity  theory,  it  is  the  quantity 
of  ^^  money  "  (however  that  may  be  defined)  actually  used  as 
an  offer  for  goods;  or  the  media  of  exchange  (including 
credit  according  to  Mill)  by  which  the  goods  are  in  fact 
transferred.  According  to  General  Walker,  bank  checb 
and  similar  devices  would  have  no  influence  on  prices,  he 
believing  that  prices  fixed  elsewhere,  by  actual  passage  of 
money  from  hand  to  hand,  would  determine  the  rate  of  ex- 
change for  the  goods  transferred  by  banking  dttrices ;  that  is, 
even  in  the  mind  of  General  Walker,  in  thJ^  credit  opera- 
tions, price  is  fixed  antecedent  to  the  exchange  process.  If 
the  few  cases  in  which  goods  are  exchanged  only  by  passage 
of  the  money  determine  the  prices  for  all  other  goods  not  so 
exchanged,  then  we  have  demand  for  goods  defined,  not  as 
the  demand  for  all  goods  in  the  market  waiting  to  be  ex- 
changed, but  the  abbreviated  demand  for  a  few  goods,  for 
which  persons  in  retail  trade  or  in  provincial  regions  are 
disposed  to  present  actual  money.  A  demand  for  goods,  in 
this  sense,  as  a  force  determining  the  general  price  level  of  a 
country  seems  to  be  quite  too  attenuated  to  meet  the  require- 
ments of  the  problem.  While  it  is  admitted  that  "demand" 
for  goods  may  have  an  influence  on  their  prices,  one  is  not 

1  F.  A.  Walker,  Quar.  Jour.  Econ.,  July,  1895. 


EXAMINATION  OF  THE  QUANTITY  THEORY   828 

willing  to  have  general  demand  parodied  in  the  above  foshion ; 
nor,  as  I  have  already  tried  to  show,  is  it  correct  to  define 
the  demand  for  goods  as  the  quantity  of  the  media  of  ex- 
change by  which  goods  are  in  fact  transferred. 

Those  who  deny  the  validity  of  the  quantity  theory,  then, 
cannot  by  any  stretch  of  the  imaginatio  be  regarded  as  hav- 
ing denied  the  principle  of  demand  and  supply.  ^They  have 
accepted  the  fundamental  principle,  and  have  rejected  the 
theory,  simply  because  it  seemed  to  them  inconsistent  with 
the  principle."  ^  In  the  next  chapter,  in  which  the  construc- 
tive theory  of  prices  is  presented,  it  will  be  found  that  the 
principle  of  demand  and  supply  for  both  the  standard  metal 
and  for  goods  has  been  fully  recognized. 

§  6.  In  what  sense,  then,  can  we  speak  of  prices  being  ^ 
determined  by  demand  and  supply?  It  was  a  general  prin- 
ciple laid  down  by  Mr.  Mill  that  the  values  of  goods  de- 
termined by  the  laws  of  value  under  conditions  of  barter 
remained  wholly  unchanged  on  the  introduction  of  a  mone- 
tary rigime;  the  only  new  problem  was  the  relation  of  goods 
to  money.  That  is,  there  are  unquestionably  some  general 
forces  regulating  the  values  of  goods  (including  gold,  which 
is  a  commodity),  that  are  of  general  application  and  not 
solely  applicable  to  the  particular  case  of  value,  called  price, 
—  which  is  the  value  of  a  money  metal  relatively  to  all  other 
goods. 

The  distinction  between  particular  demand  and  supply  and 
general  demand  and  supply  should  be  kept  in  mind.     In  the 
first  case,  any  one  article  may  change  in  value        . 
relatively  to  ai^iother,  or  to  all  others,  because  of  numd  and 
fluctuations  iA  the  supply  of,  or  demand  for,  that  *"^^  ^' 
particular  t&ng;  and  if  gold  be  supposed,  for  argument,  to 
be  unaffected,  these  changes  in  value  will  be  accurately  re- 
corded in  terms  of  gold  (as  a  common  denominator),  that  is, 
in  the  price  of  this  particular  article  and  in  the  prices  of  the 

1  W.  C.  Mitchell,  Quantitj  Theory  and  the  Valae  of  Money,  Jour.  PoL 
Econ.,  Much,  1896,  p.  141. 


324  THE  PRINCIPLES  OF  MONEY 

other  goods  with  which  it  is  compared.     In  the  second  case, 
an  increase  of  demand  for  all  goods  can  arise  only  from  a 
General d         general  increase  of  ttie  supply  of  all  goods;  gen- 
muid  and         eral  supply  and  general  demand  are  identical  phe-  ^ 
•nppy-  nomena  seen  only  from  different  sides.  ^    Each 

producer  has  more  goods  to  offer  as  a  demand,  but  each  pio-* 
ducer  has  this  increased  demand  only  as  he  has  increased  his 
supply. 

A  general  demand  for  all  goods  cannot  economically  be 
separated  from  a  general  supply  of  all  goods;  and  by  tbe 
relative  (i.  e.,  special)  play  of  demand  andsup- 
mand  based  ply  between  particular  commodities  the  relative 
on  goods.  values  and  prices  of  each  of  the  goods  constitut- 
ing the  general  supply  are  ascertained.     How,  then,  can  we 

^  speak  of  a  general  demand  for  goods  arising  from  the  side  of 
money  ?  That,  in  truth,  is  only  a  phantom  demand*  a  fig- 
ment of  the  imagination.  The  real  demand  arises  from 
goods,  and  the  fact  that  the  particular  value  of  each  article 
is  expressed  in  money  (t.  «.,  by  its  price)  does  not  affect  the 
character  of  the  demand;  nor  is  the  character  of  the  demand 
influenced  by  goods  being,  through  a  medium  of  exchange, 
presented  temporarily  in  terms  of  a  standard  money.  X  is 
exchanged  for  money ;  then  the  money  is  given  for  Y.  The 
real  exchange  is  of  X  for  Y ;  the  mediation  of  money  has  no 
true  effect  on  the  process  of  evaluation  between  X  and  Y; 
it  is  used  simply  as  a  convenience. 

The  question  of  price  —  in  spite  of  the  statement  that  we 
are  dealing  with  general  and  not  with  particular  prices  —  is 
Priceacnse       Unmistakably  a  case  of  particular  demand  and 

'^  deSTandand      s^Pply;  the   case   of  the   relation   between  one 
supply.  article  chosen  as  a  money  standard  and  all  other 

goods.  The  theoretical  problem  is  simplicity  itself.  Any- 
thing which  can  alter  the  ratio  of  exchange  between  the 
money  commodity  and  all  other  goods  will  affect  the  price 
level.     Then,  in  studying  the  value  of  money,  how  is  it  that 

1  For  this  elementary  proposition,  cf.  J.  £.  Caimes,  Leading  Prindplet  of 
Political  Economy,  chap.  ii. 


EXAMINATION  OF  THE  QUANTITY  THEORY       326 

we  are  supposed  to  be  concerned  only  with  general  prices  ? 
The  answer  is  simple:  influences  operating  only  on  the  side 
of  the  money  commodity,  and  which  have  power  enough 
to  raise  or  lower  the  value  of  it,  will  —  if  forces  acting  on 
&e  side  of  goods  remain  unchanged  —  lower  or  raise  prices, 
generally.     The  only  important  point  in  such  a  case  is  that 
tke  disturbing  cause  of  prices  is  referable  to  one  acting  solely 
on  the  money  commodity  itself.     This  does  not  oblige  us  to 
tbink  that  prices  can  be  influenced  only  by  causes  affecting  the 
money  metal  itself;  far  less  does  it  require  us  to  believe  that 
^vemust  pay  attention  only  to  that  part  of  the  standard  com- 
modity which  happens  to  be  used  as  a  medium  of  exchange. 

The  quantity  theory  errs  in  wrongly  applying  the  general 
principles  of  demand  and  supply;  it  sets  up  a  fictitious  theory 
of  demand  quite  independent  of  the  goods  on  Error  of  qii«n- 
which  the  demand  is  based ;  it  uses  the  symbols  to'demijid  for 
of  the  values  exchanged,  that  is,  the  media  of  "»<««y- 
exchange,  as  the  initial  force  in  determining  the  relative 
values  of,  goods  and  gold.  The  error  in  the  quantity  theory 
also  lies  in  not  properly  defining  the  demand  for  money.  To 
say  that  the  demand  for  money  is  the  total  mass  of  goods  to 
be  exchanged  (allowing  for  the  number  of  times  each  article 
changes  hands)  is  far  from  correct.  The  demand  for  the 
money  commodity  arises  from  both  non-monetary  and  mone- 
tary wants;  and  the  monetary  demand  for  it  as  a  medium  of 
exchange  has  almost  no  connection  whatever  with  the  total 
mass  of  transactions ;  for  the  amount  of  the  standard  com- 
modity required  by  a  community  as  a  medium  of  exchange 
varies  with  their  habits  of  trade,  their  readiness  to 
economize  the  use  of  the  valuable  standard,  their  banking 
development,  their  general  commercial  intelligence,  their 
confidence  in  their  fellows,  the  stability  of  the  government, 
the  prevalence  of  law  and  order,  the  conditions  of  business, 
and  many  such  considerations.  In  fact,  since  the  largest 
commercial  operations  and  the  greatest  development  of  trade 
are  usually  found  in  company  with  a  tendency  to  save  un- 
necessary risks  and  expenses,  it  is  practically  true  that  where 


326  THE  PRINCIPLES  OF  MONEY 

the  greatest  amount  of  exchanges  are  going  on,  theie  yoa 
will  find  relatively  the  least  quantity  of  the  standard  monej 
of  the  land  in  actual  use  as  a  medium  of  exchange.  Instead 
of  the  quantity  of  standard  money  needed  for  exchange  risiog 
in  any  set  proportion  to  the  increasing  amount  of  transactioM, 
in  modem  progressive  countries  it  is  usually  found  that  the 
tendency  is  rather  the  other  way;  and  the  statesmen  iriio 
ignorantly  advertise  their  per  capita  circulation  as  kiger 
t^n  that  of  other  countries  are  unwittingly  pubUshing  to 
the  world  the  backward  condition  of  their  monetaiy  and 
business  development. 

/  §  7.  Lastly,  the  quantity  theory  does  not  explain  the  facti. 
Myself  once  a  believer  in  this  Ricardian  theory,  I  was  in  time 
led  to  question  its  truth  because  it  gave  no  solution  of  practi- 
cal problems  of  price.  From  the  point  of  view  of  eoonome 
method,  this  inefficiency  of  an  accepted  dogma  to  explain  tlie 
facts  would  be  the  first  to  be  established  as  a  ground  f(ff  dia- 
crediting  its  premises  and  the  reasoning  on  which  it  waa 
reached.  Since,  however,  both  the  premises  and  the  reaaon- 
ing  appeared,  in  my  opinion,  unsound,  it  seemed  advisable, 
for  purposes  of  exposition,  to  treat  them  first,  and  afterwuda 

,  to  discuss  the  inevitable  dissonance  between  the  theory  and 
the  facts. 

There  would  not  be  space  in  the  proper  limits  of  this  vol- 
ume to  introduce  here  a  statistical  examination  of  many  cases 
where  data  can  be  found  upon  prices  and  the  quantity  of 
money  to  show  the  discrepancy  between  the  theory  and  experi- 
ence.    Indeed,  as  has  been  mentioned  by  Mr.  Marshall,^  the 

,  statistics  to  support  the  quantity  theory  itself  are  wanting. 
The  day  of  trustworthy  statistics  on  prices  and  money  has, 

1  While  Mr.  Marshall  thought  that  we  hare  fairly  good  statistics  in  regard  to 
the  mass  of  goods  on  sale,  he  beliered  that  we  had  no  statistics  whateTer  npon  the 
arerage  number  of  times  each  article  changed  hands  during  the  year,  or  upon  the 
average  number  of  times  that  each  coin,  or  each  element  of  the  currency,  changei 
hands  during  the  year.  And,  also,  on  the  proportion  which  purchases  otherwise 
than  by  currency  bear  to  purchases  by  means  of  currency,  he  holds  that  we  han 
no  trustworthy  statistics.    Op.  cit.,  Q.  629. 


EXAMINATION  OF  THE  QUANTITY  THEORY        827 

indeed,  but  recently  dawned.  But  taking  the  available  data 
at  hand  for  the  United  States,  one  would  have  no  hesitation 
in  saying  that  in  no  single  case  examined  has  there  been 
any  proportion  whatever  between  the  movements  of  prices  ' 
and  the  quantity  of  the  circulation.  Certainly,  no  investi- 
gator who  might  have  approached  the  subject  inductively, 
from  a  desire  to  arrive  at  the  principles  regulating  prices 
solely  by  studying  the  data,  could  conceivably  have  arrived 
at  the  quantity  theoiy.  It  has  had  its  origin  in  pure  deduc-  § 
tion,  unconfirmed  by  statistical  inquiry. 

Taking  two  different  tests  of  the  relation  of  the  quantity 
cxf  the  circulation  to  the  level  of  prices  in  the  United  States, 
— which  are  typical  of  many  others,  — it  will  be  Quantity 
found  that  the  quantity  theory  and  the  facts  are  ^tmWn 
strangely  at  variance.  If  a  cause  be  announced  ^«  ^^ 
in  theory  as  producing  certain  effects,  and  yet,  when  tested 
by  experience,  the  effects  never  follow  the  supposed  cause, 
certainly  no  one  is  under  obligation  to  regard  that  fictitious 
arrangement  of  cause  and  effect  as  an  established  economic 
principle.  To  be  sure,  it  will  be  said  that  the  quantity  of 
money  as  compared  with  the  money  work  regulates  prices, 
other  things  being  equal;  but  if  the  ^^ other  things  "  are  so  im- 
portant that  changes  in  the  quantity  of  circulation  on  a  marked 
scale  are  not  followed  by  corresponding  changes  in  the  price 
level,  then  that  is  equivalent  to  proving  that  the  **  other 
things "  are  of  more  influence  than  the  quantity  of  money. 
As  will  be  shown  in  the  following  chapter,  no  one  doubts 
that  an  increased  supply  of  the  standard  metal  would  affect 
its  value,  and  hence  affect  prices ;  but  we  shall  see  that  the 
quantity  of  the  metal  is  but  one  of  several  factors  affecting 
price. 

The  first  test  we  shall  take  is  that  of  the  movement 
of  prices  in  the  United  States  from  1860  to  1891,  during 
a  part  of  which  period  (1862-1879)  there  was  a  paper 
standard  of  prices  (an  inconvertible  paper  money). ^    During 

^  The  facts  are  here  taken  from  Misa  S.  M.  Hardy's  paper  on  "  The  Qnanlity 
of  Monej  and  Prices,  1860-1891,"  Jonr.  Pol.  Econ.,  March,  1895. 


828  THE  PRINCIPLES  OF  MONEY 

relatively  short  periods,  so  brief  that  serious  changes  in  tiie 
trade  and  transactions  of  the  country  could  not  have  taken 
place,  we  find  violent  fluctuations  of  prices  out  of  all  cQm>, 
spondence  to  the  increase  or  decrease  in  the  quantity  of  tbe 
circulation. 

Assuming  the  volume  of  the  currency  in  1860  as  100,  the 
amounts  of  the  currency  in  subsequent  years  down  to  1900 
Prices  in  the  ^""^  expressed  in  percentages  of  the  amoont  in 
United  States,  I860;  and  the  line  BB  in  Diagram  XVII  is 
drawn  to  represent  the  respective  changes  in  the 
circulation  thus  derived.  With  this  line  expressing  the 
quantity  of  money  in  circulation  is  contrasted  another  line 
A  A  showing  the  movement  of  prices  in  the  United  States, 
as  appears  from  the  tables  published  in  the  Aldrieh  Senate 
report.  It  will  be  observed  that  there  is  no  correspondence 
^  whatever  between  the  quantity  of  the  circulation  and  tbe 
level  of  prices. 

If  it  be  objected,  as  was  done  by  General  Walker,^  that  this 
study  took  no  account  of  the  growing  demand  for  money 
The  per  eapUa  causcd  by  an  increase  of  population,  it  will  be 
faiucj.  g^QQ  Ij^  ^i^Q  diagram  that  even  the  per  capita 

circulation  (CO)  bears  no  relation  whatever  to  the  movement 
of  prices. 

On  the  face  of  the  statistical  examination,  then,  it  appeara 
only  too  plainly  that  prices  seem  to  have  no  direct  connection 
with  the  changes  in  the  quantity  of  money  in  circulation. 
But  with  justice,  it  may  be  claimed  by  the  quantity  theorists 
that  it  has  never  been  urged  that  prices  fluctuate  solely  ac- 
cording to  the  changes  in  the  amount  of  the  circulation,  but 
according  to  the  relation  existing  between  that  amount  and 
the  mass  of  transactions.  Even  if  the  circulation  has  in- 
creased, and  yet  a  fall  of  prices  has  ensued,  of  course  that 
implies  to  them  an  unusual  increase  in  money  work ;  that  the 
fall  of  prices  has  been  due  to  a  changed  proportion  between 
the  quantity  of  money  and  the  work  put  upon  it. 

In  an  inductive  examination  of  the  relation  of  prices  to  the 

^  Qaar.  Joor.  Econ.,  July,  1895,  pp.  375  ff. 


BOO 

gill 

^              §             i 

m 

f  is 
\\\ 

3|5 

11! 

1,1 

"^ 

\ 

-<S^ 

^ 

x*^ 

V 

\> 

s>. 

R99 

^ 

V 

/ 

Y 

/ 

/ 

B 

/ 

^f 

/ 

/ 

/ 

/ 

^\ 

\ 

1 

\ 

y 

\ 

B7G 

// 

/ 

/ 

f 

i 

I 

p 

l 

\ 

s 

\ 

> 

Q 

BAO 

\ 

\ '"' 

\ 

i 

\ 

N, 

^ 

\ 

"^ 

/" 

\ 

1 

V 

QSfi 

/ 

^ 

/ 

/ 

/ 

\ 

■^ 

s 

\ 

\ 

r 

1 

B90 

\ 

\ 

k 

1 

\ 

1 

/ 

\ 

ROn 

f 

/ 

/ 

{ 

\ 

\ 

\ 

\.^ 

\ 

I 

ly 

I 

\  v_v_ 

J 

/ 

/ 

1  i\ 

\     \     \    \ ^^ 

tyr 


money 
lemembei'ed  that  it  is  im possible  to  test  accurately  tliat  one  of 
the  factom  which«  according  to  the  quantity  theory^  affects 
prices,  —  namely,  the  money  work.  If  the  clear-  Amount  of 
Ing-house  returns  be  taken  as  a  proof  of  the  in-  ^""^^^  ^""^^^ 
crease  in  the  amount  of  goods  to  be  exchanged,  —  as  they 
certainly  are  perfect  evidence  on  that  pointy  —  these  figures 
forbid  all  inferences  that  such  an  increase  of  money  work 
constitute  an  increasing  demand  for  money  as  a  medium  of 
exchange  (except  so  far  as  the  same  percentage  of  bank 
resources  on  a  larger  amount  of  deposits  requires  an  abso- 
lutely larger  sum  of  specie  in  reserve).  As  evidence  upon  the 
effect  of  an  increasing  demand  for  money  these  figures  are 
unjortunsteiy  selected ;  since  they  are  nothing  more  nor  less 
than  the  record  of  the  vaat  amount  of  transac- 
tions  (varying  from  S80,000  to  $100^000  millions,  ck»ri(iguAi 
or  more)  performed  by  the  deposit  currency  as  a 
medium  of  exchange,  without  the  use  of  anything  more  than 
a  small  fraction  of  specie*  Instead  of  being  good  testimony 
to  show  an  increased  demand  for  money,  they  tend  to  empha^ 
size  the  enormous  proportion  of  exchanges  accomplished  by 
devices  which  avoid  the  use  of  the  metal  in  which  the  prices 
of  all  these  goods  are  expressed. 

But  there  is  no  evidence  whatever  to  show  that  the  money 
work,  or  demand  for  money,  has  increased  out  of  proportion  f 
to  the  increase  in  the  circulation.  On  the  contrary,  the  evi- 
dence seems  to  turn  the  other  way.  To  cover  this  point,  bo 
far  as  it  can  be  shown  statistically.  Dr.  W,  C.  Mitchell  made 
a  study,  from  which  he  reached  the  following  conclusions  ^  for 
the  period  from  1860  to  1891: 

L  The  total  increase  from  1860  to  1891  in  the  amonnt  of 
goods  to  be  excbanged  has  been  from  two-fold  in  agriculture  to 
a  HtUe  less  thfein  five- fold  in  manufactures 

2 


^  SUtJitioal  (JTi- 

The  abolition  of  middlemen,  and  similar  im-   deuce  u  to  iiie 


pfovements,  have  distinctly  diminiebed  the  number 


money  wprk. 


1  QHft&tltj  Tbeoff  of  the  Valae  of  M<?i]«j,  Jour.  Tot  Ecoo.,  Mafch;  1896,  p.  1G4. 


380 


THE  PRINCIPLES  OF  MONEY 


of  times  that  the  same  goods  change  hands,  and  lessened  the 
volume  of  transactions  to  that  extent. 

3.  Credit  deposits  have  increased  eleven  times. 

4.  The  ''  circolation  "  has  increased  three  and  one  half  times. 

5.  If  there  were  100  units  of  money  work  in  I860,  there  were 
at  the  most  500  in  1891.  In  1860,  the  circalation  formed  S3 
per  cent  of  the  total  media  of  exchange  (including  the  deposit 
currency) ;  in  1891  it  formed  33  per  cent.  The  work  performed 
by  ''  money  "  in  1860  was  63  per  cent  of  100  units,  or  63  nnits; 
in  1891  it  was  33  per  cent  of  500  units,  or  165  units.  Then  the 
work  done  by  money  expressed  in  units  has  increased  about 
two  and  two-thirds  times.  But  the  actual  money  in  circnUtkm 
increased  three  and  one-half  times. 

Therefore  it  cannot  be  said  that  the  decline  in  the  price 
level  from  1860  to  1891  can  be  assigned  to  an  increase  of  Ute 
{  work  put  upon  money  out  of  proportion  to  the  increase  in 
'  the  money  itself.     In  any  case,  whatever  the  volume  of 
business,  the  media  of  exchange  ought  to,  and  always  will,    * 
be  expressed  in  sums  equal  to  the  goods  they  transfer. 
The  second  test  to  be  given  here  tells  equally  against  die  ^ 
practical  value  of  the  quantity  theory.     The  fd- 

T*ri<»A«  Anil  Ji  */  *f 

Circulation  in     lowiug  table  shows  the  monetary  and  price  changed 
1872-1880.         j^  ^j^^  period  covering  the  crisis  of  1873: 


[Figures  in  millions 

;  00,000  omitted.] 

^ 

Tew. 

Total  AnniuJ 
Clearinn  at 
New  York. 

Total  Credit 
Depositain 

Prirmte 
Depodtain 

NaUooal 
Bankaonly. 

▼olmiMof 

Prioai  Index 
Noa.lorj«tf. 

1872 

$33,844.3 

$738.9 

$628.9 

$738.3 

$138.8 

1873 

35,461.0 

750.0 

640.0 

751.8 

137,5. 

1874 

22,855.9 

861.3 

638.8 

776.0 

133.b 

1875 

25,061.2 

1,166.4 

679.4 

754.1 

I27i 

. 

1876 

21,597.2 

1,146.2 

666.2 

727.6 

1W.2 

1877 

23,289.2 

1,100.4 

630.4 

722.3 

U0.9 

& 

1878 

22,508  4 

1,081.4 

668.4 

729.1 

101.3 

1879 

25.178.7 

1,133.8 

736.9 

818.6 

96.6 

1880 

37.182.1 

1,389  3 

887.9 

973.3 

f06.9 

^  Cf.  Report  Comp.  of  Currency,  1883,  p.  cxxviii,  for  years  since  1874. 
For  other  than  national  banks,  these  figures  for  1872-1874  are  Dot^tis£B4p7'' 


1 


EXAMINATION  OF  THE  QUANTITY  THEORY        331 


On  the  6ide  of  money  work,  the  total  annual  clearings  at 
Kew  York  give  a  fairly  good  idea  of  the  inevitable  relative 
falling  off  in  the  amount  of  transactions  which  was  to  have 
been  expected  in  the  period  following  a  severe  commercial 
crisis.  The  mass  of  exchanges  during  the  lowest  years  of 
the  depression  from  1874  to  1878,  inclusive,  showed  a  de- 
crease of  about  one-third-  This  may,  with  fairness,  be  taken 
as  a  general  indication  of  the  extent  to  which  the  general 
volume  of  exchanges,  of  all  sorts,  decreased.  So  far  as 
it  affords  any  evidence,  the  table  indicates  that  the  money 
work  put  upon  the  circulation  was  largely  reduced ;  and  tliis 
agrees  with  general  personal  observations  during  that  period. 
But  now,  passing  to  the  other  factor,  the  quantity  of  money 
in  circulation,  we  find,  as  was  to  have  been  expected  from  a 
knowledge  of  our  monetary  history,  practically  no  change, 
certainly  nothing  in  the  nature  of  a  decrease.  According  to 
the  old  quantity  theory,  an  ascertained  contraction  of  the 
money  work,  combined  with  a  maintenance  of  the  existing 
demand  for  goods  in  the  form  of  the  volume  of  the  circula- 
tion, should  have  produced  a  rise  of  prices.  Unfortunately 
for  this  theory,  the  last  column  of  the  table  discloses  a  fall 
of  prices  of  about  one-fourth*  Clearly  the  quantity  theory, 
on  the  face  of  things,  gives  no  explanation  of  the  movements 
of  price  in  such  cases. 

Obviously,  by  those  who  include  credit  in  the  quantity  of 
money,  it  will  be  objected  that  the  fall  of  prices  above  shown 
was  due  to  the  contraction  of  credit  and  the  sub-  ^^^^^  ^^ 
traction  of  "purchasing  power*' from  goods  In  *^'^**- 
general.  Such  a  claim,  of  course,  removes  the  discussion 
to  tiie  action  of  credit  on  prices.  The  only  fall  in  prices  due 
to  credit  was  that  arising  from  the  collapse  of  abnormal,  or 
false,  credit,  and  the  return  to  norma)  credit,  Tliis  was  a 
subtraction,  not  of  real,  but  of  fictitious  purchasing  power 
due  to  over-trading*  While  some  violent  fluctuations  of 
market  price  may  thus  be  accounted  for,  especially  in  the 
period  of  active  liquidation,  it  remains  true  that  normal 
prices,  on  which  goods  can  be  continuously  produced,  could 


882  THE  PRINCIPLES  OF  MONET 

not  have  been  permanently  affected  merely  by  the  operations 
of  credit.  The  serious  fall  of  prices  in  the  seven  years  from 
1878  to  1880,  and  the  subsequent  low  level  maintained  ever 
since,  must  have  been  due  to  other  than  temporary  causes 
affecting  market  prices;  the  causes  must  have  been  such  as 
to  affect  the  permanent  and  normal  values  of  goods. 

§  8.  Whether  or  not  the  quantity  theory  is  true,  is  not 
merely  a  question  of  dialectics.  If  false,  it  should  not  be 
Relation  of  appealed  to  as  a  reason  for  legislation.  For 
^antity  docados  —  or  so  long  as  the  money  question  has 

Amerioan  been  a  political  issue  in  the  United  States — this 
theory  has  been  assumed  as  the  bed-rock  upon 
which  arguments  have  been  based  in  favor  of  particular 
^  remedies  for  the  ills  of  the  nation.  The  consequences  of 
that  which,  in  my  judgment,  is  an  unproved  and  Use 
doctrine,  may  be  briefly  summarized  as  follows: 

1.  The  prevalent  belief  of  large  masses  of  men  that  prices 
may  be  regulated  by  increasing  or  diminishing  the  quantity  of 
Eqaalization  money  in  circulation.  Among  those  who  propoM 
of  property.  ^  ^ork  through  the  action  of  the  state,  the  tiieary 
provides  a  process  by  which  equalization  of  property  between 
debtors  and  creditors  may  be  accomplished.  In  truth,  an  in- 
crease merely  of  the  media  of  exchange  (such  as  convertible 
paper,  like  our  greenbacks),  which  did  not  change  the  value 
and  stability  of  the  standard  in  which  prices  are  expressed, 
would  not  affect  prices.  What  many  persons  have  in  mind— at 
least  in  this  country  —  when  they  think  that  an  increase  of 
money  will  raise  prices,  is  probably  some  action  which  woold 
depreciate  the  standard  itself,  such  as  the  issue  of  greeubacb 
during  the  Civil  War,  when  prices  rose  so  strikingly ;  but  that 
was  a  case  where  inconvertibility  had  more  influence  on  the 
value  of  the  standard  than  the  quantity  issued. 

2.  Another  consequence  appears  in  the  belief,  embedded 
in  the  thinking  of  many  capable  men,  of  the  present  and 
Contraction  past  generation,  that  any  contraction  of  the  "  car- 
bogie,  rency  "  means  an  inevitable  fall  of  prices  and  gen- 
eral disaster  to  the   business   of  the  country.     This  opinioD 


EXAMINATION  OF  THE  QUANTITY  THEORY       388 

popularly  held,  without  any  attempt  to  contrast  the  quan- 
tity of  the  circulation  with  the  amount  of  transactions  (or 
the  money  work).  Here  the  two-sided  character  of  the  quantity 
theory  is  overlooked,  and,  for  all  practical  purposes,  prices  are 
r^^arded  as  dependent  solely  on  the  one  factor,  the  volume  of 
the  circulation.  This  attitude  was  so  common  in  the  years 
from  1865  to  1878  that  it  reversed  the  former  policy  of  our 
country  on  paper  money ;  ^  and  its  influence  is  still  dominant 
in  the  minds  of  most  party  leaders.*  When  there  dawns  on 
the  public  the  idea  that  the  media  of  exchange  can  vary  in 
amount  without  practically  touching  the  value  of  the  standard 
at  all,  and  hence  without  any  effect  on  general  prices,  we  may 
look  forward  to  a  more  enlightened  policy  in  regard  to  our 
monetary  system. 

8.  From  the  assumption  that  a  fall  of  prices  would  be  a  dis- 
aster, has  arisen  a  common  belief  that  it  might  be  an  ideal 
arrangement,  to  maintain  undisturbed  a  general  unchangod 
level  of  prices.  As  a  means  to  the  desired  end,  '•^•^  ®'  prkm. 
f  of  course,  it  is  expected  that  the  volume  of  circulation 
I  should  be  regulated  in  such  a  way  as  to  keep  prices  on  the  same 
old  level.  This  proposal  for  solving  the  difficulty  between 
debtors  and  creditors,  arising  from  changes  in  the  standard  of 
4>rices  and  contracts,  is  chargeable  with  a  failure  to  distinguish 
(between  the  functions  of  a  medium  of  exchange  and  of  a  stand- 
ard. In  order  to  maintain  a  given  level  of  prices,  operations 
would  have  to  be  directed  upon  the  standard,  and  its  world 
value,  and  not  upon  the  volume  of  the  media  of  exchange  within 
any  country. 

4.  Following  the  blind  acceptance  of  the  quantity  theory, 
there  has  arisen  in  the  United  States  an  ignorant  but  widely 
diffused  antagonism  to  the  issues  of  banks  and  to  Auitude 
the  operations  of  banking  institutions.  It  is  be-  towards  banki. 
lieved  that  legislation,  giving  banks  the  right  to  issue  notes, 
conveys  to  them  a  control  over  the  quantity  of   the  circula- 

1  See  the  Historj  of  the  United  States  Notes,  in  the  Report  of  the  Monetary 
Commission  of  1898  (hidianapolis),  pp.  398-444. 

*  This  fallacj  often  takes  the  form  of  basing  the  prosperity  of  the  country  on 
a  large  ptr  capita  drcolation.  As  if  a  more  expensive  medium  of  exchange  were 
an  adTaatage. 


334  THE  PRINCIPLES  OF  MONEY 

tion,  and  thus  enables  them  to  raise  or  depress  prices.  To  be 
Bare,  this  point  of  view  has  been  fostered  by  political  dema- 
gogues for  selfish  purposes ;  but  it  has  got  support  by  frequent 
quotations  from  economic  authorities  who  advocate  the  quantity 
theory.  If  the  truth  were  really  known,  the  banks  are  provid- 
ing only  a  medium  of  exchange  (whether  they  use  the  deposit 
or  the  issue  function)  which  has  no  perceptible  influence  on 
the  standard  of  prices ;  ^  and  if  that  agency  were  most  highly 
regarded  which  adds  most  to  the  volume  of  the  media  of  ex- 
change, then  the  banks  should  be  the  most  popular  institotioDS 
in  the  country. 

1  The  inflnence  of  credit  giyen  by  banks  on  pricat  ia  quite  another  qpuf&tm. 
See  iuprOf  chap.  iy. 


THE  TRUE  THEORY  OF  PRICES  885 


CHAPTER  IX 

THE  TRUE  THEORT  OF  PRICES 

AH  great  adTUices  in  sdence  are  inYariably  marked  bj  their  tendency  towards 
■implification;  althongh  arrired  at  bj  alaborions  progreae  tbrongh  complicar 
tion  and  difllcolty,  their  peculiar  merit  is  to  present,  what  was  previously 
confused,  in  an  orderly  and  simple  form,  and  to  render  resnltSy  attained  only 
by  a  series  of  laborious  and  painful  thought,  so  clear  and  intelligent,  that 
erery  one  wonders  where  the  difficulty  was,  and  in  what  the  discorery  con- 
sists. —  Lord  Oybbstonb,  Remarks  en  the  ManagtmmU  of  the  Circulation,  p.  61. 

§  1.  Price  being  the  quantity  of  the  money  commodity 
for  which  a  given  article  will  exchange,  and  the  general  level 
of  prices  being  the  quantity  for  which  all  the  articles  quoted 
will  exchange,  the  constructive  problem  before  us  is  to  state 
the  causes  which  determine  the  exchange  value  of  the  money 
commodity  relative  to  one  or  more  goods.  Price  is  not 
absolute ;  it  is  relative ;  it  issues  only  from  a  comparison 
between  two  or  more  articles.  For  convenience,  gold  will  be 
regarded  as  the  money  commodity ;  since  what  will  be  found 
true  in  general  of  one  metallic  standard  of  price  will  be 
found  true  of  another. 

From  the  definition  of  price  —  which  is  only  a  particular 
case  of  value  —  it  follows  that  any  force  whatever  which 
affects  either  side  of  the  price  ratio  —  either  gold  Forces  affect- 
or  goods  —  will  affect  price.  As  between  gold  ^KP"ce- 
and  steel,  for  example,  their  exchange  value  and  the  price  of 
steel  will  vary  with  changes  in  the  demand  for,  or  cost  of  ac- 
quisition of,  either  gold  or  steel.  We  may  state  all  the  possi- 
ble sets  of  forces  affecting  the  price  of  any  one  article  like  steel 
as  follows : 

A.  On  the  side  of  gold : 

1)  Lowered  expense  of  acquiring,  or  increased  supply 

of,  gold. 

2)  Decrease  in  the  existing   supply  of   gold  (or 

greater  expense  of  mining). 


886  TH£  PRINCIPLES  OF  MON£Y 

8)  Increased  demand  for  gold. 

4)  Diminished  demand  for  gold. 
B.  On  the  side  of  steel : 

5)  Lowered  expenses   of    production   (or  possible 

increase  of  supply  under  competition). 

6)  Increased  expenses  of  production,  or  monopoly. 

7)  Increased  demand  for  steel  (from  owners  of  o^er 

goods). 

8)  Diminished  demand  for  steel  (from  owners  of 

other  goods). 
Clearly  enough,  the  price  of  steel  at  any  time  is  a  resultant 
of  all  these  eight  sets  of  forces :  a  lowered  expense  of  acqm^ 
ing  gold,  1),  and  a  lowered  expense  of  producing 
resultant  of  steel,  5),  wiU  Operate  against  each  other,  the  one 
many  foroas.  lending  to  raise,  the  other  tending  to  lower,  the 
price  of  steeL  Or,  for  instance,  both  1)  and  7)  would  unite 
to  raise  the  price ;  or  8)  and  5)  would  work  together  to 
lower  the  price.  At  once  it  may  be  seen  that  several  pos- 
sible combinations  of  opposing  and  co-operative  forces  maj 
be  conceived.  No  one  would  say  that  the  price  of  steel  was 
due  entirely  to  2)  and  8),  that  is,  to  the  scarcity  of,  and 
increased  demand  for,  gold  —  at  least,  no  one  with  an  under- 
standing of  price  would  be  content  with  this  explanation; 
since  there  are  several  other  factors  equally  important  in 
their  efiFects  upon  the  actual  price.  In  the  case  of  steel, 
it  may  probably  be  that  1),  8),  6),  and  7)  are  all  working 
together  to  fix  the  present  price  of  steel.  Price,  in  any  one 
case,  is  the  concrete  result  of  such  union  of  the  above  forces 
as  the  condition  of  the  arts,  the  needs  of  the  community,  the 
monetary  habits  of  the  world,  industrial  combinations  creat- 
ing monopoly,  exhaustion  of  sources  of  supply,  increase  in 
taxation,  and  the  like,  may  determine.  Circumstances  affect- 
ing gold  itself,  steel  being  supposed  constant,  may  exist  which 
would  modify  the  price  of  steel;  while,  on  the  other  hand, 
gold  being  constant,  incidents  touching  only  the  conditions 
of  producing  steel,  quite  irrespective  of  the  movement  of  gold, 
may  afEect  the  price  of  steel. 


THE  TRUE  THEORY  OF  PRICES  887 

§  2.  In  order  to  clarify  the  discussion,  it  may  be  advisable 
first  to  examine  carefully  the  general  causes  at  work  deter- 
mining the  value  of  gold,  under  the  supposition  that  the 
forces  working  on  the  side  of  goods  are  constant.  For  this 
purpose  it  is  not  necessary  to  enter  into  the  general  theory  of 
iralue,  —  on  whatever  theory  the  value  of  gold  is  explained, 
the  outcome,  as  regards  price,  must  be  ultimately  the  same. 
If,  with  one  school,  we  regard  the  value  of  gold  as  determined 
by  the  final  utility  of  the  last  accretion  got  from  the  poorest 
mine  in  operation ;  or  if,  with  another  school,  we  regard  the 
expenses  of  production  at  the  poorest  mine  as  fixing  the 
value  of  gold  in  the  long  run,  —  it  makes  no  difference.  In 
either  case  the  direct  influence  of  demand  and  supply  is 
admitted.  The  utility  school  put  the  chief  stress  on  the 
subjective  character  of  demand,  while  the  other  school  em- 
phasize the  importance  of  supply  in  relation  to  expenses  of 
production.  No  matter  what  the  theory  of  general  value,  the 
gxchange  value  of  gold  with  reference  to  goods  is  the  ques- 
tion with  which  alone  we  are  concerned. 

The  durability  of  gold  and  the  consequent  growth  of  the 
existing  stock  from  year  to  year,  and  especially  since  1850, 
•have  made  the  supply  very  large  as  compared 
with  the  annual  production ;  hence  its  value  is  less  goods  b«ng 
easily  influenced  through  rapid  changes  in  supply.  *^°* 
And  considerable  changes  in  demand  can  take  place  without 
perceptible  influence  on  its  value,  because  the  force  of  de- 
mand is  dissipated  over  the  very  large  supply  of  gold  in 
the  world.    Consequently,  it  musti  always  be  kept  in  mind 
that  changes  in  price  due  to  events  influencing  gold  itself 
(and  not  arising  from  goods)  must,  in  the  very  nature  of 
things,  be  extremely  slow  and  gradual  in  their  operation.  * 
Violent  and  rapid  changes  of  price,  on  the  contrary,  must,  in 
the  very  nature  of  the  existing  demand  and  supply  of  gold, 
be  attributed  to  causes  working  on  goods  and  not  on  gold.^ 

Whenever  we  think  of  gold  as  an  element  affecting  gold 
prices,  it  must  always  be  kept  in  mind  that  gold  is  a  com- 

1  Cf.  «i/wia,  pp.  36-41. 
S2 


888  THE  PRINCIPLES  OF  MONEY 

modity,  whose  value  is  governed  by  general  laws,  jost  as 
is  wheat.  Gold  satisfies  one  kind  of  wants,  wheat  another 
kind ;  each  has  its  own  utility.  When  great  dis- 
commoditj  coveries  of  gold  are  made,  and  there  is  a  marked 
like  wheat.  addition  to  the  supply  in  the  mining  country,  the 
marketable  possessions  of  its  people  are  thereby  increased  in 
a  way  no  different  in  effect  than  when  the  soil  yields  a  great 
harvest  of  new  wheat.  The  new  gold  is  purchasing  power 
over  other  things,  at  home  and  abroad,  just  as  wheat  is;  its 
value  at  home  and  abroad  is  settled  in  relation  to  other  things 
in  the  same  general  way  as  is  the  value  of  wheat,  and  by  the 
same  general  laws  of  value.  If  a  miner  or  a  country  has 
more  gold  than  is  needed  for  monetary  (or  non-monetaiy) 
purposes,  the  surplus  of  it  is  sold  for  other  things,  just  as  in 
the  case  of  a  surplus  of  wheat.  A  mining  country  sends  gold 
to  those  other  countries  which,  by  reasons  arising  from  the 
demands  of  business,  need  more  bank  reserves,  or  more  gold 
as  a  medium  of  exchange  (this  last  not  being  usual  in  an/ 
large  amounts,  except  in  case  of  a  change  of  standard  Ilk? 
that  of  Germany) ;  or  if  none  is  needed  for  monetary  pur- 
poses, then  it  goes  to  the  purchasers  of  plate,  of  ornaments, 
and  the  like.  If  the  supplies  of  new  gold  constantly  com- 
ing forward  are'  vast,  there  may  spring  up  new  demands  in 
some  countries  which  have  substituted  gold  for  silver  in 
their  system,  or  a  more  extended  demand  in  those  countries 
already  using  gold.  If  no  such  new  demands  arise,  if  the  mone- 
tary demand  is  satiated,  then  the  large  new  supplies  of  gold 
must  inevitably  result  in  a  fall  of  its  bullion  value  relatively 
to  other  things ;  for,  if  not  needed  for  monetary  purposes 
anywhere,  its   only  possible   destination  is  the  arts.^    If  a 

*  T.  N.  Carver,  however,  says :  "  Gold  will  distribnce  itself  between  its  two 
general  uses  in  such  proportions  that  its  marginal  utility,  or  yalue,  wiU  be  the 
same  in  each.  ...  If  too  little  gold  should  for  any  reason  go  into  arcnlation 
and  too  much  into  the  arts,  until  people  needed  coin  more  than  they  needed 
bullion,  gold  would  be  sent  to  the  mint  in  larger  quantities  until  the  equilibrium 
was  restored.  .  .  . 

"  But  to  admit  that  is  to  admit  a  quantity  theory.  To  admit  that  the  share  of 
gold  which  goes  into  the  currency  is  determined  antomaticallj  by  the  needs  of 


THE  TRUE  THEORY  OF  PRICES 


339 


stream  of  water  from  a  hose  be  turned  into  a  bucket^  when 
the  bucket  is  foil,  the  excess  of  water  will  overflow  on 
the  ground  and  spread  everywhere ;  in  like  man-  Adjufttttieot  of 
ner,  the  stream  of  new  gold  will  first  flow  into  the  ^^  i^^""*: 
circulation  and  reserves,  if  needed  there,  and  all  Ki^neury  uMt. 
additional  supplies  will  paas  into  the  arts  for  general  use. 

The  details  of  this  process  of  adjustment  are  not  diflBcult 
to  foUow.  A  lai^e  new  supply  of  gold,  either  in  the  form  of 
bars  or  coin,  would  probably  appear  first  at  the  counten*  of 
public  or  private  banks ;  the  banks  would  retain  only  that 
amount  which  was  needed  for  reserves  by  the  existing  condi- 
tions of  business*  Tliese  institutions,  or  owners  of  bullion, 
would  have  two  destinations  for  the  surplus  gold  not  needed 
for  reserves:  (1)  the  circulation  (as  a  medium  of  exchange), 
or  (2)  the  arts*  (1)  If  the  country  already  had  media  of 
exchange  other  than  gold  —  such  as  bank  notes,  deposit  cur- 
rency, and  the  like  —  sufficient  to  carry  on  existing  transac- 
tions, then  the  injection  of  the  new  gold  into  the  channels  of 
trade  as  a  medium  of  exchange  would  be  resisted  by  the  buai^ 
ness  habits  of  the  community.  If  put  into  circulation,  it 
would  not  stay  there,  —  any  more  than  did  our  surplus  silver 
dollar  pieces.  Hence  the  surplus  gold  could  not  affect  piiees 
by  being  directly  offered  against  goods  as  a  medium  of  ex- 
cha^e^  because  it  would  not  necessarily  appear  in  that  form, 
(2)  On  the  other  hand,  if  no  more  gold  were  needed  in  the 
reserves  and  the  media  of  exchange,  and  if  it  finally  went 
into  the  arts,  the  increased  supply  must  there  adjust  itself  to 
the  existing  demand  in  exactly  the  same  way  as  would  that 
of  any  other  commodity.  Gold  articles  (omitting  the  labor 
impressed  upon  them)  would  fall  relatively  to  wheat  and 
other  goods,^     Plat©  formerly  priced  at  fifty  dollars*  or  fifty 

buAtfiesa  ID  tQ  i^fnit  tbat  the  number  of  hqiU  has  ianiethuig^  to  do  irtth  the  value 
of  eiieh  unit."  Qaar.  Jour.  Econ*.  Juir,  1897,  pp.  431^32.  To  admit  that 
the  value  of  the  stajidard  cau  l>e  itidiieDcad  bj  tupplj  la  not  to  admit  the  usual 
quantitr theory  of  moneT.  In  the  ordinarj  form  of  the  dogma,  prices  are  re^- 
lAted  by  a  comparison  between  the  money  work  and  the  quantity  of  the  media 
of  exchan^. 

*  CL  Lori%  op.  cit,^  pp.  13-15. 


840  THE  PRINCIPLES  OF  MONEY 

bushels  of  wheat,  would,  for  instance,  now  exchange  for  only 
forty  bushels  of  wheat  (and  the  plate  would  be  paid  for  by  & 
check  on  a  deposit  account  based  on  wheat  thus  coined  into 
means  of  payment).    But  if  gold  plate  falls  relatively  to 
wheat,  so  would  gold  as  a  standard  of  prices ;  since,  under 
free  coinage,  nothing  bars  the  presentation  of  plate  and  bullion   ' 
to  the  mint,  or  the  melting  up  of  coins  to  go  into  the  arts. 
The  plate  could  have  been  coined  —  in  round  numbers  ~ 
into  fifty  gold  dollars ;  so  that  wheat,  owing  to  the  fall  'm 
the  relative  value  of  gold,  would  now  be  priced  at  a  rise  of 
twenty-five  per  cent.    Obviously,  such  operations  are  not 
followed  instantly  by  their  results ;  since  some  time  is  needed 
for  the  effects  to  be  worked  out.    It  is  not  at  all  neces- 
sary to  appeal  to  a  later  step,  such  as  the  actual  increase 
of  the  supply  of  the  media  of  exchange  as  compared  with 
transactions,  before  we  can  ascertain  a  fall  in  the  value  of 
gold,  as  seems  to  be  required  by  the  quantity  theory.    And 
yet  due  importance  has  been  given  in  our  demonstration 
above  to  the  operation  of  the  law  of  demand  and  supply  on 
the  value  of  gold,  which  is  the  more  influential  because  tbe 
direct  effect  of  expenses  of  production  is  masked  by  the  du- 
rability of  gold. 

We  may  then  pass  to  the  slower  effects  flowing  from  changes 
in  expenses  of  production.  In  the  mining  regions,  mor^ver, 
Evaluation  be-  between  the  newly  mined  gold  and  the  commodi- 
S"  m  min"^  ^68  needed  by  the  miner  from  the  adjacent  neigh- 
ing countries,  boihood,  there  is  an  instant  valuation  going  on, 
based  mainly  on  the  relative  expenses  of  production  of  gold  and 
of  these  commodities.  Provisions  and  similar  farm  products, 
whose  expenses  of  production  have  undergone  little  change, 
buy  a  very  much  greater  weight  of  gold  than  previously, 
because  the  exertion  and  outlay  for  obtaining  the  new  gold 
just  there  is  less  relatively  to  that  of  the  provisions.^  At  the 
mines  and  adjacent  farms  it  is  easy  to  compare  expenses,  and 

^  **  The  rise  in  price  ha«  been  most  rapid  in  commodities  produced  in  the  gold 
coantries;  having  in  these,  at  a  single  honnd,  reached  its  utmost  limit —  the  limit 
set  by  the  cost  of  procuring  gold."    Cairnes,  Essays,  p.  73. 


THE  TRUE  THEORY  OF  PRICES  841 

the  pricte  of  farm  products  rise   relatively  to  gold, 
lit  usually  happens  that  discoTeries  of  gold  are  made  by 
OBuners  in  isolated  places,  where,  in  the  beginning,  transpor- 
-tation  and  connection  with  central  markets  are  not  quick 
and  easy.    The  ability  to  dig  or  wash  out,  with  labor  and  a 
limited  capital^  more  gold  than  can  be  had  under  existing 
processes  of  agriculture  by  offering  farm  products  for  gold 
in  that  locality,  is  only  a  statement  of  the  changed  relation 
between  the  expensea  of  production  of  &rm  products  and  of 
gold.    Then  and  there  more  newly  mined  gold  is  offered  for 
bkxm  goods  than  those  goods  could  command  before  the  dis- 
oovery ;  that  offer  is  itself  a  change  of  price.    To  be  sure,  it 
may  be  said  that  this  alteration  of  exchange  ratios  between 
goods  and  gold  is  due  to  a  change  in  demand,  and  not  to  a 
tall  in  the  expenses,  of  producing  gold  at  that  spot;  but  the 
change  in  demand  is,  in  reality,  due  to  the  fact  that  the  gold 
miner  has  a  less  subjective  estimate  of  gold  because  it  comes 
to  him  with  less  sacrifice  as  compared  with  the  farm  products 
necessaiy  to  his  consumption.^    But  even  if  the  new  adjust- 
ment of  value  between  gold  and  goods  were  assignable  directiy 
to  a  changed  demand,  that  explanation  still  does  not  require 
a  leiort  to  the  quantity  theory  to  show  why  the  prices  of  farm 
products  rose.    The  value  of  the  standard  metal,  therefore, 
falls,  and  prices  rise,  first,  in  the  mining  districts,  for  very 
l^viotis  reasons  which  require  no  resort  to  the  quantity  theorjk 
^l^en,  when  gold  is  exported,  it  goes  abroad,  not  because  pric< 
have  first  risen,  but  bemuse  relative  to  other  things  gold  is 
more  easily  acquired tjprices  were  a  result  of  that  fact,  not 

1  If,  however,  the  opening  of  new  gold  supplies  had  taken  place,  even  on  a 
very  large  scale,  close  to  established  markets  for  goods  and  gold,  the  adjustment 
of  the  exchange  value  of  goods  and  gold  would  in  the  end  be  the  same,  although 
the  process  would  be  different.  In  this  case,  the  world  value  of  gold  would  be 
controUing  at  the  mines,  and  supplies  of  goods  could  be  had  at  the  usual  market 
quotations.  There  would,  then,  be  no  sudden  fall  in  the  value  of  gold  relative  to 
goods,  at  the  mines.  If  the  expenses  of  producing  gold  were  very  low,  the  miner 
would  ob^in  differential  gains  by  that  fact  until  in  due  time  the  new  supplies 
had  lowered  the  world  value  of  gold.  The  methods  by  which  this  would  take 
place,  by  gold  flowing  into  the  arts  if  the  monetary  needs  were  satisfied,  has 
already  been  explained. 


842  THE  PRINCIPLES  OF  MONEY 

the  cause  of  the  export  movement  of  gold^  Gold  was  ex- 
ported according  to  the  accepted  economic  law  of  comparative 
costs. 

In  the  non-mining  country  the  gold  costs  what  that  costs 
which  is  g^ven  for  it.  If  it  was  sent  from  the  mining  countrjr 
„   ,    .     .      because  its  value  had  fallen  there  relatively  if 

Evalaation  in  <*     ^ 

non-mining       Other  goods,  evidently  the  .importing  countiy  gets 
les.  .^  cheaper  than  before,  by  giving  less  of  her  goods 

for  gold.  This  is  the  form  in  which  a  fall  in  the  value  of 
gold  is  naturally  adjusted  to  goods  in  non-mining  countries. 
The  money  metal  having  fallen  in  value  relative  to  exports  in 
these  latter  nations,  of  course  prices  rose ;  the  rise  of  prices 
merely  registered  the  antecedent  causes  which  had  their  pre- 
vious effect  on  the  value  of  the  standard.  In  this  case,  again, 
it  is  not  necessary  to  explain  the  fundamental  change  of  prices 
by  reference  to  the  quantity  of  the  media  of  exchange.  The 
change  in  the  value  of  gold — fio  matter  by  what  steps^t,  vt^ 
fact,  spreads  over  the  commercial  world — is  itself  a  change 
in  price.  It  seems  quite  unnecessary,  then,  to  go  throogfa  s 
subsequent  process  of  comparing  the  media  of  exchange  with 
the  mass  of  transactions  in  order  to  produce  a  change  of 
prices,  or  to  find  the  cause  of  any  alteration  of  prices,  ^e 
modification  of  value  going  on  antecedently,  for  causes  exist- 
ing before  the  actual  record  of  prices  on  the  dial-plate  of 
trade,  was  the  real  price-making  process,  to  which  the  media 
*  of  exchange  afterwards  conform  as  a  matter  of  course,  or  as 
a  register  of  events.  If  the  standar^  falls  or  rises  in  value, 
of  course  prices  rise  or  fall ;  that  is  what  is  meant  by  a  fall 
or  rise  in  the  value  of  the  money  commodity. 

§  3.   For  practical  purposes,  the  value  of  gold  so  far  as  the 
elements  affecting  itself  are  concerned  is  influenced  mainly  by 
its  supply  and  demand.     In  regard  to  its  supply, 
supply  of  j^oid    it  is  of  no  consequence  to  consider  the  diminution  . 
isrega  ^^   ^^^   supply:   the  production  since   1850  has 

more  than  quadrupled  the  probable  stock  in  existence  befftre 
the  discoveries  in  Australia  and  California,  and  the  annual 


' 


production  is  now  about  treble  what  it  was  twenty  yeai^s  ago 
The  existing  stock  having  thus,  in  recent  years,  become  ^^ 
enormous  because  of  its  durability,  it  would  be  absurd  to  x, 
speculate  about  any  Influence  of  abrasion,  loss,  etc.,  in  reduc- 
ii^  the  world's  supply.  As  to  the  future  increase  of  supply 
no  one  can  say :  although  the  most  confident  prophecies  were 
made  in  the  past  by  geologists  that  the  production  of  gold 
would  be  restricted,  yet  the  product  goes  on  increasing  in  an 
unpamUeled  way  from  South  Africa,  Australiaf  our  Western 
States,  British  Columbia,  and  Alaska.  Moreover  the  cyanide 
process  of  reducing  ore  haa  cheapened  the  methods  of  extract- 
ing gold,  and  has  raade  it  profitable  to  work  poorer  grades  of 
ore  and  soil.  As  regards  the  practical  problem  of  price,  then, 
ttie  diminution  of  supply  — A,  2) — ^ranst  be  regarded  as  in 
abeyance ;  [while  the  lowered  expense  of  acquiring  gold  — 
A,  1)  —  is  the  important  existing  factor  under  supply^ 

§  4,  Passing  to  the  demand  for  gold  (still  using  it  as  typi- 
cal of  the  money  metal  )^  it  has  utility,  not  only  for  monetary 
purposes*  but  for  various  uses  in   the  arts.      As   ^ 

^  The  Tiou-jaoji^ 

Mr,  Nicholson  says ;  ^  '*  If  gold  were  no  longer  ury  demiDd 
used  for  coinage,  it  would  probably  still  possess  ^^  ^^ 
a  very  high  value  as  a  commodity/'  The  non-monetary  uses 
of  the  precious  metals  were  originally  of  such  importance,  they 
were  so  generally  desired  for  their  own  beauty  and  decorative 
qualities^  that  they  furnish  the  chief  reasons  why  these  metula 
have  been  so  generally  adopted  for  monetary  purDoaes ;  their 
intrinsic  qualities  fitted  them  better  than  any  offlier  articles 
for  use  both  as  a  standard,  and  as  a  medium  ol  exchange. 
Their  use  by  dentists,  surgeons,  and  mauufaclurers ;  the 
employment  of  gold-leaf  in  gilding  books  andr  producing 
sumptuous  architectural  effects  on  domes  and  interiors ;  their 
consumption  in  the  innumerable  forms  of  jewelry,  watches, 

^  Thcs  stock  arailablti  iu  1B50  in  eatitnatod  at  not  teas  thim  $2,000,000,000. 
The  prmlttction  of  the  la^t  fifty  jeara  lb^  in  roatid  numbers,  f7tOOD»D0O,0OO. 
Tbe  aopua]  prod  act  of  the  wadd  in  1899  wsa  $306,000,000  as  agaiiut  about 
ilOO.000.UOO  in  ISSl-lSS^. 


34' t4  THE  PRINCIPLES  OF  MONET 

^^ilate,  and  the  like;  the  accumulations  of  gold  (as  well  m 

ilver)  in  hoards,  or  by  the  people  and  potentates  of  India  aad 

^.^^^le  Orient,  in  the  form  of  idols  or  of  massive  vessels  and 

furniture, — are  some  of  the  uses  for  which  there  is  a  noD- 

monetary  demand. 

The  other  and  commonly  regarded  demand  for  the  predow 
metals  is  for  monetary  uses.  When  a  country  estaUiahei 
The  moneurj  gold  Or  silvcr  as  a  legal  standard  for  contract 
gSS  mV""'  prices  will  be  referable  to  that  metal,  and  a  demanl 
itandard.  fQj.  that  metal  is  thereby  created.  In  this  sense 
only  can  law  in  any  countiy  create  a  demand  for  a  given  metid: 
it  can  determine  to  which  of  the  precious  metals  the  given  de- 
mand of  a  people,  be  it  large  or  small,  shall  be  directed.  But 
this  demand  for  monetary  purposes  may  be  either  for  main- 
taining the  standard,  or  for  providing  a  medium  of  exchange 
in  whole  or  in  part.  (1)  For  the  purpose  of  mainf^ining  tbe 
standard,  the  sums  needed  to  furnish  constant  tests  of  the 
solvency  of  the  various  media  of  exchange  other  than  gold 
may  consist  mainly  of  reserves  in  banks,  or,  if  the  state  isaoes 
paper  money,  of  reserves  in  the  national  treasury.  Where  the 
standard  is  removed  from  politics  and  its  stability  is  unqoee- 
tioned,  these  reserves  may  be  kept  at  a  minimum ;  and  the 
media  of  exchange  may  be  almost  entirely  provided  by  con- 
trivances other  than  the  standard  metal.  In  these  conditions 
no  very  great  quantity  of  gold  would  be  required  by  a  coun- 
try; and  the  monetary  demand  would  be  at  the  minimum. 
This  situation  is  fairly  well  illustrated  by  England:  having 
had  the  gold  standard  since  1816,  there  seems  to  be  not  the 
slightest  thought  of  changing  it  for  any  other  metal;  ita 
niustrmted  by  medium  of  exchange  is  largely  the  deposit  cur- 
Engiand.  rency  of  banks,  and  of  the  Banking  Department 

of  the  Bank  of  England ;  its  paper  money  is  provided  for 
by  the  Issue  Department  of  the  same  institution,  where,  in 
excess  of  about  £16?  millions  of  government  bonds,  each 
note  is  secured  by  gold,  which  in  general  amounts  to  about 
£83  millions.  Beyond  the  reserves  of  the  Banking  Depart- 
ment, the  reserves  of  private  banks  (neither  of  which  cany 


THE  TRUE  THEORY  OF  PRICES  346 

laige  sums  of  gold),  and  the  amount  of  coin  kept  for  daily 
use  in  minor  retail  transactions,  little  or  no  gold  is  required. 
The  greatest  commercial  nation  of  the  world,  acting  as  a 
clearing-house  between  almost  all  the  countries  on  the  globe, 
financing  foreign  public  debts  and  operations  in  many  coun- 
tries, has  a  monetary  demand  for  less  than  $450,000,000  of 
gold, — ali  amount  which  could  be  supplied  by  one  and  a  half 
year's  production  from  the  mines.  In  a  modem  commercial 
nation,  therefore,  the  monetary  demand  for  gold  is  far  less 
than  usually  supposed,  when  it  is  needed  mainly  for  main- 
taining the  standard,  and  when  it  itself  is  little  used  as  a 
medium  of  exchange. 

(2)  In  the  second  case,  if  gold  were  also  required  as  a 
medium  of  exchange,  the  demand  for  it  might  be  very  heavy ; 
but  that  implies  a  strictly  primitive  condition  of  Demand  for 
business  which  nowhere  now  exists.    The  reasons  ||^Jdiam\r 
for  the  evolution  by  which  the  valuable  standard  •«*»ng«- 
was  saved  from  bdng  used  as  a  medium  of  exchange  have 
already  been  given.^    How  much  the  standard  metal  will  be 
needed  as  a  medium  of  exchange  by  a  country  will  vary  with 
its  development  and  internal  conditions.      In  the  United 
States,  under  a  gold  standard,  almost  no  gold  is  in  circulation 
as  a  medimn  of  exchange ;  it  is  found  in  the  reserves  of  the 
treasury  and  of  the  banks  as  a  means  of  main-  case  of  the 
taining  the  solvency  of  United  States  notes,  of  ^"''^  s^*«»- 
bank  issues,  and  of  the  deposit  currency,  which  form  the 
chief  media  of  exchange  ^  (apart  from  silver  and  silver  cer- 
tificates).    The  total  amount  of  the  demand  for  gold  in  this 
country  is  met  by  about  $1,135,000,000,  or  by  less  than  four 
years*  production  of  gold  at  the  present  annual  average  rate. 
This  is  the  combined  use,  both  for  preserving  the  standard 
and  for  a  medium  of  exchange ;  and  it  is  undoubtedly  much 

1  See  chap.  L 

'  Ang.  1,  1901.  Besides  the  deposit  cnrrency,  onr  media  of  exchange  (ex- 
etamy%  of  gold)  were:  silver  dollars  and  silver  certificates,  $497,000,000;  snb- 
sidiarj  sUver,  $80,000,000;  treasary  notes  of  1890,  $45,000,000;  United  States 
]iot6%  $882,000,000 ;  and  National  Bank  notes,  $346,000,000. 


346  THE  PRINCIPLES  OF  MONEY 

more  than  is  really  needed  if  our  system  were  scientificallj 
ordered* 

The  monetary  habits  of  a  people,  their  skill  in  creating  an 
efficient  machinery  of  exchange  at  the  least  possible  coet,  — 
Demand  for  80  that  it  shall  require  no  more  of  the  wealth  of 
5?nm  rf«^*"  ^®  country  than  possible  to  be  invested  in  i 
^^ro"^©?!?  '^l^^ble  money  metal  which  in  itself  remains 
trmnsactions.  Unproductive  —  will  directly  influence  the  coun- 
try's monetary  demand  for  that  metal.  To  say  that  it  will 
vary  with  the  amount  of  exchanging  to  be  done  is  quite  aside 
from  the  point ;  indeed,  there  seems  to  be  no  direct  relation 
between  them.^ 

Having  in  the  last  section  discussed  statistically  the  world's 
supply  of  goldf  we  should  turn  now  to  the  world's  demand  for 
gold.  As  to  the  non-monetary  demand,  the  statistics  are  so 
untrustworthy  as  to  require  one  to  avoid  exact  inferences 
from  them.  As  to  the  monetary  demand  for  gold  and  8il?er, 
the  data  provided  by  the  United  States  Mint  seem 
monetary  to  be  fairly  Satisfactory.  The  total  monetaiy  de- 
domand.  ^^^  j^^  ^^j^  ^  ^^^  ^^^^  14,906,700,000,  and 

for  silver  $8,841,100,000.  Since  the  world's  stock  of  gold  in 
1850  was  probably  not  less  than  $2,000,000,000,  and  as  the 
world's  production  since  then  has  been  about  $7,000,000,000, 
the  world  supply  must  be  no  less  than  $9,000,000,000.*  Of 
this  only  a  little  more  than  one-half  has  been  absorbed  by 
the  monetary  demand  of  all  countries.  It  is  a  real  statistical 
difficulty  to  discover  a  demand  for  the  remainder.    There 


^  Nicholson  (op.  cit,,  p.  349)  states  the  causes  affecting  the  demand  for  gold  as 
coinage  to  be :  (1)  Substitution  of  gold  for  silver  or  paper;  (2)  increase  of  popu- 
lation and  wealth  in  new  countries ;  (3)  same  in  out-of-the-waj  parts  of  old  cfloo- 
tries ;  (4)  increase  of  population  and  trade  in  great  centres  of  old  countries.  lo 
the  main  these  causes  would  operate  on  retail  payments,  and  would  increise 
the  demand  for  coinage  on  a  small  scale,  as  compared  with  the  mass  of  whole- 
sale transactions  in  which  coins  are  seldom  if  ever  used. 

«  Paul  Leroy-BeauHen  has  recently,  in  *' L'ficonomiste  franyais,"  estimated 
the  total  stock  of  gold  at  $10,000,000,000.  My  estimate  of  $2,000,000,000  in  1850 
allows  the  wide  margin  of  $1 .300.000,000  for  loss  and  disappearance  betweea 
1492  and  1850,  in  which  period  the  total  production  was  $3,300,000,000. 


THE  TRUE  THEORY  OF  PRICES 


347 


is  GO  evidence  of  consumption  in  the  arts  which  will  lead 
MB  to  believe  that  more  than  $2,500,000,000  (or  posaibly 
13,000,000,000)  has  been  taken  in  the  last  fifty  years  by  the 
non-monetary  demand*  In  my  judgment,  it  U  very  much  less- 
How  can  the  remaining  $1,500,000,000  be  accounted  for?  It 
is  impoasible  to  say ;  but  any  great  public  loan  is  certain  to 
bring  forward  supplies  without  derangement  of  international 
exchanges.  If  I  were  to  hazard  a  guess^  I  should  suggest 
that  it  is  largely  held  in  the  reserves  of  great  financial  houses 
in  Europe,  and  of  the  many  other  private  bankers  the  char- 
acter of  whose  business  does  not  require  them  to  make  public 
reports  of  their  specie  holdings# 

As  to  the  change  in  the  world's  demand  for  gold  since  about 
1850,  a  full  treatment  must  be  reserved  to  another  volume.* 
For  the  purpose  in  hand,  it  may  be  sufficient  to    siibititiitiott 
recall  the  reader's  attention  to  the  series  of  mon-    lij^l^J'^l 
etary  events  by  which  gold  was  substituted  for  sil-   d«niMd. 
ver  in  several  countries  of  America,  Europe,  and  Aaia»^    The 
abundance  of  gokl  permitted  these  nations  to  take  it  and  give 
up  silver;  and  the  general  outcome  of  this  movement  is  shown 
in  the  figures  of  the  monetary  demand  of  the  world  for  gold 
at  the  latest  report  just  discussed.    At  the  time  of  the  changes 
from  silver  to  gold  the  process  attracted  a  great  deal  of  dis- 
cussion, —  but  mainly  because  of  the  inevitable  decline  in  the 
value  of  the  discarded  silver.     As  a  matter  affecting  the  value 
of  Rold,  this  new  demand  must  have  helped  to  maintain  and 
steady  the  value  of  gold,  in  the  face  of  the  enormous   new  i^j^'*'*^^^^ 
supply;  but  beyond  this  it  probably  did  not  go.^     That  it*" 
raised  the  value  of  gold  relatively  to  goods  does  not  seem  to 


»  Vol.  n»  Metallic  Money. 

5  Tot  a  brief  general  account  of  theae  chan^^,  se«  my  "  Historj  of  Bimetnl^ 
Ikm  m  the  United  §tnt«fl  "  (4th  ed.),  pp.  170-206. 

*  If  the  T&lue  of  ^Id  tendii  to  fall,  becau^^^e  of  uew  discoTeries  on  a  great  s<ia^&j 
the  Tolue  of  gold  onkaments  wotilil  become  cheaper  relatively  to  wheat  and  other 
goodM,  to  that  there  would  arise  a  tendoncy  to  wart]  s  an  increased  use  o£  gold  for 
t) on-monetary  pnTpoHei.  If  the  monetary  sjitem  eoalii  not  take  up  alt  that  li 
coined,  then  the  overflow  into  the  arts  woqM  aatomatic^ly  operate  lo  increase 
the  uoQ-mocetaiy  demand  mofe  or  leas  aa  the  ralae  tended  to  faU. 


848  THE  PRINCIPLES  OP  MONET 

be  possible,  in  view  of  a  supply  quite  out  of  proportion  to  anj 
new  demand  during  the  years  since  1850. 

§  5.  Having  now  analyzed  the  forces  touching  the  value  of 
gold,  so  far  as  they  directly  operate  on  the  standard  in  which 
the  prices  of  commodities  in  general  are  expressed,  it  will 
next  be  possible  to  study  the  goods  side  of  the  price  ratio, 
under  the  supposition  that  gold  is  constant. 

First,  compare  a  single  article,  like  steel,  with  the  money 

metal.    What  determines  the  price  of  steel?    Nothing  other 

than  the  forces  which  determine  the  value  of  steel 

Case  of  one 

article,  gold  relatively  to  wheat,  or  to  any  other  commodity. 
"*^"*  How  can  the  comparison  of  steel  with  gold  take 
place?  In  the  same  general  way  in  which  steel  would  be 
compared  with  wheat  Particular  supply  and  demand  tend 
to  cause  the  exchange  to  take  place  between  steel  and  wheat 
at  a  rate  in  the  long  run  and  under  competitive  conditiong, 
proportioned  to  their  expenses  of  production  (the  concrete 
rewards  for  the  subjective  sacrifices  of  production),  with  fluc- 
tuations above  or  below  this  level  at  any  stated  time  due  to 
demand  and  supply.  Given  the  value  of  gold  as  constant) 
steel  would  tend  to  exchange  for  that  amount  of  gold  which 
would  cover  the  expenses  of  production  of  steel  (including 
interest  on  the  outlay).  An  increase  in  any  item  of  the 
expenses  of  production  —  higher  wages,  higher  cost  of  mate- 
rials, higher  rewards  of  manager  or  of  capital  —  would  cause 
a  rise  of  price.  Monopoly  conditions  which  increase  the  item 
of  rewards  to  capital  in  the  expenses  of  production,  would  act 
in  the  same  way  upon  the  selling  price,  relatively  to  goli 
On  the  other  hand,  the  introduction  of  new  machinery,  or 
any  device  by  which  the  same  capital  and  labor  could  produce 
more  units  of  product,  would,  unless  controlled  by  a  complete 
monopoly,  cause  a  fall  in  the  price  of  steel  per  unit  (or  ton), 
because  it  would  have  lowered  the  expenses  of  production  for 
that  unit.^ 

^  The  operation  can  be  seen  in  the  following  concrete  case,  showing  the  ex- 
penses of  producing  73,780  tons  of  steel,  in  the  first  case,  at  $30  a  ton.    Bj  intro- 


THE  TRUE  THEORY  OF   PRICES 


349 


In  practice^  when  steel  is  expressed  in  gold,  that  quantity 
of  gold  is  instantly  compared  (by  the  price)  with  the  quantity 
of  eome  other  article,  say  wheat,  for  which  that  ^^^  .^^ 
gold  will  exchange.  In  this  way  it  is  feasible  to  muking 
ascertain  at  once  whether  steel  commands  a  suffi- 
cient amount  of  gold  to  put  steel  on  an  equitable  basis  of 
exchange  with  any  other  commodity,  like  wheat,  whose  ex- 
penses  of  production  (or  its  value,  when  fluctuating  above 
or  below  expenses  of  production  through  the  influence  of 
demand  and  supply)  may  be  compared  with  eteeL*  If  steel 
obtainn  a  weight  of  gold  less  in  proportion  than  that  com- 
manded by  other  goods,  it  is  at  once  seen  that  its  price  is  too 
low,  and  the  self-interest  of  the  seller  raises  it  to  the  proper 
point;  if  too  high,  the  self-interest  of  the  buyer  lowera  it. 
An  adjustment  of  the  value  of  gold,  on  the  one  hand,  with 
the  value  of  steel  on  the  other  hand,  is  thus  reached  on  the 
general  principles  of  value,  no  matter  how  many  other  goods 

tlociag  new  machitierf  which  will  *dd  fifty^  per  cent  to  the  nnmbflr  of  tons 
|»roda<!ed,  and  by  getting  maieriala  cheaper,  various  itema,  in  the  second  emu, 
may  be  iocreased,  and  yet  the  price  per  too  may  fall  to  $28.46 : 

(1)  Buildings   .*.,.,  t6O>Q<0O 

Material    ......  92,SOO 

Machi  ne  ry  ( wear  and  tear)  30 ,000 

Taxes     .....,,  2,500 

Iiisiinyice    ......  500 

Wtgei(lO0nieii)    .    .    .  17,000 

Mauager'a  wages     .    .    .