Ludwig von Mises Institute

Chapter 25
Price with and without Value

I am glad of the reappearance of your old contributor, Richard Sulley, in the pages of the Merchants' Magazine. In former times I have been indebted to him for good ideas in political economy, and I find much to approve in his article in the May issue, just received, which is courteous in criticism of the article on the Balance of Trade contributed by me to the February number. I think I shall be able to convince him of the correctness of the principle to which he objects, that money cheapened by mining, being capital, is profitably exported, when in natural excess, in exchange for other capital; and is thus a source of national wealth, like everything else cheaply produced for foreign commerce—that is to say, over and above the home demand. I ought to have said it is national wealth, as well as the source of it. Money is a simple commodity governed by the same law of value and exchange as all other commodities and all other capital.

In the present stage of political economy there is an unaccountable tendency among thinkers to look beyond the facts experience has established (which constitute true science) into the regions of speculation and obscurity for truth that lies at our feet. It seems to be given over, at present, to metaphysical abstractions and scholastic subtilties that appall practical minds, and render the science of little or no use in the conduct of government or of the business of life. By this sort of treatment two points of great national inexplicitness have been most thoroughly obfuscated namely, money and value; and Mr. Sulley, I think, has not altogether escaped the occult influence of such teaching. He says:—

The opinion that money (gold and silver) is capital, and that we get value for it when it is exported in the usual course of trade, is not peculiar to Mr. Carroll, although it has been incidentally combatted in the pages of the Merchants' Magazine. Nevertheless, all the claim it has to be considered capital arises from its powers of saving labor by facilitating exchanges; but paper money, where it has value, is just as good as gold; and the only reason why gold is preferred for exportation is because its value is intrinsic, and therefore universal, while that of paper money is only imputed, and therefore local.

This argument is founded upon the abstraction that money is merely a medium of exchange, and everything professing the quality of a medium of exchange is money: hence paper, stamped or issued by government, or by corporations, is money. On this theory overvalued tokens are money and wealth, because money is wealth, and the Spartans were as rich with their iron currency as if they had earned and possessed its weight in gold. But money is no such abstraction. It is not merely a medium of exchange, but also an object of exchange, the product of labor and capital, from which it derives its attribute of value, and by reason of which it is the equivalent of other products of labor and capital. Without this equivalence there is no money, and with it a thing is not money, unless it is acknowledged and accepted as such in absolute payment of intrinsic value, by the commercial world.

Money was discovered or invented in the unknown past: its use and its meaning were established before the records of history, and the common sense of mankind determines what is money to-day with more accuracy than the most profound disquisitions of the most learned political economists. Indeed these learned men acknowledge the corruption of the word, and concede the argument to common sense, when they use the term real money. What is not real money? Why, spurious money—no money at all. And such is a currency of debt, which expels money, and is an incubus upon the capital of the country. It pays nothing, but requires continually to be paid in money or in other capital, and when this requirement becomes urgent, its issuers assume the position of preferred creditors, take possession of the money and floating capital of the public, to the extent of their requirement, and plunge other debtors into insolvency and ruin. There is nothing of this nature in money.

"But," Mr. Sulley says, "paper money where it has value is just as good as gold." Let me assure him there is no place where it has value. The element of value does not exist in a paper currency, nor in any other description of debt whatever. The value to which all debt relates is the property appropriated to pay it. There cannot be two values embracing one and the same thing; one in an estate and another in the deed of conveyance which certifies its ownership, or in the instrument of mortgage upon it. The term "paper money" is a ridiculous sophism; there can be no such thing. The dollar, which in this country the maker of the paper promises to pay, is 23.22 grains of pure gold; the gold is the money, not the paper; and the value is in the gold, not in the paper. Gold being acknowledged and accepted as a common equivalent of other values all the world over, an equivalent of gold in other capital is capable of discharging an obligation to pay gold. The notion that there is the value of a dollar in a memorandum of a contract—a written promise to pay a dollar—is the delusion upon which rests the whole scheme of factitious credit miscalled "paper money." The amount of bank notes, as such, is of no consequence in the consideration of this question. The bank, having no value to lend, lends promises to pay dollars of value which have no existence, and whether it inscribes this factitious credit on a piece of loose paper for circulation, or on a book of account to be circulated by check, makes not the slightest difference in principle or effect. Hence deposits in bank, subject to check at sight, are currency as completely as bank notes deposited in one's pocket. Naturally, the same proportion of currency as of capital will be at rest, in the long run, waiting demand somewhere.

In what is called the credit system, the currency is based on commercial notes, by which the trade of the country, that with a currency of money would be a cash system, is forced through debt and credit. Under the credit system the same value in raw material, or in the process of manufacture, is frequently sold several times over on credit. The amount of needless debt thus created can scarcely be conjectured; but the daily settlements at the clearinghouses show that it is enormous. Does Mr. Sulley, or does anyone, imagine that this vast debt, whether needless or otherwise, is value to be added to the inventory of the property of the country? This would be necessary, on principle, if there were value in a paper or debt currency. I do not understand the significance of the term "imputed value," unless it means spurious value. It seems to me there must be either value or no value in everything. Debt circulates in its evidences, not for the value it is, but for the value it promises.

Mr. Sulley appears to have overlooked, or perhaps does not remember, an explication of this thing called "paper money," showing the fallacy of the notion that it is as good as gold, that, without reference, I am sure I have furnished in some one or more of my contributions to this magazine. Let me repeat the idea in another example. It happens that the aggregate price of the property of this country, and doubtless of other countries, is always about twenty-five times the sum of the currency. Let the volume of currency vary as it may, the price of the whole property in due time rises and falls accordingly, not equally, but in the aggregate. Things in the most immediate request rise first, and in the greatest proportion. If one thing does not advance in due proportion, something else advances more than the due proportion, and thus the currency is duly employed and the average completed. The circulating capital is in the ratio, approximately, of 10 to 1; the fixed capital 10 to 1; and the unproductive and enjoyable wealth, which is not capital, is as 5 to 1 of the currency, making 25 to 1 in all, as before mentioned. This is an approximate calculation that is, perhaps, as nearly correct as an estimate of the kind can be made. At all events, it is sufficiently accurate for my acquirement.

In the last census year, 1860, the currency of this country, including California, amounted to about $640,000,000; consisting of say $436,000,000 net liabilities of banks, payable on demand, i.e., notes and deposits and balances due to other banks, deducting specie reserves, $4,000,000 of counterfeit currency, and $200,000,000 of money in and out of bank and free of hoards. Had this currency been money exclusively, the wealth of the country would have been in money value as stated in the census, $16,000,000,000, divided as follows:

Circulating Capital, comprising money and all value seeking to be exchanged	$6,400,000,000
Fixed Capital, comprising property employed for purposes of gain not seeking to be exchanged	6,400,000,000
Unproductive Wealth, comprising money in hoards, houses, furniture, &c., in use by their owners, and pleasure property per se	3,200,000,000

But money proportionate to other capital was absent to the amount of $440,000,000; the value of the circulating capital was, therefore, but $5,960,000,000, and of the total wealth but $15,560,000,000. There is a question of equivalence here that invites discussion, but which is not essential to our present argument. My belief is that because of the deficiency of $440,000,000 in the circulating capital there was a deficiency of the other two classes of wealth in the same proportion, because the equivalent of fiction can be nothing but fiction.

Let us now assume, for argument's sake, that this currency of $640,000,000 consisted of gold and silver exclusively, there being no such thing as fictitious credit to circulate in either notes or checks. It is obvious, then, that the buying and selling of goods must have been for cash; otherwise the currency could not be employed; and the borrowing and lending of capital would have been done by and through the banks instead of by buying and selling goods on credit. At this point of pure money currency we will suppose that we begin the credit system of making currency through banking on commercial notes. This requires the buying and selling of goods on credit to produce the notes for discount; and suppose we pursue this plan of running in debt to each other for existing capital, and getting notes discounted until we have an aggregate of $640,000,000 of "deposits" to our credit in bank, over and above all the deposits existing before. This gives us $1,280,000,000 of "money," instead of $640,000,000, or double the "money" to circulate the same capital; and the price of the whole property necessarily rises from $16,000,000,000 to $32,000,000,000! Where does this additional $640,000,000 of money come from? and where does the additional $16,000,000,000 of property come from? There is no such thing as either. The whole addition is pure fiction. There is no value in the money or currency above $640,000,000, and no value in the whole property above $16,000,000,000; all the rest is price without value, the merest moonshine in the world. That which costs nothing to anyone is like air and solar light, no value and no wealth.

But the effect of this spurious money, while it is interchangeable with real money, is to reduce the value of gold and silver, locally, one-half. Two dollars possess no more purchasing power than one possessed before, and of course the export demand of commerce is changed from our merchandise to our money, because the local depreciation of its value here has no effect upon its value abroad until the money gets there and enters into general circulation, when it becomes merged in the vast volume of currency in all other commercial countries, and has scarcely an appreciable effect on the general value of the money of the world. Not a particle of business can be done with the double volume of currency more than was done with half the amount before, only what is done will be at double the natural price, and people will run in debt at double the natural price, so long as the double volume of currency can be maintained, which is longer, under specie payment, than Adam Smith with his disciples has supposed. How long, depends upon the quantity of gold and silver in the country to begin with, to support the drain, and upon the unreasoning confidence of the public in the "paper money." If people generally do not call upon the banks for payment, the banks will supply additional currency by new discounts as fast as the money can be exported, because it is for their interest to do so, as they get additional interest on every additional factitious dollar they make. I censure not them, but their system, for this.

The principle of this currency is that the bank lends you a contract to pay money and value that have no existence, and throws upon you the obligation to meet that contract, under bond and security, to provide the institution with funds to discharge the same when it shall be called upon to do so. Of course the loan is made upon some specified time, but that time is arranged upon the principle stated, that the bank shall be put in funds to meet the impossible contract, which in the end is inevitable bankruptcy somewhere; since, the moment the banks withdraw any portion of their currency, they contract the measure of price, leaving the debts made by the old measure to be discharged by the new, under which the assets fall in price and become insufficient to discharge the obligations resting upon them. The experience of England with the financial crisis, while I write, in May, is a practical illustration of this pernicious and preposterous principle. The Bank of England is the mother of it, and it is astonishing that the accomplished merchants and bankers of England do not see the impossibility of meeting the contracts she imposes upon them.

I think I have said enough to meet Mr. Sulley's remark, that "where paper money has value, it is just as good as gold." I hope he will see that it has no value under any circumstances. The effect of this spurious money upon the capital of the nation is the loss of every dollar of gold or silver shipped under the degradation of the value of money which it causes, because the imports are advanced in price by that degradation, in common with all other descriptions of capital, and it is the amount of the degradation that is sent abroad in gold and silver. Real money is thus paid to foreigners for a false price. This important practical result, which all the metaphysical economists have overlooked, I am happy to see that Mr. Sulley understands; but I do not see how so good a thinker can imagine that the same result follows the local increase of gold, or that a paper currency is even capital in the hands of an individual or of the community. "Out of nothing, nothing is generated. This," says De Quincey, "is pretty old ontology." And when nothing is substituted for capital in gold exported, it is very clear that the capital is lost, which would not be the case if the paper were capital.

The unsophisticated truth is that the individual who accepts a bank note for his goods parts with his capital for that which has no value, and is therefore no capital He lends his capital on the note, and is no more paid for his goods than if he had accepted his customer's note for them. He cannot thus eat his cake and have it too. He cannot part with his capital and possess it at the same time. He it is who lends capital in this business, and not the bank; and he it is who pays the interest which is included in the price of whatever he purchases. When he wants to recover his capital, he parts with the paper promise and gets value for it; he is then paid in the value received for the value delivered, and not before, and the exchange which was only halfway made before is then complete. Should the bank happen to burst while he holds its note, I think Mr. Sulley will see that in holding the note he does not hold his capital, and is not paid. Hence the note is not and never was capital.

Mr. Sulley's error, or what I conceive to be his error on this point, lies in the following statement. I say, what I conceive to be his error, for I am open to conviction, and always intend to give heed to respectful criticism, such as I find in the writings of Mr. Sulley:

Money, no doubt, whether of paper or the precious metals, is capital in the hands of individuals; but a larger or smaller quantity makes no difference in the capital of a nation; and if it be of gold, and is exported from excess, the nation will get nothing in return for it. If it increases in a greater ratio than other commodities, it must of necessity depreciate, as no condition of cheapness will induce an adequate consumption. This has been sufficiently shown by M. Chevalier, both from French and English statistics. It must therefore be exported in price without value; that is to say, without any return being made for it in the imports. Consequently to the nation that produces the precious metals, while at the same time it produces large quantities of other commodities for exportation, the production of the metals will be just so much loss. This is the evil of a fixed standard of value.

In making these remarks, Mr. Sulley overlooks the fact that all values are reduced, specially, by an increase of supply. The wealth of the world accumulates in this manner. What if the crops of grain are doubled this year in this country? Will not the bushel of grain fall in value as well as in price? That is to say, will it not exchange for less of commodities in general as well as for less money than before? Obviously, any exported excess of grain commands desirable capital in exchange, which is just so much added to the wealth the nation possessed before that excess was produced. And why is not this principle applicable to gold and silver? The miner who digs gold improves his fortune like the miner who digs iron, and as much as he adds to his own wealth by his labor he adds to the wealth of his country. But, be it observed, the gold must be produced in excess to supply the quantity exported; it must not be merely degraded in value to the exporter's limit by adulteration with "paper money," since by such adulteration and degradation the quantity exported is drawn from the precreated stock and lost, because nothing but debt remains to balance the value thus degraded and sent abroad. In the one case, there is the same quantity of gold left after the shipment of the excess as the nation possessed prior to the increased production and the capital returned for the shipment besides; in the other, a less quantity of gold by the amount of the shipment and no more of other capital to compensate the loss.

The French economist, Frederic Bastiat, says: "Utility is increased as we succeed in constraining nature to a more efficacious co-operation. So that we may say that mankind have as many more satisfactions, as much more wealth, as they have less value." In other words, mankind, by availing themselves of natural forces more and more, continually have an increase of utility, satisfactions, and wealth, at diminished cost.

Where nature furnishes the most efficacious co-operation in the mining and transportation of gold, it can of course be supplied at the lowest value, and if we can produce gold and exchange it for iron and cloth, and other utilities, at less cost of labor and capital than we can directly produce the utilities, themselves, we have "as many more satisfactions, as much more wealth, as we have less value." In what respect, then, is it less advantageous to procure and possess cheap gold than cheap capital of any other description? provided always we have the gold, and not an incubus upon capital in its place to cheapen it.

Jean-Baptiste Say notes a striking example of the increase of wealth by the reduction of value in the invention of the art of printing. "So that where there was formerly one copy only of a literary work (manuscript) of the value of 60 francs of present money, there are now a hundred copies, the aggregate value of which is 300 francs, though that of each single copy be reduced to 1/20th." That is to say, the reduction of the money value, by the increase of supply from 60 francs to 3 francs per copy, produces in this commodity a fivefold sum of wealth. There has been an abundant increase of wealth of this description by cheapening production since Say wrote in 1820. "Gold and silver," says Adam Smith,

whether in the shape of coin or of plate, are utensils, it must be remembered, as much as the furniture of the kitchen. Increase the use of them, increase the consumable commodities which are to be circulated, managed, and prepared by means of them, and you will infallibly increase the quantity; but if you attempt by extraordinary means to increase the quantity you will as infallibly diminish the use, and even the quantity too, which in those metals can never be greater than what the use requires.

Money cheapened by mining is, therefore, a cheap utensil and cheap capital, as wheat cheapened by tillage is cheap capital, and any normal excess of either over the home demand is equally a gain of national wealth. But it is only in its function of capital, the subject or object of commerce, that the increase of money is of the least consequence. As the instrument of commerce, the measure of price, the most limited quantity consistent with convenience in the coin is even better than a greater quantity, because lower general prices are thereby secured, and, other things being equal, the nation or community having the lowest general prices, in other words, the most valuable money, will have the advantage in the commerce of the world. But the two functions of money cannot be separated, any more than the beauty of the diamond can be separated from its worth, and the proper and only profitable course is to treat it as we treat other capital, accumulate as much as possible, and exchange the surplus for products of greater value.

In regard to Mr. Sulley's remark that a fixed standard of value is an evil, I suppose he refers to the adoption of an irregular quantity of metal for the unit of money, like our dollar, which is an unequal fraction of a troy ounce of gold, the French franc, which is out of the line of the decimal notation of the Empire, the English sovereign, or pound sterling, and the various units in use in commercial countries, which are "names indicative of nothing whatever," as to the established and ordinary weights employed in commerce. Unquestionably this is an evil. I have endeavored to expose it in your pages; but I do not see that it amounts to a fixed standard of value. I do not find, and cannot conceive of such a standard in money or in anything else. In the words of Mr. De Quincey: "An object to stand still when all other objects are moving, showing how much of the change has belonged to one object, how much to the others, or whether either has been stationary: this is a thing we shall never have; because no such qualification can arise for any object—nor can be privileged from change affecting itself." Let money change as it may, it is the legitimate price of things. I prefer, therefore, to call it the measure of price. When price is not money value, when it is made by a measure which is not money, it is illegitimate and false. There is a ground of value in the equivalence of labor and capital, to which objects must be referred in money, however much it may change in itself. To that true price is the equivalent of money value.

It follows that the rise of general prices, which results from the actual increase of the precious metals, is not, as Mr. Sulley imagines, price without value, but price with value, which, relating to our foreign commerce, is returned in the imports. And the export of gold or silver under this normal condition of things is just as profitable to the nation as the export of wheat or tobacco, or any other of the hundred commodities annually sent abroad, whether they are the direct or the indirect product of the industry of the country.

Twenty dollars is the price of a barrel of flour to-day for my family use. What sort of dollars? Not such as are produced by labor and capital—not dollars of value. If we had possessed twenty such dollars for such an exchange, probably twelve of them would have gone abroad long ago, and returned the value of a barrel and a half of flour of the same quality more than the nation possesses at present in its capital. The dollars of to-day are made by the scratch of a pen; these are inscribed as a "deposit" when no dollars are deposited. They are not dollars of value, because they cost nothing. They are dollars of price, and the strongest motive which actuates man in society—self-interest—is involved in their further and unlimited increase. Certain men in corporations are privileged to make and take interest on such dollars as money. Do you suppose they will be checked in this business by the limitation of the issue of bank notes to $300,000,000? Not in my opinion. When the barrel of flour costs $100, as it will in time if the present financial system continues, perhaps the folly of the system may be discovered, and suffering among the industrious classes lead to its suppression. Already the bank deposits amount to $670,000,000 including those due by banks to banks, while the notes are but $250,000,000.

It is an immense argument in favor of the natural resources of this country, and the untiring energy of the people, that the nation is not ruined by its political economy in raising prices against itself by tariff, and, especially, by creating prices without value.