H ■ : i^'n^ THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES -V', .1' ~ -V •'■"'y '■ ■ • . • ■•*■■ ,^-^S'i BERKEL., I THE POLITICAL ECONOMY GREAT BRITAIN, THE UNITED STATES, AND FRANCE, USE OF MONEY. A NEW SCIEiNCE OF PEODUCTION AND EXCHANGE. BT J. B. HOWE. Money cannot be separated from its use ; because, if separated. It ceases to be money. Bank debt is the record of production by the aid of bank loans, and bank reserve is the record of the exchanges for consumption of the things produced by the aid of bank loans. Therefore bank reserre and bank debt ought to be kept in as steady a ratio as possible. The great need of the commercial world, at thi.s time, is a sound theory of production and exchange, by actual demonstration. BOSTON: HOUGHTOX, OSGOOD AND COMPANY. Crbc Hiijcrcitic Prcoo, Cambriiijrr. 1878. Copyright, 1878, Br J. B. HOWE. BIVERSIDB, CAMBRIDGE : 3TERB0TTPED AND PRINTED BT H. 0. HOUGHTON AND COMPANY. 17/ TO THE BANKERS OF THE UNITED STATES. I DEDICATE to yoLi this book, which for good reasons, as I believe, I have entitled "The Political Economy of Great Britain, the United States, and France, in the use of Money. A new Science of Production and Exchange." My theory of money, and consequently of deposits, is, I believe, entirely new, and therefore so entirely opposed to all current ideas and the language which embodies them, that to get a fair hearing at once may perhaps be difficult. Commerce is a series of exchanges ; gold and silver are exchanged for all articles of merchandise in international commerce, where there are no convertible promises to deliver them on demand. Where there are such promises they may be substituted in the national markets, except where ship- ments of money into the markets of other nations are re- quired ; and, in the latter case, the money usually becomes merely bullion. Gold and silver in coin, and all other me- tallic money, when actually exchanged for merchandise of any sort, naturally, because necessarily, cease to be like the ordinary merchandise for which they are exchang«Hl. The relation between one kind of merchandise and another, when the two are directly bartered for each other, is plain and pal- pable, and consists of the different uses to which they are to be put, and the respective quantities of each to be had, et^\ When two Africans or two Indians exchange commodities, they naturally, perhaps instinctively, value by iniits. This is demonstrated by the kind of money they use, where they use tangible money at all. There was at one time a western tribe of Indians which used elk teeth. These must have iv DEDICATION. been substantial!}^ mere units of valuation and purchase. There was an African tribe, says Montesquieu, who used ab- . stract units called Macoutes to make their exchanges. There was really no such thing as a Macoute, except as the name of an abstract unit ; if there had been it was no longer to be found. These were merely units of valuation, and not of valuation and purchase. This is the true nature of all money. Neither gold nor sil- ver, in its character of money, can by any possibility be val- ued, nor can it be used to value, as an ordinary commodity. The bullion can be so valued and can itself so value ; and can value and be valued in no other way. Hence the bullion rates in London are mere barter rates of exchange between gold and silver, or metallic merchandise or commodities ; sil- ver has not fallen fifteen per cent, below gold, but only seven and one half per cent., while gold has risen seven and one half per cent, above silver. One has lost and the other has gained in barter rates, precisely to the same extent. If Ger- many had kept silver as standard instead of adopting gold, while on the other hand the states of the Latin Union liad, as they virtually have, made gold the standard by stopping the free coinage of silver, silver w^ould have fallen less and gold would have risen less than it has in London. The dif- ference resulting from the act of the Latin Union, whatever it might be, would have found expression in Berlin as a rise in gold and not a fall in silver ; and it could not be intelligibly stated in any other terms. On the London side we should, in that case, I will suppose, have a fall in silver of say seven and one half per cent., and on the Berlin side a rise in gold of seven and one half per cent. But rise of gold cannot take place at Berlin unless silver is stationary at Berlin, and fall of silver cannot take place in London unless gold is station- ary at London. A contradiction in terms results which can only be solved by a mutual compromise. The solution is, that gold has risen halfway and silver has fallen halfway. But this has nothing to do with the actual average pur- chasing power of gold in England, and of silver in Germany or India, in the shape of units of money. Average purchas- DEDICATION. V ing power of gold and silver depends upon two elements : first, total number of units coined and distributed ; and second, total amount of circulation accomplished by them. The relation of the metallic merchandise or commodity gold, or the metallic merchandise or commodity silver, to all other merchandise or commodities, is necessarily and unavoidably abstract ; that is to say, the only conceivable relation be- tween them universally existing is that of units ; and this conception is practically carried into effect, whenever, where- ever, and however money is used. This is the reason, and the only reason, why paper money largely takes the place of the metals. All money becomes a substitute merchandise or commodity in all exchanges. But, to speak with rigorous accuracy, it is only a series of units of valuation, purchase, and payment, limited so far as limited at all, if metal, by the quantity of metal to be had ; if convertible paper, limited perfectly or imperfectly by the units of metal circulating at the same time ; and if incon- vertible, only by the exchanges it makes with commodities. This analysis lets in a flood of light upon banking reserve and deposits. If gold or silver in the banking reserve is an ordinary commodity, as Adam Smith and everybody else in his time believed and asserted, and everybody has taken for granted since, then merely to supply the demand is all that is necessary, and bankers keep much more than is necessary, because they keep much more than enough to meet ordinary calls. But if gold and silver money furnish, as unquestion- ably they do, the steadiest currency, not because they are ordinary commodities, but because there is already a vast ac- cumulation of such money distributed with and by commerce, and because instead of being ordinary commodities they are really units of valuation, purchase, and payment, or substitute commodities, if in order to aid the understanding we choose to call them so, then an intelligible relation between deposit- reserve and deposits is immediately demonstrated. If we wish to regulate deposits, we must do it by the re- serve ; if we do not, deposits will regulate the volume of the reserve instead of the reserve regulating the volume of de- VI DEDICATION. posits. Deposits, as distinguislaed from the reserve, are not money, but a power to put in circulation money out of, into, and in some cases (by clearing) in the reserve, equivalent, so far as the circulation into, out of, and in the reserve is concerned, to so much money. They are powers to put in circulation, by means of the stream coming into the reserve, the same amount of money the owners of the powers could circulate if they had bank-notes or metal equaling the powers in volume ; while the banks at the same time have an unlimited power to put in circulation, through loans, all the money the producing market will stand short of a crisis ; and these loans are all supplied, as they are made, out of the same stream. This results from the unit character of all money. The only check possible or supposable in the case, is a limitation of the volume of these powers (created by bank loans) by the incoming stream of deposits, whicli is supplied by actual exchanges of merchandise for consump- tion. Why and how such a limitation naturally results from the use of sound, convertible bank-notes, coming from banks of issue only, having no function of deposit or discount (for all which we have the testimony of Adam Smith in respect to the Scotch banks of issue of his time), and why and how it happens that no such limitation exists in respect to the powers referred to, called deposits, which are equivalent to bank-notes, I have discussed in every form I could think of, and from every angle of observation I could find, in the book referred to above. My theory thus answers the old question : " Of what use is metal in banking reserve beyond supplying the calls of those who want to carry it away from the bank ? " It is equally efficient in solving the problem in respect to the re- monetization of silver by the United States. The objec- tions to remonetization do not arise from the cheapness of silver or dearness of gold. Probably no material difference would exist between the purchasing power of silver in the United States, should our barter rate of monetization drive out all the gold, and the purchasing power of gold, should we refuse to remonetize. Other things being equal and no DEDICATION. vii treasury notes kept out in either case, probably the differ- ence would not exceed three per cent. In other words, we might have in one case three per cent, more of silver dol- lars, their multiples and fractious, than in the other case of gold dollars, their multiples and fractions. To bring about this final result would take some time, but before it could be accomplished, the barter rates of exchange between metals in London would produce fluctuating rates of exchange against outgoing produce from the United States, which could only be paid by an arbitrary credit given to the outgoing produce to cover the difference. This would make its appearance in the bills of exchange, founded upon the outgoing produce. The debit to silver, in the barter exchange with gold in London, would be paid by American outgoing produce. In order to make this payment, it must first, through bills of exchange, be credited with that difference. To create this credit a credit must be entered for bills of exchange, founded upon and resulting from the outgoing merchandise. This would create a debt to be paid by all production and all com- merce in the end, to a great extent, although outgoing prod- uce would retain, probably, a part of the credit it had re- ceived. Furthermore, merchants and bankers of the United States are not yet ready to deposit in the treasury all their silver, and circulate it by means of paper. To circulate it in any other manner, after driving away all the gold, would be intolerable. To substitute silver entirely for gold, and take the load other nations have thrown off in part, and will gradually throw off entirely, would be to go backward and not forward ; it would also cost more than to keep our pres- ent stock of gold, get a little more, and maintain an out- standing circulation of treasury notes to the amount of seventy-five to one hundred and fifty millions. Whether we keep gold, or exclumge it for silver, an equal cancellation of b;ink and treasury notes is demanded, in either case. Ultimately, in case of remonetization at the ratio of 16 and 1, the barter exchange between metals would settle down to a comparatively steady rate ; perhaps three per cent. The change would be an experiment, resulting viii DEDICATION. in no expansion, in the popular sense, but in great inconven- ience, and a postponement of convertibility. The premium on metal in treasury and bank notes is no indication of the contraction we must actually make in the volume of out- standing paper. The real contraction which has taken place is in production and business ; production is the original source of deposits over and above reserve ; the whole volume of money must be reduced. This volume has at this time nothing to do with prices. These are the true and therefore the only really practical objections to the remonetization of silver at the ratio of 16 and 1. The whole subject should be postponed to a con- gress of commercial nations. If the United States choose, they have undoubtedly the same right to remonetize that other nations had to demonetize. They are bound by only one guaranty, and that is to keep their creditors and all other creditors safe from any loss by reason of their act, when the loss is the direct result of it, and from any loss by the act of other nations. Had the United States driven out gold, by undervaluing its barter rate with silver, instead of driving out silver as they did, by undervaluing its barter rate with gold, the late demonetizations would have caused a rise of barter rate on the part of gold, which would have de- preciated their silver dollar regarded as bullion in European markets. This loss the United States would have been bound to make good to their creditors, although the exact tenor of the bond would not have required it. It is not the legal tenor of their obligations which binds nations ; it is their equitable tenor. The barter rates of the two metals, or the barter rate of one metal to-day, as com- pared with its barter rate at a future day, as in the case last supposed, must determine the question ; it is not the relative purchasing power of the two metals considered as one in re- spect to all commodities, nor the relative purchasing power of one metal (e. g. silver) to-day, compared with its purchas- ing power at a future day, that determines the liability. That difference is practically incapable of being ascertained, depending upon an indefinite, I had almost said infinite, DEDICATION. ix number of ratios resulting from each purchase. Govera- ments may depreciate gold forty per cent, in purchasing power, as did the United States, but this they cannot be called upon to make good to home creditors. Purchasing power is one thing ; barter exchange rates between gold and silver, or gold to-day as compared with gold to-morrow, and silver to-day as compared with silver to-morrow, are another thing. Again, were there but one metal, quantity of metal in a money unit of a given name to-day is one thing, and quan- tity in the same unit to-morrow is another thing. To raise this question of barter exchange requires more than one country, and a market like that of the commercial world, composed of the markets of several countries, and purchasing power is not an element of it. The late commission ap- pointed in England to inquire into silver prices in India, re- sulting from the late demonetizations of silver, ought to have been supplemented by a commission to inquire into gold prices in England. From the standpoint of gold and silver money being ordinary commodities, and governed by the laws of ordinary commodities, one commission would have been as reasonable as the other. It is a mistake to sup- pose that bankers have any peculiar interest in opposition to the remonetization of silver ; so far as bank-note redemptions go their interest lies with remonetization. It is really the whole country that is interested against it, and not a part of it. These are some of the new ideas brought forward in the book, and to them I invite the attention of all bankers. I ask this because it is so difficult to get a hearing upon a sub- ject which every one supposes that he understands suffi- ciently already. It is credit of some kind, on a gigantic scale, which is the cause of commercial crises. It comes in some way from bank loans, becjiuse a banking crisis accompanies a commercial crisis. Either the latter causes the former, or the former causes the latter. But it is impossible for com- mercial crises to be the cause ; they are only the result. Banks then are the cause or one of the causes, and tlu' cause is brought to bear through loans, and loans depend upcrn the reserve. X DEDICATION. It is inconceivable how a mass of metal or ordinary com- modity in the reserve can have any effect. It must and can be conceived as a series of units only, like the units of bank credit. Without this conception, the whole subject is chaos. Upon no other conception of money is it possible to un- derstand in what way a reserve of metal can, in any manner, regulate bank loans, or have any necessary connection with them. It is in consequence of the credit character of all money that bank debt, whether in the shape of notes or credit entries, connected with outstanding circulation by means of the reserve, becomes a substitute for an equal num- ber of the units of metal in bank-note-redemption reserve and in banking reserve. Whoever offers metallic money, bank-note money, or credit in bank, to be transferred by check, in exchange for all things on sale, labor included, is by convention entitled to make the exchange. If by any artificial contrivance the money can be used to pay for labor faster than the results of that labor can command the same amount of money the labor cost, the result (which is the main thing to be looked at) is production on credit. The credit consists in obtaining a living by consuming, through the aid of the money advanced, things other than those pro- duced, and retaining the savings of labor in the shape of earnings to be used, as the other portion of the money was, in future support and in paying over future wages out of profits obtained from sales of the overstock by producers to those who cannot sell it to consumers ; in profits out of such sales realized by stockholders, in vast sums in the shape of discount and interest paid to banks and individuals out of the same fund, and in wages indirectly paid out by the re- ceivers of these dividends and profits, through the purchase of railroad debentures, mortgages, city, town, and county bonds ; the proceeds being applied to pay for labor or debts due labor. It is said that deposits arise from sales. This is a mis- take. They arise from production ; and under the English and American system of banking they arise from production DEDICATION. xi on credit. The means of creating the credit consist of the loans of money which are used to pay for hibor faster than labor's results will sell, or can themselves become productive. It is a blocking of the exchanges. This is the real credit. Banks do not make all the loans ; they make the loans by which other loans become possible, and then all the loans taken together constitute the vast system upon which pro- duction on credit is built up. The ability to produce is limited, and hence the power of consuming, if not limited otherwise, is limited by the power of producing. Consumption is thus brought to an average, and being itself thus brought to an average, brings the cir- culation of money, as the means of distributing the things to be consumed, to an average. One class of consumers cannot go far in advance of another, therefore ; and so far as they do go in advance the circulation of money must go equally in advance, and general prices must rise. Production rises in proportion until checked by the law just stated. ^Icmey in the reserve is deposited from the outstanding circulation, which is all the time making dis- tribution to consumers. On the other hand, the increasing volume of deposits shows the increase in the volume of prod- ucts which cannot be distributed for consumption. There- fore, to allow deposits to increase in this manner is to at- tempt to regulate consumption by production, the commerce of commodities by production of commodities. To regulate deposits by reserve is, on the other hand, to limit, at some point, the production of commodities by the commerce of commodities ; and hence if metal constitutes the reserve, it must itself constitute a part of outstanding circulation, either alone or in company with bank-notes, as was the case in Adam Smith's time in Scotland. This is the only kind of real connection between deposits ami banking reserve, be- cause reserve, on the one hand, shows the consumption and therefore the real commerce of the country which supplies it, and, on the otlier hand, deposits show a large proportion of the production of the country which supplies the com- merce ; the ratio between deposits and reserve shows the XII DEDICATION. ratio or proportion between accumulated stocks and actual commerce. If the latter ratio is maintained at an average within short intervals, business is sound and healthy, as in France, with her metallic currency without banks ; if at long intervals only, as in England, under her virtually metallic currency, and in the United States, with their convertible bank-note currency, business is not sound and healthy, be- cause the average can be brought about only by a commer- cial crisis, which, in true economical science, is a rectification of the exchanges, by forces paramount to money and the use of money. My theory of money thus explains all the phenomena of money, in addition" to the fact that I have demonstrated it both directly and indirectly, synthetically and analytically, in advance of this explanation. It shows also in advance what the commission of inquiry into East India " silver " prices discovered to be the fact, that prices have not risen in India in consequence of the fall of silver bullion in Europe, and that any change of this kind must be slow ; while, on the other hand, any change in " gold " prices must be equally slow ; and the changes themselves, when accomplished, will be of little practical importance unless further monetizations or demonetizations on an extensive scale occur. All this is true because gold and silver coin have no universal relation to all other commodities except that of numbers by units, and no mental conception of any other universal relation can be formed. Bullion rates are therefore a part of necessary means to the end, which is coining of units of weight to be used as money. Changes in the latter are the slow and gradual results of changes in the former. No extensive changes in purchasing power are likely to result. Relative consumption of gold and silver in the arts and manufactures is increased by relative increased production, and diminished by relative decreased production. The vast store of silver and gold in the latter shape and the vast store (probably twice as much) in coin, render it practically im- possible that there should be any overproduction of either metal, because the ratio of production to money is so small ; DEDICATION. xiii but, nevertheless, under deposit loans, conservative bankers, manufacturers, and merchants are powerless in checking the advancing tide of ill-balanced production. How to do it I have shown in this work. The question, "What is money?" has, in my opinion, never been answered truly before, because the answer has always been and still is, Real money in the shape of metal is a commodity, like all other commodities. I claim to have demonstrated in this work that it is not an ordinary com- modity, but a conventional one ; in exact language, a unit of valuation, purchase, and payment, and, taken altogether, a series of such units limited in number by the metal which localizes them. Having thus answered the question, " What is money ? " I am prepared to answer the questions, " What are De- posits ? " and " How do they affect production and com- merce? " As articles of commerce are produced and sold in excess of consumption, deposits increase ; as they are sold to consumers who get their money from articles of commerce they have sold themselves, the reserve increases. The circu- lation of money is everywhere and always one and the same thing, because money is everywhere one and the same thing in substance ; and production, commerce, and circulation con- stitute one grand whole, whose minutes are recorded in Eng- land and the United States in deposit and discount banks. It is impossible to understand this fully without a jnvceding analysis (mentally) of money and its uses. It is because all money is essentially a series of units, each of which is pos- sessed of purchasing power, in proportion to tlie number of all of them, nndtii)les and fractions included ; whether units be in the sliape of reserve or in deposits generally or in bank- notes, or in any kind of commodity (even wheat by measure or weight units), that the reserve is in any sense a regulator of discounts. Whatever may bo tlie money in circulation, the reserve, in the absence of artilieial regulation, is made up and consists entirely of money deposited out of that circula- tion ; and that circulation is the circulation of a consumer's market. If, on short averages, seventy-five per cent, only of Xiv DEDICATION. all deposits were kept out on loan, there could be no such thing as we call a banking crisis, because the consumption and therefore the exchanges of merchandise with and among actual consumers, would, upon short averages from that point, equal the production of merchandise and of all commodities and services. There are three grand fallacies which must be subverted before there can be any progress in monetary science : a bank does not deal in debt or credit, as commonly supposed : money (gold or silver) is not a commodity : the doctrine that there can be no overproduction is absolutely false though relatively true. In opposition to these fallacies, I claim to have demonstrated the following propositions : A bank deals only in that additional use of money deposited, over and above the use made by depositors, which the current of deposits enables it to make, and the result appears in loans on the side of the bank and production on the side of the borrower. This additional use may be called the credit cir- culation of money. A bank of deposit can no more deal in its own debt than a house can stand in the air without foun- dation. The moment it deals in its own debt it must be- come a bank of issue in some form. Deposits come only from outstanding circulation. Hence to fix and keep reserve at a certain point is merely to stop using the money of com- merce at a fixed point, instead of using it in further produc- tion. This is demonstrated by the fact that when reserve ends banking ends. Money is not a commodity but a series of valuing, purchasing, and paying units ; otherwise it could never furnish steady circulation and prices. M. J. B. Say's law, that there can be no overproduction, while relatively true in a limited sense is absolutely false, because the abso- lute necessaries of life cannot be overproduced, while the relative can be and are being overproduced in a ratio pro- gressively increasing with the progress of civilization. In France rectification of the latter takes place within short, in England long, and in the United States still longer periods. The present generation of writers and bankers will not ac- cept and act upon these new ideas or theories ; the next will. DEDICATION. XV If banks deal in credit, it must be an ordinary credit like that of meieliants given to merchants ; but this is impossible, because one of the effects of bank loans is to raise general prices. Mercantile credit only raises the price of the mer- chandise sold on credit. Again, bank loans feed laborers, producers, and their familit^s, whether the loans are made directly to first producers Avho originate, or to intermediate producers who produce additional value in the merchandise on its way to market. The latter step into the first pro- ducer's place in bank through a loan which succeeds and also adds to the amount of the first. Neither mercantile credit, nor any credit which resembles it, can accomplish those results which bank loans undoubtedly accomplish, and which every practical man must admit they do accomplish. The premises, being thus contradicted by the conclusion in two very important particulars, must be false. The fallacy that banks deal in their own debt probably arose from the fallacy that bills of exchange, notes, and checks are a " species of currency." If the notes given for merchandise, and the bills drawn against it, circulated gen- erally, like bank-notes, then undoubtedly they would be money as well as bank-notes, and would affect prices in the same manner. They would also be equally efficient in buy- ing the merchandise necessary to support the laborers, pro- ducers, and merchants, who are creating overstock and hold- ing it by the aid of bank loans. But this is not the case. Checks would also be money as well as bank-notes, if they circulated in the same manner, but they do not. They are the instruments to put in circulation the money, which is called the reserve. This word of itself indicates what de- posits are. All the circulation brought about by depositors, ■whether they become such by loan or not, is through the reserve. What has helj)ed to perpetuate the fallacy that a blink deals in its own debt is the old theory that money has a mercantile value. Because this is an error, and money is really a series of units, there is no assignable limitation but a commercial crisis to the amount of circulation, which may be accomplished by means of the reserve. xvi DEDICATION. It is the rise of prices and feeding and supporting pro- ducers and laborers of all kinds which causes that want of harmony in production which can only be rectified by a com- mercial, industrial, and banking crisis. All loans of money, even in France, cause production on credit, but rectification of the exchanges of merchandise and money takes place at short intervals. If we represent the production of absolute necessaries by a circle, and that of relative necessaries by an inscribed polygon, then to designate the production and com- merce of France, we may inscribe a polygon of three hundred and sixty sides, for that of England, one of thirty-six, and for that of the United States, one of eighteen sides. In France, the inscribed polygon, for all practical purposes, is the circle itself, because it touches it so frequently. Relative deviation from harmony of production in the three countries is thus illustrated. The absolute and the relative are practically on a par in France, but are brought together in England and the United States onlj^ by a crisis. It requires a severe crisis to make the inscribed polygon touch the circle in England, and a still more severe one in the United States. The forces at work to bring on a crisis both in England and the United States are in the end par- amount to money and the circulation of money. That the operation of these forces is postponed to so late a period in England and the United States that the banking and commercial crisis is the only remedy, while in France they operate so speedily and continuously that no crisis arising from causes working at home makes its appearance, results from the fact that money is what I have afiirmed it to be, and not a mercantile commodity, and because a bank deals, not in ordinary mercantile credit, or a credit resem- bling it, but in a circulation of depositors' money which is represented exactly by bank loans, and which is in excess of all the circulation caused by depositors themselves. If de- posit banking (without power to discount) could be and were introduced at once throughout France, depositors put- ting their money in circulation by the use of checks, twenty- five per cent, of the money deposited would be sufficient to DEDICATION. xvii meet all culls, and the remainder miglit be locked up. The incoming stioani of deposits would supply the outgoing stream represented by checks. The money locked up couUl not be used by the l)anks ^vith()ut adding seventy-live per cent, to the existing volume of loans. Suppose the banks to use it, however ; it would create a crisis ; but if the banks carefully refrained afterwards from loaning any of the twen- ty-five per cent, now containing the "reserve," there would not be another crisis, because henceforth bank loans would be stopped at a definite point, the banks loaning seventy- five per cent, of all their deposits and no more. This is what I propose for American and English banks in the work referred to. To illustrate the operation of the English and American system as it differs from the foregoing : Suppose the French banks to depart from their wise resolution, not to use more than seventy-five per cent, of the deposits in loans, and to make loans without any limitation by the reserve, they would then introduce the English and American system of banking, and with the same results. As Mr. Bonamy Price says in relation to reserve in the Bank of England, which includes a large amount of the reserves of all the banks, there would still be an abundance of metal in the reserve to answer, and more than answer, all calls. This comes from metallic money not being a commodity, but a series of units, like bank-notes. All this time the French banks would deal only in money in the reserve, precisely as they did at the begin- ning when they were merely deposit banks, and precisely as they did when they limited discounts by their reserve. * The American banks, if pennitted, could, under " specie pay- ments," pay off their debts in a year by turning out the whole reserve and the whole line of discounts to depositors, or by issuing baidc-notes for all dep(»sits to depositors, re- taining the metallic reserve to redeem with. In either case bank loans would soon come to an end, because the banks would cease to exist, and there would be no deposits to loan from and no stream of deposits to maintain loans. Every bank loan, therefore, would come to an end in time, and pro- xviii DEDICATION. duction on credit (not production as a total or on the aver- age) would be brought approximately to the French stand- ard, and the circulation would be both paper and metal as with the Scotch banks in Adam Smith's time, and now in France. Were the American banks thus converted into banks of issue exclusively, it would at once appear that bank debt over and above reserve, which I have called a series of powers belonging to depositors to put money in circulation, out of and in the reserve, is, upon a close examination, noth- ing of the kind. It was only a figurative expression to aid the understanding in comprehending the assertion that the whole circulation is supplied by the reserve. By the sup- posed metamorphosis or change of banks of discount into banks of issue exclusively, it would now appear that when depositors keep their own money, a volume, equaling the total of deposits, is requisite to supply the circulation they cause to take place, but when it is all banked, twelve, fifteen, or twenty per cent, is sufficient, the banks loaning all the rest. It would appear that all new loans are still, as all loans at the commencement of banking were, supplied out of what is called the reserve, because there is no other fund to supply them. Deposits, minus loans, always equal the re- serve, and deposit and discount banks do not loan their credit any more than they loan their confidence or their good faith. Deposit loans come from what is deposited, not from what is not deposited. Not only bank-notes, but mercantile notes, and even credit entered on bank books, without any reserve of metal whatever, mighty nevertheless, be used if the commercial community would agree to do so, and could thus make their exchanges satisfactorily, as they surely could not. The point to be noted and remembered is, that banks can only deal in the money of commerce which comes out of a consumer's market. It must be deposited before it can be loaned, whatever its character may be. The moment a bank puts in circulation anything upon its own credit, it becomes so far a bank of issue. It might enter credits to be circu- lated by check. This would make it so far a bank of issue. DEDICATION. xix After the credit was deposited, it might loan upon it as a bank of deposit and discount, and not before. All this results from the fact that all money, including metallic, is a series of units, of valuing, purcluusing, and pay- ing power, and not in any c;ise an ordinary commodity. Were it such, all exchanges would be made only by the primitive barter of barbarians. The true science of money, of banking, and of bank reserve, will not be understood until this important fact is believed and generally taught. When it is, paper may with great convenience be more extensively used for commercial purposes, if properly limited by metal ; the latter being confined chiefly to international exchanges. For the reasons given, to call my theories by anv other name than I have given them would be a misnomer. They certainly constitute an entirely new theory of production and exchange. I have demonstrated by the chapter on the development of money and its uses, and that in which the monetary systems of France, Great Britain, and the United States are compared, that the original idea of money has been developed in two directions : 1st, that of conventional commodity in the character of units of metal or other ma- terial ; and 2d, that of mere units localized in paper prom- ises ; and that both, iis units merely, have value inversely in proportion to numbers. I have demonstrated that the mind can form no other conception of money than that of a series of units. If all commodities and merchandise were merely circulated as money is, and never used otherwise, no other conception would be formed of them, because tliat would be the only one called for. It follows, in the second place, without reference to devel- opment, and a priori, that such must necessarily be the case with money. In the thinl place, I ilemonsti-ate the same proposition by collateral facts. If metallic, money is a series of units, lim- ited in quantity by the metal which contains and numbers them, then the two metals, gold and silver, ouglit to be in barter value, one to the other, inversely as the weights of the respective masses coined, assuming both to be uuiver- XX DEDICATION. sally in use as money, or approximately so ; and sucli has always been the case. Again, if metallic money is an ordi- nary commodity, bartered for what it buys, like other com- modities, then paper money must be the same, Avhether convertible or inconvertible ; and barter rates of bullion in London ought to give the relative purchasing power of paper as well as gold and silver. But this is not the fact, and ought not to be the fact, if my theory of money is true. Carrying out this unit theory to its logical conclusions, I demonstrate that banking reserve is sufficient to supply all calls from depositors and borrowers, by means of the in- coming stream of deposits supplied by the circulation of a consumer's market. Passing on, I demonstrate the important distinction be- tween money and the circulation of money and the true grounds of the fact generally accredited in the commercial world, that gold and silver furnish the steadiest prices, by showing why this is the case in France, and why it is not the case in England. Possibly I might never have made the discovery referred to had I not commenced my studies with the complex questions, What are deposits, and what is banking reserve ? The practical outcome of the theor}'- for England and the United States is, that even with a circu- lation substantially metallic in the former, the benefit of the regulating qualities of the reserve is lost, because the circu- lation of the gold in it varies with the total of deposits, and in the United States bank-notes and metal in the reserve vary in like manner. The examination of deposits and reserve has also led me to discover that the theory that there can be no overproduction is practically false, and that the disastrous results brought on, in the shape of industrial, commercial, and banking crises, are largely to be attributed to what I call the credit circula- tion of money in banking reserve, giving rise to production on credit, as explained in one of the chapters of the book. The mind almost instinctively repels at first thought the idea that metallic money is a series of valuing, purchasing, and paying units embodied in metal. It may be aided by DEDICATION. XXI examining the process of all the purchases that are continu- ally going on. Units of money are proportioned variously to units of goods, and units of the latter to units of money. The resulting ratios give purchasing power on the one hand, and price on the other, and the various ratios compounded give compound ratios of purchasing power and price. But without a few words of qualification my definition of money would be entirely misunderstood. Tiie idea, iissump- tion, or belief, that either gold or silver coin is an ordinary commodity, having mercantile value, and being therefore an end in itself, instead of only means to an end, is the old mer- cantile theory itself, pure and simple. I would not be understood as affirming that this theory, or rather this idea, can ever be eradicated, or that it would be desirable even if it were possible to eradicate it. The distribution of the precious metals has not been entirely in the tracks of commerce, because some nations receive and keep them in excess of their conmierce, as compared with that of other nations ; and banks have in some countries re- duced the natural portion which, in the absence of banks, they would have required, the surplus going to countries where there are no banks. The idea of mercantile value in money is salutary where gold and silver, or one of them only, constitute the circulation. Stability does not lie in the money itself altogether, but partly in the persistence of the mercantile idea. Where money, however, has attained such complex development as in Great Britain and the United States, it has become one of the needs of the time to subject the phenomena which underlie the idea to rigorous analy- sis, not for the hopeless purpose of supplanting the idea as matter of fact, but for the purpose of scientific demonstra- tion, with a view to the remedy of evils which, with the advancement of society and the progress of improvement, especially in coimtries pcissessed of such productive energy as Great Britain and the Unitt'il St;iti-s, are as.sumin satis- fied with any sum short of one hundreil and iifty millions, so long as such a volume of pa|>er remains not retired ? The premium on gold has nothing to do witli the question ; the contraction of circulation has nothing to do with it. Not- withstanding this contraction, the same volume of paper remains. Whoever wishes to study contraction of volume in a currency which has been convertible, by the light of one which has not been convertible, will do well to look at xxiv DEDICATION. deposits and circulation as they were in 1857 and 1858, and as they were in 1873 and 1874, and since. Expansion of circulation is paying out money, and contraction of circula- tion is receiving it back. We have had enough of the latter, but none of that contraction of volume which must antedate convertibility. Again, will any practical man hazard his reputation by asserting that there will be, under any system of convert- ibility, less than fifty cents of metal to every dollar of bank- note circulation and commercial deposits, which latter are equivalent to a like sum in bank-notes in the hands of de- positors, and the reserve in the possession of the banks, — the two latter being mutually equivalents, while the banks can at the same time maintain the whole volume of loans ? That was the proportion of metal in Scotland in Adam Smith's time, and even in the United States in 1857, the difference being that in Scotland the metal circulated with the bank-notes, while in the United States one hundred millions of it were hoarded ; the remainder of it was in the banks and sub-treasury, and circulating alone without bank- notes in California. If it were practicable, on a return to convertibility, to limit all bank loans to seventy-five, or at first eighty per cent, of deposits, all the hoarded gold would take its place by the side of bank-notes, and the full benefit, not of a metallic basis, but of a metallic limitation to the issue of notes and to the use of the reserve obtained. Be- fore this can be done, writers on money and leading bankers must be convinced of the truth of my demonstration. That they will be in process of time, I cannot entertain a linger- ing doubt. John B. Howe. CONTENTS. INTRODUCTION. PAOE The subject of production and exchange vastly complex ; excess of pro- duction anywhere blocks the exchanges 1 Production on credit ; bank credit does not circulate .... 2 Paper supplies the jdace of coin ; convertibility alone in.sufficient . . 3 New science needct be nrkoned . . . .21,22 Absurdities of the mercantile theory of intrinsic value . . .23, 24 XXV] CONTENTS. PAGE The circulation of money may be artificially increased through payments to labor 24 Production increased chiefly by the aid of loans 25 Inconvertible notes in France 26 Falsity of the doctrine of M. J. B. Say and his followers as to overproduc- tion 26, 27 Conditions which render overproduction possible .... 28-31 The remedy 31 CHAPTER I. DEVELOPMENT OF MONET AND ITS USES. The invention of money ; a mode of measuring the value of commodities in its inception ........... 33, 34 Valuation must be by units at the second stage of development, as well as the first 35 The diflFerence is, that the second stage locahzes and limits the ideal or ab- stract unit, and thus gives it conventional value in place of one of the commodities 35-37 The doctrine that bank reserve ought to vary, the logical result of the mercantile theory of a commodity value in gold and silver coin , 37, 38 The doctrine that convertibility is sufficient, false. The perfection of me- tallic money lies in its distribution and its limitation ; hence converti- bility should be carried far enough to insure the latter . . . 37-39 The English system ; why the plan of the Bank of England has failed ; it cannot be explained upon the mercantile theory of gold and silver as commodities, in bank reserve ....... 39-44 Why gold has not risen, and why silver has not fallen in value as money 42, 43 The difference between money and commodity values ; the former can be fixed because it is only a unit value in a ratio or equation ; the latter cannot because it is a commodity, and quantity is essential . . 43-45 Productive energies of English-speaking people ; the problem is, to har- monize production .......... 45 It has become necessary to demonstrate that bank reserve makes all pay- ments, and is alone drawn upon by checks 46-50 Bullion ratios can be changed by general consent ; purchasing power must be apportioned between gold and silver ...... 53 The natural ratio ought to be adopted as nearly as possible . . .53, 54 The prevailing idea, in respect to the steadiness of metallic money, right , 55 CHAPTER II. THE PRIJIARY CAUSE OF BANKING AND COMMERCIAL CRISES EXPLAINED UPON AN ENTIRELY NEW THEORY. The original cause 56-60 Fallacies embodied in the terms "overtrading," "speculation," etc. . 57-61 CONTENTS. xxvil rAOB Overproduction entails loss from it!\ commencement .... 60 Tlie loss is tlisKiiist-'d by rise in unit price CO, 61 Bank contraction is not the cause 63 In the absence of money, four co-factors would demonstrate loss ; money conceals the demonstration ........ 63, 64 Non-redemption of bank liabilities out of tht; commercial world's stock of coin cause ; its effects .......... 66 The post-auxiliary causes which accelerate and nia^;nify industrial and commercial crises 67, 68 Tendency to unequal production increased by the very fact of its artificial introduction, through increased loans to producers on credit 69 How tariffs and taxes may aid towards a crisis 69, 70 The conse(|ucnces of an industrial and bankinp crisis . . . .70 Its progress and development, illustrated by diagram .... 71 Loss is not the cause, but a result ; the cause, a misdirection of energy . 74 Defective monetary .systems of Great Britain and the United Slates fur- nish the conditions which enable tlie active cause to work . . 74-77 Mr. McCulloch's policy 77 Exj^ansion of ])roduction ; consum])tion, and contraction ... 77 Gold and silver may, when in bank reserve, cause exj)ansi<>n of circulation 79 Production and consum])tion were nearly balanced in Adam Smith's time 79 American and French currency ; Michigan agricultural and Western free- bank currency 80 "Money," "exchanges," "intrinsic value," etc., but chaos, without ex- planation 80 Immense masses of treasure in China ; prices there arc steady because production is steady 81,82 Theorists who favor inconvertible paper money 83 The operative credit which leads to crisis is the extra circulation of money tiirough increased production ........ 83 Science of Troduction and Exchange 84 CIIArTEll III. THE THEORIES OF MILL AND miCE, AS TO THE CAUSES OF DANKIXO AND COMMERCIAL CRISES. Mr. Price's theory 85 Mr. Mill's theory ; credit the active cause, according to his and Mr. Price's theory 86, 87 The English mind wedded to the idea conveyed by "overtrading" . . 87 The oflice of money is to pay labor as well as to distribute its fruits . 87, 88 Kiso and fall of prices in consequence, resulting from ])ayments to labor, not of credit, Itut of money 88 The agricultural base line 89 Mr. I'riec's theory of deposits ......... 89 Set-offs are not jiayments 90 Deposits arise from production, and not sales merely . . . . 90, 91 XXVlil CONTENTS. PAGB Bank reserve increases, on the other hand, through sales of the ai'ticles pro- duced by the aid of bank loans, to consumers 91 How money acts on prices .94 CHAPTER IV. VALUE AND PRICE. Value and price are in reality the same ; intrinsic value a contradiction in terms 95 Value is an equation expressing the terms of exchange between two things 95 Intrinsic value, if it means anything, must mean intrinsic utility and lim- ited supply 95, 96 Commodity value of the material of money absorbed in the money value . 96 In like manner the money value of bank-notes and credits is extrinsic . 96 And depends upon the quantity of other things it will exchange for . 96, 97 Opinion of bankers, merchants, and manufacturers, as to rise and fall of prices 99 Absolute necessaries cannot be overproduced, nor, upon the average, rela- tive necessaries, because the latter would not support the laborers 99, 100 Increased production of pi-ecious metals will not raise prices fast enough to do any injury unless largely in excess of any past production . 100 Overproduction the cause of rise in prices 100 The fallacy of mercantile value in money conservative in its influence, where the money is kept out of circulation by its means . . 100 Bank loans furnish money and not credit .101 They furnish money to labor, which soon finds its way to bank reserve ; the important fact is payment, and not whether money actually moves out of the reserve 101 Fallacy upon which the English Bank Act of 1844 is founded . 101, 102 Metallic reserve would be unnecessary, if production were balanced by consumption ; excess the result of the operation of two compound factors 103 Harmony of production essential 103 CHAPTER V. BANKING IN ENGLAND, AND EXPANSION AND CONTRACTION OP CIRCULA- TION, UNDER THE BANK ACT OP 1844. Banking in England is like banking in the United States, in nearly all essential particulars ; the difference 104 Circulation takes place inside as well as outside of banks ; circulation is in all cases a delivery of units of money, or transfer of the right to them ; balancing of debts a result only 104, 105 The fallacy in calling gold coin a commodity merely because the unit and its bullion may happen to coincide in value 105 CONTENTS. XX ix PAOI The change introiluced by the Bank Act of 1844 ; its effect . . 105, 106 Fallacies in tilt" tlu'Dry of the act . ....... 106-124 Abundance of metal in the reserve ........ 108 Bank credits are the 77. «»// of loanin;,' depijsits 109 If not sto[ijied at a dcMnite point, they ivry without reference to the re- serve, and therefore without reference to outstanding circulation 109, 110 Mercantile credit not analogous to bank credit Ill A bill of exchange cannot take the place of money ; it ia an instrument to put money in circulation, and a bank loan pays it . . . .112 It cannot take the ])lace of money, because bills of exchange cannot l>e redeemed by bills of exchange ; a.s one kind of money is always re- deemed with another, or money in one place with money in another place 112 Bankers' credits and guaranties will not pay wages . . . .114 The true object of a reserve ; a greater power than money causes rUo of prices 114, 115 Analysis of the circulation of money ; three kinds 116 What English banks deal in ; what purpose banking reserve as actuallv kept answers in England and the United States . . . 117,118 Actual depreciation of the unsold products of labor ; how the deprecia- tion is masked for a time ......... 118 On what kind of credit jjroduction is founded . ..... 119 Necessity of rigorously adhering to the theory that all money po.^sesses conventional value only, in order to perceive clearly that prices depend upon production, consumption, and circulation . . .119 Clearing verifies the theory 119,120 If production and consumption balance, the expansion and contraction of the circulation of money will lialance 122 The Bank Act has failed in its object, because the metallic units of money in the reserve arc controlled by instead of controlling the units of credit in deposits . . 123, 1.33 Steadiness the paramount advantage of a circulation of gold and silver . 124 To understand fully why the Rank Act has failed, it is essential to learn under what conditions gold and silver possess this steadiness, and under what conditions they do not ...... 124-128 It is harder to establish the ri;,'ht rule .is matter of fact than to prove it . 128 Sound banks of issue are, comparatively, self-rcLTuIating . . . 128, 129 The advance of jnoduction ; the reason why banks of deposit-loan are not self-reirulalint; in respect to loans . . . .... 130-132 Adam Smith's opinion in relation to the volume of bank-notes . . 129 Items of bank clearings 132 A due limitation of all units of money requires as a condition th.it metal- lic units shall form a definite portion on the average of nil the nnit.s fn circulatiim 129 Units of mercantile credit might, but in jmint of fact do not. circtilate 13.) The English bankint: crisis of 1806 and the English commercial, indus- trial, and l)anking crisis of 1874-75 ...... 133-143 Investments in cotton planting . 134 XXX CONTENTS. FAOB Production of absolute necessaries cannot be unduly stimulated by ris- ing prices 134 Artificial derangement of the distribution of metallic money a cause of local rise of prices 136 Steadiness of metallic circulation, lost by the artificial contrivance of bank- ing, requires an equally artificial arrangement of banking reserve to restore it 136 Brief statement of the causes of the failure of the Bank Act . . 135-142 Definite quantities of the precious metals would go into coin and manu- facture, if their distribution equally in the tracks of commerce were not interfered with 135 All loans produce an expansion of circulation 137 What an English bank deals in 137 Credit and debt 138 Why the reserve pays all checks 138, 139 The mistake of the authors of the Bank Act arose from supposing the va- riation of gold to be that of a commodity instead of that of a series of metallic units, when used by buyers to purchase labor as well as com- modities .... 141 And hence the true objective point was limitation, in order to insure steadi- ness to the highest degree possible by the aid of gold . . . 141, 142 The true principle of variation, therefore, was that the circulation of money, or, in other words, loans, should be made to vary with gold in the reserve, instead of the latter being made to vary with the for- mer 140-142 CHAPTER VI. BANKING IN THE UNITED STATES. In point of true science writers have not defined excess of issues . .143 Whether one bank can control the issues of other banks . . 143-146 When circulation is in excess 145, 146 Sound banks of issue, where there are no banks of deposit-loan, are com- pelled to keep their issues limited by metallic money . . . .145 The true object of this limitation . 144 Of banks combining the functions of issue, deposit, and discount in the United States 146 Banking a common law right 146 The theory of the founders of the Bank of England and English as well as American bankers and writers upon the subject of money and ex- change is that banks deal in debt 147 It has been maintained with great vigor and force by Professor Bonamy Price 147 To say that a bank deals in debt has no more real meaning in point of sound logic than to say that it deals in confidence . . . .147 The use and the value of gold as money alike conventional; conventional value controls and absorbs mercantile value 148 CONTENTS. XXXI PAGE Gold is not worth what it buys by reason of the Jal>or in producing it, but conventional value causes labor to be employed for that purjwse ' . 14S Bank coffers are, as a rule, amply stored with metal, not only to meet all ordinary calls, but witli much more 1-15 The true office of bank reserve is, therefore, not merely that of a consoli- dated fund, but to limit the circulation 150 The mistake lies not in supp()>iii;,' liank loans to l>e founded on credit and confidence, but in supposing that credit and confidence and metallic commodity enter into the exchanges 150,151 The essential difference between gold coin and inconvertiide bank debt . 151 The distril)Ution of metallic money is in the tracks of commerce, and not of production 151, 152 Expansion of circulation under banks of issue, deposit, and discount, in the United States, compared with that taking place under banks of issue 152 Banks disturb the natural distribution of the precious metals . . .153 France requires more than Eughuul, and England more than the United States 154 The benefit of metallic limitation of circulation lost unless the metallic units are allowed to distribute themselves according to the laws of commerce . 153 Steady jirices might bo obtained with a " credit" currency, if production were steady .......... 153, 154 The theory that unsteady jirices arise from want of harmony in production established by the author a new one 155 The theory that overproduction is irapo.ssible is true only in a general (or abstract) sense ; because it is true in a general sense, commercial crises come and cause a rectification of excess .... 155-157 The paramount forces which control all production . . . .157 Rigorously exact analysis of the causes and conditions which bring about expansion of in-odnction through bank loans .... 158-161 " Clearings" help to create and maintain the fallacy tliat banks deal in their own debt instead of tliat extra or additional circulation or use of money, in exces^s of the exchanges of commerce and industry which would be po-^sible in the absence of banks ..... 161-164 Summary of banking in the United States . . . . . .164 Under banks of issue, deposit, and discount, without any regulation by re- serve, bank debt is redeemed out of a reserve having no relation to commerce 164 All banks redeem out of their reserve 164 The reserve makes all loans, and its ecjuation always is Deposits minus Deposit Loans f 71/(1/ Ucservo . . . . . . . 1 ('>4 The important difference between the banking of banks of issue only and banks of dejwsit loan consists in the nitio of reserve to liabilities, and the mode of re])lenishiiig the reserve ....... 165 The important part j)layed by s;ivings banks in the grand business of |)ro- duction . IGT), 166 All money substantially the same 166 The pr:u;tical (juestion for every banker to answer before making a lo.in 163 xxxii CONTENTS. PAOB The true proportion, upon sound principles, between written bank debt and coin, in circulation outside of banks, and bank debt by book and coin reserve 166 Harmonious production 167 The guaranty of the maintenance of conventional value in metallic money 167,169 Demonstration of the fact that banks deal in the extra circulation or use of money which can be given it in excess of that given it by deposit- ors, and not in credit or debt 169, 170 What kind of money the banks of the United States put in circulation 170, 171 Deposit and discount banking only one among other possible phases of loaning money (by means of an extra or additional circulation) out of a consolidated reserve 171 The best kind of bank to carry out the principle of a regulated reserve in the United States 172,190 Bank debt over and above reserve, plus 1 76 Banking reserve, as a total, is the sum of the money reserves of all de- positors, which, if not in banks, would be (in the shape of metal and bank-notes) in pockets, tills, and safes ; and bank reserve makes the same payments reserves in pockets, tills, and safes would make if there were no bank loans 184, 185 The monetary systems of the United States, Great Britain, and France, represented by inscribed square and polygons 185 All banking reserve ought to be metallic 186 The national banks should be retained 172 Banking reserve is the money of commerce paid in by consumers who w^ere sellers before they were buyers 186 Weak banks of issue, in the absence of all deposit loans, demonstrate their weakness, and cannot conceal it 186 But their notes are now constantly redeemed for them by banks of de- posit-loan, and bank debt by book given in exchange for them . 186, 187 The redemption is completed by the checks and drafts of deposit-loan banks, and thus each bank virtually redeems for all other banks . .186 What kind of practical political economy required for the nations of the Anglo-Saxon family 18S Deposits, including reserve, in the view of true economical and monetary science, belong to depositors . . . . . . . .190 Banks can no more deal in their own credits or debts than a house can stand in the air 190 It were well if they could, because they would then be banks of issue, and their reserve would regulate itself 184 CHAPTER VII. REDEMPTION OF CURRENCT. Fallacy involved in the assertion that bank-notes ought to be redeemed in metal because it has intrinsic value as a commodity, which the notes have not, conceals the true object of redemption in point of science . 191 CONTENTS. xxxiii PAGI The value of all money is of the same kind ; all money value is conven- tional 191, 192 Monetization gives and demonetization takus away its value more or less 193 Money possesses no value in itself, becau-e its value lies whully in what it buys; it is mathematically certain, tlierefore, that it has no value a*; a commodity 194, 195 Taxation of money in hank, ami bank stock ...... 194 Monetization and demonetization are inerely modes of transferring con- ventional value from one kind of material to another . . .196 A check is the voucher to a banker for ])ayinjjr on de}«>sitor's account. . 196 The value of wheat, if used as money, would be so far entirely conventional, because all money must value and pay in the cliaracter of units . 197, 198 By a mathematical necessity conventional value can only l)e stated in the form of abstract units; conventional value is in itself an abstraction 196, 198 The banks of Venice and Amsterdam furnish practical proof to this effect 199 The money unit is ideal, and limited cither by the material which supplies tlic units, or by commodities ........ 199 What redemption of a currency is ....... . 200 National redem])tions cost nothinj;, because the value of all money lies in what it will procure, and the new metal or material in which the old money is redeemed acquires value as fast as the old material can lose it 200,201 Absolute utility in any material makes it unfit for money .... :iOI Policy of the United States in reference to funded debt .... 201 Holders of money have been sellers of products personally or representa- tively . . " 203 Value of gold coin being debased by the issue of substitutes, redemption alone cannot compensate for the debasement ; iedenii)tion must there- fore have some other object than to furnish commodities possessed of intrinsic value 205 Conversion by exchange, of mercantile into bank debt .... 20f) A banker does not loan liis credit by this exchange ; he loans the use of the money of his depositors, and takes mercantile bills and notes in ex- change ; he guaranties his dei)ositors against loss by reason of his act through his credit with them, and his capital .... 2U6, 207 If there were no money, and he received dejrosits of commodities, the nat- ure of his loans and guaranties would be substantially the same . 207 Absolute necessaries cannot be overjiroduced 207 Mere credit can by no ])ossil>ility bring on a banking and industrial crisis 207 The manner in which credit temporarily checks the operation of the well established law, that there can bo no excess of production, by failure to maintain purchasing jKJwer 203 Purchases on credit cannot raise general prices 20S It is a fallacy, therefore, to a.ssert that commercial cri>es ari.so from excess of credit 208, 209 Bills of exchange and checks do not buy merchandise, unless there is money behind them for which they can be exchanged . . . 209 c xxxiv CONTENTS. PAOB They cannot properly be called money, because they are soon exchanged either for gold, bank-notes, or banker's credit 209 Bank credit cannot take the place of money without a reserve ; it is the measure of economy of the precious metals and bank-notes . . 210 Bank loans are mostly made to producers 211 Say's doctrine of the impossibility of overproduction 212 Population and absolute necessaries abreast 212 Rise of prices comes through the circulation of money, and disguises the actual depreciation of commodities 213 The three fallacies on which the credit theory (of bank dealings), in oppo- sition to the money theory, are founded 213 No excess of credits in reference to production ; the excess becomes such, only by the inability of commerce and consumption to keep pace with production 213 The three fallacies which are at the bottom of the theory of mercantile value in money 214 The money unit, whether designated bj^ a given weight or measure, or by a name which does not refer to weight or measure, is ideal only . 215 Least variation in the prices of absolute necessaries . . . .215 Local redemption of money 217 Conducted upon the same principle as the national or universal redemp- tion 217 London clearings 217, 218 liedemption being only an exchange of one kind of money for another, even gold is redeemed in England (by depositing it) with bank credit 218 Transfer of bank credit from A. to B. is only the registry of the move- ment of gold in the reserve from A. to B., or, what is the same thing, of his right to it 219 The founders of the Bank of England, regarding gold coin as a commodity and a standard, failed to perceive that what they called bank credit was only the bank registry of the actual circulation of money which had been deposited in the reserve 219 American banking system substantially like the English before 1844 . .219 What sound banks were subjected to prior to 1857, when exchanges were in favor of clearing centres, through depreciated currency . . 220 Gold in London is not a regulator of its own circulation .... 221 It is made a kind of ballast only, and its movement regulated through in- terest rates 221 Prices depend upon the amount of circulation, even of gold, and gold in the Bank of England circulates in the reserve, in subordination to bank credits, instead of controlling by its circulation the creation of bank credits 221 Redemption an infallible test of money 221 The initial movement of currency 221 All loans to manufacturers and merchants are loans to producers in excess of all their own money, and the loans to producers of absolute neces- saries, as such 221, 222 Bills of exchange are not money, because they are not redeemed with bills 222 CONTENTS. XXXV PAGE The retnrn movement of money out of circiilaiion, when goods have been bou;;ht by couMiiners .....••••• 222 Accoinmoilation bills 222 Tein{)orary auxiliaries, towards overproduction ...... 223 Keal value an es-sential in the selection of material for money, only for the pur|)o.«e of maintaining; steadine.sj> in the number of units . . 224 Adam Smith's demonstration 225 The mercantile theory so called 225 Effect of the di.scovery of America upon production .... 225,226 The advantages of a metallic circulation, a-s shown by France . . 227 The final test of what constitutes money is not its original coet, but its cost to the owner, and that it is always redeemable with commodities whicli have cost actual value 227, 228 Labor does not measure values, but values eiiualize labor .... 229 Overvaluation of one of the precious metals, and metallic circulation in the markets of overvaluation 230 Redemption of bank-notes and the fallacies connected therewith . 230, 231 Redemption declared by certain writers to be au end in itself ; thi> is a fallacy 231 Gradual gain of gold in piirchasing power 232 The ratio of metallic production to existing miisa of metal being small, maintains steady purchasing power in metallic units .... 232 CHAPTER VIII. PRODUCTION, OVERPRODUCTION, ILL-DIRECTED PRODUCTION, PRODUCTION ON CREDIT, AND 8PECUL.A.TION. Production the foundation of commerce ; what it is 233 What labor is ; what ca])ital is 2.33 Commerce ; in a general sense i.s a branch of production .... 233 Money is the conventional commodity by means of which it is effected 233, 234 There is a natural tendency to invent and use money ns well as huiguage 2.34 A commodity employed for jjurposes of money necessarily ceases to be a commodity subject to the common law of sujjply and demand . . 234 Money resolves itself, therefore, into a series of units, and commodities can only be valued and exchanged by units .so long as money is usetl . 234 All money, whether that of the precious metals or inconvertible notes, values in the character of units, in all iijuations of exchange . 2.34, 235 Because money is never consumed, if it can Ik; jmid out for Inltor fa-^ter than the products «)f lal»or can be sold, it follows th:it in its tmit char- acter it must depre« iatc in «'xchangeable value its to comnuHlitirs . 235 A crisis in production must, therefore, neci-s.sarily result 235, 236 Why overproduction in any (piarter is u]n}U the average impossible 236 Average price result.s from average ]iroilnction 236 The system of exchange one of action and reaction 236 Limit to the productive powers of laud ; what land is first cnltiTaled . 236 XXXvi CONTENTS. PAoa The capacity of the United States to produce necessaries ; overproduction and ill-directed production 236, 237 Fallacies arising from use of terms 236 Average expenses of living and maintenance of capital absorb all but a small percentage ... 237 Danger of bankruptcy ; cotton culture in the East 237 Unproductive investment not the cause of commercial crises . . . 237 Crisisof 1866; crisis of 1873 237,238 M. Say's abstract demonstration 238 Labor at the plow ; steady wages ; fallacy in the assertion that unproduc- tive investment is an active cause instead of being only a result of in- vestments 238, 239 False idea of those who maintain such a doctrine, that the producers of relative necessaries have thrown away their time, instead of being only ahead of time 239 An actual fall of overproduced commodities, .as valued in equations of ex- change for commodities not overproduced, would be always apparent, in the absence of money, from the very commencement of overpro- duction 239 Money, by producing, on the contrary, as production progresses, an ap- parent rise in money value, disguises the real fall in commodity value, through increase of circulation, until the reaction of a crisis sets in 239, 240 The borrowing of money in order to increase production, for a time, there- fore, and up to a crisis, raises general prices, whereas if producers bor- rowed necessaries themselves, instead of the money to buy them with, the more they borrowed the higher in price they would rise and their own products fall 240 Production on credit and speculation . . . . ' . . . . 240 Why the author caJls it production on credit 240 Sacrifice of overstock 240, 241 With steady prices there must be always harmony of production . . 241 With steady prices fewer failures and less speculation .... 241 There cannot be a fair distribution of wealth and capital when a large proportion of business men fail through fall in prices . . . 241 The distribution of wealth in England and the United States . . , 241 False ideas of labor in respect to the responsibility of capital for the sup- posed wrongs of labor thus engendered 241,242 Steadiness of wages in France 242 The use of money is itself founded on credit 242 Whoever has sold commodities for money stands credited with commodi- ties, if he wishes to buy 242 Expansion of credit 242 Its contraction, and the contraction of circulation .... 242, 243 The contraction of circulation the subjective result of a power higher than the circulation of money itself 242,243 Money is always and everywhere abundant, when the forces of production are ready to expand 243 CONTENTS. XXXYU Steady prices a result and nut a cause : they may be lost by a consolida- tion of numerous reserves of money into one, and loaninj^ extensively while at tiie same time furnisliinj; (lejio>itstractly sjieaking, therefore, it is not pro|)erly taxable .... 251 Unjust discriininaiions against banking ca))ital ..... 251 Abstractly speaking, income ought to 1m.' a>ses.«*<'(l, becau.-**' income Jiays 251, 2.'i2 The different kinds of interest 252 Kftdical difference U'tween bank loans and most lojuis secured by land 253, 254 Interest is paid out of rents, profits, and sometimes capital . . 258 xxxviii CONTENTS. PAOI The lender is the borrower's partner when there are contingencies . . 253 Loss in a national point of view 253, 254 Why land bears so large a part of the burdens of taxation . . 253, 254 EfiPect of taxation upon interest ........ 255 Of what products those who live by taxation consume most . . . 255 Production on credit invites heavy taxation, and pays more than it is able until a commercial crisis, and then throws its load upon other production 255, 256 How assessments for taxation ought to be made 256 Interest paid by producers on credit 257 The purchase of labor and raw material which cost labor with cash (not borrowed) cannot produce a commercial crisis 257 It is the purchase of labor and raw material by the aid and with the proceeds of bank loans 257 It is immaterial whether the purchase be made with gold eagles or (were it really, as it is not, used) bank credit 257 Because bank loans are in excess of all others possible, the scale of pro- duction and that of bank loans rise and fall together .... 259 Interest is steady when production is steady, and rises with the incre.ise and falls with the decrease of its volume 259 This variation results chiefly from variation in the risk, and intensity of demand for the means of holding overstock 259 The demonstration of the causes of fluctuation in bank interest is the demonstration already given of the unit theory of money and the fact of overproduction : fluctuation follows from these . . . .259 The phrase, quantity of money ; its meaning 259 Wealth is not absolute, but relative 259 Inequalities in the distribution of capital and its fruits essential to civiliza- • tion 259 What is the highest condition of wealth 259 Interest is the share in the profits of production paid to the lender by the borrower, and sometimes is taken in advance .... 259 Interest paid banks is their stipulated share of profits in that additional in excess of all production otherwise possible, which their loans ena- ble producers on credit to effect 259 The highest condition of wealth possible is the utmost possible advance of production, so long as it proceeds with harmony in all its parts . 260 Civilization cannot exist without inequalities in the distribution of capi- tal, and consequently more or less of what is called luxury . . 260 Unsteadiness of production, and consequently of profits, interest, and prices, causes excessive variations in the expenditures of luxury . 260 Interest is the fixed share of the capitalist in the profits of the produc- tion on credit taking place by the aid of his loans .... 260 Bank interest is the share of the banker or stockholders in the profits of that additional production on credit which cannot take place without bank loans, and the additional circulation they thus give to the money of any country 260 Additional jjroduction takes place through bank loans, and interest could CONTENTS. XXXIX rxGi not be paid to banks at uU were it not for thu adUitional produc- tion 260.261 The profit-fund out of which interest is jmid, although thus increaaed, is neverthelesis one total 261 And all producers share gain and lotw, as do also all lenders . . . 261 Gain or loss is a lottery, but the most prudent make most gain . . . 261 Wliat is essentiid in order to maintain steadiness 261 Whv banks of issue cause less circulation of money upoD credit, and therefore less production uj)on credit, than banks uf deposit and dis- count 261 This is easily demonstrated ; why it is so 201 Excess of loans through banks of i.^sue may nevertheless occur . .261 There is a limitation to their issues short of a banking crisis . 2tJl Rates of interest steadier with banks of i.xsue, and why .... 201 Steadiness of production chief cause of steadiness of interest . . 262, 263 Indefinite exchange of relative necessaries only, through money ait an auxiliary, would produce no importiint result in removing the block- ade of the exchanges between abs«aries . . 263 As production of absolute gains upon that of relative necessaries, rates of interest l>econic steadier 263,261 Taxes rise as interest, wages, prices, and government expenses rise . . 264 The result would be the .same if the excess were found on the side of ab- solute iustiad of relative necessaries 264, 2C5 Apjiarent ]iro>ptrity increases taxation . . . . 265 Modes of taxation 265 The true principle of taxation ; double taxation .... 265, 266 Taxation >ipon the income ilerived from mortgages .... 266, 267 Taxation falls upon all income 268 Protected production 269 Steady nites of interest, as well as steady prices, important for all pro- ducers 270 Borrowed money pays for the larger part of all production of relative necessaries 270 Barter out of the question in a state of civilization 271 No barter between the East and West in the United States, nor between the Ignited States and other countries 271 Tariffs, taxes, and iniiiioveinents in machinen,- are not either jointly or scvenilly the cause of eonnnereial cri.xes 271 The question of questions for the United States is the distribution of its j)roiluctive population 271,272 Commercial cri.ses could never occur if barter would answer the purposes of civilized men ; money is indispensable in all exchanges . 272, 273 The objective jH)iiit of i)erfection in all exchanges is abundance without excess; human sld sovereigns or bank-notes from producers on creilit, so far as overstock is concerned .... 274 Xl CONTENTS. PAas The real difference is not between the use of what the economists call bank credit (or bank-notes) and gold and silver, but between production by the aid of money borrowed and production by the aid of money not borrowed, which has been received from sales to consumers . . 274 In the case of production with cash received from sales to consumers, labor's products have been exchanged ; in the case of production by the aid of loans, they have not been exchanged, but on one (the loan) side they are yet to be produced and may not find a market . 274, 275 M. Say's theory practically false ; the cause of overstock and the reaction which remedies it, complex 276 Malthus' theory 276 The absolute necessaries of life consumed annually 276 Why there can be upon the average no overproduction .... 276 Falsity of the assertion that bank credit circulates or pays .... 277 What circulates and pays can by no possibility be anything but money . 277 The science of production and exchange being empirical, that of interest, rent, and taxes, which are branches of it, must be the same . . 277 The leading, active cause of disturbance must be money ; small notes . 277 The English banks loan gold to pay labor, and the effect upon production on credit is the same as if they loaned what is called their credit . 277 Small notes 277, 278 What a purchase from a manufacturer outside of a consumer's market, the market of true commerce, is 278 There are three exchanges with only one commodity .... 278 Farming land and loans 278, 279 CHAPTER X. CAPITAL, LABOK, AND WAGES. Capital ; fixed and quick 280 Exchanges through the medium of a series of units called money . . 280 Labor runs no risk of market, and therefore receives less as its share of profits, in the shape of wages, than the successful producer . . 281 Inequalities of capital absolutely essential to the employment of labor . 281 Increase of laborers compensated by increasing competition of capital . 281 Concentration of cajntal no grievance of labor in any just sense . . 282 Capital sunk by small as well as large investments in raih'oads . . . 282 Increased value of land compensates in part to the owners of land, and thus to the country at large, the losses through investments in railroads . 282 The actual cause of labor against capital has little foundation . . 283 The real grievance of labor is the grievance of capital in many particu- lars 283, 284 Economical science has hitherto been unable to give the true answer to the complaints of labor, because it maintains that production must necessarily proceed harmoniously in all quarters . . . 284, 285 It is utterly impossible that ordinary credit can be the cause of lal>or's grievance 284, 285 CONTENTS. xli FAGI Wapcs are paid out of caj)ital before labor's pnxluct is rrtant office of coin in the Hank of Amsterdam 292 The sum total of bank loans is the total of deposits minus total bank rc- »cr%c 292 What this total is in respect to production 293 What bank loans in Kngland and the United States show with mathemat- ical certainty 293 Money being only a conventional commowi»«l by pro- ducen», whether manufarturon, merchants, railroad builders, etc, from bankers, who give by the jcmns an additional circulation to the money of their dejKisitors, ami throneh bank capital cuaranty de|K>sit- ors Bgninst loss by reason of this additional cin-ulation . 29.1.294 Depositors do not furnish the wages, and therefore do not fnmish labor xlii CONTENTS. PAGH the necessaries which wages procure, so long as bank capital stands as a guaranty fund 294 Hence it is absolutely certain that what banks loan to their customers, and consequently what "they deal in," is that extra circulation or use of the conventional commodity or localized units called money which is in excess of the use depositors make themselves, by purchases or loans 295 Labor's wages are largely expended in its maintenance, and the surplus goes into savings banks 295, 296 The resulting excess and want of balance in production constitute the only true or real grievance of labor 295 Looking only at the real exchanges, the wages of labor paid out of the pro- ceeds of bank loans, are borrowed in an economical sense out of com- modities on hand and to be produced, which are needed for consump- tion 295, 29f The only real in contradistinction to a credit wages-fund is that part of the products of labor which it will itself consume, and which other produc- ers will take in exchange 296 The laborer as well as the loaning capitalist and producer tread on danger- ous ground. This is the true " grievance " of labor .... 29G "What a steady reserve means in respect to production and consumption . 296 What kind of protection the producers as well as laborers of the United States now need 296 Another " grievance " of capital as well as labor is the complex nature of money, rendered still more complex by banking, which disguises the real forces at work in production, exchange, and consumption 296, 297 Mill and Price : their doctrine that what acts on prices is credit, whatever form it assumes, and that a bank deals in what they call credit : the same doctrine maintained by economists in the United States . . 297 Until these two erroneous propositions are rejected, and the two proposi- tions in contradiction to these, maintained and established in this book, are admitted and acted on, the most important benefit of a banking re- serve will be lost 297 Prices rise through the extra circulation given money by bank loans when in the ascending scale, not only from unproductive consumption b}' the aid of the loans, which happens more or less at all times, but produc- tion in excess of the ability of producing consumers to exchange . 297 Unproductive consumption, and production in excess of the consumption of its product, equally and alike (to the extent of their respective to- tals) increase the ratio of the circulation of money to the circulation (distribution) of commodities for consumption; this is the cause of rise of prices throujrh ill-balanced production 297 Mill and Price are therefore mistaken ; mere credit cannot raise general prices 297, 298 General prices could never rise and there could never be a commercial crisis if banks merely loaned their credit, and there would be no neces- sity for a reserve, because there could be no overproduction . . . 298 There could be no overproduction, because the price of overproduced arti- cles could not be maintained, but would immediately fall . . . 298 CONTENTS. xliii PAOI Such is always the roal in contradistinction to the apparent fact ; it is be- cau>-e bunks loiin money instiad uf cretlit that the real fall in di»);iii:*cd in the money rise, until the paramount forces at work behind a com- mercial crisis demonstrate to the conirary ...... 298 The foundation of the rise is not a loan of credit, as Mill and Price and American economi>t3 affirm, but the extra circulation of troKI ami bank notes from the reserve, throu;,'h the wages of labor '.^08, 299 The true remedy for the prievances of laUjr 299 It follows from the forepoinp with all the certainty of mathematical nnal- ysis that the circulation of money can be no more rapiil than the cir- culation of commodities ......... 299 Mill's doctrine of rapidity of circulation without any mcaninp . . 299 The real movement which is mistaken by .Mill ami others for increased rapidity of circulation is the extra or ador and cn))ita! before their products find a market 299, 300 In rigorously exact monetary terms, the sup|)08ed increased rajiidity of cir- culation is an ex])aiision of the circulation or payimr out of money by means of loau.s, in excess of the contraction of circulation by the re- payment of loans 299, 300 Upon the average there is no excess of circulation, because upon the aver- age there can be no excess of production ...... .300 Coin as a currency ; coin and bank-notes as in Ailam Smith's time; and coin and bank-notes economized throu;,'h deposit loans . . .101 A metallic circulation without banks prevents all excess, as it were by a metallic barrier . 301 The productive powers of France well balanced. .... .302, 303 Impossible to have a limitation of the use of the units of money in subor- dination to consumption as wtdl as ]>roduction by a metallic banking reserve, unless artificially regulated ; it will not regulate itself . 3l)2, 303 Suspensions of the Hank of Kngland by orders in council and suspensions of American banks the same in princijde and in ert'ect . . . 302. 303 How the Knglish system of banking affects the United States . . 303 Valuations in the currencies of one country correctetl in the currencies of other countries .303, 304 The subject too complex to bo understixid by lal>or without study, jus hap- jHiis in the cas»' of all scienci's hard to be understood . . . .304 The Uicardian theory of rent fanciful, and not s..nnd .... 304 Cultivaiioii of land ami rent ......... 305 Practical demonstnition of the fact that credit is not the caus«> of indus- trial disturbances, by the results of banking in France as they would be manifested if banking were intnxluced there .... 305, 306 The holder of money a producer when he sells, and a consumer when he buys 306 All money paid labor or capital in excess of sales of the pnxlucts of labor and capital is therefore in exce.*s of all coiuiuniption, demonstrated . 306 The effect ujmju metallic distribution of the intnxluction of banking into France; cconomv of metal 307 xliv CONTENTS. PAGI Scientifically viewed economy of metal, is in the sense of true economy im- aginary 308 Set-offs not a payment in banking, but the result of payment . . 309 Set-ofFs of mercantile against bank, and bank against mercantile credits occur, where goods produced by the aid of bank loans are purchased by the aid of bank loans 309 Sales for cash or to consumers on the other hand increase bank reserve, and hence there is no set-ofF arising from such sales .... 309 The set-offs have the appearance of real commerce, and have led British and American writers to suppose that banks deal in credits or debts, and that deposits arise from the sale of commodities .... 309 But real sales (commerce) are an indirect exchange of commodities by means of money, and therefore do not create but pay, and thus re- • tire bank credits and debts 310 What amount of reserve needed in the United States . . . 310,311 Erroneous opinions in respect to so-called economy of metal . . .312 The material point to be guarded in the use of any kind of money, is har- mony of production 313 A want of harmony is loss of energy and productive power as well as bankruptcy 313, 314 The true objective point would be observed, did not the auxiliary exchange of money prevent 314 The presence of money as an auxiliary in equations of exchange and the shadow of loans, disguise the commercial connection between bank reserve and production on credit in advance of consumption . . 314 The general opinion that the movement of bank credits, so called, arises from buying and selling commodities, and is therefore not " specula- tive," a fundamental misconception or non-perception of the real proc- ess 315 The opinion that an exchange of gold for goods is an exchange of com- modities, and that an exchange of units of bank debt for goods is a purchase either with or on credit, utterly absurd . . . 315,316 Gold and silver, put in circulation by the aid of bank loans and paid to labor and by labor put in circulation and paid out for the necessa- ries of life by the aid of deposit and discount banking, have the same effect in laying the foundation of a commercial crisis as bank- notes 315, 316 The record of production on credit as shown by bank books . . .316 CHAPTER XI. REGULATION OF RATES OF INTEREST BY LAW. Interest has no relation to the volume of money because it has been dem- onstrated in previous chapters that money possesses no mercantile value and is therefore not a commodity 317 The mercantile theory of money as a commodity itself instead of being, as it really is, only a process of exchanging articles of merchandise, or CONTENTS. Xlv PAQI in other words commodities, by means of limited and localized units of conventional value, nieasuriuj.' the values of all comniodities rela- tively to each other, and takin;; the place of commodities on one side of all equations of exchange between buyers and sellers, is the founda- tion of the ideas of plenty and scarcity of money as distinguished from plenty and scarcity itf its circulation 317 Bank discount is credit interest taken in advance, and the fixed share of the banks in the final result of production on credit . . . .317 The two kinds of risks banks take 317 Which of the two risks is greatest 318 As bank loans rise the rate of interest rises; and why .... 318 Bank interest cannot be regulated by law; the elements of irregularity . 318 Steadiness of rate the result of harmonious production .... 318 The risk of finding a market for the results of labor and capital brought about l)y the aid of bank loans, grows with loans .... 319 In principle it is as reasonable to fix by law the profits of the borrower in the results, as those of the lenders 319 How the idea of prohibiting usury arose originally 319 Money produces nothing itself, and hence interest is only a share in re- sults 319 CHAPTER XII. ANALT81B OP THE TAXATION OF MONET, AKD ITS RESULTS. Taxation of money logically results from the theory that as a commodity it pos.scs-ses mercantile value, and is an end in itself, instead of being only means to an end , 321 To tax money is double taxation, because there is in it no jirod active power to be taxed 321 Money in the posse.ssion of individuals (not borrowed) is evidence of jirod- ucts exchanged (sold) and consumed by others 321 What taxation of depositors and deposits really is 321 The more commodities are used, the higher goes their price, but the more money is used, the lower goes its price as a series of valuing units, in point of valuing power 322 By the clearest demon.stration it is one and the .«!arae thing whether the money taxed is in the tax-payer's hands in the shape of gold coin, or in that of bank-notes or " credit in bank" 322 To understand with all the clearness of demonstration why money is not properly taxable, wo must go back to the original idea and follow it through development 322, 323 How the fnll devclojMnent of the fundamental idea of money ai« a mere auxiliary in exchanges, working by locjilized, limited, and duly dis- tributed units of valuation and purchase, has l>een arrvsted, not in fact, but in o]>inion 323, 324 The persii'tencc of the false theory of mercantile value, nevertheless to a large and precisely what extent, advantageous in maintaining steadi- nesa of prices 324 xlvi CONTENTS. CHAPTER XIIL TARIFFS AND PRODUCTION. PAas Protection of home industry 325 Tariffs and taxes and improved machinery and processes do not cause com- mercial crises, either jointly or severally 325 To affirm that improved machinery and processes produce them would be to affirm that real advancement is retrogressive 325 Tariffs and taxes cannot cause them, because they can only operate in the way of exhausting the means of buyers, and exhaustion is not the cause of a crisis 325 The true cause is inability to sell the products of labor to cash buyers . 325 Protection of home industry 325 Tariffs and taxes help to exhaust the income of buyers but do not cause commercial crises 325, 326 The unproductive consumption which takes place through taxation . . 326 It makes no difference where taxation falls, because all taxation is so much exhaustion of income 327 Tariffs in this respect are therefore like all other taxation . . . 328 Tariffs for protection of the industry devoted to the production of certain relative necessaries, act injuriously as bounties at times . . . 328 If tariffs operate as bounties for a long period, while they are also at the same time taxes, they defeat the very object in view, while they in effect take the property of one producing consumer and give it to another 328 This results from not giving to the American producer the protection of a steady currency, which he needs more than that of a bounty . . 328 The changes in the mode of taxation by tariff which are needed . 328, 329 A large portion of taxes levied upon raw material and other articles im- ported, paid out of profits made by American producers upon sales of their product to intermediaries standing between them and consumers, before the product finds these consumers 328, 329 This results from the expansion of circulation .... 328, 329 It is in reality paying taxes out of a credit fund 330 Sellers as well as buyers have a voice in fixing prices .... 330 CHAPTER XIV. MONETARY SYSTEM AND PRODUCTION OP FRANCE : HOARDING IN PRANCE AND ELSEWHERE. France has no established system of maintaining production on credit . 332 The reason is that loans in France are regulated by a consumer's market, because money loaned can be paid back to lenders, no faster than bor- rowers can procure it by sales in that market 332 The military fine paid Germany out of the proceeds of goods sold in a con- sumer's market, where there was no blocking of the exchanges . . 332 The true secret of the prosperity of France under adverse circumstances 332 CONTENTS. xlvii ruan Her money — bank-notes as well as coin — is left where commcrco dij»- tributes it ; no nrtificial iiicrea.se of its circulation thruu^h buulcs . 333 The natural inequalities in the distribution of wealth are iiut increuji«(l in France, liv pnnluction on credit throu;;h banks and sales in the Bpecu- lative niarket8 of overstock to merchants, who do not know that in point of fact thoy are speciilatura ....... 333 No I08.S of productive ener^cy in France, and [xjpulation and production apj)roximato their limits 334 M. J. B. Say's theory of the impossibility of overproduction not so surpris- ing' therefore 334 The doctrine nevertheless false 335 Production on credit in France is limited by the jKissible total which may be on loan at any one time 335 Loans vary in France as money in the reserves of capitalists varies, but in the Bank of England loans vary without reference to banking re- servo 335 The small reser^-es or hoanls 335 Ie of payments out of banks in excess of receipts 338 To stop loaning the money of dejKwitors in all banks at one and the same stage of the re.>«ervo, as compared with the total of loans in France, would 1)0 the only nlcthod of approximating under banking to the old stability and harmony which cxi-sted before the introiluction of bank- ing 337 Would France or tho commercial world be benefited by introducing the English or American system of banking until the wienco of Iwinking is better understood ? 339, 340 Why the enormous issues of inconvertible notes in France have produced so slight an effect on prices 341 The fallacy of a supposed mercantile value in gold and silver money had xlviii CONTENTS. PAQB a conservative effect in retiring the metal for a time, and circulating paper in its place 341,342 Its effect in such a country as China where there are vast hoards . . 342 The theory has a strong hold upon the human understanding . . . 343 It is not only harmless but heueficial in the cases just mentioned, but un- der the fully developed banking systems of England and the United States, it ought to be subverted in order to show, by the clearest dem- onstration possible, that the most important office of bank reserve is limitation of bank loans 343 CHAPTER XV. BULLION VALUES : MONEY VALUES : BULLION AND MONET VALUES COMPARED : A COMMERCIAL CRISIS THE LIMITATION OF EXPANSION FOR GOLD AS WELL AS PAPER, UNDER A VARYING RATIO OF BANKING RESERVE. Misconception of the true relations between the precious metals as bullion ; it grows out of the mercantile theory of money as possessing mercan- tile value in the character of a commodity ...... 345 Mint regulations of Germany, France, and other European nations, and of the United States . . 345 Erroneous estimates of the effect of those regulations founded upon the same theory 345, 346 Risk of not hitting the true barter rate by free coinage of silver in the United States alone 347 The bullion of the unit; is not the unit itself, and standard in the sense of a mercantile commodity of a given weight is impossible . . .348 The standard possible is the standard unit called macoute, dollar, pound, or franc ; the greater the amount of metal in the unit the less will be the whole number of money units ; the less the amount the greater will be the number of money units 348 To increase the quantity of metal is merely to divide by the same number the units of a ratio consisting on the one hand of units of money, and on the other units of goods ; to decrease the quantity is on the other hand to multijjly each set of units ; the ratios and quantities are not changed in either case . . . 348 Use of precious metals in arts and manufactures ; the principal use as money controls the subordinate one as commodity .... 348 What the United States is equitably bound to do 348 Upon what principle the two metals must be artificially related to each other in order to carry out the convention by which both are used as money 349 The relation must be established upon the simplest principle, and that is one of weight ........... 349 Intrinsic qualities are entirely eliminated, because they have no relation to the use, which is tliat of units in ratios of valuation and equations of purchase 349 If buyers and sellers had to stop and estimate the intrinsic qualities of gold CONTEXTS. xlix rAOi and silver in coins, as well aa commodities bought, there would be no e.\cli!in;,'ea but those of coniinun barter ...... 349 If },'old and silver arc bartered as coniinoditio*, the United Stafen would pay in silver at its London barter rate a.s cr)mpared with pold . . 350 Historical critici.sm in relation to the use of the precious metals . . 351 The precious metals pay, not as commodities but a.s units of valuation and payment, quite as much when w«M;;hed out n.* units in the absence of coinage as they do when actually coined ; tliey never pay a» bullion . 351 The utility of silver and its comparatively lart,'e mass, consume much more of it in proportion, and thus reduce its actual total in the shapo of money and manuafctured commodity 351, 352 This is the reason why silver, if produced on the avernf^e at the rate of 40 pounds to one pound of jjold, has stcr, the met.al is thus cheapened in its exchangeable relations with commodities gencrallv, and more of it is carried into ct»mmodity use ..... 356 The value of the unit thus controls the value of the metal . . . 3.'>fi, 3.'>7 Demonetization, total or partial, cheajicn.s luetal .... 357, 358 If gold Jind silver were every where and ecs in the commercial world 361 Objections to the coinage of silver have no pn)|K"r relation to its purchas- ing ymwcT M to commodities, but only as to iti prcsurtion with the units of metal upon short averages, and thus controlled by those uuit,*, in- stead of controlllm' ili. in _ 355 d CONTENTS. CHAPTER XVI. OP LABOK AS A MEASURE OP VALUE : DIVISION OP LABOR AND ITS IN- CREASING EFFICIENCY. PAOB Labor is not the measure of values in any just sense 367 Doctrine of Adam Smith ; unit of labor and unit of time . . . 367 We are carried back by that doctrine to the old valuation of commodities by each other 367 And we are compelled to adopt the abstract unit for the purpose of esti- mating the values of the commodities 367 Values are determined by the action and reaction of demand and supply 367 The production and commerce of the world ought to be looked upon in the light of actual facts and not opinions 368 The absolute necessaries of life must be had before othei-s are procured, and the absolute vary the least 368 The absolute must control the relative, and does so maintaining proper harmony in all production, if there be no artificial disturbance . . 368 It is questionable whether the advance of modern civilization is not retro- gressive unless harmonj' can be maintained ..... 369 The mischief lies, not in ordinary mercantile or banking credit, as com- monly understood, but in production on credit by the aid of money loans 369, 370 It results from more buying of labor than selling of labor's products 369, 370 The buying comes from borrowing money on merchants' and other pro- ducers' credit, and it is in effect a buying of the commodities con- sumed by producers and laborers by the aid of the loans, on the guar- anty of the bankers 370 CHAPTER XVn. BANK-NOTE-REDEMPTION RESERVE AND BANKING RESERVE : THEIR RATIO TO BANK DEBT, AND THE PROPER PLACE OF KEEPING THE RESERVE OP EACH KIND. Deposits are the total or consolidated money reser\'e, composed of the money reserves of all depositors 371 In the absence of consolidation the money reserves of the depositors and all other money holders would be the only source of loans, and after the consolidation the consolidated reserve is the source of loans made by depositors, as well as those additional loans which banks are, by reason of the consolidation, enabled to make 371 Deposits and all other money constitute a series of reserves belonging to money holders 371 No assignable limit but a crisis to the extent to which bank reserve may continue to lose metal or notes to pay for labor, raw material, profits, and charges 372 Mr. Price's argument against the policy of keeping so much gold in the Bank of England, not surprising therefore 372 CONTENTS. li The volamc of loans always shows the extent to which what is called hunk reserve has Ik-cu drawn upon . . . . . . . 3<3 Banks of issue in Scotland in Adam Smith's time 373 Why thiir issues were !imit(.*y ini'tallie reserve and why their power to sustain prtMluction <>n creilit was t-liecked hy it .... 373 A re.serve may In; made to vary like i;old so lonp as no bank loans arc made out of it ........•• . 374 The variation in biUjking reserve which resulUs from hank loans is different fron> the former because the variations are always attended with in- crease of |)Owcr to put money in the reserve in circulation by the in- cre.uxe of bank debt, or with a contraction of that jMiwer by a diminu- tion of Itank debt 375 The ratio of bank debt to reserve is therefore always the material point in rcsp<'et to production on credit and prices ...... 375 Crisis of 1857 and bank-debt variations of that jjeriod furnish practical proof . . . . . • • • • . 3<5 Dlustnition of the difference between purchases with cash not l>orrowed and j>urcha.se8 by the aid of bank loans 375 Actual sales of commodities to consumers do not create but retire deposits; production in some form alone creates them ..... 375 Mr. Price's a.>»scrtion, that deposits arise from sales, is therefore a mi-stakc 376 Balancinjj and set-off; units of bank debt 376 Ri^'orous analysis recjuires the observer to look behind lank movements . 376 Real commerce is the indirect oxchaiipe of commoosit loans, banks of issue regulate their reserve by self-acting machinery .......... 377 Units of bank debt standing to the credit of depositors .... 377 What they are 377 They are not the cau.so but the result of ])roduction on credit . . 377 Utterly imjMJ.ssible for a bank to deal in anything it has not received un- less it is a bank of issue ; hence it only loans out of its reserve . . 378 Supposed case of a bank of clejHJsit in England .... 378, .179 Mr. Price's question in reference to supposed surplus of mcUxl . 380 What the general government ought to do in relation to the n-sk-rves of the national banks .......... 381 A consolidated n's<>rve in the city of New York for the national banks . 381 This would be the lirst step towards regulated reserve . . 381, 382 CHAPTER XVIII. THE POI.1CT OF KXCLrniSO SMALL NOTKS CONSI l>t:l(l;l> : OS X RKTUBN TO CONVKKTiniMXr, OUGHT ALL ItASK-XOTKS UNDKR FIVE DOLLARS TO GO OUT OK U8K ? The answer to this question depends u|)on the answer to the question, Is it jM)ssibIo to regulate banking reserves either directly or, through a central redemption of bank-notes, indirectly '...., 383 lii CONTENTS. PAQB The mere exclusion of small notes upon the principles before demonstrated, cannot regulate bank loans ........ 383 Nor can they be regulated by a huge bank 383 The reason is that regulation does not end with bank-notes, but begins with all bank loans 383 The regulating function of the old United States Bank . . . 383, 384 A large national bank cannot regulate banking in the true sense of regula- tion, because banking, which is but trading, and free of common law, is the receiving and paying deposits and making bank loans ; this is the thing to be regulated and not merely the issue of bank-notes . 384 The true policy is to retain the national banks, and make their notes re- deemable at a central bureau, and to fix the minimum below which the reserve of each bank shall not go 385 The exclusion of small notes would then be a matter of no importance, because a regulated reserve would render their exclusion unneces- sary ............. 385 The English system of regulating bank-notes by gold and excluding small notes, instead of regulating all bank loans by gold, founded on an en- tire misapprehension of the true office of a metallic reserve . 385, 386 Great Britain peculiarly subject to banking and commercial crises . . 386 Scotch banking 386 CHAPTER XIX. GOLD, SILVER, AND OTHER METALLIC UNITS OF MONET. If only one metal were in use to furnish units of conventional value, pur- chase, and payment, the total purchasing power of all the units throughout the commercial world would be an abstraction . . . 387 "What is and what is not capital 387, 388 Taxation of money 388 Security by quick and fixed capital 388 Fallacy of the principle of taxing money 389 Double taxation 389, 390 Depreciation of one kind of bullion valued in another, no test of pur- chasing power in reference to commodities ...... 390 Gradual changes in metallic units in respect to quantity of metal . 391 Governments cannot change the value relations of commodities . .391 But they can change the value of the money unit in its relation to com- modities by increasing the total of money units, while producers and banks change its value by increasing the circulation of units in the reserve, as coin is " economized "....... 391 The value of bullion in relation to commodities is the relation of its me- tallic units to commodities, and therefore rises as units of money de- crease and falls as units of money increase 392 International economy of metal 392 Metallic production ; convention in respect to the use of the precious metals as money 393, 394 CONTENTS. liii FAGB Dollar 19 the standard unit of the Uuited States .... 393, 304 Price is the quotient or Btatcinent of a ratio, being units of money divided by units of (,'ood8 ^'■* 111 its character of a unit the unit of coin as well as the unit of bank-notes is intant;ible and abstract, because the member of a ratio having con- ventional value only ^^^> ^^" Actual relations between coined units of metallic money ; between the totals of those units and the masses of nu-tal not cuiiifd ; and between the masses not coined thi'inselvcs '''"' Tho production of silver and gold ^''' The relative masses by weight of silver and gold which have been raanu- , factured .397 The relations by weight of the masses after the demand for manufacturing purposes is supplied ......••■• 397 The values of the resi)octive masses thus left reckoned in each other . . 397 With both metals everywhere and eiiually m»ney, the value of the metjillic units of each metal would be, al>.>tr.ictly speaking, the same, and prac- tically, on the average, exactly the same, local variations in respect to demand and supply of commodities excepted .... 397, 398 The reason is that piirciiasing j)ower is conventional and therefore abstract ; the units of l)oth metals are distributed everywhere, and if there is less of one sort of units in any i)lace it is made up by more of another ; the purchasing jwjwer of all the units is an abstraction ; divide or multiply the whole numl)er by 2 and the value renmins the same 307-399 Single barter between the two precious metals must exist before both can be used as money ^^^ Every sale is a valuation by ratio, perfected by mutual deliveries through the equation of exchange 399 The mistake of theorists who disregard facts and whose belief is controlled by their own ideas, lies in supposin;; that barter exchange between the metals follows them in their character of units of money, thus making monetary science a science of contradictions .... 399, 400 CHAPTER XX. TALLACIE8 ARISING FKOM THE REOFMITIOS OF cmRKXCIES. Fallacy No. 1 and Fallacy No. 2 ... 401 Theorists who put opinion in the place of fact deny that bank-note* nro money, and in^i.st that even if bank credits go into put8 as much coin or bank notes in circulation an if the owner had a like amount of coin in his i>osseMion, is sulwtan- tially money ^^^ The testimony of Adam Smith, in relation to bnnk-notes kept by dealers in Scotlanil *^ The theory of Mill an.l others that Ixink-notcs and bank credits have no effect as such on prices •*02 liv CONTENTS. PAOB Intrinsic value founded on cost of labor a fallacy, because a bank credit costs as much labor as does a like sum in gold 402 Title deeds and certificates may be regarded as property, if the right to property passes with them 403 The fallacies which monetary science has to overcome before any true science can be founded 404 One of these fallacies is the o))inion of scientists that redemption of cur- rency is an end in itself, instead of being what it really is, an exchange only 404 CHAPTER XXI. PREMIUM ON GOLD AND SILVER. Premium in the United States, England, and France under inconvertible currencies 405 If metallic money were a commodity it might in one sense be a standard 406 Being only a unit, as a bank-note is, or a series of units, it rises and falls in value with all money units . . . , • . . . . 406 Fall of gold as well as of all money units in exchangeable value between 1861 and 1873, in the United States .406 Mill's doctrine of premium ; average and high premium ; loss of purchas- ing power in gold 406 Rise of prices through bank loans depreciates gold ; loss of gold by the United States ; equilibrium ; relative values of coin ; economy of gold 407, 408 Metallic circulation in England ; prices rise and fall with bank reserve . 409 Range of prices in England ; Mr. Thomas Tooke's theory ; the theory of the bullionists 410,411 CHAPTER XXII. VARIATIONS IN BANK-NOTE CIRCULATION. What banking is ; the two kinds of banker's debt 412 Mr. Price's theory of a crisis ; redundancy of production, of goods, and of circulation 413, 414 Temporary glut ; England's hazard and that of the United States . .415 Production of absolute necessaries cannot be stimulated in excess of population ; redundancy ; equilibrium ; France and England com- pared 415, 416 Frenchmen conservative in respect to banks ; M. Wolowski . . 416, 417 CHAPTER XXin. FALLACY IN THE USE OF THE TERM BANK DEBT, OR BANK CREDIT. The mistake of the founders of the Bank of England, of English and American writers, and of Mill and Price, in reference to bank credit . 418 CONTENTS Iv rAOs A Jeposit in bank gives the «anie cumniand OTcr the field of prcxluctiou M bank-notes 418, 419 Want of harmony in pro«luction ; rctlemption of gold and silver . *'^< CHAPTER XXIV. COMTLCX NATrRK OF MOSEV. Money the most complex of all subjects ..... 421 The purchasing power of money 421,422 The difference between raercantile and bank creditn ; the furmerariitc from sales of goods on time, and the buyers owe for go«>ds sold ; the hold- ers of deposits do not owe for goods sold, and may or may not owe a bank ; full paying power exists in dejiosit credit 422, 423 The only credit in the case having a mercantile character is the ability to obtain comraoditie:* throujjh the aid of bank loans, — a kind of credit which attaches to any loan of money 423 Banks arc the instrument.-; by whith additional loans are made over and above the jMjssible volume of loans in their absence . . . 423, 424 Demonstration by analysis ; buyers of crops 424 Adam Smith's comparison of money to a bill of exchange ; loans in the absence of money ......... 42i-427 Prices necessarily steady in the absence of monoy, antl why ; they wouhl be equally steady with money, if production on credit could pro»?eed no farther than it could without money 427, 423 Loans are made mostly to prmluccrs, but they are paid only by consum- ers in an economical sense ; this is the cause of bank expansion . 429, 430 Contraction of means in one bank l)ecome8 sometimes the expansion of means to another, through want of due regulation . 430, 431 Loans of money cause expansion of circulation ; payments of loans con- traction of circulation ; the only limit to the expansion a crisis . 431, 432 The enormous prices paid for Knj,'Iish iron and other jiriKlucts of indiLs- try in con.scquence of that exj)ansion ; Mill and Price say buying is the cause of rising prices, whereas ex|>iinsion of pHKluction is the first cause 433, 434 Summary ; bank expansion arises from expansion of production . . 435 All money is but a scries of reserves ; without loans of money there could be no crisis ............ 435 There is a strong tendency in production outside of the necessaries of life to expand ; the immense loss which follows excess . 436, 437 Local redundancy of money in th<> time of the Roman em|iir«, and of late indermany; adviinoing prices a phantom .... 437,438 They stimulate pro4, 4C5 Th(> oxpanKJoit \» tnnMkod to (lc|K>Hiton« ....... 4CS Contraction iin|>o!iitihlc until it lM:(-onif!t univcrftal ..... 466 Bunk-notc.t ilo not intorfcru with liie diittributiaa of tho uuiLt of money as (lejMwitH do ; and wliy ........ 4C7, 468 The difftn-nci! Ix-twoen local rwlundancy and general ex{ian»ion . 468, 469 The procesw of grndtiul eN|iiij;hout the romnn-rriiil world . 469 Depreciation of gold and Milver ; local and national ox (>au»iun . . .470 When hunk uoteH ought (o be retired 470,471 Bunk-notes which ought to Ih3 redeonieil are depo*ito fur- ther loans ; loM of reserve relatively and alxiolmt'ly 471,472 How a regtilated reserve would cheek such ilejKwitH .... 4*3 The real forces at work behind deposits and circulation ; bank.notcs under five dollant . 474 rn.vrTr.ij xxvii. THE STIMfLrS TO SPKCII-ATI VE l-K«H)UCTIOX AXD SPECCLATIOX, FROM THE IXrREASI!JO PERSONAL MANAGEMENT OF CORI'ORATE AND riDl'CIART CAP- ITAL. The va.st amount of capital nnder the nominal control of corporations ; the real control, where it lies ; ^t4K•kholde^9 take all the ri.sks without having all the gaiuii .......... 475 The joint grievance of capital and hilKjr; tho result unavoidable . 476 Management of railroadx ; of bank.t ; harmony and discord 476,477 Failure.s of merchant.** ; the source of their losses andliankruptcy . 477 Northern Pacific Railroad ; tho importance of dispatch in busincM removes safeguards ; hence tho great imiKirLinco of limitation by bank re- serve . 477 Cll.M'ir.K XXVIII. THS BPECIB PAR OF GOLD AND HILVER; DALANCR OP TRADE. Export of gold nnder a metallic currency without lianks occurs on failure of cro|M ; itA movement niitiintl and not nrtiticial .... 478 Demand for cotnnien ial gohl ; lialiince of trade ; economy nhown by l»«l- nncc 479 The distribution of the pn-ciou* metaU tjntform nnleia duturbc«t 480 The first pnr of pnrchaiting p«)wer ; t! \r . . . 479, 4S0 Artiticinl rise nf priros ; .\dtim .^miih -< \ as to b(uik-notc« . 4!!>l Com|tensati<>n f<>r tax on commodities ; expansion of biuik-notcs in orxler to e<|nalizo prices 482 The natural movemrnt of t;old snd silver in the tracks of commerw, and tho impossibility of diverting it except through l>auks 4A.1 The term Tar 484 Iviii CONTENTS. CHAPTER XXIX. STANDAKD, DOUBLE STANDARD, AND METALLIC SUPPLY. PA6I Standard is born of Commodity ; the two conventional values .' . . 485 Price, Commodity, and Standard 486, 487 The variations in the ratios of units of money to units of commodities in equations of exchange between buyers and sellers .... 487 The objective point the highest degree of steadiness practicable . 487, 488 Credit can no more enter into equations of exchange than confidence or hope 488 With gold and silver alone, and no banks, the borrower can produce no more than can the lender, without selling 489 A rising is always succeeded by a falling scale of prices .... 489 Metallic money evidence in holder's hands of production balanced by con- sumption 490 Standard, as applied to either of the precious metals, the father of Premium 491 Metallic supply, and its disposition 492 The increase of banks has more effect on prices than metallic supply 492, 493 Limited and free coinage 494, 495 Coinage by the United States ; monetary congress .... 496-498 Economy of metal ; limitation of units ; variations in equations of ex- change 498-501 Banks do not make equations of exchange between buyers and sellers . 502 Valuation and exchange 503 Commodities are still valued relative to each other, as in barter, except that the unit of valuation is localized in another commodity or thing . 504 Why coin is exported when its metal is undervalued .... 505, 506 CHAPTER XXX. THE PURPOSES TO "VTHICH PRODUCTION ON CREDIT IS APPLIED, ETC. Production on credit a new term ; the meaning of the term . . . 507 The vast extent of the subject ; the abstract proposition of M. J. B. Say, as to impossibility of overproduction ; Adam Smith's doctrine, that labor is the measure of value 507-509 Production on credit the cause of commercial crises .... 510 Deposits show the cost of production 510 The doctrine of Mill and Price 511 Production on credit does not end with an excess of such articles as iron and cloth 511-513 Savings bank loans ; purchases of land ; purchases which are made, not by bank loans, but as one of the results of bank loans . . . 513,514 Bank-notes are not the cause of commercial crises 515 Railroads : where the most disastrous of the results of excessive produc- tion on credit may be found ........ 516, 517 To regulate bank debt is to regulate production 518 The movements, both substantial and speculative, which result from the use of the credit fund 519 CONTENTS. lix PAGE Overtrading is not a cause, Imt a result ; case of a mill owner ami mer- chant by way of illustriitiou 519, 520 Deposit and discount banking like nothing but itself .... 521 It is not a dealing in credit, but an efficient system of production on credit ; Great Britain in 1797 ; additional circulation given to money by un- productive consumption, and productive consumption in advance of cash markets 521-523 What a crisis is ; no proper word in the English language to designate that of 1873 522, 523 Dividends and profits declared in consequence of sales of products which do not find cash markets ; these are largely devoted to still further production and help to produce a crisis ..... .'>23, 524 The objects to which they are applied ; what the average credit fund is 524 Mr. Mill's theory of mercantile credit; the economical statement . . 525 The defective reasoning of the economists; they reason from effects in- stead of causes 526, 527 DISTRIBUTION AND CONSUMPTION ON CREDIT. Losses in England and the United States ; what might be easily accom- plished by the United States in respect to metallic currency . . 529 What is needed for the United States 530, 531 Circulation and unproductive consumi>tion in France .... 532 M. J. B. Say's proof of the fallacy of Adam Smith's opinion as to labor . 533 Mistaken views of the results of silver coinage by the United States in consequence of the mercantile theory 534, .535 For what purpo.ses gold and silver are in demand .... 536, 537 Interest a stipulated rate of profit . . 538 Why silver should be remonetized 539 Gold and silver being the money of the commercial world, all nations should act in concert ; Adam Smith's law of bank-notes . . . 540 Deposits being regulated, circulation is regulated ; average price of wheat 541 Surplus of wheat ought to remain for a time in first hands . . . 542 Practic.ll remarks ; communism in France ; communism transplanted ; to their natural extent, unccjual accumulations of cajiital ueces-;ary to human progress 543 But they are exaggerated by our monetary system .... 543, 544 The idea hiis a political origin in France, and a social one in the United States .'>44, 545 The difference between banks in Adam Smith's time and ours . . .146, 547 Bank-note redemption in the United States ; the actual relation between bank reserve and bank debt in the United States and England . 547 Smith's testimony ccmtradicts the opinion of writers in reference to bank- notes .'J47, 548 Excessive loans confined to a few Imnks in Smith's time, but now excessive loans are found in nearly all banks 349 All production by the aid of loans is on credit 550 Ix CONTENTS. PAGB Expansion of deposits in the United States and England . . 550, 551 The rapid contraction of deposits; what causes it ... . 551, 552 Apparent rise and real fall ; what the nations of the Anglo-Saxon family require 552, 553 CHAPTER XXXI. THE PRESENT INDUSTRIAL CONDITION OF THE UNITED STATES; PLENTY AND scarcity; capital and COMMUNISM. The subject a grave one ; civilization and progress 555 Commercial world in many respects but one country . . . 555, 556 The ability of the United States to manufacture for itself . . . 556, 557 The test of oA'crproduction is, in an economical sense, surplus . 557, 558 The articles having surplus fall in price ....... 559 Range of variation in prices ; the real contraction ..... 559 The crisis of 1873, and its results 560, 561 Differences of habits and manners; conversion of deposit-loan banks into banks of issue 562-564 The condition of American labor ; Say's abstract law . . . 565, 566 The practical remedy ; false and misleading theory of money as an active cause i 567 Capital and communism . . 568-572 CHAPTER XXXII. OUGHT GOVERNMENTS, OR BANKS IN THEIR BEHALF, TO ISSUE INCONVERTI- BLE CURRENCY UNDER ANY CIRCUMSTANCES 1 Under what conditions it may be issued ; the stimulus of advancing prices 573 The issue of such currency in Great Britain and the United States . 573 Mistaken policy of the United States in respect to its debt . . 574-577 CHAPTER XXXIII. HOW BANKING RESERVE OUGHT TO BE KEPT. The question of legal property in deposits : what deposits are in their origin 578 The effect of a regulated reserve upon outstanding circulation . . 579 Difference between the objects to be attained by a regulated reserve in England and the United States 580, 581 The maintenance of Adam Smith's law 581, 582 LXTRODUCTION. I HAVi:, after niueli rellection, boon induced to write ami publish this work, because I believe that the science of Po- litical Economy, otherwise callt-d Production and Exchange, has never yet been put on the proper foundation as to money, and production which puts money in circulation. No science can be said, in a true sense, to be founded, until the remote causes which underlie phenomena have been unmasked, as far as human reason is capable. To treat effects as causes is not the way to establish a science. Some of the })henomena may be and have been, in this manner, ]iartially explained, but never satisfactorilv and clearly. Moreover, tiie subject of production and exchange is by no means simple, but vastly complex. It embraces the principal business of civilized man, from the cradle to the grave, in two grand fields: that which furnishes the absolute necessaries of life, and that which furnishes those which are cpiite as necessary to maintain civilization. It has been hitherto asserted that there can be no excess of production anywhere. To prove that there can, and that the exchanges, on the harmony of which conun.rc.' and liv- ilization dej)end, are thereby blocked, is one of the objects of this work. Another object is to show in what way, or rather by what cause or causes, the exchanges are blocked ; and herein lies the most complex part of the whole complex subject. The iuinuMli:ite or jiroviniate cause is inability to make sales of overstock, or, in «tther words, to exchange the conMn in jtroportion ; and there must have 4 INTRODUCTION. been (assuming both metals in universal and equal use every- where as money) an equal amount of each coined, approx- imately, — the increased production of one being attended by loss in value of its mass, and corresponding apprecia- tion in the other. The quantities actually coined and the quantities actually in coin are conjectural only ; and the actual commerce carried on with either metal, in point of fact, has varied, and will continue to vary, the amount and value of each metal in the shape of coin, as one or the other metal is demonetized or monetized, from time to time. Hence and for other reasons which will appear in the perusal of the work, I call it a new science of production and exchange. I do not ask any man to believe what is affirmed in this introduction unless his reason is entirely convinced by the demonstrations following. All works since the days of M. Leon Say written on this science in the main repeat their predecessors. It is time to bring to bear plain fact and rigorous analysis, in order to get rid, in this most complex of all sciences, of the fallacies which have heretofore passed for truth, because they have not been questioned. " Business " of some kind is what nine tenths of the men in the civilized world are engaged in. This business is producing and exchanging by the instrumental- ity of money, applied to paying for labor and commodities. If commodities were all consumed and no more produced, the use of money, which is commonly called the circulation of money, and which is nothing but giving money in ex- change for the labor which first creates, and for all the la- bor which accompanies the exchange of the commodities, — the use of money, I say, would altogether stop, because the money, as such, could not be consumed, like other commodi- ties. Hence, because the use of money begins with the la- bor which originates commodities, and ends with the ex- tinction of that labor, the expansion of labor, which is but another term for the expansion of production, is the service which originates the use of money. Therefore, as production expands, the use of money expands with it. But the only object of production is consumption ; and in order to enable INTRODUCTION. 5 one man to consume, lie must produce an equivalent to ex- change for what he consumes, ami on the average he can do no more. So far as he for a time consumes more than he ex- changes, he locks up the difference for the time in overstock. Ihit he cannot consume at all except by giving money in exchange for what he consumes, while he can get money only by selling what he has })r(>(luced. For this his excess of consumption over and above his actual exchanges, therefore, he must borrow money. If manufacturer A. sells all the woolen cloth he makes as fast as he makes it, and if manu- facturer B. sells all the iron he makes as fast as he makes it, to actual consumers, the expansion of production is balanced immediately by consumption ; and precisely to the same ex- tent is the expansion of circulation (which is expansion of the use of money) balanced by the contraction of that use. This contraction is the return of an amount of money to A., who caused the production to take place, sutruient to cover the amount he paid for all the labor expended by himself and others on the commodity. If he used his own money, it is simply balancing the exchanges between production and consumption in the first and simplest form : the produc- tion and consumption of commodities balance their exchanges, and the use and retirement from use of what may be called the substitute commodity, money, balance their exchanges in like manner, — not as an active cause of the exchange of real commodities, but as the instrument by which the active cause works. But if A. borrowed the vionei/ to pay fur the labor which caused the production to take place in the first instance, and B., as a merchant, by loan purchased the juod- uct of him, he borrowed the money to pay for all that labor and the labor which has since accrued on the road to mar- ket. And another result follows : B. has stepped into A.'s shoes as a borrower, and increased the volume of debt by profits before the protluct has reached market. The circulation or use of money has been expanded by all the labor accrued since the first movement was made or blow struck by the workmen; and no corri'sponding con- traction has taken place by selling the gootls for cash not 6 INTRODUCTION. borrowed, to consumers who have actually made exchanges and thus obtained the money. The expansion of i^roduction of commodities is thus ex- actly equal in this case to the expansion of money circula- tion ; and the contraction of production by consumption is exactly equal to the contraction of circulation, by returning the money either to those who put it in circulation, that is to say, to use, because it was their own, or to those who lent it. Production and consumption are, therefore, the para- mount forces which expand and contract the circulation of money. But the total of deposits is not only equivalent but much more than equivalent to an equal sum in bank- notes, because beside being equivalent it at the same time maintains a volume of production equal to deposits minus reserve. Hence the common opinion that deposits arise from sales of commodities is erroneous. I think I have proved the fallacy of that opinion with a certainty beyond reasonable doubt. Deposits expand with production, and contract with con- sumption ; and here we have the recorded history in terms of money, of industrial, commercial, and banking crises. Ideas, that is to say, current opinions about money, are em- bodied in the terms Commodity, Circulation, Plenty, Scar- city, Bank Credit, Bank Debt, Reserve, Bullion Value, The Exchanges, Cost of labor as a measure of values, etc. Of all complex subjects arising out of the development of hu- man society money is one of the most complex and difficult to be understood ; and the difficulty is increased by the terms embodying old theories, which the author of a new theory is still compelled to use, with the best modifications he can make, in order to be understood at all. This gives rise to apparent prolixity and frequently repetition. The cause of the great complexity of the subject is seven-fold : 1st, the unequal distribution of capital ; 2d, the unequal ap- plication, as shown by results, of productive force to the pro- duction of absolute as compared with relative necessaries ; 3d, the use of money as a conventional commodity to ex- change for labor and the commodities produced by labor ; INTHODtjCTION. 7 4tli, the use of money throu«,'li ordinary loans in the absence of all i)iink.s, and with tin* use of M)etals like f^ohl and silver only, for the purpos*; of having labor and eonunodities ; 5th, the use of convertible bank-noti*s ; Gth, the use of inconver- tible j)aper money ; and 7th, the intnxluction of dejwjsit and discount banking. Deposits are a consolidation in one mass of all the money received by one set of ayments actually made. When there is no reserve in the vaults of a bank, or of some other bank or treasury for its ai-eount, banking is at an end for that bank. What really passes, then, in all payments made by banks for their customers is the money in the reserve. The vast complexity of the whole process has producetl the fallacy that a bank deals only in debt, whiih is gen- endly established in the opinion of bankei-s and writers. This fallacy arises from bank loans. As loans increase bank debt increases, l>ecause production, which is variable, is advancing in excess of consumj)tion, which is, comj)ara- tively speaking, invariable. This bank debt — everv dollar and pound of it — is a credit to ilepositi»rs, an«l has the same j)ower in expanding the circulation, which is the use of the money in the reserve, by causing prothution to take place through loans, as if precisely .so much gold or bank-notes were in the pockets of depositors: the total of ower as coin in France or (lerniany, where, although coinage haa « It lian a »>eftriiij; n|>«n Uiik rpaorrc, hconuao iho iiniu of commij, ihnniK'H iomiuprrc. an? dijUrihut^^l by anJ llirrefonj with tho unii» of inomy. So loiij; mt ihin f rotmiUKliiio* cminot \h-). \l \* for A., n., anil C, «>r any other ra|i«tali«t«. to b»nn in.mrv any faster ; » lo them ihrouj^h miU* of i-ominojitip*. Hut - -i all thr m.^t.^ lu iauk*, and it can hv loaned junt a« fa-t a« it con^ > tho Kank, in cxrhanj;* for rommo:in lift\iiiu' t.ikcn place. 12 INTRODUCTION. been stopped, it still circulates ; nor its purchasing power in India or China, where it still is the sole "standard." It will take time for the purchasing power of silver in India and its bullion value as shown in the commercial world's market in London to harmonize. This will take place only as the units of metal capable of being circulated in India and China are gradually increased. If the use, and there- fore the value, of silver as money were not wholly conven- tional, and founded on the idea of promoting exchanges; in short, if it were used as an ordinary commodity like iron, and for the most part copper, the bullion price would be the measure of the purchasing power. What then has arrested the full development of this fundamental idea ? It is the fact that a large amount of silver and gold is consumed in the manufacture of plate and in various other modes. The money value controls the bullion value instead of the latter controlling the former ; but because an ounce of metal in coin and an ounce in bullion are substantially equivalents, the fallacy lurking in the assertion that a gold coin minus alloy and bullion of equal weight are one and the same thing is overlooked, and the whole case thus prejudged. The fal- lacy lies in the omission of the fact that a very large portion of the value of the metal as money, and therefore as ordinary commodity, is conventional and outside of the coin itself and in the commodities purchased by the coin, which value would be entirely lost by a general demonetization, and succeeded by that value which grows only out of the intrinsic qualities of the metal itself. This fallacy has arrested the full prac- tical development of the fundamental idea, and the fallacy is crystallized in the terms Commodity, Standard, Measure of Value, Bank Credit, etc., while proof abounds, neverthe- less, that the terms are misapplied. Gold cannot be a stand- ard by which to measure values, like a yard-stick or half- bushel, because it merely embodies and limits the units in the denominator of a ratio ; and such units cannot be a standard or a measure. There can be no standard, because there is a constant fluctuation between the number of units in the numerator and the number in the denominator. An INTRODrCTIOX. 13 Kvpr.i^'»' within short jxTiodH, jiii.l ih.- most perfi^ot average attainahlf, arises fr(»in tlu; um«« of the units of gold or silver distributed with commotlitirs. There can be no double standard (»f ^'old and silv»'r, and no threefold standard of gold, silver, and c<)|>|M'r, or any (ither niet4il, because a unit ounce of copper or silver will be to one of gtjld in relative bullion value, under a pMU'ral nioneti/jition throuj^diout the coniinereial worM, inversely ;is the wiiL'lits of tin; n'sjMM-tivo masses in coin. The Mercantile Theory of intrinsii- value in ^<»ld antl sil- ver coin as ordiiuiry coninuHlities, while still retaining their character of coin, has rendered it almost impossible to as- certain what money really is. The author of this book wrote and published a pamphlet, in the spring of 1873, upon bank-note cin-ulation and tin; necessity of a fixed ratio of reserve, and upon the latt«'r subject in the *• lianker's Mag- azine," Mav and .hine numb«M-s, IHT'), but could not make his argument clear, by reason of the old fallacy referred to. It is absolutely impossible for any man holding the commotlity theory to answer intelligently th«* (piestions growing «»ut of a well-put suggestion of Mr. Honamy Price: Why should the Bank of England keep so much useless gold, — so much more than enough to supply all the ordinary calls? Why should it not be sent away where it is wanted, an[)rcli«'nsible subjet-t uiuler the commmlity theory ; and this keeps men who might ma^^ter the 8ubje«'t fnun reading and inyestigiiting. DEFINITIONS AND TERMS. There is a want of precision in the language of the sci- ence of Political Economy, which is that of Production and Exchange. I shall call it by the latter title for the most part in this work. The cause lies in the numerous fallacies resulting from taking only a surface or outside view of the phenomena, without subjecting them to rigorous analysis. I call capital in a general sense everything not actually purchased or exchanged for consumption. Money is not real capital but conventional capital, and is possessed there- fore only of conventional value. Nothing has value unless it can be put to some use. Money can be put to no use whatever except to exchange for all other capital than itself. Hence its value, as a matter of fact, lies only in the things for which it can be exchanged. But this is only another form of saying that money has only conventional value. I call a commodity any thing resulting from the appli- cation of labor, or labor and capital aided by natural ele- ments and forces, to other capital, and intended for con- sumption. A service arises also from labor, or labor and capital, aided in like manuer. A commodity is a tangible and real, a service an intangible but real, result, important in the maintenance of civilization, and hence of production, as well as of the exchanges which maintain the latter. At the same time services are never overproduced. I say never overproduced because, although they may give rise to ex- cessive unproductive consumption, they are immediately consumed, or, in other words, they leave no products which require a market after they are produced. DEFINITIONS AND TERMS. l.'j I call ov«'r|>ro«luttion the |)roductii»n on creilit of u tanjji- ble proiUut which wants a market antl findji it not, l>ecau80 it is relatively in advance of other prtMluciion : the ex- chanj^es upon whiili the hannony of production dej)end8 are thus hloiked, and the n*sult is a commercial and indus- trial crisis. I call the absolute n('c»>.ss;iri«'s ot life tli<>s«' witiiout which life cannot be sustained, huch a« rude shelter, ruile cloth- ing, and food. In a state of civilization the term for all pnu'tical purposes inchules fotxl for the most part. I call the relative necessaries of life all niHc.-i.s;iries oIIht than those before mentioned. I call bank debt the total of all dcl>t iluc by all the banks in a c()untrv to all the deposit<»rs in that country other tluiu banks plus the t*)tiil of bank-notes issued by banks of i«sue, minus all metallic banking re.serve an«l all the meUil kept for the redemption of bank-notes. The t<»tal of this bank debt minmi notes is a like total of cretlit to the account of all the depositors in the country, and nuulo up of the total of credits standing to their several accounts viiium the total of banking reserve before mentioned. I alUiiu that bank- notes pass and are used as money ; I deny that bank debt, wliich is also bank credit. pa.sses or is used as m">ney, but as- sert, on the contrary, that banks pay out money from the reserve only, and receive money into the reserve only, while depositors, through the iTistrumentality of checks or other- wise, ortler money to be paid out of the n'serve only, which is |Kiid by the banks accordingly, while all the money they pay in is |Miid into the reserve, — bank debt, the iN|uivalent of bank cretlrt, U'ing o/i/y thf result of unpnMluclive con- sumption occasionally, ami pnxluction on credit chiefly, liaving no objective reality as a substitute for money. The money which circulat«'« out.Hido of banks must neccHsarily 1k5 the same kind of nu>ney which is dejH.sit«tl in, \vx\*\ out from on check, an«l hmncil by banks ; there can Ikj no essen- tial difTerence between the two kinds <»f money. The 8U|>- poscil circulation or use of bank debt, otherwise called bank credit, for the purpose of paying debts is illusory, because. 16 DEFINITIONS AND TERMS. among other reasons, all sales of goods produced on credit by the aid of bank loans, from producer to merchant, and from one merchant to another merchant, by the aid of bank loans, merely substitute one bank debtor or borrower for another, adding to bank debt due depositors, over and above reserve, the interest, profits, and charges which have ac- crued upon the goods in the seller's hands, while all sales for cash, and therefore for consumption, increase the re- serve, — all of which will be demonstrated hereafter. As capital includes commodity, money being conventional cap- ital is also conventional commodity, and bank-notes con- vertible into gold are thus conventionally used. I call the total number of units of metal found in any country the natural amount and volume of money for the country, re- sulting from commodities which have been exchanged for consumption, and from money paid out for labor and raw material as fast as commodities have been thus exchanged, and no faster. I call convertible bank-notes the equiva- lent of so many units of metal produced and coined, and the total of bank debt used over reserve the result and the record of so much additional above the natural circulation of money through the instrumentality of deposits and loans. I call the metal out of which money is made a commodity. Whoever buys it to work up into money, plate, or jewelry buys it by weight, but whoever buys money cares not for weight, if he can pass it for what he has taken it at. In other words, money must be coined in units of weight ; but the unit is alone thought of, and not the weight, and a unit of weight becomes a unit of valuation, purchase, and pay- ment. Money is, therefore, a series of units of valuing, purchasing, and paying power, which is but another name for commodity of conventional value. If money (e. g. sil- ver coin) were a commodity like wheat, the late demoneti- zations which have made silver bullion decline very largely in London ought to have made silver coin decline in ex- changeable value or, in other words, purchasing power in India and China as well as in France and Germany. But this has not been the case yet, because silver coin is not DKFIXITIONS AM) TERMS 17 :iii onlinarv (•••luniodity Imt :i cunventiunal oiir ; aiul he- cause eonveiitioiial, a unit of valuation. Prices, tlierefore, will not be seriously alTetted unless, and until gradually and linally, in eonsecjuence ni an increase of nu)iu*y in those countries, by reason of the denionctizutions, the purchasinj^ j)o\ver of silvi-r as money is reduci'd until it coincides with that of its bullion. The value of a toniniodity is not the labor it cost t^> produce it, for such a value is impossible, not only U'cause capital and the elements and forces of nature contribute, but because necessity, both absolute and relative, causes the demand which is the foundation of value, while limitation of supjdy as it may be greater raises, and as it may l>e less lowers, pricrs. The rcnidt is that the wages of labor and profits are equali/.ed by tin- natural tendency to equaliza- tion. Labor do<'s n(»t determine values, Imt values deter- mine labor. I call the ajjparrnt valui? of a real commotlity its money price, and its indirect but real value whatever the money obtiiined fur it will j)rotun> of other real com- modities. I call the conventional value of any metal or other com- modity used for the purposes of money a value arising from the convention established by the usage of a whole or a part of the commercial world, to make use of the units of that commodity as money. It is immaterial whether the mass of the commodity be greater or h-ss, subject t«i the j)roviso that the units can be made of suitable and con- venient size and the mass sulliclent to distribute the units throughout the commercial world — weight or size of the unit iletermining its relative value. The necessary and unavoidable result of this conventional arrangement is to make the resulting units of money, so far as they are used, the units in the denominaitor of a valuing ratio at ever}' sale, the units of gofnls in the numemtor determining and fixing for the time, at each purchase, the conventional value of the money reckoneer cent, of each metal into that use. The money valu»» controls the bullion value, which for a time may bo less than that of the money, while it cannot exceetl it, anil in the end exactly meets it. Tho cheaper tho metal more, the dearer loss goes into manufacture ; and thus the metallic units of valuation maintain themselves in liarninny with commerce, and then'by with pnxiuction. -. I'nits of bank and govi'rnment written pronuses to pay metal are also tinits of valuing, i>urchasing, an*! |\aying power, because the units of metal art* no more, and they aire either limited by the units of metal absolutiOy, approx- imately, or very imperfet tly. They are limitetl abM>lut4>ly when a government or bank issues paper, much less in vol- 20 Ki:W THEORIES OF PRODUCTION, EXCHANGE, ETC. lime than the total amount of money in a country can by any possibility be, if distributed naturally through com- merce, — as in the case of a limited issue of treasury notes, and the notes issued by the Bank of England on tlie security of government debt, were there no deposit and discount banking in Enghmd. They are limited approximately under a series of banks of issue, whose notes are convertible on demand, as in Scotland in Adam Smith's time. And they have been and are limited very imperfectly under deposit and discount banking, even while convertible, in the United States. All units of metal distributed through a country in the absence of banks have been distributed to the present holders for the most part for goods sold for consumption, that is to say by commerce ; the like may be said of pa- per limited by a definite amount; and, subject to some allow- ance, of paper approximately convertible, but not at all of that convertible very imperfectly. Paper not convertible is, in the absence of deposit and discount banking, limited only by discretion, but if prudently issued will very fairly represent in the hands of holders goods sold. Real redemp- tions of currencies consist in maintenance of steady pur- chasing power and conversion into other currencies. Re- demption is substantially exchange of currency, whether metallic or paper, to meet the wants of holders and main- tain purchasing power. 3. The natural and ordinary use or circulation of money consists in its regular distribution, through commerce, with the commodities it exchanges ; and for the purposes of such distribution it may be called a conventional commodity, be- cause it succeeds through the developement of society and commerce to, and takes the place of, one of the two commodi- ties exchanfjed through barter. Hence it is evidence in the hands of holders of so many commodities exchanged by them, or others in their behalf, through commerce, for use and consumption ; but as it is also paid out for labor and raw material, it becomes also the evidence of commodities produced, but not yet sold. As no money, however, can be used for this purpose to any considerable extent, whether NEW THEORIES OF PRODUCTION, EXCHANGE. ETC. 21 by loan or otherwise without banks, unlets it ban first \>een received for comnKHlities exchanj^etl for coiiRiunption, pro- duction on credit through h>;inH i» babinced by conMumption throujjh ooinnierce, within short perifKls, — iw in Fnmce with her cireiihiti(»n when chiflly metallic, and substantially so with her inconvertible currency of late yean*, which retireasuro of values by the amount f)f labor the artich»s to Ikj valued have cost : the articles are vjdueil absolutely in each other, ami the variations in value — wants remaining the same — depend uintn variations in the (juantities ready and waiting to Im" exchanged, anil demon- stnited to Iw thus rea«ly and waiting by the fact tiiat they are so exchangeil. That commodities have at first look the 22 NEW THEORIES OF PRODUCTION, EXCHANGE, ETC. appearance of being measured in value by the units of labor they have actually cost, and still more perfectly by the labor it would cost to reproduce them, is tnie, because on the whole and in the long run they cannot, by the very necessities of the case, be sold at less than cost. Production would come to an end, and society itself, were it otherwise ; for all pro- ducers must live, and in order that all may live each must exchange with the other at rates equaling cost. That units of labor do not measure units of commodities (the precious metals inclusive) is therefore a demonstrated proposition ; that the labor which commodities cost is on the whole paid for by the price they bring, reckoned in each other, is un- doubtedly true, because human necessities are the paramoimt forces which cause it to be true, as an effect following the cause. Production on credit, of any kind, and keeping the prod- uce out of a market, cannot, under natural conditions, be carried very far, because the producers are forced to sell from time to time by a natural necessity; but if by any artificial means it can be and is carried to an excess, — the resulting crisis precipitating all the relative overstock on the market, — the prices of the overstock will not be meas- ured by the labor it cost, but by its quantity as compared with the quantity of commodities not in overstock, for which it seeks an exchange. The proposition I have established, although somewhat general and abstract, is no more so than the proposition that in the long run labor measures the values of all commodities which it subverts. The fallacy lies in calling an effect produced and controlled by a para- mount cause the cause itself. It is a kind of fallacy which prevails in the science of Political Economy, and has ren- dered it impossible to establish any true science in respect to production, exchange, and the masterly power exercised over them by the use of what I will now call the conven- tional commodity, money. It has led to the fallacy that gold and silver in the shape of coin are commodities in the same sense that gold and sil- ver in plate, wheat, cloth, or iron are commodities, and so NEW TUEOllIES OF PRODLCTION, EXCIIAXGK. ETC. 23 to the mercantile tlM-oi y of " iiitrinhic " vjilue in {^old or silver coin as an end in it.sflf, and not merely meanM to an end. The nin.st ahnunl rfsulis «»f thiri theory wrre attju*ked hy Adam Smith, hut not the theory itiudf. He IndievtHl in the theory, because he l>elieve«l that labor iH the meaMure of values. He mistook an effect for an active cause ; he ex- plored the river of ilistribution through commerce ; he did not follow it up to the source of supply in pro«luction, and the forces behind prcHluction. l( money in the hhape of coin is an ordinary commodity, the end is attained when- ever the coninioditv is ol»tain«Ml, or can at short notice be obtained. H«'non two things: first, the ipumtity of it actually umhI as money; and, secondlv, the tpiantity of it actu." ■ d as f(XKi. There w«)uld be a mutual and jM«rp« : lM'tw«'en these two valuations : the more of it in actual cirmilation 24 NEW THEORIES OF PRODUCTION, EXCHANGE, ETC. as money, so much greater the values of those commodi- ties reckoned in it, and so much less its own exchangeable value reckoned in them ; while the more of it in use as food, the higher its value, reckoned in commodities other than itself. The more of it in use as money, the cheaper it would be ; the more of it used as food, the dearer, it would be. But the latter is for short periods a steady use, and increases in steady ratios. The variations in wheat, there- fore, if the production of it, by the aid of natural and human forces, were steady (as that of gold and silver are), would depend entirely upon its varying use as money, and the vari- ation would depend almost entirely upon the variation in loans to producers, who would employ it both for circu- lation and consumption. If by any artificial contrivance, therefore, the wheat could be given an extra or additional circulation through loans, over and above its natural circu- lation in distributing commodities and supplying by labor the void to be filled by production, in consequence of their consumption, this additional circulation would raise the price of other commodities reckoned in wheat, and at the same time lower the price of wheat reckoned in them. The amount and the extent of the use, then, are what determines the price or exchangeable value of gold and silver coin, as well as of all other money. If its circulation is artificially doubled, there must be in consequence a rise of prices. But consumption, and therefore actual commerce, cannot by any possibility be doubled ; it may be stimulated, but not very greatly increased within short periods, because limited by surrounding conditions. Therefore, if the circulation of money is artificially doubled, or even very largely increased, it must be caused, in the first instance, not by the distribu- tion, and therefore purchase of, commodities, but by their production and necessary and unavoidable accumulation in overstock. Circulation,*or use of money, is thus artificially maintained in excess of the commodities actually exchanged for consumption. Whether this can be done, — if done, in what way, — will appear in detail by reading the following pages. The use of money cannot be separated from money itself. NEW THEORIES OF PUODTTTIOV, EXCHANGE. ETC. 25 t5. Money l>cing cirpulat««l. <»r, in «>ilii-r wonls, ilistributed, in exchanj^e for comm«Hliti<'.s to \h* c"<>nHUinooint and to a limited ext<'nt pro- duction will be stimulateil ; but the nomiiuil cost of protiuc- tiou will rise continually, and cannot Ikj far behind prices of the article produied, profits included. The reason is that the increased volume of money is rapidly distributeil through the distribution of conunodities, and its natural circulation is that of the commodities themselves. I*roe carriinl on in excess of former ppnluftion on credit before the ex- pansion very far, because money has expandewer. The Hjime amount of lalnir can be paid for through tln» in- strumentality of loans, and thert>fon> the Kime amount of production can take place as Ix^foro, and no mon\ In a country develnpfd like France it would stimulate pn^luc- tion to only a slight extent. The inconvertible Itank-notes issued within the last seven vears — 1870-1H77, by the Hank 26 NEW THEORIES OF PRODUCTION, EXCHANGE, ETC. of France — retired the metal and convertible bank-notes formerly in circulation, adding to the actual volume of the circulation somewhat without increasing the " loanable capi- tal," which means the actual nioney waiting for loan, except perhaps somewhat as to its volume. No more production could take place in France than before. But let such an enormous volume of paper money be issued, by banks or governments, that the ability of the banks or governments to maintain, not convertibility merely, but exchangeable value or purchasing power is endangered, it will either de- preciate or be entirely discarded, and go out of circulation as worthless. It will depreciate relatively to some other cur- rency (that of the commercial world), or entirely lose pur- chasing power. So long as the chances in its favor are supposed to be on the whole greatest, it will circulate with great depreciation as compared with the money of the com- mercial world, while its purchasing power, until it is repu- diated or likely to be so, will be governed by the rules before mentioned. The currency issued by the United States in immense volume during the late civil war fell enormously, as reckoned in gold, during the war, — the fall culminating at the battle of Gettysburg, — and rose rap- idly after the end of the war. The French assignats and continental currency of the American Revolutionary war became utterly worthless by entire loss of purchasing power. The maintenance of purchasing power failed by over-issues. 6. The doctrine of M. J. B. Say and his followers, that there can be no overproduction, is absolutely true, but rela- tively false. It is absolutely true, because there can be no overproduction of the absolute necessaries of life : it is rela- tively false, because there can be and has been an overpro- duction of the relative necessaries of life, measured by the standard of the absolute. It is absolutely true, because the production of the relative in excess of the absolute, which limits it, can be carried on only for a time, and is stopped by a crisis in the relative. The progress of the relative is not only checked, but its producing power is cut short, so as to maintain an average, in the long run, with the absolute, NEW THEORIKS OF PRODUCTION, EXCHANGE, ETC. 27 which limits luul controls it. National prosperity is not an absolute or indepentlent thin^, existing by itself alone, nor is it blind progress of production in certain quarters in ex- cess of otluT quarters. It is the maintenance of population in an average state of comfort, j)r<)pned to the advance of civilization, with a progressive and eijual advance in all the capital (h'voted to prmhution <*v«'n>- where, and, subject to this law, of all the energy and force j>ossible applied to production. There can be gi-eater or less economy employed in respect to the consumption of the relative necessaries of life ; there can be comparatively slight variation in the economy employed in res|>ect to absolute necessaries. It is asserted by some that improved machinery and improved processes, by others that tariffs and taxes, are the causes of overstock in recent times. This is a mistake. All improve- ments in machinery which save liands and accelenito fin- ished product, and all im|>lements and processes which save hands and increase j)roduet of raw material, c(»nstitute pre- cisely so much liuiiiaii progress and advancement. They merely demonstrate that the surplus of hands must Ito sent away to ])roduc«! absoluti^ necessaries ; they are not the orig- inal cause of overproduction. The cau»e is relative over- production ; the ijutntion is. What are the conditions which, in the first j)lace, render overproduction possible at all? and not, What are the conditions which aggiavate it ? Neither can taxes of any kind, tariffs included, be an original cause ; they are so much j)aiil by producing consumere out of real or supp«»sed profits or income for the support of the govern- ment and the payment of its debts. The greater the tax, the greater the amount of unproductive consumption, so far as respects the total fund which pays the t»)tal tax. The unproductive consumers buy most of the absolute necessa- ries, and have so much h'ss money left torting, U'caus** government could get on without tiixes, probably one half would go to ])rotlucing absolute necessaries, and thus help to restore the balance in favor of the absolute insteail of, as before, hel|ung to turn it the other way. To this extent, and no more, do 28 KEW THEORIES OF PRODUCTION, EXCHANGE, ETC. taxes of all kinds — tariffs included — help to bring on com- mercial crises. 7. I now come to consider another subject treated in this book, and practically the most important of all : the condi- tions which render possible that excess or overproduction of the relative necessaries of life which brings on an industrial and commercial crisis. The forces actually in operation behind money are paramount to money itself; that is to say, to the circulation of money. Every merchant or man- ufacturer who has had a large stock of goods which he would be glad to sell if he could at less than cost, and indeed at any price which would enable him to pay his debts, knows this to be true, and that it is not an abstract proposition but plain matter of fact. Money is plenty enough, but pro- ducing consumers will not buy, because they are already supplied ; and they have been supplied by selling all they had to sell. Had the merchant and the manufacturer fore- seen the overstock and the fall in prices, the latter would not have produced and the former would not have bought. Why did they not foresee it? The propositions demon- strated already show that as goods increase, while demand, which practically means ability to purchase and consume, remains the same, prices of goods fall. Therefore, as the overstock was rising, the resulting fall in prices ought to have demonstrated loss immediately, unless loss was con- cealed in rise of price. But how could prices rise, when no additional issues of money were going on ? and how could loans be obtained to create the overstock ? Both these ele- ments are found in deposit and discount banking, and they are found nowhere else. Consolidate one half of all the money distributed as goods have been distributed in one re- serve ; lock up seventy-five or eighty per cent, of it indefi- nitely ; receive deposits and pay out deposits upon checks, and the stream of incoming will average with that of outgo- ing money, and there will be the same number of exchanges by the payment and receipt of money as before. Circulation outside of the " reserve " will be replenished by and will itself replenish the reserve. But is this in any sense a re- NEW THEORIES OF I'UODUCTIONT, EXCHANGE. ETC. 29 serve ? Would it not r»-'4uire u stretch of tlie iiuagiimtion to consider this a reserve ? It all belongs to depositors, as well as the money locked up. Hut now suppose the custo- dians or haukers of this consolidated reserve to unlock the money which is not in the " reserve." and loan it gra/,• expansitin of the circulation or u.se of the money in the reserve, bv the aid of the resulting bank debt, operating like a |>ower or series of powers in the hands of dej)ositors, bv the instru- mentiility of checks, was fully equal to the pmgible circula- tion of metiil and notes when all the money was in the 30 NEW THEORIES OF PRODUCTION, EXCHANGE, ETC. hands of depositors. The actual expansion which took place by loaning the metal and notes from time to time resulted in an equal amount of production on credit, and an equal amount of debt due the bank, but made no change in its debt due depositors. This power to use the reserve was and is precisely equal to all the possible circulation which could be accomplished by the departing metal and notes. The latter departed, because they were superfluous; they were superfluous, because their issue as it proceeded left a substitute in their place previously existing, — a power to work the reserve, so to speak, in such a manner (by the in- strumentality of checks) that the metallic pieces and the bank-notes in the reserve equaled in efficiency all the money before it was deposited. But one inexorable condi- tion attended the loan of the metal and notes, in addition to the creation of this equivalent power. That condition was the purchase with the metal and notes of an equal amount of labor, or, what is the same thing, commodities which cost labor. The purchase of commodities had pre- cisely the same effect as the purchase of labor, because it enabled the buyers to buy on credit. I say on credit, not merely because they borrowed the money, but because they borrowed it in excess of all the exchanges of commodities, and therefore of money, which had up to that time taken place. It was giving the money a circulation on credit, be- cause it was in excess of all the exchanges the money had previously accomplished, when, as already shown, the nat- ural use of money as a conventional commodity, which is but another name for unit of valuation, purchase, and pay- ment, consists in exchanging it for commodities, and labor to produce commodities, as fast as consumed. It is the nat- ural use, because it naturally arises if money is left to itself, inasmuch as money follows commodities. By the natural use of money there can be no excessive production, any more than under a state of barter, because, under either, produc- tion on credit is very limited. But the introduction of de- posit and discount banks has so complicated the subject of money that it is the most complex of all the problems of NEW TIIEOUIES OF PKOUUCTION, KXCHANGE. ETC. 31 the time, wliile it luw u iu'»r»' iiu])ortant bearing; than any other tijxtii the comfort and happineiM of men. l)e|KMiti) do not create any " inflation " of the currency, a« Ronii-tinjes supposed, because th»'y increaise in exact pro|Kjrtion to the pnnhiction of gooils, and no fiuiter. A dollar or |Kiund in goods apjwars for every dollar or {>ound in de|M>8it8; an in- flation of currency appears in an issue of money which is in excess of gfRnls. Hut the expansion of dejK>sits raises prices, although coinnKMlities increaMe at the same rate, bo- cause loans enable pnMlucers to keep their stinks out of market; and this, until tin* overstock is so great as to bring on a crisis, enables tlinn to sell at a profit. If bank loaiiB were made only to manufacturers, nu'nliants wouM have little overstock, comparatively ; the overstock wouKl In? left in first hands, and sales for cash, to distribute to actual consumers, could alone reimburse the manufacturers and enable them to produce again. It is the purchases by mer- chants which cause no actual exihanges of coiumtslitics to take place, that carry up and maintain the prices 61 the overstock. This is buying on credit, unosit, and dis<*ount having a resen'o artificially maintaiiuNl in nearly u.h i>vo fwkoil, Why plao* the «ubj«'<'t of moiu'V in th«» fn-st rhajjUT of a l>on I*olitiaiI EcoiHunv ? TIm' answer is Imm:iuh«« P«ilitit>nl Fx*<»ni»jny in the science of PnKlurtion and Kx«'linnge, ami the inven- tion of nionov is th»* first Bt«'i> towanls making i'\ witlioiif ulii.li fliiTf iiMilil !»«• Ill) j>r '^n'ss in j>r»«>- lutely true becau»<» that is one of the ohj»M'ts for wliii'h mone'v was invented, and, acrordinj* to Montenquieu, the only ohjeet attained hy the money of a eertain African triln', — ideal units called Macoutes. This money di«l not suimtmiIo barter, but enabled barter t«> tiike place with mon» facility. Barter is the exrlmnpi of «»ne arti«le or o>inmilitated in this triU' by the use of the un ■••H. If Mill' (-iiiiMniMH' ni.i nii^jht Ih« valiie»n- tains the whole tnith in res|>ect to money, we are still in the 84 POLITICAL ECONOMY. condition of this African tribe. The macoute was an imagin- ary unit, by which the rehitive values of two commodities, brouglit together by two parties to be exchanged, were deter- mined. The yard-stick measures length and breadth, and thus furnishes a unit of length, a unit of breadth, and a resulting unit of surface, which is actual and visible. The macoute, or unit of valuation, is neither actual nor visible, because it is entirely abstract and ideal, like all units. It is a method of measuring the value of one commodity by comparing it with another, through the instrumentality of an abstract unit which has neither length nor breadth. It is impossible to separate the macoutes from their use : their use is the measuring of two values by means of a ratio, and a ratio is necessarily abstract. One thing is certainly true of these macoutes : they are units of valuation, and therefore may be said to measure values of commodities. Another thing is equally certain : that abstractly there is no limit to the units in a ratio. How, then, can the macoute be said to measure values ? Can it by any possibility be said to be a measure, if it has no assignable limits ? Surely not. But has it no limits ? Surely it has, because it is limited by the commodities actually exchanged. This is the analogy, and the only analogy, between the macoute or money unit, the yard-stick, which measures surface, and the pound, which measures weight. Here lies the true germ of all money. Now let us take one step more in the process of development. The first step is barter, and the commod- ities are exchanged by means of an ideal unit, which, al- though it has no local habitation, has a name, which is, macoute. The name, however, is not essential : if one com- modity be counted 2, the other may be counted 3 or 4. The second step is to dispense with one of the commodities, and give, not only a name, but a local habitation to the ideal unit called macoute. Let us suppose that after various commodities have been adopted and superseded by the ad- vance of society silver is introduced. Now how can silver be used as a commodity of universal exchange ? It is abso- lutely, I had almost said mathematically, certain that it can DEVKLOl'MKNT OF MONEY AND ITS I'SKS :!' only be us«'tl ius a unit of v!iIiiution like the in.i. ui. . ^sm this quulification, — that the i»h'al unit calle«l umcound, and another a half pound, as the unit of weight for its coin, it is mathematicailly certain that the purchasing power or value in exchange of the latter must in the abstract be to the former as the weights ; that is to snj, directly, or as ouf to two. Valuation of all sorts, there- fore, by way of the pnx'ess or invention c;dhnl money, must necessjirily be by way of altstmct or ideal units, limittnl in one of the two mullion in the market. This theory is false in reference to any commodity, as I shall show in the cours4' of this work, and I will shortly demonstnite its falsity in n*H|)ect to gold and silver coin. If metallic money is limitccl by the number of metallic units in existence, paper money, liaving a rewrve of metal behinrri of the Bank of I!; ' ! ts mojlitiiHl by the act of lSl4,in order to vary as go. », must have a definite amount of nietd Udiind it : the amount of |>a|M>r must Im> in a definite projMirtion to that metal. Hut has not till' pa|M'r of the Hank of Kngiand a definite pro- portion of gold beliind it ? Surely it ha«. I)ut Fnince, and place no limit Udow which the " reserve " shall U' allowed to fall, and there is no as^sign- able limit to the numb«*r of units which can be put in circu- lation but the limit of possible prinluction through payments made for labor and raw material. This prcnluction I call, in the following pages, I*rans to pHnlucers shall stop; thenceforth limiting pHnluction by actual stiles for consumption. Now all this is unintelligible ui>on the men^mtile theory of intrinsic or coujuxnlity value in g«»ld and silver coin, but rigorously true and clearly following from the demonstrntcii 40 POLITICAL ECONOMY. truth that all money is but a series of units, limited either by the commodities actually exchanged for each other, or by the units manufactured out of any given material. It is im- possible that money should be anything else. Suppose for one moment gold coin to be a commodity like wheat. The wheat must first be valued in the coin, and then the coin in the wheat, or the coin must first be valued in the Avheat, and then the wheat in the coin, by means of a relative valuation of each in the other. This relative valuation requires the mental use of units of valuation like the macoutes, and then coin would cease to be money. It is utterly impossible for money of any kind to be anything but a limited and localized macoute. Paper money without any metal to limit it is limited only, so far as it is limited at all, by the units of all commodities, as well those produced as those actually dis- tributed for consumption. This is the limit of all paper money issued to solvent borrowers. If issued only to such borrowers, and if production could never by any possibility gain upon consumption, — the latter balancing the former, — prices would be steady, and paper without any reserve might then be said to vary as gold would vary. But to distribute money by means of loans, in proportion to production, by paying money for all the labor which causes that production, when production is rapidly gaining upon consumption, is to cause unsteady and rapidly advancing prices, until arrested by a crisis in production and labor, which crisis, as an active cause paramount to all others, turns the scale of prices upside down. But there is a practical demonstration, now working itself out before the eyes of the commercial, banking, and scientific world, that silver coin is not a commodity. If it is a commodity, why has not the exchangeable value of silver coin in the countries where it remains in use followed the bullion value of silver in the world's market in London ? Governments cannot fix the value of commodities. Why has not silver lost exchangeable value in Germany and France corresponding to the loss of bullion value in Lon- don ? Why has it not lost purchasing power in the East Indies, and China, and every other country where it is still DEVELOI'MKNT UK MONEY AND ITS USES. 41 in use as money ? The true unnwer in, lieoiuae the exehange- able or unit value of cttiu ics money, and not aa material to maiiufaeture money, am ehanj^t* only a* the uniut jin* erjineiu value will then, after the lapHo of a consiilerable ]MTlod, coineide with the bullion value ; and hucIi will Im> thn fate of gold as coin. The loss in the jturchasing power of Hilver will be balaneed by an equal g.iiu in g'>ld ; the g:iin in the lalt«'r will take place as slowly a.s the Ifjss in the former ; and neither will be prcKluetive of a|>pre<'iable loss to anvb<><|y. The incon- veniences which would result by the atloption of silver by a Urge commercial nation like the Uuiteil States, acting singly, are discu.Hse«l hereaft«*r. Mi»ney is the all-inip«>rtant i^ubject in luiMleru tiujes, espe- cially for commercial nations of such wealth anti such pro- ductive energies jus (Jroat Britain, Fninre, and the IDited Stiites. This is the rejuson why I have made it the subject of my first chapter; for it is im|M»ssible to have a ct)rrect con- ception of l*roduction and Distribution, or Commence, with- out a correct (inception of money and its uses. The use of money, therefore, by way of loans, causing an expansion of its use or circulation, I shall call expansion of circulation, anears in the increase or diminution, the expansion or oontniction of its use, when its natural distribution is not disturU'il ; nnd thirdly, the unnatural or artilicial di-^lnrb- uncu ttf that distribution — unnatund bei>auM> not allowed to remain wlM>re the nalund distribution of rommtMlities, otherwise «illtT«l comment*, left it — by the enlargement *»f the use or circulation of money U'vonil what t*«>ulil follow that natural distribution, by ctms'tlidating it in hip^> dep^^it res«rv(>H und thus giving rimt to inon*as4Hl hxins. Money, und«'r tln-,' of the following p^g*'**' i" connectiitn with the priNluctitm and distribution which it ctiuses to taike place; and l^riKluc- 42 POLITICAL ECOXOMY. tion and Exchange constitute the science of Political Econo- my. The mercantile theory of gold and silver coin as a com- modity possessed of intrinsic value has undoubtedly solved some important truths ; or, rather, it has not prevented the solution of them, because, as a result, or as an effect of gold and silver having come into general use as money, it may be regarded as substantially true. Because gold and silver are and long have been in use as money, they possess a value in exchange which they would not otherwise possess. Vast masses of these metals have been manufactured into coin, which would never have been mined had they not been long before in use as money ; a dollar in gold is prob- ably not worth all the labor it cost, but, on the average, much less. If, however, the. miner cannot earn a living of average comfort at mining, and a little more, he will in the end abandon it and work at something else. In this sense and to this extent the result of all the causes in operation is to pay the miner for his work a fair rate of wages. The Chinese pursue in California the business of mining at the rate of fifty cents or less per day, where American miners have long since abandoned the ground. What I ask the reader to do after perusing this chapter is to divest himself, if he can for a time, of his preconceived ideas of money and the " circulation " or use of money. Gold or silver coin is not a commodity like wheat, because it is not governed by the laws of ordinary commodities. Can any people or any government, by a mere conventional ar- rangement, either raise or put down the exchangeable value of wheat, except by raising the cost to the consumer through a tax or tariff ? Can they do it by a mere legislative enact- ment or by a decree ? Can wheat, without the imposition of any tax or tariff, and by mere legislative enactment, or by de- cree or order, be made worth $1.50 per bushel in London, and 'SI. 75 in Paris or Berlin, assuming that it would cost less than a cent and a half per bushel to carry it from London to Paris or Berlin ? If gold or silver coin is a commodity in the ordinary meaning of that word ; if, as the followers of Smith and Say assert, an exchange of wheat, cloth, or iron, I DEVELOPMENT OF MONEY AM) ITS USES. 43 for gold or silver coin, is an act of barter, like that of the 8ava<^«*s \\\\o rockniR-d in niacout»*s ; aMn»«lucti%e •MHTpi*« of nil Kn^liali s|H*akiii|^ |k-o|i1i> havr Imi'u d<*Vflop«ftl tu a lii^li Uiv _:riH>. All liavu a ^«mi(Tu1 knovrled^^ of manufacturing ]irocc«uw.H, the cliviHion of lulM)r, and the improveinenta in agriculture, in nianufa<*tun^, and in machinery of all mirta. The |iri>l>leui Ih to harmonize priHluction ; and thit can only bedonu by preventing a^i far ax {)«MMil»le protluction on cntiit, whi- ! r j»ro<'eed very far without borr • ' — !y till" I. • H i>f lifo tnuler Color of the roit • u- modity cuih-d m<»npy, — from proceeding to that point where the oulv reiui*dy in a reaction in the Hha|>« of a commercial criHJH. Hence, in ordi'r to demouHinite my pn>|KMition)i in relation to tliiit all-im|H>rtant Hubject, which really embraces all the pmcti«'al knowle«lge r»'Hition, HH th«' n*»idt «)f the unalyniH of the various pnM*«>ftseH, which, nlth tiu'h aip]>anntly ditbrent in themM>lveit, lead sultsttui- ti.>r.\ the Mime result. He who ran master all the movi^ iiKiito .iiid ;ill tht> results of that conventional cii<-y, can maMter the movemiMits and reHiilt!« of pro- du(*tion and exchange ; and he who has maHten.> minute: but tlie pn«- ■ ^ give f ■ !s .; -. cause, li .-. . .-...>,. .u they n*ally an*, the men« eflTtwt or subjet^tive r^wult of using the money of depositt'rs — thus giving it an additional cinu- 46 POLITICAL ECONOMY. lation over and above that given it at the same time by the depositors, who are the real owners of the money, — renders this minute analysis necessary. It is necessary in order to demonstrate that it is not the depositors' credit or the bank's debt which pays for commodities, but the money in the bank reserve, which is the consolidation of all the reserves of the different depositors, and which, through deposit and redeposit, is amply sufficient to meet all the calls of deposit- ors after having made the whole volume of loans. These loans have been made once for all, and need no more money to sustain them ; it is the uncertain and varying reserve, out of which and in which the units of coin and bank-notes which pay for commodities are placed from time to time in the various ratios of price, and which assume the appear- ance of credits used instead of money, — it is, I say, this un- certain and varying reserve which makes the unit of gold, of silver, and of bank-notes virtually an equivalent for so many units of bank credit. This happens, because all money is but a series of units as before stated, and the real and only utility of such a varying reserve is, that it limits, not loans, — for that is impossible with such a reserve, — but the scale or height to which prices can be carried, and there- fore the depth to which they can be lowered ; such a reserve is an imperfect limitation to the whole volume of money units in circulation, and therefore in deposit. The germ of money is an ideal unit, like the macoute, used mentally to compare the values of two commodities brought together for exchange. Each commodity was valued in units limited by the commodity itself, and the units of each commodity were then compared with those of the other. The next stage of development in natural order was to embody the unit or macoute in a commodity of universal ex- change, which thus not only furnished a unit of valuation, but also a commodity of universal acceptance, and so of universal exchange. A valuation by units is therefore the root and origin of all money, behind which lies the commodity which embodies and thus limits them. It is a mathematical impossibility for money to be used in any other way. But DEVELOPMENT OF MONEY AND ITS USES. 47 because gold, 8ilv«?r, eopjMT, uiul otIuT inetuls which an? inii- terial substances and highly urteful commodities, have been in iiHf fron» the earliest |HTi\ver of a valuable commoility as an articlo of uiiiversal cxchang**, thc»«' units of Weight are in onu sense coininower or vaUn? of the same silver bullion in the BhaiH? of units of weight reckoninl in units i»f gold in Paris and Berlin. Imperial jKjwer cannot fix the value of any comm»Mlity like wheat, reckoned in other commodities or in money, but it can fix the purchasing |xjwer of a comnxKlity like silver in the shajM-'of units of weight, as compared with those of gold, for (he purpoges of mon^y, up to a certain point explained hereafter. Were silver the only mat4>rial UHe«l as money throughout th«» conunercial world, imjM'rial power could not accomplish this task of fixing the purchasing power of silver without ailopting stmie other ma- t«'rial for money in addition to silver, by means of which to fix it: it could no more accomplish such a trlion, as will Ui further shown hereaft««r. (lold, silver, or any other ctmimotlity, therefore, when usimI iui a univerMil medium of exchange, c**iis««« to be govern«'d by the oniinary laws of supply ami tio- mand in its character of money, In^chuso its value is wholly conventional s«» far as it is us«»e embinlied or (through bank or govern nu?nt notes or bank debt of any kind) limited, either jwrfectly or imperfectly, by those metallic unita ; and thus adding, in the former case, a definite, and in the latter case an indefinite, sum to the total of the metallic unitA as r • distributed miturally through the exchanges of com- 1 In the former case a triu*, exaict, antl jwrfect ** metallic biisis," in the latter a false, inexact, and im)>erfect one is attained. It is absolutely im|Kxuiible for all governmenta combined to change or to atlect in the slightest degree, a* a tchoU^ Uie purchasing power or exchangeable value of all the unitfl emb(Mlied in gold, if we luisume that t«> Ik* the only money in use ; aiul so of silver or nny other metal, singly ajul solely used as money, and distributed in coin throughout the com- 4 50 POLITICAL ECONOMY. mercial world. If the United States, in such a case (where gold, for instance, is the only money), coins dollars, and Great Britain, adding a little more gold to her sovereign or pound sterling, whichever we choose to call her unit, puts in it five times as much gold as there is in the dollar, the conventional value of the coins is directly as their respective weights, and inversely as the respective numbers of like coins which could be made out of the whole coined mass of gold throughout the commercial world, first in the shape of dollars, and secondly in the shape of sovereigns or pounds. Again, if dollars alone were in use throughout the commer- cial world, no real change of purchasing power would take place, by general recoinage in the shape of half eagles, the total purchasing power would remain the same, the purchas- ing power of each unit being increased five times, while its mass increases in like proportion. All this happens under free coinage for all who bring gold bullion to the mints. But suppose the United States choose to coin, on their own account, what are called gold tokens, while all the coins throughout the commercial world (gold being the only money in use) are of the weight of the English sovereign increased so as to make it equal to our present half eagle. Let the token be in weight one fifth that of the present half eagle, with a device peculiar to itself, and let it be made by law legal tender for the same amount with the half eagle, under an issue of tokens to the amount of fifty millions, nominally. Suppose this to be the' only in- stance of token coinage throughout the commercial world ; what will be the consequence ? Will the tokens pass for half eagles, each, although they contain but one fifth of the weight of a half eagle ? Doubtless they will ; but what then ? Free coinage existing elsewhere, and in the United States also, with the single exception of the fifty millions in tokens, what will be the effect of this coinage on the pur- chasing power or exchangeable value of the half eagle, which contains full weight? Will its value be diminished ; and if diminished, in what proportion ? It will be diminished in exact proportion to the increase in the number of standard DEVELOPMKNT OF MONET AXD ITS USES. 51 units, in conwMjuence of the roinago of tokens <»f one fifth weight, by the rnit«'«l StatfH, to the timount of fifty niillions. If the total of ^oKI half eagles were one thouKiiml millions In-fore the coinaj^e of tokenn the t«»tiil number of units w«»ultl thus be increiukHJ, and therefore tlie average purchasing |M)\ver of tin? unit wouM be, in the course of time, inrrr'astnl four jH>r cent. Hut th«' tokens are not ilirectly ri*tle«mfti by the Uniteil St^ites in luilf eagles on chMuaml ; and how then will they, how can tlu'V, circuhit*' side by sitle with tin* half eagles of full wtight ? They will circulate, because they will by law, and therefore general consent, buy im many half eagles of full w«*ight, which constitutes a n-al and con- tinual redemption ; for it is a niistake to 8U|>|>ose that they are not red«'emed. They will be further reih'emwl by thu govemnient, which receives and pays them out as if they were of full weight, and tlu-y are constantly reth*eme*l by every seller who takes tln-ni of the buyer at the sjime rate they c kin\ernment antl the banks ; and precisely like that whi«h is elTeoti'd by any pajHT or cretlit currency maintained in ono unvarying nitio with metal. Hut it is all an illusion to 8up|HMi«; this to have been in the past, or by any |M»ssibility to bo in the futijn», real and true economy, exc»»pt as hen'inafler ex- plained. Iku^iusi> tile metal is in use as numey through- out the commercial world, it is sim|>ly antl purely an artifi- cial arrangement t4> diminish the exehungeable value of the metallic unit, and cons4><|uently the |Ki|>er unit which circu- lates side by side with it. It follows logit-ally, as in ]>oint of fa«'t it has followetl, that where one country, like France, maintains for the m<»st part a metallic cirrulaiioii, other com ' " T nd and miuh more the I'niled States, iuive - ^ ^ iiieir Ions of btdlion by what is caUei f.ti 11. aiHt Iw •^ill.llJ•■l liu? IIUIIIimt, lul* ^Ttator the j)urtlia.sin^( |M»\Vfr ••( i-aiclj. Weight, therefore, neceiMMirily tleteriniiutl the purchiiAing power of each unit. It fdUowH that if Hilver ' ' *'y without itij niticj to p)M i*- ing |X)wur of uiiy one of itH uiiitH must b« nit of 1 invernely h-h the n - ' uml, ami I.. rufore invefHely lus ih : , weight of eiich metul coinetl. It further folhiws Uiat th« whole cciii- inereial worUl can agrtn*, aiul rati alno n ito effect the ngreeiiuMit, to refuno lo coin m..., .. ^ to what may be calluil this natunil (beciiu»e nei*e*»ary» »o long as undisturbed) relation of the t\\() metaU. in |K)int of |>ur- chasing |H)wer, by changing the ratio fr»)ni nay l'>^ to 1, to 20 to 1.' They can refuse to coin nilver ex«v|»t when twenty imunds of Milver sells in the bullion market for one ; ;:i I f - Itl, aiiil to stop coining silver as so^ju as it be- .ilH)ve that ratio. The total purcliaHing |K»wer of all the gold and silver will then (H|ual exui-tly tiie tot^U !ia.sing (K>wer of all the gold, when ' : ' dy .A in use as money. Hut, again, if i: ib- senco of legislation, fixes it.self, us it as.sure«lly will, 1<*)^ to 1 InMiig found, for insUuuv, to be the natural nitio, the total ]>urchasing power of the two metals will still be that of gold U'fore silver was moneti/.e«l, ami conse)|u«M)tly the total pur- i-hasing {xiwer of the two nu'tals, which is also the total pur- chasing |>ower of the one metal g<»ld, b«'fore the monetizii- lion of silver, will now be eUl one liaU :• : ' ;...wer Ver . ' " . ' ' " tO lilt ilinl . of pHMluction and ilistribution. (it>lii and silver being tiiiui '"' 'Weil to tak'* tlu-ir n.i" ' ' * ■ ri- L'uiion of purcha-'iii^ p mi- tion, left to itsidf, can by no p*iiwibility t^ike plaoo in any Other manner, or in any other pro|M>rtioii titan that statetl 64 POLITICAL ECONOMY. (exact equality), the weight of the total mass of silver and gold in coin will be greater by 4^ pounds of silver for every 15^ pounds of silver and every pound of gold coined than where all governments agree by treaty, sustained by ade- quate legislation, to coin only when and so long as the ratio continues at the rate of 20 to 1, instead of 15i^ to 1. To coin at the former ratio would be a real saving (whether an economical one is not the inquiry now) of a fraction more than twenty-one per cent, in the total mass by weight of gold and silver used as money. All this results because metallic money is a series of units of valuation, purchase, and payment, localized in and limited by the metallic commodity of which they are made. This limitation is essential, not because total purchasing power could be made greater by an indefinite increase of the units, or made less by an indefinite diminution of them, but because it is essential, in order to keep the purchasing power steady, in the hands of successive holders. Money is not a commodity, but a process of valuation by units, followed up by the delivery of the units, localized in metal or debt, as a substitute or conventional commodity. Upon this analysis it is easy to understand why metal has been so generally believed to be a steadier and safer cur- rency than bank-notes or any other form of debt, however safe and well secured, for conventional use as money. The belief may truly be said to be universal, although in some instances opposed, but not overcome, by the extensive use of inconvertible bank and government notes. Such notes are merely units of valuation, purchase, and payment, and their whole value lies in the fact that they will exchange for units of merchandise. Such, to speak with rigorous accuracy, is and necessarily must be the character of all money, because it can only be used as money to procure other things. Hence the intrinsic qualities of the metal, in the shape of money, must be eliminated in an analysis of money and its uses. The true reason why metallic money, duly distributed with commodities through commerce, is the steadiest of all cur- rencies is that there are definite limitations to its manufact- DEVELOPMENT OF MONEY AND ITS USES. 55 ure as a unit of viiluo in the metallic material, of which it is composed, while the prevailing idea, which can never be subverted, jRihiips, exccj)t as matter of science, is that as money its intrinsic tiuiilities give it a value as a commodity which remains in it and cannot be Be|)arated from it, even when it is used only as money. The prevailing idea is right in respect to the fact of steadiness of metallic money in ex- changeable value, but wrong its to the true rcjison for it. The true reason I have given ; the popular reas^jn is, that the unit of money is itself in the shape of a metallic coin, — a valuable commodity at the moment it is used, — and that it performs its valuing function as a conimor existing in the highest degree in the Unitert v com- plex nature of money itself in Hngland an«l the UniteiiL;.ii<- iiml cMiiipi.-ii'-iui Uii; Mi"\"Mnfiil or circulation of gold, bank-notes, or bank credits, it is not sufUcient to investigate nn'rely the facts which lie behind "tmfljc," "trade," "over-trading," " sjM'culation," etc., be- cause if we stop there we shall really make n«» investigjition at all, and we shall leave the subject with ignorance more prf)fountl than we entered upon it. We must ascend the river which supplies us to its source ; we must go from "traffic," which we must hencefonvard call Distribution, to its source, IVnluction, and thence down t^) Consumption, — the former, ultinmte cause, and the latter, ultimal4' etTect, — otherwise wo shall have no science ; In'cause s|>cr than i>xchange, Wcause goo\( implies a aourco from which distribution is n-nth-riMl |M«4utiblc. Di. m.«v for till' present, and sup|x»,Hing, iiustfad of Imn :.d- ists nuiking it their business to loiui money, banks and cap> 58 POLITICAL ECONOMY. italists making it their business to sell their written promises to manufacturers and merchants, by which they promise to pay on demand, to them or to bearer, certain quantities of staple commodities, or, should they prefer it, an equivalent in other commodities, writing these promises in as small amounts as desired, for convenience in paying wages, — can any overstock or redundant production arise from these loans ? The answer to this question is in what follows : Of the absolute necessaries, of grain and provisions, there can be no redundancy, for that proposition is demonstrated by the facts of all past time. There may be in some localities a glut, arising from inability to get to a market ; there may be at times too large quantities thrown upon the market at once, where the whole produce is bought within a short time, instead of keeping a part of it where, for the good of all, it properly belongs, in the hands of the producers until wanted ; there may be high, to be followed perhaps by low, prices ; but there can be on the average, in this part of the field, no overproduction ; because if there is not a market at home for a surplus, there is abroad. But while there can be no overproduction of absolute necessaries, can there be any overproduction of articles which are not abso- lute necessaries, on a national scale. There certainly can ; especially in those articles having the smallest class of con- sumers, unless four cofactors, which will follow the overpro- duction, shall immediately arrest its progress. These four cofactors are : 1st, the law which makes all commodities less and less valuable as the}'- increase in quantity, unless the in- crease is consumed as fast as it is produced, the demand keeping up with the supply ; 2d, the progressive loss of cap- ital, from inability to reinvest, because it is locked up in the overstock ; 3d, the increased rate of interest arising from in- creasing scarcity of loans, and the increased risk to capital- ists and bankers ; 4th, more than all, the increased price of the necessaries of life bought on credit. These four cofac- tors will make overproduction to an extent sufiicient to bring on an industrial crisis impossible, because they will make the conditions preceding it impossible. CAUSE OF BANKING AND COMMKKCIAL CRISES. 69 But granting that it is jK»s«ible to airry the overpruossibility, and so thf overprinhution itsi-lf, t-an arine only by ncutralixing or niiusking the operation of these enfactors by giving some new an the legitimate o{)eration of these cofactors, {M.'rsonal credit must be masked by exchanging it for or converting it into something else, because it is im|K>ssiblo to give any new qualities to credit. I am still 8U|)posing a state of civili/ji- tion and prtHluctiun like that of the |>r«-.sent day to exist, and that all exchanges are made, both dire<'tly between produc- ers and consumers, and meiliately through merchants and tra«lers, by the aid of bankers' and capitalists' written j>rom- ises in the form supposeil, because in this way I remove the veil placed upon the wh. All pa|>er dt)cumenta in the shajH* of deeils, bonds, mortgages, stock certificattjs, deU-ntures of all kinds, bills, and notes, are but the evidence of title in the real owners and holders of the capital, but do not constitute the capital itself. luiismuch as they servo to divide the capital up into as small j>ortions jis may bo neces- sary, they in elTi'ct rentier the whoU? and every part of the ca]>ital more rejulily salable and transferable ; an«l thus, while not capital, they add greatly to its elliciency. I will now, for the ])urpose of clearing the way to the S4>- lutioi) of the main question, — What is tin* caus««of iiulustriiU and banking driscs ? — sup|x>so Imnkers' tokens, cquid in value by common cons^-nt and by a«'tuid ro«lemption on the part of bankers to the former promis«\H, t«» Ik* issutHl, and their written pmmim's to furnish comnxMlities retired. So long as they are mere t«*kenH, and are n'gularly rtHlecme*! in commtxlities as fautt as they have Ih>4M) \\mh\ in |myment for lalnir ami mat4>rials, it is in effect the «»ld promist* to |Miy in comnuNlities, and there can be therefonj no gretit cx|)an- 60 POLITICAL ECONOMY. sion of production beyond consumption, because there is nothing to neutralize the operation of the four cofactors ; but let the idea of measuring values in the terms of the tokens taken as so many units of universal value in exchange supersede the old mode as it naturally would, and we have money ; and we can thus easily have an overstock of money in these tokens. The tokens are paid out, and are received back ; they are loaned only to pay for labor and materials. As they are paid out and their volume expands, production expands with them ; and as they are paid back their vol- ume is contracted, and production contracts in like manner. After a time production expands together, and in exact pro- portion, with the volume of tokens in excess of consumption and contraction, and for every token's worth of the excess there is one token outstanding and not retired, or, as it might be said with equal truth, calling the token a dollar, for every dollar's worth of the excess of unconsumed goods a dollar has been put in circulation ; and this is certainly an enor- mous expansion of tokens or dollars, whichever we choose to call them. Now it is quite certain that the banker is lowering the exchangeable value of his tokens, otherwise called dollars, for himself, and the capitalist, as well as the producer, the distributor, and the consumer. The producer gains at every issue of tokens, whether to himself or another producer, in the rising price of his commodities, and in that only. So far as he and his laborers consume other produce, however, they are losers as well as the banker and capital- ist ; but while the commodity he produces rises for a time, with everything else, there is an appearance of profit in every sale he makes, which masks, by apparently suspending, the operation of the four cofactors ; the loss by depreciation is locked up for the present, and disguised in the overstock, and sooner or later comes the industrial and banking crisis. There is but one crisis, and it has an industrial as well as a banking side. CAUSE OF IIAXKLVG AND COMMERCIAL CRISES. Gl COMMERCIAL AND I'OPUL^XR TERMS THAT HELP TO DIS- OLISK THE TRUTH. There are commercial terms •wliidi hiint of fact it I'omes from inahility to trade, and thus to get rid of an over- stock by means of traih" ; for the object of trade is to bring j)roducer and consumer together, and there is an inability by means of trade to makt; |)eoj)le consume l)«>yond their capac- ity. *' Overtrading " is in its true sense a tenn of local ap- plication only. Certain merciiants or adventurers attempt to control ])rices and sell at a profit, by buying up all the produce (especially if an article of foreign pr«Hluction) and disposing of it before the market can obUiin ade(juate sup- j)lies from abroad — a speculation occasionally successful; but, if unsuccessful, it does not prmluce an industrial crisis. Again, where an industrial and banking crisis occura, and stocks of merchants as well as producers are thrown upon the market at ruinously low prices, the merchants involveil could never have been gnilty of overtrading had there not existed an antecedent cause in overpnKluction ; they have been selling all the time at a profit, because the actual loss in value was nnisked in price. The real depreciation was disguised in the aj)j>arent profits yet lying in the sto4-k but not actually reali/.e ;i i;ii-eculations in constructing railroads, an excess «>f siH'Cidation in stix^ks, ami 8{H>culations in n'al estate, but tin* cause, the origin (if the speculation, has In-en an (>xpansii>n of circulation, i*]iusing an expansion of production, where the expansion «'onies through bank loans ; for I am not now refi'rring to g tvernment issues. The industrial and banking crisis is on » national scaler and 62 POLITICAL ECONOMY. the chief business of civilized man in respect to wealth is to produce, distribute, and consume. Progressive expansion of prices of the fruits of capital must arise before expansion of prices of capital. Advancing prices of merchandise cause active trade, active trade activity of passenger and freight traffic, advancing prices in railroad stocks, advancing rents, and so advancing improvements, and therefore prices of real estate ; and the latter speculation may be and is carried to an excess unwarranted even by any advance of prices. Profitable or seemingly profitable trade, following apparently profitable and excessive production, draws population to towns and cities, and attracts men from agricultural pursuits. There may be, it is true, an occasional mania of speculation that will break out in some quarter or other, by means of credit or without it, in real estate or in something else, and the tulip mania in Holland is an instance ; yet this is en- tirely different from an industrial and banking crisis. But, in the case I have supposed, the excessive use of tokens at last brings on a crisis. What is the result ? Ex- tensive bankruptcies of banks, and still more of merchants, manufacturers, railroad contractors and builders, sacrifice of stock, and that phase of the crisis which is peculiarly indus- trial, the discharge of large numbers of laborers. There is apparently actual abundance of provisions, as well as goods, and there is an exuberance of production in certain quarters, as there was in the United States in 1873. There is cer- tainly nothing actually wrong, says the ordinary observer, and the " panic " ought not to have happened^ and ruined business in this way. The common observer has, from his point of view, a great deal of common sense on his side ; and wherein lies his mistake, inasmuch as he perceives that there is abundance and more than abundance ? He insists, there- fore, that if the "panic" could have been prevented nothing could have occurred to mar the happy state of trade and banking. Another observer insists that if the banks had consented to loan more money, instead of actually contract- ing it by calling in loans, or if the Treasury had only pos- sessed and exercised the power of issuing notes, there would CAUSE OF BANKING AND COMMERCIAL CRISES. G3 have been no panic and so no crisis. There is an abundance, say both these observers, of money as well as goixls, and if the banks had loaned freely, instead <»f contnutiiit^ sharjtly, goods could have brcii held and prices sustained. This reasoning is apparently correct, but tliere is a fallacy in the premises. The panic is not the cause, but only an incident in the series of results ; and because not a neceanary incident to the main result it might never occur. England is now in one stage of an industrial and banking crisis which has not been attended by panic, but slu; sulTered from a panic in the crisis of 180G, as tliil the United States from the panic which attended the crisis of 187:). Assuming, however, that a crisis can be avoided, provided a panic can be avoided, these reasoners are right, because a panic, if thn-atened, may in all probability be postponed — and j)ossibly avoided alto- gether — by free loans in bank, or free government issues, under the present banking systems of England ami the United States, either with convertible bank-notes or incon- vertible bank-notes, for reasons appearing in the chapters on Banking in the United States, and Banking in Englantl. Had the banks of the United States, and especially the banks of New York, refrained from forcing their customers to pay up at such short notice, the j>anic of IHoT, as respects New York city, would have been, perhaps, ]v)st})oned, and possi- bly a panic there might not have i)crnrred at all. inasiiuuh :us proilucers and merchants would thus have been eiiableil to hold the stock on hand for a time longer. The four cofac- tors had been, however, for some time in vigorous operation, as .shown in the high rates of interest, high prices of neces- saries, ditliculty of making new loans, ilerangement of the "exchanges" between New York and the West through depreciated bank-notes, and '* balance of trade " largely against th«> interior. Possibly a bank panic might thus have been avoided in New Yf)rk city, but the four cofactors had already brought on the industrial and banking crisis u|>on a national .scale, for that was unavoidable. Now the h'.sson to be learned here is, that the overproin<; silver roin ami bullion on arrount <»f it« ^jrtMt n-la- tivi* weight and bulk, and isHuing tokens for tin? d«*i>osil), is a matter to be di.Hcussed in a monetary convention of uU nations. Whether it would be «l«\Hiniblo de|)endH entirely upon the question, whether the annual ppnluet of the two metals, with the gn-atly inore;i.He«l value given to wilver by its general use na coin, wouhl be niore likt'ly than that of gold alone to increase in harmony with the annual increase of ]M'(Nluction ami distribution — in other wordn, c»»inineree. Nevertheless, for all practical purp<»»es, wo may safely say that the 8uppose«l accumulation of gold for tlu' last twenty- five years in excess of eommerce is imaginary; gold luis cheapeiu'd more by the relative increjuu* of banks, and |)Ofwi- blv greater activity of prodiu'tion in that |MMi<»d, than it has by the accumulation. \N'e may say, then, that there can be no overpnuluction of gold, any more than there can Ih» of necessiiries ; anil as shown with regjinl to the latter in u former chapter, so we may say of gohl, that its jiroduction cannot be ciirried almve the bjuse line of agrii'ultural j)nKluc- tion of necessaries; antl therefore if gold, or tokens converti- ble into gohl as fast jus ppMluctiun takes place, be \\m^\ to measure values cn'ated to satisfy any wants b«»yonil neces- saries, the prmluction of the latter cannot Ik; carried beyond or in excess f)f HU«h agricultural pr«Mluetion. Gohl coin or tokens, or papt?r (for instanc** pajM'r dollar) convertible, — and not only convertible, but actually con- verted into gold, — as s«K>n as it has jn-rformed its only le- gitimat«> <»ftice of stinudating prtnluction by |t;iying for labor and material, and, in the next place, by one |>aym«*nt more furnishing the lal>«»r«'r and pHnlucer with nit'esHiirles, savingn, and raw material increase*! by profitH, will always keep pn>- duction and (*«uiHumption near togi't her ; and if the pMni ac- tion of articles not n«*oessaries could never bo in excvm of the production of n- ^. a token < ' * n, and by parity of rejuvm baUK i issuinl by li iv, and not ft 60 POLITICAL ECONOMY. by governments, never could be in excess so long as loans were confined to producers and merchants. I pass now to the consideration of the subordinate, or what may be called the post-auxiliary, causes which acceler- ate and magnify industrial and commercial crises. The primary cause is the non-redemption in gold of bank liabilities arising either from book or note as soon as they have performed their only legitimate office. The consumer pays, otherwise he could not consume ; the money expan- sion, therefore, represents the overstock that cannot be sold to consumers. The difference between expansion of circula- tion in harmony with expansion of production, and inflation of circulation by government issues, like legal tender notes ; currency issued by States and called in tlie constitution of the United States bills of credit ; the old Continental scrip ; French assignats ; the notes of the Agricultural Banks issued in large amounts in Michigan, 1838-0, to provide the people of that State a safe currency ; and finally the issues of the Free Banks of Indiana and Illinois (which did not belie tlie name of the bank§, for the issues were free indeed), I have clearly pointed out in another chapter. I refer now particularly to loans made for what bankers would call legitimate business, for the purposes of production, dis- tribution, and consumption. No doubt a bank might make a loan of its credit, in the shape of convertible notes, or on its books, to be used by the borrower in the purchase of capi- tal, for instance a farm, a quantity of railroad or other cor- poration stocks or debentures ; and if the money were used, as it usually is for these purposes only^ and the loans paid back, even where a " stock speculation " has intervened, no expansion of circulation in the sense in which I use the term, in this and other chapters, has occurred, because the expansion arising even from a stock speculation is short- lived, and is speedily retired ; but where the loans have been used to pay out either bank-notes or bank credits by means of checks, for labor and materials resulting in a new product, and hence new value in addition to all the values in the country existing before, this expansion of circulation, CAISK OK IJANKINt; AND CUM.NLEUCIAL ( !^! < '^T which has c-awscd an (••juivalcnt expansion of values, can nt'ver be retirtnl except hy an t;<)uivalent t'ontnicti(jn which results from sales for cxsh and which puts the borrowers in the way of payin*^ tiicir loans. This is usually the index and the j^uaranty that an cipiiva- lent consumption, ami thus contmction of values, is about to take place. WllAP AUK THi: l'(>ST-ArXII.IAl:V CAUSES WHICH AO- CELKKATi: AND MAGNIFY INDUSTUIAL AND CoMMEUCIAL CltlSES ? I have demonstrated that the ultimate cause of industrial and banking crises is the masking of the four cofactors, — inability to make sales, resulting in loss of profits of capi- tal ; depreciation of goods from ovei-stock ; rise of rates of in- terest in favor of bankers by reiison of an increase of their own liabilities and risk thn)ugh non-payment of loans, re- sulting in sc^ircity of m«)ney to loan ; and the relative in- crease in the prices of necessaries in which there is no over- stock ; and the first of these cofactors has a negative, the remainder a ])ositive operation. If any one of the neces- saries, like wheat, has its relative value reduced through the influence of a foreign market, the difference is made up in other necessaries. Overstock of all srs of land, or at h-ast lalHirera in the prtnluction of artitjes more necess;irv and therefore hav- ing a more extensive market than thos«> in the manufacture of which they liave been previously eng:»geHsibility on the part of auv one ni.iiiufa>(urer cu- m.-r, li:inf tr. st.n ..r 68 POLITICAL ECONOMY. retire ; and so the chances are in favor of large capital and exceptional sagacity and force ; and the two latter qualities appear largely in adapting the qualities of goods to the taste of consumers, and in bringing goods to their notice. It is therefore a question of chances, when viewed as a whole, who will or will not become bankrupt. This inability to stop the wheels of excessive production is a post-auxiliary cause, coming into operation through the primary cause, and is on the negative side. Another cause is the progres- sive improvement in machinery, economizing hand labor. This cause is not post-auxiliary in the sense that the primary cause necessarily precedes it, for it does not ; but it is post- auxiliary in the sense that without the existence of the primary cause it never could, with the aid of all other causes, bring on a crisis. We must not lose sight of the fact that the question is not, How many hands more or less will it take to produce the articles not absolutely necessary ? but, How many hands can be set at work in this production, and be enabled to cause such exchanges to take place as will give them and their employers a living ? It must not be forgotten that the business of society, aside from the time given to mental occupation, consists not only in producing but exchanging, and the net annual gains after the produce has been exchanged directly, or distributed by the agency of money, are small, after making good the waste and deterio- ration of capital. If thei'e be an excess, therefore, of one commodity, relatively to another, " the exchanges " are ad- verse to somebody, and the " balance of trade "is in favor of somebody. The "balance of trade," for instance, was in favor of New York and against the West in 1857, not only on account of depreciated bank-notes like those of the free banks, but because labor had been expended on rail- roads by the aid of bank-notes, and the result of the labor- er's work in the shape of shares and debentures of, or claims against, the railroads, would not bring cash : " the ex- changes" between the West and East were partially blocked. But there is another cause which increases and is itself in- creased by the primary cause, which masks actual and inher- tAlM. or is.\MM>>. AM' « mMMKRCIAL C1U8E8. 69 ent cl«*|)r»*t'iiition in the ^iiiw* «»f ii ph:intn aHS4>rtcd that tariffs and Uxxos have done much towards the overst«H*k. I grant that they have done srs themselves. The otrio«»-holden», the army and navy, and the government debt holdem, at home and abroad, so far an they tlntw n|>on the government, draw Jr. •' \hoareat IIp ' 'nio of ne*Nv. id t: • «1 by means nn ■ < ' put it in plainer terms. 70 POLITICAL ECONOMY. inasmuch as all taxes fall most heavily upon land, the more land is taxed, — waiving for the present the question, whether and how far this taxation reacts upon all other production, — so much the less has land left to exchange for relative neces- saries ; or, to put it in homely phrase, if a farmer, whom I bring forward as the representative of his class, pays in the purchases he makes one fifth of his crop product, in the shape of an increased price of what he consumes, his ability to buy of the merchant, that is to say of the manufacturer, is reduced by one fifth. This is a post-auxiliary cause only in the sense that it accelerates the advent of an industrial crisis, makes it more intense, and delays the reaction by de- laying the restoration of the exchanges between the two classes of producers. WHAT ARE THE CONSEQUENCES OF AN INDUSTRIAL AND BANKING CRISIS? The absolute necessaries of life are abundant where there is a large surplus after all the inhabitants of a country are fed. How then, asks a banker, a merchant, a cloth or iron manufacturer, railroad builder or laborer, could a crisis have occurred, if the banks that supply all the loans had agreed to stand, and had actually stood by us? I answer again, that although there may be apparently actual abundance, yet every man, in this universal system of exchanges, must him- self have something, not only to offer, but something that will be taken in exchange, before he can eat ; and the result of his inability to make such an exchange carries him, or some one else in his place and stead, either to the base line of agriculture, whence the supplies come, or to some point on the road towards it. In the mean time, production of articles not absolutely necessary continues to diminish with diminishing consumption, until by the necessary and inher- ent law of all action and reaction it falls as much below as it had been before above average. Agriculture is then no longer in the ascendant, and the manufacturers of England and the United States have at last touched the lowest point in the descending scale of quantity and price, which have (vIni ..I i; \\K!\., AND COilMilK' IM- ri:l>c»M*tls upwaiti to l\ mul lh«'n passes the base lin»« at I), until in its ilownwanl progress it st«»p8 at G, and fnuilly {iscemls through the b;iso line jit K and com- pletes the cycle at li. The prmluction of relative neces- saries, instead of moving in the sjime plane or on the s;ime bast^ line with necessjirifs, is, by the aid of bank exjumsion, itself carrietl above that line, only to be carrietl afterwards as much below it. W«' may d«'Stribe agriculture, therefore, as the base line, which is immovable, and the specie line (or convertible bank-note line as it existed with the Scotch Imnks in Adam Smith's time) as coiuciiling with it ; whilt> under the inconvertible bank-note line, or the imjH'rfi'ctly convertible bank-note line existing in the Tnittil Stat<« even with " specie payments," as «'xplained in the chapter on American Hanking, the movement upwar«l of ex|Kiniiing prrxluction through the aid of luink loans, and the oorre- S(>onding movement downwards in spite of all that bank loans can do, nnisi n-new their cycle through the delayt^tl and therefore intensilieil a«'tion of the four c^ifactors, upwanls ami downwards indelinitely. lUit what has tlie agriculturist t<» say to all this disturbance of the *' exchangi*s,*' or what have his friemls to sav for him? It has Imh'U said that 72 POLITICAL ECONOMY. he is abused, but he seems to have greatly the advantage. His produce rose to as high, or higher figures than the man- ufactured goods he bought, except only in the period last mentioned, when the goods had reached the lowest figures, in quantity and price, and were rising ; but he has been compensated for this, and more than compensated, by the very low prices which the goods brought while forced sales were going on. But says a theorist, who has a theory that gold is good for money only because it has " intrinsic value," right as he is in his opinion, but wi'ong in his rea- son : Did not the agriculturist who sold his wheat for one dollar and a quarter a bushel, when gold stood at 110, and manufactured goods were at least seventy-five percent, in ad- vance of old prices, suffer to the extent of sixty-five per cent, in making his exchanges ? I answer, that his sales of home produce helped to make up a good share of the loss, and moreover his wheat was sent to Great Britain, where gold, while possessing, as here and everywhere, " intrinsic value," is nevertheless, as with us under even specie pay- ments, converted partially into merchandise, inasmuch as millions of pounds can be carried there or taken away with- out affecting the ability to loan, and because Great Britain was in the same plight with ourselves ; she had over pro- duced the relative necessaries, and the absolute necessaries had risen relatively ; and in this quarter the remainder of the agriculturist's loss was made up. But after the crisis is developed, a great economy of ex- penditure, that is to say a diminution in the volume and number of exchanges, takes place. There is less and con- tinually less merchandise produced and exchanged, but at present no essential change in the necessaries, except that there are more people producing them for themselves. The " balance of trade " between Great Britain and the United States is favorable to the latter, and the balance arises from exchanging less of our grain, provisions, petroleum, and cot- ton for her manufactured goods, than we did before, and for a time she sends us some of lier merchandise that is earning her nothing, in the shape of gold. Equilibrium in the ex- CAUS1-: OF HANKI.Nt; AM) ( < »M.Mi:iiriAL CKISKS 73 clumges will be reston-il iit last by \ivv buying Ifsis and less of us so \ontf as we do tlie same by iier ; but when the con- tracting vt. On the whole, the results nf the enforced economy are that inasmuch as there can be no overstock of the necessaries of life, the laborers, producers, an«l distributors, who have been compelled to be idle, will, many of them, succeed in earning their own absrilute necessaries by turning to agrii'ul- tural pursuits ; rtthcrs who have lived upon imaginary values, will leave the cities and towns and tind some other business; and all will economize in the use of articles of relative neces- sity, the economy bcnng another name for the shrinkagi' in production of these necessaries, and the diversion of capital and labor to other necessaries. Net savings will be more and more applied to restore wjiste and make new improvements in the j)roductive capital applied to absolut** necessaries, and so far JUS actual capital, and not the instruments of circulat- ing it, in the shape of bills, nnt««s, del>entures, stcx-ks, njort- gages, etc., and the actual fruits of capital an«l labor an* con- cerncil, the crisis was a disease, not of excess on the whole, but of congestion, and a derangement of the exchanges going on betwe<'n the dilT«'rent parts of tin* social systeni ; and the cure lies in the restoration of the exchanges ; but unfortu- nately, under the monetary systems of Kngland and the Uniti'd State's, we have abundant stin)ulus but n«i regulation, an»l the cure comes onlv with an enhan<'ed liabilitv to incur 74 POLITICAL ECONOMY. the danger of another attack of the original disease, in a severer form. The real loss lies chiefly, 1st, in banks : enor- mous losses arise for them, through the failure or bank- ruptcy of merchants and manufacturers ; 2d, enormous losses are incurred by other merchants and manufacturers who do not become bankrupt, but the loss of the latter in a national point of view is partly compensated by the low prices at which consumers are enabled to purchase ; 3d, the losses incurred by laborers, who cannot now dispose of their labor ; 4th, the losses of railroad companies, capitalists, and others, who have built railroads attended by equal loss, and perhaps bankruptcy to the iron manufacturers : but this is not a total loss to the country ; a large part of it is made up by the increased value of produce, and consequent rise of land in the neighborhood of the roads. We may finish the summing up, by adding, that the prin- cipal loss stated in the fewest possible words, consists in the blind misdirection of energy, of enterprise, labor, and capital ; the actual loss cannot be estimated, and must be placed on the whole upon the negative side of the equation ; it is the difference between results as they are and as they might have been, if the same number of people with the same fac- ulties and the same capital had been so restrained in the pro- duction of relative necessaries that they would have been compelled to produce less relative necessaries, and enough more absolute necessaries, to maintain such an equilibrium between the two as would always make " favorable ex- changes," and a fair, because exact, " balance of trade." These blessings can never be permanently enjoyed by Eng- land and the United States until the defects of their bank- ing systems are at last brought home step by step, and line by line, to the knowledge of bankers, manufacturers, and merchants, and the mass of theorists, who write but do not demonstrate. It is hardly possible to keep off the veil thrown over the exchanges of products by their auxiliary, money, long enough to discover to the understanding the realities that are beneath. Under a steady system of production and exchanges, the apparent " volume of trade " would have beeu CAUSE OF BANKING AND COMMEUCIAL CRISES. 75 smaller, as manufacturers, ami theri'fon' merchants, would have had no overstock, and therefore ready sales ; the '' lines of pjootis," and therefore the discount lines, would have been smaller, and there would have been apparently *' dull and slow times;" but taking the whole period intervening be- tween the limits of exj)an.sit)n and contraction, under the ])resent banking system, and the same peritnl luuler a strict- ly convertible system, with bank-notes convertible into gold coin, moving, circulating, and therefore varying, in harmony with production as well as consumption, instead of gold ex- ported, imported, and moved, as mere merchandise, the aver- age volume of business would have been the same. In a moral or social and political point of view, the losses from such a crisis as began before, but was made manifest by the panic of 1873, aggravated as they were by the enormous issues of government paper, and made certain by the stoppage of the contraction begun by Mr. McCuUoch in I8t3'j, cannot be estimated. The indebtedness of individuals can be wiped out by discharges in bankruptcy ; that of states, cities, and towns cannot. There is no rule to estimate the losses ac- cruing from turning men out of business, and laborei^s out of employment, and the demoralization and crime which ensue. Last, but not least, is the " adverse exchange," which turns production and distribution into a lottery : some prizes for the few, and blanks for the many, its we have seen in the most aggravated form in the United States of late. Doubt- less many enter})rises have been undertaken, and some have been successful, that would not otherwise have been under- taken ; but this does not compensate the national loss, and Americans need no stimulus in this regard, but rather re- straint. The eyes of bankers and merchants have been brought in all probability to the perception of two important truths: Ist, that there can be overproiluction ; and -d, that bank clearings an*, vnli/ in ifr,r(, a settlement of credits. Now would be the time, if knowledgt' were sulhciently ailvanced, to found the true science of Money and l^xchange. Until a science is developed by thinkers and writer'^, — and there can 76 POLITICAL ECONOMY. be none until we have demonstration and not theory, — there will be no practical science on the subject for bankers and merchants. The difficulty is, that every man who writes, takes up some theory that is sustained by and explains some of the phenomena, but not all, and yet insists that it can ex- plain all. Even the theory of the convertible bond and cur- rency theorists has some facts to give it color. They say with truth that specie redemptions under our system amount to little, and that an actual contraction took place prior to 1873. They are wrong in their opinion as to what caused the contraction, but right in saying that there was contrac- tion, because the limit of expansion had been reached. They are wrong in saying that contraction brought on the crisis, but had they merely asserted that a further issue of govern- ment paper would have postponed the panic phase of the crisis, to make it more intense at a future day, they would probably have been right. The correct argument in support of their false theory, although they do not make it, would be this : by the large issues of government paper tokens, and the subsequent issues of bank-notes, both of which had arrived at their maximum, the total of possible bank loans under the rules, imperfect nevertheless as they were, regulating the reserve, had been about reached ; therefore, to produce any more iron, rail- roads, rolling stock, cloth, etc., was impossible without more loans to enable the producers to reinvest in raw material and pay for labor. Thex'efore, the producers having been brought into this plight, a new issue of government paper furnished with a safety valve, in the shape of a 3.65 specie bond, into which any possible surplus of the notes might be converted, and for which notes might be at any time ob- tained at par, would be the remedy. But to say nothing of the more violent, because suspended operation of the four co- factors, which must soon follow such an issue, the fallacy in the premises lies in the omission of the fact that sales had been already stopped by the overstock, and that they would have raised the prices of necessaries against themselves by new issues, and there could be no contraction at all in the CAUSE OF BANKING AND COMMERCIAL CRISES. < 1 volume of notes, until by tlie suspension of further work and consuni{)tion — or, in otlier wonls, siiles for casli in excess of production — the equilibrium had been restored. Thus there could be no conversion into the 3.65 bonds, even if the gov- ernment had kept them ready for the purpose ; in other words, excessive production over and above any possible sales for cash had been effected already by the loan of notes, through banks ; and hence it could only be reduced by a cor- responding contraction of loans, just as Mr. McCuUoch told Congress and the country that the only way to reduce ex- pansion was to contract it. It was better to reduce it grad- ually, than suddenly by accumulating gold, admitting the latter process possible. These theorists, however, are as cor- rect in their theory as those who would maintain the sound- ness of the present banking systems of Great Britain and the United States. The sum of the matter, then, is that no tlieory should be adopted except with a view to explaining all the phenomena. When it will not do this, it should be abandoned. Rifrorous demonstration should be demanded, and terms carefully de- fined. Bj^ expansion of production I mean any increase of value given to raw material by labor, combined with capital, in excess of consumption; and by expansion of circulation, the payment of money for the labor and raw material, and profits of capital, including interest, corresponding to that increased value. By consumption I mean a sale for cash, which usually implies consumption. By contraction of cir- culation I mean the return or repayment of the money thus paid out, back to him who paid it out, and if he is a bor- rower of the money, then the repayment by him to the lender; and in this manner the circle of exchanges is com- pleted. Should the manufacturer use only his own money, he has produced new value as the result, and if he sells for cash immediately, he restores the money back to his own pocket, safe, or account in bank, and the expansion of circu- lation is met by a corresponding contraction. If he fails to sell, the money he paid out remains in tht» hands of others, giving them a power to buy any and all things they choose 78 POLITICAL ECONOMY. to the extent of the money he has thus put into their hands ; which amount, not being balanced by an equal amount paid back to him by means of a cash sale, puts so much addi- tional means, so much new purchasing power, in the hands of the holders of the money, which they could not have exer- cised had he not paid it out. This power of buying, thus transferred and exercised through the money, raises prices before the manufacturer can use the money again in produc- tion, by receiving it back through cash sales. If he has paid out one thousand dollars for labor and materials, and cannot sell the product, he has taken out of the market so much ma- terial and labor, thus virtually reducing the actual amount of exchangeable things consumed in the market, while he has at the same time increased the amount of money ready to be offered towards the purchase of the remainder. Consumption cannot be increased at will ; but he, directly against himself, has put an extra thousand dollars into the hands of laborers, who, if they were to use all the money he paid them in still further production, would increase the overstock ; but they do not so employ it; they are cash buyers of the necessaries of life like all others, when they possess the means, and of the relative necessaries, so far as they have a surplus after buy- ing the absolute necessaries. But the quantities of absolute necessaries they will consume is very nearly a fixed quanti- ty, the other a variable one ; they have, therefore, carried up the price of necessaries they require absolutely, and the rela- tive necessaries they actually buy, relatively, by becoming buyers with additional cash to the amount of one thousand dollars, over and above what they would have had the means of purchasing if the manufacturer had been unable to obtain a loan in bank, of say five thousand dollars, in order to lay out four thousand dollars in the purchase of raw material, and one thousand dollars in the purchase of their labor. The same result follows with the four thousand dollars paid out for raw material, and in this way the sellers of raw material and the laborers taken together can buy and pay for five thousand dollars of absolute necessaries more than they could otherwise have done. Instead of being required to find a CAUSE OF BANKING AND COMMEUCIAL CRISES. 7'.' cusli buyer who will take their hibor aiul raw material, or, what is the same thing, the maiuifacturetl articles into which they liave been converted, and so enable them to get fur the manufactured articles they have produced the other articles they are now consuming, and thus maintain the equilibrium of the exchanges in domestic and foreign trade, they have been allowed to eat, drink, and wear, to the amount of live thousand dollars, before any one h;us been found who would take their manufactured articles and give them what they are now eating, drinking, and wearing. The domestic exchanges are thus blocked ; and looking, for the present, at the field from the industrial instead of the banking side, the mate- rials of an industrial crisis, and derangement directly of the domestic and indirectly of the foreign exchanges, are being, formed. To make the jioint still clearer, I will show that such a result might follow from an exclusively gold and silver cur- rency. A corollary meanwhile from the foregoing demon- stration, sustaining what has been said before, is, that prices result from and are proportioned to the daily average of con- sumption, or, in other words, sales for cash, and the number of money units in the hands of consumers, in other words, buyei*s, and which they are ready and willing to expend in purcluises for consumption, or, in other words, cash. There- fore we may add the further corollary, in support of what I have stated before, that, taking gold as the standard, under a currency convertible, as in Adam Smith's time, when pro- duction was nearly balanced by consumption, when the ex- changes were at mutual par, and when, as lu» declares, not more than one trader in a thousaupen in fact, because one of the most important elements of value in gold and silver as money is the persistence of national habits, resulting in slow and gradual changes only, if any changes occur at all. The theory of intrinsic value, then, in goKl and silver, aside from their use as money, which the bullion- ists urge, is false, like most theories. The ratio of intrinsic value in the arts to value or purchasing power, arising from their use as money, is only a fraction of the whole value. The value of them as money arises from their distribution as it actually exists. To disturb the distribution deranges the intrinsic value by making it greater at one place and less at another, so far as any disturbance of the kind is possible. Mr. Uicardo's theory was, that gold and silver are distrib- 6 82 POLITICAL ECONOMY. uted over the world in such proportions as to accommodate themselves to the natural traffic that would take place if the trade were one of barter. Here is another theory which is contradicted by fact. More silver has been sent to and re- tained by China, in proportion to traffic, than to any other country, by the civilized nations of the world, because the Chinese would not traffic, that is exchange their teas for European and American goods ; in other words, they de- manded an exchange for silver instead of goods. In like manner, other nations make demand for certain portions of gold and silver, according to their wants for the arts and for money, or for ballast against inflation, as in the United States, and the uniform competition of all the different de- mands results in certain proportions being constantly main- tained in the quantities annually received by each nation ; and all these ratios of demand, operating with the persist- ence of national habits, make gold at this time, aside from the influence of government issues, and deposit and discount banking, a steady measure of value. Possibly a more steady measure might be attained by restoring silver to its former use, but never unless with the consent of all nations. ' All theories, then, being utterly disregarded, the proposi- tion demonstrated is this : The circulation of the United States, under specie payments, consists mostly of bank debt in the shape of notes loaned to producers ; these loans cause an overstock of relative necessaries, because production is al- lowed to proceed so far ahead of consumption as to produce a crisis. The crisis has a banking as well as an industrial side, but could not have a banking side without bank loans, as it could have no industrial side without overproduction. The next proposition is that the evil of overproduction can be to a great degree remedied, which for the present I shall not ex- amine, but leave it for the future. If it can be demonstrated that the mischief can be remedied, the problem to be solved is, to show the best method of doing it. The probable rem- edy, if there be one, stated in the most general terms, is, that as, under our system, gold reserve is not money but only a ballast against the inflation of bank-notes and bank-credits, CAUSE OF BANKING AND COMMERCIAL CKISKS. 83 the gold ballast must be converted into money, and if such a conversion can be accomplished, tlun follows the problem already mentioned. If the whole science of production and exchange, as effected through the agency of money, is des- tined to continue to be the sport of tlieorics and theorists, all theories liave some truth in them, and all should be examined, and those adopted that s«>em to have the most. The use of a convertible bond for convej-sion of surplus notes instead of a coin reserve in the shape of ballast rather than money, is by no means absurd, if any method can be dis- covered of stopping inflation before it proceeds to a crisis. The discovery is not yet made, and probably will not be. The theorists who uKiintain that a good and safe currency could be obtained by the plan of mutual convertibility be- tween government currency and government debt in the shape of a bond bearing interest at three and sixty-five one hundredths per cent., are entirely right in asserting that con- vertibility is more in name than in fact under " si)ecie pay- ments " in the United States, although the remedy would be the opposite of what they propose, and are as nearly right as those who insist that safety and security would exist if gold anti silver were the only currency, with banks of de- posit and discount, free to discount, without such arrange- ments as would check overproduction ; and quite as nearly right as the theorists who maintain that there can be no in- flation, or, in other words, undue expansion of bank-notes when convertible under our present banking system, because the latter are contradicted by the crisis of 1857 ; and, in short, they are as nearly right, or ought to be presumed as nearly right, Jis any other theorists who have not yet abso- lutely demonstrated the truth of their theories. These mat- ters cannot be further examined here, but will be under the head of Banking in the United States. Finally, to speak figuratively, we may say, that if we ft)llow the river of Sup- ply up to its source. Production, we shall find that it never overflows, if left to its«'lf, but only when its waters are set back by rn>dit in the guise of Mon(\v ; and if we compare the circulation of the fruits of capital and labor to that of 84 POLITICAL ECONOMY. the human body, we may say that obstruction of free circu- lation through -weakness or excess in any part, leads to con- gestion and crisis, howsoever small or howsoever great the volume of circulation. If we speak as bankers and mer- chants, we may say that there is derangement of the ex- changes, and adverse balance of trade ; if we speak as phi- losophers, that absolute wants must and will control relative and conditional ones, in spite of all human efforts to the contrary ; and if we would give a name and title to the sci- ence resulting from the investigation (the foundation of all other social science) we may call it The Science of Produc- tion and Exchange. I CHAPTER III. THE THEORIES OF MILL AND PRICE AS TO THE CAUSES OF BANKING AND COMMERCIAL CRISES. a Mr. Price says a true crisis is a destruction of means, diminution of wealth ; that the laborers employed were consumers of food and tools, while they produced nothing of exchangeable value, and thus actually annihilated wealth. The error in these assertions lies in calling one of the effects the cause. If the crop of British wheat were to fail totally in any season, the loss would be not only from thirty to forty millions of pounds through the failure of the crop itself, but there would be losses arising to other producers, from the inability of their home customers, the producers of the wheat, to buy as much as usual, and the disorganization of labor which would follow. If manufacturers of goods never produced beyond the ability of consumers to pay for and consume, — in other words, to give something else in the shape of other productions, or, in still other words, to sell for cash, — there could be no industrial crisis, and con- tinual discharge of laborers, and, on the other hand, no banking crisis caused by the bankruptcy of manufacturers and merchants and their inability to pay bank loans. If railroads, city houses and stores, and public improvements were never built or made beyond the point where they would yield a fair income or a public benefit equivalent to the cost, no crisis could be brought on or intensified by such causes. Therefore, for all jjraetical purposes, ami with the view to remedies, we may well say that redundant production, which means production to meet artificial wants, all tlie way down from those most artificial to the least artificial, in excess of the market for them furnished through the production of 86 POLITICAL ECONOMY. absolute necessaries, — in other words still more general, production to meet artificial in excess of production to meet natural wants, — is in a general sense the cause of industrial crises, and that great loss attends them through shrinkage in price, and in some cases total loss of the investments. In time, however, in the United States hitherto, the manufact- ured goods remaining on hand have been sold, and popula- tion and production have made the railroads productive. If this is admitted to be a correct practical conclusion from all the facts, and a correct answer to the question. What is a crisis ? the next inquiry is. What is the cause ? The theoiy of Mr. Price, that it is a destruction of means only, cannot stand, because he says that the usual cause is the unpro- ductive consumption of the laborers who work and the loss of the capital, tools, and materials employed ; whereas the labor is not wholly, but only partially, unproductive. His statements, however, are clear and emphatic, and eminently true as to the fact of great national loss ; but he makes the mistake of calling one of the effects the cause* Mill, on the other hand, says that a commercial crisis is simply a collapse of prices resulting from an. undue exten- sion, and, without saying so, probably intended to have it implied that the national loss lies only in the losses of those who suffer directly from the collapse in the prices of goods bought on speculation. Mill says, also, that the active cause is credit : " What does act on prices is credit, in whatever shape given, and whether it gives rise to any transferable instruments capable of passing into circulation or not." Mr. Price adopts and reaffirms this proposition with his usual clearness and emphasis, on page 168 of his " Principles of Currency." Now credit, unaided by bank and other loans, is available in production only to a slight extent, and to a moderate extent in the distributing markets, by way of raising prices. The credit given by one merchant, — for instance, a commission merchant, who sells prints or cloth for the producer to a jobbing merchant, and by the latter to a retail merchant, — and even the credit extended by com- mission, importing, and jobbing houses to other houses or THEORIES OF MILL AND PRICE. 87 individuals, who buy on the chances of a rise, is confined to a few lines of goods ; it does not extend to tlie whole mar- ket. Mere pci-sDiial credit will not pay for labor expended upon raw niiitcrials, like cotton, wo(j1, or })ig iron ; nor will it pay for the raw materials themselves, for they have cost labor, and the laborers must be pai.l. Personal credit must therefore first be exchanged for bankers' credit in the shape of bank-notes or bank debt, transferable by the instru- m«*ntality of checks, and so invested with a second and fur- ther quality which p«?rsonal credit does not possess, namely, paying power, in addition to purchasing power. Mercantile credit is a very limited, but banking credit an unlimited power, — unlimited at least by anything short of that state of redundant pnxluction which causes an industrial and bank- ing crisis. The word " industriid " is better than "commer- cial." The English mind is wedtled to the itlea conveyed by " overtrading," and of this idea Mill and Price are the exponents. They all tsike it for granted that the ciiuse lies in the distributing and not the producing market, as the term '* overtrading " implies. The ditticulty is that they have explored the course of the stream of production where it widens out into distribution, instead of following it up to the head- waters. If we suppose all production in a given country to stop at a given time, and distribution to go on until the hist article is sold and consumed, all bank debt in the 8ha])e of notes and book entry will be retiri'd, and cap- ital no longer productive, and therefine worthless ; money in the shape of gold and silver will also retire or leave the country, for the most part. The ottice of money, therefore, is not only to distribute the fruits of cajutal ami labor, but to pay labor to pnxluce as fast as these are consumed. The occasional disposition of fixed or circulating ca}>ital is merely incidenUil to the distribution of the fruit,s. If production were to stop, the check to consumpti«)U by rise in price of ar- ticles bought on speculation, through credit, would lengthen the period of rising prices by the gradual diminution of com- mtMlities. The tinminal rise of price of the articles bought on credit would therefore be maintained, and the 8|)eculation 88 POLITICAL ECONOMY. successful, through the maintenance of the rise. This is an ideal case, assumed to illustrate the bearing of production — the source of supply — upon speculative purchases in the dis- tributing market. In the case supposed there is a nominal rise by way of price. Turn now to actual facts, to realities, and how is it ? In nine tenths of all the cases actually occur- ring there is nominal and therefore real loss to those who buy on credit, whether they use it directly, or on the other hand indirectly, by exchanging it for banker's debt, which has paying as well as purchasing power, making the banker their creditor instead of the seller of goods. If in nine tenths of all cases they lose, it follows that the loss comes from sup- plies thrown upon the distributing from the producing mar- kets, thus absolutely increasing the stock, as well as from the diminished consumption through rise of price, which causes a relative increase of the supply. Hence, looking at the sub- ject from this abstract quarter, it is certain that every crisis comes from a disturbance of the relations between producers and consumers. In the most abstract form, the proposition demonstrated is this: A "commercial" crisis, sometimes called " overtrading," is, when reduced to its most abstract or general terms, an overstock extending to all or some commod- ities intended for distribution and consumption, over and above the ability of consumers to pay for and use, — in other words, beyond their immediate wants, — and carried to such an extent as to require the discharge of laborers upon an extensive scale. This increases the overstock by making the laborers comparatively non-consumers at the same time that they become non-producers, causing shrinkage in values, forced sales and bankruptcy for the producers, and the same results for the distributors or merchants, and through them for the bankers. The latter are the fii'st movers and the originators of this disturbance. This I affirm now in answer to the question. What is the active cause ? Leave out the delays from time and space ; suppose no money to be necessary to exchange and no merchants to dis- tribute the fruits of labor and capital ; every producer is daily met by other producers, and exchanges the fruits of his labor THEORIES OF MILL AND PRICE. 89 for theirs. Can there be any undue accumulation or redun- dant production by any one producer ? Not to any impor- tant extent certainly, for all j)roducers will buy only what they can consume, and that is exactly what they can pay for, and they can pay just to the extent that they can produce themselves. No one can })roduce to excess, because no one I can produce beyond the ability of others to consume. But I while there can be no overstock on the side of absolute nec- essaries, can there not be on the side of those required to satisfy wants more or less artificial — the producers who pro- duce to satisfy absolute wants being unable to make an over- stock ? There certainly can, if they will not only all trust each other, but make the producer of absolute necessaries also trust them. The overstock that follows, however, will shortly come to an end, because the rise in price of absolute necessaries through purchases on credit, and the impossibility of forcing the grand total of all necessaries to rise in quan- tity for a long time above what may be called the base line of population and agriculture, devoted to absolute neces- saries, or, to simplify the expression still further, the agri- cultural base line, will soon bring about an equilibrium of production. The ability of the producers to produce on credit would soon come to an end in all cases where no arti- ficial cause interposed to prevent it by making the producers of absolute necessaries temporarily share the loss, and thus spreading it as it were over all producing capital. It is production in certain quarters, in excess of production in other quarters, then, which produces the crisis which Mr. Price asserts is a destruction of means. The destruction of means is not an active cause, but only one of the results of an active cause; and that cause is a want of harmony in production. Mr. Price, like Adam Smith and M. J. B. Say, supposes money to be a commodity like a cart or any other, tool, and so places the commodity theory of money in the plainest light possible. He also asserts that deposits arise from the sale of commoditifs which are paid for by a balanc- ing or set-olf of debts. From these propositions his error in relation to the cause of commercial crises naturally follows. 90 POLITICAL ECONOMY. Metallic money is not a commodity, but a series of units, as already shown, and the value of the unit embodied in the metal lies wholly in what it purchases and not in itself — value in the actual metallic unit being thus wholly conventional, and therefore merely ideal. The units are not a commodity, but units of valuation, purchase, and payment, limited by a commodity of universal exchangeable value in this conven- tional character. It is this unit, embodied in metal, or bank- notes mostly covered by a deposit of metal, which pays for goods through clearings. It is not in fact units of bank debt which pay for commodities through clearings, but where goods are merely sold, not for consumption in reality, although they may be intended for that purpose, it is pre- cisely the same thing whether there is gold in the reserve on that particular occasion, or whether there is none, be- cause if gold were taken out of the reserve by the buyer to pay for the goods, it would be immediately deposited by the seller in the reserve, as soon as the sale took place. So far as the reserve remains the same after sales take place, it may be apparently equivalent to, but it is not in fact a mere balancing of debts. The buyer's debt to the bank, which re- sults from his loan in bank, to enable him to buy the goods, is not set off against or balanced by the debt of the seller to the bank for a like amount, because a set-off or balancing of debts destroys and annihilates both debts mutually ; but in this case the new debt to the bank, created by the loan of the buyer, does not balance but annihilates and takes the place of the debt of the seller to the bank, leaving the same amount of bank debt standing as before. Whatever profit the buyer pays the seller over and above what the goods cost to the latter creates precisely so much additional debt to the bank, and therefore precisely so much additional debt due by the bank to depositors, whether metal or bank-notes be carried away by the seller, or whether they be not. If they are not carried away bank debt is increased by so much over and above reserve ; if they are carried away bank debt over and above reserve is increased by precisely the same amount ; the ratio of bank reserve to bank debt is diminished to the THEORIES OF MILL AND PRICE. 91 same extent in e;icli case. Absolutely unproductive con- sumption, if ciiust'd by bank loans, diminishes the ratio of bank reserve in like manner. Loans to pay for labor and niw material, so long as the product remains unsold. Lave the same effect upon reserve. Now the amount of absolutely unproductive consumption through bank loans is compara- tively small, and there could surely be no goods to sell if nime were produced. Therefore the origin of that part of deposits which is Total Bank Debt over and above Total Banking Reserve lies in production and the succeeding jjrof- its of the several merchants who buy the goods, deducting from the total absolutely un])roductive consumption. The fountain and origin of this part of deposits, therefore, may be found in that part of deposits which is in excess of reserve. But if a cash buyer who does not borrow his cash — his possession of the cash being a demonstration of the fact that he or some one else for him has caused an equal amount of goods to be exchanged for consumption — buys the goods of the mercliant or other jiroducer, who purchased tiieni by the aid of a bank loan, which remains unpaid, the latter, by means of the cash, pays so much bank debt. It is entirely immaterial whether the cash consists of a credit standing in bank to the account of the buyer, or whether it consist of gold or bank-notes, because in either case it dimin- ishes by so much the grand total of bank debt over and above the grand total of bank reserve. Hence the increase of bank debt over and above reserve arises from production, in the first instance, as the primary cause, and the profits accruing to the several buyers, who add further value to the product by their capital and labor; imluding, of course, all increased cost for interest, carriage, and insurance, as the secondary cause. On the otlier hand, the increiuso of bank reserve, which is relative diminution ^>f bank debt, arises from SJiles of goods to consumers. Hence it is absolutely certain that sales of goods to consumer, in other words for cash, are accomplished by |)aying money into the reserve, while j)urchases of labor and raw material and the succeed- 92 POLITICAL ECONOMY. ing charges, expenses, and profits of the distributors, who by buying the product intervene between the first producer and consumer, create bank debt over and above reserve, and therefore deposits. Deposits arise, therefore, not, as Mr. Price asserts, from the sale, but from the production, of goods ; and the total of deposits, minus reserve, shows the total of pro- duction accomplished by means of bank loans. This total is an amount of production over and above what could have taken place without deposits and bank loans. To this total may be added the 7'esulting totals arising from a considerable part of savings bank loans and loans by individuals, as I have demonstrated elsewhere. The latter totals come from sav- ings of wages of labor deposited in savings banks whose products have been sold to merchants who have not yet found a consumer's market, and from profits of production on the same products paid to capitalists who have made loans to producers out of those profits. But, again, Mr. Price says there can be no inflation, no excess, of bank-notes. He is right except as to the small total of absolutely unproductive consumption arising from bank loans of bank-notes, because the notes are all called for to pay for labor, raw material, expenses, charges, and profits arising between the original producer and consumer. For these purposes the notes are all wanted. The fallacy in the premises lies then in the fact that production is ignored and distribution only considered. The notes are undoubtedly all needed, if it be necessary to bring to pass all this production in advance of consumption. But this advance of production is, as I have shown elsewhere, the cause of banking, indus- trial, and commercial crises, and the circulation of the notes which causes the excess ought to be checked. Therefore, if production can be limited by consumption in proportion to the increase of bank reserve, as compared with bank debt, as I have shown elsewhere that it can be, such limitation would check the circulation of bank-notes used to cause such production exactl}'^ by the extent to which it might be car- ried. Mr. Mill, on the other hand, mistakes a collapse of credit THEORIES OF MILL AND PRICE. 93 used in buying up one article of commerce found in the mar- kt't, like tea, for instance, for a commercial crisis. But the former embraces only a small part of the commerce, the lat- ter the whole of it. He has no idea whatever of overpro- duction, or what may be called excessive production on credit by the aid of bank loans. He lays do\\'n, however, one proposition about money which is true and fundamental, and which I have demonstrated to be true. He says that money acts on prices only by b('in«^ tendered (he might have added, and paid) for commodities. This I have shown to be true, because money is a series of units of valuation, purchase, and payment. Had he followed this proposition down to its necessary conclusion, — that the units must have some practical limitation, eitheB in the material of which they are made or in commodities sold, if they are to answer the purjH)ses of what we call money, — a rigorous and cau- tious analysis might have conducted to the solution of the problem. What is money ? He might have discovered that there are two elements of price : first, increase or decrease in the total volume, which means the total number of units circulated (tendered and paid) in exchange for commodi- ties ; and secondly, increase or decrease of circulation of those units, whatever the total volume or number of them may be, through loans. This would have opened before him the character and function of money, and would possibly, by the aid of rigor- ous analysis, have carried him to the correct conclusion, that all circulation of money, in excess of that given it by its ouTiers (depositors), and therefore in excess of commodities actually exchanged for consumption, must necessarily, after deducting the small amount of absolutely unproductive con- sumption which it causes through improvident or accidental loans, be expended in paying for labor, services, and raw material, to produce something which is in excess of any act- ual market, and therefore only on credit and in hope and confidence of a market, and which ought therefore, if practi- cable, to be limited universally at some fixed point. It would have led him also, perhaps, to the conclusion that 94 POLITICAL ECONOMY. money is not a commodity, because it can by no possibility be separated from its use ; it is only money while it is being used. If it acts on prices only when tendered and paid, the total quantity on hand does not affect prices, but only the greater or less use of it, and that must depend upon the amount of it being paid out, while the latter depends upon the amount of production, and not the amount of consump- tion taking place. Gold and silver are as abundant as ever in England, and so is paper money in the United States, but the circulation of money has been greatly contracted in both countries within the last four years by contraction of produc- tion. If gold or silver coin is a commodity like wheat, its price, which is its purchasing power or exchangeable value, reckoned in wheat or other commodities, ought to depend, like wheat, on the quantity in market, more than on the quantity which is being sold ; but Mr. Mill as well as Mr. Price, while insisting that money acts on prices only while being tendered (sold) for commodities, insist with their pred- ecessors, Adam Smith and M. J. B. Say, that the mercan- tile theory of intrinsic value in gold and silver coin is true, because each is a commodity. It is impossible to arrive at any correct conclusions about the use of money as it acts upon the production and exchange of commodities upon any such theory. CHAPTER rv. VALUE AND PRICE. Value and Price are in reality the same. Intrinsic value is a contradiction in terms; because all value ex vi termini is extrinsic, that is to say it is somotliing otlicr than the thing viduod, and of which, oonimorcially, tlie thing valuud is the equivalent. If the thing valued be placed on one side of a simple equation, that which gives it value takes the other side : if a busliel of wheat is worth one dollar, one dolhir is worth a bushel of wheat. Therefore the assertion that gold coin possesses intrinsic value and paper money does not, is false, because it affirms that gold coin is valued by itself, when it can only be valued by what it will exchange for ; and if the same amount in paper money will exchange for the same things as the gold, both possess the same value, which is extrinsic, and not intrinsic. There is, however, a latent truth in the popular fallacy, that gold coin possesses intrinsic value : if it possess not intrinsic value, it certainly possesses intrinsic utility to so high a degree that it is worth on the average nearly or quite as much in the shape of bullion as of coin. But what is this intrinsic utility ? Those who .afhrm tliat gold coin possesses intrinsic value will reply. Utility in the arts. But herein lies another fallacy less apparent, but quite as great as the first, because both are not oidy jxirtially but entirely opposeil to the truth. The intrinsic utility named is utility as a material to manufacture money units, because universal convention, evidenced by universal use, makes gold the material out of which to manufaeture the unit. Did <'-old possess no utility in the arts whatever, the whole of it \\\nx\i] be found in the shape of coin, and the only result would be 96 POLITICAL ECONOMY. to make each money unit heavier than now. The vahie of the commodity used as money, then, is entirely absorbed in its value as money. Intrinsic utility means only that, in- trinsically, gold coin can be used as money. There is, how- ever, another fallacy of a different kind, arising from stating only a part of the truth. It is intrinsic value in the arts which has led to the idea of intrinsic value in gold as money, and has retired large sums from circulation, while utility in the arts tends to absorb a considerable portion, as it is cheap- ened by a more active circulation, and by the use of paper and credit money. Utility in the arts does not make the gold any more or any less money than it would be without such utility : it only furnishes a sound reason for its universal adoption as a material for the manufacture of money units. That sound reason is, the tendency of an undue expansion of the volume of money units through coinage, government and bank issues, and consequent cheapening of gold bullion, to be neutralized by a corresponding absorption of gold in the arts ; while an undue contraction, by the withdrawal of bank and government issues, or diminished circulation of gold, is in whole or part counteracted by the coinage of bullion and plate. Thus, the popular idea of intrinsic value in gold is resolved into intrinsic utility, arising not only from the fact that it is a material limited in quantity, but from the further fact that its utility in arts tends to moderate excess and supply defect of money units made tangible in coin. The value of money units made tangible in gold coin, of money units evidenced by and made tangible in bank-notes, and of intangible units evidenced by entries or inscriptions on bank books, is wholly and equally extrinsic, and consists of the things for which they will and do exchange ; and therefore the whole amount of units of money expended for purposes of consumption in the United States in one year marks the value of the whole number of units of weights and measures of commodities bought. But inasmuch as, on the average, incomes are nearly all expended in consumption (consump- tion is within a small percentage, on the average^ equal to production), an increase of money units by government and VALUK AND PRICE. 97 blink issues will in time increase tlie prices of these units of weights and measures in projiortion to the amount of the outstanding issues. liut this inf«M-ence is too hasty : it in- cludes and atiinns one of that kind of fallacies, the assertion of which without regard to actual facts has rendered the es- tablishment of a science of money and exchange almost im- possible. It is not necessarily true that prices will rise in the pro- portion named, because annual saviuf^s are made, and they are all made by refraining from consumption, that is to say by not spending money when it might be spent. Hut if we suppose five per cent, of income to be saved on the average onlv, and government and bank issues to take place, so as to double the whole volume of money, even then, ought not prices- to rise fifty per cent. ? To assert that they would, would involve a fallacy of the same kind arising from rejecting important facts. If money, and therefore capital, were evenly and equally distributed to every consumer, and all consumers were to consume alike, the qu«'stion might be answered in the affirmative ; but the distribution is not even and equal : some consume all their income, ami vjist numbers are obliged to contract their con- sumption largely after an industrial crisis. Price in money, therefore, varies according to the demand, and prices will grow higher or lower as the average quantity of money ex- pended in consumption increases or decreases. By the same rule the average })rices of money, reckoned in units of weights and measures, will increase or diminish in proportion to the quantities of th<^ units of wfiglits and measures in market. The amount of money expended in any one year will de- pend upon the amount possessed by each buyer on the one hand, and the amoutit he saves, or refrains from spending, on the other hand. If he is a caj)italist, and has money con- tinually coming into his hands which he is unable to spend, and invests it in banking, or in the di.scount of bills and notes, when there is an active commercial demand for loans, and in- terest is rising in consequence, what is done with the proceeds of these loans ? They are investetl in production, because 7 98 POLITICAL ECONOMY. they can be invested in no other way, and are wanted for no other purpose. On the average, there can be no overpro- duction of things not absokitely necessary in excess of those absohitely necessary ; but so long as loans without any limit other than that of an industrial crisis are made, and because there is no method of preventing or regulating them, the ex- cess of money that capitalists cannot use for themselves, and the whole of that which the banks can lend, is distributed by loans, and increases the yearly average of money, as an in- strument to buy with, in the hands of laborers, producers, and sellers of raw material. This raises money prices, by in- creasing the quantity of money on hand and in readiness to spend with these laborers, producers, and sellers of raw ma- terial, who embrace nearly the whole of the active members of society : the more money there is in the hands of the whole community to buy with, the more money there is loaned, so much more money there is to pay out for articles to be consumed. To give full effect to increased issues by way of raising prices, the additional issues must go into cir- culation by loans. The loan market varies, however, and this is the reason why prices do not necessarily respond to the full extent of the increased issues. But this is not the whole explanation of this complex subject : the quantity of absolute necessaries produced is, almost all, annually con- sumed, and there is no overstock ; and for that reason, and that only, there cannot be on the long run — that is to say, upon the average, ten years more or less — an excess, glut, or overstock of things not absolutely necessary to existence. But for a portion of the period — say the first half — in which the average is made up, there can be an excess arising from two causes : 1st, the rise of prices caused by the expansion of circulation referred to, affecting even the commodities in which overstock is taking place ; 2d, the ability to cause, by means of loans, production of overstock, or excess in those things to produce which the loans are made. If the con- sumption is equal to the production, if the sales for cash equal the loans, prices cannot possibly rise, because, then, as the units of money increase in circulation for the purpose of VALUK AND PRICE. 99 buying wluit is in the murket, so also and precisely in the same ratio do the units of weights and measures of those things wliieh are actually bought. As the denoniiniitor (inonev) increases, so does the numerator (weights and measures of commodities), and tiie ratio or fraction continues to be, therefore, tlie same. But it is a common saying, and a common belief among bankers, merchants, and manufact- urers, iind it is, moreover, true, that ])rices rise up or nearly up to the time of a crisis, and then fall, not only as much as they liad risen, but c»jnsiderably more, in the articles not absolutely necessary to existence, and in which it is impossi- ble to assign, by any such abstract rule as writers refer to (<'.iliti/ only, upon their theory, growing out of the relation of what is limited to what is absolute. Tiie truth and the whole truth lies in these few words : AhuiAute neces- saries cannot be overproduced ; relative necessaries cannot upon the average be overproduced^ because the producers of the latter will starve unless they stop producing at regular or irregular intervals. Hence it follows that so long as the producere of relative necessaries can obtain absolute neces- saries with the proceeds of loans put in circulation by them to buy absolute necessaries they will do so, while there is an apparent advance in the price of what they sell, be- cause it furnishes them the means of paying some of their loans, leaving a profit besides. Therefore, in taking an inventory, tiiey will reckon the overstock in tigures show- ing a profit, as will tiie merchants, who also have overstock which they cannot sell, Tiie mitiiey units in circulation have increased in nuiiil)t'rs in the liaiuls of all buyers, bank- ers and capitalists included, and so the increase of units has been mostly in the denominator of the ratio (money units), but the stimulus of sulvaneing prices and apparent prosperitg has increased also somewhat, but not in proportion the units of weights and measures of commodities consumed, (the nu- merator of the ratio) because people spend more ; still, be- cause the denominator (^nioiiey units) luis increased in excess 100 POLITICAL ECONOMY. of the numerator (units of weights and measures of com- modities), prices in money have therefore risen. Hence it is not only probable but absolutely certain, that prices rise, and can rise, only by the aid of bank loans, when and so long as an overstock of relative necessaries is being made ; and prices fall as soon as the overstock brings on a crisis and forces goods on the market. If the overproduction of relative neces- saries in any one year were impossible, therefore, as the pro- duction of absolute necessaries is in fact impossible, prices would be stable and uniform ; the present production of gold might be quadrupled for years without raising prices, and, on the other hand, the entire failure of the annual production of gold would have no effect whatever, because the money unit substitutes for gold-money units, in the shape of bank- notes and bank credits, to the precise extent that they have become and are substitutes for gold units, would of them- selves increase and take the place of some of the gold, and liberate so much gold for use in those countries having a gold currency. Moreover, any further defect would be reme- died by coinage of bullion, and, if necessary to an equilibrium of prices, of plate itself. I say if necessary ; but it would not be necessary, because a more active circulation, suffi- cient to produce equilibrium, would arise from the large masses of metallic money (in France, for instance), now kept partially out of circulation by the beneficent operation of that fallacy of what is called The Mercantile System, — the assumption that gold and silver coin possesses intrinsic value. Hence I lay down the universal law, as the result of the foregoing demonstration : — Were Production and Consumption alike within short periods ; were production balanced by consumption within one year, there would not be, because by no possibility could there be, any material excess or defect of prices ; rise or fall of price in any one article would arise only from excess or defect relative to the rest. Were the money units all metal- lic, and should the metal in ingots largely increase, there would be sooner or later, undoubtedly, a rise of prices, by a general increase of money units ; the denominator would in- VALUE AND PKICE. 101 crease in excess of the nuincnitor of the ratio. But what do bank loans furnisli '.'' Money, undoubtedly, and not what is most erroneously called Credit. It is money in the shajje of gold coin, silver coin, and bank-notes, not only for the most part, but altogether. Suppose payment were made partly by checks. The sellers of raw material and the sell- ers of labor obtain payment of the cliecks in the same me- dium ; if the sellers of raw material send in the checks for collection and credit of their account in the banks where they deal, a "clearing" might save the associated banks the trouble of handling the coin or the notes. It is pret-isely the same in principle as the payment of coin or bank-notes to the laborers ; the di (Terence is merely a matter of the coin or notes getting back to the common or consolidated fund in the deposit and discount bank, a little later in the latter case, and a little earlier in the former. It is a great fallacy to sup- pose that there is any difference in principle between these two cases: that the first is a circulation of bank credit ; the latter, of money. Nevertheless, it is the fallacy upon which the liank Act of 1841 in England was founded, through confounding the distinction between potential and actual money ; money not in circulation, and money in circulation ; in short, by adhering to the mercantile theory, that gold and silver coin are commodities and possess intrinsic value. It is not merely the excessive and ill-regulated circulation of money, therefore, but circulation not regulated at all, which enables the labor and material placed in overstock to be paid for, and prices to advance until the materials of a crisis are stored up, and the crisis comes as the natural remedy. The most marked of all the jihenomena in the whole prog- ress of this commercial, industrial, and banking cycle is the rise and fall of ])rice8, — a phenomenon described in its as- cending scale as abundance of money, and in its ilescend- ing scale as scarcity of money. This phenomenon has no objective, but only a subjective reality ; in other words, it is effect in both its phases and not a cause of itself. Moreover, the overstock of the services and products of labor is also subjective only ; it is effect and not cause : it is the effect of 102 POLITICAL ECONOMY. bank loans, which enable producers to pay for labor and materials going into overstock, and of the ascending scale of prices arising from the increased circulation, which enables them to sell at a profit while the overstock is being pro- duced. The purchasing power of the money they put in circulation to pay for labor and materials may be and is constantly growing less, but so long as it pays their bank loans and a little more they are making an apparent profit : the realities of the case do not appear until the crisis comes. Rise in prices, then, comes from increased circulation, not of bank credits, but of money, through bank loans ; bank credits are not themselves circulated, but are powers to cir- culate money out of the common or consolidated fund in bank, and have no objective, but only a subjective existence. They are the result of bank loans, and not the cause of bank loans. Overstock is also the result of bank loans and rising prices up to the time of the crisis. The overpowering and uncontrollable crisis brings the overstock to market ; the producers as well as the bankers often to bankruptcy ; and makes low prices in spite of abundant money in bank coffers, by diminishing the ability to pay for what is offered for sale, and thus contracting the circulation of money, the direct opposite of the previous expansion. The rising and falling prices taken together and compared with the things pur- chased, woidd show average prices. Had prices been steady at the average, it would have arisen from the fact that the contraction of circulation was equal to its expansion, as I have shown elsewhere ; and this equality of expansion and contraction of circulation would have arisen from the fact that all the products of labor were exchanged for cash as fast as produced, causing bank loans to contract as fast as they could expand. A metallic reserve, where production and consumption thus balance, would be unnecessary, moreover, so far as steadiness of prices is concerned, and therefore might be dispensed with altogether. Steadiness of prices would come without a metallic reserve if the products of labor would always sell. These products of labor would all sell, if not in excess : hence it is a great mistake to affirm that a VALUE AM) riacE. 103 crisis arises entirely from unproductive consumption. It is an excess of energy of production which causes the crisis, and the creation of tlio excess is made possible by two com- pound factors, — the ability to borrow money out of the con- solidated deposit fund, to pay for labor and material, with- out any other limit than an impendin:i|)<'r dollar is worth nothing except in the promise written upon it. The premises and the con- clusion are unimpeachable ; the fallacy lies in not carrying into the premises the whole truth of the case. Gold bullion is useful, not only to malct^ coin, but also plate and jewelry ; and it is also eminently useful in dentistry, and in other arts and manufactures besides jewelry ; but all this is incidentally and not principally important. It is incidentally important, because it has carried into jilate and the arts, as I have sho\jn elsewhere, an amount of metal e^ual in weight, and therefore in value, to one half of all the gold in gold coin throughout the commercial world. Previously to 1844 the Hank of Euirland was onlv bound to maintain the convertibil- ity of its notes, keeping such a reserve as it might choose for that purpose ; since 1844 it has issued notes secured by a like amount of government debt, as above stated, and also what may be called gold vouchers, having the semblance of bank- notes with an equal reserve in gold to exchange for them. Has the Hank Act of 1844 accomjilished any important change? If the volume of gold coin, g<»ld vouchers, and bank-notes j)ut in circulation since the Act of 1844 is smaller, as com])ared with the volume of bank-notes and gold j)ut in circulation before the act, relatively to the \inits of aipital and commodities distributed and exchang«>d, the ratige of ])rices has been relatively less, but the average vari- ation h:us been the same. Tlu! tendency, however, to dimin- ish the ratio of variation in prices, by the use of a so much larger proportion of metal in the circulation since 1844, may luive been, and probably has been, largely counteracted, by maintaining a much smaller reserve in the joint stock and private banks ; the smaller the* total reserve the larger, and the greater the total reserve the less, the circulation; higher prices accompanying the former, lowi'r the lalt(>r. As the 106 POLITICAL ECONOMY. banks do not publish their condition, the only evidence of change is in the reserve of the Bank of England, where they keep a large portion of their metal. The Act of 1844 was passed upon the theory that a metallic circulation being of all others the steadiest, a circulation consisting largely of notes having an equal amount of gold behind them would vary in amount as a metallic currency would under like cir- cumstances. This theory was and is absolutely true ; it is as true to-day as the day the Bank Act passed. The circula- tion of England has for more than thirty years varied sub- stantially as a metallic one would under like conditions. This is saying nothing beyond the truth of the case : the small amount of the notes of the bank secured by gov- ernment debt, when compared with the total of the money in circulation, may well be regarded as of no importanqe in respect to the question of variation : we may call the circu- lation a metallic one for all practical purposes. The theory, then, is true, but what has it availed ? Prices have varied up and varied down, and there has been no more steadiness of prices than before the act was passed. There has been no gain whatever in that respect ; and, if any general result as to prices is desirable, it is that stead- iness which is supposed to belong to a metallic circulation, in contradistinction to one of paper. FALLACIES IN THE THEORY OF THE BANK ACT OF 1844. There must, therefore, be a fallacy in the theory of the Bank Act of 1844, if it has given no additional steadiness to the circulation. The theory is undoubtedly true, but, for the reason given, it cannot contain the whole truth. The founders of the bank took it for granted that gold coin in its character of money is a commodity, and that deposits, exclu- sive of reserve, are a substitute for, but are not, money. I have already demonstrated that gold coin in its character of money is not a commodity, and that in the ratio of price the question is not, what kind of units, but how many units, whether metallic, paper, or credit, are in the denominator? What shall I say to the other assumption, that bank credits BANKING IN ENGLAND. 107 are a substitute for, but not, money ? This assumption is historically and lo»,Mcally truo for all j)nicti<'al purpostis, but not absolutely true ; absolutely speaking it is fidsf, lis I have shown elsewhere. IJnt why «lo I say that the proposition is historically and logically true? H«;'jause bank credits have no objective reality in themselves ; they are the development and the result of deposits of metallic and \r.i\^er money ; they are not a system or a process having an independent exist- ence of itself, but a debt arising to depositors, orir/inally from the deposit of coin and notes. This debt is not money in itself. Therefore the assumption referred to is true. But the assumption does not contain the whole truth ; there is a monstrous fallacy lurking in it, arising from the supposition that bank credit has a positive existence of its own independ- ently of money, instead of being merely the result of the deposit of coin and bank-notes, and the loan of a large por- tion of these by the banks ; and that a credit in bank is, therefore, substantially like all other credit. This fallacy arises from the former one, that gold coin in its character of money is a commodity circulating as a commodity, while credit circulates as credit. Money having conventional value only can by no possibility be, in its character of money, an ordinary commodity, although the material of which its units are made may be. It is impossible to understand the use and operation of money upon any such theory. Money, moreover, having only the equivalent of purchasing and paving power, cannot be a tool, as it is sometimes called, nor can it give rise to " double barter," for it was devised in order to get rid of barter. Money and the circulation of money are j^ractically, therefore, one and the same thing; the units of money in the shape of coin and bank-notes (cre//if be, but now are not used) are the means of effecting the circulation of money. No man by means of a sale ])rocures gold as a tool to enable him by a second and further use of the tool to procure what lu^ wants. He sells for money, and he l)uys with money ; after he has sold for money another man sells to him for money ; after one man has purchased of him for cash he purchases of 108 POLITICAL ECONOMY. another man for cash ; sales offset sales and purchases offset purchases ; one man's sale is another man's purchase, and one man's purchase is another man's sale ; mutual wants producing mutual action and reaction. The question, then, of price absolutely and of price relatively, of high prices and low prices, and of steadiness and unsteadiness of prices, depends directly upon the number of units of money circu- lated to distribute and exchange a given number of units of commodities and capital. If a large amount of inconvertible paper, much larger than the amount of convertible money which precedes it, as in the United States, or rather more than equaling it, as in France, be issued, by governments or banks, a much higher range of prices is made loossihle ; and if additional circulation takes place — that is to say, the cir- culation of an additional number of units, as in the United States, by reason of the issue of them by government — a much higher range of prices is seen ; but if circulation is not increased in proportion, and the metallic money retires largely from circulation, as in France, prices may continue comparatively steady. The question, then, of prices" under a system of deposit and discount banking, developed to a high degree, as in England, depends upon the amount of money, that is to say the number of units of money, put in circulation and kept in circulation by the banks ; there is al- ways metal enough in the common reserve (as it may well be called) in the Bank of England to pay every dollar demanded, in coin, unless in case of .panic; the amount of possible circulation which could be effected by means of this consolidated fund has never been reached ; it is checked by a greater power than any power existing in a thing like money, which has only conventional value ; it is checked by the impossibility of making sales ; the exchanges of what has been and is being produced, for the units of conventional value called money, are blocked ; bank loans cannot be paid, and production is brought to a stand. The subjective proc- ess of the circulation of money is controlled by the objective and paramount influence of production, distribution, and con- sumption. Money and the circulation of money are but BANKING IN ENGLAND. lO'J means to an end ; tlie chief eml is consumption, throiif^li dis- tribution f(illo\vin«; ju-uduction ; and, therffoic, when by tlie operation of the forces at work consumption is checked, cir- cuhition of moiU'V must ho, checked also. The extent of possible range of prices upward, linder a fully developed banking system, is determined by the total number of units of metal or paper, or both, by the extent of possible produc- tion by means of bank hxins, and by possible consumption. Had the volume of inconvertible paper issued l)y the United States govtMiuntiit niid the banks during and after the late civil war been only one half the amount actually issued, or had the energy of production, and therefore bank loans, been equally reduced, the range of prices would have been much lower, and possibly not more than seventy or seventy-five per cent.»of the total actually reached. Moreover, bank credit, when convertible, being entirely the result of the original deposit of metallic and paper units, anle of being effected by mere personal creilit, and such is mercantile credit (money being by hyj)othesis non-existent), an* but barter ; the moment that one com- modity possessed of " intrinsic " value is disjiensed with, and something possessed of I'mv.'utional value takes its place, 112 POLITICAL ECONOMY. and thus enables iis to dispense with the former, the next moment we have money. Money is always redeemed with money only ; personal credit is never redeemed ; it is liqui- dated by barter or money ; it possesses no general exchange- able and conventional value like money. Hence it is a monstrous fallacy to assert that bank credit, or bank debt, whichever we call it, is like mercantile credit. A bill of exchange may be, and, indeed, always is, used in interna- tional, as it would be in national trade, in the absence of banks. It is generally asserted that this instrument, of itself, forms a species of mercantile currency, similar to the credit currency of banks, as that currency is sometimes called. A greater fallacy than this, abundant as financial fallacies are, scarcely exists. Has a bill of exchange a general conven- tional value or purchasing power like that afforded by the units of bank credit? Is it redeemed, that is to say, ex- changed through redemptions, always for itself, as money is ? If it be so redeemed, then it follows that bills of exchange are always redeemed with bills of exchange ; which is absurd and impossible. With fallacies of this sort, generally taken as true without argument, how is it possible to form any def- inite opinion of the active cause which deranges production and distribution, by excessive and disproportioned circula- tion, causing an ascending scale of prices, locking up prod- ucts in overstock, and so bringing on commercial, banking, and industrial crises ? That bank credit is radically differ- ent from all other credit can also be plainl}' demonstrated otherwise. Suppose banks to discount no paper whatever, and . a banker's business, instead of loaning money, to be a loaning of his personal credit in the shape of indorsement or guaranty of the paper of producers, both manufacturers and merchants ; the latter belonging undoubtedly to that class, while they are at the same time distributors : How far will this guaranty go towards paying wages, or buying raw ma- terial ? Is any conventional value attached to such a guar- anty, and would it pay wages? By no means. No over- stock could be created, therefore, and no banking, commercial, and industrial crises brought about, by the aid of such guar- I{AXKIN(i IN ENGLAND. 113 antit'S. But could genenil conventional value be given to such guaranties, so as to make them pass as money, pay wages and buy raw material.' It certainly might, by com- mon consent, evidenced by conunon practice ; and then if the paper were dividetl in suitable amounts, it would be used precisely as bank-notes are now. It would be no lonEfer mercantile credit alone, but mercantile credit backed by banker's credit, or, more properly, banker's credit protected by mercantile credit. But would the merchants be called upon to redeem such paper? Certainly not, except in Ciise of the banker's failure. There would be no possibility of redemption by the merchants. Money must always be re- deemed in some mode ; the exchanges would still be effected through the banks, and if not altogether, th«m, so far as a few merchants might, if by any possibility they could mutually clear, the principle would be the same. Therefore it is a great fallacy to call bank credit the equivalent of ordinary mercantile credit, because labor and material could not be paid for by credit; circulation could not, by credit, be in- creased beyond its natural limits, through the distribution of commodities, nor general jirices placed in the ascending scale by means of increased circulation. Hence there could, by means of credit alone, without money, be no banking and commercial crises. lyogically and historically, therefore, I repeat, the units of bank credit are not money, while at the same time they do not and cannot take the place of money as mere credits. They are powers to put in circulation the metal in reserve ; metal belonging to the common fund being present in abun- dant quantity to answer all ordinary calls. It is absolutely true, Tievertheless, that banking has, by its development, practically demonstrated the truth of the proposition that the units of bank credit can be used as moncv without anv reserve, either of metal or j)aper, l>eca»ise all money of every kind necessarily, by the very fact of its atloption and use, develops into a s»Mics of units limited in number by the material of which they are made, or, in the case of bank- notes and units t»f bank credit, by the commodities they 114 POLITICAL ECONOMY. cause to be produced ; and all such units are money quite as absolutely as the units of metal, although they possess a smaller field of circulation. But such units never can be used safely alone without being limited by a duly propor- tioned reserve. There would always be an ascending fol- lowed by a descending scale of prices, precisely as now in England and the United States. The range would be higher and lower in both countries if gold were eliminated entirely from banking land redemption reserves, but the cause which creates and brings into existence a rising and falling scale of prices would be the same in both cases. The true object of a reserve is to put, not an indefinite, but a well defined limit to the expenditure of labor for purposes other than the production of absolute necessaries ; to keep a due proportion of labor at and near the base line of production. An ex- cess of laborers in towns, cities, and villages is thus pre- vented, as far as it can be, by forcing more of them to remain at the plow in order to earn their bread. The pro- duction of relative necessaries is thus limited by limiting bank loans. As shown elsewhere, a fixed ratio of reserve to liabilities is requisite to effect this object. What purpose, then, does a metallic reserve answer in Eng- land and the United States ? I postpone the answer to this question until I have answered another. What causes the rise and fall of prices even under the metallic circulation of Eng- land with a large metallic reserve ? One thing is certain, that the rise and fall are subjective and not objective ; they have no causative power ; they are, on the other hand, the effects of some grand cause, and that they are merely effects, appears clearly from the fact that there is no change in the power of the banks, abstractly considered, to cause money to be put in circulation after a crisis appears. There is, nevertheless, the same amount of money to be had when prices are fall- ing as when they are rising. A power greater than money causes the ascending scale as well as the descending one ; that power is Productive Power on a general scale ; it is no trifling cause which produces such gigantic results. This grand cause I have examined at large in other chapters, and can BANKING IN ENGLAND. 115 only briefly refer to it now. Tliere can be no excess of the necessaries of life ; such excess is impossible, but there can be a relative and temporary excess of the products of labor in other directions ; improved machinery tends to incre;ise the excess, and tarilYs and taxes help to diminish the power to consume relative necessaries on the part of the producers of absolute necessaries, because the consumers of tariffs and taxes consume more in jiroportion of absolute than of relative necessaries. This is all the truth there is in the assertion that taxes fall chiefly on land. It would be attributin<^ ^i^antic results to causes wholly incapable of producing chem to alHrm that improved machin- ery, and tariffs and taxes, cause overstock on the part of the relative necessaries of life, suflieient to bring on a commer- cial crisis. It is not true absolutely that there can be no over- production ; it is relatively true only. It is absolutely true that there can be no excess of the absolute necessaries of life, and therefore it follows that on the average there can be no excess of relative necessaries. In the operation of this law it appears that although the energy of production be applied in the fullest manner possible in every direction, there will still be a comparatively st«*ady result in respect to absolute necessaries, that kind of production being always abreast of but not in advance of population, while production of the other sort tends to move in advance of production of absolute necessaries, as well as population, in the most advanced na- tions. I have shown that raw material and labor could not be paid for by credit only ; but suppose that they could ; an equilibrium of all ])roduetion would ni'vertheless be fairly mainUiined by credit for these conclusive reasons : The very moment an overstoek began to take place in any kind of pr(Klucti<»n, whereby the exchanges wt'ic likely to In- block«'d, that very moment the producer would be compelled to stop. The co-factors, depreciatinn of overstock, loss by pavment of interest, rise of necessaries of life, and injibility to borrow purchasing power of any kind, would soon bring the ex- changes to j)ar. Price has no existence asitle from the use of units of val- 116 POLITICAL ECONOMY. uation or purchasing power, passed from buyer to seller, and without such units, inasmuch as there can be no price, there can be no rising or falling scale of prices ; and without a ris- ing scale of prices, by means of an expanding circulation, there can be no loss from overstock, and hence no overstock. There are three kinds of circulation : 1st. That of the compar- atively primitive and simple community, where but little money is borrowed, and that which is, is borrowed merely to anticipate future income, and supply immediate wants; it is not borrowed to expend in production or speculative under- takings, in expectation of profit, and hence in such a com- munity usury is looked upon with abhorrence. 2d. That additional circulation of an advanced and highly civilized country, like France for instance, where capital and what always accompanies it, money, have largely increased, and loans of money are made to producers of all kinds, mer- chants included ; but there is no artificial stimulus, or but comparatively little at least, given to the circulation of money, and hence production by the aid of banks. This additional circulation, however, created by loans from indi- viduals, may be very properly called, on its money side, ex- pansion of circulation, growing out of the development and increased civilization of mankind. Will such an expansion of circulation, and therefore of production, give rise to a de- rangement or blocking of the exchanges, by creating an ex- cess of the products of labor, relative only to civilized wants? By no means, certainly to no great extent, if the money units are metallic, because all the units of money in the hands of capitalists, waiting to be loaned, have come back to them in consequence of a like amount of commodities which have been actually exchanged for consumption, and because they cannot, without the aid of banks, be put in circulation to pay for labor and material, as a general rule, often enough to produce an industrial and commercial crisis. A sufficient stock undoubtedly will be created by loaning them as fast as called for, to supply consumption through commerce; there will be more or less advance of prices, and afterwards fall of prices, according to the state of demand BANKING IN ENGLAND. 117 and supply ; because with any kind of money or conventional value this is unavoidable, but the ratio of variation will be very moderate ; there can hardly be a commercial crisis, but should one occur, it must arise from exceptional and not permanent caiuses. The expansion of circulation through loans, if not met and counteracted by an equal contraction of circulation by payment of loans, undoubtedly creates a rising scale of prices, and leads to an undue expansion of jiroduction in one or more quarters and rise of prices ; but the sale of what is produced takes place within short periods, and thus enables loans to be paid, and the exjmnsion of circulation caused by money paid out for labor and material, resulting in a product not yet consumed, is met within safe periods by a sale and consumption of the product and payment of the loans. The contraction of production by consumption ac- companies or precedes a corresponding contraction of circu- lation. English banks do not deal in anything like mercan- tile credit; for a commercial and therefore a banking crisis is impossible through the use of such credit. If there is any proposition in economical science which can be demonstrated with a certainty almost mathematical this is one. It is equally certain that metallic money, left to itself without banks, furnishes, through the co-factors before mentioned, the same protection against want of harmony in production with mercantile credit itself, could that be used instead of money, in highly advanced communities. Prices, on the other hand, ascend and descend regularly ; expand and con- tract under the loans of deposit and discount banks, where metallic money is in use as in England, and commercial and banking crises follow. 1 will now answer the question : What purpose does a metallic reserve, as actually kej^t, an- swer in England and the United States ? It limits the range of variation in prices caused by bank loans, even when its ratio to loans is in a state of constant variation upward or downward, although steady prices can only be obtained by a ratio ranging within short periods, and to a slight extent only. Higher prices are attained with inconvertible than with convertible notes, as witness deposits in the Bank of 118 POLITICAL ECONOMY. England between 1797 and 1816, compared with preceding and succeeding periods, but the subsequent contraction of loans, even before convertibility is reached, where a crisis has taken place in production, makes the ratio of variation the same as under a convertible or even a metallic currency. General results are the same, whether the currency be con- vertible or inconvertible ; there is the same rise of prices, productive of the same mistakes on the part of producers, and there is afterwards the same fall ; for take now the third kind of circulation as we actually find it in England with a full development of the only machinery capable of arti- ficially increasing the amount of circulation of metallic money, not only beyond its natural limits in those cases where no loans are made for the purposes of production in a primitive community, but even much beyond the limits possible by means of ordinary loans for the purposes of production, as in France, without banks. When the ascend- ing scale of bank loans begins, and increases above average, and prices rise, to what use are the loans applied ? Not to consume certainly, biit to produce. Banks do not loan to mere consumers, or to adventurers who dig holes in the ground or erect pyramids, but to producers of some kind. Suppose a loan made to a wholesale merchant in domestic trade ; he is both a producer and distributor, for he produces value by distributing. But there is a progressive rise in the ascending scale of prices ; it continues l^ntil a crisis takes place, and the ascent in the scale of prices changes to a de- scent. What is the precise effect of that rise ? To speak with rigorous accuracy it has but one, but that a most potent effect. It masks the real depreciation of the unsold products of labor (which are not sold to pay loans, because they cannot be) under the guise of apparent appreciation, and therefore profit. A merchant buys, and the products of labor are ap- parently rising on his hands ; he buys by the aid of a bank loan, and the loan results in an increase of bank debt, or a loss of bank reserve by the difference between the cost of the labor and materials, represented by a loan to the manufact- urer, and the cost and profit paid to the manufacturer by the n.\„NKlN»; IN KNULAM). 119 same mercliunt ; ami so jus to all other ])ro(luet'r.s, whutlier tiu-y staiul ill tin- lirst iMiik or in a rank interinLMJiatc* between the first producer and lonsunifi-. It is all founded on credit, apparently, and a kind of ereilit whose units circulate as money. Money itself beinfj simply, when actually untd^ but a series of units, these credit units are the same in eflfect as any other units. The contraction of this circulation, corre- spctnding to and resulting from consumption, takes place in its first act by transfers of bank credit tlirougli clearing; and is consummated by the contraction of bank debt or the increase of bank reserve which takes place, for the most part, after- wards, at another clearing, by those to whose credit the trans- fers are made ; so that every clearing causes a certain amount of contraction to take place corresponding to the contraction of circulation which takes place by the payment of coin to a lender in France ; and the contraction of circulation in this case, whether the units are composed of credits canceled or coin deposited, is accompanied by a corresponding contraction in the volume of commodities, whose sale and consumption enable this contraction of circulation to take place. It is absolutely true, however, that all loans and all redemptions are made out of reserve only, because by every loan is the ratio of reserve to debt diminished.^ By the abandonment of all theories, and by rigorously adhering to the premises in which lies' no lurking fallacy, viz, that all money is con- ventional only, and therefore consists of a series of units, whether those units be evidenced by weight units of metal, notes, or credits, it can be shown that prices depend upon production, consumption, and circulation. The demonstra- tion, from the admitted premises, that all circulation is the use of a series of units of conventional value, is verified by the practical demonstration of the same fact bv the aiil of clearing; because while there is always an ai)undance of gold in the consolidated reserve to pay every che<'k-holder, clearing ' Wlu'tifvor it is nllirnu'il in this cliaptiT, or pl!«owhorf in this work, that units of iMink debt or crotlit nre circulated or paiil, it i.H atfinncd hyjMUhcticallv with the intention of showiii;: that cvni upon iho hypoilicsis, without a fixed ratio of reserve in silver or (;old, there is no metnllie limitation of loans by the reserve — such a liniitatiortant office. 120 POLITICAL ECONOMY. is rendered possible only by the fact that the check-holders would, were they to withdraw gold, immediately redeposit in the consolidated fund. Hence the excessive and unlim- ited circulation of gold units themselves is precisely equiva- lent to the circulation of a like amount of units of bank credit. In the ratio of price^ both are mere units and noth- ing more. Stability of prices, therefore, does not depend at all upon whether the buyer pays with gold coin, the mate- rial of which only, and not the coin in its character of money, is a commodity, or with units of bank-notes or bank credits, or — were it an actual fact that they are so used — commer- cial-credit units. One more important fact or law, whichever we choose to call it, if thoroughly understood and pondered, will enable one to comprehend the immense forces at work, in bringing on commercial crises. If we suppose the existence of a community, all of whose members are in possession of undoubted credit, and whose commerce lies entirely within itself, each member upon pur- chasing a commodity could give his own notes, payable in notes issued by other members, or in commodities, at the option of the holder. If these notes by general consent evi- denced by common usage were never issued by any member in excess of commodities shortly thereafter produced by him- self, or purchased with like notes issued by others, no produc- tion taking place in excess of the wants of the community, prices under this paper currency would be steady. Prices would be steady because the units of money circulated could not be in excess of the units of commodities. The contrac- tion of commodities taking place by the purchase of one com- modity for consumption would be soon met by a correspond- ing expansion of commodities by means of the purchaser's production, and which another purchaser is waiting for ; and the expansion of circulation which he caused to take place, by paying out his own notes, made and issued by himself, in exchange for the commodity he bought and consumed, would be soon met and balanced by a corresponding contraction of circulation through a like number of units of notes paid him HANKLNG IN ENGLAND. 121 by another member of the community for another commod- ity which he hud produced since liis purchase. To take the place of the commodity he purchiised and consumed he would produce and sell another of a like value, and so production anil consumption would balance. ^ He would cause an ex- pansion of circulation by issuing his own notes, and he would cause a corresponding contraction of circulation by tiiking back an equal number of units in notes; it may be the notes issued by himself; it may be notes issued by others. In either case expansion of circulation is balanced by a corresponding contraction, because the receipt oi the units thus paid him, whether his own issue or another's, retires his former issue, and they, whether his own or anoth- er's, can be used only on the next similar occasion with like eli'ect; and thus there is no expansion of circulation without a corresponding contraction occurring soon after- wards. Hence, by the most rigorous demonstration, it ap- pears that paper units will maintain an equilibrium or stead- iness of prices so long as every member of the community can sell what he produces within short periods. It further appears that high and low prices come from the production of those things which will not sell; because, could they be, and were they sold, the sales would produce a corresponding contraction of circulation. Moreover, the phenomena of ris- ing and falling, or high and low prices, accompany com- mercial crises ; therefore it is a fair inference, or rather it furnishes demonstration in fact, that such crises come from the impossibility of realizing upon some of the products of labor ; and inasmuch as there is a banking phase to every crisis, the production whose, products will not sell must have come from bank loans. Hu\ of this I can furnish actual cer- tainty by demonstration. Why do general prices rise ? » Expansion of circiilatioii l>y liank loans Oi-curs bv paynients for labor and r.iw mutfiial, and therefore for jirodiution in advance of consumption ; the latter must come in due time in order to balance the former. In the Ciise sup- l>OMd in the text no expansion of circulation occurs until production has act- ually taken jjlace, but the expansion nevertheless continues until it is balanced by means of an eciual amount of consumption following an elil, then, under deposit and discount banking, any better ; has it any more potency in maintaining steady prices than the unit of bank credit or bank-notes, the latter two being equiva- lents ? It must b(! confessed that it has not, in England, under deposit aiid discount banking. 124 POLITICAL ECONOMY. THE BANK ACT OF 1844 HAS FAILED ; AND WHY ? IS THERE A REMEDY? The paramount advantage of a circulation consisting of gold, or gold and silver units, is, confessedly, steadiness or uniformity of prices. Safety to the holder is undoubtedly an object gained to a considerable extent by gold and silver coin, but in England it has been practically demonstrated that the notes of the Bank of England are deemed amply safe, because in the very midst of a banking panic nothing better is asked. Therefore I affirm that in England stead- iness is the object sought by the use of metallic circulation outside of banks. But it is very certain that the object has not been attained ; for, beyond all question, there has been a constant succession of rising after falling and falling after rising prices since the Act of 1844 was passed. This varia- tion in prices arose from ill-balanced production and from no other cause. I proceed to demonstrate this proposition in another form. In the community before mentioned, after the manufacturers began to pay out their own notes for labor and raw material these notes were money, because they had, by the consent and practice of the community, conventional value in exchange — in other words, purchasing and paying power. Their circulation had the same effect precisely in the denominator of the ratio of price as a like amount of circulation accomplished by the use of a like number of units of gold. Now in order to understand this reasoning clearly, it must first not only be demonstrated that money in the shape of gold coin and in its character of money is not a commodity in the proper meaning of that word, but the truth of the demonstration must be clearly perceived, and I therefore proceed to prove the proposition again in another form. In the first place the development of banking in England has, as already shown, practically proved it. Gold or bank-notes representing a like amount of gold are always on hand to answer every call by check ; if not paid out it is because the gold would immediately be redeposited by or for the check-holder, in the same common reserve, and if by BANKING IN ENGLAND. 1J.3 common consent all the golil were removed from the tom- mon reserve, luul units of bank eredit circulated through checks, the result would be forever and always the same, as to the ratio of variation in ])riec.s. Therefore the units of bank credit, as counted in bank credit, are precisely the same as tile units of gold coin in the reserve counted in gold coin : in the ratio of price each counts out mere units and nothing more, whether the count of units of valuing, purchasing, and paying power is accom})li.sIied by gold or credit. Bv the manner of conducting banking in England, then, it is practi- cally demonstrated that units of credit c(jntn)l the units of gold. But to make it still plainer, perhaps, to some minds, that gold coin in its character of money is not a commodity, suppose all banks in France out of the way, the circulation wholly metallic, and the consolidation in a bank (of deposit simply) of all the money reserves of every business man and capitalist in Paris. Suppose the fund to be one thousand millions of francs. Twenty-five per cent, or less of this amount would sulKce to answer the actual demands of depos- itors, and the rest might be permanently locked up. Could it be used by any but the owners to accomplish their own and only their own circulation ? Doubtless it eould, in the way of loans, and the economy of metal required to pay de- positors won 111 be the same as an increase of metid to the amount economized. Now if gold and silver coin were really commodities this could never take place. The amount econ- omizi'd b»Mng ecpiivalent to the production of a like amount of metal, a ])art of the metal economized or an equal amount in bullion will be manufactured anil another part retainetl iis coin, sf) as to maintain the same ratios between metiil coined and metal not coined as would result had the amount econo- mized been addeil by mining to the world's stock instead of being economized. In other wonls, the number of units of weight in coin d«-tiTMiiiU's the units of weight that are used as a commodity. The number of units of valuing, purduis- ing, and paying power which all the i-oin in the world if counted would sum up dettMiuines the (piantity of metal manufactured, the metal economized being equivalent to so 126 POLITICAL ECONOMY. much produced. Once more : suppose all banks in England to have a reserve of thirty-three and one third per cent. For every one thousand pounds in money deposited and circu- lated there is one third of that amount in gold in the reserve. Clearing would take place precisely as now, and might take place if the banks were in possession of twice the amount of gold. But credit or debt units alone a'ppear^ and the result is the same as if the gold coin were in all cases actually paid out. The real difference between this kind of banking and banking as it actually is in England consists not in the kind of units used ; gold is on hand in sufficient amounts to an- swer actual calls, in both cases ; but in the first case the amount and number of credit units are controlled by the number of gold units behind them ; in the actual case, as we find it, the number of gold units is entirely controlled by the number of credit units. In the community above supposed, when each producer issued his own notes as money, and the twenty-five per cent, surplus of a certain kind of production took place, a remedy more or less perfect would have been afforded by requiring redemptions in gold or silver, as with hanks of issue. In that case, as with banks of issue, notes once issued could not, before their return to the issuer, be circulated a second time ; if used in production, as they undoubtedly for the most part would be, they could be used but once ; and meanwhile, if the producer could not sell because of an overstock or excess, the issuer would be called upon to redeem, and, on the whole, production would be kept within proper vol- ume hj keeping circulation within proper volume. With deposit and discount banks, however, although they keep their reserve in gold, this is impossible, because there is no limit to possible circulation by their agency short of a commercial crisis when the volume of bank credits deter- mines the amount of metallic money circulated, instead of the latter determining the former. A rising scale of loans shows a rising scale of production rendered possible by a rising scale of prices. All the labor is paid for by gold, all the raw material by gold also, which is in the consolidated BANKING IN ENGLAND. 127 reserve behiiul bunk cretlits. But this gold is the precise equivaUmt of bunk credit, — nothing more or less, — because the result would bo tlie satno if the reserve were out of the way ; and two tilings which are equal to the same thing are equal to each other. Hence it may be called (this circula- tion of gold), what it in fact is, the equivalent of units of bank credit, and nothing else. But this same credit controls the metallic circulation throughout the kingdom ; therefore the circulation of gold tlirougliout the kingdom is the pre- cise equivalent of a like amount of bank credit, or, what is the same thing, paper units. But a rising scale of bank loans means, as already demonstrated, a rising scale of prices proportioned to the rising scale of loans, and both in the order nannnl lead to an equivalent amount of unsold pro- ductions. What renders this overstock possible ? Nothing but rising prices, which import simply that the expansion of circulation, unbalanced by an equivalent contraction, has so advanced in that part, as well as all other parts of the great field of production, — the prices of things sold for actual con- sumption to consumers, to merchants, and to speculative buvcrs, whatever the production maybe, — that there is an apparent profit in all the stock, and an actual profit so far as sales for consumption arc made or loans are actually repaid. The expansion of circulation through loans, although the subjective result of the paramount cause, which is actual ability for a time on the part of the producers in this line to go in advance of the producers of absolute necessaries at the base line, becomes of itself a working cause, operating to conceal real depreciation, in the guise of apparent appre- ciation, through the rising scale of prices caused by the rising scale of bank loans. But is there no remedy ? Is the popular opinion that metallic money is the safest and steadiest of all money a delusion, because the opinion that metallic money is a ((MnmcHlity is a delusion ? By no means. The popular opiniMn is subst;intially sound : but upon the baseless theory, in short the fallacy, that any money can be a commoility, it is utterly impossible to demonstrate why, and wherein, and under what conditions, the popular opinion 128 POLITICAL ECONOMY. is sound. The grand object is stability of prices. It has been demonstrated ah*eady, that if production and consump- tion balance, the expansion and contraction of circulation balance ; and for that reason, and for that only, prices con- tinue steady. It has been further demonstrated that the use of metallic money, where the larger (wholesale) transac- tions of commerce are accomplished by the circulation of metal in a consolidated fund with uncontrolled power of dis- count in the managers, gives no guaranty whatever of stead- iness, because credits are thus made to control the metal, instead of the metal controlling the credits. The remedy lies, therefore, in solving this problem : How to make metal control bank credits. It is manifest that there is but one wa)'^ of solving the problem, and that is by keeping at all times a definite minimum ratio of reserve to liabilities in all banks, whether each bank keep its own share in the consol- idated reserve belonging to depositors in its own vaults, or whether all reserves be kept in the Bank of England. It is ea.sy to lay down the rule, but to carry it into effect — hie labor, hoc opus est. Banks of issue, having no deposit, if well and honestly worked, necessarily keep a definite min- imum ratio of reserve by their own working, because all re- demptions must be made out of the redemption reserve, and that reserve must be supplied from metallic circulation out- side. As consumption of the goods produced by means of the bank-notes, loaned and paid out for labor and materials, progresses, the notes, or metal in their absence, will be re- turned to the banks in payment of loans, and expansion will be balanced by contraction. The very moment production is unduly stimulated by loans, that moment the banks are called upon to pay out from the reserve more metal than their receipts, in the shape of metal and their notes, and they are thus compelled in the end to contract loans. They are compelled, because they have no consolidated reserve con- stantly replenished by redeposit, out of which to redeem at all times and under all circumstances. In England such a redemption of bank-notes would not be required were de- posit and discount banking abolished, because the circulation » BANKING IN ENGLAND. 129 is nearl}- all inotallic, actually or representatively ; but the principle involved is the same, because bank-credit and bank- note units are, as I have already demonstrated, one and the same, or rather, it is a necessary corollary from the demon- stration made. Why does metallic money, left to itself, give the safest and steadiest circulation ? Because the ratio (jf annual pro- duct ioji to the total mass, however great or however small, has never, on the whole, seriously advanced beyond the prog- ress of commerce, that is Jo say, of distribution aiul consumi> tion. Adam Smith was substantially right in saying that bank-notes (deposit had not developed in his time beyond a germ), always convertiijle, could not exceed in volume the gold and silver whose place they took ; but he was wrong in not affirming that the volume of money will be actually in- creased throughout the whole commercial world by the exact volume of the notes above reserve. The effect of a paper or credit circulation regulated exactly in such a manner by metal that production cannot be far in excess of consump- tion, because by reason of the steadiness of prices overpro- duction would soon demonstrate to the eyes of the producer positive loss instead of apparent profit, is substantially the same as one of metal. The metal, in such a case, must actually circulate ; other- wise it cannot regulate the circulation of the units of paper or credit. A circulation like that of France is steady in the highest degree ; a circulation consisting largely of units of bank credit can be made steady to a high degree, provided the plan of a fixed minimum metallic reserve be admitted, and provideil further it is practicable to enforce it. All this appears clear enough from the premises, Init ut- terly incomprehensible upon the false theory that true money is a commodity. Everything is money that jvople can and do use as money. If money were a commodity, there is no conceivable way of using it except by exchanging it as other commodities are exchanged for each other, and in that case we should be in the condition of savages ; what is called double barter, if such 9 130 POLITICAL ECONOMY. a process be conceivable, would be putting us in a condition worse than that of savages. But the false theory, so diflBcult to overcome and perhaps in some minds impossible to overcome, that gold coin, when used as money, is also used as a commodity, as already shown, leads to the theory equally false, that the units of bank credit, if circulated by the instrumentality of checks, are still like units of ordinary credit, and circulate as bills of exchange or promissory notes circulate. This proposi- tion, when carefully examined, is just as false and incom- prehensible as the proposition that money when circulated in the shape of gold is a commodity. If the circulation of gold can be carried so far that the units circulated by it are only equal in power and effect to units of bank credit in keeping prices steady, because, as already demonstrated, all money-units are in the denominator of the ratio of price mere units and nothing more, — the heavier the units of metal, exactly so much less the whole number, — it follows incontestably that credit, eo nomine^ and by that designa- tion, does not circulate. It might be said with precisely as much meaning, and with vastly more truth, that confidence, instead of credit, circulates, because although they are equiv- alent words, the word confidence would at once demonstrate to the practical as well as the scientific mind the utter im- possibility, because inconceivability, of a circulation of credit. But there is a germ of truth also, even in the proposition that credit circulates ; because credit or confidence is the founda- tion for the use of units of credit, whether furnished by individuals or banks. Bills of exchange and promissory notes might undoubtedly be used as money as already shown, pro- vided the makers and indorsers were known and had ample credit, and provided, further, the bills and notes could be and were divided in suitable sums ; and last and more than all, provided the proper set-offs could be made by payments fol- lowing clearings. Clearings transfer from the last or retail distributors to wholesale distributors units of bank credits belonging to the former, and created by the deposit of money made bj .the former, consisting undoubtedly in part of like BANKING IN ENGLAND. 131 credits transferred to tlifin hy elieck from consumers, but very largely of gold and silver and bank-notes. The set-off of bank eredits thus transferred to the wholesale distril>utor against the debt he owes one or more banks, and evidenced by his note or bill, takes place by means of a check going into a clearing and drawn by himself, the proper function of which check is to cause the set-off to take ])lace. Bank credit is thus extinguished to the amount of the check, which is equal to the amount of the bill or note. The ex- pansion of circulation arising originally from the loan, which was the foundation of the bill or note, and which was the foundation of an equal expansion of production, is now bal- anced exactly by an equal contraction of circulation, or, as it may be put, of an exactly equivalent power to put money in circulation by means of bank credit. Precisely to the same extent production is balanced by consumption. It is consumption, in short, which enables circulation, or the power to put money in circulation, to be contracted. The next item in the clearing is a check given by a wholesale distrib- utor to a manufacturer or his agent or factor, transferring to him say one thousand pounds in payment for a bill of do- mestic goods of like amount, which are rising in price nom- inally in consequence of increasing overstock, and are them- selves a part of the overstock. The manufacturer or his agent or factor, as the case may be, already owes one of the banks a much larger amount, and in fact he owes for all the overstock in his hands ; and his debt is represented in part by bank credits now held by other parties, which have by their creation relatively decreased the total of banking re- serve, and in part by gold, silver, and notes taken out of reserve on his loans to j>ay for labor, and which have thus ahsolutehf decreased reserve. The absolute and the ndative decreas*' is all ont> and the same thing, tending to the same result, and distinguished now only for tlu^ purpose of show- ing with rigorous acemaey how each arose. The relative decrease of bank reserve came apparmth/ by creating and loaning bank credit to pay for raw mat«'rial, but the absolute decrease came by the withdrawid of coin and notes to pay for 132 POLITICAL ECONOMY. labor. The wholesale distributor, before giving his check, borrows of a bank one thousand pounds to paj^ the manufact- urer, which is placed, less discount, to his credit ; and he, by- check, transfers it to the manufacturer or his agent, who by his check cancels a like amount of bank credit. Bank credit is thus, by means of the loan created to the extent of one thousand pounds and by check, immediately transferred and then canceled to a like amount. But the transaction amounts to nothing in respect to deposits in this case because the goods are not sold to consumers, nor for cash not borrowed. A very important result follows. By means of apparently rising prices the merchant, without any fault on his part, is enticed into borrowing ; the bank, without any fault on the part of its managers, into loaning ; and the producer into more manu- facturing. Other items in the clearing may be checks grow- ing out of speculations in stocks, which are entirely distinct from the other transactions, and have a history and a begin- ning and ending by themselves. Nevertheless, a properly regulated reserve would control these, as well as all other commercial or speculative transactions. Doubtless eras of speculative transactions may and do arise, without the aid of banks, by means of speculative demand arising from extraordinary causes, both in war and peace ; but the ever-present and ever-acting causes in highly commercial countries are those named, and they are increas- ing, and are likely to still further increase, by the extension of banks. No practical man, nevertheless, will set his face against deposit and discount banks, or urge their abolition. The unequaled advantages afforded by them will not allow Englishmen or Americans to agitate the public mind for their abandonment. Regulation, but not destruction, is the word. To abolish banking in England and the United States would disturb the ratio of gold distribution, and perhaps make it necessary to remonetize silver. It is a monstrous fallacy to assert that bank credit is like mercantile credit. The area of commerce included within the limits affected by London clearings is too vast, the transactions too compli- cated, and the conveniences for setting off or balancing of BANKING IN ENGLAND. 133 the fxpunsion of ciroulutioii Ly its contniction when con- Hurnption takes place too uncertain, for anything resembling mercantile credit to answer the purpose, as affirmed by Eng- lish writers. Mercantile cretlit will not circuhite ; bank- credit in the shape of units can. Mercantile credit in units might circulate, undoubtedly, within a narrow field, as I have already shown, but it does not in England, nor does it in the United States. Foreign bills of exchange are a temporary contrivance ; they are all discounted, and the credits arising extinguished through consumption, by means of banks. All credit helps to raise prices, undoubtedly, but the primary and jiaramount causes are those before mentioned. The fact that circulation of gold by means of units of bank credits having behind them no fixed minimum reserve of metal, and a circulation of credit units without gold, are substantially one and the same thing, is so important that it h;is led me to some repetition. A minimum reserve is one that never goes below a fixed ratio at starting. THE ENGLISH BANKING CRISIS OF 18G6, AND THE ENG- LISH COMMERCIAL, INDUSTRIAL, AJND BANKING CRISIS OF 1874-75. The truth of the propositions demonstrated is practically Bhown by the English crisis of 18G6, and the crisis of 1874-75, still in operation in 1877. Every crisis has a commercial, industrial, and banking side, but the crisis of 1800 more ]iarticularly affeoted the banks. The grand cause in operation was undoubteiUy the j)rogre8S of production to satisfy minor, secondary, or rela- tivii wants in excess of absolute wants, and conseipiently of j)opnlation. Money had been loaned, as usual, for the pur- poses of pr(xluction, and speculators, as well as nuTchants, took the overstock to a large extent from first and some- times second liands to invest abroad. Cotton and cotton fabrics had fallen in price, and a large part of the invest- ments liad cost too much, an»l some were comparatively un- productive. The fall of cotton in price and the ill success of the attempts to increase cotton 8ui)ply in the East consti- 134 POLITICAL ECONOMY. tuted an important element in the crisis. It happened, as in every crisis, that the investments were largely unpro- ductive, and the loss came to a great extent from fall in prices, because the investments had been made under the rising scale, when everybody was investing, and the invest- ers were called upon to realize under the falling scale of prices, when everybody wanted to sell. The banking phase of the crisis of 1866 was thus more prominent in its direct apparent effects in England than either the commercial or industrial phase. Had the adventurers in cotton planting been able to furnish cotton at the rates of the time in abun- dance, the crisis would have been less severe ; but, on the whole, the same causes were at work in this crisis as in all others. Rising prices cannot unduly stimulate the produc- tion of the absolute necessaries of life, simply because that kind of production cannot be in excess, but other production can be relatively in excess. It never can be in excess, how- ever, to a sufficient extent to bring on a crisis like that of 1866 without the aid of a rising scale of prices. Suppose prices had been steady, as under the metallic circulation of France ; the loss in overstock by falling prices would have been apparent as the overstock increased, and it never could have been carried so far under steady prices as to produce serious embarrassment, because the circulation of money could not be increased in payment for labor and raw mate- rial so as to make any serious amount of overstock. The effect of a steady circulation is to force sales for cash long before a crisis can take place, and those who buy, even on speculation, buying as they do at prices which can be real- ized again, can suffer little loss. The crisis of 1874-75 in England was more particularly commercial and industrial than that of 1866. Nevertheless, it had a banking as well as commercial and industrial side, although the overstock extended more or less to all departments of industry outside of agriculture in England. BANKING IN ENGLAND. 135 CAUSES OF THE FAILURE OF THE BANK ACT OF 1844, lUllEFLY STATED. A metallic circulation, unaided by banks, will maintain steady prices, notwithstanding the tendency in advanced nations like En<;land and the United States, increased by improvements in machinery and other additions to produc- tive power, to produce the relative in excess of the absolute necessaries of life ; and steady jn-ices will jirevent the ten- dencv to unbalanced production from goint^ so far as to pro- duce a serious commercial crisis, even by the aid of personal credit, because, while general prices remain steady, any im- portant increase of overstock would reduce the price at which articles of the kind in overstock could be sold relatively be- low the range of general })rices, and demonstrate loss then and there, instead of postponing the demonstration to the time of a commercial crisis by means of a rising instead of a falling scale of ]>rices, which rising scale always accom- panies overproduction. Any metal sutiicient in quantity to distribute its units of conventional value over the whole com- mercial world in the tracks of commerce, wall carry definite ratios of quantity by weight into coin and into manufacture, and while this natural distribution is not materially dis- turbed, no material excess of circulation, and therefore of production, can occur. In the seeond place, I have demonstrated that when pro- duction and consumption balance, the expansion and contrac- tion of circulation balance, and prices are steady ; therefore, under such conditions, a paper or credit circulation, consist- ing of units circulatctl by means of banks, woulil maintain steady prices. Hut inasmuch as that kind of production which grows out of ailvancing civilization, and din^s not em- brace the absolut*' necessaries of life, tends to advance in excess of the latter, j)aper or credit units paid out for labor and raw material having no such natural limitation as those of metal, and therefore furnishing no natural limitation to possible circulation, cause a rising instead of falling scale of 136 POLITICAL ECONOMY. prices. The tendency to overstock in the direction named is not onl}^ made possible, but is actually carried into effect by the use of such units, because the depreciation naturally fol- lowing large overstock is converted into apparent apprecia- tion by a rising scale of prices while the overstock is being produced. In the third place, paper and credit units whose circula- tion is controlled by a definite ratio of metallic units approx- imate to the steadiness of a metallic circulation, because the circulation of the former is thus prevented from being car- ried to such excess as to cause overproduction and a rising scale of prices. The metallic units regulating the credit units rather than the latter the former, expansion and con- traction balance, although not as perfectly as under an ex- clusively metallic circulation. An artificial derangement of the distribution of the metal by war and conquest, as in the times of the Roman empire, and as of late in Europe, or by other means, may temporarily derange the stability of the purchasing power of coin. In the fourth place, a currency consisting entirely, or almost entirel}^ of gold, circulated actually or representa- tively, as in England under the Bank Act of 1844, affords no steadiness where units of credit control those of metal. The natural steadiness of a metallic circulation is lost by the artificial contrivance of banking, unless it is restored by an equally artificial arrangement of reserve, there being no limit as yet found to possible circulation out of a consolidated me- tallic reserve in England, for the same reason that none has yet been found to the circulation out of a paper reserve, short of a commercial crisis. Money is paid out in the shape of units of gold and silver ; units of gold on deposit in the issue department of the Bank of England represented and covered by an exactly equal issue of vouchers to the deposit of the gold in the shape of bank-notes ; units of bank-notes issued for a like amount of government debt belonging to the bank ; and units of bank credit convertible on demand into the gold of the consolidated reserve in the shape of the BANIvIXG IN ENGLAND. 137 vouchers before mentioned, and so at any time into gold it- self, for the absolute necessaries of life in the shape of wheat, or relative necessaries in the shape of iron for instance, after it has been produced and is ready for market. These pay- ment are effected, undoubtedly, to a large extent by the aid of bank loans, and thus cause an expansion of circulation ; but the consumption of nearly the whole produce of wheat within the year produces a corresponding contraction ; the non-consumption of the iron maintains expansion. Loans everywhere and under all circumstances produce an expan- sion. Gold, in its distribution throughout the commercial world (so far as not artificially prevented), by following commerce, also follows capital, which is the first element of productive power. All loans are to some extent a disturb- ance of this distribution, and therefore, to maintain the ex- changes of commodities in harmony, loans must, within com- paratively short periods, be repaid by means of actual sales to consumers, and not by making a loan elsewhere. All this happens with a metallic currency without banks of deposit and discount, but not with them. What an English bank deals in, therefore, if a brief definition be demanded, is gold and silver coin, gold vouchers, and bank-notes, placed for the most part in a consolidated fund belonging in definite por- tions to all the banks ; which coin, vouchers, and notes are not actually delivered in most cases, because were they de- livered they would be immediately redeposited in the con- solidated fund. But whether actually delivered or not, they are equivalent only to a like amount of units of bank-notes or bank credits ; first, because all units in the ratio of price are alike ; and secondly, because in the whole circulation of England, outside as well as inside of banks, the units of bank credit dctfrniint' the number of nu'tallic units placed in each ratio, as well as the general ratio of price. In the foregoing demonstrations in this chapter 1 have assumeil, according to the appearance of the process and common opinion, that what circulates between banks and between individuals and banks — what is expandetl and con- tracted, paid out and retired — consists of units of bank debt 138 POLITICAL ECONOMY. or bank credit. I have written " credit " for the most part instead of " debt." It is immaterial which term is used. The two words express only two different aspects of the bank unit. It is a unit of debt against the bank, while it is a unit of credit to the depositor who disposes of or puts money in circulation by check. I have used the words in- discriminately, however, and they are, while regarded as units of circulation, one and the same thing. But again : what really circulates is the metal in the reserve, in its char- acter of a series of units of valuing, purchasing, and paying power. If this were not so, no bank could ever become bankrupt by being called upon to pay more gold or give checks for more gold than it has on deposit in the Bank of England. In point of fact, such a call bankrupts the bank. The circulation of the units furnished by the metal in the reserve, which takes place, therefore, through checks and crediting and debiting, is precisely the same thing in effect as actual deliveries of coin out of and into reserve. By bank loans out of depositors' reserve an equal amount of debt, less discount, is created in favor of the borrower and against the bank, and by actually taking the proceeds of the loan in gold out of the reserve the fund belonging to depos- itors is to that extent reduced. The reserve, which is bank means as well as depositors' fund, is reduced, in the first instance, by creating a new deposit, and a demand credit in favor of the borrower without any increase of reserve ; in the latter, by actual reduction. What seems to circulate in all cases where money is not actually carried away from the reserve is the unit of demand credit thus created ; what really circulates is the number of units of pounds marked upon the check, never exceeding the number of units of sov- ereigns in the reserve belonging to the bank drawn upon or drawing. That this number contained in the check shall never exceed the number in the reserve is the only limita- tion imposed under the present system of English as well as American banking;. With a fixed minimum ratio of reserve to liabilities which I propose, the limitation would be carried farther against the bank by making checks not only payable BANKING IN ENGLAND. 139 in coin as they now are, but by causing, at least within very short averages, a delinite amount to be kept there. In the chapter on American Bunking I have called banking not merely what it is in appearance, but in fact, — luanimj moueij out of a consolidated reserve. Some repetitions have occurred in reference to coined metal and bank credit, but tiiey were necessary, as they will be hereafter, to explain the entirely new positions as to the nature of coin and the fixed ratio of reserve to bank credit and bank debt which I have taken. At this period in the commercial history of Great Britain and the United States the most important thing to be studied, and, if possible, understood, is the vastly complex subject of banking. It is impossible to understaml the subject of pro- duction and exchange in these times without understanding that of banking. The influence of banking, in sustaining a svstem of loans to producers over and above all loans j)OS- sible without banking, is the main point to be studied and investigated. All money paid out counts units only in the denominator of the ratio of price; and all units in that de- nominator, whether counted out by units of metal, paper, or ideal units of bank debt, are in counting equally ideal, and their relative value depends upon their limitation and their circulation in such a manner that they shall be used to ex- change commodities or buy labor only as fast as commodities produced can be exchanged. This is what all kinds of money not artificially disturbed accomplish, because money accom- plishes and follows the natural distribution of commodities, and cannot be used to buy labor faster than commodities can be consumed. Bank loans sustain a volume of production ex- actly etjual to their own over and above all production which could otherwise take place. This is the true reason why Bank of England notes have varied as gold would under like conditions, but have failed to vary as gold varies in France. In France gold varies ni>t with production, as in England, but with production limited at short periotls by consumption. The chief dilTerence lietween ICmrlish ami American bankincr lies in the fact that in Englantl what is substantially a metal- lie circulation is expanded by bank loans far in advance of ^i 140 POLITICAL ECONOMY. actual consumption, by means of unduly expanded produc- tion ; in the United States the expansion of circulation is aggravated by bank-notes issued upon an insufficient and fluctuating reserve. It may be said, therefore, by way of summary, that Eng- lish banks do not, as generally supposed, deal in anything like mercantile credit ; for that kind of credit does not pay debts, but makes debts, while the kind of credit banks deal in (assuming that they deal in credit at all) pays debts, leaving the borrower indebted to the lender as all loans do, although this debt is only an incidental, not the princi- pal result. Bank loans also leave another result, which is merely incidental — an equal increase of bank debt due de- positors. How can this debt increase if banks deal only in mercantile credit or mercantile debt ? Such increase would be absolutely impossible. What banks in England really deal in, is the additional circulation which they give money in deposit, by means of loans. The proceeds of the loan, whatever they may be called, buy commodities and pay debts, like all other money, whether metal or notes. The total of mercantile deposits in England buys and pays like an equal total of metal or bank-notes ; were every depositor's money kept by itself, and a pound in bank-notes or metal placed by itself for every pound due him, he would buy and pay no more than he does now. In view of the demonstra- tion by induction, by analysis (and in this chapter by the fact that the theory alone explains banking phenomena), that all money is a series of units of valuing, purchasing, and paying power, it is immaterial whether we admit the fact, that in all cases the reserve pays all bank debts, because, except in case of panic, the reserve is always sufficient for that purpose, and clearing only saves labor, or whether we still choose to insist that banks deal in their own debt. It is a dispute about words and terms only. Whether we insist upon the debt theory or whether we admit the fact as it is, one thing is certain in either case : bank loans vary in Eng- land without regard to metallic reserve, and therefore with- out any metallic limitation. Bank of England notes vary BANKING IN ENGLAND. 141 there undoubtedly Mith gold, as the fuunders of the bunk asserted, but they do not vary with gold as the founders probably supposed they would, because their tlieory of me- tallic money was not in accordance with the fact. They supposed it to be a commodity, instead of a unit of valua- tion, purchase, and payment,N limited by and embodied in metal. To make its limitation, and therefore its variation, such as they probably intended, mercantile deposits which are equivalent to bank-notes, must be limited by metallic re- serve ; otherwise the ])henomenon is presiMited of bank-notes limited by gold, circulating into, out of, and outside of bank reserve, while the equivalent of a much larger amount of notes is circulating through deposits, and varying with loans, but not with gold. The Bank of England can do little for steadiness of prices by raising the rate of interest. Artificial rise in the rate of interest may be sahitary, not for the pur- pose of preventing the efflux of gold, but checking invest- ments through loans. With a reserve kept at short intervals in one unvarying ratio with loans in all the banks, there could be no efflux of (;old which oufrht to be checked. It could arise only from a deficient harvest or some similar cause. The enormous discounts of the English joint-stock and private banks ought to be regulated in some manner, and it is certain that there is no effectual way of doing it but by the reserve. No wonder that the vast transactions of those banks have been supposed to rest on credit ; they undoubtedly do, but it is not credit like that of merchants, for it lias universal buying pow^'r. There is always a foun- dation of truth in such opinions ; and the defect here is want of analysis to show what kind of credit is used. Money it- self is founded on credit, and the use of deposits made by the English banks is a credit circulation of the money of de- positors, because in excess of the circulation the latter give it themselves. The final result, however, is mercantile credit on an enormous scale, through the instrumentality of money. The merchants and other investers finally pt'rceive that the results of their investments stand di-btor to other results of labor to a large amount which cannot be realized. To pay 142 POLITICAL ECONOMY. the debt, overstock in the former stands debtor to under- stock in the latter, and is first pledged as security, capital of investers next, then bank capital by way of guaranty, and lastly, through that guaranty, the capital of depositors. The practical corollary from my theory of money, if admitted, is that gold in the reserve must be considered as a limitation and not a basis of loans. Whether the currency be metallic as in England or paper as in the United States, the reserve under deposit and discount banking should be exclusively metallic, both for deposits and notes, for reasons which will appear in the next chapter. i CHAPTER VI. BANKINO IN THK UNITED STATES. liANKlNG iu the United States, as before reiiuirkeJ, is like banking in England, except that bank-notes instead of gold are in use. The issue of bank-notes has been intrusted to a multiplicity of banks. The regulation of banks of issue by- banks of issue never availed much, and in the nature of tilings never could, because deposit and discount banking renders it impossible to any great extent, even were it other- wise i)()ssible. But suppose deposit and discount banking out of the way, and banks of issue only doing business. IIow is any one bank to control the rest ? The business of a bank of issue, as such, is to issue its own notes payable on demand in coin at its counter, or at a commercial centre. It is said by most writers that a bank of issue cannot keep in circulation an excess of its notes when convertible, because the excess will be immediately returned for coin. But what is excess ? They have not defined excess ; and until they do, what does the assertion amount to ? It amounts only to saying that excess cannot be maintained, and that excess is excess. But what is excess in a true scientific point of view? Surely there can be no excess when j)rices are stead v. But when prici'8 are steady, the exchanges of commodities are going on harmoniously, and therefore there is no relative ex- cess or defect of production in any one quarter : when it is otherwise there is a rising scale ft)lloweil by a descending scale of prices, as heretofore shown. Therefore an excess of note issues tjikes place, and is aftt^rwards retired, where the notes, by being exj)ended on labor or raw material in excess of demand on the one hand or altogether unproductively, and therefore in excess of production on the other hand, have 144 POLITICAL ECONOMY. caused an excess of circulation evidenced by a rising scale of prices. The excess is of the same character in both cases. Overproduction in any quarter, therefore, and absolutely un- productive consumption, in other words consumption without any production at all, have under deposit loans a precisely equivalent effect in destroying steadiness and producing a ris- ing scale of prices. Thus, if A. borrows ten thousand dollars from a commercial bank, which I will suppose to be the only bank in the country, and pays it out to weavers or spinners, whose product is locked up and cannot be sold, all the money they expend goes into circulation and is returned out of cir- culation, leaving behind it an equivalent bank credit, which is not retired until through actual exchanges the product is sold to consumers to enable the borrower A. to circulate- that amount back into the bank by payment of his loan : the payment of his loan consists in canceling bank credit or increasing the reserve. In the mean time the weavers and spinners have deposited a part of their earnings, say twenty per cent., in a savings bank. What become^ of the two thousand dollars thus deposited in the savings bank ? It is deposited by the savings bank in the commercial bank, or one of its branches, and within a month perhaps loaned with eight thousand dollars more, deposited by other weavers and spinners, to the same A. for a year instead of a month ; and thus he is enabled to hold his overstock in part by the aid of the very weavers and spinners who received his first money. This latter operation makes the savings bank unwittingly a potent auxiliary in maintaining overproduction by the aid of the machinery of deposit and discount banking. Could this occur under banks of issue only? If it could, there would be so far an issue of bank-notes in excess of commodi- ties exchanged and therefore commerce, giving rise to an equal volume of production, and causing a rising scale of prices, which would for a time conceal the fact of the exist- ence of overstock. With strictly convertible notes, however, and banks of issue only, this would be impossible. If a loan is made in bank-notes borrowed by A. from a sound bank of issue (discount and deposit banks being supposed BANKING IN THE UNITED STATES. 145 non-existent) and piiid to weavers ami spinners, they pay out as before say eighty per cent, for expenses of living, and twenty per cent, of savings into a savings bank. The money they pay out for expenses of living goes to dealers and oth- ers who do not deposit it in a bank of discount and deposit, because no such bank exists ; and therefore it is not because it cannot be reloaned to pi'oducers (before A. calls for it) to stimulate production by being paid out for labor and mate- rial a second time, thus causing it to be used twice at least as it is under the combined issue, dej)osit, and discount sys- tem (while under the single-issue system it couhl, for the most part at least, be used but once), Jind so causing further production to take place before it could be returned to the bank which issued it, either by way of repayment of the loan or for redemption. The dealers, when having no bank of deposit to place the notes, must call upon the issuing banks to redeem in gold, or exchange payable in gold, at a commercial centre, taken from the commercial world's gold ut large and not out of a consolidated and fluctuating reserve of gold. 'I'he twenty per cent, savings of labor might still under banks of issue only, be deposited in a savings bank in the shape of bank-notes, but the notes could not be reloaned so as to cause any material excess of production, because the first borrower would be compelled to make sales in the market of consumers to meet his bills maturitiir with the issuing bank, it being impossible to pay to any great extent by renewals. The savings bank loans, therefore, where there are no banks of discount and deitosit, instead of tendijig to increase production in that (iiiarter where excess of product- ive power is liable to i>e applied, will be taken by the own- ers of what is called fixed rather than by the ownere of what is called quick capital. P^xcess of production in any one quarter as compared with others, wiiich has the same effect on general ])rices by ex|)anding circulation as unjiroductive consumption, is kept in check, because redemptions k«'ep prices steady and limit loans. Loans are rarely intended by borrowers for aiding in the production <»f absolute necessaries of life; but if they were applied to the latter purpose and lu 146 POLITICAL ECONOMY. were to be in as great excess, and produced overstock, as do the loans whicli cause overproduction of relative necessaries, they would have the same effect as the latter in expanding circulation, for the reason that they would cause the same expansion of deposits as compared with the volume of com- modities distributed. If A. borrows ten thousand dollars of a bank at Lawrence, Massachusetts, and invests four fifths of it in wool, and one fifth of it in labor to pay spinners and weavers, and the cloth goes into overstock and cannot be sold, the ten thousand dollars have nevertheless, to a consid- erable extent, gone into circulation to pay for commodities which are actually consumed : if there be no relative excess of commodities in any quarter, and the ten thousand dollars be expended in consumption without producing anything, the circulation is so far in excess of production. In the first case production was in excess of consumption ; in the latter, consumption was in excess of production ; but in both, the volume of circulation was increased equally in excess of the volume of commodities actually exchanged. The expansion occurred partly by the increase of deposits and partly by loss of reserve, but it was all one and the same thing. OF BANKS COMBINING THE FUNCTIONS OF ISSUE, DE- POSIT, AND DISCOUNT, IN THE UNITED STATES. In the United States most banks combine the functions of issue, deposit, and discount ; banks having no charter, and not organized under any general law permitting the issue of notes, are what are called private banks, possessing only the functions of deposit and discount. To conduct such a bank may be regarded, subject to some limitations and conditions, as a common law right, both in England and the United States. The founders of the Bank of England supposed, all the English bankers of the time supposed, and all the Eng- lish bankers of the present day, so far as they have spoken or written, appear still to suppose, that all banks having the functions of deposit and discount deal, for the most part at least, in what they call debt. All the English and all the American writers upon the subject of money and exchange, II BANKING IN THE UNITED STATES. 147 are of the same o])iiii()n. Mr. lionainy Price, Professor of Political Economy in the University of Oxford, has main- tained the theory with great vigor and force, in showing how utterly useless a large banking reserve is, assuming the tlieory to be true. His argument is sound and unanswera- ble, if it be true that a bank deals almost altogether in " debt." ^ Hence the only point at which his argument is as- 'sailable lies in the premises. Does a bank deal in debt alto- gether, or for the most part at least ; or, on the other hand, does it deal in money altogether ? Has it anything but money to give in exchange for the bills, notes, and other securities it buys or discounts ? I affirm that it has nothing but money to deal in, because it can deal only in what it originally re- ceived. To say that a bank deals in debt or credit is really equivalent to saying that it deals in confidence ; but this ex- pression is without meaning, and equally so is the other. The fallacy involved in the expression comes naturallv from the fallacy contained in the assertion that gold coin, in its charac- ter of money, is a commodity ; and a greater fallacy than this can iiardly be found, although it approaches very nearly to the truth. I say, very nearly, because the material of which gold coin is made is a commodity ; the units of valuation, and purchasing and paying power, brought into operation by tht! use of the coin, are not. They are no more so than like units brought into operation by the use of bank-notes, or even bank debts, were bank debts so used. I will demon- Btrate this projiosition in a few words, as I have already done in other chapters. The use of gold and silver to coin units of valuation and ]>urchasing and paying power is conven- 1 In OHO sonso nnly does a l>iink dojil in d.-l.t. All its deposits ovor and above rcsorvcs arc debt dnc the hank liy pnidnrcrH of 8on>e sort (or »t paid by exchanj^ing the st«H-k indirectly throujjh money, for other products ofTored hv I'liiwiniiiT". 148 POLITICAL ECONOMY. tional, as the partial demonetization of silver has practically- shown. The use being conventional, the value is conven- tional. Gold is not worth what it buys, because it cost an equivalent amount of labor to produce it, but it cost that amount of labor (if such be the fact) because the conven- tional value, which means purchasing power, makes it worth that amount of labor to obtain it. Take away conventional value, and a large part of the labor employed in mining gold will be stopped. Its conventional value controls and absorbs all its mercantile value. Again, token coins as they are called, by the very fact of their use, furnish a practical de- monstration to the same effect. Such coins derive their con- ventional value from the fact of, and the limitation implied in, coinage on government account, with the exclusion of coinage for individual account. If it were possible to devise a plan by which governments could combine in coining silver for what is called token circulation, with one fifteenth of the present mass of silver coin, and hereafter with such portion of the annual product as would maintain conjointly with gold the same ratio of value of total annual coinage, to the total value of the mass already in coin, as would be main- tained were silver universally remonetized, then a token coinage of this kind, were the danger from counterfeiting re- moved, as it probably could not be, would be as stable in value as gold itself. This, however, would be impossible, not because there is any natural relation existing between given weights of silver and of wheat, or other commodities, but because such a convention could not be carried into effect, by reason of the impossibility of controlling the quantity of the mass of silver in coin, the annual production and the an- nual consumption by manufacture. ^ These elements would 1 The term Token Coinage is not correct. Waiving the danger of an excess of coin by counterfeits made of true metal, and the possibility of governments issuing an excess, single and double eagles of silver might be coined of the same weight as those coins now have of gold. They might be declared of equal value with those coins and legal tender. They would then stand precisely upon the same footing of national conventional value as the treasury notes called Greenbacks, do to-day. The field of convention would be the United States, and not the commercial world. Such coin would be subject to the same BANKING IN THE UNITED STATES. 149 rentier abortive all such attempts. Again, it is a fallacy to assert that bank clearings, or transfers, or contractions of bank debt effected in any manner, are the real j)ayments, because if money is not taken by banks, or by customers out of the reserve, in the shape of coin or bank-notes, it is be- cause the labor is saved by clearing or otherwise. Banks have coffers amply stored to meet, and much more than meet, all ordinary calls, as Mr. Bonamy Price has well re- marked. If the coin is not taken out by a check-holder, who wishes to make a deposit or pay a bank debt, it is because it is unnecessary, and because he would thus lose a part of tlie unrivaled convenience given to customers by our banking system. The result is the same as if the metal or notes were taken from deposit and afterwards redeposited. Clearing is precisely the same in principle, then, with payment out of bank, of coin or coin vouchers in England, or bank-notes in the United States, to pay for labor or commodities ; the only difference is that clearing is possible as to the larger trans- actions of commerce, because coin or notes, if paid out, would stay out of deposit less than a day, while as to the smaller transactions they must stay out a much longer time. There- fore, if the clearings are mere settlements of credits, so are the payments of gold in England and bank-notes in the United States, from the reserve, and their return afterwards to the reserve ; the difference is only one of time. But there is 8ome truth in the assertion that a bank deals only in debt; the fallacy consists in not stating the whole truth ; and the whole truth, as I have just demonstrated, appears to be that gold coin, when used, only furnishes units of valuation and purchasing and paying power, inversely proportioned to the number used to buy a given number of units of commodi- ties ; tliat both convertible and inconvertible government and bank notes furnish units of like sort ; and that circula- tion resulting fi-om the use of gold coin or bank-notes, out of oiyrction with these notes ; they could not follow the tracks ot comiyerce throughout the commercial world. The German and Latin union silver coin now circulates upon this ])rinciple ; it is not money of the commercial world. 150 POLITICAL ECONOMY. a jQuctuating and virtually consolidated reserve, wliicli is the sum of all banking reserves, is of the same kind. This cir- culation may be called a credit circulation, only in the sense that it is substantially the same thing, whether gold or notes be paid out, because gold or notes may be wanted, or because clearing is impossible ; or, on the other hand, saved from being paid out, because it is possible. An excessive circulation of gold, therefore, growing out of the use of a consolidated fund of gold, is the same thing in effect as the circulation of units of bank-notes, whether convertible or in- convertible, or units of bank debt. None of these cause a circulation of debt, credit, or confidence, because that would be absurd and impossible ; but all furnish units of valuing^ pur chasing, and paying power. The problem to be solved, therefore, is how to keep these units founded on credit or debt in subordination (in point of number) to the number of units of commodities, not produced only, but produced and consumed, so as to keep steady prices. No doubt units of valuation and of purchasing and paying power could be furnished by means of banks, and indeed by merchants, or even consumers generally, in the shape of notes, bills, or book credit. But clearings would be impossi- ble between these persons except by the aid of banks. The mistake, therefore, lies not in asserting that credit or confidence is the foundation of all dealings with banks, be- cause that cannot be denied ; but in asserting that gold and silver coin are commodities, having value in themselves as coin, distinguished from their conventional or what may be called their accredited value, and that credit can, by any pos- sibility, furnish a circulation in any other than the character of units of the kind named, redeemable on demand by the issuer, in gold coin, if he has so undertaken ; and if not, re- deemable by all issuers in the shape of checks or drafts upon commercial centres ; and exchangeable for all commodities in the hands of every holder. Hence it appears that every- thing is money which is used as money, and all money is founded on convention in the first instance, and confidence in the second ; that what has thus by common consent received BANKING IN TlIK UNITED STATES. 151 ConventioiKil valiic will cnntiime to in;iint;iin it ; tli:it having cost the present hohleis hibor, commodities, or capital, it can in like manner be exehan