r/; ^.;^;i^k^^ j%c:„s^^^^^^^i^^^ (gtaus Sprccbclg HfTund ^^^^^^S Digitized by the Internet Arciiive in 2007 witii funding from IVIicrosoft Corporation littp://www.archive.org/details/contributiontostOOwliitrich A CONTRIBUTION TO THE STUDY OF A CONSTANT STANDARD AND JUST MEASURE OF VALUE GLASGOW: P. DONEGAN & CO., Printers, 98 and lOG Dunlop Street. g^v-^x ■■ v-:.^ V v.x^-vv^>V:.\ -.-X > \;y;^s,;.A^<^.^- ^^^^:;.>^-,.^:^v^^:^,j»^,^^^ A CONTRIBUTION TO THE STUDY OF A CONSTANT STANDARD AND JUST MEASURE OF VALUE. T. I5T-. AATSII'X'IKILJL ^V- GLASGOW: P. DONEGAN & CO., Pointers, 98 and 106 Dunlop Street. (\ t)i(o \\'^^^^ ^PBECKELS *^ A perfect and just measure shalt thou haver- -Deut. xxv. 15. ^' Aiuongst the many and grave duties of rulers wJio zuould do tlieir best for the people, the first and chief is to act ivith strict justice — 2uith that justice which is called in the Schools distributive — to- zvards each and every class. — Encyclical Letter " On the Condition of Labour." PREFACE. The following are the features of this essay to which attention is more particularly directed : — 1st. The mathematical nature of the proof, in the first chaj)ter, that steady general prices cause continuously advancing wages, and are the solution of the '' difficulty of employment.'' 2nd. The idea of basing the value of money on the prices of chosen agricultural products, and not on the prices of goods in general. 3rd. The naming and description of the func- tion which money fulfils as the regulator of general prices and of trade. 4th. Tlie explanation of the law of the average rate of interest, and of the function which money fulfils in regulating the prices of State and other securities to fixed interest by means of the rate of discount. 5th. The recognition of the remarkable char- acter of the change, which steady prices together with a supply of money freely permitting any rate of expansion of commerce, are calculated to produce in the position of wage-earners. 6th. The whole system of ''just money,'' as an attempt to realise, in a practicable system, the theoretic requirements of a perfect money ; and 7th, As an attempt to state the laws of issue of a good paper money. T. N. W. 87 Sydney Street, Glasgow, \st February, 1896. i 23063 CONTENTS. CHAPTER I. ON THE EFFECTS ON COMMERCE OF MOVEMENTS IN GENERAL PRICES. CHIEF ARGUMENTS. 1. That Steady general prices cause continuously increasing wages, and are the solution of the ''difficulty of employment." 2. That, in theory, a constant standard of value must have a steady buying power over chosen agricultural products. CHAPTER n. WAYS IN WHICH STATES HAVE SOUGHT TO CONTROL PRICES. CHIEF ARGUMENTS. 1. That the chief function of money is to regulate prices and trade. 2. That neither bi-metallism nor mono-metallism can pretend to secure steady prices. CHAPTER III. THE SYSTEM OF ''jUST MONEY." A system of paper money, payable with a fixed value of gold or silver, maintaining goods in general, and also securities to fixed interest steady in price. CHAPTER IV. CONSIDERATION OF OBJECTIONS TO PAPER MONEY. CHAPTER V. THE IMPROVEMENT IN THE POSITION OF WAGE-EARNERS PRODUCED BY "JUST MONEY." APPENDIX (A). REMARKS ON THE PROPOSED FREE COINAGE OF SILVER BY THE UNITED STATES. APPENDIX (B). REMARKS ON MR. FONDA'S "HONEST MONEY." CHAPTER I. ON THE EFFECTS ON COMMERCE OF MOVEMENTS IN GENERAL PRICES. Perhaps the easiest way of approaching the study of money is by a consideration of the effects on commerce of movements in general prices. General prices, as a term, is appropriated to goods or commodities. Just as we may have a pound of coffee and chicory, so we can suppose a definite parcel of all the goods produced or consumed in a State in the proportions in which they are on an average produced or consumed. The price of such a parcel is the price of general goods ; its movements are the movements in general prices in the State. There may be a continued steadiness in general prices, or a more or less rapid movement upwards or downwards. Movements in general prices have very im- portant effects on trade, and on the distribution of wealth. The more rapid the movement in general prices the greater is its effect. A rise of, say, from 20 to 50 per cent, in general prices within a few weeks means a period of the wildest speculation when immense profits are made by those who hold goods, and, at the same time, it is a sudden reduction in the buying power 6 ON THE EFFECTS ON COMMERCE of all fixed incomes, Avhicli greatly changes the degree of comfort of a large section of the people of the State. A fall of from 20 to 50 per cent, within a few days or weeks is an essential feature and, indeed, the immediate cause of the typical commercial crisis. So great a fall in prices can only take place w^hen some sudden extreme scarcity of money renders goods unsaleable except at a great sacrifice. The degree of suff'ering to industry from a fall in prices will depend upon the rapidity and extent of the fall. A fall of 30 per cent, within a week will cause much more severe suffering than when the same fall takes place gradually in the course of a year ; and a fall of 30 per cent, in a year will cause keener suffering than when the same fall takes place in the course of 10 years. The difference will, however, only be one of degree. In the early part of the present century violent fluctuations in prices, of from 20 to 50 per cent, within a few weeks, were so frequent and so dis- astrous as to awaken the agitation for monetary reform which culminated in the Bank Act of 1844 Since that date, as it has become apparent that movements of from 5 to 30 per cent, in 10 years also cause serious evils, a growing agitation has arisen for the completion of the work begun in 1844, by some modification of our existing system of money which Avill protect industry not only from rapid but also from the slow move- ments in general prices. OF MOVEMENTS IN GENERAL PRICES. 7 There have been two great periods of slow falling prices in the present century, during which prices have fallen at the rate of about 25 per cent, in ten years, namely, from 1819 to 1850, and from 1873 to the present year. Each of those periods was characterised by continued complaints of bad trade, depressed agriculture, difficulty of employment, and ''sweating.'' Of course, in such periods there are times of special depression and times of fairly steady prices. A fall in general prices can only take place when the supply of goods becomes in excess of the demand. When the supply of goods becomes in excess of the demand, the requirement for fresh goods is checked to an extent depending upon the over- production. Under those circumstances factories tend to be less fully worked, or to be stopped, and workers tend to be thrown out of employ- ment; in fact, all the features of that state of commerce called ''bad trade'' tend to be pro- duced. The degree of " badness" of trade will depend on the extent of the overproduction or excess in the supply of goods, and this will be shown by the rate and extent of the fall in prices. As long as general demand keeps pace with supply there can be no period of " bad trade" of the kind indicated, because goods are then clearly consumed at the same rate as they are produced. Now^, as general prices can only fall when supply becomes in excess of demand, there can be no period of "bad trade" (such as I have indi- cated), without falling prices, and if falling prices can be produced or prevented by the supply of 8 ON THE EFFECTS ON COMMERCE money, at the will of a Government, then falling prices may be regarded as the direct cause of ^' bad trade/' Owing to the reduced activity of commerce which accompanies falling general prices, the production of wealth in a State will be greater with steady prices than with falling prices, for it is obvious that, other things remaining the same, the production of goods over any period will be greater when the factories and workers of a State are steadily and fully employed, than when they are only partially employed. Owing to this greater activity of commerce, and to the fuller em23loyment of workers, a period of steady prices will tend to give larger real incomes to the workers than a period of falling prices. General wages can only increase by improve- ments in production economizing labour (apart from the limited increase which may be possible at the expense of interest, rents, and profit), for it is obvious that, as real wages consist of the goods produced, the workers cannot get larger wages (except as before indicated), unless they can produce a greater quantity of goods by the same time devoted to labour. It is from improvements in production econo- mizing labour that the greatest advance in the position of wage-earners is, at any time, to be anticipated. For the interests of the wage-earners it is desirable that the utmost pressure should be brought to bear upon employers, tending to make them economize labour, because, as necess- OF MOVEMENTS IN GENERAL PRICES. 9 ity is the mother of invention, the more extreme this pressure becomes, the greater is likely to be the rate at which labour will be economized, and the greater is likely to be the rate at which wages will advance. With steady prices there is a greater and better kind of pressure towards improvements in pro- duction than with falling prices. There is a gi^eater pressure because the steady price of goods limits the extent to which wages can be advanced without an increase in the pro- duction of goods per worker. As wages rise from general economies of labour, and employees are enabled to ask and to obtain advances in wages, each employer in turn is com- pelled to do his utmost to economize labour to enable him to get a profit in face of the increasing cost of labour and the fixed price of goods. On the other hand, as the pressure towards improve- ments with falling prices is chiefly due to the fixity of wages, and this fixity is due merely to the unwillin^rness of masters and men to reduce them, it is not of a nature to resist any great pressure; it is not of a nature to produce that extreme pressure towards improvements which is specially fruitful in inventions. The reduction of wages gives the employer a means of avoiding the loss with which he is threatened by falling prices, such as does not exist with steady prices. With falling prices the reduction of Avages is always before the employer as a ,possible way of avoiding a loss, whereas, when steady prices render continuously advancing wages a permanent feature of commerce, the employer is always threatened with a loss, and must continually seek to introduce labour-econo- 10 ON THE EFFECTS ON COMMERCE mizirig improvements as the only possible Avay of avoiding this threatened loss. By the continuous rise in wages, the employer's thought and energy are continually directed to the economy of labour. As there is a greater pressure, so there is also a better kind of pressure towards the economy of labour with steady prices than with falling prices ; for, as the pressure with steady prices comes from advancing ivages, or from the increasing cost of labour the employer is directly compelled to make use of labour-saving appliances of all kinds, and to do his utmost to economize labour in every way. With falling prices, on the other hand, the pressure does not come from a demand for greater wages showing an increasing scarcity of labour, but from a want of demand for the increasing production of goods in general, which checks in- dustry, increases the proportion of the unem- ployed, and makes it extremely difficult for those thrown out of work to get new employment. Under such circumstances, the aim of the em- ployer is as much to keep his men employed as to make a profit : he is not directly forced to economize labour, as is the case with steady prices when employees ask advances in wages and can easily get higher wages elsewhere. In so far, then, as steady prices insure a more rapid rate of improvement in production than falling prices, they insure a more rapid rate of increase in general real wages. With a certain rate of fall in general prices, improvements in production will only suffice to keep general wages steady. In this case, real wages increase by the fall in OF MOVEMENTS IN GENERAL PRICES. 11 general prices, i,e, by the rise in the buying power of the fixed wages in money. With steady prices, on the other hand, a con- tinuous improvement in production results in a continuous advance in wages, and such an advance in wages is the solution of one of the most serious difficulties of the present time, namely, the difficulty of obtaining employment ; for with such an advance the demand for labour increases more rapidly than the supply. A continuous advance in money wages with steady prices indicates a condition of the labour market quite different from that which exists along with a continuous advance in the buying power of fixed wages due to falling prices, for, in the latter case the difficulty of obtaining employ- ment continues. The advance in real wages which has taken place during the last twenty years has been chiefly due to the rise in the buying power of fixed wages through the continued fall in general prices. Money wages, in general, have probably not increased, they have, perhaps, hardly remained steady, but their buying power has greatly increased owing to the fall of about 50 per cent, which has taken place in staples. This advance has taken place in the face of continued difficulty of employment. Steady prices give another great advantage to the workers by securing to them the whole of any increasing production of goods due to economies of labour, and by protecting them from any fall in wages. The workers, as a body, produce and sell goods and pay large sums as rent and interest. 12 ON THE EFFECTS ON COMMERCE Suppose, during a particular year, they pro- duce goods which, if prices remained steady, would sell for £1200 millions, and are engaged to pay £300 millions as rent and interest. It is obvious that, in the event of goods falling by 50 per cent, in the course of the year, so as to sell at £600 instead of £1200 millions, the workers would only be able to purchase one-half instead of three-quarters of the goods produced, and those who obtained £300 millions as rent and interest would be enabled to purchase one-half instead of one-quarter of those goods. Of course, such a fall, as I have here supposed, could hardly take place in reality and leave the workers solvent, but the supposition serves to explain how it is that any fall in prices is a direct cause of loss to the workers, it serves to indicate how serious an evil a fall in prices may be. Steady prices, then, insure higher wages, in so far as they protect the workers from the direct loss which they experience from a fall in the prices of their products. Steady general prices, then, ofter very great advantages to a State as compared with falling general prices; (1), by making general demand increase as supply, and thus giving full employ- ment to works and workers, and preventing '^bad trade;'' (2), by causing a greater and better kind of pressure towards improvements in production ; (3), by causing a continuous increase in wages, and thus removing the ''difficulty of employment f and (4), by protecting the workers, as a body, from the direct loss they suffer from any fall in the prices of their products. OF MOVEMENTS IN GENERAL PRICES. 13 There is clearly no effectual remedy for bad trade, with its attendant evils, unless some means can be found of preventing any fall in general prices, that is, unless means can be found of making the demand for goods in general increase, at least, at the same rate as their supply. As long as demand does not increase as rapidly as supply, general prices will continue to fall, and the evils which attend bad trade will continue. Falling general prices are inseparable from bad trade, they are the sign that demand is not increasing as rapidly as supply, that overproduc- tion is taking place. Falling prices and bad trade amount to the same thing. The chief difference between rising, and steady or falling prices in connection with our present point is, that rising prices ultimately tend to give a less production of wealth per head of the population owing to the reduced pressure to- wards improvements in production. The extent of this effect will depend on the rate of the rise in prices. With rising prices there may be no j)ressure towards improvements owing to the advances in wages which are obtained being neutralised by a simultaneous rise in the price of goods. In the course of a period of, say, 10 years of a continuous and considerable advance in prices it is, I think, certain, that the decreased rate of improvement in production would result in a considerably less production of goods per worker for the period, than would be the case with steady, or even with falling prices. That is, with such a rise in prices there would be less wealth available for division amongst the citizens, and less real wages available for the workers. 14 ON THE EFFECTS ON COMMERCE On the whole, steady prices, appear to insure the greatest production of goods per worker, the greatest rate of increase in the production of goods, and the greatest rate of increase in wages. Steady prices are as essential in a State to place all contracts on a fair and just basis as to secure the best production of wealth. In a just monetary contract a debt should be paid in money of the same buying power as it possessed when the debt was contracted. When (through the action or inaction of the Government) prices rise or fall during the currency of a contract, in the first case the creditor, and in the second the debtor is compelled to suff*er an injustice. A striking case of hard- ship from an unjust money is presented by the agricultural industries of gold States during the last twenty years. A farmer who fulfilled a con- tract for a twenty years' lease made twenty years ago, would now, through the fall of 50 per cent, in prices due to the inaction of Government, be compelled to pay his rent in money worth about tAvice as much as when the contract was arranged. This instance of agriculture shows how all industries are aff*ected, to a greater or less extent, by an increase in the buying power of money or by a fall in prices. It is true that many of the citizens gain by falling prices from the increase in the buying power of fixed interest or wages, but they gain at the expense of other sections of the citizens. The chief suffering from a period of falling OF MOVEMENTS IN GENERAL PRICES. 15 prices comes upon the large class who are thrown out of employment, and upon farmers. Manufacturers are able to protect themselves from loss, to some extent, by ceasing to produce or by reducing their output for a time, and their employees may be able to protect themselves from a reduction of wages by " striking ;'' but farmers continue to produce, profit or no profit, and must accept a heavier share of the loss from a given fall in prices, because the other sections of the citizens are in a position to protect themselves, to a greater or less extent, from the effects of the fall. From its peculiarly helpless position agricul- ture suffers more than other industries during a period of falling prices ; therefore, whenever falling prices come upon us we immediately hear complaints from the farmers. An instructive case of the effect of rising money or falling prices is that of the National Debt, in which the burden of the debt has not only been increased by falling prices but also by a falling rate of interest. Part of the National Debt was incurred in the early part of the century, when the rate of interest was 5 p.c. and prices were at least double what they are now. As Consols have now risen, owing to the fall in the rate of interest, to about £100, from about £50 at the beginning of the century for say 2^ per cents., every one pound obtained in the early part of the century is now rejDayable with nearly two pounds, and, owing to the fall in prices, each of those pounds is worth two of the pounds in which the debt was contracted, that is every pound of the debt then incurred is now repayable w^ith four pounds of the original buying power. 16 ON THE EFFECTS ON COMMERCE Special attention should be given to this case, because, further on, we shall consider a monetary system which aims at maintaining the rate of interest as well as general prices steady, and thus wholly preventing what seems an extreme financial absurdity, viz: — a monetary law, made by a State, increasing the burden of its own debts, both by causing falling general prices and and by bringing about a gradual decrease in the rate of interest. Steady prices are required to place many other laws and arrangements made by Govern- ment on a reasonable basis. For examjole, the arrangement that Railway and other Companies shall charge a fixed amount per mile is evi- dently unreasonable without steady prices, for when prices rise or fall considerably, the burden of the fixed amount becomes quite diff'erent from what was intended A striking instance of the need for steady prices is the arrangement of the Irish Land Purchase Act, by which the tenants agree to make fixed annual payments for forty-nine years to purchase the land ; for, with a fixed debt and a diminishing revenue from the land owing to falling prices, it may easily become impossible to the tenants to meet their obligations ; whereas, had the Government been in a position to insure steady prices, the arrangement would have been on fair and intelligible basis. Archbishop Walsh directed attention to this instance of the efffect of falling prices in his pamphlet on bi-metallism. It is an instance of the bearing of prices upon agricultural depres- sion and the land question. Had the United OF MOVEMENTS IN GENERAL PRICES. 17 Kingdom been able to maintain general prices steady from 1873, agriculture would have been steadily prosperous, and as the tenants would, on the whole, have had the advantage in all contracts, by getting more than their estimated profit from the land, there would have been no land difiiculty. Steady prices, then, mean good trade, they tend to secure the greatest production of goods per head of the population of a State, and the greatest wages to Wage-earners. They secure a fair distribution of wealth amongst the citizens, and give a fair and intelligible basis for all contracts, taxation, mileage rates, etc. In showing that falling general prices are an evil in themselves, it is not necessary for me to discuss the question whether the fall in prices of the last twenty years was due to overproduction of goods or to scarcity of gold. It does not matter how falling prices are produced, they mean bad trade with its accompanying evils of difiiculty of employment, sweating, etc. There is no effective remedy for this bad trade except the prevention of falling prices. Labour colonies and other proposed remedies leave the cause of the evil untouched. The only remedy for bad trade is to cause the demand for goods to increase at least at the same rate as the production of goods, that is to secure, in one way or another, either rising or steady general prices. We shall see, further on, that it is apparently completely in the power of a State to do this by means of money. [Whenever we have falling general prices v/ith our present system of money, the supply of precious metal is clearly inadequate to maintain steady prices, the precious metal is clearly scarce in this special sense. B 18 ON THE EFFECTS ON COMMERCE Those who say that the recent period of falHng prices was due to overproduction of goods and not to scarcity of gold are simply saying in other words that it was due to underproduction of gold, for it is obvious that had gold been produced at the same rate in proportion to demand as goods in general, goods in general would have remained steady in price. It will be seen, as we proceed, that according to the supply of money, there will be seeming scarcity, or seeming excess of goods, the first accompanying rising, and the second falling prices, the first being due to a greater relative increase in the quantity of money than in the quantity of goods, the second to a greater increase in the quantity of goods than in the quantity of money.] Having indicated how steady prices are neces- sary to insure the greatest production of wealth in a State, as well as to secure a fair distribution of wealth, and to place taxation on a reasonable basis, let us now see what guidance we can obtain as to the right variation of prices in a State, from considering the nature of money in theory, as the standard and measure of value. As the standard and measure of value, money should be made a constant standard and just measure of value. To be a constant standard of value money must have a fixed buying power over products of industry of fixed quality. Now the great staples, unlike many manufac- tured products, remain of practically the same quality from year to year and from century to century. A fixed quantity of those staples may be so chosen that it will represent a product of fixed quality, freely obtained from the earth by the industrial organization. (See Chapter III.) That is, it may be chosen from such goods as are freely obtained from the earth by labour; and from such a number of staples that the effect of temporary scarcity or excess of one kind of goods will be neutralised by excess or scarcity of another. OF MOVEMENTS IN GENERAL PRICES. 19 The metals and minerals must be excluded from this quantity of staples, as their supply is liable to great and prolonged variation, through the discovery or exhaustion of mines. A constant standard of value must have a steady buying power over such a quantity of staples, or, in other words, such a quantity of staples must be steady in price in terms of a constant money, as the quality of the staples is fixed, and their natural supply is free. There may be a temporary scarcity or excess of one agricultural product tending to cause it to rise or fall in price, but with supplies drawn, as they now are, from the most distant parts of the world, a scarcity in one part of the world is likely to neutralize an excess in another part of the world, with the result of tending to give even one article a fairly steady price. The sum of the prices of, say, twenty agricul- tural products would be almost unaffected by scarcity or excess, as the effect of scarcity or excess of some products, due either to the seasons or to the undue direction of labour to their production, would tend to be neutralized by excess or scarcity of other products. Such a parcel of goods then will neither rise nor fall in price in terms of a constant standard of value, for there is no scarcity or excess to make it rise or fall. But when a quantity of say from 15 to 50 of the chief staples is maintained steady in price by means of money, goods in general are maintained steady at the same time by money and by com- petition. (See Chapter III.) That is, a constant standard of A'alue is a money whfch maintains steady general prices. 20 ON THE EFFECTS ON COMMERCE When we consider money as a just measure of value, it is also obvious that it must maintain steady general prices, or must have a steady buying power. For, as the level of general prices is dependent on the quantity of money, which is supplied by the law to commerce, it is evident that the law must regulate the supply of money so as neither to depress prices against the seller nor to inflate prices against the buyer, that is, the law must so regulate the supply of money as to maintain steady general prices. As goods in general are not liable (as explained in the previous argument) to be afffected by scarcity or excess, general prices will remain steady unless they are inflated or depressed by other causes ; but the only other cause that can affect general prices is the supply of money, and the supply of money is regulated by law. Any movement in the level of general prices is there- fore due to the supply of money, and is funda- mentally caused by the Government. Any rise in general prices is a cause of injustice to buyers in making them pay more for goods than they would otherwise require to pay ; any fall in prices is a cause of injustice to sellers in depriv- ing them of a part of the price they would obtain but for the fall. Each kind of goods is liable to vary in price, firstly, from scarcity or excess in production, and secondly, from an excess or scarcity of money. Whenever the second variation hapj^ens, buyers or sellers sufffer losses, which are directly pro- duced by an unjust monetary law. Although general prices are kept steady by means of money (see Chapter III.), particular goods are free to vary in price from scarcity OF MOVEMENTS IN GENERAL PRICES. 21 or excess. It is by the variation of particular prices that labour is directed to supply consumers with what they want. The business of the merchant is to prevent any continued scarcity or excess of particular goods. Merchants, as a matter of fact, recognise this, and continually study the production and con- sumption of goods, with the aim of being the first to notice a scarcity or excess. The fluctuations caused by a bad money interfere with this work of the merchants. The theoretic requirements of a constant standard and just measure of vahie, then, are exactly those which a State is urged to secure, by broad considerations of policy and justice — to obtain the best production and a fair distribution of wealth — to secure steady prosperous commerce, and a continuous advance in wages. It was by such considerations as I have indicated that the States of the world should have been guided in arranging their systems of money. Satisfactory standards of length, weight, and capacity have been arranged in the leading States of the world, but hitherto no satisfactory standard of value has been legalised. The States of the world have confused weight with value, and have been at great pains to define the iveight of their coins, instead of directing their attention to the nature of the thing value. The sovereign, for example, would have been quite a satisfactory standard of weight, but it cannot be a tolerable standard of value, as it is liable to great variations in value from changes produced, by the discovery or exhaustion of mines, by popular fancy for ornaments, by monetary S,cts of foreign States, and by wars. 22 WAYS IN WHICH STATES HAVE SOUGHT Especially in modern times when our appli- ances enable us to attain quickly the utmost rate of production from mines, the precious metals are about the worst possible basis for the value of money, because, as a rule, they will cause long periods of falling prices. In making the value of a fixed weight of precious metal the standard of value, the States of the world have acted as absurdly as if they had made the length of a boy the standard of length, without defining the particular boy. CHAPTER 11. WAYS IN WHICH STATES HAVE SOUGHT TO CONTROL PRICES AND TRADE. Having indicated some of the advantages which steady general prices ofifer to a State, and in particular the great advantage w^hich they ofifer of securing continuous good trade, let us now consider some of the ways in which States have sought to control prices. The level of general prices is of course wholly dependent on the supply of money. In so far as the State can control the supply of money, it can control prices. Until quite modern times the custom of re- ducing the weight of coins was a means of pre- venting falling prices, which, though it seems to have been seriously abused, may often have been carried out Avith the perfectly honest aim of preventing depression of prices, at times when there was a special scarcity of the precious metal. TO CONTROL PRICES AND TRADE. 23 The variation in the weight of the standard coin is a means — though, certainly, an awkward means — of completely controlling prices from time to time. The chief means employed to affect prices in modern times have been the increase or reduction of an authorized circulation of bank notes ; the change from a metallic to a paper currency, or vice ver^sa] and the change from one to another metallic basis for the value of money. The instances of the United Kingdom limiting the issue of bank notes by the Act of 1844, of the United States and Russia adopting paper currencies, the one temporarily, the other perman- ently, and of Germany, the Latin Union and the United States discarding the use of silver, are well known cases of monetary changes made, more or less consciously, to secure a better regulation of prices and trade. Even changes merely of the metallic basis, such as that by which silver was demonetized, have made the difference to certain States of a fall of 50 per cent, in prices in twenty years, of twenty years of depressed commerce and bad trade, instead of twenty years of steady prices and good trade. These different instances shew that a State may, from time to time, make monetary changes involving most important variations in the level of general prices, and especially in the case of paper money, they shew — as we shall see — that the State has, what would appear to be, an entire control, by means of money, over prices. It may be said that in perhaps few of the cases I have mentioned did the effect of the change on general pfices receive very serious consideration 24 WAYS IN WHICH STATES HAVE SOUGHT by the governments which made the monetary changes. This I admit, and it is precisely to this point I would draw special attention, in indicat- ing that the chief function of money is the regulation of general prices. For momentous changes in money have from time to time been made, which would hardly have been permitted had it been generally recog- nised that money had such important effects on trade. In 1872, before the proposed domonetization of silver was carried into effect, Mr. Ernest Seyd and Mr. Benjamin Disraeli, amongst others, di- rected attention to the evils which would follow. They predicted (Mr. Seyd in the most exact manner) the fall in prices and the depression of trade, of which we have had unpleasant experience. In doing so they were pointing to the truth, that the chief function of money is that which it fulfils as the regulator of general prices, the regulator of trade. Much of the progress of economics consists in giving a name to something which has been tacitly recognized without being named. Now the function of money as the regulator of general prices has been tacitly recognized by all writers on money, but in so far as I am aware, no writer has hitherto so clearly recognized its importance as to distinguish it with the name. Regulator of General Prices and Trade; no one, in so far as I know, has hitherto given the function that pro- minence in economic science which is its due. Money is usually said to fulfil the functions of a medium of exchange, a measure of value and a standard of deferred payments ; to these, then, I w^ould suggest that "Regulator of General Prices TO CONTROL PRICES AND TRADE. . 25 and Trade'' should be added, and that this function of money should have a prominent place in the most elementary text-books. Certain monetary schemes have recently been proposed as means to enable the State to secure steady prices and trade. Amongst these schemes, the most prominent has been that known as bimetallism. Bimetallism is, in the first j^lace, a scheme which proposes, as I think, by a singularly interesting and beautiful practical application of the law of supply and demand, to render the two great monies of the world steady in relation to each other — to render them practically one money. It is the only scheme before the public proposing to do this, which can be carried into effect without the consent of silver-using countries. Having in view chiefly the Indian difficulty, certain writers have proposed a gold currency for India as a remedy, but it is clear that this does not overcome the difficulty which remains with China, Japan, and other silver-using States. We are, however, to consider bimetallism as a scheme for enabling the State to secure steady prices. Now, even those opposed to bimetallism must admit that the rapid increase in the pro- duction of silver since 1873 woidd have prevented, either wholly or in great part, the fall in prices which has occurred in Germany, the Latin Union, and the United States, had these States retained the full use of silver as money, even supposing their stocks of gold devoted to currency uses to have been exchanged for silver owing to the con- tinuance of the bimetallic law. The thi^e or four hundred millions of gold. 26 WAYS IN WHICH STATES HAVE SOUGHT which these States have absorbed for currency purposes, would then have been available at the ratio price for the United Kingdom and the few gold-using countries, and, being equiva- lent to doubling the output of the gold mines for the last twenty years, would have prevented, either wholly or in great part, the fall of 50 per cent., which has occurred since 1873 in the prices of those gold-using States. Through the rapid increase in the production of silver, as well as by avoiding throwing all the monetary work of the world on gold, bimetallism would, as it has chanced, have given fairly steady prices for the last twenty years, and would pro- bably give fairly steady prices for many years, if introduced at the present time, but it does not by any means ensure steady prices at all times. On the contrary, either monometallism or bi- metallism will, as a rule, cause falling prices. We come to this conclusion, I think, by con- sidering the nature of the supply of the precious metals and of the generality of goods from the land, and the nature of the requirement of man- kind for those metals and for the eeneralitv of goods. The generality of goods can be obtained from the land in ever increasing quantity, however quickly population may increase (at least until the world becomes fully populated), and at the same time for many of those goods (food stuffs for example) there is a limit, more or less fixed, to the amount each person will want. The precious metals, on the other hand, are dis- covered, from time to time, in limited amounts, and their maximum rate of output from any mines is apt, especially with modern appliances. TO CONTROL PRICES AND TRADE. 27 to be quickly attained. At the same time, there is no limit to the requirement of men for these metals; at any time, fashion or popular taste may rapidly increase the use of them for orna- ment to almost any extent. It may, I think, be taken for granted that, owing to the increase of population, there will be a continuous growth in the demand for the precious metals for ornament. Owing, then, to this increase in demand and to the rapidity with which new mines of the precious metals will, in the future, attain their maximum output, the precious metals will fall or remain steady in value, in relation to goods in general, only for brief periods ; they will, as a rule, rise slowly in value for long periods, and when used as bases for the value of money (as at present), they will cause long periods of falling prices — long periods of bad trade. In past experience we find great variations in general prices, even when bimetallism was, on the whole, more or less effective. The downfall of the Roman empire is attributed by Alison largely to the fall in prices caused by long continued scarcity of the precious metals. This scarcity continued until the discovery of the New World by Columbus, and was probably the chief cause of the widespread system of depreciat- ing the coinage. The coinage was rapidly appreciating from extreme scarcity of metal, and the reduction of the weight of the coins from time to time was quite a legitimate and honest remedy, had it been kept within bounds. The great mines of the Old World had been exhausted in the dawn of history. The discovery of the l*ew World with its great supplies of 28 SYSTEM OF "JUST" MONEY. precious metals, was a peculiar, an exceptional event, and brought with it a period of about one hundred and fifty years, during which prices quadrupled or quintwpled. The first fifty years of the present century, however, saw the produc- tion of the iDrecious metals diminishing, and prices fell about as rapidly from 1800 to 1850 with bimetallism as basis, as they have done from 1873 to 1894 with gold as basis. Between 1850 and 1873, on the other hand, still with bimetallism reigning, the production of the precious metals was such that prices rose, according to Jevons, by about 73 per cent. Bimetallism, then, leaves the regulation of prices to the chance of the mines ; it does not insure steady prices, though it may fix the value of silver in relation to that of gold, and may, at the present time, promise a great improvement over the use of gold alone, as a basis for the value of money. CHAPTER III. SYSTEM OF ''just" MONEY. The monetary system I shall now describe is specially arranged to satisfy the requirements of a constant standard and just measure of value ; it is specially arranged to secure not only steady general prices, but, what we shall find to be also a requirement of a just money, namely, steady prices for State securities to fixed interest, and for all other safe rights to fixed annual payments of money. (Such a money will, of course, leave SYSTEM OF 'MUST" MONEY. 29 speculative securities free to fluctuate from vary- ing risk and profits.) It will be found that when a money fulfils the above requirements it holds the balance even between buyer and seller and debtor and creditor ; it neither inflates nor depreciates any form of wealth. This system I call true paper money, to dis- tinguish it from paper currencies issued on no definite principle; or ''just'' money, to emphasize the fact that money is a creation of the law, and that the key to the solution of the monetary l^roblem is in the idea of justice to buyer and seller and to debtor and creditor. Some features of such a system have been discussed by Professor Jevons in " Money and the Mechanism of Exchange," and also by Mr. Aneurin Williams, in a paper in the Economic Journal for March, 1892. Mr. Williams' paper was criticised by Dr. Giffen in the September (1892) number of the same journal. A work has lately appeared by Mr. A. I. Fonda (" Honest '' Money," Macmillan, 1895) on similar lines to those of this essay. I have briefly considered the chief points of difference between "just" money and "honest" money in an appendix. As there is still an unreasoning prejudice against paper money in this country (a result, as I think, of the painful experience of attempts to use such a money when its laws of issue w^ere quite unknown), it is as well to explain that, even though ^' just'' money is found to be inferior to metallic money, this essay Avill still be of value in so far as it is successful as an attempt to extend the knowledge of the laws of issue of good paper money. For, seeing that paper monies exist in the world, and that new experiments are from time to time being made with them, it is of great scientific and practical interest to ascertain the law^s by which their issue should be regulated. At any moment, even in this country, we may 30 SYSTEM OF ''JUST" MONEY. be compelled to fall back on a pure paper money, as was the case about 100 years ago. It is, therefore, of great practical interest, even to us, to know how the faults of such a money as we used from 1797 to 1819 can be avoided, especially when the present monetary position is such, that the outbreak of a great war might readily create the same intolerable scarcity of a metallic currency as made the use of paper money in 1797 a necessity. A first general idea of the solution of our pro- blem may be obtained by supposing a State in which ten articles are produced per week. These ten articles may be sold at a penny each, if ten pence per week is thrust upon commerce with a certain force. But, if production increases to eleven articles per week, and no more than ten pence per week is thrust upon commerce; then, from speculators ceasing to buy, there will probably be no more than nine articles sold, and there will be over- production of two articles. Under those circum- stances, a partial stoppage of industries, will take place, accompanied by a fall in prices, and difficulty of employment ; in fact, there will be a period of bad trade. Suppose, on the other hand, that with the increase in production from ten to eleven articles, eleven pence is thrust upon commerce, with the same force as ten pence was originally thrust upon commerce, then the eleven articles will sell as originally at one penny each. With any increase in the production of goods in a State, a corresponding increase in the supply of money will give steady prices and steady trade. The whole solution of the problem of steady SYSTEM OF -;< jpsf ''^1|^rHf:Y. 31 prices consists in thrusting money upon com- merce, at the same rate and with the same force as goods are produced and thrust upon commerce. The system of ''just'' money is merely an application of the simple principles I have just explained. It is a system of regulating the issue of paper money by the general price of goods, so as to keep general goods from rising or falling to any considerable extent in price. To render this system more easily intelligible, let us suppose its introduction in the United Kingdom. Let us suppose the United Kingdom to com- mence to change its present system to the one we are considering. A State Issue Department, say that of the Bank of England, would in that case be definitely set apart to issue the new money. For a limited time, say a year, to favour the transition to the new money, this department would accept freely the coin of the realm ; the sovereigns, half-sovereigns, crowns, etc., in ex- change for the pounds, ten shillings, crowns, etc., of paper money ; otherwise, it would only issue the new money in exchange for short dated commercial bills, secured fully by a deposit of the State debt. By this system of issue against short dated commercial bills, the circulation of money may at any time, as we shall see, be rapidly increased or diminished, through varia- tion of the rate of discount. At any time there is an inflow and outflow of money, which may be increased or diminished as the Issue Department chooses. The figure representing the general price of goods, by ^vllich the issue of this money is regu- 32 SYSTEM OF ''JUST" MONEY. lated is obtained in the following way, which, in the actual case, would be determined by law. A sufficient number of the chief products of agriculture, say from fifteen to fifty, are selected as the commodities, the prices of which are to be maintained steady by means of money, with the aim of keeping general prices steady. Probably the twenty articles in the following table would suffice for the purpose. Chosen Standard Market Goods. Quantities. Price. £ s. D. Wheat, - A bushels. @ W - 5 Barley, - B )) X - 5 Oats, - C u Y - 5 Maize, - D J} Z _ 5 Potatoes, - <&C. &C. &C. _ 5 Rice, - )) n _ Beef, - }f n - o Mutton, - >j )) _ 5 Pork, - )f f) _ 5 Bacon, - )) J} - o Butter, - >; )) - o Cotton, - ft )' - 5 Flax, - n )) - 5 Hemp, - i) f) - 5 8 Jute, - >) u - 5 Wool, - j» jy - 5 9 Linseed, - )) () - 5 Timber, - }i )) - Hides, - )> a - 5 Tallow, )f 1) }) ft Standard General Price, - £^100 The prices of those goods are obtained daily from committees of merchants elected in several chosen market centres. On the day of beginning the system, the amounts of each of those commodities, worth £5 at the market prices, w, x, y. &c., of the day is cal- culated, and gives the standard amounts, a, b, c, &c. SYSTEM OF ''JUST MONEY." 33 The standard general price, or the value of all those amounts, a, b, c, &c., on the day of begin- ning, is, therefore, £100. This standard general price is the price to which the issue department seeks to keep the sum of the values of the standard amounts of the chosen goods, at the prices of any succeeding day, as nearly equal as possible by means of its control of the supply of money. On any succeeding day, the values of the standard amounts are found at the market prices of the day, and the sum of those values gives the (jeneral ]jrice of the day which may be greater or less than £100. When the general price rises above £100, the rate of interest is raised, and the supply of money is thus restricted, until the general price returns to £100. When the general price falls below £100, the rate of discount is lowered, and the supply of money is thus increased, until the general price rises to £100. The very beginning of a movement in general prices is indicated by the daily general price thus obtained, and the issue department is promjDtly guided to check a rise or fall. Of course the variation in the supply of money does not affect the chosen goods alone ; it affects all goods; decrease in the supply tending to lower all prices, and increase to raise all prices. It seems desirable to exclude the metals and minerals from the goods chosen to give the standard general price, because they are liable to a sudden increase, or to long continued scarcity in natural supply, from the discovery or exhaustion of mines. With the great rate of expansion of commerce, which steady prices promote, it is probable that, 34 SYSTEM OF ''JUST MONEY." as a rule, the metals and minerals would advance continuously in value from restriction in the natural supply, and being chosen along Avith agricultural prodvicts to give the standard general price, they would cause a continued depression of agricultural prices by this advance. By chosing fixed values of such agricultural products as I have indicated, any temporary excess or scarcity of one product, due either to the seasons or to the undue direction of labour to its production, will be neutralized, as a rule, by a scarcity or excess of another product, and the general prices obtained, as I have indicated, will be the value of a fixed quantity of produce of fixed quality, neither raised nor depressed at any time in relation to other goods by restriction or excess in supply. When the chosen agricultural products are kept steady in price by the system of money, they keep other goods steady by competition, with the exception of those goods which fluctuate from variation in the proportion of natural supply to demand ; but that part of the price of the latter goods which is due to the cost of labour is kept steady by competition. Of course, as has been already said, the varia- tion of the supply of money afifects the prices of all goods, tending to keep them all steady, and this effect of money is merely supplemented by the effect of competition due to the direct fixa- tion of the price of the chosen products. Instead of twenty agricultural products, a larger number of goods, including metals and minerals, might be chosen, so as to be as repre- sentative as possible of every branch of human industry, and a sum of values of such goods SYSTEM OF ''JUST MONEY." 35 might be kept steady in price by means of money, thus keeping general goods even steadier than would be the case with the system I am describ- ing. Such a system, however, would probably cause depreciation of agricultural values from appreciation of metals and minerals, and would not give so perfect a standard as the one I am describing, for in theory money sliould rather keep a fixed quantity of a fixed quality of labour (as represented by, say, the twenty goods in our list) steady in price, than goods in general. The twenty goods I have chosen are suflicient in number, I tTiink, to give all necessary steadi- ness to general prices, and, at the same time, to give a very definite economic quantity as the basis for the value of money. The independent banks obtain the new notes as they obtain gold at present ; namely, as money lodged by the people on current account or in exchange t<:)r deposit certificates; or they obtain the notes, in case of need, from the State Issue Department, on the extra security of a deposit of Consols, by means of a promissory note payable at a short date. Tlie deposit of Consols is to secure the State absolutely against loss. The promissory note is to secure the short period of issue of money. As w^e shall see further on, State debts, under this system, become perfect securities, and the Issue Department, therefore, takes no part in the risks of commerce, but leaves those risks entirely to the banks. With a shoiii date to the bills the rapid contrac- tion of the circulation, in case of need, is sufiiciently insured, without the Issue Department ofiering any interest on deposits. In ordei', however, to 36 SYSTEM OF "JUST MONEY." add to the facilities for contracting the circula- tion, the Issue Department offers a h^w rate of interest on deposits left with it for not less than one month. The Issue Department does not compete with the banks for bills of a longer date than the de- termined limit of, say, six weeks, however perfectly secured, but leaves the banks to take the risk of all unsecured and long dated bills. By the variation of the rate of discount the Issue Department immediately affects the rate of the outflow of money. The banks vary the rate of interest on deposits and the rate of discount on bills in harmony with the variations of the Issue Department, and thus secure the expansion and contraction of tlie circulation throughout the State, as required. Goods tend to be bought and to rise in price when money is €heap, when the rate of interest is low ; they tend to be sold and fall in price when money is dear, when the rate of interest is high. By the varia- tion of the rate of interest the desired steadiness of general prices is secured. The first law for the issue of ''just money" follows from the need for a regulation of general prices ; it follows from the function of money as regulator of prices and trade. The rate of discount must he varied, so as to prevent any considerable rise or fall in general prices, as represented by the daily general price obtained by the Issue Department. With any advance of the daily general price above the standard price, the rate of discount is raised until the inflow of notes so exceeds the outflow tliat the daily general price falls to the standard general price. AVith any fall of the SYSTEM OF ''JUST MONEY." 37 daily general price below the standard general price, the rate of discount is lowered until the outflow of money so exceeds the inflow that the daily general price rises to the standard general price. With a little experience/ the agents in the Issue Department will learn how the rate must be varied to secure, in the smoothest way, the desired steadiness in prices. But it is obvious that the market value of State and other securities to fixed interest wdll vary with the average rate of interest given for money, and that, when the State has control of the rate of interest, it ought not to vary it so as to cause a rise or a fall in the price of those securities. The second la,w with regard to the issue of "just money" — of true paper money, is therefore, that ''the rate of interest must be varied so as to maintain the price of State securities steady.'' State securities to fixed interest must clearly remain steady in price in terms of a constant money because they are State promises to pay fixed amounts of money at fixed dates. The second law of issue determines the average rate of interest. The State is now the source of money, and can fix any average rate of interest it pleases, within certain limits, seeing that paper money costs the country practically nothing. Such an average rate of interest should be fixed as vv^ill cause as little change as possible in the price of State securities, and with them of all un- doubted securities to fixed aimual payments of money. In this, it is guided by the current price of State securities at the beginning of the system. 38 SYSTEM OF ''JUST MONEY." Supposing State securities for the payment of 3 per cent, per annum are worth £100 at the beginning of the system, the discount rate will then be raised above and below 3 per cent, within as narrow limits as will suffice to keep general prices steady, so as also to keep State securities as steady as possible at a market price of £100. By lowering the average rate of interest the State can raise the market price of State securities ; by raising the average rate of interest it can lower the price of State securities. The average iYite of interest determines the price of perfect securities. The variation of the rate of interest, above and below the average, by varying the supply of money, determines the level of the prices of goods in general. The regulation of the general piice of goods, and the regulation of the price of securities are two functions which a good money must fulfil. They are functions of money, because the standard of value can only be maintained as a constant standard by controlling the prices of goods and securities. Money is not, like the standards of length, weight, and capacity, a passive standard, it is an active regulative standard. The distinguishing feature of money as the regulator of the prices of goods and securities is the variation of the rate of interest. The variation of the rate of interest performs a similar function to the rising and falling of the governor of a steam engine. Continual variation of the rate of interest takes place with any money ; if it is not done by a State Issue Department, it is done by bankers and money brokers. SYSTEM OF "JUST MONEY." 39 It is obvious, however, that, as the first law of issue is to maintain general prices steady, the average rate of interest is, to a certain extent, beyond the control of the State, and depends on the profitableness of commerce with steady prices. With steady prices the rate of interest would be much higher than it has been with a period of falling prices, such as we have recently experienced. Starting, for example, at present, after a period of extreme depression of trade, this system could not maintain Consols at the extravagant price they have lately reached, owing to the depression. [It is, however, to be noticed that the rate of discount charged by the Issue Department on, say, six weeks' bills, is somewhat less than the average rate of interest Vv^hich results in the State from this, and which is revealed by the rate of interest which the State must give annually to obtain each £^100 of a loan.] The effect of the second law, then, is to direct the Issue Department to aim at the average rate of discount, which would maintain State securities steady^ but, in any case, to maintain as low an average rate of cliscount as will suffice to keep general prices steady^ tvithout raising the price of State securities. (See next page). Starting with prosperous commerce and steady prices, or once it has been for a short time in operation, the system permits of a steady average discount rate, of a rate w^hich will maintain the price of State securities steady within narrow limits for the future. [The minimum possible average rate of discount with steady prices, that is, the least average rate of discount which would just suffice to keep general prices steady, will probably vary a little from time to time, tending to increase a little when the profits of commerce are affected by great new discoveries, or great improve- ments in pro(^iction; and to decrease a little at times, when the in- creasing wages of labour are pressing upon profits; but, on the whole, it will, I think, remain steady, or move within very narrow limits.] 40 SYSTEM OF ''JUST MONEY." It is, I think, obvious that, with this money, the power of the State over commerce increases with the rate of discount it cliarges, because it takes a greater share of the profits of commerce, the higher the rate of discount. Starting the system, then, with an existing average rate of interest above the miniinum necessary to maintain steady prices, it should be easy for the Issue Dej^artment to maintain State securities steady, seeing it can maintain a higher, though not a lower average rate of interest than that which will just suffice to keep goods in general stead}^ in price. During the course of any month in a State with this money, we might have the rate of dis- count ranging, for example, between 3 and 4 per cent., to prevent fluctuations in general prices, but resulting during any month, and month by month, in an average rate of 3^ per cent. With such an average rate, sufficing month by month to keep general prices steady, State securities to fixed interest would have a certain steady price. The Issue Department might maintain general prices steady during the same months, with a discount rate varying between 4 and 5 per cent., and resulting in an average rate, for any month, of 4^ per cent ; but, in aiming at such an average rate of interest, it would give State securities a lower price than with a 3| per cent, average rate of discount. In a particular case, a variation between 2^ and 3^ and resulting in an average rate of 3 per cent, might suffice to keep goods steady in price, but, suppose commerce had been pros- SYSTEM OF "JUST MONEY." 41 perous when the system was commenced, then State securities to 3| per cent, per annum might have stood at £100. Under those circumstances the State would not. perhaps, adopt the possible average rate of 3 per cent., but an average rate as near 3^ per cent, as would keep State securities steady at the price of £100. It would not be advisable for the State to fix an average rate of interest mucli above the minimum possible average rate, for, on the whole, the higher the rate of interest, the greater would appear to be the restriction on commercial enter- prise, and the greater the return to tlie mere money lender. The variation of the rate of discount introduces no new element into commerce, it is by the variation in the rate of discount or interest that goods are kept at any given price at present. The variation of the rate of discount with "just money " would be practically the same as that which would take place at present, did the mines produce gold for a period of years at a rate sufiicient to maintain prices steady. Much of the need for the Issue Department varying the rate of interest with ''just money'' would be removed by the speculative action of bankers and money brokers. In the course of time, as exjoerience is gained of the variation in price of particular goods, there will be a knowledge of the highest and lowest prices to which each kind of goods may usually attain, by which business men will be guided to check a tendency to an extreme rise or fall in the price of any particular goods. As this ex- perience is gained, prices are regulated, to some extent, by* the speculative action of merchants, 42 SYSTEM OF 'MUST MONEY." and the Issue Department finds less need for a variation of the rate of discount. By this speculative action of merchants, as well as by the speculative action of bankers and money brokers, it seems highly probable that the discount rate would ultimately remain, as a rule, steady, and Avould only be varied at times when some exceptional change had taken place in commerce. It is one of the great merits of this system, that business men have a knowledge of how money will be supplied to commerce, and acquire by experience a knowledge of the effects of the method of supplying money. They are thus enabled to facilitate the smooth working of the system by their speculative action. Ultimately this would secure, as a rule, a fairly steady rate of discount for money from the Issue Department ; an almost perfectly steady price for State Securities ; and a perfectly steady customary rate of interest for money lent on good securities. To realize the importance of the law with regard to the rate of interest, it must be remem- bered that contracts are, at any time, in existence extending to one, ten, twenty, and even ninety- nine years, and that the value of this vast amount of wealth, in the form of rights to revenue, is directly affected by a permanent rise or fall in the rate of interest. Suppose a State made the rate of interest 5 instead of a possible 4 per cent., it would thus make a difference in the value of rights to interest of 20 per cent., and in the United Kingdom, for example, might cause a loss to existing creditors of 600 millions sterling. Considered merely as the standard of value, SYSTEM OF "JUST MONEY." 43 a constant money should be supplied in a State at a constant rate of interest. If the use of a £100, for six weeks, can be obtained in one part of the State at a given time at the rate of 3 per cent, interest, it should be obtainable at any other time and in any other part of the State at the same rate, otherwise it is not constant in value in relation to itself Regarded as a con- stant standard of value, it is not at first glance apparent that money should have a steady buy- ing power over goods in general, but it is at once obvious that it must have a steady buying power over itself But money is hot merely the standard of value, it is also the regulator of prices and trade — the means of preventing inflation or depression of prices and trade, and the fulfilment of this function necessitates a variation of the rate of discount. As ' any variation of the rate of discount is, however, arranged to produce a certain average rate of discount, the result of this variation is the establishment of a fixed average customary rate of interest in the State, for money let on good security ; that is, the result of this system is really the practical realisation of the ideal of a constant standard and measure of value, namely, a steady rate of interest or price for money. " Once the system was fairly in operation, and it was found, for example, that a 3f per cent, average rate of discount sufficed to keei3 general goods steady in price, and State securities to 4 per cent, per annum steady about £100, the State covild then fix the average rate of discount by law at 3f per ce]?t. ; that is, the fixity of the average 44 SYSTEM OF ''JUST MONEY." rate of discount would ultimately be recognised and defined by law. At this point it is desirable to note that the function of money as the regulator of prices and trade, as the means of preventing inflation or depression, is a function which any money must fulfil. In order to adjust the level of general prices to that height which any particular supply of money justifies, and especially to prevent the continual tendency to inflation of prices, a con- tinual variation in the rate of interest must take place with any system of money. When a State fixes the rate of interest and permits a free supply of money at the fixed rate of interest in exchange for perfect securities, i.e., for State securities to fixed interest; general prices soon begin to rise, and rise with ever increasing speed until such wild inflation as took place in France with John Law's system, and with the Republic's system of assignats, shows the need for something more than a steady rate of interest ; indeed, for that variation of the rate of interest by which a tendency to inflation or depression is checked, by which steady general prices are secured. At present bankers and money brokers do the work of varying the rate of interest according to the demand for and supply of money, and when the supply of money chances, at any time, to be such as to maintain steady prices, they vary their rates of interest in much the same way as they would do under the system we are con- sidering. We can now realise how "just money" neither inflates nor depreciates any form of wealth. SYSTEM OF "JUST MONEY." 45 Buildings and agricultural land are maintained steady with goods in general, no change in their value is due to money. A rise in the value of land and buildings may take place from the increase or movement of population, a part of which the State may secure for the common good by taxation. Secure rights to fixed annual payments of money are kept steady by the steady average rate of discount. There remain only wages to be considered. Wages are free to rise, and they rise continu- ously. Rising wages are the gi^eat result of ''just money/' removing, as the)^ do, drfficulty of employment, sweating, &c., and raising the wage- earner into a position of striking independence. No general rise in wages can, however, take place except as a result of a corresponding improvement in the quality of labour, for with steady general prices (apart from a small and limited rise which might take place at the ex- pense of interest and profit), without improve- ment in production, there would be no increase of goods to make an increase in real wages. This system of money can be national or inter- national. I shall shew that it gives great ad- vantages in foreign trade to any single State adopting it and competing with other States having such a money as gold has been for the last twenty years. It can also be shown that, as it may be started wdth advantage by one State, so any number of States may unite to issue money on the same list of goods, on prices from the same markets, and at the same average rate of interest, and can thus have constant monies having a steady value in relation to each other. 46 SYSTEM OF ^'JUST MONEY." [Such a common money would form a good basis for the federation of a number of States, for it would tend, in many ways, to favour commerce between the States. Any important group of States uniting to use "just money" could, at certain times, render the use of precious metals almost impossible to other States, by each agreeing to buy up so much precious metal annually. States using metaUic money would be exposed to the danger of this action by States using paper, whereas the latter, having money entirely within their own control, would not be at the mercy of foreign States. At present a gold using State cannot buy up gold to injure the commerce of a foreign State at a time of war, because in buying and locking up gold it w^ould injure its own commerce as much as that of the foreign State. Paper-using States, on the other hand, can "do this without injury to their own trade. It will, as a rule, pay them to do it, for they will afterwards, as a rule, be able to sell the gold for a much larger quantity of the depreciated goods of foreign States than they required to give to purchase tlie gold.] I need hardly say that under this system, although the State is the source of money, the Government obtains money for its requirements exactly as with the present system. When it requires to make exceptional expenditure, as at a time of war, it obtains the money as a loan from its citizens, at the average rate of interest. By raising the money in this way, it takes capital from wliere it can be most easily spared. Having now indicated the essential features of this monetary system, it remains to explain the position of the bullion department. In the transition from a metallic to the new system, the State Issue Department accepts, for, say, a year, bullion and coin freely in exchange for notes, at the rates which have been current, e.g.^ the sovereign for the pound. If the Issue Department did not do this, there would possibly be a severe fall in the price of gold. In the event of the change being made at a time of rapid increase in the production of gold, practically the entire metallic currency might be SYSTEM OF ''JUST MONEY." 47 exchanged for notes, at any other time a large part of a great metallic currency would probably be exchanged for notes. The large stock of bullion which the Issue Department thus obtains has no essential con- nection with money. The State might lock it up, as in a military chest, and yet, under certain circumstances, the mines would supply more at a price than the arts could take, and gold would fall continuously in relation to the note. Had such a money been instituted in 1850, say, by the United Kingdom, the price of the sovereign would have fallen gradually to perhaps under 12s., even supposing the Issue Department to have locked up the entire metallic currency existant at the beginning of the system. The State might sell the whole of its bullion and leave the business of dealing in gold to independent merchants. But, probably, the best policy would be to sell gradually any stock not required to permit the Issue Department to take upon itself the work of dealing in precious metals, that the State may pay its notes in a fixed value y though not a fixed iveujJtt of precious metal. When the general price of goods is fixed, instead of the price of gold, the precious metals are free to fluctuate like any other particular goods, but from the commencement of the system the citizens can always obtain from the State Issue Department the same value of precious metal for a pound as could be obtained at the beginning. That is, the amount of precious metal obtained at any time for a pound, will purchase as much of the goods in general of the State as the sovereign did when the new system was begun. * 48 SYSTEM OF "JUST MONEY." For general convenience, then, the State Department will coin the precious metals and keep a stock of those metals in the form of coin and bullion. It will be prejDared to buy and sell the precious metals at prices which will be deter- mined by the outside price and its own stocks. With an increasing inflow of precious metals it may reduce its price until the inflow ceases ; with an increasing outflow it may raise its price, and thus maintain its stock of precious metal within any limits which the Government may, from time to time, consider desirable. Briefly stated, this system of money consists in the issue of notes by one or more State offices in exchange for short dated bills secured by State debt, at such an average rate of discount as will maintain State securities to fixed interest steady in price, at least from the time when the average rate of interest becomes established, and at such variations above and below the a^^erage rate of discount as will suffice to keep the general price of goods steady within narrow limits. The Pound Sterling under this system is any note in issue, bearing upon its face the words — One Pound Sterling. It derives its value from its utility and scarcity, being maintained at a fixed value by its mode of issue. This fixity of value would be defined and guaranteed by law. It thus forms the practically constant standard and just measure of value of the State. As a constant standard of value it embodies or represents the value of a fixed quantity of a fixed quality of goods, representing a fixed quantity of a fixed quality of labour. It is a fixed and definite economic quantity. SYSTEM OF "JUST MONEY." 49 [Mr. Gide, the eminent French economist, in his text-book on Economics, is of opinion that an advance can be made on paper money by a system of book-keeping — debt canceUing debt. But this is not so, money, as the medium of exchange, is a labour- saving appHance, giving a great economy to commerce over any system of book-keeping.] The great practical monetary problem of the present time is to make the general demand for goods keep pace with their supply, and thus prevent depression of trade, and ''the difficulty of employment.'' "Just money'' does not merely j^ermit demand to keep pace with the supply of goods, it compels demand to keep pace with supply. Money is, as it were, thrust upon commerce so as to increase the supply of money to buyers with any increase in the quantity of goods produced. Commerce may increase its rate of expansion, its rate of increase in the production of goods to any extent, but this will never cause over-pro- duction ; for with the increase in the production of goods the people obtain such an increase of wages, profits, &c. as enables them to buy up the goods produced at customary prices. In an imaginary State in which all the citizens are paid wages by the Government, any increase in the production of goods is removed at usual prices by a sufficient advance in wages. Sup- pose, for example, the average production of goods per worker increases from 30 to 33 articles per week, then a rise of wages from, say, 30 to 33 shillings per week will permit the sale of the extra production at steady prices. In the present form of the State the same thing can be done automatically by such a system as ''just money." 50 CONSIDERATION OF OBJECTIONS CHAPTER IV. CONSIDERATION OF OBJECTIONS TO PAPER MONEY. I shall now consider objections which have been made to paper money in general, and to some features of the system which has briefly and in outline been described. A common objection to any kind of paper money arises from the popular idea that, to possess value, the notes must be a promise to pay something, or must be ''convertible" into something. I need hardly, however, say that we have actual experience of paper monies in opera- \tioii at present, the notes of which are not promises to pay anything ; or that theoretically the value of a paper money is dependent on its utility and scarcity, like the value of any other thing. Tram-cars could be maintained at a steady price, even though they cost nothing to to make, if their supply was restricted: their value in this case would depend on their utility and scarcity, just like the value of paper money. Money, as the medium of exchange, is a labour-saving appliance of the utmost utility. The supply of paper money can be controlled with the greatest precision. Having a definite value from utility and scarcity, paper notes are convertible at the shops or banks into gold, silver, and all other goods. The stability in value of "just money'' is specially secured by the arrangement that the notes are freely accepted by tlie Issue Department in exchange for interest-bearing deposit certificates of the same nature as consols, and that the great body of those in issue, at any TO PAPER MONEY. 51 time, onust return within six weeks to the IssUe Department in payment of hills. In criticising similar monies to the one that has been described, both Mr. Walter Bagehot and Dr. GifFen dwell specially upon the difficulty of obtaining the prices of the chosen commodities. So greatly, however, do the systems they consider differ in detail from ''just money,'' that few of their criticisms apply to it. With ''just money'' it would not be necessary " to put the quality of beef, or pork, or tea into an Act of Parliament." The Act of Parliament would merely name the goods chosen to give the standard general price, and state the principles by which committees of merchants, elected in a few chosen market centres, would be guided in returning the prices of those goods daily to the Issue Department. These matters could be laid before Parliament by a committee of specialists. The committee of merchants for each kind of goods could be elected by dealers in those goods at the different market centres. For each kind of goods two, or three, or more centres could be chosen. The chances of error would be reduced by obtaining quotations from several markets for each kind of goods. The committees would be guided in their quotations by the price-move- ments of a leading brand or quality of the goods. In this system it is rather the variations of the market than the actual prices of any brand which are important; but it would be desirable that the actual net prices of a leading brand should be the basis of the quotations. Where actual sales were not made, the committee would 52 CONSIDERATION OF OBJECTIONS estimate the price of the goods by the feeling of the market. The publicity given to the quotations of the committee would permit their work to be criti- cised by the electorate. The mode in which prices are obtained is only an application of the ordinary method by which any important business house gets reliable quota- tions, perhaps hourly, it may be, of many differ- ent kinds of goods. There is certainly no difficulty in getting sufficiently accurate quotations of the prices of the chosen goods ; for to do all that this requires, is a matter of every day experience in business. There is no difficulty in getting most accurate prices. But great accuracy in prices is not necessary to the system, for the daily price merely guides the variation of the rate of interest. The officials in the Issue Department have other guidance from the rate of outflow of money, which, with a little experience, Avill help them to form an estimate of the movement of prices, inde- pendently of that given by the merchants. The fact that the rapidity with which the rate of interest is varied is left to the experience of the officials, lessens, in a great degree, the importance of the prices returned by the merchants. The officials merely require an indication of a move- naent from the merchants, they merely require to know that prices have risen or fallen. In the course of time, it will, I think, be found that, under normal conditions, the outflow of money increases in a certain normal way, and the officials might ultimately be able to regulate prices by the variation from the normal of the rate of TO PAPER MONEY. 53 outflow of money, perhaps with but little need for aid from the prices returned by the merchants. There is nothing, then, in this matter of obtaining prices that seems to present any difiiculty. The objection to paper money on which the greatest stress is commonly laid is the danger of over-issue. On this subject there has been much confused writing, from the want of a clear definition of a right issue of money. In the same article we may find a writer taking, at one point, a rise in the price of gold, at another, inflation of general prices, as the sign of over-issue. Now, inflation of general prices is the sign of true over-issue, though, of course, a kind of over- issue takes place whenever notes are issued in excess of the amount permitted by law. For our present purpose two kinds of over- issue may be distinguished : — firstly, the over- issue which arises from ignorance of the depen- dence of prices upon the supply of money ; and secondly, the over-issue which may arise from the suspension or breaking of a law. The assignats of the French revolution, and several paper currencies of American States were instances of the first kind of over-issue, that is, of over-issue owing to the want of knowledge of that regulation of the supply of money, by which inflation or depression of prices is prevented. This kind of over-issue is clearly impossible with *'just money.'' It is, however, this mode of over- issue which has been generally in the minds of those who have written most about the danger of over-issi^e of paper money. It might be shewn that the strong prejudice against any kind of 54 CONSIDERATION OF OBJECTIONS paper currency which exists, has been inherited from our fathers, and can be very largely ex- plained by the painful experience which they had of paper issued in ignorance of the laws of money, in such a way as to break in the most glaring niauner those very laws of issue which are the peculiar features of the money we are considering. Paper money, like the steam boiler, is capable of being of the greatest utility to mankind ; it is also, like the steam boiler, a j^i'obable cause of disaster in the hands of those ignorant of the laws by which it should be regulated. Paper money can be the worst or the best form of money. The second kind of over-issue occurs wherever a definite law for the issue of a paper money exists, and this law is susj^ended by the Government. This kind of over-issue may occur with any system of money. It is liable to occur at any commercial crisis with the notes of the Bank of England. On three or four occasions within the last hundred years, the Government of the United Kingdom suspended its law with regard to the jDayment of the notes of the Bank of England in gold. On those occasions, owing to export of gold and to hoarding, the country was left with so inadequate a suj^ply of a medium of exchange, that goods became unsaleable, even at a great reduction in price, and Government was forced to relieve the monetary stringency by permitting the issue of pure paj)er money. To this kind of over-issue our existing system of money is, from its very nature, liable ; so much is this the case, indeed, that it has been proposed TO PAPER MONEY. 55 by Mr. Goschen and others to make the right to suspend specie payments, on certain occasions, a part of our monetary law. True joaper money also, is issued on a definite law, and may be over- issued, like any otlier kind of money, when the law is suspended; but the law, from its ver^ nature, always gives a sufiicient supply of money to permit the sale of goods in general at average prices and, therefore, with true paper money Government is never liable to be compelled to suspend its law. Banking is rendered peculiarly safe by the system of '\just money,'' for, in the first place, State and Munici23al securities are rendered per- fectly safe by the fixed average rate of discount ; and, in the second place, commercial bills are rendered much safer than tliey have hitherto been, by the steady general price of goods. The banks have recently made large profits through the advance in the price of such secur- ities as consols (owing to bad trade and the very low rate of interest). With a rapid change to good trade, they Avould be liable to make heavy losses, from a fall in the price of such securities. Under the system of '^just money" they are free from this risk. Under the same system they have also very complete protection from risk of loss by com- mercial bills. For the average commercial bill is a means to give the buyer time to sell the purchased goods to obtain the money to pay for them, and, hitherto, the buyer has been liable to find that, goods are rendered unsaleable, even at a great reduction* in their prices, whenever a certain 56 CONSIDERATION OF OBJECTIONS distrust is awakened, causing the currency to disappear by hoarding or export of coin. When the scarcity of money reaches a certain point, the familiar banking and commercial crisis occurs; the direct cause of the crisis being the sudden fall of, j^erhaps, from 20 to 50 per cent, in prices, and the unsaleability of goods, in any quantity, even at the reduction. As the commercial bills, which form the great part of the securities held by the banks really represent the goods which are being offered for sale, it is obvious that any rapid and considerable fall in prices will be likely to cause a banking and commercial crisis. The typical commercial crisis usually begins with good trade and inflation of prices, until a drain of gold from the banks begins. A panic then takes place and the currency vanishes owing to hoarding. When the currency disappears goods become unsaleable. Under such circumstances, the Government in the United Kingdom has frequently been compelled to authorize the Bank of England to susjDend specie payments, and supply the want of coin by an issue of pure paper money — by an issue of money which there is no temptation to hoard. On several occasions, but for this action, there would have been a complete collapse of the Bank of England and of the entire banking system of the United Kingdom. Such has been the general character of the commercial crises in the United Kingdom, during the last hundred years. The commercial crisis is clearly liable to happen TO PAPER MONEY. 57 wherever there is a currency of precious metals, and distrust is awakened. It cannot occur without a great scarcity of money or, what is the same thing, without a great fall in prices. It is rendered impossible by the system of ''just money/' which, in maintaining general prices steady, renders the bills which represent goods, as well as goods in general themselves, extremely safe investments, compared with what they are at present. The strong prejudice which exists in the United Kingdom against paper money arose from painful experience of crises in the early part of the century, due rather to the use of bank notes and gold together, than to the use of paper money. At that time every bank had the right to issue as large an amount of notes as it pleased, with- out being required to keep any particular amount of gold against the notes issued. The evils which resulted from this system were of the most terrible character, and were attributed to paper money, although they were really due to a bad system of issuing hanh notes, i.e., notes payable with ^ fixed weight of gold. Between 1797 and 1819, when the Bank of England was authorized to suspend specie pay- ments, to supply by its notes the want of a medium of exchange, commercial crises were specially severe in country districts, owing to the extreme scarcity or entire absence of a legal tender medium of exchange. London was supplied with a legal tender money in the notes of the Bank of England, and suffered but little from the crises ; but the pro- vinces were left with the notes of the country 58 CONSIDERATION OF OBJECTIONS banks, which, during a panic, became quite useless as a medium of exchange. The awful crises of this period were naturally attributed to paper money ; they would be more correctly attributed to the want of legal tender money, together with a system of unlimited note issue, at the option of any bank. The danger to foreign trade is another common objection that is brought against the use of paper money, This is the first objection upon which Dr. Giflfen dwells in his article — " Fancy Monetary Stand- ards" — in the Economic Journal for September 1892. He indicates his belief that the change to such a paper money as we are considering, would prevent foreigners drawing their bills in London, and thus deprive London of an attraction for foreign business. I should, however, like to know more minutely how the change would prevent foreigners drawing their bills in London. The sovereign is still coined — and in the market — under the new system. It is supplied by the banks, and can be obtained as conveniently for foreign payments as under the existing system. There is no reason, that I can see, why London should not remain the safest, the cheapest, and the most convenient centre for gold payments under the new system, as it is under the existing system. It is easy to make vague statements about danger to foreign commerce from paper money ; but not so eas)^, I venture to say, to put those statements into scientific form in reference to the money we are considering. Even supposing the change to paper money tends to prevent foreign payments being made TO PAPER MONEY. 59 in London, the loss on this account to British Commerce would, I think, be altogether trifling when placed in the balance against the very great advantages which ''just money/' as I shall shew^, promises both to the foreign and to the home trade of any State which adopts it. The advantages of having London a centre for foreign payments are, however, very doubtful ; indeed, it is well known that the commerce of the United Kingdom is exposed to a serious danger from the existence of large balances in London owned b)^ foreign Governments and by private persons in foreign States, which may be rapidly withdrawn at a critical time, and thus produce or aggravate a commercial crisis. We are not, however, concerned solely with the United Kingdom in a scientific study of money, but rather with any State or all States. The opinion of Dr. Gifien that a paper money, similar to what we are considering, will endanger British advantage in foreign trade, is clearly an argument in favour of that system of money to every other State in the world, which is at a disadvantage in commercial competition with the United Kingdom. In the articles I have referred to, Mr. Bagehot and Dr. Giffen do little more than state their opinions that the systems they are criticising would endanger our foreign trade. Against these opinions it is possible I think to advance scientific proofs of the immense advantages which a true paper money promises to a State in its competi- tion with foreign States having appreciating gold currencies, such as the money of the United Kingdom and the leading States of the world has been for over 20 years, and such as money on the basis of a fixed weight of precious metal, is likely as a rule to be. 60 CONSIDERATION OF OBJECTIONS The first definite advantage to the paper-using State, arises from doing the work of a gold cur- rency, with a currency of paper. Such a State as the United Kingdom, for example, in replacing, say, 100 millions of gold with paper, would have a much larger stock of gold than would be neces- sary to meet gold requirements. It would there- fore, more or less rapidly, reduce its stock of gold to perhaps 20 millions, and, by using 80 millions of gold for the redemption of State debt, save an expenditure of from 2 to 3 millions a year of interest on debt. A second important economy results from the increase of the currency with population and commerce. An increase of one-tenth in popula- tion and in the production of goods per head of the population, which might occur with steady prices in five years, would give the State, starting with a circulation of 150 millions, an increase of 30 millions of securities in exchange for the increase in the circulation of notes. On the other hand, a State with money on a gold basis would require to part with 30 millions of goods or securities to foreign countries, to get 30 millions of gold for this increase in the circulation of gold and bank notes. There is here a saving of about 5 millions a year to begin with, and year by year the increase of revenue from this cause would continue. A third great advantage to a State using "just money '' results from the appreciation of all gold debts payable from foreign ''gold States.'' If the rate of appreciation of gold that has ruled for the last 20 years continued with the new money in operation, this advantage would amount to about 2 per cent, of annual increase on fixed foreign gold TO PAPER MONEY. 61 payments, giving the inhabitants of the paper- using States, from foreign gold investments yielding, say, 100 millions a year, an increase of 2 millions the first year, 4 millions the second, 6 millions the third, and so on. At the end of ten years, this increase would amount to an advantage of 20 millions a year. In the paper- vising States, on the other hand, from the beginning of the system, the payment of all debts would be in paper money, giving every year the same fixed value, but not fixed weight of gold. But these advantages to the commerce of the ^'just money'' State, though very important, are trifling when compared with what it would gain in competition with States having an appreciat- ing gold currency, through the steadiness in the paper price obtained for goods. The merchants in the gold-using States, with falling prices, would be continually tempted to refuse offers and hold their goods in the hope of a recovery in prices ; while the merchants of the ''just money'' State, with steady prices, would find they could, as a rule, get the estimated price ; they could, as a rule, freely accept the offers which were made to them. From this great advantage population and trade in the "just money" State would expand more rapidly than in the gold-using States. We see the result of such a benefit, in the surprising growth of cotton and other industries in India, in recent years. Those Indian trades have been competing with the same industries of the United Kingdom, industries long established, and with every advantage over those of India in the direct •application of business intelligence. 62 CONSIDERATION OF OBJECTIONS During those years, silver chanced to give India a fairly steady money similar to what "just money'' would have been. A fifth, and perhaps the greatest, advantage of the "just money'' State, over the " appreciating gold" State, arises from the steady industry of the former as compared with that of the latter. As the depression of prices proceeds in the "gold" State, industry after industry is compelled to go on "short time," or to cease working for a time ; strikes occur more frequently and for more pro- longed periods than in the "just money" State, and the proportion of unemployed, or partially unemployed, is, as a rule, greater than it would be in the latter. The dulness of trade is set down largely and rightly to foreign competition and foreign advantages. Population also increases at a slower rate than in the "just money" State, where the demand for labour is steadily increasing. It would probably be under the mark to estimate the difference in the amount of wealth produced in the two States from these causes, at, say, the produce of fourteen days' work of the whole State, or at fifty millions worth of goods per annum in two States of the same size as the United Kingdom. The advantage is with the "just money " State, not merely as regards increase of wealth, but also as regards increase of population and power. All these advantages place the "just money" State, as a whole, in a much stronger position than the "gold" State, in all competition for foreign commerce. When we turn from looking upon the States as wholes, to contrast the position of the separate industries in the two States, we find the advan- TO PAPER MONEY. 63 tages of the State with constant money are even more striking. The industries of the ''gold'' States, when gold is appreciating, are severely handicapped by the increasing burden of all debts, as well as by the difficulty of selling when prices are continually falling. Agriculture will serve as an example of what occurs, to a greater or less interest, in other industries. Suppose the farmers in the two States start Avith leases of 20 years, involving the payment of 150 millions per annum of rent. Then, each year, with steady prices in paper — that is with constant money — the farmers of the ''just money" State are enabled to pay their rent by the sale of the same number of bushels of wheat, whereas those of the " gold '' States are, year by year, compelled to sell an increasing number of bushels to get the wliere- withal to pay the rent, until at the end of 20 years, such as we have had since 1874, they re- quire to sell twice as great a quantity of wheat to do this; that is they have then to give twice as much to pay rent as their competitors in the "just money'' State. The burden of railway rates, of taxes, and of some other expenses in- creases in the "gold" State in the same way, and contributes to render competition with States having constant money a quite hopeless task for States with appreciating metallic money. With such great and obvious advantages, the "just money" State would supplant its "gold" opponents not only in neutral markets, but — sup- posing free trade to be permitted — in the markets of the "gold" States themselves. From those advantages, there result special facilities for foreign payments to the ''just money" State; for* its foreign sales tend to increase 64 CONSIDERATION OF OBJECTIONS steadily ; they tend continually to create an excess of payments due by foreign States. The "just money " State thus tends, as a rule, to be in a position to take gold from, or purchase the securities of the "gold'' States. When it pur- chases securities, those securities appreciate with gold, and are a means at once of increasing, through this appreciation, the payments due by "gold'' States to the "just money" State, and of being sold, when necessary, to meet any exceptional indebtedness of the "just money" State" to the " gold " State. The "just money " State has also its stock of gold in a peculiarly favourable position for foreign payments. It can easily be shewn, in detail, that the State with constant money is in a much better position than the State with an appreciating-gold cur- rency to make foreign payments. The State which uses this paper money has a great advantage at a time of outbreak of war over gold States. It can expand the currency to permit the sudden increase in the production of goods which results from war, owing to dock- yards, arsenals, and most other industries having exceptional demands made upon them. When this sudden increase in production takes place in "gold" States, it causes a sudden in- crease in the demand for money. The circulation does not expand to meet the exceptional produc- tion bf goods. Scarcity of money makes itself felt. Goods are sacrificed and all industries are depressed — many of them perhaps paralyzed — when they should be stimulated. War means a sudden increase of work — ^a sudden extra pro- duction of goods; it means, therefore, a sudden need for more money. TO PAPER MONEY. Q5 States using metallic money are at the mercy of any considerable State using "just money;'' for the latter can, at any moment, cause a com- mercial crisis from extreme scarcity of metallic money by entering the market as a large buyer of gold or silver. It may do so at a time when war is threatened, with the aim of weakening its enemy. As the '' paper-money'' State has money wholly under its own control, it is not exposed to this danger from the action of foreign States. The advantages which paper money offers at a time of war are worthy of most serious consideration ; they may be more than equivalent to an additional army or navy. It is also obvious that as ''just money" causes an ever increasing demand for labour wherever it is current, it can be used as a means of direct- ing the stream of emigration from a mother country to its colonies. States using "just money" would be at a dis- advantage in competing with States using monies based on the precious metals, when a great in- crease in the supply of the precious metals caused those monies to fall in value in relation to goods in general and to "just money." I have indicated how such periods of falling money, with the jDrecious metals used as basis, would probably be brief, and how, as a general rule, there would be long periods of rising money. When foreign money commenced to fall in value, the "just money" States could either suffer the disadvantage for a time, as States are accus- tomed to do at present under such circum- stances ; or they could enter the market as buyers of the precious metal to keep it from falling ; or they coufd protect themselves, for the time, by a 6G CONSIDERATION OF OBJECTIONS tariff, increasing with the fall in the price of the precious metal. I have indicated how ''just money'' may be adopted by any State or group of States, with, as a rule, great advantages to them in competition with other States retaining money on the basis of a fixed weight of precious metal. It remains to indicate the advantages which it offers over bi-metallism as a means to obtain one money instead of two in the world by international agreement. As we have seen, bi-metallism cannot pretend to insure steady prices. Neither can it insure a smooth transition from two monies to one, even when there is a general agreement to institute it, at the existing market ratio at the time of commencing. It would be grossly unjust on the part of the States uniting to institute bi- metallism to aim at a return to the old ratio, or to any other ratio than that existing in the open market. For any advance in the ratio of silver to gold thus produced, would cause depres- sion of prices and of trade in '' silver'' States, and inflation of prices and trade in ''gold" States, in proportion to the amount and rapidity of the change in the ratio. The State has no true right to make any mone- tary change which will cause inflation or depres- sion of prices. It can be shewn that a return to the old ratio would cause a fall in the value of debts contracted in ''gold" States of, probably, 25 per cent., which would mean a loss of, pro- bably, 500 millions to creditors in the United Kingdom alone. A return to the old ratio, or to any higher ratio than the market one, cannot be justified by the TO PAPER MONEY. 67 plea, that such a return is only restoring by a rise in prices that which was previously lost by a fall in prices. For though some, who had lost by the fall in prices, would have their loss made good by the rise in prices, many would have a new loss inflicted upon them by a rise in prices from having, for instance, sold their old securities and purchased new ones. It is an absurd idea to imagine that a State can restore, by causing a rise in prices, what certain citizens have lost over a period of years by a fall in prices. A State cannot cause a rise or fall in general prices, without robbing a section of the people. Now, it is a weak point in bi-metallism, that even when the States uniting to adopt it, agree to institute it at the market ratio existing at the time of its institution, they cannot prevent a great sj)eculation in silver as soon as their intention becomes evident. If this speculation raised the ratio of silver to gold to any considerable extent, it would cause a critical depression of prices in ''silver'' States, and an inflation of prices in ''gold'' States. "Just money," on the other hand, may be instituted without danger of either inflation or depression of prices. It may be said, that those who remained doubtful of paper money, might cause depression of prices by hoarding precious metal as soon as they saw the probability of tlie institution of the new system. But in answer to this, it is to be noted that hoarding, in producing scarcity of precious metal, would cause, at the worst, a slow and inconsiderable fall in prices, and under the supposed circumstances, would probably hardly aflfect prices at all, as there would 68 CONSIDERATION OF OBJECTIONS be no pressure to sell goods when the cause of the scarcity was well known to be temporary. Hoarding would not begin until it became evident that the institution of the new money would soon take place, and at this stage the immediate adoption of the paper money, or the gradual transition to it by the expansion of the system of bank notes, would provide an easy and effective remedy for any scarcity of precious metal caused by hoarding. The danger of inflation in ''gold'' States, and depression in ''silver'' States, through the adop- tion of bi-metallism, is, on the other hand, a danger of a great inflation and depression, which the States introducing the system, could hardly in any way prevent. For as soon as it was known that bi-metallism would be established at the market ratio, speculators would be assured that in raising the price of silver to the old ratio, or even higher, that price would be permanently established with the institution of the system. It would, therefore, only be necessary for specu- lators to purchase and hold silver for a short time, when bi-metallism would come to their aid, and render their profits quite secure. Under these circumstances, there would be every temptation to a gigantic speculation bringing with it a vast disturbance in prices throughout the world. Having found that most of the objections com- monly advanced against paper currencies have more weight against our present systems of bank notes and coin than against true paper money, it remains to be considered whether a valid objection to paper money may not be found in some danger arising from the absence of that TO PAPER MONEY. 69 large currency of precious metals, a great part of which is at present always in the hands of the people. The value of this metal currency is largely independent, whereas the value of paper money is wholly dependent on the action of the Govern- ment, and it might be argued that an unscrupu- lous or untrustworthy Goverment could upset commerce more easily with the former than with the latter in existence. But this, I think, is not the case, because it is perfectly easy for a Govern- ment to pass at any time from a metallic money to a paper currency. We have examples of the change occurring every few years. The protection of a metallic currency against the action of a Government is purely imaginary. If it could be shewn that the existence of a large stock of coin was any security, then it is not difficult to modify our system by having a large number of local offices of issue, under a certain local government, each Avith its stock of gold coins ready to be sent into circulation on any emergency. But it is obvious that, at any time when there is a doubt as to the honesty of the Government, a currency of precious metals is most dangerous to commerce, because at such a time, when State and other Securities become doubtful, every one hastens to hoard or export precious metal as the safest form in which to store wealth. In doing this, they leave commerce without a medium of exchange and increase the panic. With a pure paper money the people can also purchase and hoard the pre- cious metals at a time of distrust, but in doing this, they do not remove the medium of exchange, they do not disturb commerce. It may be that from this or some other point of view, practical objections may be found to the 70 THE IMPROVEMENT IN THE money we have considered, overweighing the great advantages which it promises as compared with metallic money. If this should happen, which I think very unlikely (so bad is our present money), I submit that in its outline the system we have considered is still the type to which any good system of money must approximate in so far as any good system of money must neither raise, nor lower the prices of either goods in general, or of State and other Securities to fixed annual payments of money. I also submit that even if "just money'' be found inferior to metallic money, it may still embody the laws by which good paper money should be regulated, and con- tribute to the improvement of existing paper currencies. CHAPTER V. THE IMPROVEMENT IN THE POSITION OF WAGE- EARNERS PRODUCED BY '' JUST MONEY.'' In showing the great advantages which ''just money" promises in foreign commerce and other ways, I have been dealing with the common objections advanced by economists against paper money. But because a scientific system of paper money has not, at least until quite recently, been brought before economists for consideration, I have not been enabled, in meeting the common objections, to touch upon those great advantages offered by "just money," compared with which the advantages gained in foreign commerce are of small importance. I refer to the advantages which ''just money" offers in the internal com- POSITION OF WORKERS. 71 merce of a State, to the workers in general, and especially to the wage-earners. In treating of the eflfects of variations in general prices, I have indeed indicated those advantages ; but it seems desirable to develope the same subject a little further at the stage to which we have attained. The change Avhich such a money as I have described is calculated to bring about is of so remarkable a character that it seems hardly credible a law so simple and so easily instituted should be capable of producing it. There are, however, three chief results of "just money" which explain the great improvement which it eflfects. These results are : — the security of commercial enterprise with steady prices ; the free expansion of commerce with "just money;'' and the special pressure which, w^ith steady prices, is brought upon leaders of industry, causing them to econo- mize labour, and make improvements in produc- tion tending to secure the greatest rate of advance in general wages. Of those three causes of the improvement, the first two tend directly to insure the utmost rate of expansion of commerce ; the third tends to insure the utmost rate of advance in general wages. The security of commercial enterprise with steady general prices favours a rapid expansion of commerce. It is evident that with the assurance of steady prices, commercial enterprise is placed on quite a new basis. When falling general prices are no longer possible, and steady general prices are assured, ^he removal of a great risk and a great cause of loss renders innumerable enterprises 72 THE IMPROVEMENT IN THE safe, which, with falling prices, could only result in loss, and with the chance of falling prices would be too risky to be undertaken. As the security of commerce favours the rapid expansion of commerce, so a free supply of money, at a fixed average rate of interest, per- mits a freedom of expansion of commerce hitherto unknown. At present, any increase in the production of goods is always liable to be checked by a scarcity of precious metals. Modern commerce has, indeed, never been permitted to show the great things it is capable of doing ; it has never been permitted to expand freely. Under the most favourable circumstances in past experience, it has hardly commenced to expand with the ever increasing rapidity which it tends to develope, when inflation of the rate of interest and of prices has taken place, followed by a collapse of prices and a commercial crisis owing to scarcity of gold. Witness the crises of 1857 and 1866, taking place while the great supply of gold from the mines in California and Australia Avas increasing rapidly. On the other hand, with a free supply of money at a fixed average rate of interest, how- ever rapidly population increases, and however rapidly the production of goods per head ot population increases, there is no check or hind- rance from the currency. However rapidly money is taken into circula- tion, the rate of interest does not rise so long as there is no inflation of general prices. The system of ''just money'' prevents inflation or depression of prices, but permits any rate of POSITION OF WORKERS. 73 increase in the production of goods. The security of commerce, then, and the free supply of money, favour the utmost rate of expansion of commerce. The continually increasing rate of expansion of commerce, causing as it does an increasing need for workers, is a factor in helping the rate of advance in wages — in enabling wage-earners to get quickly the benefit of improvements in production. With steady prices and a steady rate of in- terest, all improvements in production are obtained as increased wages and profits by the workers — that is by those engaged or taking part in any way in the risks of commerce. Under these cir- cumstances general wages increase with a rapidity varying as the rate at which improvements in production are made, and this rate depends on the pressure towards improvements in production. Now, steady prices, as we have seen, insure a greater pressure towards improvement in pro- duction than either rising or falling general prices ; they bring the utmost price-pressure to bear upon leaders of industry, compelling them to do their utmost to increase the rate at which wages advance ; for every improvement in pro- duction is a means of enabling workers to get larger real wages by the same time devoted to work, or to produce more goods in the same time. Although all economies of labour are immedi- ately means of reducing the need for labour, they are ultimately the means, and the only means by which wages advance. With the rapid expansion of commerce which steady prices tend to insure, the wage-earners are rapidly enabled to obtain 74 THE IMPROVEMENT IN THE the benefit of any improvements as increased wages. Increasing wages and improvements in pro- duction react upon each other, the greater the rate of increase in wages, the greater is the pres- sure towards improvement in production, and the greater the pressure towards improvement in production, the greater tends to be the rate of increase in wages. With the growing scarcity of labour which results from steady prices, the position of the wage-earner becomes changed to one of striking independence. He can move about with a cer- tainty of getting employment easily ; he is sought for, instead of requiring to seek employment. With continued steady prices, there would probably be a general advertisement in town and country for workers, who under those conditions would be able to satisfy their aspirations as to hours of work without need for help from legis- lation. Under such circumstances, there is no doubt that within a few years the position of the lowest wage-earners would be raised to one with every desirable comfort within reach, and every year thereafter their position would continue to im- prove. The pressure which comes upon the leaders of industry, through advancing wages, tends to realize, in a quite unobjectionable way, the idea of the transfer of the value of the means of pro- duction to the wage-earners in general. For it is obvious, that the greater the pressure of ad- vancing wages upon profits, the greater is the share of the return from the appliances of pro- duction that goes to wage-earners. As steady POSITION OF WORKERS. 75 prices insure a greater and better kind of pres- sure upon profits, they tend, at any time, to give a greater share of the return from appliances of production to wage-earners than rising or falling prices would give. - To secure the utmost benefit to the people from steady general prices and advancing wages, it would, perhaps, be desirable that any general increment in the value of the land, should be secured for the common good by taxation. It is at least obvious that the question of the taxation of land values assumes a new aspect, when the State is in a position to insure steady prices, and make a continuous general rise in the "value of land a certainty. The question of the ownership of the means of production ceases to have any interest, under a system of steady prices, when any general incre- ment in the value of the rights to land and minerals is taken for the common good by taxa- tion or otherwise. The matter tends to be regarded in quite another way. The leaders of industry are com- pelled by the system to make every effort to improve production, and particularly to econo- mize labour; they are thus really compelled to make every effort to advance wages. The w^age- earners get better work done for them by the leaders of industry with steady prices, than with either rising or falling general prices; and as wages increase, the past value of appliances of production is continually passing to the wage- earners with a rapidity depending on the rate at which improvements in production are made. As it would be desirable to secure any general incremerPb in the value of land for the common 76 THE IMPROVEMENT IN THE good, so it would be advisable for the State to purchase the rights to the various mines of metals and minerals so as to be in a position to restrict the output of those commodities, and obtain the great increase in the value of the mines for the common good; for the rapid expansion of com- merce would otherwise bring about an early exhaustion of mines, and other evils. '' Just money '' promises to remove those evils which have given the chief force to the Socialist movement, and appears to insure, with the present organization of the State, a much greater rate of increase in the production of wealth than the organization of the State advocated by Socialists could obtain ; because the pressure towards im- provements in production which arises in the present State from competition, and is specially stimulated by steady prices, does not exist in the Socialist State, at least to the same extent. It seems to the writer that invention is by far the most important means of increasing the wealth of a people. It may, at any time, within a few years, enable wage-earners to obtain double their previous wages. It is the cause of the continuous increase of wages. Every leader of industry knows how much invention is de- pendant on compulsion and how often it is only when threatened with loss that he makes the extra exertion necessary to discover some im- portant economy. The proverb " Necessity is the mother of invention,'' shows that this experience of the leader of industry is the experience of mankind. Now, the compulsion towards invention which is specially strong in the present State with steady prices, is absent from the State imagined by Socialists. POSITION OF WORKERS. 77 To some it may appear incredible that so great an improvement as has been indicated, should result from a mere word — from a mere change in a law — from a change which does not take any- thing from any class of the people, but actually enriches all classes. A moment's reflection should, however, con- vince any thinking person that it is rather the present state of things which is incredible. For the problem to be solved is an extremely simple one ; it is merely to allow the unemployed worker to go to the land and take wages from it, and to allow him to take larger wages when im- proved appliances render this possible. In its most elementary conception, money is obviously the means of enabling the modern State to do this. It is the means of causing such a demand for labour, that the employer tends to seek the worker, rather than the worker the employer. ''Just money '' does not pretend to be a remedy for all forms of poverty or for all kinds of bad trade ; it does not remedy the poverty and suffer- ings of children, which may be due to the extravagance of parents, or bad trade which the may be due to ''strikes,'' or to war. It is advanced as an effective remedy for " bad trade,'' due to falling prices, and for the evils which accom- pany this "bad trade," namely, the extremely low wages which result from labour being as "a drug in the market", the special depression of agriculture, and the difficulty of obtaining em- ployment. Those evils are of the gravest nature. They are not natural to commerce, but are produced by a bad monetary law, and only continue because 78 THE IMPROVEMENT IN THE Governments have not yet seriously faced the monetary problem. It is mathematically certain that there is no true or effective remedy for these evils, except in monetary reform. It may well be that the system of ''just money'' will fail, as a whole, to pass the ordeal of criticism ; but, I think, it cannot fail to contribute, along with other writings on the same subject, to shew that the problem of securing a constant standard of value is fundamentally a simple problem, and a problem which ought, now, to have a first place amongst questions demanding the attention of economists. There is no economic problem which approaches in importance that of money. For in monetary reform lies not only the promise of the solution of the chief political difficulties of the time, but also the solution of the problem of placing econo- mics on a scientific basis that it may give clear guidance in the development of the State, and attain its true position and dignity amongst the sciences. The consideration of a constant standard of value is the logical beginning of the science of w^ealth. The institution of such a standard in a State produces as great a simplification in the study of economics, as the recognition of the sun as the centre of the solar system produced in the study of astronomy. It is quite a mistake to suppose that the system of money at present in use is an old system. It is not by any means an old system. It differs greatly from that in use in the early part of the present century, and still more from that in use from ancient, down to quite modern times, or, from that in use in ancient Rome. POSITION OF X^toRKER^" ^ 79 AccordiDg to Mr. A. otel Mar,^'-TOe system of money under which Rome attained its utmost prosperity was a regulated issue of copper coins, which were maintained at a chosen buying power by limiting their issue. The copper in the coins was of little value. The value of the coins was derived from their utility and their restricted issue. They were, in fact, of the same nature as a pure paper money. The decline and fall of the Roman Empire began from the time that gold and silver were adopted as money to satisfy the wishes of the army : it is attributed by Sir A. Allison to the falling prices produced by scarcity of the precious metals. After the fall of Rome, right down through the middle ages, the monetary system in general use was one of regulating the supply of money by a reduction from time to time in the weight of coins. It cannot be doubted that this system, which we find in general use throughout Europe until quite modern times, was adopted by practical Statesmen to prevent the fall in prices with the consequent rapid increase in the burden of rents and all debts which the extreme scarcity of precious metal would otherwise have produced. It is an awkward way of preventing a continued fall in prices and is liable to abuse, but it is the most obvious remedy for a rise in the value of coins. When coins, for example, double in value, the first remedy that suggests itself is to halve their size. Favoured by the rise of banking, and by the great supplies of precious metal which followed the discovery of America, a new monetary system 80 IMPROVEMENT IN POSITION OF WORKERS. appeared, in which, by the confusion of weight for value, it was supposed that honest coins should always contain the same fixed weight of metal. Until 1844, the right of unrestricted issue of bank notes, made this system specially liable to cause a great and rapid fluctuation in prices. After 1844, the strict limitation of bank- note issues made it a * system specially liable to cause long periods of falling prices. The money existing since 1844 is quite different from that existing in the earlier part of the century, and both of those systems difffer from earlier monies in being based on the absurd idea that a fixed weight of metal can be a satisfactory standard of value. The periods of falling prices which have occur- red since the beginning of the present century, ha\e shewn the need of a return to the principle of the older systems, of a return to a rational control of the supply of money — to what amounts to a variation in the weight of coins — but to a scientific variation which will make notes always exchangeable for the same Jixed value or buying power of precious metal. If the existing system cannot claim our respect on the ground of long usage, just as little can it claim our respect on the ground of the monetary knowledge of those who established it. It was a new experiment made at a time when very little was known about money. It is an improvement on the crisis-making money which existed prior to 1844 ; but being based on a fixed weight of precious metal, it is a scientific absurdity and is in nearly every respect the opposite of what good money should be. A CONTRAST. 81 The following contrast of our present money in of good money. The Present System of Metallic Money. A dear currency as unneces- sary as gold telegraph wires would be. As a rule unfavourable to both home and foreign commerce, by increasing the burdens of pro- ducers ; by causing falling prices ; by making commerce pay for the dearest instead of the cheapest substance for the medium of ex- change; by causing partial stop- page of industries, and thus re- ducing the amount of goods available as real wages for di- vision amongst the 'workers. Bank notes are liable to over- issue from scarcity of precious metal. Bank of England notes were over-issued four times in the last 100 years. A fluctuating buying power as a rule causing falling prices and bad trade. will recall those features which it is the opposite True Paper Money. A cheap currency capable of saving the United Kingdom from 2 to 3 millions a year from its cheapness compared with gold. Places foreign, as well as home trade, on a secure and in- telligible basis, and as a rule gives very great advantages to the State using it, and competing for foreign commerce. Is not liable to over-issue. The supply of notes is always, by the very nature of the system, sufficient to permit the sale of goods at usual prices. A steady buying power. Assured steady prices good trade. and £1 may rise to buy twice as £1 has a definite meaning, it much or fall to buy half as much, buys as much at one time as as at a given date — 1=2=^ J — a another— a true money, false money. By causing, as a rule, falling prices it enriches the creditor at expense of the debtor. Owners of secure rights to fixed interest, ^re enriched at the expense of workers. F Justice to debtor and creditor. Secure rights to fixed interest neither increase nor diminish in any way in buying power. 82 A CONTRAST. The Present System of Metallic Money. A fluctuating rate of interest sometimes falling for long periods. By the fall in rate of interest since the early part of the cen- tury, from 5 or 6 per cent, to under 2| per cent, part of the State debt has been doubled. £50 borrowed is now repay- able with £100. True Paper Money. A Steady average rate of in- terest maintaining State securi- ties steady in price. £100 borrowed always re- payable with £100. Liable to cause inflation of prices and trade, followed by scarcity of gold and a commer- cial crisis. A commercial crisis from scarcity of money is impossible. The notes are of unstable and uncertain value, from being con- vertible into a fixed weight of gold. The notes are convertible into a fixed value of gold. Of stable and definite value. Money and trade are con- trolled by the chance of the muies, and are liable to be most dangerously affected by hostile, or even, by accidental monetary action of foreign States. Money is under complete con- trol of the State, and commerce is quite protected from injury by the accidental or intentional monetary action of foreign States. As a rule, causes bad trade, Secures permanent good trade, "difficulty of employment," and complete protection from "sweating," and agricultural the "difficulty of employment," depression. sweating and agricultural de- pression caused by falling prices. PROPOSED FREE COINAGE OF SILVER. 83 APPENDIX (A). KEMARKS ON THE PROPOSED FREE COINAGE OF SILVER BY THE UNITED STATES. The possibility, which at present exists, that the United States may suddenly authorise the free coinage of silver at the ratio of 16 to 1, without waiting for the co-operation of other States, gives a special interest to a consideration of the effects of such a change on the United States, on "silver" States, and on '' gold '' States. At the same time this consideration brings into prominence some interesting differences between ''just money'' and Bimetallism. At present, the United States has about 80 millions of silver and silver certificates in circula- tion and about 120 millions of gold coin and bullion. To replace the gold it would require 480 million ounces of silver, and to permit the inflation of prices by, say, from 50 to 75 per cent., consequent on the free coinage of silver, it would require from 400 to 600 ounces more of silver, that is, it would probably require in all, for its new currency, from 880 to 1080 million ounces of silver, or about 6^ years' production of the mines. Unless silver rose up to or above the ratio of 16 to 1, practically the sole source of silver for the United States would be the currencies of '' silver" States, which might contain silver to the amount of from 2000 to 2500 million ounces. The demand for silver would exert its force not over a period of years, but within a few weeks. As soon as the free coinage of silver became 84 ON THE PROPOSED FREE COINAGE assured, speculators in the United States, would sell goods for forward delivery in ''silver'' States to obtain silver about to rise by 50 per cent, in value, and they would buy goodg for forward delivery in the United States, in anticipation of their inflation from the possibility of paying for 100 dollars worth of goods with 50 dollars worth of silver. From those causes there would be a great depression of prices in ''silver'' States, and a great inflation of prices in the United States. The great demand for silver would cause a severe commercial crisis in every "silver" State, and probably compel some of those States to abandon silver for paper money. With these complications the United States would, probably, fail to get anything like the large quantity of silver mentioned, and its great inflation of prices would, probably, end in a sharp depression from the highest point, with a severe commercial crisis. Silver would, probably, rise in gold-price from 20 to 40 per cent., general prices in the United States from 40 to 80 per cent., and general prices in "silver" States would, probably, fall from 20 to 40 per cent. In "gold" States those movements would result in a depression of agriculture and general industry, with a possible stimulation of a few industries supplying "silver" States. The great depreciation of the dollar would act as an enormous bounty to all the industries of the United States, enabling them to force down general prices in "gold" States by, perhaps, from 5 to 15 per cent. When we remember that a similar currency change in the Argentine Re- public so stimulated the agriculture of that covmtry that its production of wheat was trebled OF SILVER BY THE UNITED STATES. 85 in five years, and the gold-price of wheat reduced to the lowest point reached for more than a hundred years, we can form some idea of the severe blow which the proposed action of the United States would inflict on the industries of ^^gold^' States. The blow would fall upon all the industries of ''gold'' States, because the United States, unlike the Argentine Republic, is a manufacturing as well as an agricultural country, and every in- dustry would obtain the bounty. The proposed coinage would inflict a heavy loss upon many wage-earners, upon all with fixed incomes, and upon creditors in general in the United States. In the case of prices in the United States rising by 80 per cent., a majority of the people would find their incomes reduced by nearly one-half, and creditors, as a body, might lose something like 10,000 millions of dollars. The chief suffer- ing w^ould, of course, fall upon the poorer wage- earners and upon widows, orphans, and others with small fixed incomes. The proposed coinage would also cause wide- spread ruin and keen suffering in all ''silver'' States, and intensify the depression of trade from which the workers of " gold " States have so long been suffering. International Bimetallism, at the ratio of 15^ to 1 would produce a similar disturbance of prices. It would cause a great rise of prices in all "gold" States and a great fall of prices in all "silver" States. It is questionable if any scheme for the free coinage ot silver, acceptable to bimetallists, could be arranged, which would give assurance against great inflation and depression at the start; and 86 PROPOSED FREE COINAGE OF SILVER even if this difficulty could be obviated (see page 67), the great fault of bimetallism, in any form, re- mains, viz. : — that it does not provide an effectual remedy for falling prices and bad trade. It can- not pretend to secure permanently steady prices. It cannot even give assurance that prices will remain steady for any length of time after their first brief inflation on the introduction of the system. (See pp. 27-28.) It is not unlikely that after causing a brief period of inflation, the proposed free coinage of silver in the United States would force general prices downward just as before, and make trade as bad as ever : it is no permanent, no effectual remedy for the evil of falling general prices, which has aroused the agitation for monetary reform in the United States. From these considerations it is obvious that any good scheme of monetary reform ought to give clear proof, (1), That the proposed change is necessary, e.g. to remedy serious evils ; (2), That the proposed remedy will be effectual ; and (3), That the proposed remedy will not inflate or depress general prices, either at the start or at any other time. Bi-metallism entirely fails to satisfy the second and third of these conditions. I submit that ''just money'' completely satisfies those conditions; that it is a safe and effectual remedy for the grave evils which have aroused the growing agitation for monetary reform, and that it is a remedy with which there is positive assurance of protection from inflation or depression of general prices, either at the start or at any other time. ON MR. FONDA'S ''HONEST MONEY." 87 APPENDIX (B). REMARKS ON MR. A. I. FONDA's '^HONEST MONEY.'' '' Honest money/' an able and interesting work by Mr. A. I. Fonda (Macmillan, 1895), treats of a system similar in general character to ^^just money." The chief points of difference are the following: — The standard general price in the system of ''honest money" is obtained from one hundred or more commodities, a much greater number, in my opinion, than is needed for the purpose. I think even so small a number as fifteen commodities could be so chosen as to give practically the same price-movements as one hundred commodities, or as goods in general. To obtain the standard general price Mr. Fonda selects a number of commodities repre- sentative of goods in general (including metals and minerals), and takes a value of each in propor- tion to its consumption. I have given reasons for preferring a fixed value of each of a number of the products of agriculture, and for excluding the metals or minerals (p. 19). In this difiference I submit that ''just money" is theoretically better than "honest money," and that in practice, owing to this difference, it would obviate a slow continued depression of agricultural prices that " honest money " would be likely to cause. With the aim of making up for a previous fall in prices, "honest money" takes the average prices of the chosen commodities over five years to give the standard general price; w^hereas "just money" j^akes the actual prices on the day of beginning the system. 88 ON MR. FONDA'S "HONEST MONEY." " I submit that ''just money'' is in this feature at once simpler and more just than ''honest money;'' for in causing arise in prices "honest money" inflicts a loss on buyers and creditors ; and in Mr. Fonda's own words (p. 162), "The fact that in the past the debtors have been wronged to the advantage of creditors by an increasing value of money, furnishes no excuse for a reversal of this injustice ... a wronging of creditors . . . The debtors and creditors of to-day are not the same individuals who stood in those relations at any time in the past, and two wrongs do not make a right." Mr. Fonda would have the State lend " honest money" on all securities considered safest by banks, and w^ould thus permit the State to take part, to some extent, in the risks of commerce. With "just money" the State takes no part in these risks, as the payment of any loan is ab- solutely secured by the deposit of State debts. It is a special feature of "just money," that it makes State securities to fixed interest perfectly safe and stable securities. " Honest money " regulates prices by the varia- tion of the rate of interest, but does not touch upon the need of a steady average rate of interest. I submit that the law of issue by which the inflation or depression of securities is pre- vented, is of extreme importance — of an import- ance only second to the law for the regulation of general prices. A system of money started with- out the knowledge of this law (of the average rate of interest) might be a cause of great injustice to debtors and^^ejpaditors through a mistaken variation ofi45^^a|e of interest. HOME USE CIRCULATION DEPARTMENT MAIN LIBRARY This booK is due on the last aaU ^ff^^. ITEEyBBARYj^^OAN T 1)21— A-40m-l2,'74 ^^^ (S2700I>) General Libranr University of California Berkeley ID WJCCX)