A Short History of Paper Money and Banking
Chapter II. Of Real Money
Paper money is the foundation of the American Banking System. But, as, without a knowledge of what is genuine, it is impossible to have a clear conception of what is spurious, it will be necessary to give a statement of the qualities and functions of real money.
Money is not, as was asserted by a late Secretary of the Treasury, (Mr. I.) “merely the representative of property.” Money of gold and silver is property—is wealth. A hundred dollars in silver can no more be considered as the representative of a hundred dollars’ worth of flour, than a hundred dollars’ worth of flour can be considered as the representative of a hundred dollars’ worth of iron. Each is the equivalent of the other; but each is real wealth—not a mere symbol or representative.
But money is not, as is supposed by some others, superior in its nature to all other kinds of wealth. The precious metals do not differ essentially from other items of wealth. This is distinctly seen when they are in the form of bullion. Converting them into coin, does not change their nature. It only adapts them to a particular use—fits them for passing from hand to hand, without the trouble of weighing and assaying each piece at each transfer. An increase of the stock of gold and silver in our country, is very desirable; but it is for precisely the same reasons that an increase of other kinds of wealth is desirable.
Some fancy that it is the authority of Government that gives money its value. But the true value of money, as measured by the amount of goods for which it will honestly exchange, cannot be affected by edicts of Princes or acts of Parliament. Monarchs and Ministers may alter the weight of coins, or lessen their purity; but they cannot make a coin containing an half of an ounce of pure silver, worth as much as a coin containing an ounce. The stamp of the State is a mere certificate of the weight and fineness of the piece.
Others suppose that the precious metals owe their value entirely to their scarcity. But if gold and silver were not useful in the arts, they would have no value in commerce. Their utility is so great, that even if they were not the material of money, they would exchange for great quantities of corn and other commodites. If they were as plentiful as copper and tin, they would be more valuable than these base metals; because they are applicable to more various uses. The market value of the precious metals is, as that of all other things, in the compound ratio of their utility and of their scarcity. It does not depend on their scarcity alone.
Money is, simply, that valuable by reference to which the value of other things is estimated, and by the instrumentality of which the interchange of other things is effected. There is nothing mystical in its nature; nor is it likely that its character would ever have been misunderstood in the United States, if the avoirdupois ounce of silver had been made the unit of reference, and if coins had been struck of the weight of an ounce, and of aliquot parts of the ounce. Men would then have had as clear conceptions of the nature of the transactions into which money enters, as they now have of those in which iron is exchanged for wheat. They would then have seen that there is no essential difference in these transactions—that trade by barter, is exchanging wheat for one metal, and that trade with money, is only exchanging wheat for another metal. It has been by taking for the unit of reference a fractional part of the Troy ounce, which is a weight with which the people are not familiar, and by giving to this unit the arbitrary name of “a dollar,” that the subject has been rendered obscure to many minds.
As whatever is extended may be made the standard of length, in like manner, whatever is valuable may be made the standard of value. Instead of saying, this tract of land, or this bale of cloth, is worth so many ounces, or so many pieces of silver, men might say, it is worth so many horses or cows, or so many pounds of lead or of iron. The principle of valuation would be identical with that which is adhered to in countries where only solid money is used. But he who had a small article to sell, would find it difficult to calculate its exact value in the fractional parts of a horse or a cow, and pounds of lead or of iron would be a very inconvenient circulating medium.
Corn, cattle, iron, leather, cacoa, tobacco, and other commodities, have all, in point of fact, been used as money, in different ages and different countries; but they have long ceased to be so used, by commercial nations, for reasons similar to those which have induced men to choose for their standard of length, some object less liable to variation than the foot of a Chancellor, or the fore arm of a King.
The high estimation in which the precious metals have been held, in nearly all ages and all regions, is evidence that they must possess something more than merely ideal value. It is not from the mere vagaries of fancy, that they are equally prized by the Laplander and the Siamese. It was not from compliance with any preconceived theories of philosophers or statesmen, that they were, for many thousand years, in all commercial countries, the exclusive circulating medium. Men chose gold and silver for the material for money, for reasons similar to those which induced them to choose wool, flax, silk, and cotton, for materials for clothing, and stone, brick, and timber, for materials for building. They found the precious metals had those specific qualities, which fitted them to be standards and measures of value, and to serve, when in the shape of coin, the purposes of a circulating medium. To this use they are admirably adapted:
1. Because they are divisible into extremely minute portions, and capable of re-union without any sensible loss of weight or value; so that the quantity may be easily apportioned to the value of the articles of purchase.1
2. They have a sameness of quality all over the world. The difference between iron from different parts of our own country and of Europe, is well known to all dealers in that article. The copper of Siberia is superior to that of Germany, while that of Sweden is better than that of Siberia, and that of Sweden is surpassed by that of Japan. But, one grain of pure gold is exactly similar to another, whether it comes from the mines of Europe or of America, or from the sands of Africa. Time, weather, and damp, have no power to alter the quality: the relative weight of any specific portion, therefore, determines its relative quantity and value to every other portion; two grains of gold are worth exactly twice as much as one.
3. Gold and silver, especially with the mixture of alloy that they admit of, are hard enough to resist very considerable friction, and are therefore fitted for rapid circulation.
4. Their rarity and consequent dearness are not so great, that the quantity of gold or of silver, equivalent to the generality of goods, is too minute for ordinary perception: nor, on the other hand, are they so abundant and cheap, as to make a large value amount to a great weight.
5. They are capable of receiving a stamp or impression, certifying the weight of the piece, and the degree of its purity.
6. They are liable to less variation than any other article, from changes in the relations of supply and demand, including the cost of production among the conditions of supply.
By the discovery of America, the supply from the mines was increased tenfold, but as there was at the same time an increase of demand, owing to the increase of other kinds of wealth, the rise of prices from 1520 to 1620, was only fourfold. An opinion prevailed about fifty years ago, that the value of silver had been gradually declining from the year 1620, but Adam Smith, who inquired carefully into the facts, came to the conclusion that the opinion was unfounded, and Jean Baptist Say, the celebrated French economist, is of the belief that there has been hardly any variation in the value of silver in the last two centuries.
During the eight years preceding 1819, the supply from the mines is supposed to have fallen short one-half, owing to the troubles in South America. Such a diminution in the supply of any other article, would have made a great alteration in its value; but the annual product of the mines is so small in proportion to the whole quantity of the precious metals in the market of the world, that it requires very nice calculations to show that their value has been affected by this falling short of the supply.
According to the estimate of Mr. Gallatin, the stock of the precious metals on hand is between four and five thousand millions. From 1803 to 1809, when the mines are believed to have been most productive, the annual supply was fifty millions. In the last twenty years, it is said to have been but twenty-seven millions. But when the annual supply was most abundant, it was only in the proportion of one and a quarter per cent. to the stock on hand, and when it was lowest it had fallen only to three-fifths of one per cent. The ordinary supply of gold and silver does not exceed one hundredth part of the stock on hand, while the annual supply of agricultural products always exceeds, and that of manufactures often equals, the stock on hand.
The demand for the precious metals may be measured by the whole amount of other commodities in the market of the world, and the whole amount of labor. In this, but little variation can take place from year to year, or even in a series of years. There may be a glut of corn, cloth, cotton, or other merchandise. More of these articles may be produced than can be consumed, at a particular time or place: but there is never a glut of gold or of silver. The demand for these metals is universal and incessant. We do, indeed, say that “money is scarce, or money is plenty,” but what we mean thereby is, that loanable capital is scarce or abundant. With the great body of men, money, and the material of which it is composed, are always scarce: and must continue scarce, as long as they want those things which money can procure.
From the durability of silver, and its other physical properties, from the steadiness and universality of the demand for it, and from the small proportion the annual supply bears to the stock on hand, it appears to unite all the qualities that can reasonably be desired in a commercial standard of value.
If it is not, as has been asserted by some, “an absolutely perfect and altogether permanent standard of value,” it, in this respect, resembles our standard measure of length. Even a platina rod is affected by changes of temperature. All things here below are in a state of mutat on. The very figure of our earth is changing; and an arc of the meridian will not, in the cycles of futurity, be of precisely the same length that it was when measured by the French Academicians.
It is true, our standard of value is liable to be affected by more causes than our standard of length. But we can calculate the force of these causes, and construct tables showing the effective power of money in exchanges in different ages. Such tables have been published by Sir George Shackford, in the Philosophical Transactions, by the Rev. Arthur Young, in one of his treatises, and by Admiral Rainer, as an accompaniment of his valuable charts of fluctuations in the price of corn. The difficulty of showing the effective power of money in remote periods, is not owing to any inherent defect in the material of which it is composed: but owing to the chroniclers of ancient times not having recorded a sufficient number of facts for the satisfaction of modern inquirers.
In solving problems in Political Economy, it is necessary sometimes to use labor as a measure of value, sometimes corn, and sometimes other commodities. So, to measure heights, we sometimes use the foot rule, sometimes the barometer, and sometimes the theodolite. But as, whatever instruments they may use, men find it convenient to express their mensuration of height in feet and inches their fractional parts and multiples, so, whatever measure of value writers may adopt, they seldom find it convenient to proceed far in their calculation, without reducing their expressions of value into the common money of account.
In no way can a clear conception of the wealth of a man in a distant time or place, be so easily acquired, as by a comparison of his income in money with the money price of labor and commodities at the same time and place.
Those who object to silver as an imperfect standard of value, appear to have fixed their minds on our common measures of length, and finding in them some qualities which silver does not possess, have hastily concluded that, as a standard of value, it is more imperfect than it really is. But, as value and length are essentially different, we must expect to find the standard and measures of the one essentially different from those of the other. The causes of variation must also be different; and the extent of variation must be different. The analogy between the standards and measures of different things, cannot be greater than the analogy between the things themselves. Value and length agree only in this—that each admits of increase and decrease by homogeneous degrees, whence it is that each is mensurable by like quantities.
If the reader will not suffer his mind to dwell exclusively on measures of length, but extend his thoughts to measures of duration, of heat, and of atmospheric pressure, he will probably be convinced that the common measures of value are not more defective than the common measures of time, temperature, and gravity.
To talk of absolute value is as absurd as to talk of absolute distance. As the distance of the earth from the sun increases as it passes from its perihelion to its aphelion, the distance from the sun to the earth must increase also.
As the value of other things falls, that of gold and silver rises. If the mercury in the thermometer did not rise as the heat increases, we should not be able, by that instrument, to measure degrees of temperature. If the mercury in the barometer did not fall, as we ascend mountains, we should not be able, by that instrument, to measure heights.
For an absolute standard of value, we should have to find something, the cost of production of which should be the same at all times, and in all places, and the demand and supply of which should never vary in the smallest degree. It is impossible even to fancy such a thing. It would be as reasonable to wish for a pendulum which should beat seconds in all latitudes, and in all elevations.
The effective power of money is much greater in some countries, and some ages, than in others. But we do not complain of our common measures of weight as imperfect, because ponderous bodies weigh more when on a level with the sea, than when on the tops of the highest mountains.
To object to the precious metals, on account of their being affected by the costs of production, and by the relations of supply and demand, is to object to them on account of the very things that fit them for standards and measures of value. If the causes of their value were not similar to the causes of the value of other items of wealth, and if they were not liable to be affected by the same causes of variation, they could not serve as a material for money. There must be some homogeneousness in the measure and the thing to be measured.
An ounce of pure silver is a quantity which never changes. We may make this our standard of value—our unit of reference in estimating other things. It is our own fault, if we afterwards vary this standard.
In many minds the notions of value and utility appear to be confounded. But the two things are distinct, though frequently conjoined. A fine lady and a merchant of the society of Friends have very different views of the utility of diamonds; but if the merchant has diamonds for sale, the creed of his church does not induce him to value them at less than the fine lady is able and willing to give. The value of commodities is in proportion to their adaptation to the wants and wishes of mankind, rational or irrational, and to the facility or the difficulty with which those wants and wishes can be gratified.
With others, value and wealth appear to be synonymous terms. But the various items that constitute wealth are positive in their nature. They are all those things that conduce to the gratification of human wants and desires, and which may be estimated by reference to a given standard—all those things which may be bought and sold, or estimated at a price. The word value is used to denote certain relations among these items. It always implies comparison of two or more objects. In its strict sense, it denotes the effective power of things in exchanges; but it is, without impropriety, sometimes used to designate that property in things which makes them effective in exchanges, and sometimes to signify the judgment the mind forms of different things, on a consideration of their effective power in exchanges. All these meanings of the word are closely connected, and grow out of one another.
Various views may be taken of value; but in whatever light it may be regarded, we shall find gold and silver money the most convenient instruments of valuation, though certainly not the only ones it is expedient to employ. The political economist, to determine the natural value of things, may compute their cost of production in days’ labor and capital; but he will find it very difficult to estimate accurately these elements of production, except by the instrumentality of money. If he cannot bring his calculations into the common money of account, his labor will be of very little use to the practical man, for the effective power of things in exchanges is always estimated in this way, and it is the relation the natural value bears to the market value, that induces the enterprizing to incur the toil and expense of production.
In countries in which paper money is unknown, the common standards and measures of value appear to approach as near theoretic perfection, as the common standards of weight, length, or capacity. The standard of reference has no variation, except such as necessarily arises from the nature of value. The measures are composed of the same material as the standard.
The calculations necessary to show the effective power of money in different countries, and different ages, may not unaptly be compared to those which show the length of pendulums to beat seconds in different latitudes; or to those which show the loss of weight ponderous bodies sustain on being carried to different elevations above the surface of the sea.
In all such countries, the people suffer no more practical inconvenience, from the want of any theoretic perfection philosophers may discover, or may fancy they discover, in the common measures of value, than from similar imperfections in the common measures of time and weight.
Where metallic money is exclusively used, the value of land, of labor, and of all commodities, great and small, can be determined with great accuracy. If, in such countries, the trade between different men is not always an interchange of equivalents, the fault is not in the instrument of valuation, but in those who use it.
If the labor of a man, for a day, or for a year, produces more than is necessary for his immediate support, he can, by exchanging the surplus product for gold or silver, secure the means of supplying his wants in future days or years. Time will not corrupt his treasure or lessen its value. If he should not require it all for his personal wants, he may, at the end of fifty years, endow his children with a portion.
The use of money renders it unnecessary for families to keep on hand a large stock of provisions and other necessaries, and thus saves them from the risk of loss from provisions spoiling, and from various accidents. Having money, they may procure whatever else they want, in just such proportions, and at just such times, as they want.
If business or duty calls a man to a distant country, he finds in money the means of procuring comforts similar to those be enjoys at home. The instrument by which he procures all these advantages, is light of carriage, and is unaffected by any climate into which he may travel.
As the value of silver has undergone hardly any variation in the last two centuries, and probably will not undergo any great variation for a hundred years to come, a man may, in solid money countries, enter into a contract to pay a sum of money, ten, twenty, or thirty years hence, and rest assured that more wealth will not be exacted from him than he intends to give. In such countries, contracts can be complied with in equity.
As the standard of value in most countries is the same, the coins differing only in weight, purity, stamp, and denomination, the value of different articles in different countries at the same time, can be ascertained with sufficient accuracy for each country to determine what articles it is expedient to export and what to import.
Without money, the division of labor could never be carried to any great extent, and the wealth of society would be small. Money, by promoting commerce, advances civilization.
All these advantages are procured at a small cost, for the product of the labor of a commercial nation, for a few weeks, will procure it enough of metallic medium for all the purposes of domestic trade, and this medium will not require renewal for centuries.
If the sovereign power refrains from unnecessary alteration in the coinage, commerce is, in countries where metallic money is exclusively used, liable to derangement only from great natural or political causes. If the supply of gold and silver from the mines is greatly increased, it does not produce a great rise of local price, for the metals diffuse themselves over the whole commercial world. If any country gets a large portion of these metals, manufactures absorb a part, and the increase of money is only in proportion to the increase of trade. If the supply from the mines is diminished, manufactures absorb less.
To the state of trade in different countries, the supply of gold and silver money naturally adapts itself; and also to the state of trade in each county and town, and to the condition of each individual. If any country, any county, any town, or any individual wants money, it is for the same reason that that country, that county, that town, or that individual, wants corn, cloth, coaches, or other commodities.
If the laws regulating trade introduce a new state of things, the supply of gold and silver soon conforms to the new relations of supply and demand.
No prohibitions can prevent money’s departing from those countries where its amount is beyond what their trade and industry require. No country can be deprived of its just proportion of the precious metals, except by the use of paper, or by such causes as ruin the commerce and industry of a nation. No obstacle, except spurious money, can prevent the precious metals from flowing into countries where wealth is increasing.
No instance is on record of a nation’s having arrived at great wealth without the use of gold and silver money. Nor is there, on the other hand, any instance of a nation’s endeavoring to supplant this natural money, by the use of paper money, without involving itself in distress and embarrassment.
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2 See Say, Book, Chap. xxi, Section 2.
